Page 1 of 40
Index to Exhibits on Page 15
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________.
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 - 40,726,493 shares as of March 31, 2000
<PAGE>
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
----------------
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS -
FEBRUARY 29, 2000 AND AUGUST 31, 1999 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS AND SIX MONTHS ENDED
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-9
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-12
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 12
PART II. OTHER INFORMATION
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
<PAGE>
Page 3
<TABLE>
<CAPTION>
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per-share data)
February 29, August 31,
2000 1999
----------------- -------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,483 $ 2,254
Receivables, less reserves for doubtful accounts of $7,275 at February 29,
2000 and $6,306 at August 31, 1999 377,441 382,188
Inventories, at the lower of cost (on a first-in, first-out basis) or market 243,276 218,191
Linens in service, net of amortization 56,988 58,875
Deferred income taxes 11,643 10,271
Prepayments 14,838 8,634
----------------- -------------
Total Current Assets 705,669 680,413
----------------- -------------
Property, Plant, and Equipment, at cost:
Land 28,193 25,764
Buildings and leasehold improvements 191,949 186,776
Machinery and equipment 614,720 587,719
----------------- -------------
Total Property, Plant, and Equipment 834,862 800,259
Less-Accumulated depreciation and amortization 438,117 417,946
----------------- -------------
Property, Plant, and Equipment-net 396,745 382,313
----------------- -------------
Other Assets:
Goodwill and other intangibles 545,376 551,995
Other 77,308 81,068
----------------- -------------
Total Other Assets 622,684 633,063
----------------- -------------
Total Assets $1,725,098 $1,695,789
================= =============
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Current maturities of long-term debt $ 324 $ 368
Commercial paper, short-term 172,050 102,539
Notes payable 11,474 11,471
Accounts payable 126,688 128,122
Accrued salaries, commissions, and bonuses 35,241 65,458
Current portion of self-insurance reserves 9,108 8,785
Accrued taxes payable - 12,203
Other accrued liabilities 75,539 94,939
----------------- -------------
Total Current Liabilities 430,424 423,885
----------------- -------------
Long-Term Debt, less current maturities 434,007 435,199
----------------- -------------
Deferred Income Taxes 95,517 95,557
----------------- -------------
Self-Insurance Reserves, less current portion 37,158 38,828
----------------- -------------
Other Long-Term Liabilities 85,892 86,446
----------------- -------------
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 30,451 29,055
Retained earnings 994,683 976,461
Accumulated other comprehensive income items (9,086) (9,326)
----------------- -------------
1,073,967 1,054,109
Less-Treasury stock, at cost (17,192,485 shares at February 29, 2000 and
17,449,752 shares at August 31, 1999) 431,867 438,235
----------------- -------------
Total Stockholders' Equity 642,100 615,874
----------------- -------------
Total Liabilities and Stockholders' Equity $1,725,098 $1,695,789
================= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
Page 4
<TABLE>
<CAPTION>
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per-share data)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -----------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
-------------- --------------- -------------- --------------
Sales and Service Revenues:
<S> <C> <C> <C> <C>
Net sales of products $ 527,994 $ 436,564 $ 1,070,288 $ 880,021
Service revenues 77,419 73,795 155,135 149,264
-------------- --------------- -------------- --------------
Total Revenues 605,413 510,359 1,225,423 1,029,285
-------------- --------------- -------------- --------------
Costs and Expenses:
Cost of products sold 319,985 263,394 647,137 525,095
Cost of services 44,805 45,608 89,939 89,345
Selling and administrative expenses 192,981 165,743 386,714 335,950
Interest expense, net 10,527 2,537 20,513 4,879
Gain on sale of businesses (170) (3,511) (356) (3,511)
Restructuring expense, asset impairments,
and other charges - (2,216) - (2,216)
Other expense (income), net 4,155 (623) 8,494 (614)
-------------- --------------- -------------- --------------
Total Costs and Expenses 572,283 470,932 1,152,441 948,928
-------------- --------------- -------------- --------------
Income before Provision for Income Taxes 33,130 39,427 72,982 80,357
Provision for Income Taxes 12,854 14,665 28,316 29,891
-------------- --------------- -------------- --------------
Net Income $ 20,276 $ 24,762 $ 44,666 $ 50,466
============== =============== ============== ==============
Per Share:
Basic Earnings per Share $ .50 $ .60 $ 1.10 $ 1.22
============== =============== ============== ==============
Basic Weighted Average Number
of Share Outstanding 40,711 41,046 40,641 41,219
============== =============== ============== ==============
Diluted Earnings per Share $ .50 $ .60 $ 1.10 $ 1.22
============== =============== ============== ==============
Diluted Weighted Average Number
of Shares Outstanding 40,737 41,227 40,721 41,412
============== =============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
Page 5
<TABLE>
<CAPTION>
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
SIX MONTHS ENDED
--------------------------------
February 29, February 28,
2000 1999
-------------- --------------
Cash Provided by (Used for) Operating Activities
<S> <C> <C>
Net income $ 44,666 $ 50,466
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization 42,493 28,988
Provision for losses on accounts receivable 2,047 2,055
Gain on the sale of property, plant, and equipment (1,024) (410)
Gain on the sale of business (356) (3,511)
Restructuring expense, asset impairments, and other charges - (2,216)
Change in noncurrent deferred income taxes 2,250 941
Change in assets and liabilities net of effect of acquisitions and divestitures-
Receivables 7,083 4,883
Inventories and linens in service, net (22,185) (8,990)
Deferred income taxes (817) 2,406
Prepayments and other (4,760) (2,473)
Accounts payable and accrued liabilities (45,856) (24,359)
Self-insurance reserves and other long-term liabilities (2,614) 4,623
-------------- -------------
Net Cash Provided by Operating Activities 20,927 52,403
-------------- -------------
Cash Provided by (Used for) Investing Activities
Purchases of property, plant, and equipment (47,443) (31,973)
Sale of property, plant, and equipment 2,094 931
Sale of businesses - 631
Acquisitions (21,533) (39,234)
Change in other assets 1,300 (384)
-------------- -------------
Net Cash Used for Investing Activities (65,582) (70,029)
-------------- -------------
Cash Provided by (Used for) Financing Activities
Proceeds from notes payable, net - 2,738
Issuances of commerical paper, net (less than 90 days) 51,045 -
Issuances of commerical paper (greater than 90 days) 140,551 -
Repayments of commerical paper (greater than 90 days) (122,750) -
Borrowings of long-term debt - 187,582
Repayments of long-term debt (568) (80,037)
Issuances (purchases) of treasury stock, net 2,098 (23,535)
Cash dividends paid (26,444) (25,952)
-------------- -------------
Net Cash Provided by Financing Activities 43,932 60,796
-------------- -------------
Effect of Exchange Rate Changes on Cash (48) 110
-------------- -------------
Net Change in Cash and Cash Equivalents (771) 43,280
Cash and Cash Equivalents at Beginning of Period 2,254 19,146
-------------- -------------
Cash and Cash Equivalents at End of Period $ 1,483 $ 62,426
============== =============
Supplemental Cash Flow Information:
Income taxes paid during the period $ 41,932 $ 25,941
Interest paid during the period 19,677 5,906
Noncash Investing and Financing Activities:
Treasury shares issued under long-term incentive plan $ 5,667 -
Noncash aspects of sale of businesses--
Receivables recorded - $ 396
Liabilities assumed - 326
Noncash aspects of acquisitions--
Liabilities assumed or incurred $ 1,219 $ 12,027
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, 1999 has been derived from audited statements. These statements
reflect all adjustments, all of which are of a normal, recurring nature, which
are, in the opinion of management, necessary to present fairly the consolidated
financial position as of February 29, 2000, the consolidated results of
operations for the three and six months ended February 29, 2000 and February 28,
1999, and the consolidated cash flows for the six months ended February 29, 2000
and February 28, 1999. 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, 1999.
The results of operations for the three and six months ended February 29, 2000
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. ACCOUNTING STANDARDS YET TO BE ADOPTED
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was issued in June of 1998 and is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
company is in the process of evaluating the impact of adoption on the
Consolidated Balance Sheets and Consolidated Statements of Income.
3. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Six Months Ended February 29, 2000 Revenues (Loss) Expense Acquisitions
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Lighting Equipment $ 721,691 $ 64,300 $ 24,646 $ 40,610
Chemical 239,508 20,094 5,510 2,251
Textile Rental 155,135 11,434 7,556 15,024
Envelope 109,089 5,523 3,648 9,214
-------------- -------------- -------------- --------------
1,225,423 101,351 41,360 67,099
Corporate (7,856) 1,133 1,877
Interest expense, net (20,513)
-------------- -------------- -------------- --------------
Total $1,225,423 $ 72,982 $ 42,493 $ 68,976
============== ============== ============== ==============
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Six Months Ended February 28, 1999 Revenues (Loss) Expense Acquisitions
-------------- -------------- -------------- --------------
Lighting Equipment $ 556,665 $ 53,313 $ 12,911 $ 39,741
Chemical 233,440 18,261 4,976 4,323
Textile Rental 149,264 15,934 7,265 9,296
Envelope 89,916 6,654 2,822 17,511
-------------- -------------- -------------- --------------
1,029,285 94,162 27,974 70,871
Corporate (8,926) 1,014 336
Interest expense, net (4,879)
-------------- -------------- -------------- --------------
Total $1,029,285 $ 80,357 $ 28,988 $ 71,207
============== ============== ============== ==============
</TABLE>
<PAGE>
Page 7
<TABLE>
<CAPTION>
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Three Months Ended February 29, 2000 Revenues (Loss) Expense Acquisitions
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Lighting Equipment $ 354,096 $ 29,013 $ 12,240 $ 15,706
Chemical 119,607 11,472 2,798 917
Textile Rental 77,419 6,306 3,804 11,456
Envelope 54,291 2,455 1,867 4,867
-------------- -------------- -------------- --------------
605,413 49,246 20,709 32,946
Corporate (5,589) 574 208
Interest expense, net (10,527)
-------------- -------------- -------------- --------------
Total $ 605,413 $ 33,130 $ 21,283 $ 33,154
============== ============== ============== ==============
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Three Months Ended February 28, 1999 Revenues (Loss) Expense Acquisitions
-------------- -------------- -------------- --------------
Lighting Equipment $ 272,588 $ 23,834 $ 6,454 $ 6,430
Chemical 116,696 9,725 2,531 2,016
Textile Rental 73,795 9,215 3,632 3,547
Envelope 47,280 3,118 1,422 15,142
-------------- -------------- -------------- --------------
510,359 45,892 14,039 27,135
Corporate (3,928) 505 290
Interest expense, net (2,537)
-------------- -------------- -------------- --------------
Total $ 510,359 $ 39,427 $ 14,544 $ 27,425
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets
February 29, 2000 August 31, 1999
------------------- -------------------
<S> <C> <C>
Lighting Equipment $1,080,589 $1,073,936
Chemical 230,013 233,461
Textile Rental 214,517 203,509
Envelope 147,664 139,755
------------------- -------------------
Subtotal 1,672,783 1,650,661
Corporate 52,315 45,128
------------------- -------------------
Total $1,725,098 $1,695,789
=================== ===================
</TABLE>
4. INVENTORIES
Major classes of inventory as of February 29, 2000 and August 31, 1999 were as
follows:
<TABLE>
<CAPTION>
February 29, 2000 August 31, 1999
------------------- -------------------
<S> <C> <C>
Raw Materials and Supplies $ 87,275 $ 99,249
Work-in-Process 11,612 16,718
Finished Goods 144,389 102,224
------------------- -------------------
Total $ 243,276 $ 218,191
=================== ===================
</TABLE>
5. EARNINGS PER SHARE
The company accounts for earnings per share using Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Under this
statement, 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 February 29 and February 28:
<PAGE>
Page 8
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
--------------- -------------- --------------- ---------------
Basic earnings per common share:
<S> <C> <C> <C> <C>
Net income $ 20,276 $ 24,762 $ 44,666 $ 50,466
Basic weighted average shares outstanding (in thousands) 40,711 41,046 40,641 41,219
--------------- -------------- --------------- ---------------
Basic earnings per common share $ .50 $ .60 $ 1.10 $ 1.22
=============== ============== =============== ===============
Diluted earnings per common share:
Net income $ 20,276 $ 24,762 $ 44,666 $ 50,466
Basic weighted average shares outstanding (in thousands) 40,711 41,046 40,641 41,219
Add - Shares of common stock issuable upon assumed
exercise of dilutive stock options (in thousands) 26 181 80 193
--------------- -------------- --------------- ---------------
Diluted weighted average shares outstanding (in thousands) 40,737 41,227 40,721 41,412
--------------- -------------- --------------- ---------------
Diluted earnings per common share $ .50 $ .60 $ 1.10 $ 1.22
=============== ============== =============== ===============
</TABLE>
6. 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 six months ended
February 29, 2000 and February 28, 1999 includes only foreign currency
translation adjustments. The calculation of comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 20,276 $ 24,762 $ 44,666 $ 50,466
Other comprehensive income (loss) 250 (367) 240 1,666
--------------- --------------- --------------- ---------------
Comprehensive Income $ 20,526 $ 24,395 $ 44,906 $ 52,132
=============== =============== =============== ===============
</TABLE>
7. 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, which are included in current liabilities,
totaled $10,788 and $11,000 at February 29, 2000 and August 31, 1999,
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 amount of such costs below or in
excess of that accrued is reasonably estimable.
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 as to the method of apportioning the liability can be given as to any
particular site.
<PAGE>
Page 9
The company is currently a party to, or otherwise involved in, legal proceedings
in connection with 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 due to its
limited involvement at the sites and the number of viable PRPs. 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. The company is currently responding to EPD's comments regarding
the CSR. Until 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 approximately $430 of 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, Georgia 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 that any material expenditures will be required 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 environmental
liabilities arising from events occurring prior to the closing, subject to
certain exceptions. 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. The
prior owner is currently conducting an investigation of the contamination at its
expense, subject to a reservation of rights. 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 past
and future response costs in connection with the release or threatened release
of hazardous substances at and from the Blydenburgh Landfill in Islip, New York.
The company believes that it is not a successor to Serv-All Uniform Rental Corp.
and therefore has no liability with respect to the Blydenburgh Landfill, and it
has responded to the lawsuit accordingly. At this stage of the litigation, it is
too early to quantify the company's potential exposure or the likelihood of an
adverse result.
8. INCREASE IN SHARES AUTHORIZED UNDER LONG-TERM ACHIEVEMENT INCENTIVE PLAN
On January 5, 2000, the stockholders approved an amendment to the National
Service Industries, Inc. Long-Term Achievement Incentive Plan for the benefit of
officers and other key employees of the company. In addition to other
modifications, the amendment increases the number of shares authorized for
issuance under the plan from 1,750,000 to 5,750,000.
<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 solid financial condition at February
29, 2000. Net working capital was $275.2 million, up from $256.5 million at
August 31, 1999, and the current ratio remained constant at 1.6. At February 29,
2000, the company's percentage of debt to total capitalization increased to 49.0
percent from 47.2 percent at August 31, 1999.
Results of Operations
National Service Industries generated revenue of $605.4 million and $1.2 billion
in the three and six months ended February 29, 2000, respectively, compared with
revenue of $510.4 million and $1.0 billion in the three and six months ended
February 28, 1999, respectively. The increase was primarily due to acquired
revenue in the lighting equipment and envelope segments. The lighting equipment
segment purchased Holophane Corporation ("Holophane") in July 1999 and certain
assets of Peerless Corporation ("Peerless") in April 1999. In addition, the
envelope segment purchased substantially all of Gilmore Envelope in February
1999. These acquisitions generated combined revenue of $70.3 million and $155.6
million for the three and six months ended February 29, 2000, respectively, that
was not included in prior-year results. Excluding acquisitions, revenue
increased in each of the company's core businesses.
Net income totaled $20.3 million and $44.7 million, or $.50 and $1.10 per
diluted share, for the three and six months ended February 29, 2000,
respectively, compared to net income of $24.8 million and $50.5 million, or $.60
and $1.22 per diluted share, for the three and six months ended February 28,
1999. Income from acquisitions not included in prior year results and income
from core business growth in the lighting equipment and chemical segments were
more than offset by increased interest expense on borrowings and amortization
expense related to recent acquisitions. Additionally, operating profit decreased
in the textile rental segment as the second quarter of fiscal 1999 included $3.5
million in unusual gains compared to $.7 million during the second quarter of
fiscal 2000. Current year to date net income also included a charge for closing
a manufacturing facility in the lighting equipment segment.
The lighting equipment segment reported revenue of $354.1 million and $721.7
million for the three and six months ended February 29, 2000, respectively,
representing an increase of 29.9 percent and 29.6 percent over the respective
periods of the prior year. These increases resulted primarily from the
acquisitions of Holophane and Peerless. Additionally, continued strength in the
non-residential construction market had a positive impact on lighting equipment
revenue resulting in growth in the segment's core business. Operating profit
increased 21.7 percent and 20.6 percent for the three and six months ended
February 29, 2000, respectively, driven by contributions from Holophane and
Peerless, growth in the segment's core business, and containment of fixed costs,
offset somewhat by a $1.0 million pretax charge during the first quarter of
fiscal 2000 for closing a manufacturing facility in California.
Chemical segment revenue increased 2.5 percent to $119.6 million for the second
quarter and 2.6 percent to $239.5 million for the six months due to continued
growth in the retail channel and higher revenue from the institutional and
industrial channels, resulting primarily from an increase in the segment's core
business. Operating profit of $11.5 million and $20.1 million during the three
and six months ended February 29, 2000, respectively, was higher than last
year's results primarily due to a reduction in general and administrative
expenses, fluctuations in selling expenses, and an increase in revenue.
Textile rental segment revenue, representing all of the company's service
revenues, increased 4.9 percent to $77.4 million for the quarter and 3.9 percent
to $155.1 million for the six months. The current year revenue increase was
primarily related to acquired revenue and price increases in the segment's base
business, offset somewhat by the negative impact of ice storms in the Southeast
during the second quarter. Operating profit decreased to $6.3 million from last
year's $9.2 million for the second quarter and to $11.4 million from $15.9
million for the first half of the year primarily as a result of $3.5 million of
unusual items being included in the prior year compared to a $.7 million gain on
the sale of property in the current quarter. Operating profit for the three and
six months ended February 28, 1999 included $5.7 million of unusual gains
related to the 1997 uniform plants divestiture and restructuring activities,
offset by a $2.2 million write-off for merchandise inventory used by
unprofitable accounts. Excluding unusual items in both years, operating margins
for the quarter remained flat. However, year to date margins declined as higher
fuel costs, the impact of adverse weather, and contract wage increases for
production employees more than offset the increase in revenue.
Envelope segment revenue increased 14.8 percent to $54.3 million and 21.3
percent to $109.1 million for the three and six months ended February 29, 2000,
respectively, while operating profit decreased 21.3 percent to $2.5 million and
17.0 percent to $5.5 million for the three and six months ended February 29,
2000, respectively.
<PAGE>
Page 11
Revenue increased due to additional sales resulting from the Gilmore Envelope
acquisition and continued volume growth in the base business, offset somewhat by
the prior year divestiture of Techno-Aide/Stumb Metal Products in June 1999.
Operating margin percentages decreased during the three and six month periods as
a result of lower average margins from prior year acquisitions, higher paper
prices which were passed on to customers, pre-production costs associated with
newly acquired manufacturing equipment, and depreciation from a new enterprise
resource planning system.
Corporate expenses increased to $5.6 million during the second quarter primarily
due to costs related to strategic initiatives. For the six months, corporate
expenses decreased to $7.9 million as costs related to strategic initiatives
were offset by lower incentive compensation expense. Net interest expense
increased $8.0 million to $10.5 million and $15.6 million to $20.5 million for
the three and six months ended February 29, 2000, respectively, as a result of
increased borrowings to finance recent acquisitions. Additionally, the provision
for income taxes was 38.8 percent of pretax income for the quarter compared with
37.2 percent in the prior-year period primarily due to goodwill recorded in the
Holophane acquisition, which is not deductible for tax purposes.
Liquidity and Capital Resources
Operating Activities
Operations provided cash of $20.9 million during the first half of fiscal 2000
compared with $52.4 million during the first six months of fiscal 1999. The 2000
cash flow was lower primarily because of a decrease in current liabilities
related to incentive compensation plan payments, an increase in income tax
payments, and a decrease in accounts payable. Additionally, increases in
inventory, offset somewhat by a decrease in accounts receivable primarily in the
lighting equipment segment, contributed to the decrease in operating cash flow
compared to the prior year.
Investing Activities
Investing activities used cash of $65.6 million for the six months ended
February 29, 2000 compared with cash used of $70.0 million in the six months
ended February 28, 1999. The change in investing cash flows relates primarily to
a decrease in acquisition spending offset by an increase in purchases of
property, plant, and equipment. Acquisition spending during the first six months
of fiscal 2000 was $21.5 million and related primarily to Holophane. The company
purchased Holophane in July 1999 for approximately $470.8 million, including
approximately $20 million for the payoff of Holophane's existing debt. Of the
total purchase price, $454.6 million was paid during fiscal 1999 and $14.5
million was paid during the first six months of the current year, which was
primarily for the cash-out of remaining Holophane shares. Other acquisition
spending during the first half of fiscal 2000 related to several minor purchases
in the textile rental segment. Prior year acquisition spending of $39.2 million
was primarily due to the lighting equipment segment's purchase of certain assets
of GTY Industries (d/b/a "Hydrel"), a manufacturer of architectural-grade
lighting fixtures for landscape, in-grade, and underwater applications, and the
envelope segment's purchase of substantially all of Gilmore Envelope, an
envelope manufacturer headquartered in Los Angeles, California.
Capital expenditures were $47.4 million in the first six months of fiscal 2000,
compared with $32.0 million in the first six months of fiscal 1999. Capital
spending during the first half of fiscal 2000 was primarily attributable to the
lighting equipment, envelope, and textile rental segments. The lighting
equipment segment invested in land, buildings, and equipment for a new plant and
in manufacturing upgrades and improvements. Capital expenditures in the envelope
segment related primarily to new folding capacity, manufacturing process
improvements, and information systems. The textile rental segment's expenditures
related to replacing old equipment and delivery truck purchases and
refurbishments. The lighting equipment segment's capital expenditures in the
prior-year first half related to the purchase of land and buildings for a new
plant, manufacturing improvements and upgrades for capacity expansion, and
implementation of new technology. Textile rental segment expenditures 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. Management believes current cash balances,
anticipated cash flows from operations, available funds from the commercial
paper program or the committed credit facilities, and the complementary lines of
credit are sufficient to meet the company's planned level of capital spending
and general operating cash requirements for the next twelve months.
Financing Activities
Cash provided by financing activities decreased $16.9 million to $43.9 million
in the first half of fiscal 2000 primarily as a result of a decrease in cash
provided by net borrowings, offset by the suspension of the company's share
repurchase program in the third quarter of fiscal 1999. Although the company has
a standing annual authorization to repurchase 2.0 million shares plus the number
of new shares issued in any one year, the company does not plan to purchase
additional shares until its debt to capitalization is within the company's
stated objective of 30 to 40 percent. For the six months ended February 29,
2000, net borrowings, primarily under the company's commercial paper program,
provided cash of $68.3 million compared with cash provided by net borrowings of
$110.3 million during the same period of the prior year. Current year borrowings
were used for general corporate purposes, including working capital
requirements, capital expenditures, and acquisitions. At February 29, 2000 and
August 31, 1999,
<PAGE>
Page 12
approximately $250 million in commercial paper was classified as long-term as
the company has the ability to refinance the commercial paper on a long-term
basis. Funds borrowed during the first half of fiscal 1999 were used primarily
to finance acquisitions, share repurchases, and internal growth. Dividend
payments totaled $26.4 million, or 65 cents per share, compared with $26.0
million, or 63 cents per share, for the prior-year period. On January 5, 2000,
the regular quarterly dividend rate was increased 3.1 percent to 33 cents per
share, or an annual calendar year rate of $1.32 per share.
Environmental Matters
See Note 7: Environmental Matters for a discussion of the company's
environmental issues.
Impact of the Year 2000 Issue
The company did not experience, nor does it expect to experience, significant
disruptions to its mission critical systems related to the Year 2000 Issue. As
of April 14, 2000, all of the company's mission critical systems have been
tested and are fully operational. However, no assurance can be given that the
cost of remediating any problems associated with the Year 2000 Issue will not
materially affect the company's business.
Quantitative and Qualitative Disclosures about Market Risk
The company is exposed to market risks that may impact the Consolidated Balance
Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash
Flows due to changing interest rates and foreign exchange rates. The company
does not currently participate in any significant hedging activities, nor does
it currently utilize any significant derivative financial instruments. The
following discussion provides additional information regarding the company's
market risks.
Interest Rates- Interest rate fluctuations expose the company's variable-rate
debt to changes in interest expense and cash flows. The company's variable-rate
debt, primarily commercial paper, amounted to $455.4 million at February 29,
2000. Based on outstanding borrowings at quarter end, a 10 percent adverse
change in effective market interest rates at February 29, 2000 would result in
additional annual after-tax interest expense of approximately $1.7 million.
Although a fluctuation in interest rates would not affect interest expense or
cash flows related to the $160 million publicly traded notes, the company's
primary fixed-rate debt, a 10 percent increase in effective market interest
rates at February 29, 2000 would decrease the fair value of these notes to
approximately $134.4 million.
Foreign Exchange Rates-The majority of the company's revenue, expense, and
capital purchases are transacted in U.S. dollars. International operations
during the first half of fiscal 2000, primarily in the lighting equipment and
chemical segments, represented approximately 9.5 percent of sales and service
revenues, 4.5 percent of operating profit (loss), and 8.4 percent of
identifiable assets. The company does not believe a 10 percent fluctuation in
average foreign currency rates would have a material effect on its consolidated
financial statements or results of operations.
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 and (b) statements made regarding management's intentions or expectations
with regard to future earnings, projected capital expenditures, future cash
flows, debt refinancing, share repurchases, and debt to capitalization
objectives. A variety of risks and uncertainties 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 include without limitation the following: (a) the
uncertainty of general business and economic conditions, including the potential
for a slowdown in non-residential construction awards, fluctuations in commodity
and raw material prices, market demand for public debt, interest rate changes,
and foreign currency fluctuations; and (b) the ability to achieve financing
objectives and strategic initiatives, including but not limited to the
achievement of synergies related to acquisitions and the achievement of sales
growth across the business segments through a combination of increased pricing,
enhanced sales force, new products, improved customer service, and acquisitions.
<PAGE>
Page 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 15).
(b) There were no reports on Form 8-K for the three months ended February 29,
2000.
<PAGE>
Page 14
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 April 14, 2000 /s/ KEN MURPHY
KEN MURPHY
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
DATE April 14, 2000 /s/ BROCK HATTOX
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
<PAGE>
Page 15
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Page No.
<S> <C> <C>
EXHIBIT 10(iii)A (1) Nonemployee Directors' Stock Option Agreement Dated January 5, 2000 16
between National Service Industries, Inc. and
(a) Leslie M. Baker, Jr.
(b) John L. Clendenin
(c) Thomas C. Gallagher
(d) Bernard Marcus
(e) Samuel A. Nunn
(f) Ray M. Robinson
(g) Herman J. Russell
(h) Betty L. Siegel
(i) Kathy Brittain White
(j) Barrie A. Wigmore
(k) Neil Williams
(2) National Service Industries, Inc. Long-Term Achievement Incentive Plan Reference is made to
as Amended and Restated Effective as of January 5, 2000 Exhibit A of registrant's
Schedule 14A filed with
the Commission on
November 22, 1999, which
is incorporated herein
by reference.
(3) Nonqualified Stock Option Agreement (Surrendered Aspiration Award) 21
between National Service Industries, Inc. and:
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
(4) Incentive Stock Option Agreement for Executive Officers Effective 27
Beginning January 5, 2000 between National Service Industries, Inc.
and:
(a) James S. Balloun
(b) George H. Gilmore, Jr.
(c) Brock A. Hattox
(d) David Levy
(e) Stewart A. Searle III
(5) Nonqualified Stock Option Agreement for Executive Officers Effective 34
Beginning January 5, 2000 between National Service Industries, Inc.
and:
(a) James S. Balloun
(b) George H. Gilmore, Jr.
(c) Brock A. Hattox
(d) David Levy
(e) Stewart A. Searle III
EXHIBIT 27 Financial Data Schedule 40
</TABLE>
Page 16
Exhibit 10(iii)A(1)
STOCK OPTION AGREEMENT
FOR NONEMPLOYEE DIRECTORS
THIS AGREEMENT, made as of the 5th day of January, 2000 (the "Grant
Date"), between National Service Industries, Inc., a Delaware corporation (the
"Company"), and Name (the "Optionee").
WHEREAS, the Company has adopted the National Service Industries, Inc.
1992 Nonemployee Directors' Stock Option Plan (the "Plan") in order to provide
additional incentive to nonemployee directors to exert maximum efforts for the
success of the Company; and
WHEREAS, pursuant to the terms of the Plan, the Optionee is entitled to
the option grant 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 1,500 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 422A 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 $27.6875 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 17
Exihibit 10(iii)A(1)
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, the shares covered by the option after the expiration of one
(1) year from the Grant Date.
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, 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 12 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.
6. Termination of Service.
6.1 Termination for Cause. If the Optionee's service as a
Director terminates for Cause, the Option shall immediately terminate in full
and no rights hereunder may be exercised.
6.2 Other Termination of Service. If the Optionee's service as
a Director is terminated for any reason other than for Cause, the Option shall
<PAGE>
Page 18
Exhibit 10(iii)A(1)
continue to be exercisable in whole or in part (to the extent exercisable on the
date of such termination) at any time within three (3) years after the date of
such termination, but in no event after the expiration of the Exercise Term. In
the event of the Optionee's death, the Option shall be exercisable, to the
extent provided in the Plan and this Agreement, by the legatee or legatees under
his will, or by his personal representatives or distributees and such person or
persons shall be substituted for the Optionee each time the Optionee is referred
to herein.
7. Effect of Change in Control.
Notwithstanding anything contained in this Agreement to the
contrary, 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 the 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 the portion of the Option
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, the Optionee shall be entitled to surrender for
cancellation the Option or any portion of the Option 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.
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 Continuing Service.
Nothing in this Agreement or the Plan shall be interpreted or
construed to confer upon the Optionee any right with respect to continuance of
service as a director of the Company, nor shall this Agreement or the Plan
interfere in any way with the right of the Company to terminate the Optionee's
service as a director at any time.
10. Adjustments.
In the event of a Change in Capitalization, the Board shall
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 Board's adjustment shall be made in accordance with the
<PAGE>
Page 19
Exhibit 10(iii)A(1)
provisions of Section 7 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. Optionee 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.
13. 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.
14. 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.
15. 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.
16. Successors in Interest.
This Agreement shall inure to the benefit of and be binding
upon each successor to the Company. 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.
<PAGE>
Page 20
Exhibit 10(iii)A(1)
17. 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 Board. Any
determination made hereunder shall be final, binding, and conclusive on the
Optionee and the Company for all purposes.
ATTEST: NATIONAL SERVICE INDUSTRIES, INC.
___________________________________ By:_________________________________
Secretary James S. Balloun
Chairman, President and
Chief Executive Officer
_________________________________
Optionee: Name
Page 21
Exhibit 10(iii)A(3)
NONQUALIFIED STOCK OPTION AGREEMENT
(SURRENDERED ASPIRATION AWARD)
THIS AGREEMENT, made as of the Day day of Month, Year (the "Grant
Date"), between National Service Industries, Inc., a Delaware corporation (the
"Company"), and Name (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, in accordance
with the election previously made by the Optionee to surrender all or a portion
of Optionee's Aspiration Achievement Incentive Award in exchange for Options.
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 Amount
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 $27.6875 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 22
Exhibit 10(iii)A(3)
4. Exercisability of Option.
The Option is, immediately upon grant, fully vested and
exercisable, subject to expiration and termination as provided herein.
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.
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 terminate on the
date of the Optionee's termination of employment.
6.2 Termination of Employment Due to Specified Reasons.
If the Optionee's termination of employment is due to
<PAGE>
Page 23
Exhibit 10(iii)A(3)
death, Disability, Retirement (termination on or after age 65), termination
by the Company other than for cause, termination after attaining age 55, or
voluntary termination, the following shall apply:
(a) Termination Due To Death. In the event the Optionee
dies while actively employed, the Option shall remain
exercisable until seven (7) years after the date of
grant or one (1) year after the date of termination,
whichever is later (but in any event not beyond 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 Option 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.
(b) Termination by Disability. In the event the
employment of the Optionee is terminated by reason of
Disability, the Option shall remain exercisable until
seven (7) years after the date of grant or one (1)
year after the date the Committee determines the
Optionee terminated for Disability, whichever is
later (but in any event not beyond the Exercise
Term). In the event of the Optionee's death after
such termination, the Option shall continue to be
exercisable in accordance with this subsection (b) as
if the Optionee had lived and the Options shall be
exercisable by the persons described in (a) above.
(c) Termination by Retirement or by the Company Without
Cause. In the event the employment of the Optionee is
terminated by reason of Retirement (at or after age
65) or by the Company for any reason other than for
cause, the Option shall remain exercisable until
seven (7) years after the date of grant or five (5)
years after the date of termination, whichever is
later (but in any event not beyond the Exercise
Term). In the event of the Optionee's death after
such Retirement or termination, the Option shall
continue to 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. In the event 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 Option
shall remain exercisable until five (5) years after
the date of grant (but not beyond the Exercise Term).
In the event of the Optionee's death after such
termination, the Option shall continue to 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 24
Exhibit 10(iii)A(3)
(e) Voluntary Termination. In the event Optionee
voluntarily terminates employment, the Options shall
remain exercisable until ninety (90) days after the
date of termination (but not beyond the Exercise
Term).
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, the Optionee shall 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, the Option shall continue to be
exercisable at any time until seven (7) years after the date of grant or three
(3) years after the date of such termination of employment, whichever is later,
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.
<PAGE>
Page 25
Exhibit 10(iii)A(3)
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.
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.
<PAGE>
Page 26
Exhibit 10(iii)A(3)
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, 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.
____________________________________ By:________________________________
Secretary James S. Balloun
Chairman, President, and
Chief Executive Officer
________________________________
Name of Optionee
Page 27
Exhibit 10(iii)A(4)
INCENTIVE STOCK OPTION AGREEMENT
FOR EXECUTIVE OFFICERS AND OPERATING UNIT PRESIDENTS
THIS AGREEMENT, made as of the 5th day of January, 2000 (the "Grant
Date"), between National Service Industries, Inc., a Delaware corporation (the
"Company"), and Name (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 Amount
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 $27.6875 per Share.
<PAGE>
Page 28
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, Para. 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 29
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.
(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 30
Exhibit 10(iii)A(4)
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 31
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.
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.
<PAGE>
Page 32
Exhibit 10(iii)A(4)
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 33
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.
_____________________________________ By:_______________________________
Secretary James S. Balloun
Chairman, President, and
Chief Executive Officer
_______________________________
Name of Optionee
Page 34
Exhibit 10(iii)A(5)
NONQUALIFIED STOCK OPTION AGREEMENT
FOR EXECUTIVE OFFICERS AND OPERATING UNIT PRESIDENTS
THIS AGREEMENT, made as of the 5th day of January, 2000 (the "Grant
Date"), between National Service Industries, Inc., a Delaware corporation (the
"Company"), and Name (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 Amount
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 $27.6875 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 35
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, Para, 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.
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
<PAGE>
Page 36
Exhibit 10(iii)A(5)
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 escribed in (a)
above.
<PAGE>
Page 37
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 38
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 39
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.
__________________________________ By:__________________________________
Secretary James S. Balloun
Chairman, President, and
Chief Executive Officer
__________________________________
Name of Optionee: Name
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Page 40
Exhibit 27
Financial Data Schedule
Quarter Ended February 29, 2000
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 February 29, 2000 and
the consolidated statement of income for the six months ended February 29, 2000,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-1-1999
<PERIOD-END> FEB-29-2000
<CASH> 1,483
<SECURITIES> 0
<RECEIVABLES> 384,716
<ALLOWANCES> 7,275
<INVENTORY> 243,276
<CURRENT-ASSETS> 705,669
<PP&E> 834,862
<DEPRECIATION> 438,117
<TOTAL-ASSETS> 1,725,098
<CURRENT-LIABILITIES> 430,424
<BONDS> 434,007
0
0
<COMMON> 57,919
<OTHER-SE> 584,181
<TOTAL-LIABILITY-AND-EQUITY> 1,725,098
<SALES> 1,070,288
<TOTAL-REVENUES> 1,225,423
<CGS> 647,137
<TOTAL-COSTS> 737,076
<OTHER-EXPENSES> 392,567
<LOSS-PROVISION> 2,047
<INTEREST-EXPENSE> 20,751
<INCOME-PRETAX> 72,982
<INCOME-TAX> 28,316
<INCOME-CONTINUING> 44,666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,666
<EPS-BASIC> 1.10
<EPS-DILUTED> 1.10
</TABLE>
