Page 1 of 21
Exhibit Index on Page 11
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For quarter ended May 31, 1996 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)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (applicable only to corporate
issuers).
Common Stock - $1.00 Par Value - 47,532,030 shares as of June 30, 1996.
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Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS -
MAY 31, 1996 AND AUGUST 31, 1995 ............................. 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS AND NINE MONTHS ENDED MAY 31, ................... 4
1996 AND 1995
CONSOLIDATED STATEMENTS OF CASH FLOWS - ............................ 5
NINE MONTHS ENDED MAY 31, 1996 AND 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ......................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 7-8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................... 9
SIGNATURES ............................................................... 10
EXHIBIT INDEX ............................................................ 11
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Page 3
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
May 31, August 31,
1996 1995
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 79,307 $ 79,402
Short-term investments ............................. 2,551 3,598
Receivables, less reserves for doubtful
accounts of $8,981 at May 31, 1996
and $6,467 at August 31, 1995 .................... 255,564 266,056
Inventories, at the lower of cost (on a
first-in, first-out basis) or market ............. 177,503 185,789
Linens in service, net of amortization ............. 94,833 88,605
Deferred income taxes .............................. 7,145 10,221
Prepayments ........................................ 8,997 6,739
Total Current Assets ............................. 625,900 640,410
Property, Plant, and Equipment, at cost:
Land ............................................... 29,587 31,016
Buildings and leasehold improvements ............... 194,197 192,023
Machinery and equipment ............................ 536,071 503,868
Total Property, Plant, and Equipment ............. 759,855 726,907
Less - Accumulated depreciation and
amortization ..................................... 403,873 377,003
Property, Plant, and Equipment - net ........... 355,982 349,904
Other Assets:
Goodwill and other intangibles ..................... 89,905 101,410
Other .............................................. 39,324 39,622
Total Other Assets ............................... 129,229 141,032
Total Assets ................................... $1,111,111 $1,131,346
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ............... $ 54 $ 87
Notes payable ...................................... 6,529 6,399
Accounts payable ................................... 69,801 81,524
Accrued salaries, commissions, and bonuses ......... 37,469 43,944
Current portion of self insurance reserves ......... 15,769 16,276
Other accrued liabilities........................... 49,973 54,340
Total Current Liabilities ........................ 179,595 202,570
Long-Term Debt, less current maturities .............. 26,737 26,776
Deferred Income Taxes ................................ 61,509 65,756
Self Insurance Reserves, less current portion ........ 68,515 67,830
Other Long-Term Liabilities .......................... 25,999 24,010
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 at May
31, 1996 and August 31, 1995 ..................... 57,919 57,919
Paid-in capital .................................... 10,830 8,065
Retained earnings .................................. 773,870 746,256
842,619 812,240
Less - Treasury stock, at cost (10,204,248 shares at
May 31, 1996 and 9,609,261 shares at August
31, 1995) ........................................ 93,863 67,836
Total Stockholders' Equity ................... 748,756 744,404
Total Liabilities and Stockholders ......... $1,111,111 $1,131,346
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
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NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per-share data)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31 MAY 31
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales and Service Revenues:
Net sales of products ......................... $ 381,114 $ 363,765 $ 1,093,359 $ 1,042,706
Service revenues .............................. 135,756 142,033 398,267 409,886
Total Revenues .............................. 516,870 505,798 1,491,626 1,452,592
Costs and Expenses:
Cost of products sold ......................... 237,414 233,668 691,951 669,891
Cost of services .............................. 77,078 75,227 226,292 225,054
Selling and administrative exp ................ 157,395 153,085 460,438 447,001
Interest expense .............................. 1,082 1,002 3,180 2,792
Other expense (income), net ................... (435) 1,752 (2,386) 5,024
Total Costs and Expenses .................... 472,534 464,734 1,379,475 1,349,762
Income before Provision for Inco ................ 44,336 41,064 112,151 102,830
Provision for (Benefit from) Income Taxes:
Current ....................................... 15,779 18,842 42,997 41,973
Deferred ...................................... 880 (3,405) (1,042) (3,462)
16,659 15,437 41,955 38,511
Net Income ...................................... $ 27,677 $ 25,627 $ 70,196 $ 64,319
Per Share:
Net income .................................... $ .58 $ .53 $ 1.46 $ 1.32
Cash dividends ................................ $ .29 $ .28 $ .86 $ .83
Weighted Average Number of Shares
Outstanding (thousands) ....................... 48,059 48,382 48,240 48,813
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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Page 5
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
<TABLE>
NINE MONTHS ENDED
MAY 31
1996 1995
<S> <C> <C>
Cash Provided by (Used for) Operating Activities:
Net income ................................................. $ 70,196 $ 64,319
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 44,184 43,467
Provision for losses on accounts receivable ............ 3,509 3,698
Loss (gain) on the sale of property, plant and equipment (1,718) 137
Loss (gain) on the sale of business .................... (2,946) (1,161)
Change in noncurrent deferred income taxes ............. (1,042) (3,462)
Change in assets and liabilities net of effect
of acquisitions-
Receivables ........................................ 6,311 (1,547)
Inventories and linens in service, net ............. 799 (19,178)
Current deferred income taxes ...................... 3,076 6,657
Prepayments and other .............................. (2,375) (1,970)
Accounts payable and accrued liabilities ........... (23,771) 9,132
Net Cash Provided by Operating Activities ........ 96,223 100,092
Cash Provided by (Used for) Investing Activities:
Change in short-term investments ........................... 1,047 (6,807)
Purchase of property, plant, and equipment ................. (48,367) (39,180)
Sale of property, plant, and equipment ..................... 5,177 6,435
Sale of business ........................................... 11,517 4,626
Acquisitions, net of cash acquired ......................... (600) (2,668)
Change in other assets ..................................... (65) (2,487)
Net Cash Used for Investing Activities ................... (31,291) (40,081)
Cash Provided by (Used for) Financing Activities:
Change in notes payable .................................... 130 1,425
Repayment of long-term debt ................................ (72) (638)
Recovery of investment in tax benefits ..................... 1,290 872
Deferred income taxes from investment in tax benefits ...... (3,205) (2,925)
Issuance (purchase) of treasury stock ...................... (23,262) (23,758)
Change in other long-term liabilities ...................... 2,674 5,121
Cash dividends paid ........................................ (41,458) (40,630)
Net Cash Used for Financing Activities ................... (63,903) (60,533)
Effect of Exchange Rate Changes on Cash ...................... (1,124) 721
Net Change in Cash and Cash Equivalents ...................... (95) 199
Cash and Cash Equivalents at Beginning of Year ............... 79,402 58,619
Cash and Cash Equivalents at End of Period ................... $ 79,307 $ 58,818
Supplemental Cash Flow Information:
Income taxes paid during the period ........................ $ 44,791 $ 34,620
Interest paid during the period ............................ 3,026 2,681
Noncash Investing and Financing Activities:
Noncash aspects of sale of business -
Receivables incurred .................................... $ -- $ (893)
Noncash Aspects of Acquisitions:
Liabilities assumed or incurred ............................ $ 6 $ 468
Treasury stock issued (returned)
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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Page 6
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION:
The interim consolidated financial statements included herein have been prepared
by the company without audit and the condensed consolidated balance sheet as of
August 31, 1995 has been derived from audited statements. These statements
reflect all adjustments, all of which are of a normal, recurring nature, which
are, in the opinion of management, necessary to present fairly the consolidated
financial position as of May 31, 1996, the consolidated results of operations
for the three months and nine months ended May 31, 1996 and 1995, and the
consolidated cash flows for the nine months ended May 31, 1996 and 1995. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in the company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1995.
The results of operations for the three and nine months ended May 31, 1996 are
not necessarily indicative of the results to be expected for the full fiscal
year because the company's revenues and income are generally higher in the
second half of its fiscal year and because of the uncertainty of general
business conditions.
2. BUSINESS SEGMENT INFORMATION:
Three Months Ended May 31
Sales and Service
Revenues Operating Profit
1996 1995 1996 1995
(In thousands)
Lighting Equipment ......... $ 219,904 $ 215,987 $ 21,596 $ 16,155
Textile Rental ............. 135,756 142,033 11,519 16,005
Chemical ................... 95,657 91,129 9,394 7,407
Other ...................... 65,553 56,649 4,532 3,837
$ 516,870 $ 505,798 47,041 43,404
Corporate and other ........ (1,623) (1,338)
Interest Expense ........... (1,082) (1,002)
Total ...................... $ 44,336 $ 41,064
Nine Months Ended May 31
Sales and Service
Revenues Operating Profit
1996 1995 1996 1995
(In thousands)
Lighting Equipment ......... $ 634,636 $ 620,546 $ 51,750 $ 42,425
Textile Rental ............. 398,267 409,886 30,519 34,806
Chemical ................... 272,119 259,273 25,321 23,019
Other ...................... 186,604 162,887 10,674 10,597
$ 1,491,626 $ 1,452,592 118,264 110,847
Corporate and other ........ (2,933) (5,225)
Interest Expense ........... (3,180) (2,792)
Total ...................... $112,151 $102,830
3. INVENTORIES: Major classes of inventory as of May 31, 1996 and August 31,
1995 were as follows:
May 31, August 31,
1996 1995
(In thousands)
Raw Materials and Supplies ................... $ 77,675 $ 87,470
Work-in-Process .............................. 9,140 9,879
Finished Goods ............................... 90,688 88,440
Total ................................... $177,503 $185,789
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Page 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes.
Financial Condition
National Service Industries continued in solid financial condition at May 31,
1996. Net working capital was $446.3 million, up from $437.8 million at August
31, 1995, and the current ratio was 3.5, compared with 3.2 at year end. Cash and
short-term investments were $81.9 million compared with $83.0 million at August
31. For the nine months ended May 31, the company invested $49.0 million in
capital expenditures and acquisitions. Long-term debt and other long-term
liabilities were 13.9 percent of total capitalization, up slightly from 13.7
percent at August 31. Cash provided by operating activities was $96.2 million,
compared with $100.1 million through the third quarter last year.
Capital expenditures, exclusive of acquisition spending, were $48.4 million for
the first nine months this year and $39.2 million for the nine months last year.
Lighting equipment segment spending included expansion of the Mexican production
facility as well as continued investment in equipment replacements, process
improvements, and tooling for new products. Through the third quarter, textile
rental segment spending consisted primarily of replacement and improvement of
facilities, equipment and vehicles. Prior-year spending included the lighting
equipment segment's manufacturing equipment replacements and improvements and
construction of the Mexican production facility and the textile rental segment's
fleet upgrades, facility improvements, and information systems enhancements.
Acquisition spending in the current year has been minimal. Prior-year spending
of $2.7 million was mainly due to the lighting equipment segment's acquisition
of the assets of Infranor Canada, Inc., a small outdoor lighting products
company.
Dividend payments for the three quarters totaled $41.5 million, or 86 cents per
share, compared with $40.6 million, or 83 cents per share, for the prior-year
period. Effective January, 1996, the regular quarterly dividend rate was
increased 3.6 percent to 29 cents per share, or an annual rate of $1.16 per
share. For the year to date, the company has repurchased 745,400 of its shares
under the board approved 2.0 million share per year standing authorization.
For the periods presented, capital expenditures, working capital needs,
dividends, acquisitions, and share repurchases were financed primarily with
internally generated funds. European operations were supplemented by short-term
borrowings in the European market. Contractual commitments for capital and
acquisition spending during the coming twelve months total $23 million. For the
current fiscal year, the company expects actual capital expenditures to be
somewhat higher than levels of recent years, which, excluding acquisition
spending, were $59 million in 1995, $43 million in 1994, and $36 million in
1993. Current liquid assets and internally generated funds are expected to be
more than adequate to meet anticipated general operating cash requirements for
the next twelve months. Some interim borrowings might be incurred to meet
short-term needs. The company has complimentary lines of credit totaling $152
million, of which $110 million has been provided domestically and $42 million is
available on a multi-currency basis primarily from a European bank. During the
third quarter, the company has negotiated a $250 million committed credit
facility which is scheduled to close during the fourth quarter. The facility
will enhance the company's financial flexibility and provide resources to fund
future growth.
Results of Operations
National Service Industries' earnings per share for the third quarter ended May
31, 1996 increased 8.7 percent to 58 cents compared with the same quarter a year
ago. Sales for the quarter increased 2.2 percent to $517 million. Net income of
$27.7 million was 8.0 percent higher than the $25.6 million reported in last
year's third quarter. Earnings per share increased at the greater rate of 8.7
percent due to a reduction of 323,000 in average shares outstanding.
The increased third quarter profit was driven by the lighting equipment and
chemical segments. The performance of all four segments was enhanced by improved
workers compensation claims experience.
For the nine months of NSI's fiscal year, sales increased $39.0 million, or 2.7
percent, to $1.49 billion. Net income increased $5.9 million, or 9.1 percent, to
$70.2 million. Earnings per share increased 10.4 percent to $1.46.
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Page 8
The lighting equipment segment continued its growth with sales for the third
quarter advancing 1.8 percent to $220 million from $216 million last year. For
the nine months, sales increased 2.3 percent to $635 million from $621 million.
The increases in both periods resulted from pricing gains, which were offset
somewhat by lower unit volumes. For the third quarter, operating income advanced
33.7 percent to 9.8 percent of revenues, compared with 7.5 percent the year
earlier. For the nine months, operating income grew 22.0 percent to 8.2 percent
of revenues, compared with 6.8 percent the prior year. Better pricing, a more
favorable product mix and cost reduction efforts, in addition to the reduction
in workers compensation costs, continued to benefit profit margins in both
current-year periods.
Sales of the textile rental segment declined 4.4 percent from $142 million to
$136 million for the quarter and 2.8 percent from $410 million to $398 million
for the nine months. The declines in both periods were due largely to lost sales
from previously divested branches. Operating income decreased 28.0 percent to
$11.5 million for the quarter and 12.3 percent to $30.5 million year to date
primarily as a result of lower prices and additional labor, maintenance, and
merchandise costs. Results for both current-year periods benefited from the
reduction in workers compensation costs and year-to-date results included the
sale of two non-strategic branches. The healthcare business continued to remain
under pressure.
Chemical segment sales advanced 5.0 percent to $96 million for the quarter and
$272 million for the nine months due largely to higher unit volumes with some
improvement in pricing. Operating income increased 26.8 percent to 9.8 percent
of revenues for the quarter and 10.0 percent to 9.3 percent of revenues for the
nine months, from 8.1 percent and 8.9 percent the respective prior-year periods.
The improvement resulted almost entirely from volume increases and lower raw
material prices.
Combined sales of the insulation and envelope businesses increased 15.7 percent
for the quarter and 14.6 percent for the year to date. Operating profits
improved by 18.1 percent for the quarter and .7 percent year-to-date. The
quarter's improvement was largely a result of the reduced workers compensation
costs. An unfavorable product mix in the insulation business and higher envelope
manufacturing costs offset the year-to-date workers compensation benefit.
Corporate expense was higher for the third quarter this year due to increased
administrative expenses. Year-to-date expense was lower and benefited from
interest earned on higher average investment levels. Last year's nine-month
expense was also higher due to the company's first quarter adoption of Statement
of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for
Postemployment Benefits." Last year's resulting accrual related primarily to
severance agreements and the liability for life insurance coverage for certain
eligible disabled employees.
Interest expense on European loans was higher than in the prior-year period due
to increased borrowings at somewhat higher average interest rates.
The provision for income taxes was 37.6 percent of pretax income for the quarter
and 37.4 percent for the year to date, compared with 37.6 percent and 37.5
percent for the respective prior-year periods. Changes in the comparative
year-to-date effective rates resulted from variations in the relative amounts of
tax exempt income.
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Page 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 11).
(b) There were no reports on Form 8-K for the three months ended May 31, 1996.
<PAGE>
Page 10
SIGNATURES
Pursuant to the requirements 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.
REGISTRANT
DATE July 10, 1996 /s/ David Levy
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE July 10, 1996 /s/ Mark R. Bachmann
MARK R. BACHMANN
VICE PRESIDENT, CONTROLLER
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Page 11
INDEX TO EXHIBITS
Page No.
EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements:
(a)-Letter Agreement dated March 21, 1996 amending
the Consulting Agreement betweeen National Service
Industries, Inc. and Erwin Zaban dated December
31, 1991 12
(b)-Severance Agreement between National Service
Industries, Inc. and J. Robert Hipps dated May 14,
1996 13
(c)-Letter Agreement between National Service
Industries Inc. and J. Robert Hipps dated May 24,
1996, amending as of that date the Incentive Stock
Option Agreement 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 17
(d)-Appendix C to Restated and Amended Supplemental
Retirement Plan for Executives of National Service
Industries, Inc. (Supplemental Pension Plan)
Effective May 31, 1996 19
EXHIBIT 11 - Computations of Net Income per Share of
Common Stock 20
EXHIBIT 27 - Financial Data Schedules 21
Page 12
Exhibit 10(iii)A(a)
March 21, 1996
Erwin Zaban
3374 Old Plantation Road, N.W.
Atlanta, Georgia 30327
Dear Erwin:
This letter amends your consulting agreement with National Service Industries,
Inc. dated December 30, 1991, in accordance with action taken by the Board of
Directors at its meeting yesterday.
The original term of the consulting agreement was three years. Because the
agreement was suspended while you served as an officer of the Corporation from
October, 1992 until September, 1994, the original term was scheduled to expire
in October, 1996.
The term of the consulting agreement is hereby extended through December 30,
1996. The consulting fees and other terms of the agreement remain unchanged.
Sincerely,
/s/ James S. Balloun
James S. Balloun
AGREED TO AND ACCEPTED
AS OF MARCH 21, 1996:
/s/ Erwin Zaban
ERWIN ZABAN
Page 13
Exhibit 10(iii)A(b)
May 14, 1996
J. Robert Hipps
5021 Northside Drive, N.W.
Atlanta, Georgia 30327-4421
Dear Bob:
This letter will confirm our agreement with respect to your termination of
employment with National Service Industries, Inc. ("NSI").
1. Effective Date. Your termination of employment will be effective on May
31, 1996 (the "Effective Date"). Our expectation is that you will continue to
work until the Effective Date, unless I advise you otherwise, in which case you
will be placed on a paid leave of absence until the Effective Date.
2. Severance Pay. NSI will pay you, as severance pay, an amount equal to
your salary at the current monthly rate for a twelve (12) month period
commencing on June 1, 1996 and continuing until May 31, 1997. Payment of your
severance pay will be made on a semi-monthly basis. You will also be entitled to
a pro rata share of your bonus for fiscal year 1996 payable in September, 1996.
3. Additional Benefits. If you elect COBRA coverage following your
termination of employment, you will continue to pay the portion of the health
insurance premium cost which you currently pay to NSI, and NSI will pay the
remaining amount of your monthly premiums for COBRA coverage (including coverage
for your wife) until the sooner of (a) your qualification under a medical plan
offered by your employer, or (b) May 31, 1997. NSI will amend your Stock Option
Agreements in two respects: (1) stock options that would otherwise vest in
September, 1996 will vest on or before May 31, 1996; and (2) the time for
exercising all vested stock options will be extended until May 31, 1997. You
will receive a pension annuity commencing on June 1, 1996 or on such other date
as you elect prior to your 65th birthday. The amount of the pension annuity will
be determined based upon the pension annuity you would have received under the
Supplemental Retirement Plan for Executives of NSI (effective as of January 1,
1994) if you had had four additional years of credit and had been eligible for
early retirement under the Supplemental Retirement Plan for Executives of NSI on
the Effective Date. An
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Page 14
Exhibit 10(iii)A(b)
Page 2
J.R. Hipps
May 14, 1996
appendix to such plan will be added in the form attached to this letter. In lieu
of the annuity, you may elect to receive a lump sum equivalent as of May 31,
1996 (calculated using a discount rate of 8%). You will also receive a lump sum
payment on June 15, 1996 in the amount of $41,877 to compensate you for the
difference between the Interest Earnings Rate and the Termination Interest
Earnings Rate under the Senior Management Benefit Plan, assuming an Interest
Earnings Rate of eleven percent (11%) going forward and a discount rate of eight
percent (8%), and for the unvested portion of your 40l(k) plan account. Further,
we confirm that the Company Contribution Amount for you under the Executives'
Deferred Compensaton Plan will vest on the Effective Date. In addition, NSI will
pay for out-placement services in accordance with the executive placement
program offered by Right Associates.
4. Other Terms of Payment. You acknowledge that the foregoing severance pay
and benefits exceed those which you would otherwise receive upon your
termination of employment. Your severance pay and benefits will be subject to
appropriate tax withholdings and will satisfy all sums which might otherwise be
due you from NSI, including, without limitation, vacation pay and bonuses, but
excluding any payments due you under the Executive Deferred Compensation Plan
for Senior Officers, the Senior Management Benefit Plan, the Executive Savings
Plan, NSI's Pension Plan C, the Supplemental Retirement Plan for Executives of
NSI (effective as of January 1, 1994), and NSI's 40l(k) Plan, which payments
will be made in accordance with the terms of such plans. You will not be
eligible to participate in any employee benefit plans following your termination
on the Effective Date, except as provided above and as provided for under the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), as amended.
5. Conditions to Payment. You understand that the severance pay and
benefits provided for hereunder are conditioned upon (a) your not disparaging
NSI or any officer, director or employee of NSI in any material respect; (b)
your not disclosing to any person or using for your own benefit, directly or
indirectly, any trade secrets or confidential information of NSI, unless
directed to do so by court order; (c) your not soliciting, either directly or
indirectly, any current employees of NSI to terminate their employment with NSI
and become employed by you or any person or entity with whom you are associated;
(d) your compliance with the provisions of paragraph 6 below, and (e) the
approval of the Executive Resource and Nominating Committee of the Board of
Directors of NSI. In the event you violate any of the foregoing conditions
(other than the condition set forth in subparagraph (d) above) within a period
of five (5) years after the date hereof, NSI may suspend all further severance
pay and benefits provided hereunder. In the event you violate the condition set
forth in subparagraph (d) above at any time prior to the expiration of the
applicable statutes of limitations, NSI may suspend all further
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Page 15
Exhibit 10(iii)A(b)
Page 3
J.R. Hipps
May 14, 1996
severance pay and benefits provided hereunder. In addition, NSI may at any time
pursue any other remedies to which it may be entitled at law or in equity.
6. Release. In consideration of enhanced severance pay and benefits, and
subject to the fulfillment of the condition provided in subparagraph 5(e)
hereof, as described above, you hereby release and forever discharge NSI and its
divisions, subsidiaries, and affiliates and their respective shareholders,
officers, directors, employees, agents or others acting on their behalf, and
each of them, from any and all claims, losses or expenses (including attorneys'
fees) which you now have or have had or may later claim to have had as of the
date hereof against them arising out of your employment with NSI or the
termination of your employment. You understand and agree that as a result of
this release and discharge, you will not, for example, be entitled to pursue any
claims arising out of any alleged violation of your rights while employed by
NSI, including, but not limited to, (a) claims for back pay, reinstatement or
recovery of any losses or compensatory, punitive, or other damages to you or
your property resulting from any alleged violation of state or federal law, such
as (but not limited to), claims arising under Title VII of the Civil Rights Act
of 1964, 42 U.S.C. SS 2000e, et. seq. (prohibiting discrimination on account of
race, color, sex, national origin or religion); the Age Discrimination in
Employment Act of 1967, 29 U.S.C. SS 621, et. seq. (prohibiting discrimination
on account of age); the Americans with Disabilities Act of 1990, 42 U.S.C SS
12101, et. seq. (prohibiting discrimination on account of disability); the
Family and Medical Leave Act of 1993 (relating to leaves of absence for family
and medical reasons); and any similar federal or state law claim relating to
your employment; and (b) claims resulting or arising from or in connection with
any alleged tortious conduct or other wrongdoing by NSI.
7. Acceptance Period. You have a period of twenty-one (21) days from the
date hereof to consider whether or not you will accept the terms and conditions
set forth herein. You are advised to consult with an attorney and anyone else of
your choosing to obtain advice and information concerning such terms and
conditions. In order to receive the severance pay and benefits, it will be
necessary for you to accept such terms and conditions by signing both copies of
this letter agreement and returning one (1) copy to me within twenty-one (21)
days from the date hereof.
8. Revocation Period. You understand that for a period of up to and
including seven (7) days after the date you sign this letter agreement, you may
revoke it entirely. No rights or obligations contained in this agreement shall
become enforceable before the end of this seven (7) day revocation period. If
you decide to revoke this letter agreement, you will deliver a signed notice of
revocation to me on or before the end of this seven (7) day period. Upon
delivery of a timely notice of revocation, this letter agreement shall be
canceled and void, and neither party to this letter agreement shall have
<PAGE>
Page 16
Exhibit 10(iii)A(b)
Page 4
J.R. Hipps
May 14, 1996
any rights or obligations arising under it.
9. Nondisclosure Covenant. You agree to hold this agreement and the
contents hereof in strict confidence and not to disclose such contents to any
third party, other than your family members and financial and legal advisors,
without the prior written approval of NSI.
10. Nondisparagement by NSI. NSI agrees to take appropriate steps to ensure
that the officers of NSI will not disparage you.
11. Miscellaneous. This letter agreement constitutes the entire agreement
of the parties and supersedes any prior agreements, whether oral or written,
between the parties, including any prior employment agreements. This letter
agreement shall be binding upon and inure to the benefit of the successors and
assigns of NSI and your heirs, administrators, executors and personal
representatives. If any provision of this letter agreement is determined to be
unenforceable by a court of appropriate jurisdiction, the remaining provisions
of this letter agreement will continue in effect at the discretion of NSI.
12. Statement of Understanding. YOU STATE THAT YOU HAVE CAREFULLY READ THIS
LETTER AGREEMENT, UNDERSTAND ITS MEANING AND INTENT, AND VOLUNTARILY AGREE TO
ABIDE BY ITS TERMS. YOU FURTHER STATE THAT THE ONLY PROMISES MADE TO YOU TO SIGN
THIS LETTER AGREEMENT ARE SET FORTH HEREIN.
Sincerely,
/s/ James S. Balloun
James S. Balloun
AGREED TO AND ACCEPTED THIS
17th DAY OF May , 1996.
/s/ J. Robert Hipps
J. Robert Hipps
Page 17
Exhibit 10(iii)A(c)
May 24, 1996
J. Robert Hipps
5021 Northside Drive, N.W.
Atlanta, Georgia 30327-4421
Re: Amendment of Stock Option Agreements
Dear Bob:
In connection with your termination of employment, and as confirmed and
evidenced by this letter agreement, the terms of certain stock options
previously granted to you were amended by action taken by the Executive Resource
and Nominating Committee of NSI's Board of Directors (the "Committee") on March
20, 1996, and ratified by the Board of Directors on that same date.
The following installments of employee stock options, which had previously
been granted to you and which would otherwise have vested and become exercisable
in September 1996, have been accelerated so that they are immediately
exercisable on this date:
Number of
Option Grant Date Shares In Installment
September 16, 1992 2,529
September 16, 1992 471
September 15, 1993 2,671
September 15, 1993 1,079
September 21, 1994 5,000
September 20, 1995 5,000
16,750
In addition, the Committee amended the expiration provisions of those
options for 16,750 shares and options for 32,364 shares which were previously
granted to you and were already exercisable according to their original vesting
schedules. Pursuant to the amendment, said options for 49,114 shares remain
exercisable through May 31, 1997, notwithstanding your resignation effective May
31, 1996.
<PAGE>
Page 18
Exhibit 10(iii)A(c)
Page 2
J. Robert Hipps
May 24, 1996
Your Incentive Stock Option Agreement dated September 19, 1990, Incentive
Stock Option Agreement dated December 18, 1991, Incentive Stock Option Agreement
dated September 16, 1992, Nonqualified Stock Option Agreement dated September
16, 1992, Incentive Stock Option Agreement dated September 15, 1993,
Nonqualified Stock Option Agreement dated September 15, 1993, Nonqualified Stock
Option Agreement dated September 21, 1994, and Nonqualified Stock Option
Agreement dated September 20, 1995 (the "Stock Option Agreements") are each
hereby amended in accordance with this letter.
Please acknowledge your acceptance of this letter by signing in the space
provided below and returning the executed letter to me. A duplicate is enclosed
for you to retain with your copies of the Stock Option Agreements.
Very truly yours,
/s/ James S. Balloun
James S. Balloun
Chairman and Chief Executive Officer
JSB:sdh
Enclosures
Accepted and agreed to as of the
24th day of May, 1996:
/s/ J. Robert Hipps
J. Robert Hipps
Page 19
Exhibit 10(iii)A(d)
APPENDIX C
C.1. Eligible Individual: J. Robert Hipps
C.2. Effective Date: May 31, 1996
C.3. Special Provisions: The following special provisions shall apply
to the Eligible Individual's participation in the Plan.
(a) As of the Effective Date, the Eligible Individual shall have his
benefits determined as if he had ten (10) years of Credited Service for benefit
accrual and vesting purposes under the Plan.
(b) As of the Effective Date, the Eligible Individual shall be treated as
if he had fifteen (15) years of service for purposes of qualifying for an Early
Retirement Accrual Pension under Section 3.3 of the Plan, but only for purposes
of qualifying for such benefit.
Page 20
Exhibit 11
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATIONS OF NET INCOME PER SHARE OF COMMON STOCK
(In thousands, except per-share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31 MAY 31
1996 1995 1996 1995
Primary:
Weighted Average Number of Shares
(determined on a monthly basis).. 48,059 48,382 48,240 48,813
Net Income ........................ $ 27,677 $ 25,627 $ 70,196 $ 64,319
Primary Earnings per Share ........ $ .58 $ .53 $ 1.46 $ 1.32
Fully Diluted:
Weighted Average Number of Shares
Outstanding ..................... 48,059 48,382 48,240 48,813
Additional Shares Assuming Exercise
of Options:
Options exercised ............. 1,293 1,031 1,293 1,037
Treasury stock purchased
with proceeds ............... (919) (874) (919) (878)
Average Common Shares Outstanding
(as adjusted) .................. 48,433 48,539 48,614 48,972
Net Income ........................ $ 27,677 $ 25,627 $ 70,196 $ 64,319
Fully Diluted Earnings per Share .. $ .57 $ .53 $ 1.44 $ 1.31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Page 21
Exhibit 27
Financial Data Schedules
Quarter Ended May 31, 1996
Pursuant to Section 601(c) of Regulation S-K
This schedule contains summary financial information extracted from National
Service Industries, Inc. consolidated balance sheet as of May 31, 1996 and the
consolidated statement of income for the nine months ended May 31, 1996, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 79,307
<SECURITIES> 2,551
<RECEIVABLES> 264,545
<ALLOWANCES> 8,981
<INVENTORY> 177,503
<CURRENT-ASSETS> 625,900
<PP&E> 759,855
<DEPRECIATION> 403,873
<TOTAL-ASSETS> 1,111,111
<CURRENT-LIABILITIES> 179,595
<BONDS> 26,737
0
0
<COMMON> 57,919
<OTHER-SE> 784,700
<TOTAL-LIABILITY-AND-EQUITY> 748,756
<SALES> 1,093,359
<TOTAL-REVENUES> 1,491,626
<CGS> 691,951
<TOTAL-COSTS> 918,243
<OTHER-EXPENSES> 458,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,180
<INCOME-PRETAX> 112,151
<INCOME-TAX> 41,955
<INCOME-CONTINUING> 70,196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,196
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.44
</TABLE>
