-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sqaq/XaT9gKDoF1vIZoileO9lg+65s+iLrnCi3EGj13Jz+buRHJHOzQRe+KgnnGk ECSwUzsAX71w8U6FwC5Dag== 0000950144-97-012648.txt : 19971121 0000950144-97-012648.hdr.sgml : 19971121 ACCESSION NUMBER: 0000950144-97-012648 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971120 SROS: BSE SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL SERVICE INDUSTRIES INC CENTRAL INDEX KEY: 0000070538 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 580364900 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03208 FILM NUMBER: 97725164 BUSINESS ADDRESS: STREET 1: 1420 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30309 BUSINESS PHONE: 4048531000 MAIL ADDRESS: STREET 1: 1420 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30309 10-K 1 NATIONAL SERVICE INDUSTRIES INC. 1 Page 1 of 59 Index to Exhibits on Page 16 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended August 31, 1997 Commission file number 1-3208 NATIONAL SERVICE INDUSTRIES, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 58-0364900 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 1420 Peachtree Street, N. E., Atlanta, Georgia 30309-3002 ---------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (404) 853-1000 -------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------- Common Stock ($1.00 Par Value) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based upon the closing price as quoted on the New York Stock Exchange October 31, 1997 the aggregate market value of the voting stock held by nonaffiliates of the registrant was $1,911,956,610.75. The number of shares outstanding of the registrant's common stock, $1.00 par value, was 43,208,059 shares as of October 31, 1997. DOCUMENTS INCORPORATED BY REFERENCE Location in Form 10-K Incorporated Document --------------------- --------------------- Part I, Item 1 1997 Annual Report Part II, Items 5, 6, 7, and 8 1997 Annual Report Part III, Items 10, 11, 12, and 13 1997 Proxy Statement Part IV, Item 14 1997 Annual Report 2 Page 2 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES Table of Contents
Page No. -------- Part I Item 1. Business 3-4 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 Part II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters 6 Item 6. Selected Financial Data 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 8. Financial Statements and Supplementary Data 6 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 6 Part III Item 10. Directors and Executive Officers of the Registrant 7 Item 11. Executive Compensation 7 Item 12. Security Ownership of Certain Beneficial Owners and Management 7 Item 13. Certain Relationships and Related Transactions 7 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 8-12 Signatures 13 Financial Statement Schedules 14-15 Index to Exhibits 16
3 Page 3 PART I ITEM 1. BUSINESS The registrant, incorporated in Delaware in 1928, provides a wide variety of products and services through its operating segments, as follows:
Divisions Principal Products or Services Marketing Area --------- ------------------------------ -------------- PRODUCTS AND SERVICES FOR INDUSTRIAL, COMMERCIAL, INSTITUTIONAL, AND HEALTHCARE CUSTOMERS TEXTILE RENTAL National Linen Service Rented napkins and table Principally the southern, National Healthcare Linen Service linens, bed linens, bath southwestern, and central National Facility Services towels, bar and shop towels, United States National Direct Source sterilized products, mats, and mops. CHEMICAL Zep Manufacturing Company Chemical products Throughout the United Zep Manufacturing Company of Canada including cleaners, sanitizers, States, Canada, Zep Europe disinfectants, polishes, floor Puerto Rico, and Selig Chemical Industries finishes, degreasers, water Western Europe. National Chemical treatments, pesticides, insecticides, and herbicides. ENVELOPE Atlantic Envelope Company Custom business envelopes and South and Southwest. ATENCO Filing Systems courier packages and specialty Lyon Folder Company filing products. Techno-Aide/Stumb Metal Products Company PRODUCTS FOR THE CONSTRUCTION INDUSTRY LIGHTING EQUIPMENT Lithonia Lighting Fluorescent fixtures for Throughout the United Lithonia Fluorescent commercial, industrial, and States, Canada, Lithonia Hi-Tek Lighting institutional applications; Mexico and overseas. Lithonia Downlighting high-intensity discharge Major Reflector Products fixtures for industrial and RELOC Wiring Systems commercial use; architectural Lithonia Controls Systems outdoor lighting; downlighting; Lithonia Emergency Lighting sportslighting; track lighting; vandal-resistant fixtures; emergency lighting; lighting and dimming controls; and manufactured wiring systems.
4 Page 4
Divisions Principal Products or Services Marketing Area --------- ------------------------------ -------------- PRODUCTS AND SERVICES FOR THE CONSUMER CHEMICAL Enforcer Products, Inc. Pesticides, insecticides, rodenticides, Throughout the United States herbicides, cleaners, plumbing pipe and sewer drain cleaners and clog removers LIGHTING EQUIPMENT Home-Vue Lighting Fluorescent work lamps, recessed Throughout the United States Light Concepts and track lighting, and other decorative fluorescent fixtures.
Competition While each of the registrant's businesses is highly competitive, the competitive conditions and the registrant's relative position and market share vary widely from business to business. A limited number of the competitors of each division are large diversified companies, but most of the competitors of the principal divisions are smaller companies than the registrant. Such smaller companies frequently specialize in one industry or one geographic area, which in many instances increases the intensity of competition. Management believes that its Lighting Equipment segment is the largest manufacturer of lighting fixtures in the world and its textile Rental segment is one of the largest such companies in the United States. Raw Materials There were no significant shortages of materials or components during the years ended August 31, 1997, 1996, and 1995. No one commodity or supplier provided a significant portion of the company's material requirements. Total Employment The registrant employs approximately 16,100 people. Financial Information about Industry Segments The financial information required by this item is included on page 39 of the company's annual report for the year ended August 31, 1997, under the caption "Business Segment Information" and is incorporated herein by reference. 5 Page 5 ITEM 2. PROPERTIES The general offices of the company are located in Atlanta, Georgia. Because of the diverse nature of the operations and the large number of individual locations, it is neither practical nor significant to describe all of the operating facilities owned or leased by the company. The following listing summarizes the significant facility categories by business:
Number of Facilities -------------------- Division Owned Leased Nature of Facilities - -------- -------------------- -------------------- Lighting Equipment 7 5 Manufacturing plants 1 6 Distribution centers -- 14 Field warehouses Textile Rental 37 10 Linen plants 6 16 Linen service centers -- 1 Distribution centers Chemical 10 4 Manufacturing plants 22 49 Distribution centers -- 2 Sales offices Envelope 6 4 Manufacturing plants -- 2 Warehouses -- 1 Sales office Corporate Office 1 -- Corporate headquarters
ITEM 3. LEGAL PROCEEDINGS The registrant is neither a party to nor is its property subject to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the three months ended August 31, 1997. 6 Page 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is included on the inside back cover of the company's annual report for the year ended August 31, 1997, under the captions "Listing," "Shareholders of Record," and "Common Share Prices and Dividends per Share" and is incorporated here by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included on pages 44 and 45 of the company's annual report for the year ended August 31, 1997, under the caption "Ten-Year Financial Summary" and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included on pages 41 through 43 of the company's annual report for the year ended August 31, 1997, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. From time to time, the company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the company notes that a variety of factors could cause the company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the company's business include without limitation the following: (a) the uncertainty of general business and economic conditions, particularly the potential for a slow down in nonresidential construction awards; (b) the ability to achieve strategic initiatives, including but not limited to: the ability to achieve sales growth across the business segments through a combination of increased pricing, enhanced sales force, new products and improved customer service; share repurchases; and acquisitions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included on pages 26 through 40 of the company's annual report for the year ended August 31, 1997, under the captions "Consolidated Balance Sheets," "Consolidated Statements of Income," Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Report of Independent Public Accountants" and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 7 Page 7 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item, with respect to directors, is included on pages 2 through 4 under the caption "Information Concerning Nominees" of the company's proxy statement for the annual meeting of stockholders to be held January 7, 1998, filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers of the company are elected at the organizational meeting of the Board of Directors in January.
Name and age of each executive officer Business experience of executive officers during the five and positions held with the company years ended August 31, 1997 and term in office. - --------------------------------------------------- ---------------------------------------------------------- James S. Balloun, age 59 Mr. Balloun was elected Chairman and Chief Executive Chairman, President, and Officer effective February, 1996 and assumed the role Chief Executive Officer of President in October, 1996. Previously, he served and Director McKinsey & Company as a Director. David Levy, age 60 Mr. Levy was elected Executive Vice President, Executive Vice President, Administration in October, 1992. He served as Senior Administration and Counsel Vice President, Secretary and Counsel from 1982 through and Director September, 1992. Brock A. Hattox, age 49 Mr. Hattox was elected Executive Vice President and Executive Vice President and Chief Financial Officer effective September, 1996. Chief Financial Officer Previously, he served McDermott International, Inc., as Chief Financial Officer since 1991 and President of the Engineering and Construction Group since 1995. Stewart A. Searle III, age 46 Mr. Searle was elected Senior Vice President, Planning Senior Vice President, and Development effective June, 1996. Previously, he served Planning and Development four years with Equifax as Senior Vice President of Development.
ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included on pages 4 through 14 under the captions "Compensation of Directors," "Other Information Concerning the Board and its Committees," "Compensation Committee Interlocks and Insider Participation," "Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated Option Exercises and Fiscal Year-End Option Values," "Employment Contracts, Severance Arrangements, and Other Agreements," and "Pension and Supplemental Retirement Benefits" of the company's proxy statement for the annual meeting of stockholders to be held January 7, 1998, filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included on page 6 under the caption "Beneficial Ownership of the Corporation's Securities" of the company's proxy statement for the annual meeting of stockholders to be held January 7, 1998, filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included on page 5 under the caption "Certain Relationships and Transactions" of the company's proxy statement for the annual meeting of stockholders to be held January 7, 1998, filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. 8 Page 8 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) Financial Statements The company's 1997 Annual Report contains the consolidated balance sheets as of August 31, 1997 and 1996, the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in |the period ended August 31, 1997, and the related report of Arthur Andersen LLP. The financial statements, incorporated herein by reference, include the following: Consolidated Balance Sheets - August 31, 1997 and 1996 Consolidated Statements of Income for the years ended August 31, 1997, 1996, and 1995 Consolidated Statements of Stockholders' Equity for the years ended August 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows for the years ended August 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Report of Independent Public Accountants on Schedule Schedule Number II Valuation and Qualifying Accounts Any of schedules I through V not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits filed with this report
Reference No. from Reg. 229.601 Item 601 Description of Exhibit ----------------- ---------------------- 3 Restated Certificate of Incorporation and By-Laws 4 Shareholder Rights Plan Adopted May 9, 1988 10(i) Section 168 Agreement and Election dated as of April 9, 1982, between National Service Industries, Inc. and Oglethorpe Power Corporation 10(iii)A Management Contracts and Compensatory Arrangements: (1) Directors' Deferred Compensation Plan (2) Executives' Deferred Compensation Plan and Amendments (3) Restated and Amended Supplemental Retirement Plan for Executives of National Service Industries, Inc., Amendments and Appendices (4) The National Service Industries, Inc. Senior Management Benefit Plan and Amendments
9 Page 9 ITEM 14. (Continued) (3) Exhibits filed with this report (Continued)
Reference No. from Reg. 229.601 Item 601 Description of Exhibit -------- ---------------------- (5) Severance Protection Agreement between National Service Industries, Inc. and David Levy and Amendment (6) Severance Protection Agreements between National Service Industries, Inc. and (a) James S. Balloun (b) Stewart A. Searle III (c) Brock A. Hattox and Amendment (7) Bonus Letter Agreements between National Service Industries, Inc. and (a) James S. Balloun (b) David Levy (c) Stewart A. Searle III (d) Brock A. Hattox and Supplemental Letter Agreement (8) Long-Term Incentive Program and Amendment (9) Incentive Stock Option Agreements between National Service Industries, Inc. and (a) D. Raymond Riddle (b) Don W. Hubble (c) David Levy (d) J. Robert Hipps (e) Stewart A. Searle III (f) Brock A. Hattox (10) Nonqualified Stock Option Agreement for Corporate Officers between National Service Industries, Inc. and (a) James S. Balloun (b) D. Raymond Riddle (c) Don W. Hubble (d) David Levy (e) J. Robert Hipps (f) Brock A. Hattox (11) Nonqualified Stock Option Agreement for Corporate Officers Effective Beginning September 21, 1994 between National Service Industries, Inc. and (a) D. Raymond Riddle (b) Don W. Hubble (c) David Levy (12) Benefits Protection Trust Agreement and Amendments (13) Executive Benefits Trust Agreement and Amendment (14) Consulting Agreement between National Service Industries, Inc. and Erwin Zaban and Amendment (15) 1992 Nonemployee Directors' Stock Option Plan Effective September 16, 1992
10 Page 10 ITEM 14. (Continued) (3)Exhibits filed with this report (Continued)
Reference No. from Reg. 229.601 Item 601 Description of Exhibit -------- ---------------------- (16) Nonemployee Directors' Stock Option Agreement between National Service Industries, Inc. and (a) John L. Clendenin (b) Robert M. Holder, Jr. (c) F. Ross Johnson (d) James C. Kennedy (e) Donald R. Keough (f) Bryan D. Langton (g) Bernard Marcus (h) John G. Medlin, Jr. (i) Dr. Betty L. Siegel (j) Erwin Zaban (17) National Service Industries, Inc. Executive Savings Plan Effective September 1, 1994 and Amendment (18) National Service Industries, Inc. Management Compensation and Incentive Plan Effective September 1, 1994 (19) Split-Dollar Agreement among National Service Industries, Inc., D. Raymond Riddle, and Wachovia Bank of Georgia N.A. Dated January 4, 1993 and Amendment (20) Letter Agreement between National Service Industries, Inc. and D. Raymond Riddle Dated March 28, 1995 (21) Consulting Agreement between National Service Industries, Inc. and D. Raymond Riddle (22) Letter Agreement between National Service Industries, Inc. and D. Raymond Riddle, Dated April 10, 1995 (23) Employment Letter Agreement between National Service Industries, Inc. and James S. Balloun, Dated February 1, 1996 (24) Severance Agreement between National Service Industries, Inc. and J. Robert Hipps, Dated May 14, 1996 (25) Letter Agreement between National Service Industries, Inc. and J. Robert Hipps, Dated May 24, 1996 (26) National Service Industries, Inc. Nonemployee Director Deferred Stock Unit Plan, Effective June 1, 1996 (27) Severance Agreement between National Service Industries, Inc. and Don W. Hubble, Dated July 22, 1996 (28) Employment Letter Agreement between National Service Industries, Inc. and Brock A. Hattox, Dated August 26, 1996
11 Page 11 ITEM 14. (Continued) (3)Exhibits filed with this report (Continued)
Reference No. from Reg. 229.601 Item 601 Description of Exhibit -------- ---------------------- (29) Incentive Stock Option Agreement Effective Beginning September 17, 1996 between National Service Industries, Inc. and (a) James S. Balloun (b) David Levy (c) Stewart A. Searle III (30) Nonqualified Stock Option Agreement for Executive Officers Effective Beginning September 17, 1996 between National Service Industries, Inc. and (a) James S. Balloun (b) David Levy (c) Stewart A. Searle III (d) Brock A. Hattox (31) National Service Industries, Inc. Long-Term Achievement Incentive Plan Effective September 17, 1996 (32) Aspiration Achievement Incentive Award Agreements between National Service Industries, Inc. and (a) James S. Balloun (b) Brock A. Hattox (c) David Levy (d) Stewart A. Searle III [a confidential portion of which has been omitted and filed separately with the Securities and Exchange Commission] (33) National Service Industries, Inc. Supplemental Deferred Savings Plan Effective September 18, 1996 (34) Letter Agreement Between National Service Industries, Inc. and Don W. Hubble Dated October 18, 1996, amending as of that date the Incentive Stock Option Agreement Dated September 15, 1993, the Incentive Stock Option Agreement Dated September 21, 1994, the Nonqualified Stock Option Agreement Dated September 21, 1994, the Incentive Stock Option Agreement Dated September 20, 1995, and the Nonqualified Stock Option Agreement Dated September 20, 1995. (35) Stock Option Agreement for Nonemployee Directors Dated March 19, 1997 between National Service Industries, Inc. and (a) John L. Clendenin (b) Senator Sam Nunn 11 Computations of Net Income per Share of Common Stock 13 Information Incorporated by Reference from Annual Report for the Year Ended August 31, 1997 21 List of Subsidiaries 23 Consent of Independent Public Accountants
12 Page 12 ITEM 14. (Continued) (3) Exhibits filed with this report (Continued)
Reference No. from Reg. 229.601 Item 601 Description of Exhibit -------- ---------------------- 24 Powers of Attorney 27 (1) Financial Data Schedule for the Year Ended August 31, 1997 (for SEC use only)
(b) The registrant filed a report on Form 8-K dated July 14, 1997, which reported the sale of certain assets of the Textile Rental segment to G & K Services, Inc. The financial statements filed as an exhibit to the report were: Unaudited Pro Forma Balance Sheet as of February 28, 1997. Unaudited Pro Forma Statement of Operations for the six months ended February 28, 1997. Unaudited Pro Forma Statement of Operations for the year ended August 31, 1996. (c) Exhibits 2, 9, 12, 18, 22, and 28 have been omitted because they are not applicable. (d) Not applicable. 13 Page 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL SERVICE INDUSTRIES, INC. Date: November 20, 1997 By: /s/ Kenyon W. Murphy ----------------- ----------------------------------------------- Kenyon W. Murphy Vice President, Secretary, and Associate Counsel Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title - ---------------- -------------------------- James S. Balloun* Chairman, President, and Chief Executive Officer and Director Brock Hattox* Executive Vice President and Chief Financial Officer Mark R. Bachmann* Vice President and Controller John L. Clendenin* Director Thomas C. Gallagher* Director Robert M. Holder, Jr.* Director James C. Kennedy* Director --November 20, 1997 David Levy* Director Bernard Marcus* Director John G. Medlin, Jr.* Director Samuel A. Nunn* Director Herman J. Russell* Director Betty L. Siegel* Director Barrie A. Wigmore* Director *By /s/ David Levy Attorney-in-Fact ----------------------- David Levy
14 Page 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To National Service Industries, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in NATIONAL SERVICE INDUSTRIES, INC. and subsidiaries' annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated October 20, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 in this Form 10-K is the responsibility of the company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia October 20, 1997 15 Page 15 SCHEDULE II NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED AUGUST 31, 1997, 1996, AND 1995 (In thousands)
Additions Charged to Balance at ---------------------------------- Balance at Beginning Costs and Other End Description of Period Expenses Accounts (1) Deductions (2) of Period - ----------------------------- -------------- ------------ --------------- ---------------- ------------ YEAR ENDED AUGUST 31, 1997: Deducted in the balance sheet from the asset to which it applies- Reserve for doubtful accounts $ 5,807 $ 2,276 $ (745) $ 3,036 $ 4,302 ======== ========= ======== ======== ========== YEAR ENDED AUGUST 31, 1996: Deducted in the balance sheet from the asset to which it applies- Reserve for doubtful accounts $ 6,467 $ 2,708 $ (964) $ 2,404 $ 5,807 ======== ========= ======== ======== ========== YEAR ENDED AUGUST 31, 1995: Deducted in the balance sheet from the asset to which it applies- Reserve for doubtful accounts $ 7,385 $ 3,170 $ (384) $ 3,704 $ 6,467 ======== ========= ======== ========= ==========
(1) Recoveries credited to reserve, reserves recorded in acquisitions, and reserves removed in sale of businesses. (2) Uncollectible accounts written off. 16 Page 16 INDEX TO EXHIBITS
Page No. -------- EXHIBIT 3 -Restated Certificate of Incorporation Reference is made to Exhibit 3 of registrant's Form 10-Q for the quarter ended May 31, 1992, which is incorporated herein by reference. -By-Laws as Amended and Restated June 21, 1989 Reference is made to Exhibit 3 of registrant's Form 10-K for the fiscal year ended August 31, 1989, which is incorporated herein by reference. EXHIBIT 4 -Shareholder Rights Plan Adopted May 9, 1988 Reference is made to Exhibit 1 of registrant's Form 8-A as filed with the Commission on May 11, 1988, which is incorporated herein by reference. EXHIBIT 10(i) -Section 168 Agreement and Election Dated Reference is made to Exhibit 10(i) of April 9, 1982 between National Service registrant's Form 10-K for the fiscal year Industries, Inc. and Oglethorpe Power ended August 31, 1982, which is incorporated Corporation herein by reference. EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements: (1) -Director's Deferred Compensation Plan Reference is made to Exhibit 10(iii)A(b) of registrant's Form 10-K for the fiscal year ended August 31, 1982, which is incorporated herein by reference. (2) -(a)Executives' Deferred Compensation Plan Reference is made to Exhibit 19 of registrant's Form 10-K for the fiscal year ended August 31, 1982, which incorporated herein by reference. (b)First Amendment To Executives' Reference is made to Exhibit 10(iii)A(b)-(ii) Deferred Compensation Plan, Dated of registrant's Form 10-K for the fiscal year September 21, 1989 ended August 31, 1989, which is incorporated herein by reference. (c)Second Amendment to Executives' Reference is made to Exhibit 10(iii)A(a) of Deferred Compensation Plan, registrant's Form 10-Q for the quarter ended Effective as of September 1, 1994. November 30, 1994, which is incorporated herein by reference. (d)Amendment No. 3 to Executives' Reference is made to Exhibit 10(iii)A(2)(d) of Deferred Compensation Plan dated registrant's Form 10-K for the fiscal year August 31, 1996 ended August 31, 1996, which is incorporated herein by reference. (3) -(a)Restated and Amended Supplemental Reference is made to Exhibit 10(iii)A(c)-(i) Retirement Plan for Executives of National of registrant's Form 10-K for the fiscal year Service Industries, Inc. (Supplemental ended August 31, 1993, which is incorporated Pension Plan) herein by reference.
17 Page 17 INDEX TO EXHIBITS
Page No. -------- (b)Amendment to Restated and Amended Reference is made to Exhibit 10(iii)A(a) of Supplemental Retirement Plan for Executives registrant's Form 10-Q for the quarter ended of National Service Industries, Inc. February 28, 1994, which is incorporated (Supplemental Pension Plan) herein by reference. (c)Appendix B to Restated and Amended Reference is made to Exhibit 10(iii)A(e) of Supplemental Retirement Plan for Executives registrant's Form 10-Q for the quarter ended of National Service Industries, Inc. February 29, 1996, which is incorporated (Supplemental Pension Plan), Effective herein by reference. February 1, 1996 (d)Appendix C to Restated and Amended Reference is made to Exhibit 10(iii)A(d) of Supplemental Retirement Plan for Executives of registrant's Form 10-Q for the quarter ended National Service Industries, Inc. (Supplemental May 31, 1996, which is incorporated herein Pension Plan), Effective May 31, 1996 by reference. (e)Amendment No. 2 to Restated and Amended Reference is made to Exhibit 10(iii)A(3)(e) Supplemental Retirement Plan for Executives of of registrant's Form 10-K for the fiscal year National Service Industries, Inc. (Supplemental ended August 31, 1996, which is incorporated Pension Plan) Dated August 31, 1996 herein by reference. (4) -(a)The National Service Industries, Inc. Reference is made to Exhibit 10(iii)A(f) of Senior Management Benefit Plan, Dated registrant's Form 10-K for the fiscal year August 15, 1985 ended August 31, 1985, which is incorporated herein by reference. (b)First Amendment to National Service Reference is made to Exhibit 10(iii)A(e)-(ii) Industries, Inc. Senior Management Benefit of registrant's Form 10-K for the fiscal year Plan, Dated September 21, 1989 ended August 31, 1989, which is incorporated herein by reference. (c)Amendment No. 2 to National Service Reference is made to Exhibit 10(iii)A(d)(iii) of Industries, Inc. Senior Management Benefit registrant's Form 10-K for the fiscal year Plan, Dated September 16, 1994 ended August 31, 1994, which is incorporated herein by reference. (d)Amendment No. 3 to National Service Reference is made to Exhibit 10(iii)A(4)(d) of Industries, Inc. Senior Management Benefit registrant's Form 10-K for the fiscal year ended Plan, Dated August 31, 1996 August 31, 1996, which is incorporated herein by reference. (5) -(a)Severance Protection Agreement between Reference is made to Exhibit 10(iii)A(h) of National Service Industries, Inc. and David registrant's Form 10-K for the fiscal year Levy ended August 31, 1989, which is incorporated herein by reference. (b)Amendment to Severance Protection Reference is made to Exhibit 10(iii)A(5)(b) of Agreement between National Service Industries, registrant's Form 10-K for the fiscal year Inc. and David Levy, Dated August 31, 1996 ended August 31, 1996, which is incorporated herein by reference.
18 Page 18 INDEX TO EXHIBITS
Page No. -------- (6) -(a)Severance Protection Agreements between Reference is made to Exhibit 10(iii)A(c) of National Service Industries, Inc. and registrant's Form 10-Q for the quarter (i) James S. Balloun (February 1, 1996) ended February 29, 1996, which is incorporated (ii) Stewart A. Searle III (June 19, 1996) herein by reference. (iii) Brock A. Hattox (September 9, 1996) (b) Amendment to Severance Protection Reference is made to Exhibit 10(iii)A(6)(b) of Agreements, Dated August 31, 1996 registrant's Form 10-K for the fiscal year ended August 31, 1996, which is incorporated herein by reference. (7) -(a)Bonus Letter Agreements between Reference is made to Exhibit 10(iii)A(j) of National Service Industries, Inc. and registrant's Form 10-K for the fiscal year (i) James S. Balloun (February 1, 1996) ended August 31, 1989 and to Exhibit (ii) David Levy (October 1, 1989) 10(iii)A(d) of the registrant's Form 10-Q for the (iii) Stewart A. Searle III (June 19, 1996) quarter ended February 29, 1996, which are (iv) Brock A. Hattox (September 9, 1996) incorporated herein by reference. (b)Supplemental Letter Agreement, Dated Reference is made to Exhibit 10(iii)A(7)(b) of August 31, 1996 registrant's Form 10-K for the fiscal year ended August 31, 1996, which is incorporated herein by reference. (8) -(a)Long-Term Incentive Program, Dated Reference is made to Exhibit 10(iii)A(k) of September 20, 1989 registrant's Form 10-K for the fiscal year ended August 31, 1989, which is incorporated herein by reference. (b)Amendment No. 1 to Long-Term Reference is made to Exhibit 10(iii)A(h)(ii) of Incentive Program, Dated September 21, registrant's Form 10-K for the fiscal year 1994 ended August 31, 1994, which is incorporated herein by reference. (9) -Incentive Stock Option Agreements between Reference is made to Exhibit 10(iii)A(l) of National Service Industries, Inc., and registrant's Form 10-K for the fiscal year (a) D. Raymond Riddle ended August 31, 1989, which is incorporated (b) Don W. Hubble herein by reference. (c) David Levy (d) J. Robert Hipps (e) Stewart A. Searle III (f) Brock A. Hattox (10) -Nonqualified Stock Option Agreement for Reference is made to Exhibit 10(iii)A(j) of Corporate Officers between National Service registrant's Form 10-K for the fiscal year Industries, Inc. and ended August 31, 1992, which is incorporated (a) James S. Balloun herein by reference. (b) D. Raymond Riddle (c) Don W. Hubble (d) David Levy (e) J. Robert Hipps (f) Brock A. Hattox
19 Page 19 INDEX TO EXHIBITS
Page No. -------- (11) -Nonqualified Stock Option Agreement for Reference is made to Exhibit 10(iii)A(k) of Corporate Officers Effective Beginning registrant's Form 10-K for the fiscal year September 21, 1994 between National ended August 31, 1994, which is incorporated Service Industries, Inc. and herein by reference. (a) D. Raymond Riddle (b) Don W. Hubble (c) David Levy (12) -(a)Benefits Protection Trust Agreement Reference is made to Exhibit 10(iii)A(n) of Dated July 5, 1990, between National registrant's Form 10-K for the fiscal year Service Industries, Inc. and Wachovia ended August 31, 1990, which is incorporated Bank and Trust Company herein by reference. (b)Amended Schedule 1 of Benefits Reference is made to Exhibit 10(iii)A(k)-(ii) of Protection Trust Agreement between registrant's Form 10-K for the fiscal year National Service Industries, Inc. and ended August 31, 1993, which is incorporated Wachovia Bank and Trust Company herein by reference. Dated September 15, 1993 (c)Amendment to Benefits Protection Reference is made to Exhibit 10(iii)A(12)(c) of Trust Agreement between National registrant's Form 10-K for the fiscal year Service Industries, Inc. and Wachovia ended August 31, 1996, which is incorporated Bank and Trust Company and Adoption, herein by reference. Dated August 31, 1996 (13) -(a)Executive Benefits Trust Agreement Reference is made to Exhibit 10(iii)A(o) of Dated July 5, 1990, between National registrant's Form 10-K for the fiscal year Service Industries, Inc. and Wachovia ended August 31, 1990, which is incorporated Bank and Trust Company herein by reference. (b)Amendment to Executive Benefits Reference is made to Exhibit 10(iii)A(13) of Trust Agreement between National registrant's Form 10-K for the fiscal year Service Industries, Inc. and Wachovia ended August 31, 1996, which is incorporated Bank and Trust Company and Adoption, herein by reference. Dated August 31, 1996 (14) -(a)Consulting Agreement between Reference is made to Exhibit 10(iii)A of National Service Industries, Inc. and registrant's Form 10-Q for the quarter ended Erwin Zaban Dated December 30, 1991 November 30, 1991, which is incorporated herein by reference. (b)Letter Agreement Dated March 21, Reference is made to Exhibit 10(iii)A(a) of 1996 amending the Consulting Agreement registrant's Form 10-Q for the quarter ended between National Service Industries, Inc. May 31, 1996, which is incorporated herein and Erwin Zaban, Dated December 31, 1991 by reference. (15) -1992 Nonemployee Directors' Stock Option Reference is made to Exhibit 10(iii)A(o) of Plan Effective September 16, 1992 registrant's Form 10-K for the fiscal year ended August 31, 1992, which is incorporated herein by reference.
20 Page 20 INDEX TO EXHIBITS
Page No. -------- (16) -Nonemployee Directors' Stock Option Reference is made to Exhibit 10(iii)A(q) of Agreement between National Service registrant's Form 10-K for the fiscal year Industries, Inc. and ended August 31, 1994, which is incorporated (a) John L. Clendenin herein by reference. (b) Robert M. Holder, Jr. (c) F. Ross Johnson (d) James C. Kennedy (e) Donald R. Keough (f) Bryan D. Langton (g) Bernard Marcus (h) John G. Medlin, Jr. (i) Dr. Betty L. Siegel (j) Erwin Zaban (17) -(a)National Service Industries, Inc. Reference is made to Exhibit 10(iii)A(s) of Executive Savings Plan Effective registrant's Form 10-K for the fiscal year September 1, 1994 ended August 31, 1994, which is incorporated herein by reference. (b)Amendment No. 1 to National Service Reference is made to Exhibit 10(iii)A(17)(b) of Industries, Inc. Executive Savings Plan, registrant's Form 10-K for the fiscal year Dated August 31, 1996. ended August 31, 1996, which is incorporated herein by reference. (18) -(a)National Service Industries, Inc. Reference is made to Exhibit 10(iii)A(t) of Management Compensation and Incentive registrant's Form 10-K for the fiscal year Plan Effective September 1, 1994 ended August 31, 1994, which is incorporated herein by reference. (19) -(a)Split-Dollar Agreement among National Reference is made to Exhibit 10(iii)A(a)(i) of Service Industries, Inc., D. Raymond Riddle, registrant's Form 10-Q for the quarter ended and Wachovia Bank of Georgia, N.A. dated February 28, 1995, which is incorporated January 4, 1993 herein by reference. (b)First Amendment to Split-Dollar Reference is made to Exhibit 10(iii)A(a)(ii) of Agreement among National Service registrant's Form 10-Q for the quarter ended Industries, Inc., D. Raymond Riddle, and February 28, 1995, which is incorporated Wachovia Bank of Georgia, N.A. effective herein by reference. March 30, 1995 (20) -(a)Letter Agreement between National Reference is made to Exhibit 10(iii)A(b) of Service Industries, Inc. and D. Raymond registrant's Form 10-Q for the quarter ended Riddle dated March 28, 1995, amending as February 28, 1995, which is incorporated of September 21, 1994 the Incentive Stock herein by reference. Option Agreement dated January 6, 1993, the Nonqualified Stock Option Agreement dated January 6, 1993, and the Nonqualified Stock Option Agreement dated September 15, 1993 between National Service Industries, Inc. and D. Raymond Riddle
21 Page 21 INDEX TO EXHIBITS
Page No. -------- (21) -(a)Consulting Agreement between National Reference is made to Exhibit 10(iii)A(c) of Service Industries, Inc. and D. Raymond registrant's Form 10-Q for the quarter ended Riddle dated March 30, 1995 February 28, 1995, which is incorporated herein by reference. (22) -(a)Letter Agreement between National Reference is made to Exhibit 10(iii)A(d) of Service Industries, Inc. and D. Raymond registrant's Form 10-Q for the quarter ended Riddle dated April 10, 1995, amending as February 28, 1995, which is incorporated of March 15, 1995 the Incentive Stock herein by reference. Option Agreement dated January 6, 1993, the Nonqualified Stock Option Agreement dated January 6, 1993, the Nonqualified Stock Option Agreement dated September 15, 1993, and the Nonqualified Stock Option Agreement dated September 21, 1994 between National Services Industries, Inc. and D. Raymond Riddle (23) -(a)Employment Letter Agreement between Reference is made to Exhibit 10(iii)A(a) of National Service Industries, Inc. and James registrant's Form 10-Q for the quarter ended S. Balloun, Dated February 1, 1996 February 29, 1996, which is incorporated herein by reference. [a confidential portion of which has been omitted and filed separately with the Securities and Exchange Commission] (24) -(a)Severance Agreement between National Reference is made to Exhibit 10(iii)A(b) of Service Industries, Inc. and J. Robert Hipps, registrant's Form 10-Q for the quarter ended Dated May 14, 1996 May 31, 1996, which is incorporated herein by reference. (25) -(a)Letter Agreement between National Refrence is made to Exhibit 10(iii)A(c) of Service Industries, Inc. and J. Robert Hipps regstrant's Form 10-Q for the quarter ended Dated May 24, 1996, amending as of that May 31, 1996, which is incorporated herein date the Incentive Stock Option Agreement by reference. Dated September 19, 1990; the Incentive Stock Option Agreement Dated December 18, 1991; the Incentive Stock Option Agreement Dated September 16, 1992: the Nonqualified Stock Option Agreement Dated September 16, 1992; the Incentive Stock Option Agreement Dated September 15, 1993; the Nonqualified Stock Option Agreement Dated September 15, 1993; the Nonqualified Stock Option Agreement Dated September 21, 1994; and the Nonqualified Stock Option Agreement Dated September 20, 1995 (26) -National Service Industries, Inc. Reference is made to Exhibit 10(iii)A(26) of Nonemployee Director Deferred Stock Unit registrant's Form 10-K for the fiscal year Plan, Effective June 1, 1996 ended August 31, 1996, which is incorporated herein by reference.
22 Page 22 INDEX TO EXHIBITS
Page No. (27) -Severance Agreement between National Reference is made to Exhibit 10(iii)A(27) of Service Industries, Inc. and Don W. Hubble, registrant's Form 10-K for the fiscal year Dated July 22, 1996 ended August 31, 1996, which is incorporated herein by reference. (28) -Employment Letter Agreement between Reference is made to Exhibit 10(iii)A(28) of National Service Industries, Inc. and Brock registrant's Form 10-K for the fiscal year A. Hattox, Dated August 26, 1996 ended August 31, 1996, which is incorporated herein by reference. (29) -Incentive Stock Option Agreement Reference is made to Exhibit 10(iii)A(5) of Effective Beginning September 17, 1996 registrant's Form 10-Q for the quarter ended between National Service Industries, Inc. November 30, 1996, which is incorporated and herein by reference. (a) James S. Balloun (b) David Levy (c) Stewart A. Searle III (30) -Nonqualified Stock Option Agreement Reference is made to Exhibit 10(iii)A(6) of for Executive Officers Effective Beginning registrant's Form 10-Q for the quarter ended September 17, 1996 between National November 30, 1996, which is incorporated Service Industries, Inc. and herein by reference. (a) James S. Balloun (b) David Levy (c) Stewart A. Searle III (d) Brock A. Hattox (31) -National Service Industries, Inc. Long- Reference is made to Exhibit 10(iii)A(7) of Term Achievement Incentive Plan registrant's Form 10-Q for the quarter ended Effective September 17, 1996 November 30, 1996, which is incorporated herein by reference. (32) -Aspiration Achievement Incentive Award Reference is made to Exhibit 10(iii)A(8) of Agreements between National Service registrant's Form 10-Q for the quarter ended Industries, Inc. and November 30, 1996, which is incorporated (a) James S. Balloun herein by reference. (b) Brock A. Hattox (c) David Levy (d) Stewart A. Searle III [a confidential portion of which has been omitted and filed separately with the Securities and Exchange Commission] (33) -National Service Industries, Inc. Supple- Reference is made to Exhibit 10(iii)A(9) of mental Deferred Savings Plan Effective registrant's Form 10-Q for the quarter ended September 18, 1996 November 30, 1996, which is incorporated herein by reference.
23 Page 23 INDEX TO EXHIBITS
Page No. -------- (34) -Letter Agreement Between National Reference is made to Exhibit 10(iii)A(10) of Service Industries, Inc. and Don W. registrant's Form 10-Q for the quarter ended Hubble Dated October 18, 1996, amending November 30, 1996, which is incorporated as of that date the Incentive Stock Option herein by reference. Agreement Dated September 15, 1993, the Incentive Stock Option Agreement Dated September 21, 1994, the Nonqualified Stock Option Agreement Dated September 21, 1994, the Incentive Stock Option Agreement Dated September 20, 1995, and the Nonqualified Stock Option Agreement Dated September 20, 1995 (35) -Stock Option Agreement for Nonemployee Reference is made to Exhibit 10(iii)A of Directors Dated March 19, 1997 between registrant's Form 10-Q for the quarter ended National Service Industries, Inc. and May 31, 1997, which is incorporated herein (a) John L. Clendenin by reference. (b) Senator Sam Nunn EXHIBIT 11 - Computations of Net Income per Share of 24 Common Stock EXHIBIT 13 - Information Incorporated by Reference from Annual Report for the Year Ended August 31, 1997 25 EXHIBIT 21 - List of Subsidiaries 46 EXHIBIT 23 - Consent of Independent Public Accountants 47 EXHIBIT 24 - Powers of Attorney 48 EXHIBIT 27 - Financial Data Schedule for the Year Ended August 31, 1997 (for SEC use only) 59
EX-11 2 COMPUTATIONS OF NET INCOME PER SHARE 1 Page 24 Exhibit 11 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATIONS OF NET INCOME PER SHARE OF COMMON STOCK (In thousands, except per-share data)
Years Ended August 31 -------------------------------------------------- 1997 1996 1995 ------------- ------------- ----------- Primary: Weighted Average Number of Shares (determined on a monthly basis) 45,191 47,941 48,696 ============ ============ ========== Net Income $ 107,278 $ 101,148 $ 94,097 ============ ============ ========== Primary earnings per Share $ 2.37 $ 2.11 $ 1.93 ============ ============ ========== Fully Diluted: Weighted Average Number of Shares Outstanding 45,191 47,941 48,696 Additional Shares Assuming Exercise of Options: Options exercised 1,379 1,260 989 Treasury stock purchased with proceeds (952) (919) (835) ------------ ------------- ---------- Average Common Shares Outstanding (as adjusted) 45,618 48,282 48,850 ============ ============= ========== Net Income $ 107,278 $ 101,148 $ 94,097 ============ ============= ========== Fully Diluted Earnings per Share $ 2.35 $ 2.09 $ 1.93 ============ ============= ==========
EX-13 3 INFORMATION INCORPORATED BY REFERENCE 1 Page 25 Exhibit 13 Consolidated Balance Sheets National Service Industries, Inc.
August 31 (In thousands, except per-share data) 1997 1996 Assets Current Assets: Cash and cash equivalents $ 57,123 $ 58,662 Short-term investments 205,302 551 Receivables, less reserves for doubtful accounts of $4,302 in 1997 and $5,807 in 1996 258,689 269,971 Inventories, at the lower of cost (on a first-in, first-out basis) or market 179,046 169,813 Linens in service, net of amortization 60,805 97,710 Deferred income taxes 13,077 2,152 Prepayments 6,716 7,522 Total Current Assets 780,758 606,381 Property, Plant, and Equipment, at cost: Land 19,911 29,062 Buildings and leasehold improvements 138,933 194,219 Machinery and equipment 434,194 542,056 Total Property, Plant, and Equipment 593,038 765,337 Less-Accumulated depreciation and amortization 356,308 407,941 Property, Plant, and Equipment-net 236,730 357,396 Other Assets: Goodwill and other intangibles 50,166 89,427 Other 38,698 41,442 Total Other Assets 88,864 130,869 Total Assets $1,106,352 $1,094,646
-26- 2 Page 26 Exhibit 13 Consolidated Balance Sheets (continued) National Service Industries, Inc.
August 31 (In thousands, except per-share data) 1997 1996 Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt $ 116 $ 46 Notes payable 5,773 6,696 Accounts payable 101,512 79,851 Accrued salaries, commissions, and bonuses 34,776 42,788 Current portion of self-insurance reserves 12,540 15,396 Accrued taxes payable 38,351 5,374 Other accrued liabilities 88,932 47,275 Total Current Liabilities 282,000 197,426 Long-Term Debt, less current maturities 26,197 24,920 Deferred Income Taxes 34,093 63,347 Self-Insurance Reserves, less current portion 57,056 63,369 Other Long-Term Liabilities 35,193 27,576 Commitments and Contingencies (Note 4) Stockholders' Equity: Series A participating preferred stock, $.05 stated value, 500,000 shares authorized, none issued Preferred stock, no par value, 500,000 shares authorized, none issued Common stock, $1 par value, 80,000,000 shares authorized, 57,918,978 shares issued in 1997 57,919 57,919 and 1996 Paid-in capital 25,521 11,021 Retained earnings 841,045 791,367 924,485 860,307 Less-Treasury stock, at cost (13,719,834 shares in 1997 and 11,447,036 shares in 1996) 252,672 142,299 Total Stockholders' Equity 671,813 718,008 Total Liabilities and Stockholders' Equity $1,106,352 $1,094,646 The accompanying notes to consolidated financial statements are an integral part of these balance sheets
-27- 3 Page 27 Exhibit 13 Consolidated Statements of Income National Service Industries, Inc.
Years Ended August 31 (In thousands, except per-share data) 1997 1996 1995 Sales and Service Revenues: Net sales of products $ 1,542,644 $ 1,482,937 $ 1,424,180 Service revenues 493,535 530,625 546,447 Total Revenues 2,036,179 2,013,562 1,970,627 Costs and Expenses: Cost of products sold 945,794 933,405 908,869 Cost of services 283,024 304,381 299,687 Selling and administrative expenses 633,740 616,513 601,143 Interest expense, net 1,624 1,565 1,648 Gain on sale of businesses (75,097) (7,579) (5,726) Restructuring expense, asset impairments, and other charges 63,091 -- -- Other expense, net 4,925 3,429 14,509 Total Costs and Expenses 1,857,101 1,851,714 1,820,130 Income before Provision for Income Taxes 179,078 161,848 150,497 Provision for Income Taxes 71,800 60,700 56,400 Net Income $ 107,278 $ 101,148 $ 94,097 Earnings per Share $ 2.37 $ 2.11 $ 1.93 Weighted Average Number of Shares Outstanding 45,191 47,941 48,696
The accompanying notes to consolidated financial statements are an integral part of these statements. -28- 4 Page 28 Exhibit 13 Consolidated Statements of Stockholders' Equity National Service Industries, Inc.
Common Paid-in Retained Treasury (In thousands, except share and per-share data) Stock Capital Earnings Stock Total Balance August 31, 1994 $57,919 $ 7,684 $ 705,504 $ (43,722) $ 727,385 Treasury stock purchased (1) -- -- -- (24,127) (24,127) Stock options exercised (2) -- 380 -- 148 528 Adjustment of treasury stock issued in connection with acquisition (3) -- 1 -- (1) -- Adjustment of treasury stock acquired in connection with divestiture (4) -- -- -- (134) (134) Net income -- -- 94,097 -- 94,097 Cash dividends of $1.11 per share paid on common stock -- -- (54,156) -- (54,156) Adjustment to recognize net increase in pension liability -- -- (3) -- (3) Foreign currency translation adjustment -- -- 814 -- 814 Balance August 31, 1995 57,919 8,065 746,256 (67,836) 744,404 Treasury stock purchased (5) -- -- -- (75,223) (75,223) Stock options exercised (6) -- 2,956 -- 760 3,716 Net income -- -- 101,148 -- 101,148 Cash dividends of $1.15 per share paid on common stock -- -- (55,272) -- (55,272) Adjustment to recognize net increase in pension liability -- -- (23) -- (23) Foreign currency translation adjustment -- -- (742) -- (742) Balance August 31, 1996 57,919 11,021 791,367 (142,299) 718,008 Treasury stock purchased (7) -- -- -- (121,668) (121,668) Stock options exercised (8) -- 2,588 -- 2,685 5,273 Treasury stock issued in connection with acquisition (9) -- 11,912 -- 8,610 20,522 Net income -- -- 107,278 -- 107,278 Cash dividends of $1.19 per share paid on common stock -- -- (54,222) -- (54,222) Foreign currency translation adjustment -- -- (3,378) -- (3,378) Balance August 31, 1997 $57,919 $25,521 $ 841,045 $(252,672) $ 671,813
(1) 949,178 shares. (2) 23,598 shares. (3) 39 shares. (4) 4,976 shares. (5) 2,000,000 shares. (6) 185,044 shares. (7) 3,000,000 shares. (8) 190,330 shares. (9) 536,872 shares. The accompanying notes to consolidated financial statements are an integral part of these statements. -29- 5 Page 29 Exhibit 13 Consolidated Statements of Cash Flows National Service Industries, Inc.
Years Ended August 31 (In thousands) 1997 1996 1995 Cash Provided by (Used for) Operating Activities Net income $ 107,278 $ 101,148 $ 94,097 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 57,981 58,428 57,130 Provision for losses on accounts receivable 2,276 2,708 3,170 Loss (gain) on the sale of property, plant, and equipment 1,233 (1,652) 1,138 Gain on the sale of businesses (75,097) (7,579) (5,726) Restructuring expense, asset impairments, and other charges 63,091 -- -- Change in non-current deferred income taxes (25,219) 1,864 (3,663) Change in assets and liabilities net of effect of acquisitions and divestitures- Receivables (11,993) (7,343) (11,367) Inventories and linens in service, net (11,286) 5,308 (8,522) Current deferred income taxes (10,926) 8,069 (2,243) Prepayments 47 (940) 2,086 Accounts payable and accrued liabilities 30,941 (6,117) 11,945 Self-insurance reserves and other long-term liabilities (758) (895) 7,819 Net Cash Provided by Operating Activities 127,568 152,999 145,864 Cash Provided by (Used for) Investing Activities Change in short-term investments (204,751) 3,047 (1,019) Purchases of property, plant, and equipment (48,806) (65,499) (58,768) Sale of property, plant, and equipment 5,370 9,105 8,491 Sale of businesses 311,382 15,250 14,044 Acquisitions (4,320) (600) (2,668) Change in other assets 2,972 (3,071) (4,848) Net Cash Provided by (Used for) Investing Activities $ 61,847 $ (41,768) $ (44,768)
-30- 6 Page 30 Exhibit 13 Consolidated Statements of Cash Flows (continued) National Service Industries, Inc.
Years Ended August 31 (In thousands) 1997 1996 1995 Cash Provided by (Used for) Financing Activities Repayment of short-term debt $ (11,021) $ -- $ -- Repayment of long-term debt (4,627) (1,897) (667) Recovery of investment in tax benefits 661 1,720 1,329 Deferred income taxes from investment in tax benefits (1,972) (4,273) (3,900) Purchase of treasury stock, net (116,395) (71,507) (23,733) Cash dividends paid (54,222) (55,272) (54,156) Net Cash Used for Financing Activities (187,576) (131,229) (81,127) (3,378) (742) 814 Effect of Exchange Rate Changes on Cash (1,539) (20,740) 20,783 Net Change in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year 58,662 79,402 58,619 Cash and Cash Equivalents at End of Year $ 57,123 $ 58,662 $ 79,402 Supplemental Cash Flow Information: Income taxes paid during the year $ 68,475 $ 58,974 $ 50,630 Interest paid during the year 5,614 4,994 3,671 Noncash Investing and Financing Activities: Noncash aspects of sale of businesses-- Receivables incurred $ 391 $ 234 $ 3,003 Liabilities assumed 22,637 1,009 1,064 Noncash aspects of acquisitions-- Liabilities assumed or incurred $ 22,440 $ 6 $ 468 Treasury stock issued (returned) 20,522 -- (1)
The accompanying notes to consolidated financial statements are an integral part of these statements. -31- 7 Page 31 Exhibit 13 Notes to Consolidated Financial Statements National Service Industries, Inc. (In thousands, except share and per-share data) Note 1. Summary of Accounting Policies Description of Business The company operates in four business segments -lighting equipment, textile rental, chemicals, and envelopes- which are leading competitors in their respective markets. The lighting equipment segment produces a variety of fluorescent and non-fluorescent fixtures for markets throughout the United States, Canada, Mexico, and overseas. The textile rental segment provides linens and dust control products to healthcare, lodging, and dining customer segments in the United States. The chemical segment produces maintenance, sanitation, and water treatment products for customers throughout the United States, Canada, Puerto Rico, and Western Europe. The envelope segment produces business and specialty envelopes in the South and Southwest. Principles of Consolidation The consolidated financial statements include the accounts of the company and all subsidiaries after elimination of significant intercompany transactions and accounts. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash, Cash Equivalents, and Short-Term Investments Cash in excess of daily requirements is invested in time deposits and marketable securities, consisting of taxable and tax exempt variable rate demand notes, included in the balance sheet at market value. The company considers time deposits and marketable securities purchased with an original maturity of three months or less to be cash equivalents. Investments purchased with a maturity of more than three months are considered short-term investments. The carrying amounts of short-term investments at August 31, 1997 and 1996 approximate fair value. At August 31, 1997, short-term investments consisted primarily of corporate debt securities and commercial paper. In accordance with the criteria specified by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," these investments were classified as "available for sale." Concentrations of Credit Risk Concentrations of credit risk with respect to receivables are limited due to the wide variety of customers and markets into which the company's products and services are provided, as well as their dispersion across many different geographic areas. As a result, as of August 31, 1997, the company does not consider itself to have any significant concentrations of credit risk. Inventories and Linens in Service Inventories are valued at the lower of cost (on a first-in, first-out basis) or market and consisted of the following at August 31, 1997 and 1996:
1997 1996 Raw materials and supplies $ 71,266 $ 73,236 Work in progress 10,572 9,679 Finished goods 97,208 86,898 $ 179,046 $ 169,813
Linens in service are recorded at cost and are amortized over their estimated useful lives of 15 to 50 months. Goodwill and Other Intangibles Goodwill of $3,460 was recognized in connection with a 1969 acquisition and is not being amortized. Remaining amounts of goodwill ($34,974 in 1997 and $45,029 in 1996) and other intangible assets are being amortized on a straight-line basis over various periods up to 40 years. 8 The company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of goodwill and other long-lived assets or whether the remaining balance of goodwill should be evaluated for possible impairment. The company uses an estimate of related undiscounted cash flows over the remaining life of the goodwill in measuring whether the goodwill is recoverable. During fiscal 1997, goodwill and other intangibles of $8,800 were written off due to the impairment of long-lived assets (Note 5). Depreciation For financial reporting purposes, depreciation is determined principally on a straight-line basis using estimated useful lives of plant and equipment (25 to 45 years for buildings and 3 to 16 years for machinery and equipment) while accelerated depreciation methods are used for income tax purposes. Leasehold improvements are amortized over the life of the lease or the useful life of the improvement, whichever is shorter. -32- 9 Page 32 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. Foreign Currency Translation The functional currency for the company's foreign operations is the local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses, net of applicable income taxes, resulting from the translation are included in retained earnings and are excluded from net income. Gains or losses resulting from foreign currency transactions are included in "Other expense, net" in the consolidated statements of income and amounted to a loss of $54 in 1997 and gains of $249 in 1996 and $201 in 1995. Pension and Profit Sharing Plans The company has several pension plans covering hourly and salaried employees. Benefits paid under these plans are based generally on employees' years of service and/or compensation during the final years of employment. The company makes annual contributions to the plans to the extent indicated by actuarial valuations. Plan assets are invested primarily in equity and fixed income securities. Net pension (income) expense for 1997, 1996, and 1995 included the following components:
1997 1996 1995 Service cost of benefits earned during the period $ 3,636 $ 2,719 $ 2,648 Interest cost on projected benefit obligation 8,505 7,438 7,277 Return on plan assets (12,393) (28,255) (12,178) Net amortization and deferral (768) 17,383 2,257 Net pension (income) expense $ (1,020) $ (715) $ 4
The following schedule reconciles the funded status of the plans as of June 1, 1997 and 1996, with amounts reported in the company's balance sheets at August 31, 1997 and 1996:
1997 1996 Plan Assets Accumulated Plan Assets Accumulated Exceed Benefit Exceed Benefit Accumulated Obligation Accumulated Obligation Benefit Exceeds Plan Benefit Exceeds Plan Obligation Assets Obligation Assets Actuarial present value of benefit obligations as of June 1: Vested $(87,929) $(5,123) $(91,127) $(3,784) Nonvested (10,180) (20) (4,281) (1,407) Accumulated benefit obligation (98,109) (5,143) (95,408) (5,191) Effect of projected salary increases (5,379) (1,195) (7,431) (1,640) Total projected benefit obligation (103,488) (6,338) (102,839) (6,831) Fair value of plan assets 133,214 - 134,426 - Plan assets greater (less) than projected benefit obligation 29,726 (6,338) 31,587 (6,831) Unrecognized transition (asset) liability (7,059) 61 (9,475) 74 Unrecognized prior service cost obligation 1,873 2,208 3,056 2,528 Unrecognized net loss (gain) 9,891 (896) 6,471 (371) Adjustment required to recognize minimum liability -- (596) -- (918) Prepaid (accrued) pension expense at August 31 $ 34,431 $ (5,561) $ 31,639 $(5,518)
For all periods presented, the discount rate used to determine the projected benefit obligation is 8 percent, the assumed growth rate of compensation is 5.5 percent, and the expected long-term rate of return on plan assets is 9.5 percent. The company also has profit sharing and 401(k) plans to which both employees and the company contribute. At August 31, 1997, assets of the 401(k) plans included shares of the company's common stock with a market value of approximately $13,868. The company's cost of these plans was $5,020 in 1997, $4,595 in 1996, and $3,810 in 1995. -33- 10 Page 33 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. Postretirement Healthcare and Life Insurance Benefits The company's retiree medical plans are financed entirely by retiree contributions; therefore, the company has no liability in connection with them. Several programs provide limited retiree life insurance benefits. The liability for these plans is not material. Postemployment Benefits Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits," requires the accrual of the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement. The company's accrual, which is not material, relates primarily to severance agreements and the liability for life insurance coverage for certain eligible employees. Interest Expense, Net Interest expense, net is comprised primarily of interest expense on long-term debt and short-term line of credit borrowings and interest income on cash, cash equivalents, and short-term investments. Other Expense, Net Other expense, net is comprised primarily of amortization of intangible assets net of gains resulting from the sale of fixed assets and casualty loss insurance proceeds. Accounting Standards Yet to Be Adopted During fiscal 1998, the company is required to adopt Statement of Financial Accounting Standards No. 128, "Earnings per Share." SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share," and promulgates new accounting standards for the computation and manner of presentation of the company's earnings per share. Earlier application is not permitted; however, upon adoption, the company will be required to restate previously reported annual and interim earnings per share in accordance with the provisions of SFAS No. 128. The adoption of SFAS No. 128 will not have a material impact on the computation or manner of presentation of the company's earnings per share as currently or previously presented under APB No. 15. During fiscal 1999, the company is required to adopt SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires the reporting of a measure of all changes in equity of an entity that result from recognized transactions and other economic events other than transactions with owners in their capacity as owners. In the opinion of management, the adoption of SFAS No. 130 is not expected to have a material impact on the company's manner of reporting the components of comprehensive income. Reclassifications Certain amounts in the 1996 and 1995 financial statements and notes have been reclassified to conform with the 1997 presentation. Note 2. Long-Term Debt and Lines of Credit Long-term debt at August 31, 1997 and 1996, consisted of the following:
1997 1996 6.5% to 9.25% mortgage notes, payable in installments through 2000 (secured in part by $ 86 $ 148 property, plant, and equipment having a net book value of $237 at August 31, 1997) 3.4% to 8.5% other notes, payable in installments to 2026 26,227 24,818 26,313 24,966 Less-Amounts payable within one year included in current liabilities 116 46 $ 26,197 $ 24,920
The annual maturities of long-term debt are as follows:
Amounts Year Ending August 31 1998 116 1999 100 2000 108 2001 91 2002 97 Later years 25,801 $ 26,313
Late in fiscal 1996, the company negotiated a $250,000 multi-currency committed credit facility with eleven domestic and international banks. The company had no outstanding borrowings under the facility at August 31, 1997. -34- 11 Page 34 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. The company has complimentary lines of credit totaling $62,000, of which $40,000 has been provided domestically and $22,000 is available on a multi-currency basis primarily from a European bank. At August 31, 1997, the company had foreign currency short-term bank borrowings equivalent to $5,773 at an average interest rate of 4.1%. Under the domestic line of credit, up to $40,000 may be used for letters of credit. At August 31, 1997, $16,683 in letters of credit associated with the company's insurance program (Note 4) was outstanding and $23,317 was available under the line of credit. Long-term debt recorded in the accompanying balance sheets approximates fair value based on the borrowing rates currently available to the company for bank loans with similar terms and average maturities. Note 3. Common Stock and Related Matters The company has a shareholder rights plan under which one preferred stock purchase right is presently attached to and trades with each outstanding share of the company's common stock. The rights become exercisable and transferable apart from the common stock ten days after a person or group, without the company's consent, acquires beneficial ownership of, or the right to obtain beneficial ownership of, 20 percent or more of the company's common stock or announces or commences a tender offer or exchange offer that could result in 20 percent ownership (unless such date is extended by the Board of Directors). Once exercisable, each right entitles the holder to purchase one one-hundredth share of Series A Participating Preferred Stock at an exercise price of $80, subject to adjustment to prevent dilution. The rights have no voting power and, until exercised, no dilutive effect on net income per common share. The rights expire on May 19, 1998, and are redeemable under certain circumstances. If a person acquires 20 percent ownership, except in an offer approved by the company under the plan, each right not owned by the acquirer or related parties will entitle its holder to purchase, at the right's exercise price, common stock or common stock equivalents having a market value immediately prior to the triggering of the right of twice that exercise price. In addition, after an acquirer obtains 20 percent ownership, if the company is involved in certain mergers, business combinations, or asset sales, each right not owned by the acquirer or related persons will entitle its holder to purchase, at the right's exercise price, shares of common stock of the other party to the transaction having a market value immediately prior to the triggering of the right of twice that exercise price. The company has 1,000,000 shares of preferred stock authorized, 500,000 of which have been reserved for issuance under the shareholder rights plan. No shares of preferred stock had been issued at August 31, 1997. In 1990, the stockholders approved the National Service Industries, Inc. Long-Term Incentive Program for the benefit of officers and other key employees. There were 1,750,000 treasury shares reserved for issuance under the program. In 1997, the stockholders approved the National Service Industries, Inc. Long-Term Achievement Incentive Plan for the benefit of officers and other key employees. There were 1,750,000 treasury shares reserved for issuance under that plan. The stock options granted under both the incentive programs become exercisable in four equal annual installments beginning one year from the date of the grant. In 1993, the stockholders approved the National Service Industries, Inc. 1992 Nonemployee Directors' Stock Option Plan, under which 100,000 treasury shares were reserved for issuance. The stock options granted under that plan become exercisable one year from the date of the grant. Under all stock option plans, the options expire ten years from the date of the grant and have an exercise price equal to the fair market value on the date of the grant. Stock option transactions for the stock option plans and stock option agreements during the years ended August 31, 1997, 1996, and 1995 were as follows:
1997 1996 1995 Options outstanding at September 1 1,266,043 1,088,773 820,752 Granted 324,500 513,200 325,400 Exercised 196,115 185,044 23,598 Canceled 7,214 150,886 33,781 Additional shares available for future grant 1,750,000 - - Options outstanding at August 31 1,387,214 1,266,043 1,088,773 Option price range at August 31 $19.75-$39.75 $19.75-$39.75 $19.75-$29.00 Options exercisable at August 31 731,914 466,377 513,665 Options available for grant at August 31 1,732,574 300,408 657,565
-35- 12 Page 35 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. Potential dilution of earnings per share applicable to these stock options is not significant. During fiscal 1997, the company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for these stock option plans. Had compensation cost for the company's stock option plans been determined based on the fair value at the grant date for awards in fiscal years 1996 and 1997 consistent with the provisions of SFAS No. 123, the company's net earnings and earnings per share would have been reduced to the following pro forma amounts:
1997 1996 Net income-as reported $107,278 $101,148 Net income-pro forma $105,793 $100,284 Earnings per share-as reported $ 2.37 $ 2.11 Earnings per share-pro forma $ 2.34 $ 2.09
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
1997 1996 Dividend yield 3.350% 4.009% Expected volatility 16.8% 15.3% Risk-free interest rate 6.73% 6.10% Expected life of options 10 years 10 years Turnover rate 5.0% 5.0%
Note 4. Commitments and Contingencies Self Insurance It is the policy of the company to self insure for certain insurable risks consisting primarily of physical loss to property; business interruptions resulting from such loss; and workers' compensation, comprehensive general, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. Based on an independent actuary's estimate of the aggregate liability for claims incurred, a provision for claims under the self-insured program is recorded and revised annually. Expense associated with the program was $7,900 in 1997, $13,677 in 1996, and $22,800 in 1995. Leases The company leases certain of its buildings and equipment under noncancelable lease agreements. Minimum lease payments under noncancelable leases for years subsequent to August 31, 1997, are as follows:
Amount Year Ending August 31 1998 $ 9,342 1999 7,791 2000 6,092 2001 4,433 2002 2,998 Later years 7,104 Total minimum lease payments $37,760
Total rent expense was $11,327 in 1997, $10,907 in 1996, and $11,607 in 1995. Litigation The company is involved in various legal matters primarily arising in the normal course of business. In the opinion of management, the company's liability in any of these matters will not have a material adverse effect on its financial condition or results of operations. -36- 13 Page 36 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. Note 5. Restructuring Expense and Asset Impairments During 1997, the company conducted reviews of the textile rental, European chemical, and corporate operations as a part of management's strategic initiatives to examine under-performing operations and to position the company for growth. As a result of the reviews, the company approved a significant restructuring program and recorded a related charge of $9,600 during the fourth quarter. The accrual included severance and union-related costs totaling $2,950 for 120 employees of the textile rental, chemical and envelope segments and $6,650 in exit expenses to close certain facilities and consolidate the operations of others in the textile rental segment. Exit expenses include costs of unexpired leases, costs to dispose of facilities, and costs of personnel to effect the closures and consolidations. The severance accrual had been reduced by payments of $205 and reserves associated with plant consolidations had been reduced by $1,910 as of August 31, 1997. As a further result of the reviews, the company recognized long-lived asset impairments totaling $43,500. Textile rental assets to be disposed of in under-performing branches were reduced by $22,300 to state them at their estimated fair value less costs to sell. The remaining net book value of these assets is immaterial. Fixed assets held for use by the textile rental, European chemical, and corporate units were reduced by $12,400 and related intangibles were reduced by $8,800. Impairments were recognized for those assets where the sum of estimated undiscounted future cash flows was less than the carrying amount of the assets, including related goodwill. Fair market values were established based on independent appraisals, comparable sales or purchases, and expected future cash flows discounted at the company's cost of capital. Factors leading to the impairments were a combination of the reviews discussed above, historical losses, anticipated future losses, and inadequate cash flows. The textile rental segment recorded other charges of $10,000 associated primarily with environmental matters. The associated reserves had been reduced to $8,400 at August 31, 1997. The losses resulting from the accruals and impairments are included in "Restructuring expense, asset impairments, and other charges" in the consolidated statements of income. Note 6. Divestitures and Acquisitions In February 1997, the company sold the North Bros. insulation business for $27.1 million in cash. An immaterial gain was realized on the sale. The business had 1997 sales of $57,000 and operating income of $1,900. Additionally, immaterial gains were recognized as the company divested several non-strategic textile rental locations. In July 1997, the company sold 29 textile rental plants to G&K Services, Inc. at a pretax gain of $74.0 million. The following condensed pro forma consolidated balance sheet gives effect to the sale as if the transaction had occurred at August 31, 1996: Condensed Pro Forma Consolidated Balance Sheet (Unaudited) August 31, 1996
Assets Current Assets: Cash and short-term investments $ 346,713 Receivables, net 249,823 Inventories and linens in service 228,808 Other current assets 8,645 Total Current Assets 833,989 Property, Plant, and Equipment, net 266,533 Other Assets 83,402 Total Assets $ 1,183,924 Liabilities and Stockholders' Equity Current Liabilities $ 230,191 Long-Term Debt, less current maturities 24,920 Deferred Income Taxes 63,347 Other Long-Term Liabilities 90,945 Stockholders' Equity 774,521 Total Liabilities and Stockholders' Equity $ 1,183,924
The following condensed pro forma consolidated statements of income restate reported results for the respective fiscal years to remove both the gain on the transaction and the results of the operations sold:
Condensed Pro Forma Consolidated Statements of Income (Unaudited) 1997 1996 Sales and Service Revenues $ 1,859,653 $1,803,034 Other Costs and Expenses 1,708,672 1,648,460 Restructuring Expense, Asset Impairments, and Other Charges 63,091 - Income before Provision for Income Taxes 87,890 154,574 Provision for Income Taxes 32,172 57,988 Income before Gain on Disposal $ 55,718 $ 96,586 Earnings per Share $ 1.23 $ 2.01 Weighted Average Number of Shares Outstanding (thousands) 45,191 47,941
-37- 14 Page 37 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. The pro forma statements are not necessarily indicative of the financial position and results of operations that would have been attained had the divestiture been consummated on the dates indicated or that may be attained in the future. In 1997, cash acquisition spending totaled $4.3 million and was the result of the chemical segment's purchase of chemical products companies in Ohio and Canada and the lighting equipment segment's acquisition of a small emergency lighting products manufacturer in Canada. The company also issued 536,872 shares valued at $20.5 million to acquire Enforcer Products, Inc., a specialty chemical company with a retail focus. The operating results of Enforcer were included in the chemical segment beginning with the third quarter of fiscal 1997. Acquisitions during 1996 related to the textile rental segment and were not material. During 1996 and 1995, the company divested several non-strategic or unprofitable businesses, primarily in the textile rental segment, generating cash of $15,250 and $14,044, respectively. In May 1995, the company acquired the assets of Infranor Canada Inc., a Canadian lighting products manufacturer based in Saint Hyacinthe, Quebec. The operating results of Infranor were included in the lighting equipment segment for the fourth quarter of fiscal 1995. Full-year acquisition spending of $2.7 million also included several small purchases for the textile rental segment. Note 7. Income Taxes Income taxes are reconciled with the Federal statutory rate as follows:
1997 1996 1995 Federal income tax computed at statutory rate $62,677 $56,647 $ 52,674 Increase (decrease) in taxes: State income tax, net of Federal income tax benefit 9,169 5,368 4,308 Other, net (46) (1,315) (582) $71,800 $60,700 $ 56,400
The following summarizes the components of income tax expense:
1997 1996 1995 Provision for current Federal taxes $ 93,912 $ 50,899 $55,921 Provision for current state taxes 14,106 8,258 6,628 Provision (credit) for deferred taxes (36,218) 1,543 (6,149) $ 71,800 $ 60,700 $56,400
Components of the net deferred income tax liability at August 31, 1997 and 1996 include:
1997 1996 Deferred tax liabilities: Depreciation $ 23,116 $ 43,790 Safe harbor lease 31,083 39,030 Amortization of linens 22,187 19,116 Pension 12,015 10,906 Total deferred tax liabilities 88,401 112,842 Deferred tax assets: Self insurance (26,307) (30,249) Deferred compensation (9,143) (7,966) Bonuses (2,989) (2,816) Foreign tax losses (605) (2,483) Asset disposition reserves (17,402) -- Other assets (10,939) (8,133) Total deferred tax assets (67,385) (51,647) Net deferred tax liability $ 21,016 $ 61,195
At August 31, 1997, the company had foreign net operating loss carryforwards of $1,639 expiring in fiscal years 1998 through 2004. Current income taxes payable were $38,351 and $5,374 at August 31, 1997 and 1996, respectively. -38- 15 Page 38 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. Note 8. Business Segment Information
Depreciation Capital Sales and and Expenditures Service Operating Identifiable Amortization Including Revenues Profit (Loss) Assets Expense Acquisitions 1997 Lighting Equipment $ 952,026 $ 92,372 $ 353,224 $16,722 $21,688 Textile Rental (1) 493,535 60,792 190,139 27,014 13,050 Chemical (2) 402,569 31,647 202,769 8,679 12,875 Envelope (3) 131,015 10,190 55,271 3,297 7,159 Other 57,034 1,906 -- 611 509 2,036,179 196,907 801,403 56,323 55,281 Corporate (4) (16,205) 304,949 1,658 1,709 Interest Expense, net (1,624) $ 2,036,179 $ 179,078 $1,106,352 $57,981 $56,990 1996 Lighting Equipment $ 867,771 $ 76,085 $ 332,006 $15,224 $20,800 Textile Rental (1) 530,625 42,198 420,169 29,753 28,418 Chemical 367,682 38,611 170,327 8,127 5,744 Envelope (5) 125,834 10,041 51,258 2,741 5,759 Other (5) 121,650 5,242 29,436 1,410 1,221 2,013,562 172,177 1,003,196 57,255 61,942 Corporate (8,764) 91,450 1,173 3,624 Interest Expense, net (1,565) $ 2,013,562 $ 161,848 $1,094,646 $58,428 $65,566 1995 Lighting Equipment $ 851,363 $ 61,313 $ 340,187 $14,205 $23,098 Textile Rental (1) 546,447 51,016 422,108 30,787 28,144 Chemical 352,670 35,227 169,376 6,711 4,527 Envelope (5) 109,806 8,882 47,125 2,390 2,957 Other (5) 110,341 5,469 36,275 1,437 1,163 1,970,627 161,907 1,015,071 55,530 59,889 Corporate (9,762) 116,275 1,600 21 Interest Expense, net (1,648) $ 1,970,627 $ 150,497 $1,131,346 $57,130 $59,910
(1) Textile rental segment 1997 operating profit includes one-time charges of $17,800 for restructuring and other and $31,800 for asset impairments. Gains resulting from the sale of fixed assets and businesses were $75,097 in 1997, $7,800 in 1996, and $6,300 in 1995. (2) Chemical segment operating profit includes one-time charges of $1,500 for restructuring and $8,100 for asset impairments. (3) Envelope segment operating profit includes one-time charges of $230 for restructuring. (4) Corporate operating profit includes one-time charges of $3,700 for asset impairments. (5) Prior-year amounts have been restated to conform to current-year presentation. Note 9. Quarterly Financial Data (Unaudited)
Sales and Service Income Earnings Revenues Gross Profit before Taxes Net Income per Share 1997 1st Quarter $511,893 $199,711 $39,340 $24,834 $.54 2nd Quarter 499,236 188,726 32,187 20,345 .45 3rd Quarter 515,279 210,864 46,808 29,434 .65 4th Quarter (1) 509,771 208,060 60,743 32,665 .73 1996 1st Quarter $492,550 $190,747 $37,095 $23,269 $.48 2nd Quarter 482,206 180,258 30,720 19,250 .40 3rd Quarter (2) 516,870 202,378 44,336 27,677 .58 4th Quarter (2) 521,936 202,393 49,697 30,952 .66
(1) Results for the fourth quarter include the gain on the sale of the textile rental plants of $75,097 and charges for restructuring and other reserves of $19,600 and asset impairments of $43,500. (2) Results for the third and fourth quarters include favorable self-insurance reserve adjustments of $6,302 and $7,644, respectively. -39- 16 Page 39 Exhibit 13 Report of Management National Service Industries, Inc. The management of National Service Industries, Inc. is responsible for the integrity and objectivity of the financial information in this annual report. These financial statements are prepared in conformity with generally accepted accounting principles, using informed judgments and estimates where appropriate. The information in other sections of this report is consistent with the financial statements. The company maintains a system of internal controls and accounting policies and procedures designed to provide reasonable assurance that assets are safeguarded and transactions are executed and recorded in accordance with management's authorization. The audit committee of the Board of Directors, composed entirely of outside directors, is responsible for monitoring the company's accounting and reporting practices. The audit committee meets regularly with management, the internal auditors, and the independent public accountants to review the work of each and to assure that each performs its responsibilities. Both the internal auditors and Arthur Andersen LLP have unrestricted access to the audit committee allowing open discussion, without management's presence, on the quality of financial reporting and the adequacy of internal accounting controls. James S. Balloun Chairman, President, and Chief Executive Officer Brock A. Hattox Executive Vice President and Chief Financial Officer Mark R. Bachmann Vice President and Controller Report of Independent Public Accountants To the Stockholders of National Service Industries, Inc.: We have audited the accompanying consolidated balance sheets of National Service Industries, Inc. (a Delaware corporation) and subsidiaries as of August 31, 1997 and 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Service Industries, Inc. and subsidiaries as of August 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Atlanta, Georgia October 20, 1997 -40- 17 Page 40 Exhibit 13 Management's Discussion and Analysis of Financial Condition and Results of Operations National Service Industries, Inc. Financial Condition National Service Industries maintained a strong financial position at August 31, 1997. Net working capital was $498.8 million, up from $409.0 million at August 31, 1996, and the current ratio was 2.8, compared with 3.1 at the prior year end. Cash and short-term investments increased to $262.4 million, from $59.2 million last August, largely as a result of the cash realized on the sale of 29 textile rental plants to G&K Services, Inc. in July 1997. During 1997, the company invested $53.1 million in capital expenditures and acquisitions. The percent of short-term and long-term debt to total capitalization was 4.6 percent at August 31, 1997 and 4.2 percent at the prior year end. Cash provided by operating activities was $127.6 million, compared to $153.0 million in 1996 and $145.9 million in 1995. The 1997 decrease resulted primarily from investment in inventories to support increased sales of the lighting equipment segment and changes in deferred taxes associated with the textile rental divestiture. The 1996 improvement was due in large part to better management of inventories and higher net income. Capital expenditures, exclusive of acquisition spending, were $48.8 million in 1997, $65.5 million in 1996, and $58.8 million in 1995. During both 1997 and 1996, the lighting equipment segment invested in facility and process improvements, equipment replacements, and tooling for new products. 1996 spending also included expansion of the segment's production facility in Monterrey, Mexico. The textile rental segment made substantial investments in facility improvements and replacement of equipment during 1997 and 1996. Cash payments in connection with acquisitions totaled $4.3 million in 1997, $.6 million in 1996, and $2.7 million in 1995. In 1997, the chemical segment purchased chemical products companies in Ohio and Canada, and the lighting equipment segment acquired a small emergency lighting products manufacturer in Canada. The company also issued 536,872 shares valued at $20.5 million to acquire Enforcer Products, Inc., a specialty chemical company with a retail focus. The operating results of Enforcer were included in the chemical segment beginning with the third quarter of fiscal 1997. The two prior years included spending for small acquisitions of the textile rental segment. In 1995, the company also acquired the assets of Infranor Canada Inc., a Canadian lighting products manufacturer based in Saint Hyacinthe, Quebec. The operating results of this acquisition were included in the lighting equipment segment beginning with the fourth quarter of fiscal 1995. In February 1997, the company sold the North Bros. insulation business for $27.1 million in cash. An immaterial gain was realized on the sale. The business had 1997 sales of $57.0 million and operating income of $1.9 million through the date of sale. Additionally, immaterial gains were realized as the company divested several non-strategic textile rental locations. In July 1997, the company sold 29 textile rental plants to G&K Services, Inc. for approximately $280 million in cash, resulting in a pretax gain of $74.0 million. The divested locations had 1997 sales of $176.5 million and operating income of $9.4 million through the date of sale. During 1996 and 1995, the company divested several non-strategic businesses, primarily in the textile rental segment, generating cash of $15.3 million and $14.0 million, respectively. During 1997, the company distributed 164 percent of net income to shareholders through dividends and share repurchases. A total of 2,727,000 shares were purchased under the company's standing annual authorization to repurchase 2.0 million shares plus the number of new shares issued in any one year. An additional 273,000 shares were purchased under the 1997 supplemental authorization for 1.25 million shares granted as a result of the textile rental divestiture transaction. Last year, the company spent $75.2 million on the repurchase of 2.0 million shares of its common stock. Dividend payments totaled $54.2 million, or $1.19 per share, in 1997, $55.3 million, or $1.15 per share, in 1996, and $54.2 million, or $1.11 per share, in 1995. The fiscal 1997 dividend of $1.19 per share was a 3.4 percent increase. -41- 18 Page 41 Exhibit 13 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Service Industries, Inc. For the periods presented, capital expenditures, working capital needs, dividends, acquisitions, and share repurchases were financed primarily with internally generated funds and some 1997 interim borrowing against the committed credit facility (discussed below). European operations were supplemented by short-term borrowings in the European market. Contractual commitments for capital and acquisition spending for fiscal 1998 total $22.6 million. The company expects actual capital expenditures in 1998 to be somewhat higher than the 1997 level. Late in fiscal 1996, the company negotiated the $250 million multi-currency committed credit facility with eleven domestic and international banks. The company has complimentary lines of credit totaling $62 million, of which $40 million has been provided domestically and $22 million is available on a multi-currency basis primarily from a European bank. Current liquid assets, internally generated funds, and the available credit are expected to meet the anticipated general operating cash requirements for the next twelve months. Results of Operations National Service Industries posted record revenues of $2.04 billion for the fiscal year ended August 31, 1997. Total year revenues increased $22.6 million, or 1.1 percent, from $2.01 billion in 1996, resulting from higher volumes in the lighting equipment, chemical, and envelope segments. Revenues for 1996 increased $42.9 million, or 2.2 percent, from $1.97 billion in 1995, primarily as a result of higher pricing in the lighting equipment segment and volume gains across the chemical and envelope segments. Net income for fiscal 1997 increased $6.1 million, or 6.1 percent, to $107.3 million, or $2.37 per share. Earnings per share grew at the greater rate of 12.5 percent due to a reduction of 2.8 million in average shares outstanding. For fiscal 1996, net income grew 7.5 percent to $101.1 million, or $2.11 per share. Lighting equipment segment sales grew 9.7 percent to $952 million from $868 million in 1996. Net income rose 21.4 percent to 9.7 percent of revenues. Higher unit volumes, primarily in the non-residential construction market, contributed to the increase in sales and, combined with improved mix and lower manufacturing costs, drove income higher. Sales for 1996 increased 1.9 percent from 1995 on the strength of pricing gains that were somewhat offset by lower unit volumes. For 1996, operating profit advanced 24.1 percent to 8.8 percent of revenues, compared with 7.2 percent of revenues in 1995. 1996 margin improvements resulted from a more favorable product mix and lower manufacturing costs. Textile rental segment revenues for 1997 decreased 7.0 percent to $494 million primarily as a result of the businesses divested. For 1997, operating income increased 44.1 percent to $60.8 million. The $75.1 million gain on the sale of plants was offset by restructuring expenses, asset impairments, and other charges totaling $49.6 million. A review of the segment's under-performing and non-strategic locations resulted in a plan to dispose of certain plants and consolidate the operations of others. Restructuring expenses included severance and union-related expenses of $1.2 million and exit expenses of $6.7 million for unexpired leases, costs to dispose of facilities, and costs of personnel to effect the closures and consolidations. Also as a result of the review and due to a combination of historical losses, anticipated future losses, and inadequate cash flows, the segment recorded an impairment loss of $22.3 million on assets to be disposed of and $9.5 million on assets held for use. After the impairment charge, the remaining net book value of the assets to be disposed of was immaterial. The benefits of these actions, primarily due to reduced employee and facility expenses, will be partially offset by the costs of plant consolidations over the next several years and will grow from approximately $3.0 million in fiscal 1998 to roughly $6.0 million in fiscal 2001. The restructuring is not expected to materially impact future liquidity or other sources and uses of capital. -42- 19 Page 42 Exhibit 13 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Service Industries, Inc. Textile rental segment revenues for 1996 were $531 million, compared with $546 million in 1995, and reflected lost sales from divested branches and continued price pressure. Operating income decreased 17.3 percent to 8.0 percent of revenues, compared with 9.3 percent of revenues in 1995, as a result of lower selling prices and cost increases for labor and merchandise, which were partially offset by lower workers' compensation costs and one-time gains on asset sales. Chemical segment revenues for 1997 grew 9.5 percent to $403 million, from $368 million in 1996, as a result of incremental volumes from U.S. and Canadian acquisitions. Operating income declined as a percent of sales due to higher manufacturing costs and investments to increase the size and capability of the segment's fully commissioned sales force. A study of the segment's European operations resulted in a severance-related charge of $1.5 million for operational reorganizations and an asset impairment loss of $8.1 million resulting from historical losses and inadequate future cash flows. Fiscal 1996 revenues advanced 4.3 percent to $368 million, from $353 million in 1995. The gains resulted from higher unit volumes, predominantly in domestic operations. Fiscal 1996 operating income grew 9.6 percent to 10.6 percent of revenues, from 10.0 percent of revenues in 1995, as margins benefited from the volume increases and lower material and operating costs. Envelope segment 1997 sales increased 4.1 percent to $131 million from $126 million in 1996 and $110 million in 1995. The impact of volume gains earlier in the year was reduced by contractual price adjustments in the fourth quarter due to reduced paper costs. Operating profit was only slightly ahead of 1996 levels due to increased manufacturing costs associated with the segment's growth initiatives. 1995 operating profit grew as a result of volume increases. The decrease in sales and operating profits of the "other" category reflects the divestiture of the insulation service business in February 1997. Corporate income declined $7.4 million in 1997 due to the fourth quarter asset impairment recorded to reflect the $1.2 million appraised value of an asset held for sale and due to accrued incentive plan costs. Corporate income increased in 1996 and declined in 1995 mainly because of 1995 accruals for higher business taxes. During all periods presented, the company benefited from higher average levels of short-term investments. Foreign currency exchange rate fluctuations were unfavorable in 1997, compared with favorable results in 1996 and 1995. Net interest expense varied only slightly for the three years presented. Consolidated income before taxes grew 10.6 percent and net income grew 6.1 percent in 1997. Excluding unusual gains and expenses, improvement resulted primarily from growth in the lighting equipment segment. In 1996, consolidated income before taxes and net income grew 7.5 percent, compared with 13.8 percent for both measures in 1995. The 1996 decline was due primarily to a lower rate of growth in segment operating profits. The 1997 provision for income taxes was 40.1 percent of pretax income, compared with 37.5 percent in 1996 and 1995. The increase in the 1997 rate was due mainly to the higher rate applicable to the gain on the textile rental divestiture. Outlook Fiscal 1997 was a year in which NSI solidified its vision of its businesses and took actions to position the company for the future. Fiscal 1998 sales are anticipated to be down slightly due to the lost sales of the divested businesses. Sales growth of continuing businesses is expected to exceed 5.0 percent, given the continued strength in the lighting equipment market and growth initiatives in the chemical and envelope segments. NSI will continue to invest for future profitable growth of the remaining businesses and to increase the pace of acquisitions. The year-over-year gain in earnings per share is expected to be in line with 1997's growth performance. -43- 20 Page 43 Exhibit 13 Ten-Year Financial Summary National Service Industries, Inc.
(Dollar amounts in thousands, except per-share data) 1997 1996 1995 1994 Operating Results Net sales of products $ 1,542,644 $ 1,482,937 $ 1,424,180 $ 1,337,410 Service revenues 493,535 530,625 546,447 544,454 Total revenues 2,036,179 2,013,562 1,970,627 1,881,864 Cost of products sold 945,794 933,405 908,869 875,055 Cost of services 283,024 304,381 299,687 286,519 Selling and administrative expenses 633,740 616,513 601,143 576,463 Interest expense (income), net 1,624 1,565 1,648 2,788 Gain on sale of businesses (1) (75,097) (7,579) (5,726) (2,249) Restructuring expense, asset impairments, and other 63,091 -- -- -- charges Other expense, net (1) 4,925 3,429 14,509 11,090 Income before taxes 179,078 161,848 150,497 132,198 Income taxes 71,800 60,700 56,400 49,500 Net income $ 107,278 $ 101,148 $ 94,097 $ 82,698 Per-Share Data (2) Net income $ 2.37 $ 2.11 $ 1.93 $ 1.67 Cash dividends 1.19 1.15 1.11 1.07 Stockholders' equity 15.20 15.45 15.41 14.77 Financial Ratios Current ratio 2.8 3.1 3.2 3.2 Net income as a percent of sales 5.3% 5.0% 4.8% 4.4% Return on average stockholders' equity 15.5% 13.6% 13.0% 11.6% Dividends as a percent of current year earnings 50.2% 54.6% 57.6% 64.1% Percent of debt to total capitalization 4.6% 4.2% 4.3% 4.3% (Dollar amounts in thousands, expert per-share data) 1993 1992 1991 Operating Results Net sales of products $ 1,257,906 $ 1,189,684 $ 1,164,181 Service revenues 546,916 444,127 437,534 Total revenues 1,804,822 1,633,811 1,601,715 Cost of products sold 832,264 810,552 791,355 Cost of services 281,551 236,474 240,376 Selling and administrative expenses 556,162 462,240 456,622 Interest expense (income), net 3,645 (837) (4,332) Gain on sale of businesses (1) (1,379) -- -- Restructuring expense, asset impairments, and other -- -- 63,467 charges Other expense, net (1) 13,063 8,474 5,591 Income before taxes 119,516 116,908 48,636 Income taxes 44,400 42,800 16,400 Net income $ 75,116 $ 74,108 $ 32,236 Per-Share Data (2) Net income $ 1.52 $ 1.50 $. 65 Cash dividends 1.03 .99 .95 Stockholders' equity 14.21 13.79 13.33 Financial Ratios Current ratio 2.9 3.5 3.4 Net income as a percent of sales 4.2% 4.5% 2.0% Return on average stockholders' equity 10.9% 11.1% 4.8% Dividends as a percent of current year earnings 67.9% 66.3% 146.2% Percent of debt to total capitalization 4.7% 4.2% 5.0% (Dollar amounts in thousands, expert per-share data) 1990 1989 1988 Operating Results Net sales of products $ 1,250,833 $ 1,183,666 $ 1,093,163 Service revenues 396,981 355,845 321,025 Total revenues 1,647,814 1,539,511 1,414,188 Cost of products sold 832,867 800,385 741,383 Cost of services 219,673 198,262 179,793 Selling and administrative expenses 438,949 397,160 361,845 Interest expense (income), net (3,712) (3,805) (2,429) Gain on sale of businesses (1) -- (3,080) -- Restructuring expense, asset impairments, and other -- -- -- charges Other expense, net (1) 4,322 2,571 374 Income before taxes 155,715 148,018 133,222 Income taxes 56,000 53,300 47,100 Net income $ 99,715 $ 94,718 $ 86,122 Per-Share Data (2) Net income $ 2.02 $ 1.92 $ 1.75 Cash dividends .90 .82 .73 Stockholders' equity 13.68 12.44 11.33 Financial Ratios Current ratio 4.5 4.8 5.0 Net income as a percent of sales 6.1% 6.2% 6.1% Return on average stockholders' equity 15.6% 16.3% 16.3% Dividends as a percent of current year earnings 44.6% 42.6% 41.8% Percent of debt to total capitalization 4.2% 3.5% 3.9%
-44- 21 Page 44 Exhibit 13 Ten-Year Financial Summary (continued) National Service Industries, Inc.
(Dollar amounts in thousands, except per-share data) 1997 1996 1995 1994 Financial Position Increase (decrease) in: Cash and cash equivalents $ (1,539) $ (20,740) $ 20,783 $ 42,766 Short-term investments 204,751 (3,047) 1,019 (2,197) Net working capital 498,758 408,955 437,840 413,114 Short-term debt $ 5,889 $ 6,742 $ 6,486 $ 5,765 Long-term debt 26,197 24,920 26,776 26,863 Total debt 32,086 31,662 33,262 32,628 Stockholders' equity 671,813 718,008 744,404 727,385 Capitalization $ 703,899 $ 749,670 $ 777,666 $ 760,013 Other Data Capital expenditures (including acquisitions) $ 56,990 $ 65,566 $ 59,910 $ 42,508 Depreciation and amortization 57,981 47,643 57,130 60,548 Total assets 1,106,352 1,094,646 1,131,346 1,101,261 Deferred income taxes 34,093 63,347 65,756 73,319 Self-insurance reserves 57,056 63,369 67,830 61,081 Other long-term liabilities 35,193 27,576 24,010 22,940 Weighted average number of shares outstanding (in 45,191 47,941 48,696 49,547 thousands) (2) Shareholders 7,165 6,281 6,655 7,034 Employees 16,100 20,600 21,100 22,000 Use of Total Revenues Salaries and wages $ 572,517 $ 580,571 $ 568,616 $ 565,859 Materials and supplies 909,082 875,658 832,668 783,610 Other operating expenses (1) 333,199 348,142 370,575 349,849 Taxes and licenses 124,805 115,621 110,397 102,097 Gain on sale of businesses (1) (75,097) (7,579) (5,726) (2,249) Restructuring expense, asset impairments, and other 63,091 -- -- -- charges Dividends paid 54,222 55,272 54,156 53,042 Retained earnings 54,360 45,877 39,941 29,656 $ 2,036,179 $ 2,013,562 $ 1,970,627 $ 1,881,864 (Dollar amounts in thousands, except per-share data) 1993 1992 1991 1990 Financial Position Increase (decrease) in: Cash and cash equivalents $ (85,284) $ 27,617 $ (50,437) $ 23,433 Short-term investments (3,736) (5,551) 12,813 (27,247) Net working capital 363,575 399,893 386,306 447,800 Short-term debt $ 6,196 $ 1,434 $ 3,254 $ 2,253 Long-term debt 28,418 28,359 31,373 27,465 Total debt 34,614 29,793 34,627 29,718 Stockholders' equity 704,023 682,954 660,567 675,444 Capitalization $ 738,637 $ 712,747 $ 695,194 $ 705,162 Other Data Capital expenditures (including acquisitions) $ 82,171 $ 49,789 $ 90,229 $ 82,932 Depreciation and amortization 62,097 53,816 50,249 42,821 Total assets 1,081,510 1,036,908 1,008,319 960,622 Deferred income taxes 78,286 87,150 96,627 99,277 Self-insurance reserves 56,335 47,638 38,428 15,222 Other long-term liabilities 27,110 28,677 22,015 16,067 Weighted average number of shares outstanding (in 49,556 49,539 49,540 49,389 thousands) (2) Shareholders 7,262 7,554 7,996 8,248 Employees 22,200 20,100 20,900 21,800 Use of Total Revenues Salaries and wages $ 572,163 $ 502,709 $ 501,502 $ 491,334 Materials and supplies 760,551 700,338 683,871 713,310 Other operating expenses (1) 301,356 273,330 258,919 246,288 Taxes and licenses 97,015 83,326 59,889 97,167 Gain on sale of businesses (1) (1,379) -- -- -- Restructuring expense, asset impairments, and other -- -- 63,467 -- charges Dividends paid 51,041 49,105 47,124 44,506 Retained earnings 24,075 25,003 (13,057) 55,209 $ 1,804,822 $ 1,633,811 $ 1,601,715 $1,647,814 (Dollar amounts in thousands, except per-share data) 1989 1988 Financial Position Increase (decrease) in: Cash and cash equivalents $ 14,612 $ (24,786) Short-term investments (19,633) 35,971 Net working capital 450,185 439,990 Short-term debt $ 1,372 $ 1,237 Long-term debt 20,765 21,391 Total debt 22,137 22,628 Stockholders' equity 612,668 558,160 Capitalization $ 634,805 $ 580,788 Other Data Capital expenditures (including acquisitions) $ 66,491 $ 55,394 Depreciation and amortization 36,260 31,037 Total assets 886,358 823,906 Deferred income taxes 101,320 103,021 Self-insurance reserves 15,213 15,016 Other long-term liabilities 17,964 15,330 Weighted average number of shares outstanding (in 49,255 49,258 thousands) (2) Shareholders 8,459 8,851 Employees 20,800 20,400 Use of Total Revenues Salaries and wages $ 465,522 $ 428,325 Materials and supplies 668,655 616,223 Other operating expenses (1) 222,350 201,478 Taxes and licenses 91,346 82,040 Gain on sale of businesses (1) (3,080) -- Restructuring expense, asset impairments, and other -- -- charges Dividends paid 40,389 35,960 Retained earnings 54,329 50,162 $ 1,539,511 $ 1,414,188
(1) Prior-year amounts have been restated to conform to current-year presentation. (2) Restated to reflect stock split of 3 for 2 effective January 13, 1987. -45- 22 Page 45 Exhibit 13 Shareholder Information National Service Industries, Inc. Executive Offices NSI Center 1420 Peachtree Street, NE Atlanta, Georgia 30309-3002 (404) 853-1000 Transfer Agent and Registrar Wachovia Bank of North Carolina, N.A. P.O. Box 8217 Boston, Massachusetts 02266-8217 (800) 633-4236 Independent Public Accountants Arthur Andersen LLP 133 Peachtree Street, NE Suite 2500 Atlanta, Georgia 30303-1846 (404) 658-1776 Annual Meeting 10:00 a.m., Wednesday, January 7, 1998 Woodruff Arts Center 1280 Peachtree Street, NE Atlanta, Georgia 30309-3502 Listing New York Stock Exchange. Ticker Symbol: NSI Shareholders of Record The number of shareholders of record holding NSI common stock was 7,165 as of October 3, 1997. Reports Available to Shareholders Copies of the following company reports may be obtained, without charge: 1997 Annual Report to the Securities and Exchange Commission, filed on Form 10-K; and Quarterly Reports to the Securities and Exchange Commission, filed on Form 10-Q. Requests should be directed to: National Service Industries, Inc. NSI Center Attention: Investor Relations, MS 831 1420 Peachtree Street, NE Atlanta, Georgia 30309-3002 (404) 853-1201 Web Site www.nationalservice.com Dividend Reinvestment Plan An automatic dividend reinvestment plan is available to all shareholders of record. Dividends can be automatically reinvested in NSI common stock. Participants may also add cash for the purchase of additional shares. For more information, contact the Transfer Agent at (800) 633-4236. 23 Cash Dividends NSI now offers direct deposit of dividends to bank, savings, or money market accounts. For more information, contact the Transfer Agent at (800) 633-4236. Common Share Prices and Dividends per Share
Dividends Price per Share Paid per High Low Share 1997 1st Quarter $38 1/4 $33 1/2 $.29 2nd Quarter 39 7/8 33 5/8 .30 3rd Quarter 44 3/4 37 1/4 .30 4th Quarter 52 1/4 43 1/4 .30 1996 1st Quarter $32 3/4 $28 5/8 $.28 2nd Quarter 35 1/4 30 3/4 .29 3rd Quarter 39 7/8 32 1/2 .29 4th Quarter 40 1/4 37 1/2 .29
The above common share prices are as quoted on the New York Stock Exchange. Inside Back Cover EX-21 4 LIST OF SUBSIDIARIES 1 Page 46 Exhibit 21 LIST OF SUBSIDIARIES Registrant - National Service Industries, Inc. Registrant owns, directly or indirectly, all of the common stock of the following subsidiaries:
State or Other Jurisdiction of Incorporation Subsidiary Principal Location or Organization - ----------------------------------------- ----------------------- ---------------- Chemical Continental Industries S.A.R.L. Nogent-le-Roi, France France Chemical Specialties B.V. Bergen op Zoom, Holland Netherlands Graham International B.V. Bergen op Zoom, Holland Netherlands Kem Europa B.V. Bergen op Zoom, Holland Netherlands Keplime B.V. Bergen op Zoom, Holland Netherlands Lithonia Lighting Mexico, S.A. de C.V. Monterrey, Nuevo Leon Mexico Lithonia Lighting Servicios, S.A. de C.V. Monterrey, Nuevo Leon Mexico National Service Industries, Inc. Atlanta, Georgia Georgia NSI Enterprises, Inc. Atlanta, Georgia California NSI Holdings, Inc. Montreal, Quebec, Canada Canada NSI Insurance (Bermuda) Ltd. Hamilton, Bermuda Bermuda NSI Leasing, Inc. Atlanta, Georgia Delaware Productos Lithonia Lighting de Mexico, S.A. de C.V. Monterrey, Nuevo Leon Mexico Research Development Industries S.A. Nogent-le-Roi, France France Resolve S.A. Nogent-le-Roi, France France Selig Company of Puerto Rico, Inc. Atlanta, Georgia Puerto Rico ZEP Belgium S.A. Brussels, Belgium Belgium ZEP Europe B.V. Bergen op Zoom, Holland Netherlands ZEP FRANCE Nogent-le-Roi, France France Zep Industries S.A. Nogent-le-Roi, France France Zep Italia S.r.l. Aprilia, Italy Italy Zep Manufacturing B.V. Bergen op Zoom, Holland Netherlands Zep Manufacturing Company Santa Clara, California Delaware Zep S.A. Bern, Switzerland Switzerland
The consolidated financial statements include the accounts of all subsidiaries. EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT 1 Page 47 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated October 20, 1997, included or incorporated by reference in National Service Industries, Inc. Form 10-K for the year ended August 31, 1997, into the Company's previously filed Registration Statement File Nos. 33-36980, 33-51339, 33-51341, 33-51343, 33-51345, 33-51351, 33-51355, 33-51357, 33-60715, 33-63041, and 33-63043. ARTHUR ANDERSEN LLP Atlanta, Georgia November 20, 1997 EX-24 6 POWERS OF ATTORNEY 1 Page 48 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ James S. Balloun ----------------------------------------- James S. Balloun, Chairman of the Board, President and Chief Executive Officer, and Director /s/ Brock Hattox ----------------------------------------- Brock Hattox, Executive Vice President and Chief Financial Officer /s/ Mark R. Bachmann ----------------------------------------- Mark R. Bachmann, Vice President and Controller (Principal Accounting Officer) /s/ David Levy ------------------------------------------ David Levy, Executive Vice President, Administration and Counsel, and Director Dated: November 17, 1997 2 Page 49 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ John L. Clendenin --------------------------------- John L. Clendenin Dated: November 17, 1997 3 Page 50 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Thomas C. Gallagher --------------------------------- Thomas C. GAllagher Dated: November 17, 1997 4 Page 51 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Robert M. Holder, Jr. --------------------------------- Robert M. Holder, Jr. Dated: November 17, 1997 5 Page 52 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ James C. Kennedy --------------------------------- James C. Kennedy Dated: November 17, 1997 6 Page 53 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Bernard Marcus --------------------------------- Bernard Marcus Dated: November 17, 1997 7 Page 54 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ John G. Medlin, Jr. --------------------------------- John G. Medlin, Jr. Dated: November 17, 1997 8 Page 55 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Samuel A. Nunn --------------------------------- Samuel A. Nunn Dated: November 17, 1997 9 Page 56 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Herman J. Russell --------------------------------- Herman J. Russell Dated: November 17, 1997 10 Page 57 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, her true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for her in her name, place, and stead in her capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Betty L. Siegel --------------------------------- Betty L. Siegel Dated: November 17, 1997 11 Page 58 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1997, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Barrie A. Wigmore --------------------------------- Barrie A. Wigmore Dated: November 17, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL SERVICE INDUSTRIES CONSOLIDATED BALANCE SHEET AS OF AUGUST 31, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED AUGUST 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR AUG-31-1997 AUG-31-1997 57,123 205,302 262,991 4,302 179,046 780,758 593,038 356,308 1,106,352 282,000 26,197 0 0 57,919 613,894 1,106,352 1,542,644 2,036,179 945,794 1,228,818 622,159 0 6,124 179,078 71,800 107,278 0 0 0 107,278 2.37 2.35
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