1
Page 66
Exhibit 13
Consolidated Balance Sheets
August 31
(In thousands, except share data) 1994 1993
Assets
Current Assets:
Cash and cash equivalents $ 58,619 $ 15,853
Short-term investments 2,579 4,776
Receivables, less reserves for doubtful
accounts of $7,385,000 in 1994
and $7,170,000 in 1993 256,051 249,958
Inventories, at the lower of cost
(on a first-in, first-out basis) or market 178,590 171,545
Linens in service, net of amortization 90,037 77,931
Prepaid income taxes 13,473 25,340
Prepayments 8,933 11,513
Total Current Assets 608,282 556,916
Property, Plant, and Equipment, at cost:
Land 32,237 33,303
Buildings and leasehold improvements 186,929 190,276
Machinery and equipment 507,408 500,459
Total Property, Plant, and Equipment 726,574 724,038
Less-Accumulated depreciation and amortization 378,262 358,853
Property, Plant, and Equipment-net 348,312 365,185
Other Assets:
Goodwill and other intangibles 112,286 127,387
Other 37,876 38,025
Total Other Assets 150,162 165,412
Total Assets $1,106,756 $1,087,513
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 667 $ 1,792
Notes payable 5,098 4,404
Accounts payable 81,969 85,505
Accrued salaries, commissions, and bonuses 42,624 37,103
Self insurance reserves 77,680 71,888
Other accrued liabilities 42,716 42,981
Total Current Liabilities 250,754 243,673
Long-Term Debt, less current maturities 26,863 28,418
Deferred Income Taxes 78,814 84,289
Other Long-Term Liabilities 22,940 27,110
Stockholders' Equity:
Series A participating preferred stock,
$.05 stated value, 500,000 shares
authorized, none issued
Preferred stock, no par value,
500,000 shares authorized, none issued
Common stock, $1 par value, 80,000,000
shares authorized, 57,918,978 shares
issued in 1994 and 1993 57,919 57,919
Paid-in capital 7,684 7,299
Retained earnings 705,504 673,399
771,107 738,617
Less- Treasury stock, at cost (8,678,666
shares in 1994 and 8,357,539 shares
in 1993) 43,722 34,594
Total Stockholders' Equity 727,385 704,023
Total Liabilities and
Stockholders' Equity $1,106,756 $1,087,513
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
Page 67
Exhibit 13
Consolidated Statements of Income
Years Ended August 31
(In thousands) 1994 1993 1992
Sales and Service Revenues:
Net sales of products $1,337,410 $1,257,906 $1,189,684
Service revenues 544,454 546,916 444,127
Total Revenues 1,881,864 1,804,822 1,633,811
Costs and Expenses:
Cost of products sold 875,055 832,264 810,552
Cost of services 286,519 281,551 236,474
Selling and administrative expenses 577,291 557,011 462,653
Interest expense 3,668 4,961 2,690
Other expense, net 7,133 9,519 4,534
Total Costs and Expenses 1,749,666 1,685,306 1,516,903
Income before Provision for Income Taxes 132,198 119,516 116,908
Provision for Income Taxes 49,500 44,400 42,800
Net Income $ 82,698 $ 75,116 $ 74,108
Earnings per Share (in dollars) $ 1.67 $ 1.52 $ 1.50
Weighted Average Number
of Shares Outstanding 49,547 49,556 49,539
Consolidated Statements of Stockholders' Equity
Common Paid-in Retained Treasury Performance
Stock Capital Earnings Stock Shares Total
(In thousands, except per-share data)
Balance August 31, 1991 $57,919 $ 7,631 $630,309 $(33,734) $(1,558) $660,567
Return of stock issued
under long-term
incentive program(1) - (1,300) - (258) 1,558 -
Adjustment of treasury
stock issued in connection
with acquisition(2) - (18) - (3) - (21)
Net income - - 74,108 - - 74,108
Cash dividends of $.99 per
share paid on common stock - - (49,105) - - (49,105)
Adjustment to recognize net
increase in pension
liability - - (1,721) - - (1,721)
Foreign currency
translation adjustment - - (874) - - (874)
Balance August 31, 1992 57,919 6,313 652,717 (33,995) - 682,954
Treasury stock purchased(3) - - - (837) - (837)
Stock options exercised(4) - 1,003 - 241 - 1,244
Adjustment of treasury
stock issued in connection
with acquisition(5) - (17) - (3) - (20)
Net income - - 75,116 - - 75,116
Cash dividends of $1.03 per
share paid on common stock - - (51,041) - - (51,041)
Adjustment to recognize net
increase in pension
liability - - (411) - - (411)
Foreign currency
translation adjustment - - (2,982) - - (2,982)
Balance August 31, 1993 57,919 7,299 673,399 (34,594) - 704,023
Treasury stock purchased(6) - - - (27) - (27)
Stock options exercised(7) - 385 - 90 - 475
Treasury stock acquired in
connection with
divestiture(8) - - - (9,191) - (9,191)
Net income - - 82,698 - - 82,698
Cash dividends of $1.07 per
share paid on common stock - - 53,042) - - (53,042)
Adjustment to recognize net
decrease in pension
liability - - 2,203 - - 2,203
Foreign currency
translation adjustment - - 246 - - 246
Balance August 31, 1994 $57,919 $ 7,684 $705,504 $(43,722) $ - $727,385
(1)63,612 shares. (2)748 shares. (3)34,100 shares. (4)58,359 shares.
(5)723 shares. (6)992 shares. (7)21,705 shares. (8)341,840 shares.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 68
Exhibit 13
Consolidated Statements of Cash Flows
Years Ended August 31
(In thousands) 1994 1993 1992
Cash Provided by (Used for) Operating Activities
Net income $ 82,698 $ 75,116 $ 74,108
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 60,548 62,097 53,816
Provision for losses on accounts receivable 2,804 3,300 3,398
Gain on the sale of property, plant,
and equipment (76) (1,153) (143)
Gain on the sale of business (2,249) (1,379) -
Provision for deferred income taxes (1,600) (4,363) (4,506)
Change in assets and liabilities net of
effect of acquisitions and sale of business-
Receivables (8,425) (17,544) (7,934)
Inventories and linens in service, net (23,095) (22,722) 17,761
Prepaid income taxes 11,867 9,698 (6,923)
Prepayments and other 4,667 (4,037) (459)
Accounts payable and accrued liabilities 10,542 3,923 (31)
Net Cash Provided by Operating Activities 137,681 102,936 129,087
Cash Provided by (Used for) Investing Activities
Change in short-term investments 2,197 3,736 5,551
Purchases of property, plant, and equipment (42,517) (35,513) (43,456)
Sale of property, plant, and equipment 4,552 4,399 7,067
Sale of business 2,395 2,558 -
Acquisitions (569) (97,267) (9,242)
Change in other assets 20 (7,179) (12,904)
Net Cash Used for Investing Activities (33,922) (129,266) (52,984)
Cash Provided by (Used for) Financing Activities
Repayment of long-term debt (2,680) (2,521) (3,949)
Recovery of investment in tax benefits 2,080 1,820 2,043
Deferred income taxes from investment
in tax benefits (3,875) (3,070) (3,148)
Issuance of treasury stock, net 448 407 -
Change in other long-term liabilities (4,170) (1,567) 6,547
Cash dividends paid (53,042) (51,041) (49,105)
Net Cash Used for Financing Activities (61,239) (55,972) (47,612)
Effect of Exchange Rate Changes on Cash 246 (2,982) (874)
Net Change in Cash and Cash Equivalents 42,766 (85,284) 27,617
Cash and Cash Equivalents at Beginning of Year 15,853 101,137 73,520
Cash and Cash Equivalents at End of Year $ 58,619 $ 15,853 $101,137
Supplemental Cash Flow Information
Income taxes paid during the year $ 41,584 $ 35,620 $ 51,142
Interest paid during the year 4,030 5,925 4,971
Noncash Investing and Financing Activities
Treasury stock returned for contingent
performance share grants under long-term
incentive program $ - $ - $ (258)
Noncash aspects of divestitures-
Liabilities removed $ (2,442) $ - $ -
Treasury stock acquired (9,191) - -
Noncash aspects of acquisitions-
Liabilities assumed or incurred $ - $ 31,594 $ 12,997
Treasury stock returned - (20) (21)
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 69
Exhibit 13
Notes to Consolidated Financial Statements
NOTE 1: Summary of Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the company and
all subsidiaries after elimination of significant intercompany transactions and
accounts.
Cash, Cash Equivalents, and Short-Term Investments
Cash in excess of daily requirements is invested in time deposits and
marketable securities, consisting primarily of tax exempt variable rate demand
notes, included in the balance sheet at the lower of cost or market value.
For financial statement purposes, the company considers time deposits and
marketable securities purchased with an original maturity of three months or
less to be cash equivalents. Investments purchased with a maturity of more than
three months are considered short-term investments. At August 31, 1994 and
1993, the carrying amounts of short-term investments equal fair value.
Inventories and Linens in Service
Inventories are valued at the lower of cost (on a first-in, first-out basis) or
market and consisted of the following at August 31, 1994 and 1993:
(In thousands) 1994 1993
Raw materials and supplies $ 72,677 $ 77,911
Work in progress 9,918 11,269
Finished goods 95,995 82,365
$178,590 $171,545
Linens in service are recorded at cost and are amortized over their estimated
useful lives.
Goodwill and Other Intangibles
Goodwill of $3,460,000 was recognized in connection with a 1969 acquisition
and is not being amortized. Remaining amounts of goodwill ($47,102,000 in 1994
and $48,284,000 in 1993) and other intangible assets are being amortized on a
straight-line basis over various periods up to 40 years. The company recorded
$54,235,000 of intangibles related to acquisitions in 1993 (Note 7).
Depreciation
For financial reporting purposes, depreciation is determined principally on a
straight-line basis using estimated useful lives of plant and equipment (20 to
45 years for buildings and 3 to 16 years for machinery and equipment) while
accelerated depreciation methods are used for income tax purposes. Leasehold
improvements are amortized over the life of the lease.
Foreign Currency Translation
The functional currency for the company's foreign operations is the local
currency. The translation of foreign currencies into U.S. dollars is performed
for balance sheet accounts using exchange rates in effect at the balance sheet
date and for revenue and expense accounts using a weighted average exchange
rate during the period. The gains or losses resulting from the translation are
included in retained earnings and are excluded from net income.
Gains or losses resulting from foreign currency transactions are included in
"Other expense, net" in the consolidated statements of income and amounted to
losses of $379,000 in 1994, $863,000 in 1993, and $430,000 in 1992.
Postretirement Healthcare and Life Insurance Benefits
The company's retiree medical plans are financed entirely by retiree
contributions; therefore, the company has no liability in connection with
them. Several programs provide limited retiree life insurance benefits. The
liability for these plans is not significant.
Pension and Profit Sharing Plans
The company has several pension plans covering hourly and salaried employees.
Benefits paid under these plans are based generally on employees' years of
service and/or compensation during the final years of employment. The company
makes annual contributions to the plans to the extent indicated by actuarial
valuations. Plan assets are invested primarily in equity and fixed income
securities.
Net pension (income) cost for 1994, 1993, and 1992 included the following
components:
(In thousands) 1994 1993 1992
Service cost of benefits
earned during the period $ 2,466 $ 2,652 $ 1,393
Interest cost on projected
benefit obligation 7,262 7,165 6,780
Return on plan assets (1,929) (8,198) (7,648)
Net amortization of
transition amounts (8,215) (1,217) (897)
Net pension (income) cost $ (416) $ 402 $ (372)
Page 70
Exhibit 13
Notes to Consolidated Financial Statements
The following schedule reconciles the funded status of the plans as of June
1, 1994, with amounts reported in the company's balance sheet at August 31,
1994:
Plan Accumulated
Assets Benefit
Exceed Obligation
Accumulated Exceeds
Benefit Plan
(In thousands) Obligation Assets
Actuarial present value of benefit
obligations as of June 1, 1994:
Vested $ (76,845) $(3,861)
Nonvested (6,036) (77)
Accumulated benefit obligation (82,881) (3,938)
Effect of projected salary increases (5,787) (1,523)
Total projected benefit obligation (88,668) (5,461)
Fair value of plan assets 106,031 -
Plan assets greater (less) than
projected benefit obligation 17,363 (5,461)
Unrecognized transition
(asset) liability (12,087) 98
Unrecognized prior service
cost obligation 3,058 2,514
Unrecognized net loss (gain) 16,814 (744)
Adjustment required to
recognize minimum liability - (515)
Prepaid (accrued) pension
expense at August 31, 1994 $ 25,148 $ (4,108)
The discount rate used to determine the projected benefit obligation is 8
percent. The assumed growth rate of compensation is 5.5 percent. The expected
long-term rate of return on plan assets is 9.5 percent.
The company also has profit sharing and 401(k) plans to which both employees
and the company contribute. At August 31, 1994, assets of the 401(k) plans
included shares of the company's common stock with a market value of
approximately $4,703,000. The company's cost of these plans was $3,133,000 in
1994, $3,031,000 in 1993, and $3,193,000 in 1992.
Self Insurance
It is the policy of the company to self insure for certain insurable risks
consisting primarily of physical loss to property; business interruptions
resulting from such loss; and workers' compensation, comprehensive general, and
auto liability. Insurance coverage is obtained for catastrophic property and
casualty exposures as well as those risks required to be insured by law or
contract. Provision for claims under the self-insured program is recorded
based on the company's estimate of the aggregate liability for claims incurred.
NOTE 2: Long-Term Debt and Lines of Credit
Long-term debt at August 31, 1994 and 1993, consisted of the following:
(In thousands) 1994 1993
70% to 13.0% mortgage notes,
payable in installments through 2011
(secured in part by property, plant, and
equipment having a net book value
of $2,800,000 at August 31, 1994) $ 671 $ 1,930
2.55% to 6.625% other notes, payable
in installments through 2021 26,859 28,280
27,530 30,210
Less-Amounts payable within one year
included in current liabilities 667 1,792
$26,863 $28,418
The annual maturities of long-term debt are as follows:
(In thousands) Amount
Year Ending August 31
1995 $ 667
1996 88
1997 52
1998 5,497
1999 23
Later years 21,203
$27,530
The company has complimentary lines of credit totaling $124,000,000 of which
$82,000,000 has been provided domestically and $42,000,000 is available on a
multi-currency basis primarily from a European bank. At August 31, 1994 the
company had foreign currency short-term bank borrowings equivalent to
$5,098,000 at an average foreign currency interest rate of 5.9%.
Long-term debt recorded in the accompanying balance sheets approximates fair
value based on the borrowing rates currently available to the company for bank
loans with similar terms and average maturities.
Page 71
Exhibit 13
Notes to Consolidated Financial Statements
NOTE 3: Common Stock and Related Matters
In 1988, the company adopted a shareholder rights plan under which one
preferred stock purchase right is presently attached to and trades with each
outstanding share of the company's common stock.
The rights become exercisable and transferable apart from the common stock
ten days after a person or group, without the company's consent, acquires
beneficial ownership of, or the right to obtain beneficial ownership of, 20
percent or more of the company's common stock or announces or commences a
tender offer or exchange offer that could result in 20 percent ownership
(unless such date is extended by the Board of Directors). Once exercisable, each
right entitles the holder to purchase one one-hundredth share of Series A
Participating Preferred Stock at an exercise price of $80, subject to adjustment
to prevent dilution. The rights have no voting power and, until exercised, no
dilutive effect on net income per common share. The rights expire on May 19,
1998, and are redeemable under certain circumstances.
If a person acquires 20 percent ownership, except in an offer approved by
the company under the plan, each right not owned by the acquirer or related
parties will entitle its holder to purchase, at the right's exercise price,
common stock or common stock equivalents having a market value immediately prior
to the triggering of the right of twice that exercise price. In addition, after
an acquirer obtains 20 percent ownership, if the company is involved in certain
mergers, business combinations, or asset sales, each right not owned by the
acquirer or related persons will entitle its holder to purchase, at the right's
exercise price, shares of common stock of the other party to the transaction
having a market value immediately prior to the triggering of the right of twice
that exercise price.
The company has 1,000,000 shares of preferred stock authorized, 500,000 of
which have been reserved for issuance under the shareholder rights plan. No
shares of preferred stock had been issued at August 31, 1994.
In 1990, the stockholders approved the National Service Industries, Inc.
Long-Term Incentive Program for the benefit of officers and other key employees.
There were 1,750,000 treasury shares reserved for issuance under the program.
The employee stock options granted under the program become exercisable in
four equal annual installments beginning one year from the date of the grant and
expire at the end of ten years.
In 1993, the stockholders approved the National Service Industries, Inc.
1992 Nonemployee Directors' Stock Option Plan under which a maximum of 100,000
shares were reserved for issuance. The shares become exercisable one year from
the date of the grant.
Stock option transactions for the stock option plans and stock option
agreements during the years ended August 31, 1994, 1993, and 1992 were as
follows:
(In thousands) 1994 1993 1992
Options outstanding at
September 1 680,139 473,415 339,831
Granted 214,700 365,900 164,744
Exercised 21,705 58,359 -
Canceled 52,382 100,817 31,160
Options outstanding at
August 31 820,752 680,139 473,415
Option price range at $19.75- $19.75- $19.75-
August 31 $29.00 $29.00 $29.00
Options exercisable at
August 31 316,024 176,625 111,943
Options available for
grant at August 31 949,184 1,111,502 1,276,585
Potential dilution of earnings per share applicable to these stock options
is not significant.
NOTE 4: Leases
The company leases certain of its buildings and equipment under noncancelable
lease agreements. Minimum lease payments under noncancelable leases for years
subsequent to August 31, 1994, are as follows:
(In thousands) Amount
Year Ending August 31
1995 $ 9,354
1996 7,666
1997 5,613
1998 3,856
1999 2,510
Later years 5,390
$34,389
Total rent expense was $10,585,000 in 1994, $11,230,000 in 1993, and
$8,953,000 in 1992.
Page 72
Exhibit 13
NOTE 5: Quarterly Financial Data (Unaudited)
(In thousands, except earnings per share)
Sales and Income
Service Gross before Net Earnings
Revenues Profit Taxes Income per Share
1994
1st Quarter $459,900 $175,584 $30,803 $19,172 $.39
2nd Quarter 439,337 166,082 26,149 16,273 .33
3rd Quarter 481,001 187,031 36,849 22,928 .46
4th Quarter 501,626 191,593 38,397 24,325 .49
1993
1st Quarter $434,341 $168,946 $29,358 $18,586 $.38
2nd Quarter 426,993 161,897 23,181 14,634 .30
3rd Quarter 459,964 177,949 32,702 20,511 .41
4th Quarter 483,524 182,215 34,275 21,385 .43
NOTE 6: Income Taxes
Income taxes are reconciled with the Federal statutory rate as follows:
(In thousands) 1994 1993 1992
Federal income tax
computed at
statutory rate $46,269 $41,433 $39,748
Increase (decrease) in taxes:
State income tax,
net of Federal
income tax benefit 4,693 4,230 3,358
Tax exempt interest (330) (495) (1,184)
Other, net (1,132) (768) 878
$49,500 $44,400 $42,800
Provisions for income taxes include state income and franchise taxes of
$7,220,000 in 1994, $6,478,000 in 1993, and $5,088,000 in 1992. In 1994, 1993,
and 1992 income before taxes included $952,000, $5,149,000, and $413,000,
respectively, of losses generated by the company's foreign operations.
The following summarizes the components of income tax expense:
(In thousands) 1994 1993 1992
Provision for current taxes $47,473 $41,710 $44,763
Provision (credit) for
deferred taxes:
Current:
Tax effect of linen book
amortization less than
tax amortization 3,339 9,877 3,700
Restructuring costs 365 3,025 4,028
Insurance costs (1,745) (3,452) (4,182)
Other timing differences 1,668 (2,397) (1,003)
Noncurrent-
Other (primarily tax effect
of differences between
book depreciation and
tax depreciation on
fixed assets) (1,600) (4,363) (4,506)
$49,500 $44,400 $42,800
Components of net deferred income tax liability at August 31, 1994 and 1993
include:
(In thousands) 1994 1993
Deferred income taxes:
Safe harbor lease $ 47,203 $ 51,078
Depreciation 43,443 42,511
Self insurance (17,309) (16,108)
Other 5,477 6,808
78,814 84,289
Prepaid income taxes:
Self insurance (11,539) (9,400)
Deferred compensation, bonuses, etc. (3,700) (5,484)
Other 1,766 (10,456)
(13,473) (25,340)
Net deferred tax liability $ 65,341 $ 58,949
Page 73
Exhibit 13
Notes to Consolidated Financial Statements
NOTE 7: Divestitures and Acquisitions
Effective August 31, 1994, the company sold its Marketing Services Division. A
small gain resulted from the transaction as the company received approximately
342,000 of its common shares in return for those assets transferred to the
purchasers. The Division had sales of approximately $32,000,000 in 1994 and an
immaterial operating loss.
Effective September 1, 1992, the company acquired Initial Services
Investments, Inc., an industrial uniform and dust control business known as
Initial USA. Initial was included in the results of operations of the Textile
Rental Division for the entire 1993 fiscal year.
Effective September 30, 1992, the company acquired Graham International, a
privately held, European specialty chemical business. Graham manufactures in the
Netherlands for industrial and institutional specialty chemical markets in
France, Italy, Belgium, the Netherlands, and Switzerland. Graham became a part
of Zep Manufacturing Company and the Chemical segment. Also in September, 1992,
the Chemical Division acquired Kleen Canada, Inc., a Canadian manufacturer of
specialty chemicals. The operating results of Graham and Kleen were included in
the Chemical segment beginning in October, 1992.
These and several small acquisitions, all of which were accounted for by the
purchase method, brought total 1993 acquisition spending to $97 million. 1993
results included revenues of approximately $162.5 million and pretax earnings of
approximately $5.2 million attributable to the 1993 acquisitions and to
Associated Textile Rental Services acquired at fiscal 1992 year end.
NOTE 8: Business Segment Information
Depreci- Capital
ation Expendi-
and tures
Sales and Identi- Amorti- Including
Service Operating fiable zation Acquisi-
(In thousands) Revenues Profit(Loss) Assets Expense tions
1994
Lighting Equipment $ 763,592 $ 50,092 $ 323,335 $15,460 $13,183
Textile Rental 544,454 48,840 432,994 31,656 20,986
Chemical 332,298 35,368 168,956 6,392 5,315
Other 241,520 8,822 75,580 5,792 2,695
1,881,864 143,122 1,000,865 59,300 42,179
Corporate(1) (7,256) 105,891 1,248 339
Interest Expense (3,668)
Total $1,881,864 $132,198 $1,106,756 $60,548 $42,518
1993
Lighting Equipment $ 691,946 $ 38,623 $ 298,575 $16,823 $10,193
Textile Rental 546,916 49,096 433,408 31,134 55,015
Chemical 318,098 33,280 173,175 6,499 12,743
Other 247,862 10,275 104,892 6,357 4,048
1,804,822 131,274 1,010,050 60,813 81,999
Corporate(1) (6,797) 77,463 1,284 172
Interest Expense (4,961)
Total $1,804,822 $119,516 $1,087,513 $62,097 $82,171
1992
Lighting Equipment $ 683,546 $ 35,355 $ 280,205 $18,275 $ 9,959
Textile Rental 444,127 42,781 343,332 24,140 28,156
Chemical 253,947 33,556 112,719 4,260 4,607
Other 252,191 13,581 101,564 6,238 5,085
1,633,811 125,273 837,820 52,913 47,807
Corporate(1) (5,675) 204,592 903 1,982
Interest Expense (2,690)
Total $1,633,811 $116,908 $1,042,412 $53,816 $49,789
(1)Operating profit (loss) includes income on short-term investments.
Page 74
Exhibit 13
Report of Management
The management of National Service Industries, Inc. is responsible for the
integrity and objectivity of the financial information in this annual report.
These financial statements are prepared in conformity with generally accepted
accounting principles, using informed judgments and estimates where appropriate.
The information in other sections of this report is consistent with the
financial statements. The company maintains a system of internal controls and
accounting policies and procedures designed to provide reasonable assurance that
assets are safeguarded and transactions are executed and recorded in accordance
with management's authorization. The audit committee of the Board of Directors,
composed entirely of outside directors, is responsible for monitoring the
company's accounting and reporting practices. The audit committee meets
regularly with management, the internal auditors, and the independent
accountants to review the work of each and to assure that each performs its
responsibilities. Both the internal auditors and Arthur Andersen LLP have
unrestricted access to the audit committee allowing open discussion, without
management's presence, on the quality of financial reporting and the adequacy of
internal accounting controls.
D. Raymond Riddle J. Robert Hipps John A. Bostater
Chairman and Senior Vice President, Vice President and
Chief Executive Officer Finance Controller
Report of Independent Public Accountants
To the Stockholders of National Service Industries, Inc.:
We have audited the accompanying consolidated balance sheets of National Service
Industries, Inc. (a Delaware corporation) and subsidiaries as of August 31, 1994
and 1993 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended August 31, 1994.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Service Industries,
Inc. and subsidiaries as of August 31, 1994 and 1993 and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1994 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
October 20, 1994
Page 75
Exhibit 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
National Service Industries maintained a strong financial position as it
completed fiscal 1994. Net working capital increased to $357.5 million from
$313.2 million at August 31, 1993, and the current ratio was 2.4, compared with
2.3 at last year end. Cash and short-term investments were $61.2 million, up
from $20.6 million at the prior year end. During 1994, the company invested
$43.1 million in capital expenditures and acquisitions. Long-term liabilities
were 6.4 percent of total capitalization, down from 7.3 percent at August 31,
1993. Cash provided by operations rose to $137.7 million from $102.9 million in
1993 and $129.1 million in 1992. The improvement in 1994 was largely due to a
reduced rate of investment in accounts receivable, the reduction of prepayments,
and lower charges against insurance reserves due to improved claims experience.
The decrease in 1993 resulted primarily from higher investment in accounts
receivable and inventories.
Capital expenditures, exclusive of acquisition spending, were $42.5 million in
1994, $35.5 million in 1993, and $43.5 million in 1992. Current-year spending
was primarily the result of facilities and manufacturing process improvements in
the Lighting Equipment Division, facilities additions and information systems
enhancements in the Chemical Division, and wastewater compliance projects and
fleet upgrades in the Textile Rental Division. Prior-year expenditures were
attributable to cost reduction spending in many divisions, information systems
enhancements in the Lighting Equipment Division, capacity expansion in the
Chemical Division, and fleet expansion in the Textile Rental Division.
Cash payments in connection with acquisitions totaled $.6 million in 1994,
$97.3 million in 1993, and $9.2 million in 1992. Effective September 1, 1992,
the company acquired Initial Services Investments, Inc., an industrial uniform
and dust control business known as Initial USA. Initial was included in the
results of operations of National Uniform Service, a business unit of the
Textile Rental Division, for the entire 1993 fiscal year.
Effective September 30, 1992, the company acquired Graham International, a
privately held, European specialty chemical business. Graham manufactures in the
Netherlands for industrial and institutional specialty chemical markets in
France, Italy, Belgium, the Netherlands, and Switzerland. Graham became part of
Zep Manufacturing Company and the Chemical segment. Also in September, 1992, the
Chemical Division acquired Kleen Canada, Inc., a Canadian manufacturer of
specialty chemicals. The operating results of Graham and Kleen were included in
the Chemical segment beginning in October, 1992.
In June, 1993, the Textile Rental Division acquired the linen supply business
of Heritage Linen Service, Inc. in Hickory, North Carolina.
The effect of the 1993 acquisitions on the consolidated income statements is
further discussed under "Results of Operations."
Dividend payments totaled $53.0 million, or $1.07 per share, in 1994, compared
with $51.0 million, or $1.03 per share, in 1993, and $49.1 million, or 99 cents
per share, in 1992. The fiscal 1994 dividend of $1.07 per share was a
3.9 percent increase.
For the periods presented, capital expenditures, working capital needs,
dividends, and acquisitions were financed primarily with internally generated
funds, supplemented by short-term borrowings in the European market. The Initial
acquisition was a cash transaction. The Graham acquisition in Europe was funded
primarily through short-term debt financing, which was repaid during the
remainder of the 1993 fiscal year. Contractual commitments for capital and
acquisition spending for fiscal 1995 total $12.1 million. The company expects
actual capital expenditures to be somewhat higher than levels of recent years.
Current liquid assets and internally generated funds are expected to be more
than adequate to meet anticipated cash requirements for the next twelve months,
although some interim borrowings might be incurred to meet short-term needs. The
company has complimentary lines of credit totaling $124 million, of which $82
million has been provided domestically and $42 million is available on a multi-
currency basis primarily from a European bank.
Results of Operations
For the fiscal year ended August 31, 1994, revenues moved ahead 4.3 percent to
$1.88 billion from $1.80 billion in 1993. The revenue increase was largely the
result of volume gains in the Lighting Equipment and Chemical segments. Fiscal
1993 revenues rose 10.5 percent from 1992's $1.63 billion due
Page 76
Exhibit 13
primarily to volume gains in the Lighting Equipment, Textile Rental, and
Chemical segments.
Net income for fiscal 1994 advanced 10.1 percent to $82.7 million, or $1.67
per share. For fiscal 1993, net income reached $75.1 million, or $1.52 per
share, a 1.4 percent increase over the $74.1 million posted in 1992.
Lighting Equipment Division revenues for 1994 grew 10.4 percent to $764
million from $692 million in 1993. 1993 revenues were a 1.2 percent increase
over 1992. Unit sales increases that began late in fiscal 1993 continued through
1994 and accounted for the improvement in both years. Operating profit grew 29.7
percent to 6.6 percent of revenues, compared with 5.6 percent in 1993, and 5.2
percent in 1992. For 1994, profit improvements were largely the result of higher
unit volumes and cost savings. In 1993, previously implemented manufacturing
efficiencies were augmented by the closing of the division's 130,000 square foot
facility in Rancho Cucamonga, California. This action took advantage of excess
capacity by shifting production to plants in Crawfordsville, Indiana and
Louisville, Kentucky and further reduced manufacturing costs.
Revenues of the Textile Rental Division were $544 million in 1994, compared
with $547 million in 1993 and $444 million in 1992. Pricing gains in 1994 were
offset by declining volumes, particularly in the fine dining and hospital
markets. 1993 revenues improved on the strength of the acquisitions of Initial
USA early in 1993 and Associated Textile Rental Services, Inc. at fiscal 1992
year end. The acquisitions provided revenues of $109 million in 1993. Operating
income was 9.0 percent of revenues in 1994 and 1993, compared with 9.6 percent
in 1992. Merchandise costs as a percentage of revenues grew slightly in 1994,
while administrative expenses declined. For both 1994 and 1993 costs related to
acquisitions continued to take a higher percentage of revenues. Operating
margins in 1993 for the two acquired companies were 6.3 percent of related
revenues.
Chemical Division revenues rose 4.5 percent to $332 million from $318 million
in 1993, which was a 25.3 percent gain from 1992. Volume gains in domestic
operations contributed to the improvement in both years. In 1993, the European
and Canadian acquisitions accounted for $53.2 million of the gain. Operating
profit was 10.6 percent of revenues in 1994 and 10.5 percent in 1993, down from
13.2 percent in 1992. European and Canadian operating margins, although improved
in 1994, fell short of those achieved in the U.S. The European units' loss of
$1.8 million for 1993 was significantly reduced in 1994.
NSI's other businesses produced revenues of $242 million, down 2.6 percent
from $248 million in 1993, which was a 1.7 percent decline from 1992. Operating
profit declined to $8.8 million from $10.3 million in 1993 and $13.6 million in
1992. In both years, reduced volumes and pricing pressures experienced by the
Insulation and Marketing Services divisions more than offset improvements in the
Envelope Division.
Effective August 31, 1994, NSI sold its Marketing Services Division. A small
gain resulted from the transaction as the company received approximately 342,000
of its common shares in return for those assets transferred to the purchasers.
The Division had sales of $32 million in 1994 and an immaterial operating loss.
Corporate income was lower in both 1994 and 1993 due primarily to the effect
of lower short-term investments levels and lower interest rates. Foreign
currency exchange rate fluctuations in 1994 and 1993 were progressively less
unfavorable than in 1992. 1994 interest expense was less than in 1993 due to
reductions in acquisition-related debt. The increase in interest expense for
1993 resulted from the European acquisition.
Consolidated income before taxes improved 10.6 percent in 1994 and 2.2 percent
in 1993. The corresponding improvement in net income was reduced to 10.1 percent
and 1.4 percent, respectively, due to the higher Federal tax rate. The provision
for income taxes was 37.4 percent of pretax income in 1994, compared with 37.1
percent in 1993 and 36.6 percent in 1992. The 1994 and 1993 rates were increased
as a result of the Omnibus Budget Act of 1993. Changes in the year-to-year
effective rates also result from variation in the relative amount of tax exempt
income.
Outlook
The current-year earnings increase of 10.1 percent is indicative of the
commitment of each of NSI's operating divisions to the more aggressive plans
formulated for fiscal 1994. The momentum established in 1994 should propel
earnings forward at double-digit growth rates and produce gains for NSI's
stockholders in fiscal 1995 and beyond.
Page 77
Exhibit 13
Ten-Year Financial Summary
(Dollar amounts in thousands,
except per-share data) 1994 1993 1992
Operating Results
Net sales of products $1,337,410 $1,257,906 $1,189,684
Service revenues 544,454 546,916 444,127
Total revenues 1,881,864 1,804,822 1,633,811
Cost of products sold 875,055 832,264 810,552
Cost of services 286,519 281,551 236,474
Selling and administrative expenses 577,291 557,011 462,653
Interest expense 3,668 4,961 2,690
Restructuring expense - - -
Other income, net 7,133 9,519 4,534
Income before taxes 132,198 119,516 116,908
Income taxes 49,500 44,400 42,800
Net income 82,698 75,116 74,108
Per-Share Data(1)
Net income $ 1.67 $ 1.52 $ 1.50
Cash dividends 1.07 1.03 .99
Stockholders' equity 14.77 14.21 13.79
Financial Ratios
Current ratio 2.4 2.3 2.7
Net income as a percent of sales 4.4% 4.2% 4.5%
Return on average stockholders' equity 11.6% 10.8% 11.0%
Dividends as a percent of current year earnings 64.1% 67.9% 66.3%
Long-term debt and other long-term liabilities as
a percent of total capitalization 6.4% 7.3% 7.7%
Other Data
Net working capital $ 357,528 $ 313,243 $ 357,759
Increase (decrease) in:
Cash and cash equivalents 42,766 (85,284) 27,617
Short-term investments (2,197) (3,736) (5,551
Capital expenditures (including acquisitions) 42,518 82,171 49,789
Depreciation and amortization 60,548 62,097 53,816
Total assets 1,106,756 1,087,513 1,042,412
Long-term debt 26,863 28,418 28,359
Deferred income taxes 78,814 84,289 92,654
Other long-term liabilities 22,940 27,110 28,677
Stockholders' equity 727,385 704,023 682,954
Weighted average number of shares outstanding
(in thousands )(1) 49,547 49,556 49,539
Shareholders 7,034 7,262 7,554
Associates 22,000 22,200 20,100
Use of Total Revenues
Salaries and wages $ 565,859 $ 572,163 $ 502,709
Materials and supplies 783,610 760,551 700,338
Other operating expenses 347,600 299,977 273,330
Restructuring expnse - - -
Taxes and licenses 102,097 97,015 83,326
Dividends paid 53,042 51,041 49,105
Retained earnings 29,656 24,075 25,003
$1,881,864 $1,804,822 $1,633,811
(1) Restated to reflect stock splits of 3 for 2 effective January 13, 1987, and
4 for 3 effective January 13, 1986.
Page 78
Exhibit 13
1991 1990 1989 1988 1987 1986 1985
$1,164,181 $1,250,833 $1,183,666 $1,093,163 $1,032,145 $ 968,308 $ 887,340
437,534 396,981 355,845 321,025 294,713 314,614 303,865
1,601,715 1,647,814 1,539,511 1,414,188 1,326,858 1,282,922 1,191,205
791,355 832,867 800,385 741,383 690,689 643,936 599,687
240,376 219,673 198,262 179,793 159,019 170,571 167,381
456,903 439,076 397,283 361,970 350,641 340,582 312,665
3,834 3,864 4,963 4,234 4,149 3,999 3,376
63,467 - - - - - -
(2,856 (3,381) (9,400) (6,414) (10,030) (3,507) (3,565)
48,636 155,715 148,018 133,222 132,390 127,341 111,661
16,400 56,000 53,300 47,100 56,700 56,000 44,000
32,236 99,715 94,718 86,122 75,690 71,341 67,661
$ .65 $ 2.02 $ 1.92 $ 1.75 $ 1.54 $ 1.45 $ 1.37
.95 .90 .82 .73 .62 .54 .49
13.33 13.68 12.44 11.33 10.31 9.39 8.48
2.8 4.0 4.3 4.4 4.5 4.0 3.9
2.0% 6.1% 6.2% 6.1% 5.7% 5.6% 5.7%
4.8% 15.5% 16.2% 16.2% 15.6% 16.2% 17.1%
146.2% 44.6% 42.6% 41.8% 40.2% 37.0% 35.3%
7.5% 6.1% 5.9% 6.2% 6.2% 6.4% 3.9%
$ 351,559 $ 434,092 $ 436,450 $ 426,413 $ 404,886 $ 355,175 $ 301,163
(50,437) 23,433 14,612 (24,786) 16,318 63,315 20,267
12,813 (27,247) (19,633) 35,971 5,160 - -
90,229 82,932 66,491 55,394 45,258 53,968 47,679
50,249 42,821 36,260 31,037 27,333 26,707 22,939
1,012,000 962,136 887,836 825,345 760,318 710,376 617,726
31,373 27,465 20,765 21,391 21,466 21,857 8,577
100,308 100,791 102,798 104,460 104,033 97,783 79,673
22,015 16,067 17,964 15,330 12,042 9,794 8,218
660,567 675,444 612,668 558,160 508,219 462,907 417,958
49,540 49,389 49,255 49,258 49,278 49,280 49,277
7,996 8,248 8,459 8,851 9,164 9,326 8,406
20,900 21,800 20,800 20,400 19,400 19,300 18,700
$ 501,502 $ 491,334 $ 465,522 $ 428,325 $ 399,968 $ 378,993 $ 340,026
683,871 713,310 668,655 616,223 574,179 551,550 536,027
258,919 246,288 219,270 201,478 188,414 194,215 174,538
63,467 - - - - - -
59,889 97,167 91,346 82,040 88,607 86,823 72,953
47,124 44,506 40,389 35,960 30,428 26,410 23,899
(13,057) 55,209 54,329 50,162 45,262 44,931 43,762
$1,601,715 $1,647,814 $1,539,511 $1,414,188 $1,326,858 $1,282,922 $1,191,205
Page 79
Exhibit 13
Directors, Officers, and Division Executives
Directors D. Raymond Riddle Chairman of the Board and Chief
Executive Officer
John L. Clendenin Chairman of the Strategic Planning and
Finance Committee; Chairman of
Board, President and Chief
Executive Officer, BellSouth
Corporation
Jesse Hill, Jr. Chairman and Chief Executive Officer
Atlanta Life Insurance Company
Robert M. Holder, Jr. Chairman of the Audit Committee;
Chairman of the Board, Holder
Corporation
Don W. Hubble President and Chief Operating Officer
F. Ross Johnson Chairman and Chief Executive Officer,
RJM Group, Inc.
James C. Kennedy Chairman and Chief Executive Officer,
Cox Enterprises, Inc.
Donald R. Keough Chairman of the Board, Allen & Company
Incorporated
Bryan D. Langton Chairman, Chief Executive Officer, and
President, Holiday Inns, Inc.
David Levy Executive Vice President,
Administration and Counsel
Bernard Marcus Chairman of the Board and Chief
Executive Officer, The Home
Depot, Inc.
John G. Medlin, Jr. Chairman of the Executive Resource and
Nominating Committee; Chairman,
Wachovia Corporation
Dr. Betty L. Siegel President, Kennesaw State College
Chairman Emeritus Erwin Zaban Retired Chairman of the Board
Associate Directors Gerald V. Gurbacki President, National Linen Service
Harry Maziar President, Zep Manufacturing Company
Jim H. McClung President, Lithonia Lighting Company
Officers D. Raymond Riddle Chairman of the Board and Chief
Executive Officer
Don W. Hubble President and Chief Operating Officer
David Levy Executive Vice President,
Administration and Counsel
J. Robert Hipps Senior Vice President, Finance
John A. Bostater Vice President and Controller
Howard S. Kaplan Vice President, Corporate Development
Melissa K. Meder Vice President, Taxes
Kenyon W. Murphy Secretary and Assistant Counsel
Walter H. Buce Staff Vice President-Risk Management
F. Andrew Logue Staff Vice President-Human Resources
Robert J. Mello Staff Vice President-Auditing
Bruce E. Dunkley, Jr. Assistant Vice President and Assistant
Controller-Financial Analysis
Helen D. Haines Assistant Vice President and Assistant
Controller-Financial Reporting
Carol Ellis Morgan Assistant Vice President-Legal and
Assistant Secretary
Donald A. Hundeby Assistant Vice President-Employee
Benefits
Margaret Shelfer Assistant Vice President-Taxes
William E. Statton Assistant Vice President-Claims
Administration
W. Russell Watson Assistant Treasurer
Division Executives Gerald V. Gurbacki President, National Linen Service
Dennis Harris President, North Bros. Co.
Lyons B. Joel, Jr. President, Selig Chemical Industries
Harry Maziar President, Zep Manufacturing Company
Jim H. McClung President, Lithonia Lighting Company
J. Randolph Zook President, Atlantic Envelope Company
Page 80
Exhibit 13
Executive Offices
NSI Center
1420 Peachtree Street, N.E.
Atlanta, Georgia 30309
(404) 853-1000
Transfer Agent and Registrar
Wachovia Bank and Trust Company, N.A.
Corporate Trust Department
P.O. Box 3001
Winston-Salem, North Carolina 27102
(800) 633-4236
Listing
New York Stock Exchange
Independent Public Accountants
Arthur Andersen LLP
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
(404) 658-1776
Annual Meeting
10:00 a.m., Wednesday, January 4, 1995
High Museum of Art
1280 Peachtree Street, N.E.
Atlanta, Georgia
Common Share Prices and Dividends per Share
Dividends
Price per Share Paid
High Low per Share
1994
First Quarter $26-1/8 $23-1/8 $.26
Second Quarter 28-3/8 23-1/8 .27
Third Quarter 28-1/4 24-3/4 .27
Fourth Quarter 27-1/2 25-3/8 .27
1993
First Quarter $26-3/8 $23-5/8 $.25
Second Quarter 27-7/8 24-7/8 .26
Third Quarter 27 23-1/2 .26
Fourth Quarter 27 24-1/2 .26
The above common share prices are as quoted on the New York Stock Exchange.
Ticker Symbol: NSI
The number of shareholders of record of the company's common stock as of
September 29, 1994, was 7,034.