Page 1 of 61
Exhibit Index on Page 16
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For quarter ended May 31, 1999 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.
Common Stock - $1.00 Par Value - 40,445,220 shares as of June 30, 1999.
- --------------------------------------------------------------------------------
<PAGE>
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS-
MAY 31, 1999 AND AUGUST 31, 1998 3
CONSOLIDATED STATEMENTS OF INCOME-
THREE MONTHS AND NINE MONTHS ENDED
MAY 31, 1999 AND 1998 4
CONSOLIDATED STATEMENTS OF CASH FLOWS-
NINE MONTHS ENDED MAY 31, 1999 AND 1998 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10-13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16-17
<PAGE>
Page 3
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
May 31, August 31,
1999 1998
--------------- ---------------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 62,893 $ 19,146
Receivables, less reserves for doubtful accounts of $5,784 at May 31, 1999 and
$4,631 at August 31, 1998 333,236 307,140
Inventories, at the lower of cost (on a first-in, first-out basis) or market 202,002 197,950
Linens in service, net of amortization 58,054 58,826
Deferred income taxes 10,544 17,542
Prepayments 8,941 6,447
--------------- ---------------
Total Current Assets 675,670 607,051
--------------- ---------------
Property, Plant, and Equipment, at cost:
Land 19,321 21,450
Buildings and leasehold improvements 156,227 150,326
Machinery and equipment 530,456 485,271
--------------- ---------------
Total Property, Plant, and Equipment 706,004 657,047
Less-Accumulated depreciation and amortization (413,028) (385,176)
--------------- ---------------
Property, Plant, and Equipment-net 292,976 271,871
--------------- ---------------
Other Assets:
Goodwill and other intangibles 124,211 88,280
Other 46,529 43,482
--------------- ---------------
Total Other Assets 170,740 131,762
--------------- ---------------
Total Assets $1,139,386 $1,010,684
=============== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 101 $ 98
Notes payable 11,225 7,883
Accounts payable 95,358 95,217
Accrued salaries, commissions, and bonuses 32,852 34,820
Current portion of self-insurance reserves 9,663 11,253
Accrued taxes payable 426 -
Other accrued liabilities 78,431 72,724
--------------- ---------------
Total Current Liabilities 228,056 221,995
--------------- ---------------
Long-Term Debt, less current maturities 185,628 78,092
--------------- ---------------
Deferred Income Taxes 41,131 40,404
--------------- ---------------
Self-Insurance Reserves, less current portion 42,525 44,573
--------------- ---------------
Other Long-Term Liabilities 56,854 46,719
--------------- ---------------
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, 120,000,000 shares authorized, 57,918,978 shares issued 57,919 57,919
Paid-in capital 29,010 28,521
Retained earnings 946,068 903,974
Accumulated other comprehensive income items (8,867) (11,357)
--------------- ---------------
1,024,130 979,057
Less-Treasury stock, at cost (17,477,738 shares at May 31, 1999 and 16,457,340
shares at August 31, 1998) 438,938 400,156
--------------- ---------------
Total Stockholders' Equity 585,192 578,901
--------------- ---------------
Total Liabilities and Stockholders' Equity $1,139,386 $1,010,684
=============== ===============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
Page 4
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31 MAY 31
----------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- ----------------
Sales and Service Revenues:
<S> <C> <C> <C> <C>
Net sales of products $ 489,787 $ 442,144 $ 1,369,808 $ 1,253,529
Service revenues 80,051 79,464 229,315 235,073
-------------- -------------- -------------- ----------------
Total Revenues 569,838 521,608 1,599,123 1,488,602
-------------- -------------- -------------- ----------------
Costs and Expenses:
Cost of products sold 301,328 269,019 836,864 765,854
Cost of services 44,762 45,270 134,107 136,366
Selling and administrative expenses 173,605 161,618 499,114 464,757
Interest expense (income), net 3,340 1,304 8,219 (1,092)
Gain on sale of businesses (2,303) (442) (5,814) (2,404)
Restructuring expense, asset impairments, and
other charges - - (2,216) -
Other (income) expense, net 471 50 (143) 665
-------------- -------------- -------------- ----------------
Total Costs and Expenses 521,203 476,819 1,470,131 1,364,146
-------------- -------------- -------------- ----------------
Income before Provision for Income Taxes 48,635 44,789 128,992 124,456
Provision for Income Taxes 18,094 16,650 47,985 46,161
-------------- -------------- -------------- ----------------
Net Income $ 30,541 $ 28,139 $ 81,007 $ 78,295
============== ============== ============== ================
Per Share:
Basic Earnings per Share $ .75 $ .67 $ 1.97 $ 1.83
============== ============== ============== ================
Basic Weighted Average Number of Shares
Outstanding 40,654 42,001 41,030 42,763
============== ============== ============== ================
Diluted Earnings per Share $ .75 $ .66 $ 1.97 $ 1.81
============== ============== ============== ================
Diluted Weighted Average Number of Shares
Outstanding 40,851 42,659 41,221 43,300
============== ============== ============== ================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
Page 5
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31
--------------------------------------
1999 1998
------------------- ------------------
Cash Provided by (Used for) Operating Activities
<S> <C> <C>
Net income $ 81,007 $ 78,295
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Depreciation and amortization 44,033 36,108
Provision for losses on accounts receivable 2,762 3,908
Gain on the sale of property, plant, and equipment (1,164) (3,417)
Gain on the sale of businesses (5,814) (2,404)
Restructuring expense, asset impairments, and other charges (2,216) -
Change in noncurrent deferred income taxes 727 12,216
Change in assets and liabilities net of effect of acquisitions and
divestitures-
Receivables (16,188) (28,309)
Inventories and linens in service, net 5,388 (19,683)
Deferred income taxes 6,998 (4,636)
Prepayments and other (1,550) (971)
Accounts payable and accrued liabilities (6,529) (68,834)
Self-insurance reserves and other long-term liabilities 8,087 (3,841)
------------------- ------------------
Net Cash Provided by (Used for) Operating Activities 115,541 (1,568)
------------------- ------------------
Cash Provided by (Used for) Investing Activities
Change in short-term investments - 205,244
Purchases of property, plant, and equipment (48,298) (56,829)
Sale of property, plant, and equipment 3,487 4,717
Sale of businesses 3,767 3,011
Acquisitions (62,881) (39,424)
Change in other assets (4,034) (6,230)
------------------- --------------------
Net Cash Provided by (Used for) Investing Activities (107,959) 110,489
------------------- --------------------
Cash Provided by (Used for) Financing Activities
Borrowings of notes payable, net 3,343 49,659
Borrowings (repayments) of long-term debt, net 107,538 (910)
Purchase of treasury stock, net (38,293) (145,179)
Cash dividends paid (38,913) (39,842)
------------------- --------------------
Net Cash Provided by (Used for) Financing Activities 33,675 (136,272)
------------------- --------------------
Effect of Exchange Rate Changes on Cash 2,490 (843)
------------------- --------------------
Net Change in Cash and Cash Equivalents 43,747 (28,194)
Cash and Cash Equivalents at Beginning of Period 19,146 57,123
------------------- --------------------
Cash and Cash Equivalents at End of Period $ 62,893 $ 28,929
=================== ====================
Supplemental Cash Flow Information:
Income taxes paid during the period $ 37,888 $ 76,382
Interest paid during the period 9,940 4,929
Noncash Investing and Financing Activities:
Noncash aspects of sale of businesses--
Receivables recorded $ 396 $ -
Liabilities assumed or incurred 326 165
Noncash aspects of acquisitions--
Liabilities assumed or incurred $ 15,574 $ 4,891
Treasury stock issued 845 -
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
Page 6
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share and per share data)
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, 1998 has been derived from audited statements. These statements
reflect 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, 1999, the consolidated results of operations
for the three months and nine months ended May 31, 1999 and 1998, and the
consolidated cash flows for the nine months ended May 31, 1999 and 1998. Certain
reclassifications have been made to the prior year's financial statements to
conform to the current year's presentation. 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,
1998.
The results of operations for the three months and nine months ended May 31,
1999 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
During the first quarter of fiscal 1999, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The objective of SFAS No. 131 is to provide
information about the different types of business activities in which the
company engages. The following have been identified as reportable segments:
lighting equipment, chemical, textile rental, and envelope.
<TABLE>
<CAPTION>
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Nine Months Ended May 31, 1999 Revenues (Loss) Expense Acquisitions
-------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Lighting Equipment $ 862,857 $ 82,270 $19,553 $67,076
Chemical 360,670 29,756 7,562 8,160
Textile Rental 229,315 26,146 10,862 11,955
Envelope 146,281 11,054 4,535 23,592
-------------- ------------- ---------------- -----------------
Subtotal 1,599,123 149,226 42,512 110,783
Corporate (12,015) 1,521 396
Interest income (expense), net (8,219)
-------------- -------------- --------------- -----------------
Total $1,599,123 $128,992 $44,033 $111,179
============== ============= ================ =================
Nine Months Ended May 31, 1998
Lighting Equipment $ 806,233 $ 76,649 $14,362 $ 25,131
Chemical 332,056 28,467 6,944 12,409
Textile Rental 235,073 21,525 9,765 14,594
Envelope 115,240 8,896 3,374 43,640
-------------- ------------- ---------------- -----------------
Subtotal 1,488,602 135,537 34,445 95,774
Corporate (12,173) 1,663 479
Interest income (expense), net 1,092
-------------- ------------- ---------------- -----------------
Total $1,488,602 $124,456 $36,108 $ 96,253
============== ============= ================ =================
</TABLE>
<PAGE>
Page 7
<TABLE>
<CAPTION>
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Three Months Ended May 31, 1999 Revenues (Loss) Expense Acquisitions
-------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Lighting Equipment $ 306,192 $ 28,957 $ 6,642 $ 27,335
Chemical 127,230 11,495 2,586 3,837
Textile Rental 80,051 10,212 3,597 2,659
Envelope 56,365 4,400 1,713 6,081
-------------- ------------- ---------------- -----------------
Subtotal 569,838 55,064 14,538 39,912
Corporate (3,089) 507 60
Interest income (expense), net (3,340)
-------------- ------------- ---------------- -----------------
Total $ 569,838 $ 48,635 $15,045 $ 39,972
============== ============= ================ =================
Three Months Ended May 31, 1998
Lighting Equipment $ 277,497 $ 26,123 $ 4,745 $ 8,017
Chemical 119,111 11,321 2,331 3,114
Textile Rental 79,464 8,707 3,268 4,459
Envelope 45,536 4,428 1,425 36,033
-------------- ------------- ---------------- -----------------
Subtotal 521,608 50,579 11,769 51,623
Corporate (4,486) 522 135
Interest income (expense), net (1,304)
-------------- ------------- ---------------- -----------------
Total $ 521,608 $ 44,789 $12,291 $ 51,758
============== ============= ================ =================
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets
----------------------------------------------------
May 31, 1999 August 31, 1998
--------------------- ---------------------
<S> <C> <C>
Lighting Equipment $ 461,416 $ 397,962
Chemical 239,415 235,269
Textile Rental 192,409 193,347
Envelope 125,535 103,087
--------------------- ---------------------
Subtotal 1,018,775 929,665
Corporate 120,611 81,019
--------------------- ---------------------
Total $1,139,386 $1,010,684
===================== =====================
</TABLE>
3. INVENTORIES
Major classes of inventory as of May 31, 1999 and August 31, 1998 were as
follows:
<TABLE>
<CAPTION>
May 31, August 31,
1999 1998
------------- -------------
<S> <C> <C>
Raw materials and supplies $ 81,071 $ 78,730
Work-in-progress 11,052 10,725
Finished goods 109,879 108,495
------------- -------------
Total $ 202,002 $ 197,950
============= =============
</TABLE>
4. EARNINGS PER SHARE
During the quarter ended February 28, 1998, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic
earnings per share is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed similarly but reflects the
potential dilution that could occur if dilutive options were exercised. The
following table calculates basic earnings per common share and diluted earnings
per common share at May 31:
<PAGE>
Page 8
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31 May 31
----------------------------- --------------------------
1999 1998 1999 1998
------------- ------------ ------------ ----------
Basic earnings per common share:
<S> <C> <C> <C> <C>
Net income $30,541 $ 28,139 $ 81,007 $ 78,295
Basic weighted average shares outstanding (in thousands) 40,654 42,001 41,030 42,763
------------- ------------ ------------ ----------
Basic earnings per common share $ .75 $ .67 $ 1.97 $ 1.83
============= ============ ============ ==========
Diluted earnings per common share:
Net income $30,541 $ 28,139 $ 81,007 $ 78,295
Basic weighted average shares outstanding (in thousands) 40,654 42,001 41,030 42,763
Add - Shares of common stock issuable upon assumed exercise
of dilutive stock options (in thousands) 197 658 191 537
------------- ------------ ------------ ----------
Diluted weighted average shares outstanding (in thousands) 40,851 42,659 41,221 43,300
------------- ------------ ------------ ----------
Diluted earnings per common share $ .75 $ .66 $ 1.97 $ 1.81
============= ============ ============ ==========
</TABLE>
5. COMPREHENSIVE INCOME
The company adopted SFAS No. 130, "Reporting Comprehensive Income," in the first
quarter of fiscal 1999. 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. Other comprehensive income (loss) for the three and nine months ended
May 31, 1999 and 1998 includes only foreign currency translation adjustments.
The calculation of comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31 May 31
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income $ 30,541 $ 28,139 $ 81,007 $ 78,295
Other comprehensive income (loss) 824 (535) 2,490 (843)
------------ ------------ ------------- ------------
Comprehensive Income $ 31,365 $ 27,604 $ 83,497 $ 77,452
============ ============ ============= ============
</TABLE>
6. ENVIRONMENTAL MATTERS
The company's operations, as well as similar operations of other companies, are
subject to comprehensive laws and regulations relating to the generation,
storage, handling, transportation, and disposal of hazardous substances and
solid and hazardous wastes and to the remediation of contaminated sites. Permits
and environmental controls are required for certain of the company's operations
to limit air and water pollution, and these permits are subject to modification,
renewal, and revocation by issuing authorities. The company believes that it is
in substantial compliance with all material environmental laws, regulations, and
permits. On an ongoing basis, the company incurs capital and operating costs
relating to environmental compliance. Environmental laws and regulations have
generally become stricter in recent years, and the cost of responding to future
changes may be substantial.
The company's environmental reserves totaled $11,720 and $12,600 at May 31, 1999
and August 31, 1998, respectively. The actual cost of environmental issues may
be substantially lower or higher than that reserved due to the difficulty in
estimating such costs, potential changes in the status of government
regulations, and the inability to determine the extent to which contributions
will be available from other parties. The company does not believe that any such
amount below or in excess of that accrued is reasonably estimable.
<PAGE>
Page 9
Certain environmental laws, such as Superfund, can impose liability for the
entire cost of site remediation upon each of the current or former owners or
operators of a site or parties who sent waste to a site where a release of a
hazardous substance has occurred regardless of fault or the lawfulness of the
original disposal activity. Generally, where there are a number of potentially
responsible parties ("PRPs") that are financially viable, liability has been
apportioned based on the type and amount of waste disposed of by each party at
such disposal site and the number of financially viable PRPs, although no
assurance can be given as to any particular site.
The company is currently a party to, or otherwise involved in, legal proceedings
in connection with several state and federal Superfund sites, two of which are
located on property owned by the company. Except for the Crymes Landfill and M&J
Solvents matters in Georgia, the company believes its liability is de minimis at
each of the sites which it does not own where it has been named as a PRP. At the
Crymes Landfill and M&J Solvents sites in Georgia, since the matters are
currently in the investigative phase, the company does not know whether its
liability is de minimis but believes that its exposure at each of the sites is
not likely to result in a material adverse effect on the company. For property
which the company owns on Seaboard Industrial Boulevard in Atlanta, Georgia, the
company has conducted an investigation on its and adjoining properties and
submitted a Compliance Status Report ("CSR") to the State of Georgia
Environmental Protection Division ("EPD") pursuant to the Georgia Hazardous Site
Response Act. Until EPD's review of the CSR is completed, the company will not
be able to determine if remediation will be required, if the company will be
solely responsible for the cost of such remediation, or whether such cost is
likely to result in a material adverse effect on the company. For property which
the company owns on East Paris Street in Tampa, Florida, the company has been
requested by the State of Florida to clean up chlorinated solvent contamination
in the groundwater on the property and on surrounding property known as Seminole
Heights Solvent Site and to reimburse costs already incurred by the State of
Florida in connection with such contamination. The company believes that it has
a strong defense due to likely off-site sources of the contamination and because
contamination from the property, if any, was due to prior owners and not the
company's operations. At this time, it is too early to quantify the company's
potential exposure or the likelihood of an adverse result.
The company is currently evaluating emissions of volatile organic compounds from
its manufacturing operations in the Atlanta area to determine whether it will
need to install pollution control equipment or modify its operations to comply
with federal and state air pollution regulations. Until the current evaluations
are completed, the company is not able to quantify the possible cost of
compliance. However, based upon currently available information, the company
does not expect any material expenditures to achieve compliance.
In connection with the sale of the North Bros. business and 29 of the company's
textile rental plants in 1997, the company has retained certain environmental
liabilities. The company has received notice from the buyer of the textile
rental plants of the alleged presence of perchloroethylene contamination on one
of the properties involved in the sale. The company has since asserted an
indemnification claim against the company from which it bought the property. At
this time, it is too early to quantify the company's potential exposure in this
matter, the likelihood of an adverse result, or the possibility that the company
may be fully or partially indemnified.
The State of New York has filed a lawsuit against the company alleging that the
company is responsible as a successor to Serv-All Uniform Rental Corp. for
certain environmental liabilities in connection with the Blydenburgh Landfill in
Islip, New York. The company believes that it has a strong defense that it is
not a successor to Serv-All Uniform Rental Corp. At this time, it is too early
to quantify the company's potential exposure or the likelihood of an adverse
result.
7. INCREASE IN SHARES AUTHORIZED
On January 6, 1999, the stockholders approved an amendment to the corporation's
Restated Certificate of Incorporation to increase the corporation's authorized
shares of common stock from 80,000,000 to 120,000,000. The additional shares
will be available for potential acquisitions, stock dividends and splits, and
other purposes determined by the board of directors to be in the best interests
of the corporation.
8. SUBSEQUENT EVENTS
On June 21, 1999, the company announced the execution of a definitive agreement
to purchase for cash all outstanding shares of Holophane Corporation
("Holophane") for $38.50 per share, or a total of approximately $450 million.
Holophane is a leading manufacturer and marketer of premium quality, highly
engineered lighting fixtures and systems for a wide range of industrial,
commercial, and outdoor applications. The company commenced a tender offer for
all of Holophane's outstanding shares on June 25, 1999. The transaction is
subject to a majority of Holophane's shares being tendered in the offer and
customary closing conditions. The transaction is expected to be completed in the
fourth quarter of NSI's fiscal 1999 and will be accounted for using the purchase
method of accounting.
In June, 1999, the company sold the envelope segment's Techno-Aide/Stumb Metal
Products ("Techno-Aide") business to BSC Enterprises, LLC. Techno-Aide is a
leading manufacturer and marketer of accessory products for users of X-ray
equipment with annual revenues of approximately $4.0 million. The envelope
segment realized a pretax gain of $2.0 million on the transaction.
<PAGE>
Page 10
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.
National Service Industries is a diversified service and manufacturing company
operating in four segments: lighting equipment, chemicals, textile rental, and
envelopes. The company continued to be in strong financial condition at May 31,
1999. Net working capital was $447.6 million, up from $385.1 million at August
31, 1998, and the current ratio was 3.0 compared with 2.7 at August 31, 1998. At
May 31, 1999, the company's debt to capitalization increased to 25.2 percent
compared with 12.9 percent at August 31, 1998.
Results of Operations
National Service Industries generated revenue of $569.8 million and $1.6 billion
in the three and nine months ended May 31, 1999, respectively, compared with
revenue of $521.6 million and $1.5 billion in the three and nine months ended
May 31, 1998, respectively. Revenue increased primarily due to the April 1999
acquisition of Peerless Lighting Corporation ("Peerless"), the February 1999
acquisition of Gilmore Envelope Corporation ("Gilmore"), the September 1998
acquisition of GTY Industries (d/b/a "Hydrel"), the July 1998 acquisition of
Calman Australia Pty Ltd, and the March 1998 acquisition of Allen Envelope
("Allen"). Additionally, the revenue increase was due in part to higher revenue
in the base business of the lighting equipment and chemical segments.
Third quarter 1999 net income totaled $30.5 million, or $.75 per diluted share,
compared to net income of $28.1 million, or $.66 per diluted share, for the same
period in the prior year. The increase in income related to the base business
and acquisitions was offset by an increase in net interest expense.
Additionally, the current quarter included a $2.3 million pretax gain on the
sale of industrial contracts in the textile rental segment. Net income for the
nine months ended May 31, 1999 increased 3.5 percent to $81.0 million, or $1.97
per diluted share, primarily due to increased volume in the base business,
income from acquisitions not included in the prior year results, a non-recurring
$3.5 million net pretax gain in the textile rental segment, and a $2.3 million
pretax gain on the sale of industrial contracts in the textile rental segment.
These items were partially offset by an increase in net interest expense and
gains recorded on the sale of businesses in the prior year. Diluted earnings per
share also increased due to the reduction of diluted average shares outstanding
for the three and nine months ended May 31, 1999 by 1.8 million and 2.1 million,
respectively.
The lighting equipment segment reported revenue of $306.2 million and $862.9
million for the three and nine months ended May 31, 1999, respectively, which is
an increase of 10.3 percent and 7.0 percent over the same periods in the prior
year. This increase resulted from continued strength in the non-residential
construction market and the acquisitions of Peerless and Hydrel, offset
partially by competitive pricing measures. Operating profit increased 10.8
percent to $29.0 million for the quarter and 7.3 percent to $82.3 million for
the nine months ended May 31, 1999 primarily related to the additional sales and
lower material costs.
Chemical segment revenue increased 6.8 percent to $127.2 million for the third
quarter and 8.6 percent to $360.7 million for the nine months ended May 31, 1999
primarily due to continued growth in the retail channel, higher revenue from the
industrial and institutional distribution channels, and acquired international
revenue. Operating profit of $11.5 million and $29.8 million in the three and
nine months ended May 31, 1999, respectively, was slightly higher than last
year's results as increased revenues were offset by higher selling and other
operating costs.
Textile rental segment revenue was $80.1 million for the quarter compared with
$79.5 million for the three months ended May 31, 1998 while third quarter
operating income increased to $10.2 million from last year's $8.7 million. The
increase in operating income for the three months ended May 31, 1999 primarily
relates to a $2.3 million pretax gain associated with the sale of certain
industrial customer contracts partially offset by non-operating gains recognized
during the same period of the prior year. Revenue for the nine months ended May
31, 1999 decreased 2.4 percent to $229.3 million primarily as a result of the
sale of several industrial contracts and the rationalization of unprofitable
accounts in fiscal 1998. Year to date 1999 revenue was also affected by the
temporary, negative impact of two hurricanes on nine southeastern plants.
Operating income for the nine months ended May 31, 1999 increased to $26.1
million from $21.5 million for the same period in the prior year. Year to date
1999 operating income includes a $5.7 million gain associated with the 1997
uniform plants divestiture and restructuring activities offset by a $2.2 million
write-off for merchandise inventory previously used by unprofitable accounts.
Additionally, year to date income includes a $2.3 million gain on the sale of
industrial contracts. Excluding non-recurring items in the current and prior
year, operating margins for the quarter and year to date increased due to the
segment's focus on lowering merchandise costs and improving production
efficiencies through the daily tracking of operational performance measures.
<PAGE>
Page 11
During the second quarter of 1999, management performed an extensive review of
the liabilities recorded in 1997 in connection with the textile rental segment's
uniform plants divestiture and restructuring activities. In 1997, the textile
rental segment accrued for items related to the sale of its uniform plants
including environmental exposures, severance agreements, and costs to return
leased facilities to pre-lease condition. The company has realized lower costs
than originally anticipated associated with these items and, as a result, has
reduced the liability and recorded a gain of $3.5 million during the second
quarter of 1999. Additionally, in 1997 the textile rental segment recorded an
impairment charge and accrued for items related to restructuring activities that
primarily related to branch consolidations and asset dispositions. As the
company has realized lower than anticipated costs, the reserve was reduced and
income of $2.2 million was recorded during the second quarter of 1999. During
the current year, the restructuring reserves were also reduced by a minimal
amount for payments related to plant consolidations.
Envelope segment revenue increased 23.8 percent to $56.4 million for the three
months ended May 31, 1999 primarily due to the Gilmore acquisition. Year to date
1999 revenue increased 26.9 percent to $146.3 million, largely due to the Allen
and Gilmore acquisitions. Operating profit remained relatively unchanged at $4.4
million for the quarter and increased 24.3 percent to $11.1 million for the nine
months as increased volumes and materials cost savings were partially offset by
gains realized in 1998 on the sale of idle equipment.
Corporate expenses were lower during the three months ended May 31, 1999
compared to the same period in the prior year, primarily due to a gain
recognized on the sale of a building in the third quarter of 1999. Corporate
expenses during the nine month period approximated last year.
Net interest expense was $3.3 million and $8.2 million in the three and nine
months ended May 31, 1999, respectively, compared with $1.3 million of net
interest expense and $1.1 million of net interest income for the three and nine
months ended May 31, 1998, respectively. The increase in net interest expense is
due to lower interest income, resulting from the use of the short-term
investments generated from the textile rental segment's 1997 divestiture
proceeds, combined with higher interest expense from increased borrowing. The
increased borrowing is the result of the issuance of $160 million in publicly
traded notes in the second quarter of 1999 to fund acquisitions, share
repurchases, and internal growth. See "Financing Activities" below for further
discussion.
The provision for income taxes was 37.2 percent of pretax income for the three
and nine months ended May 31, 1999 compared with 37.2 percent for the prior
third quarter and 37.1 percent for the prior year to date.
Liquidity and Capital Resources
Operating Activities
Operations provided cash of $115.5 million during the first nine months of
fiscal 1999 and used cash of $1.6 million during the nine months ended May 31,
1998. The increase in operating cash flow is primarily due to improved working
capital management in the lighting equipment and chemical segments. The
remaining improvement relates to additional tax payments of $38.5 million made
during 1998 primarily related to the 1997 textile rental segment divestitures
that are not repeated in current year results.
Investing Activities
Investing activities used cash of $108.0 million for the nine months ended May
31, 1999 compared with cash provided of $110.5 million in the nine months ended
May 31, 1998. The cash flow in the first three quarters of fiscal 1998 was
higher because of the liquidation of short-term investments. Additionally,
acquisition spending in the first three quarters of fiscal 1999 totaled $62.9
million compared to $39.4 million during the respective prior year period.
Current year acquisition spending was primarily related to the September 1998
purchase by the lighting equipment segment of the assets of Hydrel, a
manufacturer of architectural-grade light fixtures for landscape, in-grade, and
underwater applications; the February 1999 purchase by the envelope segment of
Gilmore, an envelope manufacturer headquartered in Los Angeles, California; and
the April 1999 purchase by the lighting equipment segment of Peerless, a
manufacturer of high performance indirect/direct suspended lighting products.
The company also made minor acquisitions related to the chemical and textile
rental segments. Prior-year acquisition spending of $39.4 million was due to the
chemical segment's purchase of Pure Corporation, a specialty chemical company
with its core businesses in Indiana, Pennsylvania, and New York; the envelope
segment's purchase of Allen Envelope Corporation, a single-plant,
Pennsylvania-based envelope manufacturer serving markets in the Northeast; and
performance payments associated with a 1997 chemical acquisition.
Capital expenditures were $48.3 million in the first nine months of fiscal 1999
compared with $56.8 million in the first nine months of fiscal 1998. Capital
spending in the first three quarters of fiscal 1999 was primarily attributable
to the lighting equipment, textile rental, and envelope segments. The lighting
equipment segment's capital expenditures related to the purchase of land and
buildings for a new plant, manufacturing improvements and upgrades for capacity
expansion, and implementation of
<PAGE>
Page 12
new technology. Expenditures in the textile rental segment were for
implementation of new technology, production enhancements, and delivery truck
purchases and refurbishments. The envelope segment's expenditures related
primarily to manufacturing process improvements, information systems, facility
expansion, and new folding capacity. Capital spending in the first three
quarters of fiscal 1998 consisted primarily of facility expansions and
manufacturing process improvements in the lighting equipment segment, efficiency
improvements and replacements of processing equipment and information systems in
the textile rental segment, and facility and machinery replacements in the
envelope segment. Capital expenditures for fiscal 1999 are estimated to be $81
million.
Financing Activities
Cash provided by financing activities was $33.7 million in the first three
quarters of fiscal 1999 compared with cash used of $136.3 million in the first
three quarters of fiscal 1998. Contributing to the change were net purchases of
treasury stock which were $38.3 million in the current year versus $145.2
million in the prior year. During the first three quarters of 1999 the company
repurchased approximately 1.2 million of its common shares.
In the second quarter, the company successfully completed the issuance of $160
million in ten-year publicly traded notes bearing a coupon rate of 6.0 percent.
Proceeds were used for the repayment of $80.0 million in short-term borrowings,
with the remainder available for general corporate purposes including working
capital requirements, capital expenditures, acquisitions, repayment of
outstanding indebtedness, and share repurchases. Dividend payments totaled $38.9
million, or 95 cents per share, compared with $39.8 million, or 92 cents per
share, for the prior-year period. On January 6, 1999, the regular quarterly
dividend rate was increased 3.2 percent to 32 cents per share, or an annual
calendar year rate of $1.28 per share.
Management believes the company's planned level of acquisition and capital
spending and general operating cash requirements for the next twelve months will
be sufficiently covered by current cash balances, anticipated cash flows from
operations, available funds from the existing five-year revolving credit
facility, the company's active shelf registration, complementary lines of
credit, and a new 364-day revolving credit facility which is expected to be
executed in late July 1999.
As discussed in Note 8 to the financial statements, the company commenced a
tender offer for the outstanding shares of Holophane for a total of
approximately $450 million. The company will initially finance the transaction
with short-term debt.
Environmental Matters
See Note 6 to the financial statements for a discussion of the company's
environmental matters.
Impact of the Year 2000 Issue
The "Year 2000 Issue" resulted from the use of two digits rather than four
digits to define the applicable year in certain computer programs. With the
coming millennium, any of the company's computer programs that have two-digit
date-sensitive software may interpret a date of "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
causing disruption of the operation of computer hardware and software, as well
as intelligent manufacturing equipment and processes, and telephony.
Management is addressing the Year 2000 Issue in four phases: awareness,
assessment, action plan, and plan implementation. At May 31, 1999, all areas of
the company had completed the first three phases and implementation of the plan
was approximately 92 percent complete. Management estimates that the total cost
to be incurred in connection with the Year 2000 Issue will range from $4 million
to $6 million, and substantially all mission critical systems are expected to be
in compliance prior to the end of calendar year 1999. Approximately one-third of
the total cost reflects the redeployment of existing internal information
technology resources and should not be incremental costs to the company. At May
31, 1999, the company had spent approximately $4.0 million on the Year 2000
Issue. The cost of the project is being funded through operating cash flows.
At this time, the company believes its most reasonably likely worst case
scenario is that key suppliers or service providers who have not resolved their
own Year 2000 Issue may cause a disruption of service to the company's critical
business processes. Management has evaluated the potential exposure of the
company to related problems of its customers and suppliers and has implemented a
vendor certification process. While management believes that its plan is
sufficient to address the Year 2000 Issue, management is currently completing a
contingency plan to address the potential for unforeseen issues that may arise.
These contingency plans include identifying alternative suppliers and increasing
inventory levels. There can be no assurance, however, that such exposures or the
costs of remediating any problems associated therewith will not materially
affect the company's future business, financial condition, or results of
operations.
<PAGE>
Page 13
Cautionary Statement Regarding Forward-Looking Information
From time to time, the company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
capital expenditures, 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.
Statements herein which may be considered forward-looking include: (a)
statements made regarding the company's current expectations or beliefs with
respect to the outcome and impact on the company's business, financial
condition, or results of operations of the Year 2000 Issue and environmental
issues; (b) statements made concerning management's expectations with respect to
the company's plan for strategic growth; (c) statements made regarding
management's expectations with regard to projected capital expenditures and
future cash flows; and (d) statements made regarding the acquisition of
Holophane. 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 non-residential 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, as well as share repurchases and acquisitions; (c)
unforeseen competitive reactions to the Holophane acquisition; and (d) loss of
key sales and management personnel due to the acquisition of Holophane.
<PAGE>
Page 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 16).
(b) There were no reports on Form 8-K for the three months ended May 31, 1999.
<PAGE>
Page 15
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 14, 1999 /s/ David Levy
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE July 14, 1999 /s/ Brock Hattox
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
<PAGE>
Page 16
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Page No.
EXHIBIT 10(iii)A Management Contracts and Compensatory
Arrangements:
(1) Employment Letter Agreement between National 18
Service Industries, Inc. and George H.
Gilmore, Jr., Dated May 5, 1999
(2) Severance Protection Agreement between National Reference is made to Exhibit 10(iii)A(c)
Service Industries, Inc. and George H. Gilmore, Jr., of registrant's Form 10-Q for the quarter
Dated as of June 1, 1999 ended February 29, 1996 and to Exhibit
10(iii)A(6)(b) of registrant's Form 10-K
for the fiscal year ended August 31, 1996,
which are incorporated herein by reference.
(3) Bonus Letter Agreement between National Service Reference is made to Exhibit 10(iii)A(j) of
Industries, Inc. and George H. Gilmore, Jr., registrant's Form 10-K for the fiscal year
Dated as of June 1, 1999 ended August 31, 1989, to Exhibit
10(iii)A(d) of the registrant's Form 10-Q
for the quarter ended February 29, 1996,
and to Exhibit 10(iii)A(7)(b) of registrant's
Form 10-K for the fiscal year ended August
31, 1996, which are incorporated herein by
reference.
(4) Incentive Stock Option Agreement for 23
Executive Officers Effective Beginning June
1, 1999 between National Service Industries,
Inc. and George H. Gilmore, Jr.
(5) Nonqualified Stock Option Agreement for 30
Executive Officers Effective Beginning June
1, 1999 between National Service Industries,
Inc. and George H. Gilmore, Jr.
(6) Aspiration Achievement Incentive Award 36
Agreement for the Performance Cycle beginning
September 1, 1997 between National Service
Industries, Inc. and George H. Gilmore, Jr.,
Dated June 1, 1999.
[a confidential portion of which has been
omitted and filed separately with the
Securities and Exchange Commission]
(7) Aspiration Achievement Incentive Award 45
Agreement for the Performance Cycle beginning
September 1, 1998 between National Service
Industries, Inc. and George H. Gilmore, Jr.,
Dated June 1, 1999.
[a confidential portion of which has been
omitted and filed separately with the
Securities and Exchange Commission]
<PAGE>
Page 17
INDEX TO EXHIBITS (Continued) Page No.
(8) Amendment of Aspiration Achievement Incentive 54
Award Agreement and Election Form for
Performance Cycle Ending August 31, 1999
between National Service Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
(9) Amendment No. 1 to National Service 60
Industries, Inc. Long-Term Achievement
Incentive Plan, Dated April 7, 1999
Exhibit 27 Financial Data Schedule 61
</TABLE>
May 5, 1999
Page 18
EXHIBIT 10(iii)A(1)
Mr. George H. Gilmore
631 Blackthorn Road
Winnetka, Illinois 60093
Dear George:
This letter will confirm the terms of your employment by National
Service Industries, Inc. ("NSI") and NSI Services, L.P., effective June 1, 1999
(the "Effective Date"). We are enthusiastic about your decision to join NSI and
look forward to working with you to build a bigger, stronger NSI.
The terms of your employment, which are subject, of course, to approval
by our Executive Resource and Nominating Committee and the Board of Directors
(or its Executive Committee) and satisfactory completion of NSI's normal
pre-employment screening procedures, will be as follows:
1. Title and Duties - As Executive Vice President and Group President,
you will be a senior officer of NSI reporting to its Chief Executive Officer.
You will have responsibility for NSI's Chemical Group, National Linen Service,
and AECO operating units and any additional businesses and other duties
consistent with your position which may be assigned to you by NSI's CEO. You
will also serve in the same capacity for NSI Services, L.P. (the "Partnership").
You will assume the duties and responsibilities commensurate with those
positions, which will include service to NSI, the Partnership, and other
subsidiaries and partnerships of NSI and may receive compensation, benefits, and
other amounts from such entities, the aggregate amount of which will equal the
sums and benefits specified herein. You will devote substantially all of your
working time and attention to the business and affairs of NSI and the foregoing
entities.
2. Base Salary - Your base salary will be Thirty-seven Thousand Five
Hundred Dollars ($37,500) per month or the equivalent annual rate of Four
Hundred Fifty Thousand Dollars ($450,000), subject to review for increases.
Senior officer reviews at NSI are normally conducted for the April Board meeting
effective March 1.
3. Annual Incentive Compensation - You will participate in the NSI
Management Compensation and Incentive Plan (the "AIP") for the fiscal year
beginning September 1, 1999 with a target bonus equal to 50% of your base
salary. You will participate in the AIP for the fiscal year ending August 31,
1999 on a pro rata basis for the period of your employment and will receive a
bonus for the period of at least Seventy Five Thousand Dollars ($75,000).
<PAGE>
Page 19
EXHIBIT 10(iii)A(1)
4. Long-Term Achievement Incentive Plan - You will receive a grant of
employee stock options for fifty thousand (50,000) shares of stock under our
current long-term incentive plan upon your arrival at NSI. You will also be
entitled to participate in the current long-term incentive plan on a prorated
basis for the number of months you are employed with NSI during the remainder of
the three-year cycle ending August 31, 2000 and the remainder of the three-year
cycle ending August 31, 2001 based on the performance of NSI's Chemical Group,
National Linen Service, and AECO operating units. In addition, subject to
approval by our stockholders at the January 2000 annual meeting of additional
shares to be granted under our Long-Term Achievement Incentive Plan, you will
participate in the Plan for the three-year cycle beginning September 1, 1999 on
a comparable basis with other senior officers. This Plan provides for annual
grants of stock options and annual "aspiration awards" having a total value
equal to 160% of salary at commitment (or target) level performance. Stock
options represent 70% of total value (or 112% of salary) and aspiration awards
represent 30% of total value (or 48% of salary) at commitment level performance.
Currently, aspiration awards are based on achievement of
cumulative economic profit goals over a three-year cycle and are payable
one-half in cash and one-half in NSI stock following completion of each cycle.
The form of payment may be changed under the new plan. The payout for aspiration
level performance is equal to five times the value of the payout for commitment
level performance (or 240% of salary). Failure to achieve threshold level
performance will result in no payout.
5. Retirement Plans - Upon satisfying the eligibility requirements, you
will be eligible to participate in NSI's tax-qualified retirement plans, NSI
Pension Plan C, and the NSI 401(k) Plan for Corporate Office Employees. In
addition, upon employment, you will become a participant in the Supplemental
Retirement Plan for Executives of NSI (the "SERP"). Your benefits under the SERP
will be determined in the same manner as for other executive officers of NSI
participating in the plan (other than the Chief Executive Officer), except that
you will be credited with service under the SERP for each year of actual
service. You will become vested in your SERP benefit after completing five (5)
years of employment with NSI and will be eligible for early retirement at age
sixty (60).
6. Medical, Life Insurance, and Other Employee Benefits - You will be
covered by, or eligible to participate in, the medical, dental, life insurance,
disability, deferred compensation, and other benefit programs generally made
available by NSI to its executive officers and their families, including a car
allowance of Four Hundred Dollars ($400) per month. We will reimburse you for
your COBRA expenses until you are covered under our program. You will be
eligible to participate in NSI's financial planning program and NSI will
reimburse you for any initiation fees and monthly dues for membership in the
Commerce Club.
<PAGE>
Page 20
EXHIBIT 10(iii)A(1)
7. Relocation Expenses - NSI will pay the following relocation
expenses:
(a) your expenses for moving your household effects to Atlanta;
(b) rent for an apartment and storage of your personal effects in Atlanta,
pending your move into your new home in Atlanta;
(c) brokerage and closing costs you incur in connection with the sale of your
home in Chicago and the purchase of a home in Atlanta;
(d) reasonable travel expenses to and from Chicago for you and your wife and
children until you have moved your residence to Atlanta; and
(e) a one-time payment of one month's salary for your assistance in the
relocation.
The foregoing payments will be "grossed up" so that, to the extent reasonably
practicable, they will represent your after-tax cost for covered expenses. In
addition to the foregoing, we will assist you in obtaining a bridge loan should
you purchase a home in Atlanta before selling your home in Chicago and pay up to
two (2) points of any loan fees incurred for such purchase.
8. Employment at Will/Severance Payment/Change in Control - Your
employment will be at will and may be terminated by either NSI or you at any
time for any reason, with or without notice. Except in the event of termination
in connection with a Change in Control of NSI (as defined in the Severance
Protection Agreement that will cover you), you will be entitled to the following
severance payment:
o If your employment is terminated on or before June 1, 2000 for any
reason other than voluntary termination, termination upon death or
Disability (as defined below), or termination by NSI for Cause (as
defined below), you will receive a severance payment (payable in
semi-monthly installments) equal to your then current salary for a
period equal to the time from the date of termination through June 1,
2002. If your employment is terminated after June 1, 2000 but on or
before June 1, 2009 for any reason other than voluntary termination,
termination upon death or Disability, or termination by NSI for Cause,
you will receive a severance payment (payable in semi-monthly
installments) equal to your then current salary for a period of two
(2) years.
<PAGE>
Page 21
EXHIBIT 10(iii)A(1)
o For purposes of entitlement to a severance benefit, "Cause" shall mean
any act(s) on your part that constitutes fraud, a felony involving
dishonesty, a breach of fiduciary duty, or gross malfeasance or
habitual neglect of your duties for NSI, and "Disability" shall mean a
physical or mental infirmity which impairs your ability to
substantially perform your duties as Executive Vice President,
Operations of NSI with or without reasonable accommodation for a
period of one hundred eighty (180) consecutive days. The NSI Board,
based upon the information provided to it, shall determine whether an
act constituting Cause has occurred and whether you have suffered a
Disability. In the case of termination for Cause, (i) you will be
given written notice of the actions constituting Cause at least
fifteen (15) days prior to any meeting of the Board of Directors of
NSI at which your termination is to be considered; (ii) you will be
given the opportunity to be heard by the Board; and (iii) your
termination for Cause must be evidenced by a resolution adopted by a
majority of the Board.
In the event of termination by you "for good reason" (as defined below) during
the time periods described above, you will be entitled to the applicable
severance payments described above. For purposes of this Agreement, the term
"good reason" means: a) any material diminution in your duties and
responsibilities as Executive Vice President and Group President or authority or
title; b) any reduction in your base salary to less than $400,000.00 per annum;
c) any reduction in the target amount of your annual bonus to less than 50% of
your salary, which reduction is not applicable to other senior officers of NSI;
and d) your being required to relocate to an office more than fifty miles from
NSI's current office.
With respect to Change in Control situations, you will be covered by a Severance
Protection Agreement with the same provisions as are applicable to NSI's other
executive officers. In the event of your termination in connection with a Change
in Control that entitles you to benefits under the Severance Protection
Agreement, you will receive the greater of the payments and benefits provided
under the Severance Protection Agreement (after consideration of any tax
penalties) or the severance payments described above.
9. Relocation of Residence to Atlanta - You will relocate your
residence to Atlanta and complete the move of your family on or before July 1,
2000.
<PAGE>
Page 22
EXHIBIT 10(iii)A(1)
The base salary, annual incentive, long-term incentives, nonqualified
retirement benefits, and any severance payments will be structured to ensure the
tax deductibility to NSI of the payments and benefits under the Internal Revenue
Code of 1986, including Code Section 162(m). We can provide additional
information on these issues if you so desire.
We will prepare a SERP provision and Severance Protection Agreement to
evidence the arrangements set forth in this letter.
We are delighted you are joining NSI and we look forward to a long and
mutually satisfactory relationship. This letter outlines your employment
relationship with NSI; if you agree with the employment terms as outlined above,
please sign and date both copies of this letter agreement and return one copy to
me at your earliest convenience.
Sincerely,
/s/ James S. Balloun
James S. Balloun
ACCEPTED AND AGREED TO THIS
6th DAY OF May, 1999
/s/ George H. Gilmore, Jr.
George H. Gilmore
Page 23
EXHIBIT 10(iii)A(4)
INCENTIVE STOCK OPTION AGREEMENT
FOR EXECUTIVE OFFICERS AND OPERATING UNIT PRESIDENTS
THIS AGREEMENT, made as of the 1st day of June, 1999 (the "Grant Date"),
between National Service Industries, Inc., a Delaware corporation (the
"Company"), and George H. Gilmore, Jr. (the "Optionee").
WHEREAS, the Company has adopted the National Service Industries, Inc.
Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional
incentive to certain officers and key employees of the Company and its
Subsidiaries; and
WHEREAS, the Optionee performs services for the Company or one of its
Subsidiaries; and
WHEREAS, the Committee responsible for administration of the Plan has
determined to grant the Option to the Optionee as provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option.
1.1 The Company hereby grants to the Optionee the right and option (the
"Option") to purchase all or any part of an aggregate of 10,844 whole Shares
subject to, and in accordance with, the terms and conditions set forth in this
Agreement.
1.2 The Option is intended to qualify as an Incentive Stock Option within
the meaning of Section 422 of the Code and shall be so construed; provided,
however, that nothing in this Agreement shall be interpreted as a
representation, guarantee or other undertaking on the part of the Company that
the Option is or will be determined to be an Incentive Stock Option within the
meaning of Section 422 of the Code. To the extent this Option is not treated as
an Incentive Stock Option, it will be treated as a Nonqualified Stock Option.
1.3 This Agreement shall be construed in accordance and consistent with,
and subject to, the provisions of the Plan (the provisions of which are
incorporated herein by reference) and, except as otherwise expressly set forth
herein, the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.
2. Purchase Price.
The price at which the Optionee shall be entitled to purchase Shares upon
the exercise of the Option shall be $36.875 per Share.
<PAGE>
Page 24
EXHIBIT 10(iii)A(4)
3. Duration of Option.
The Option shall be exercisable to the extent and in the manner provided
herein for a period of ten (10) years from the Grant Date (the "Exercise Term");
provided, however, that the Option may be earlier terminated as provided in
Section 6 hereof.
4. Exercisability of Option.
Unless otherwise provided in this Agreement or the Plan, the Option shall
entitle the Optionee to purchase, in whole at any time or in part from time to
time, 25% of the total number of Shares covered by the Option after the
expiration of one (1) year from the Grant Date and an additional 25% of the
total number of Shares covered by the Option on each of the second, third, and
fourth anniversaries of the Grant Date. Each such right of purchase shall be
cumulative and shall continue, unless sooner exercised or terminated as herein
provided during the remaining period of the Exercise Term.
5. Manner of Exercise and Payment.
5.1 Subject to the terms and conditions of this Agreement and the Plan, the
Option may be exercised by delivery of written notice to the Company, at its
principal executive office. Such notice shall state that the Optionee is
electing to exercise the Option and the number of Shares in respect of which the
Option is being exercised and shall be signed by the person or persons
exercising the Option. If requested by the Committee, such person or persons
shall (i) deliver this Agreement to the Secretary of the Company who shall
endorse thereon a notation of such exercise and (ii) provide satisfactory proof
as to the right of such person or persons to exercise the Option.
5.2 The notice of exercise described in Section 5.1 shall be accompanied by
the full purchase price for the Shares in respect of which the Option is being
exercised, in cash, by check or by transferring Shares to the Company having a
Fair Market Value on the day preceding the date of exercise equal to the cash
amount for which such Shares are substituted.
5.3 Upon receipt of notice of exercise and full payment for the Shares in
respect of which the Option is being exercised, the Company shall, subject to
Section 17 of the Plan, take such action as may be necessary to effect the
transfer to the Optionee of the number of Shares as to which such exercise was
effective.
5.4 The Optionee shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to any Shares subject to the Option until
(i) the Option shall have been exercised pursuant to the terms of this Agreement
and the Optionee shall have paid the full purchase price for the number of
Shares in respect of which the Option was exercised, (ii) the Company shall have
issued and delivered the Shares to the Optionee, and (iii) the Optionee's name
shall have been entered as a stockholder of record on the books of the Company,
whereupon the Optionee shall have full voting and other ownership rights with
respect to such Shares.
<PAGE>
Page 25
EXHIBIT 10(iii)A(4)
6. Termination of Employment.
6.1 In General.
If the employment of the Optionee with the Company and its Subsidiaries
shall terminate for any reason, other than for the reasons set forth in Sections
6.2 and 7.2 below, the Option shall continue to be exercisable (to the extent
the Option was vested and exercisable on the date of the Optionee's termination
of employment) at any time within three (3) months after the date of such
termination of employment, but in no event after the expiration of the Exercise
Term.
6.2 Termination of Employment Due to Death, Disability or Retirement.
If the Optionee's termination of employment is due to Death, Disability or
Retirement (termination on or after age 65), or if Optionee terminates
employment after age 55, the following shall apply:
(a) Termination Due To Death. In the event the Optionee dies while
actively employed, all vested Options at the date of death shall
remain exercisable at any time prior to the expiration of the
Exercise Term by (A) such person(s) that have acquired the
Optionee's rights under such Options by will or by the laws of
descent and distribution, or (B) if no such person described in
(A) exists, the Optionee's estate or representative of the
Optionee's estate. All Options that are not vested as of the date
of death shall be immediately forfeited.
(b) Termination by Disability. In the event the employment of the
Optionee is terminated by reason of Disability, all vested
Options as of the date the Committee determines the Optionee
terminated for Disability shall remain exercisable at any time
prior to the expiration of the Exercise Term. All Options that
are not vested as of the date of termination for Disability shall
be immediately forfeited.
(c) Termination by Retirement. In the event the employment of the
Optionee is terminated by reason of Retirement, the Optionee's
Options shall continue to vest in accordance with the original
schedule (just as if the Optionee had remained employed) and
shall remain exercisable at any time prior to the expiration of
the lesser of five years or the remaining Exercise Term of the
Options. In the event of the Optionee's death after Retirement,
the Options shall continue to vest and be exercisable in
accordance with this subsection (c) as if the Optionee had lived
and the Options shall be exercisable by the persons described in
(a) above.
<PAGE>
Page 26
EXHIBIT 10(iii)A(4)
(d) Termination After Attaining Age 55. If the Optionee terminates
employment (other than as a result of death or Disability) after
attaining age 55 but prior to age 65, unless the Committee
determines otherwise at the time of such termination, the
Optionee's Options shall continue to vest in accordance with the
original schedule (just as if the Optionee had remained employed)
and shall remain exercisable at any time prior to the expiration
of the lesser of five years or the remaining Exercise Term of the
Options. In the event of the Optionee's death after Retirement,
the Options shall continue to vest and be exercisable in
accordance with this subsection (d) as if the Optionee had lived
and the Options shall be exercisable by the persons described in
(a) above.
7. Effect of Change in Control.
7.1 Notwithstanding anything contained to the contrary in this Agreement,
in the event of a Change in Control, (i) the Option shall become immediately and
fully exercisable, and (ii) the Optionee will be permitted to surrender for
cancellation within sixty (60) days after such Change in Control, the Option or
any portion of the Option to the extent not yet exercised, and the Optionee
shall be entitled to receive immediately a cash payment in an amount equal to
the excess, if any, of (A) the Fair Market Value, at the time of surrender, of
the Shares subject to the Option or portion thereof surrendered, over (B) the
aggregate purchase price for such Shares under the Option; provided, however,
that if the Option was granted within six (6) months prior to the Change in
Control and the Optionee may be subject to liability under Section 16(b) of the
Exchange Act, the Optionee shall be entitled to surrender the Option, or any
portion of the Option, for cancellation during the sixty (60) day period
following the expiration of six (6) months from the Grant Date and to receive
the amount described above with respect to such surrender for cancellation.
7.2 If the employment of the Optionee is terminated within two (2) years
following a Change in Control, all vested Options shall continue to be
exercisable at any time within three (3) years after the date of such
termination of employment, but in no event after expiration of the Exercise
Term.
8. Nontransferability.
The Option shall not be transferable other than by will or by the laws of
descent and distribution. During the lifetime of the Optionee, the Option shall
be exercisable only by the Optionee.
9. No Right to Continued Employment.
Nothing in this Agreement or the Plan shall be interpreted or construed to
confer upon the Optionee any right with respect to continuance of employment by
the Company or a Subsidiary, nor shall this Agreement or the Plan interfere in
any way with the right of the Company or a Subsidiary to terminate the
Optionee's employment at any time.
<PAGE>
Page 27
EXHIBIT 10(iii)A(4)
10. Adjustments.
In the event of a Change in Capitalization, the Committee may make
appropriate adjustments to the number and class of Shares or other stock or
securities subject to the Option and the purchase price for such Shares or other
stock or securities. The Committee's adjustment shall be made in accordance with
the provisions of Section 11 of the Plan and shall be effective and final,
binding, and conclusive for all purposes of the Plan and this Agreement.
11. Terminating Events.
Subject to Section 7 hereof, upon the effective date of (i) the liquidation
or dissolution of the Company or (ii) a merger or consolidation of the Company
(a "Transaction"), the Option shall continue in effect in accordance with its
terms and the Optionee shall be entitled to receive in respect of all Shares
subject to the Option, upon exercise of the Option, the same number and kind of
stock, securities, cash, property, or other consideration that each holder of
Shares was entitled to receive in the Transaction.
12. Withholding of Taxes and Notice of Disposition.
12.1 The Company shall have the right to deduct from any distribution of
cash to the Optionee an amount equal to the federal, state, and local income
taxes and other amounts as may be required by law to be withheld (the
"Withholding Taxes") with respect to the Option. If the Optionee is entitled to
receive Shares upon exercise of the Option, the Optionee shall pay the
Withholding Taxes (if any) to the Company in cash prior to the issuance of such
Shares. In satisfaction of the Withholding Taxes, the Optionee may make a
written election (the "Tax Election"), which may be accepted or rejected in the
discretion of the Committee, to have withheld a portion of the Shares issuable
to him or her upon exercise of the Option, having an aggregate Fair Market Value
equal to the withholding Taxes, provided that, if the Optionee may be subject to
liability under Section 16(b) of the Exchange Act, the election must comply with
the requirements applicable to Share transactions by such Optionees.
12.2 If the Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any Share or
Shares issued to him pursuant to his exercise of the Option within the two-year
period commencing on the day after the Grant Date or within the one-year period
commencing on the day after the date of transfer of such Share or Shares to the
Optionee pursuant to such exercise, the Optionee shall, within ten (10) days of
such disposition, notify the Company thereof, by delivery of written notice to
the Company at its principal executive office, and immediately deliver to the
Company the amount of Withholding Taxes.
<PAGE>
Page 28
EXHIBIT 10(iii)A(4)
13. Employee Bound by the Plan.
The Optionee hereby acknowledges receipt of a copy of the Plan and agrees
to be bound by all the terms and provisions thereof.
14. Modification of Agreement.
This Agreement may be modified, amended, suspended, or terminated, and any
terms or conditions may be waived, but only by a written instrument executed by
the parties hereto.
15. Severability.
Should any provision of this Agreement be held by a court of competent
jurisdiction to be unenforceable or invalid for any reason, the remaining
provisions of this Agreement shall not be affected by such holding and shall
continue in full force in accordance with their terms.
16. Governing Law.
The validity, interpretation, construction, and performance of this
Agreement shall be governed by the laws of the State of Delaware without giving
effect to the conflicts of laws principles thereof.
17. Successors in Interest.
This Agreement shall inure to the benefit of and be binding upon each
successor corporation. This Agreement shall inure to the benefit of the
Optionee's legal representatives. All obligations imposed upon the Optionee and
all rights granted to the Company under this Agreement shall be final, binding,
and conclusive upon the Optionee's heirs, executors, administrators, and
successors.
18. Resolution of Disputes.
Any dispute or disagreement which may arise under, or as a result of, or in
any way relate to, the interpretation, construction, or application of this
Agreement shall be determined by the Committee. Any determination made hereunder
shall be final, binding, and conclusive on the Optionee and the Company for all
purposes.
<PAGE>
Page 29
EXHIBIT 10(iii)A(4)
19. Shareholder Approval.
The effectiveness of this Agreement and of the grant of the Option pursuant
hereto is subject to the approval of the Plan by the stockholders of the Company
in accordance with the terms of the Plan.
ATTEST: NATIONAL SERVICE INDUSTRIES, INC.
/s/ Helen D. Haines By:/s/ James S. Balloun
Secretary James S. Balloun
Chairman, President, and
Chief Executive Officer
/s/ George H. Gilmore, Jr.
Name of Optionee: George H. Gilmore, Jr.
Page 30
EXHIBIT 10(iii)A(5)
NONQUALIFIED STOCK OPTION AGREEMENT
FOR EXECUTIVE OFFICERS AND OPERATING UNIT PRESIDENTS
THIS AGREEMENT, made as of the 1st day of June, 1999(the "Grant Date"),
between National Service Industries, Inc., a Delaware corporation (the
"Company"), and George H. Gilmore, Jr. (the "Optionee").
WHEREAS, the Company has adopted the National Service Industries, Inc.
Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional
incentive to certain officers and key employees of the Company and its
Subsidiaries; and
WHEREAS, the Optionee performs services for the Company and/or one of
its Subsidiaries; and
WHEREAS, the Committee responsible for administration of the Plan has
determined to grant the Option to the Optionee as provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option.
1.1 The Company hereby grants to the Optionee the right and
option (the "Option") to purchase all or any part of an aggregate of 39,156
whole Shares subject to, and in accordance with, the terms and conditions set
forth in this Agreement.
1.2 The Option is not intended to qualify as an Incentive
Stock Option within the meaning of Section 422 of the Code.
1.3 This Agreement shall be construed in accordance and
consistent with, and subject to, the provisions of the Plan (the provisions of
which are incorporated herein by reference) and, except as otherwise expressly
set forth herein, the capitalized terms used in this Agreement shall have the
same definitions as set forth in the Plan.
2. Purchase Price.
The price at which the Optionee shall be entitled to purchase
Shares upon the exercise of the Option shall be $36.875 per Share.
3. Duration of Option.
The Option shall be exercisable to the extent and in the
manner provided herein for a period of ten (10) years from the Grant Date (the
"Exercise Term"); provided, however, that the Option may be earlier terminated
as provided in Section 6 hereof.
<PAGE>
Page 31
EXHIBIT 10(iii)A(5)
4. Exercisability of Option.
Unless otherwise provided in this Agreement or the Plan, the
Option shall entitle the Optionee to purchase, in whole at any time or in part
from time to time, 25% of the total number of Shares covered by the Option after
the expiration of one (1) year from the Grant Date and an additional 25% of the
total number of Shares covered by the Option on each of the second, third, and
fourth anniversaries of the Grant Date, and each such right of purchase shall be
cumulative and shall continue, unless sooner exercised or terminated as herein
provided during the remaining period of the Exercise Term.
5. Manner of Exercise and Payment.
5.1 Subject to the terms and conditions of this Agreement and
the Plan, the Option may be exercised by delivery of written notice to the
Company, at its principal executive office. Such notice shall state that the
Optionee is electing to exercise the Option and the number of Shares in respect
of which the Option is being exercised and shall be signed by the person or
persons exercising the Option. If requested by the Committee, such person or
persons shall (i) deliver this Agreement to the Secretary of the Company who
shall endorse thereon a notation of such exercise and (ii) provide satisfactory
proof as to the right of such person or persons to exercise the Option.
5.2 The notice of exercise described in Section 5.1 shall be
accompanied by the full purchase price for the Shares in respect of which the
Option is being exercised, in cash, by check, or by transferring Shares to the
Company having a Fair Market Value on the day preceding the date of exercise
equal to the cash amount for which such Shares are substituted.
5.3 Upon receipt of notice of exercise and full payment for
the Shares in respect of which the Option is being exercised, the Company shall,
subject to Section 17 of the Plan, take such action as may be necessary to
effect the transfer to the Optionee of the number of Shares as to which such
exercise was effective.
5.4 The Optionee shall not be deemed to be the holder of, or
to have any of the rights of a holder with respect to any Shares subject to the
Option until (i) the Option shall have been exercised pursuant to the terms of
this Agreement and the Optionee shall have paid the full purchase price for the
number of Shares in respect of which the Option was exercised, (ii) the Company
shall have issued and delivered the Shares to the Optionee, and (iii) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company, whereupon the Optionee shall have full voting and other
ownership rights with respect to such Shares.
<PAGE>
Page 32
EXHIBIT 10(iii)A(5)
6. Termination of Employment.
6.1 In General.
If the employment of the Optionee with the Company
and its Subsidiaries shall terminate for any reason, other than for the reasons
set forth in Sections 6.2 and 7.2 below, the Option shall continue to be
exercisable (to the extent the Option was vested and exercisable on the date of
the Optionee's termination of employment) at any time within three (3) months
after the date of such termination of employment, but in no event after the
expiration of the Exercise Term.
6.2 Termination of Employment Due to Death, Disability or
Retirement.
If the Optionee's termination of employment is due
to Death, Disability or Retirement (termination on or after age 65), or if
Optionee terminates employment after age 55, the following shall apply:
(a) Termination Due To Death. In the event the Optionee dies while
actively employed, all vested Options at the date of death
shall remain exercisable at any time prior to the expiration
of the Exercise Term by (A) a Permitted Transferee (as defined
in Section 8 below), if any, or such person(s) that have
acquired the Optionee's rights under such Options by will or
by the laws of descent and distribution, or (B) if no such
person described in (A) exists, the Optionee's estate or
representative of the Optionee's estate. All Options that are
not vested as of the date of death shall be immediately
forfeited.
(b) Termination by Disability. In the event the employment of the
Optionee is terminated by reason of Disability, all vested
Options as of the date the Committee determines the Optionee
terminated for Disability shall remain exercisable at any time
prior to the expiration of the Exercise Term. All Options that
are not vested as of the date of termination for Disability
shall be immediately forfeited.
(c) Termination by Retirement. In the event the employment of the
Optionee is terminated by reason of Retirement, the Optionee's
Options shall continue to vest in accordance with the original
schedule (just as if the Optionee had remained employed) and
shall remain exercisable at any time prior to the expiration
of the lesser of five years or the remaining Exercise Term of
the Options. In the event of the Optionee's death after
Retirement, the Options shall continue to vest and be
exercisable in accordance with this subsection (c) as if the
Optionee had lived and the Options shall be exercisable by the
persons described in (a) above.
(d) Termination After Attaining Age 55. If the Optionee terminates
employment (other than as a result of death or Disability)
after attaining age 55 but prior to age 65, unless the
Committee determines otherwise at the time of such
termination, the Optionee's Options shall continue to vest in
accordance with the original schedule (just as if the Optionee
had remained employed)and shall remain exercisable at any time
prior to the expiration of the lesser of five years or the
remaining Exercise Term of the Options. In the event of the
Optionee's death after Retirement, the Options shall
continue to vest and be exercisable in accordance with
this subsection (d) as if the Optionee had lived and the
Options shall be exercisable by the persons described in (a)
above.
<PAGE>
Page 33
EXHIBIT 10(iii)A(5)
7. Effect of Change in Control.
7.1 Notwithstanding anything contained to the contrary in this
Agreement, in the event of a Change in Control, (i) the Option shall become
immediately and fully exercisable, and (ii) the Optionee will be permitted to
surrender for cancellation within sixty (60) days after such Change in Control,
the Option or any portion of the Option to the extent not yet exercised, and the
Optionee shall be entitled to receive immediately a cash payment in an amount
equal to the excess, if any, of (A) the greater of (x) the Fair Market Value on
the date preceding the date of surrender, of the shares subject to the Option or
portion of the Option surrendered, or (y) the Adjusted Fair Market Value of the
Shares subject to the Option or portion thereof surrendered, over (B) the
aggregate purchase price for such Shares under the Option; provided, however,
that if the Option was granted within six (6) months prior to the Change in
Control and the Optionee may be subject to liability under Section 16(b) of the
Exchange Act, the Optionee shall be entitled to surrender the Option, or any
portion of the Option, for cancellation during the sixty (60) day period
following the expiration of six (6) months from the Grant Date and to receive
the amount described above with respect to such surrender for cancellation.
7.2 If the employment of the Optionee is terminated within two
(2) years following a Change in Control, all vested Options shall continue to be
exercisable at any time within three (3) years after the date of such
termination of employment, but in no event after expiration of the Exercise
Term.
8. Nontransferability.
The Option shall not be transferable other than by will or by
the laws of descent and distribution. Notwithstanding the foregoing, the Option
may be transferred, in whole or in part, without consideration, by written
instrument signed by the Optionee, to any members of the immediate family of the
Optionee (i.e., spouse, children, and grandchildren), any trusts for the benefit
of such family members or any partnerships whose only partners are such family
members (the "Permitted Transferees"). Appropriate evidence of any such transfer
to the Permitted Transferees shall be delivered to the Company at its principal
executive office. If all or part of the Option is transferred to a Permitted
Transferee, the Permitted Transferee's rights hereunder shall be subject to the
same restrictions and limitations with respect to the Option as the Optionee.
During the lifetime of the Optionee, the Option shall be exercisable only by the
Optionee, or if applicable, by the Permitted Transferees.
9. No Right to Continued Employment.
Nothing in this Agreement or the Plan shall be interpreted or
construed to confer upon the Optionee any right with respect to continuance of
employment by the Company or a Subsidiary, nor shall this Agreement or the Plan
interfere in any way with the right of the Company or a Subsidiary to terminate
the Optionee's employment at any time.
<PAGE>
Page 34
EXHIBIT 10(iii)A(5)
10. Adjustments.
In the event of a Change in Capitalization, the Committee may
make appropriate adjustments to the number and class of Shares or other stock or
securities subject to the Option and the purchase price for such Shares or other
stock or securities. The Committee's adjustment shall be made in accordance with
the provisions of Section 11 of the Plan and shall be effective and final,
binding, and conclusive for all purposes of the Plan and this Agreement.
11. Terminating Events.
Subject to Section 7 hereof, upon the effective date of (i)
the liquidation or dissolution of the Company or (ii) a merger or consolidation
of the Company (a "Transaction"), the Option shall continue in effect in
accordance with its terms and the Optionee shall be entitled to receive in
respect of all Shares subject to the Option, upon exercise of the Option, the
same number and kind of stock, securities, cash, property, or other
consideration that each holder of Shares was entitled to receive in the
Transaction.
12. Withholding of Taxes.
The Company shall have the right to deduct from any
distribution of cash to the Optionee an amount equal to the federal, state, and
local income taxes and other amounts as may be required by law to be withheld
(the "Withholding Taxes") with respect to the Option. If the Optionee is
entitled to receive Shares upon exercise of the Option, the Optionee shall pay
the Withholding Taxes to the Company in cash prior to the issuance of such
Shares. In satisfaction of the Withholding Taxes, the Optionee may make a
written election (the "Tax Election"), which may be accepted or rejected in the
discretion of the Committee, to have withheld a portion of the Shares issuable
to him or her upon exercise of the Option, having an aggregate Fair Market Value
equal to the withholding Taxes, provided that, if the Optionee may be subject to
liability under Section 16(b) of the Exchange Act, the election must comply with
the requirements applicable to Share transactions by such Optionees.
13. Employee Bound by the Plan.
The Optionee hereby acknowledges receipt of a copy of the Plan
and agrees to be bound by all the terms and provisions thereof.
14. Modification of Agreement.
This Agreement may be modified, amended, suspended, or
terminated, and any terms or conditions may be waived, but only by a written
instrument executed by the parties hereto.
<PAGE>
Page 35
EXHIBIT 10(iii)A(5)
15. Severability.
Should any provision of this Agreement be held by a court of
competent jurisdiction to be unenforceable or invalid for any reason, the
remaining provisions of this Agreement shall not be affected by such holding and
shall continue in full force in accordance with their terms.
16. Governing Law.
The validity, interpretation, construction, and performance of
this Agreement shall be governed by the laws of the State of Delaware without
giving effect to the conflicts of laws principles thereof.
17. Successors in Interest.
This Agreement shall inure to the benefit of and be binding
upon each successor corporation. This Agreement shall inure to the benefit of
the Optionee's legal representatives. All obligations imposed upon the Optionee
and all rights granted to the Company under this Agreement shall be final,
binding, and conclusive upon the Optionee's heirs, executors, Permitted
Transferees, administrators, and successors.
18. Resolution of Disputes.
Any dispute or disagreement which may arise under, or as a
result of, or in any way relate to, the interpretation, construction, or
application of this Agreement shall be determined by the Committee. Any
determination made hereunder shall be final, binding, and conclusive on the
Optionee and the Company for all purposes.
ATTEST: NATIONAL SERVICE INDUSTRIES, INC.
/s/ Helen D. Haines By:/s/ James S. Balloun
Secretary James S. Balloun
Chairman, President, and
Chief Executive Officer
/s/ George H. Gilmore, Jr.
Name of Optionee: George H. Gilmore, Jr.
Page 36
EXHIBIT 10(iii)A(6)
ASPIRATION ACHIEVEMENT INCENTIVE AWARD AGREEMENT
FOR EXECUTIVE VICE PRESIDENT AND GROUP PRESIDENT
THIS AGREEMENT, made as of the 1st day of June, 1999 (the "Grant Date"),
between National Service Industries, Inc., a Delaware corporation ("NSI") and
NSI SERVICES, L.P. (GA), a Subsidiary of NSI (together, the "Company"), and
GEORGE H. GILMORE, JR. (the "Grantee").
WHEREAS, NSI has adopted the National Service Industries, Inc. Long-Term
Achievement Incentive Plan (the "Plan") in order to provide additional
incentives to certain officers and key employees of NSI and its Subsidiaries;
and
WHEREAS, the Grantee, as an executive of the above-referenced Subsidiary,
performs services with respect to the CHEMICAL GROUP, NATIONAL LINEN SERVICE,
AND AECO operations of the Company (the "Operations"); and
WHEREAS, the Committee responsible for administration of the Plan has
determined to grant to the Grantee an Aspiration Achievement Incentive Award as
provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Aspiration Award.
1.1 The Company hereby grants to the Grantee an Aspiration Achievement
Incentive Award (the "Award"), which has a value determined as provided in
Section 2 below based upon the performance of the Operations during the
Performance Cycle from September 1, 1997 to August 31, 2000. As provided in the
Plan, Grantee's right to payment of this Award is dependent upon Grantee's
continued employment in Grantee's current position with the Company, or in a
position with responsibilities of substantially similar value to the Company
during the remainder of the Performance Cycle. Under certain circumstances as
described below, Grantee may be entitled to receive payment for some portion of
the Award if Grantee's employment terminates prior to the end of the Performance
Cycle.
1.2 The Grantee hereby acknowledges receipt of a copy of the Plan and
agrees to be bound by all the terms and provisions thereof. This Agreement shall
be construed in accordance with, and subject to, the provisions of the Plan (the
provisions of which are hereby incorporated by reference) and, except as
otherwise expressly set forth herein, the capitalized terms used in this
Agreement shall have the same definitions as set forth in the Plan.
2. Performance Measure and Performance Levels.
<PAGE>
Page 37
EXHIBIT 10(iii)A(6)
The Committee has established the performance measure (the "Performance
Measure"), and award and performance levels set forth in Appendix A attached
hereto. The chart in Appendix A specifies a Commitment performance level, at
which the Commitment Level Award will be paid, an Aspiration performance level,
at or above which an Aspiration Level Award will be paid, and a threshold
performance level, at which a minimum incentive award will be paid and below
which no award will be paid. For each level of performance at or above the
threshold performance level through the Aspiration performance level, Grantee
will receive an award determined in accordance with the chart and formulae set
forth in Appendix A. The terms used in determining the Performance Measure are
defined in Appendix B.
3. Determination of Aspiration Award.
3.1 Determination Notice. Subject to Section 3.2, as soon as practical
following the last day of the Performance Cycle, the Committee will determine,
in accordance with Section 7(c) of the Plan, the performance level of the
Operations with respect to the Performance Measure for the Performance Cycle.
The Committee may in determining the performance level with respect to the
Performance Measure adjust the Operations' financial results for the Performance
Cycle to exclude the effect of unusual charges or income items which are
distortive of financial results for the Performance Cycle; provided, that, in
determining financial results, items whose exclusion from consideration will
increase the performance level of the Operations shall only have their effects
excluded if they constitute "extraordinary items" under generally accepted
accounting principles and all such items shall be excluded. The Committee shall
also adjust the performance calculations to exclude the unanticipated effect on
financial results of changes in the Code, or other tax laws, and the regulations
thereunder. The Committee shall also exclude from consideration the effect on
financial performance of each of the following events or items where the result
of excluding the particular event or item is to increase the performance level
of the Operations: (i) an acquisition or a divestiture involving more than $10
million in net worth or $25 million in business revenues; (ii) an equity
restructuring involving more than $1 million; (iii) asset impairment charges
involving more than $1 million and restructuring costs involving more than $1
million associated with facility closings or reduction in employment levels;
(iv) changes in accounting treatment or rules involving more than $1 million.
The Committee may decrease the amount of the Award otherwise payable to Grantee
if, in the Committee's view, such adjustment is necessary or desirable,
regardless of the extent to which the Performance Measure has been achieved. The
Committee may establish such guidelines and procedures for reducing the amount
of an Award as it deems appropriate.
The Company will notify the Grantee (or the executors or administrators of
the Grantee's estate, if applicable) of the Committee's determination (the
"Determination Notice"). The Determination Notice shall specify the performance
level of the Operations with respect to the Performance Measure for the
Performance Cycle and the amount of Award (if any) Grantee will be entitled to
receive. Unless the Committee determines otherwise at the time the Award is paid
and except as otherwise provided in the event of a Change in Control, the amount
Grantee is entitled to receive will be paid one-half in cash and one-half in
Shares. The Shares will be valued at their Fair Market Value as of the last day
of the Performance Cycle. Except in the case of a Change in Control, the
Committee may, in its discretion, attach restrictions, terms and conditions to
the Shares issued as part of the Award.
3.2 Significant Events Involving the Operations. If, during a Performance
Cycle, NSI consummates an acquisition or disposition involving the Operations
that (i) involves assets whose value equals or exceeds 20% of the total value of
the Operations' assets, (ii) represents a part of the business whose revenues
equal or exceed 20% of the total of the Operations' revenues, or (iii) causes a
material restructuring of the Operations, the following rules shall apply:
<PAGE>
Page 38
EXHIBIT 10(iii)A(6)
(a) If the transaction is consummated during the first year of the
Performance Cycle, the Performance Cycle and the Grantee's outstanding Award
will be terminated with no payout and a new Performance Cycle containing a new
Award will be started.
(b) If the transaction is consummated after the first year of the
Performance Cycle, the Performance Cycle will end and the outstanding Award will
be determined and paid at the Operations' actual performance level to such date,
taking into account the adjustments provided for in Section 3.1 above and using
prorated performance levels of the Performance Measure to reflect the portion of
the Performance Cycle that had elapsed as of the date of consummation of the
acquisition or disposition. Payment of the Award will be made as soon as
practical after it is determined. A new Performance Cycle will be started to
cover the period remaining in the initial Performance Cycle or, if that result
is not practical, the Committee will make an appropriate adjustment to reflect
the premature termination of the initial Performance Cycle.
If, during a Performance Cycle, NSI consummates an acquisition or
disposition that is not covered by the special provisions of this Section 3.2,
the financial effects of such acquisition or disposition shall be handled as
provided in Section 3.1.
Any actions under this Section 3.2 shall be taken in accordance with the
requirements of Code Section 162(m) and the regulations thereunder.
4. Termination of Employment.
4.1 In General. Except as provided in Sections 4.2, 4.3 and 4.4 below, in
the event that a Grantee's employment terminates during a Performance Cycle, all
unearned Aspiration Awards shall be immediately forfeited by the Grantee.
4.2 Termination of Employment Due to Death, Disability, or Retirement. In
the event the employment of a Grantee is terminated by reason of death or
Disability during a Performance Cycle, the Grantee shall be entitled to a
prorated payout with respect to the unearned Award. The prorated payout shall be
determined by the Committee based upon the length of time that the Grantee was
actively employed during the Performance Cycle relative to the full length of
the Performance Cycle; provided, that payment shall only be made to the extent
at the end of the Performance Cycle the Award would have been earned based upon
the performance level achieved for the Performance Cycle (taking into account
the adjustment provisions and other rules in Section 3 above); and provided,
further, that the performance level used to determine the prorated award cannot
exceed 200% of the Commitment performance level.
<PAGE>
Page 39
EXHIBIT 10(iii)A(6)
In the event of Grantee's Retirement (on or after age 65), the full Award
shall continue to be eligible for payout at the end of the Performance Cycle,
just as if Grantee had remained employed for the remainder of the Performance
Cycle (including if the Grantee dies after Retirement but before the end of the
Performance Cycle). At the end of the Performance Cycle, the Committee shall
make its determination in the same manner as provided in Section 3.
Payment of earned Awards to Grantee in the event of termination due to
death, Disability, or Retirement shall be made at the same time payments would
be made to Grantee if Grantee did not terminate employment during the
Performance Cycle.
4.3 Change In Control. Notwithstanding anything in this Agreement to the
contrary, if a Change in Control occurs during the Performance Cycle, then the
Grantee's Award shall be determined for the Performance Cycle then in progress
as though the Performance Cycle had ended as of the date of the Change in
Control and the outstanding Award will be paid at the Commitment Level Award or
the actual performance level to such date (using, for such purpose, prorated
performance levels of the Performance Measure to reflect the portion of the
Performance Cycle that has elapsed as of the date of the Change in Control),
whichever provides the greater payment. The Award determined in accordance with
the preceding sentence shall be fully vested and payable immediately to the
Grantee. The Committee shall determine the amount of the Award under this
Section 4.3, subject to the terms of this section, and no downward adjustment of
the Award which would result in reduction of the Award by more than 50% shall be
permitted. The Award will be paid in full in cash, unless the Grantee elects to
receive one-half of the Award in Shares. For purposes of determining the number
of Shares to be paid to a Grantee under this Section 4.3, the Fair Market Value
of a Share shall be determined by taking the average closing price per share for
the last twenty (20) trading days prior to the commencement of the offer,
transaction or other event which resulted in a Change in Control.
4.4 Termination Without Cause. In the event Grantee's employment is
terminated by the Company without Cause more than one (1) year after the
commencement of the Performance Cycle and prior to the end of the Performance
Cycle, the Grantee shall be entitled to a prorated payout of the Award based
upon the length of time that the Grantee was actively employed during the
Performance Cycle relative to the full length of the Performance Cycle;
provided, that payment shall be made only to the extent at the end of the
Performance Cycle the Award would have been earned based upon the performance
level achieved during the Performance Cycle (taking into account the adjustment
provisions and other rules in Section 3 above); and provided, further, that the
performance level used to determine the prorated award cannot exceed 200% of the
Commitment performance level. Payment shall be made to Grantee at the same time
as if Grantee had not terminated employment during the Performance Cycle
5. No Right to Continued Employment.
Nothing in this Agreement or the Plan shall be interpreted to confer upon
the Grantee any rights with respect to continuance of employment by the Company,
nor shall this Agreement or the Plan interfere in any way with the right of the
Company to terminate the Grantee's employment at any time.
<PAGE>
Page 40
EXHIBIT 10(iii)A(6)
6. Nonassignment.
The Grantee shall not have the right to assign, alienate, pledge, transfer
or encumber any amounts due Grantee hereunder, and any attempt to assign,
alienate, pledge, transfer, or encumber Grantee's rights or benefits shall be
null and void and not recognized by the Plan or the Company.
7. Modification of Agreement.
This Agreement may be modified, amended, suspended or terminated, and any
terms or conditions may be waived, but only by a written instrument executed by
the parties hereto.
8. Severability; Governing Law
Should any provision of this Agreement be held by a court of competent
jurisdiction to be unenforceable or invalid for any reason, the remaining
provisions of this Agreement shall not be affected by such holding and shall
continue in full force in accordance with their terms.
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware without giving
effect to the conflicts of laws principles thereof.
9. Successors in Interest.
This Agreement shall inure to the benefit of and be binding upon any
successor to the Company. All obligations imposed upon the Grantee and all
rights granted to the Company under this Agreement shall be binding upon the
Grantee's heirs, executors, and administrators.
10. Resolution of Disputes.
Any dispute or disagreement which may arise under, or as a result of, or in
any way relate to, the interpretation, construction or application of this
Agreement shall be determined by the Committee. Any determination made hereunder
shall be final, binding and conclusive on the Grantee and the Company for all
purposes.
11. Withholding of Taxes.
The Company shall have the right to deduct from any amount payable under
this Agreement, an amount equal to the federal, state and local income taxes and
other amounts as may be required by law to be withheld (the "Withholding Taxes")
with respect to any such amount. In satisfaction of all or part of the
Withholding Taxes, the Grantee may make a written election (the "Tax Election"),
which may be accepted or rejected in the discretion of the Company, to have
withheld a portion of the Shares issuable to him or her pursuant to an Award,
having an aggregate Fair Market Value equal to the Withholding Taxes.
<PAGE>
Page 41
EXHIBIT 10(iii)A(6)
NATIONAL SERVICE INDUSTRIES, INC.
By:/s/ James S. Balloun
-----------------------------
JAMES S. BALLOUN
Chairman, President and
Chief Executive Officer
NSI SERVICES, L.P. (GA), Subsidiary
By:/s/ James S. Balloun
-----------------------------
JAMES S. BALLOUN
Chairman, President and
Chief Executive Officer
/s/ George H. Gilmore, Jr.
-----------------------------
Name of Grantee:
GEORGE H. GILMORE, JR.
<PAGE>
Page 42
EXHIBIT 10(iii)A(6)
Appendix A
Aspiration Award Program Illustration - FY 1998-2000
Name: George H. Gilmore, Jr. Division: Corporate
Position: Executive Vice President and Group President
Salary: $450,000
Total LTI Multiple: 160%
AAI % of LTI: 30%
Prorated Months: 15 of 36
<TABLE>
<S> <C> <C> <C>
Achievement Level
Threshold Commitment Aspiration
FY98-00 Economic Profit ($000,000)
(Chemical Group, National Linen Service, AECO) ** ** **
Individual AAI Opportunity $22,500 $90,000 $450,000
</TABLE>
Aspiration Award Program Opportunity
The following graph depicts the potential incentive award that would be paid out
at different levels of the Operations cumulative econimic profit, including: a
Threshold performance level; a Commitment performance level; and an Aspiration
performance level.
<TABLE>
<S> <C>
Individual
Aspiration
Economic Profit (000,000) Award
Threshold ** $ 22,500
Commitment ** $ 90,000
Aspiration ** $ 450,000
</TABLE>
** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
Page 43
EXHIBIT 10(iii)A(6)
Appendix A (continued)
ASPIRATION ACHIEVEMENT INCENTIVE AWARD
FOR
1998 - 2000 PERFORMANCE PERIOD
CHEMICAL GROUP, NATIONAL LINEN SERVICE, AND AECO OPERATIONS
Formula: Payout as a Percent of Commitment Award = a x EP + b
Below Commitment Level EP:
a = 0.02517
b = -0.65101
Above Commitment Level EP:
a = 0.09877
b = -5.47901
Notes:
1. EP = Cumulative Economic Profit for performance period, which will be
expressed in millions, rounded to one decimal place.
2. Values for "a" and "b" will be rounded to five decimal places.
3. Payout percentages will be rounded to a tenth of a percent.
4. No award is payable below the Threshold Level EP, notwithstanding the
formula set forth above.
5. The maximum award payable is 500% of the Commitment Level award,
notwithstanding the formula set forth above.
<PAGE>
Page 44
EXHIBIT 10(iii)A(6)
<TABLE>
<CAPTION>
APPENDIX B
ASPIRATION ACHIEVEMENT
INCENTIVE AWARD
PERFORMANCE MEASURE
<S> <C>
PERFORMANCE MEASURE DEFINITION
Economic Profit Sum of the annual economic profits for the performance
cycle. Annual economic profit shall be determined as
follows: Adjusted After-Tax Profits (AATP) minus
[Average Invested Capital times the Weighted Average
Cost of Capital (WACC)]
RELATED TERMS DEFINITION
Average Invested Capital Average of the average beginning and ending Invested
Capital balances each month.
Adjusted After-Tax Profit (AATP) Adjusted Pre-Tax Profit minus Book Income Taxes.
Adjusted Pre-Tax Profit (APTP) Income before provision for income taxes plus interest
expense plus implied interest on capitalized operating
leases.
Book Income Taxes Reported tax rate (determined by dividing
the provision for income taxes by the
income before the provision for income
taxes, as reported in NSI's annual financial
statements) applied to APTP.
Invested Capital [Total assets plus capitalized operating leases, less
short and long-term investment in tax benefits] less
[non-interest bearing liabilities except for self
insurance reserves and deferred tax credits relating to
the safe harbor lease].
Weighted Average Cost of Capital (WACC) Ten percent (10%) will be the WACC for the Performance
Cycle ending August 31.
</TABLE>
Page 45
EXHIBIT 10(iii)A(7)
ASPIRATION ACHIEVEMENT INCENTIVE AWARD AGREEMENT
FOR EXECUTIVE VICE PRESIDENT AND GROUP PRESIDENT
THIS AGREEMENT, made as of the 1st day of June, 1999(the "Grant Date"),
between NATIONAL SERVICE INDUSTRIES, INC., a Delaware corporation ("NSI"),
and NSI SERVICES, L.P.(GA), a Subsidiary of NSI (together, the "Company"), and
GEORGE H. GILMORE, JR. (the "Grantee").
WHEREAS, NSI has adopted the National Service Industries, Inc.
Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional
incentives to certain officers and key employees of NSI and its Subsidiaries;
and
WHEREAS, the Grantee, as an executive of the above-referenced
Subsidiary, performs services with respect to the CHEMICAL GROUP, NATIONAL LINEN
SERVICE, AND AECO operations of the Company (the "Operations"); and
WHEREAS, the Committee responsible for administration of the Plan has
determined to grant to the Grantee an Aspiration Achievement Incentive Award as
provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Aspiration Award.
1.1 The Company hereby grants to the Grantee an Aspiration
Achievement Incentive Award (the "Award"), which has a value determined as
provided in Section 2 below based upon the performance of the Operations during
the Performance Cycle from September 1, 1998 to August 31, 2001. As provided in
the Plan, Grantee's right to payment of this Award is dependent upon Grantee's
continued employment in Grantee's current position with the Company, or in a
position with responsibilities of substantially similar value to the Company
during the remainder of the Performance Cycle. Under certain circumstances as
described below, Grantee may be entitled to receive payment for some portion of
the Award if Grantee's employment terminates prior to the end of the Performance
Cycle.
1.2 The Grantee hereby acknowledges receipt of a copy of the
Plan and agrees to be bound by all the terms and provisions thereof. This
Agreement shall be construed in accordance with, and subject to, the provisions
of the Plan (the provisions of which are hereby incorporated by reference) and,
except as otherwise expressly set forth herein, the capitalized terms used in
this Agreement shall have the same definitions as set forth in the Plan.
<PAGE>
Page 46
EXHIBIT 10(iii)A(7)
2. Performance Measure and Performance Levels.
The Committee has established the performance measure (the
"Performance Measure"), and award and performance levels set forth in Appendix A
attached hereto. The chart in Appendix A specifies a Commitment performance
level, at which the Commitment Level Award will be paid, an Aspiration
performance level, at or above which an Aspiration Level Award will be paid, and
a threshold performance level, at which a minimum incentive award will be paid
and below which no award will be paid. For each level of performance at or above
the threshold performance level through the Aspiration performance level,
Grantee will receive an award determined in accordance with the chart and
formulae set forth in Appendix A. The terms used in determining the Performance
Measure are defined in Appendix B.
3. Determination of Aspiration Award.
3.1 Determination Notice. Subject to Section 3.2, as soon as
practical following the last day of the Performance Cycle, the Committee will
determine, in accordance with Section 7(c) of the Plan, the performance level of
the Operations with respect to the Performance Measure for the Performance
Cycle. The Committee may in determining the performance level with respect to
the Performance Measure adjust the Operations' financial results for the
Performance Cycle to exclude the effect of unusual charges or income items which
are distortive of financial results for the Performance Cycle; provided, that,
in determining financial results, items whose exclusion from consideration will
increase the performance level of the Operations shall only have their effects
excluded if they constitute "extraordinary items" under generally accepted
accounting principles and all such items shall be excluded. The Committee shall
also adjust the performance calculations to exclude the unanticipated effect on
financial results of changes in the Code, or other tax laws, and the regulations
thereunder. The Committee shall also exclude from consideration the effect on
financial performance of each of the following events or items where the result
of excluding the particular event or item is to increase the performance level
of the Operations: (i) an acquisition or a divestiture involving more than $10
million in net worth or $25 million in business revenues; (ii) an equity
restructuring involving more than $1 million; (iii) asset impairment charges
involving more than $1 million and restructuring costs involving more than $1
million associated with facility closings or reduction in employment levels;
(iv) changes in accounting treatment or rules involving more than $1 million.
The Committee may decrease the amount of the Award otherwise payable to Grantee
if, in the Committee's view, such adjustment is necessary or desirable,
regardless of the extent to which the Performance Measure has been achieved. The
Committee may establish such guidelines and procedures for reducing the amount
of an Award as it deems appropriate.
The Company will notify the Grantee (or the executors or
administrators of the Grantee's estate, if applicable) of the Committee's
determination (the "Determination Notice"). The Determination Notice shall
specify the performance level of the Operations with respect to the Performance
Measure for the Performance Cycle and the amount of Award (if any) Grantee will
be entitled to receive. Unless the Committee determines otherwise at the time
the Award is paid and except as otherwise provided in the event of a Change in
Control, the amount Grantee is entitled to receive will be paid one-half in cash
and one-half in Shares. The Shares will be valued at their Fair Market Value as
of the last day of the Performance Cycle. Except in the case of a Change in
Control, the Committee may, in its discretion, attach restrictions, terms, and
conditions to the Shares issued as part of the Award.
<PAGE>
Page 47
EXHIBIT 10(iii)A(7)
3.2 Significant Events Involving the Operations. If, during a
Performance Cycle, NSI consummates an acquisition or disposition involving the
Operations that (i) involves assets whose value equals or exceeds 20% of the
total value of the Operations' assets, (ii) represents a part of the business
whose revenues equal or exceed 20% of the total of the Operations' revenues, or
(iii) causes a material restructuring of the Operations, the following rules
shall apply:
(a) If the transaction is consummated during
the first year of the Performance Cycle, the Performance Cycle and the Grantee's
outstanding Award will be terminated with no payout and a new Performance Cycle
containing a new Award will be started.
(b) If the transaction is consummated after
the first year of the Performance Cycle, the Performance Cycle will end and the
outstanding Award will be determined and paid at the Operations' actual
performance level to such date, taking into account the adjustments provided for
in Section 3.1 above and using prorated performance levels of the Performance
Measure to reflect the portion of the Performance Cycle that had elapsed as of
the date of consummation of the acquisition or disposition. Payment of the Award
will be made as soon as practical after it is determined. A new Performance
Cycle will be started to cover the period remaining in the initial Performance
Cycle or, if that result is not practical, the Committee will make an
appropriate adjustment to reflect the premature termination of the initial
Performance Cycle.
If, during a Performance Cycle, NSI consummates an
acquisition or disposition that is not covered by the special provisions of this
Section 3.2, the financial effects of such acquisition or disposition shall be
handled as provided in Section 3.1.
Any actions under this Section 3.2 shall be taken in
accordance with the requirements of Code Section
162(m) and the regulations thereunder.
4. Termination of Employment.
4.1 In General. Except as provided in Sections 4.2, 4.3, and
4.4 below, in the event that the Grantee's employment terminates during a
Performance Cycle, all unearned Aspiration Awards shall be immediately forfeited
by the Grantee.
<PAGE>
Page 48
EXHIBIT 10(iii)A(7)
4.2 Termination of Employment Due to Death, Disability, or
Retirement. In the event the employment of the Grantee is terminated by reason
of death or Disability during a Performance Cycle, the Grantee shall be entitled
to a prorated payout with respect to the unearned Award. The prorated payout
shall be determined by the Committee based upon the length of time that the
Grantee was actively employed during the Performance Cycle relative to the full
length of the Performance Cycle; provided, that payment shall only be made to
the extent at the end of the Performance Cycle the Award would have been earned
based upon the performance level achieved for the Performance Cycle (taking into
account the adjustment provisions and other rules in Section 3 above); and
provided, further, that the performance level used to determine the prorated
award cannot exceed 200% of the Commitment performance level.
In the event of Grantee's Retirement (on or after age
65), the full Award shall continue to be eligible for payout at the end of the
Performance Cycle, just as if Grantee had remained employed for the remainder of
the Performance Cycle (including if the Grantee dies after Retirement but before
the end of the Performance Cycle). At the end of the Performance Cycle, the
Committee shall make its determination in the same manner as provided in Section
3.
Payment of earned Awards to Grantee in the event of
termination due to death, Disability, or Retirement shall be made at the same
time payments would be made to Grantee if Grantee did not terminate employment
during the Performance Cycle.
4.3 Change In Control. Notwithstanding anything in this
Agreement to the contrary, if a Change in Control occurs during the Performance
Cycle, then the Grantee's Award shall be determined for the Performance Cycle
then in progress as though the Performance Cycle had ended as of the date of the
Change in Control and the outstanding Award will be paid at the Commitment Level
Award or the actual performance level to such date (using, for such purpose,
prorated performance levels of the Performance Measure to reflect the portion of
the Performance Cycle that has elapsed as of the date of the Change in Control),
whichever provides the greater payment. The Award determined in accordance with
the preceding sentence shall be fully vested and payable immediately to the
Grantee. The Committee shall determine the amount of the Award under this
Section 4.3, subject to the terms of this section, and no downward adjustment of
the Award which would result in reduction of the Award by more than 50% shall be
permitted. The Award will be paid in full in cash, unless the Grantee elects to
receive one-half of the Award in Shares. For purposes of determining the number
of Shares to be paid to the Grantee under this Section 4.3, the Fair Market
Value of a Share shall be determined by taking the average closing price per
share for the last twenty (20) trading days prior to the commencement of the
offer, transaction, or other event which resulted in a Change in Control.
<PAGE>
Page 49
EXHIBIT 10(iii)A(7)
4.4 Termination Without Cause. In the event Grantee's
employment is terminated by the Company without Cause more than one (1) year
after the commencement of the Performance Cycle and prior to the end of the
Performance Cycle, the Grantee shall be entitled to a prorated payout of the
Award based upon the length of time that the Grantee was actively employed
during the Performance Cycle relative to the full length of the Performance
Cycle; provided, that payment shall be made only to the extent at the end of the
Performance Cycle the Award would have been earned based upon the performance
level achieved during the Performance Cycle (taking into account the adjustment
provisions and other rules in Section 3 above); and provided, further, that the
performance level used to determine the prorated award cannot exceed 200% of the
Commitment performance level. Payment shall be made to Grantee at the same time
as if Grantee had not terminated employment during the Performance Cycle.
5. No Right to Continued Employment.
Nothing in this Agreement or the Plan shall be interpreted to
confer upon the Grantee any rights with respect to continuance of employment by
the Company, nor shall this Agreement or the Plan interfere in any way with the
right of the Company to terminate the Grantee's employment at any time.
6. Nonassignment.
The Grantee shall not have the right to assign, alienate,
pledge, transfer, or encumber any amounts due Grantee hereunder, and any attempt
to assign, alienate, pledge, transfer, or encumber Grantee's rights or benefits
shall be null and void and not recognized by the Plan or the Company.
7. Modification of Agreement.
This Agreement may be modified, amended, suspended, or
terminated, and any terms or conditions may be waived, but only by a written
instrument executed by the parties hereto.
8. Severability; Governing Law.
Should any provision of this Agreement be held by a court of
competent jurisdiction to be unenforceable or invalid for any reason, the
remaining provisions of this Agreement shall not be affected by such holding and
shall continue in full force in accordance with their terms.
The validity, interpretation, construction, and performance of
this Agreement shall be governed by the laws of the State of Delaware without
giving effect to the conflicts of laws principles thereof.
<PAGE>
Page 50
EXHIBIT 10(iii)A(7)
9. Successors in Interest.
This Agreement shall inure to the benefit of and be binding
upon any successor to the Company. All obligations imposed upon the Grantee and
all rights granted to the Company under this Agreement shall be binding upon the
Grantee's heirs, executors, and administrators.
10. Resolution of Disputes.
Any dispute or disagreement which may arise under, or as a
result of, or in any way relate to, the interpretation, construction, or
application of this Agreement shall be determined by the Committee. Any
determination made hereunder shall be final, binding, and conclusive on the
Grantee and the Company for all purposes.
11. Withholding of Taxes.
The Company shall have the right to deduct from any amount
payable under this Agreement, an amount equal to the federal, state, and local
income taxes and other amounts as may be required by law to be withheld (the
"Withholding Taxes") with respect to any such amount. In satisfaction of all or
part of the Withholding Taxes, the Grantee may make a written election (the "Tax
Election"), which may be accepted or rejected in the discretion of the Company,
to have withheld a portion of the Shares issuable to him or her pursuant to an
Award, having an aggregate Fair Market Value equal to the Withholding Taxes.
NATIONAL SERVICE INDUSTRIES, INC.
By:/s/ James S. Balloun
JAMES S. BALLOUN
Chairman, President and Chief Executive Officer
NSI SERVICES L.P. (GA), Subsidiary
By:/s/ James S. Balloun
JAMES S. BALLOUN
Chairman, President and Chief Executive Officer
/s/ George H. Gilmore, Jr.
Name of Grantee: GEORGE H. GILMORE, JR.
<PAGE>
Page 51
EXHIBIT 10(iii)A(7)
Appendix A
Aspiration Award Program Illustration - FY 1999-2001
Name: George H. Gilmore, Jr. Division: Corporate
Position: Executive Vice President and Group President
Salary: $450,000
Total LTI Multiple: 160%
AAI % of LTI: 30%
Prorated Months: 27 of 36
<TABLE>
<S> <C> <C> <C>
Achievement Level
Threshold Commitment Aspiration
FY99-01 Economic Profit ($000,000)
(Chemical Group, National Linen Service, AECO) ** ** **
Individual AAI Opportunity $40,500 $162,000 $810,000
</TABLE>
Aspiration Award Program Opportunity
The following graph depicts the potential incentive award that would be paid out
at different levels of the Operations cumulative econimic profit, including: a
Threshold performance level; a Commitment performance level; and an Aspiration
performance level.
<TABLE>
<S> <C>
Individual
Aspiration
Economic Profit (000,000) Award
Threshold ** $ 40,500
Commitment ** $162,000
Aspiration ** $810,000
</TABLE>
** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
Page 52
EXHIBIT 10(iii)A(7)
Appendix A (continued)
ASPIRATION ACHIEVEMENT INCENTIVE AWARD
FOR
1999 - 2001 PERFORMANCE PERIOD
CHEMICAL GROUP, NATIONAL LINEN SERVICE, AND AECO OPERATIONS
Formula: Payout as a Percent of Commitment Award = a x EP + b
Below Commitment Level EP:
a = 0.02586
b = -0.75862
Above Commitment Level EP:
a = 0.14286
b = -8.71429
Notes:
1. EP = Cumulative Economic Profit for performance period, which will be
expressed in millions, rounded to one decimal place.
2. Values for "a" and "b" will be rounded to five decimal places.
3. Payout percentages will be rounded to a tenth of a percent.
4. No award is payable below the Threshold Level EP, notwithstanding the
formula set forth above.
5. The maximum award payable is 500% of the Commitment Level award,
notwithstanding the formula set forth above.
<PAGE>
Page 53
EXHIBIT 10(iii)A(7)
APPENDIX B
ASPIRATION ACHIEVEMENT
INCENTIVE AWARD
PERFORMANCE MEASURE
<TABLE>
<S> <C>
PERFORMANCE MEASURE DEFINITION
Economic Profit Sum of the annual economic profits for the performance
cycle. Annual economic profit shall be determined as
follows: Adjusted After-Tax Profits (AATP) minus
[Average Invested Capital times the Weighted Average
Cost of Capital (WACC)]
RELATED TERMS DEFINITION
Average Invested Capital Average of the average beginning and ending Invested
Capital balances each month.
Adjusted After-Tax Profit (AATP) Adjusted Pre-Tax Profit minus Book Income Taxes.
Adjusted Pre-Tax Profit (APTP) Income before provision for income taxes plus interest
expense plus implied interest on capitalized operating
leases.
Book Income Taxes Reported tax rate (determined by dividing
the provision for income taxes by the
income before the provision for income
taxes, as reported in NSI's annual financial
statements) applied to APTP.
Invested Capital [Total assets plus capitalized operating leases, less
short and long-term investment in tax benefits] less
[non-interest bearing liabilities except for self
insurance reserves and deferred tax credits relating to
the safe harbor lease].
Weighted Average Cost of Capital (WACC) Ten percent (10%) will be the WACC for the Performance
Cycle ending August 31, 2001.
</TABLE>
Page 54
EXHIBIT 10(iii)A(8)
AMENDMENT OF
ASPIRATION ACHIEVEMENT INCENTIVE
AWARD AGREEMENT
AND
ELECTION FORM
WHEREAS, the undersigned Participant was granted an Aspiration Award under
the NSI Long-Term Achievement Incentive Plan (the "Plan") for the Performance
Cycle ending August 31, 1999; and
WHEREAS, under the Plan, the amount (if any) of the Aspiration Award the
Participant will receive for such Performance Cycle is currently uncertain; and
WHEREAS, the Plan has been amended to permit the Participant to receive all
or a portion of the Aspiration Award in a different form;
NOW, THEREFORE, the Participant hereby elects to receive any Aspiration
Award earned for the Performance Cycle ending August 31, 1999, in the manner
provided below and agrees to amend the Aspiration Achievement Incentive Award
Agreement in accordance with such election:
I. AMENDMENT TO SURRENDER / EXCHANGE AWARD (OR PORTION THEREOF) FOR STOCK
OPTIONS. By checking "YES" below, you are electing to amend your Aspiration
Achievement Incentive Award Agreement for the Performance Cycle ending August
31, 1999 to provide that your Award (or a portion thereof) will be exchanged as
indicated, to the fullest extent possible, for the grant of Options to acquire
NSI stock under the terms set forth below.
<PAGE>
Page 55
EXHIBIT 10(iii)A(8)
Originally, one-half of the Aspiration Award, determined as of August 31,
1999, was to have been paid in cash and one-half in NSI stock. If you elect to
amend your Agreement, the value of the component of your Aspiration Award which
would have originally been paid in NSI stock will be adjusted to reflect any
change in NSI's stock price during the period August 31, 1999 to the
Determination Date (meaning that date in October, 1999 on which the Executive
Resource and Compensation Committee of the Board of Directors determines the
amount of the Award earned and payable). The total value of the Award at the
Determination Date will therefore be equal to the total of (a) the amount of the
Award as of August 31, 1999 and (b) the amount (either gain or loss) calculated
by multiplying (i) the number of shares you would have originally received by
(ii) the amount resulting from subtracting the Fair Market Value of NSI stock on
August 31 from the Fair Market Value at the Determination Date.
The amount of your Aspiration Award exchanged for Options will not be
currently taxable (i.e., it will be treated similarly to a bonus deferral). The
Options will be nonqualified options under the Plan. Please see the description
of the tax treatment for nonqualified options attached hereto as Exhibit "1". Of
course, you should consult your tax advisor.
_____ YES, I elect to amend my Agreement to provide for the exchange of all of
my Award (or a portion thereof), to the fullest extent possible, for the grant
of Options to acquire NSI stock under the terms set forth below, in the
following manner:
[ ] In exchange for $__________ of my Award (minimum $1,000).
[ ] In exchange for _________% of my Award (minimum $1,000).
[ ] In exchange for the grant of _________ Options (minimum 100 options).
<PAGE>
Page 56
EXHIBIT 10(iii)A(8)
The portion of the Award elected above (whether measured in dollars, percentage,
or Options) will be surrendered from the total value of the Award at the
Determination Date. The calculation of Options granted in the exchange will be
rounded down to the next whole amount. Any unexchanged portion of your Award
will be payable half in NSI stock and half in cash.
_____ NO, I elect to continue to receive the entire Award payment half in NSI
stock and half in cash.
Terms of Stock Options:
(a) Each Option will be valued for purposes of the surrender and
exchange at a percentage, as provided below, of the Fair Market Value of
NSI stock (closing price on NYSE) on the Determination Date:
(1) At 24.35%, if the Fair Market Value of NSI stock is below
$40.00 on the Determination Date;
(2) At 20.00%, if the Fair Market Value of NSI stock is $40.00 or
greater on the Determination Date.
This value is less than the Black-Scholes formula to be used for
determining an annual option grant award.
(b) The exchange will be limited by the size of your Award payment and
may be further reduced, on a pro rata basis, for Options elected in excess
of the number of Options granted to you in September 1998 (or a fraction
thereof determined by the Committee on the Determination Date), if the
total number of Options elected by all participants exceeds the pool of
Options available for exchange. It is the intention of the Committee that
300,000 Options will be available for exchange. The final number of Options
available will be established by the Committee at the Determination Date,
and your election will be adjusted in accordance with the final number of
Options available.
<PAGE>
Page 57
EXHIBIT 10(iii)A(8)
(c) The Options will be nonqualified stock options, will be fully
vested at the time of receipt, and will have a ten-year term except as
follows:
(1) in the case of termination due to death, Disability,
retirement at or after age 65, or involuntary termination by the
Company (other than for cause), the Options will remain exercisable
until seven years after the date of grant, or one year after the date
of termination, whichever is later;
(2) in the case of voluntary termination, the Options will remain
exercisable until 90 days after the date of termination; and
(3) in the case of involuntary termination for "cause", the
Options will expire on the date of termination.
The Options will generally have such other terms and conditions as the
nonqualified Options granted by the Company in September 1998.
<PAGE>
Page 58
EXHIBIT 10(iii)A(8)
II. SIGNATURE. Sign and date this form below and return it to
Helen Haines.
The undersigned hereby agrees to amend the Aspiration Achievement
Incentive Award Agreement in accordance with the election in I. above.
---------------------------------------------
(Grantee)
---------------------------------------------
Date
Received and Award Agreement
Amendment approved
on behalf of
National Service Industries, Inc.:
By:____________________________________
Helen D. Haines
- ---------------------------------------
Date
<PAGE>
Page 59
EXHIBIT 10(iii)A(8)
EXHIBIT 1
TAX TREATMENT
Nonqualified Stock Options ("NSOs"). On exercise of an NSO, the amount
by which the market price of the Shares on the date of exercise of the Stock
Option exceeds the purchase price for the Shares will generally be taxable to
the Participant as ordinary income and will generally be deductible for tax
purposes by NSI. Selling or transferring the Shares acquired upon exercise of an
NSO will generally result in a capital gain or loss for the Participant, but
will have no tax consequences for NSI. The gain or loss will be measured by the
difference between the amount realized on disposition of the Shares and the tax
basis of the Shares. The tax basis for the Shares will generally be equal to the
amount taken into ordinary income upon exercise of the Stock Option, plus the
amount of cash paid by the Participant upon exercise of the Stock Option (which
will in the aggregate generally be equal to the market price of the Shares at
the time the Stock Option was exercised).
Aspiration Awards. The grant of an Aspiration Award pursuant to the
Plan will not result in income for the Participant or in a tax deduction for
NSI. Upon the settlement of such an Award, the Participant will recognize
ordinary income equal to the fair market value of any Shares and/or any cash
received and NSI will be entitled to a tax deduction in the same amount.
Page 60
EXHIBIT 10(iii)A(9)
AMENDMENT NO. 1 TO THE
NATIONAL SERVICE INDUSTRIES, INC.
LONG-TERM ACHIEVEMENT INCENTIVE PLAN
WHEREAS, The National Service Industries, Inc. Long-Term Achievement
Incentive Plan (the "Plan") was adopted by the Board of Directors (the "Board")
of National Service Industries, Inc. ("NSI") and became effective on September
17, 1996, and was approved by stockholders on January 8, 1997; and
WHEREAS, paragraph 14(a) of the Plan permits the Board to amend the
Plan, subject to certain restrictions set forth therein; and
WHEREAS, the Board desires to amend the Plan as set forth herein to
enable a Participant to exchange the payment of an Aspiration Award for Options
under certain circumstances;
NOW THEREFORE, pursuant to action taken by the Board of Directors on
April 7, 1999, the Plan is amended, effective April 7, 1999, by adding, at the
end of paragraph 7(d) of the Plan, the following:
Notwithstanding the foregoing, the Committee may permit a Participant
to surrender all or a portion of an earned Aspiration Award in exchange
for Options pursuant to an election and upon terms established by the
Committee.
IN WITNESS WHEREOF, the Board has caused this AMENDMENT NO. 1 to be
executed on behalf of the Corporation and the Corporation's seal affixed hereto,
this 7th day of April, 1999.
Attest: National Service Industries, Inc.
/s/ Helen D. Haines By:/s/ James S. Balloun
Helen D. Haines, Secretary James S. Balloun
Chairman, President, and
Chief Executive Officer
(CORPORATE SEAL)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Page 61
Exhibit 27
Financial Data Schedule
Quarter Ended May 31, 1999
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, 1999 and the
consolidated statement of income for the nine months ended May 31, 1999, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 62,893
<SECURITIES> 0
<RECEIVABLES> 339,020
<ALLOWANCES> 5,784
<INVENTORY> 202,002
<CURRENT-ASSETS> 675,670
<PP&E> 706,004
<DEPRECIATION> 413,028
<TOTAL-ASSETS> 1,139,386
<CURRENT-LIABILITIES> 228,056
<BONDS> 185,628
0
0
<COMMON> 57,919
<OTHER-SE> 527,273
<TOTAL-LIABILITY-AND-EQUITY> 1,139,386
<SALES> 1,369,808
<TOTAL-REVENUES> 1,599,123
<CGS> 836,864
<TOTAL-COSTS> 970,971
<OTHER-EXPENSES> 486,146
<LOSS-PROVISION> 2,762
<INTEREST-EXPENSE> 10,252
<INCOME-PRETAX> 128,992
<INCOME-TAX> 47,985
<INCOME-CONTINUING> 81,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,007
<EPS-BASIC> 1.97
<EPS-DILUTED> 1.97
</TABLE>
