Page 58 Exhibit 13 Consolidated Balance Sheets National Service Industries, Inc. August 31 (In thousands, except share data) 1996 1995 Assets Current Assets: Cash and cash equivalents ........................................................................ $ 58,662 $ 79,402 Short-term investments ........................................................................... 551 3,598 Receivables, less reserves for doubtful accounts of $5,807 in 1996 and $6,467 in 1995 ............ 269,971 266,056 Inventories, at the lower of cost (on a first-in, first-out basis) or market ..................... 169,813 185,789 Linens in service, net of amortization ........................................................... 97,710 88,605 Deferred income taxes ............................................................................ 2,152 10,221 Prepayments ...................................................................................... 7,522 6,739 Total Current Assets ..................................................................... 606,381 640,410 Property, Plant, and Equipment, at cost: Land ............................................................................................. 29,062 31,016 Buildings and leasehold improvements ............................................................. 194,219 192,023 Machinery and equipment .......................................................................... 542,056 503,868 Total Property, Plant, and Equipment ..................................................... 765,337 726,907 Less-Accumulated depreciation and amortization ................................................... 407,941 377,003 Property, Plant, and Equipment-net ....................................................... 357,396 349,904 Other Assets: Goodwill and other intangibles ................................................................... 89,427 101,410 Other ............................................................................................ 41,442 39,622 Total Other Assets ....................................................................... 130,869 141,032 Total Assets ..................................................................... $1,094,646 $1,131,346 18 Page 59 Exhibit 13 Consolidated Balance Sheets (continued) National Service Industries, Inc. August 31 (In thousands, except share data) 1996 1995 Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt ............................................................. $ 46 $ 87 Notes payable .................................................................................... 6,696 6,399 Accounts payable ................................................................................. 79,851 81,524 Accrued salaries, commissions, and bonuses ....................................................... 42,788 43,944 Current portion of self-insurance reserves ....................................................... 15,396 16,276 Other accrued liabilities ........................................................................ 52,649 54,340 Total Current Liabilities ................................................................ 197,426 202,570 Long-Term Debt, less current maturities .................................................................. 24,920 26,776 Deferred Income Taxes .................................................................................... 63,347 65,756 Self-Insurance Reserves, less current portion ............................................................ 63,369 67,830 Other Long-Term Liabilities .............................................................................. 27,576 24,010 Commitments and Contingencies (Note 4) Stockholders' Equity: Series A participating preferred stock, $.05 stated value, 500,000 shares authorized, none issued Preferred stock, no par value, 500,000 shares authorized, none issued Common stock, $1 par value, 80,000,000 shares authorized, 57,918,978 shares issued in 1996 and 1995 57,919 57,919 Paid-in capital .................................................................................. 11,021 8,065 Retained earnings ................................................................................ 791,367 746,256 860,307 812,240 Less-Treasury stock, at cost (11,447,036 shares in 1996 and 9,609,261 shares in 1995)..................... 142,299 67,836 Total Stockholders' Equity ............................................................... 718,008 744,404 Total Liabilities and Stockholders' Equity ....................................... $1,094,646 $1,131,346 The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 19 Page 60 Exhibit 13 Consolidated Statements of Income National Service Industries, Inc. Years Ended August 31 (In thousands, except per-share data) 1996 1995 1994 Sales and Service Revenues: Net sales of products ..................................... $ 1,482,937 $1,424,180 $1,337,410 Service revenues .......................................... 530,625 546,447 544,454 Total Revenues .................................... 2,013,562 1,970,627 1,881,864 Costs and Expenses: Cost of products sold ..................................... 933,405 908,869 875,055 Cost of services .......................................... 304,381 299,687 286,519 Selling and administrative expenses ....................... 616,513 601,143 576,463 Interest expense, net ..................................... 1,565 1,648 2,788 Other (income) expense, net ............................... (4,150) 8,783 8,841 Total Costs and Expenses .......................... 1,851,714 1,820,130 1,749,666 Income before Provision for Income Taxes .......................... 161,848 150,497 132,198 Provision for Income Taxes ........................................ 60,700 56,400 49,500 Net Income ........................................................ $ 101,148 $ 94,097 $ 82,698 Earnings per Share ................................................ $ 2.11 $ 1.93 $ 1.67 Weighted Average Number of Shares Outstanding ..................... 47,941 48,696 49,547 The accompanying notes to consolidated financial statements are an integral part of these statements. 20 Page 61 Exhibit 13 Consolidated Statements of Stockholders' Equity National Service Industries, Inc. Common Paid-in Retained Treasury (In thousands, except per-share data) Stock Capital Earnings Stock Total Balance August 31, 1993 .......................................... $57,919 $ 7,299 $ 673,399 $ (34,594) $ 704,023 Treasury stock purchased(1) .................................. -- -- -- (27) (27) Stock options exercised(2) ................................... -- 385 -- 90 475 Treasury stock acquired in connection with divestiture(3) .... -- -- -- (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 Treasury stock purchased(4) .................................. -- -- -- (24,127) (24,127) Stock options exercised(5) ................................... -- 380 -- 148 528 Adjustment of treasury stock issued in connection with acquisition(6) -- 1 -- (1) -- Adjustment of treasury stock acquired in connection with divestiture(7) -- -- -- (134) (134) Net income ................................................... -- -- 94,097 -- 94,097 Cash dividends of $1.11 per share paid on common stock ....... -- -- (54,156) -- (54,156) Adjustment to recognize net increase in pension liability .... -- -- (3) -- (3) Foreign currency translation adjustment ...................... -- -- 814 -- 814 Balance August 31, 1995 .......................................... 57,919 8,065 746,256 (67,836) 744,404 Treasury stock purchased(8) .................................. -- -- -- (75,223) (75,223) Stock options exercised(9) ................................... -- 2,956 -- 760 3,716 Net income ................................................... -- -- 101,148 -- 101,148 Cash dividends of $1.15 per share paid on common stock ....... -- -- (55,272) -- (55,272) Adjustment to recognize net increase in pension liability .... -- -- (23) -- (23) Foreign currency translation adjustment . .................... -- -- (742) -- (742) Balance August 31, 1996 .......................................... $57,919 $ 11,021 $ 791,367 $(142,299) $ 718,008 (1)992 shares. (2)21,705 shares. (3) 341,840 shares. (4)949,178 shares. (5)23,598 shares. (6) 39 shares. (7) 4,976 shares. (8)2,000,000 shares. (9)185,044 shares. The accompanying notes to consolidated financial statements are an integral part of these statements. 21 Page 62 Exhibit 13 Consolidated Statements of Cash Flows National Service Industries, Inc. Years Ended August 31 (In thousands) 1996 1995 1994 Cash Provided by (Used for) Operating Activities Net income .......................................................................... $ 101,148 $ 94,097 $ 82,698 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................................... 58,428 57,130 60,548 Provision for losses on accounts receivable ................................. 2,708 3,170 2,804 (Gain) loss on the sale of property, plant, and equipment ................... (1,652) 1,138 (76) Gain on the sale of businesses .............................................. (7,579) (5,726) (2,249) Change in non-current deferred income taxes ................................. 1,864 (3,663) (1,092) Change in assets and liabilities net of effect of acquisitions- Receivables ......................................................... (7,343) (11,367) (8,425) Inventories and linens in service, net .............................. 5,308 (8,522) (23,095) Current deferred income taxes ....................................... 8,069 (2,243) 11,359 Prepayments ......................................................... (940) 2,086 4,635 Accounts payable and accrued liabilities ............................ (6,117) 11,945 5,796 Changes in self-insurance reserves and other long-term liabilities .. (895) 7,819 576 Net Cash Provided by Operating Activities ................... 152,999 145,864 133,479 Cash Provided by (Used for) Investing Activities Change in short-term investments .................................................... 3,047 (1,019) 2,197 Purchases of property, plant, and equipment ......................................... (65,499) (58,768) (42,517) Sale of property, plant, and equipment .............................................. 9,105 8,491 4,552 Sale of businesses .................................................................. 15,250 14,044 2,395 Acquisitions ........................................................................ (600) (2,668) (569) Change in other assets .............................................................. (3,071) (4,848) 52 Net Cash Used for Investing Activities ...................................... $ (41,768) $ (44,768) $ (33,890) 22 Page 63 Exhibit 13 Consolidated Statements of Cash Flows (continued) National Service Industries, Inc. Years Ended August 31 (In thousands) 1996 1995 1994 Cash Provided by (Used for) Financing Activities Repayment of long-term debt ......................................................... $ (1,897) $ (667) $ (2,680) Recovery of investment in tax benefits .............................................. 1,720 1,329 2,080 Deferred income taxes from investment in tax benefits ............................... (4,273) (3,900) (3,875) (Purchase) issuance of treasury stock, net .......................................... (71,507) (23,733) 448 Cash dividends paid ................................................................. (55,272) (54,156) (53,042) Net Cash Used for Financing Activities ...................................... (131,229) (81,127) (57,069) Effect of Exchange Rate Changes on Cash ..................................................... (742) 814 246 Net Change in Cash and Cash Equivalents ..................................................... (20,740) 20,783 42,766 Cash and Cash Equivalents at Beginning of Year .............................................. 79,402 58,619 15,853 Cash and Cash Equivalents at End of Year .................................................... $ 58,662 $ 79,402 $ 58,619 Supplemental Cash Flow Information: Income taxes paid during the year ................................................... $ 58,974 $ 50,630 $ 41,584 Interest paid during the year ....................................................... 4,994 3,671 4,030 Noncash Investing and Financing Activities: Noncash aspects of sale of businesses- Receivables incurred ........................................................ $ (234) $ (3,003) $ -- Liabilities assumed (removed) ............................................... 1,009 1,064 (2,442) Treasury stock acquired ..................................................... -- -- (9,191) Noncash aspects of acquisitions- Liabilities assumed or incurred ............................................. $ 6 $ 468 $ -- Treasury stock returned ..................................................... -- (1) -- The accompanying notes to consolidated financial statements are an integral part of these statements. 23 Page 64 Exhibit 13 Notes to Consolidated Financial Statements National Service Industries, Inc. NOTE 1. Summary of Accounting Policies Description of Business The company has leadership positions in four business segments-Lighting Equipment, Textile Rental, Chemicals, and Envelopes. The Lighting Equipment segment produces a variety of fluorescent and non-fluorescent fixtures for markets throughout the United States, Canada, Mexico, and overseas. The Textile Rental segment provides linens, garments, and dust control products to healthcare, linen supply, and industrial customers principally in the United States. The Chemical segment produces maintenance, sanitation, and water treatment products for customers throughout the United States, Canada, Puerto Rico, and Western Europe. The Envelope segment produces business and specialty envelopes in the South and Southwest. The company's other business, which is being divested (Note 5), provides insulation products and services principally in the southeastern United States. Principles of Consolidation The consolidated financial statements include the accounts of the company and all subsidiaries after elimination of significant intercompany transactions and accounts. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash, Cash Equivalents, and Short-Term Investments Cash in excess of daily requirements is invested in time deposits and marketable securities, consisting of taxable and tax exempt variable rate demand notes, included in the balance sheet at market value. The company considers time deposits and marketable securities purchased with an original maturity of three months or less to be cash equivalents. Investments purchased with a maturity of more than three months are considered short-term investments. The carrying amounts of short-term investments at August 31, 1996 and 1995 approximate fair value. At August 31, 1996, short-term investments consisted of preferred stocks. In accordance with the criteria specified by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," these investments were classified as "available for sale." Concentrations of Credit Risk Concentrations of credit risk with respect to receivables are limited due to the wide variety of customers and markets into which the company's products and services are provided, as well as their dispersion across many different geographic areas. As a result, as of August 31, 1996, the company does not consider itself to have any significant concentrations of credit risk. Inventories and Linens in Service Inventories are valued at the lower of cost (on a first-in, first-out basis) or market and consisted of the following at August 31, 1996 and 1995: (In thousands) 1996 1995 Raw materials and supplies ............................... $ 73,236 $ 87,470 Work in progress ......................................... 9,679 9,879 Finished goods ........................................... 86,898 88,440 $169,813 $185,789 Linens in service are recorded at cost and are amortized over their estimated useful lives of 15 to 60 months 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 ($45,029,000 in 1996 and $47,853,000 in 1995) and other intangible assets are being amortized on a straight-line basis over various periods up to 40 years. The company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of goodwill and other long-lived assets or whether the remaining balance of goodwill should be evaluated for possible impairment. The company uses an estimate of related undiscounted net income over the remaining life of the goodwill in measuring whether the goodwill is recoverable. 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 or the useful life of the improvement, whichever is shorter. 24 Page 65 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. Foreign Currency Translation The functional currency for the company's foreign operations is the local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses, net of applicable income taxes, resulting from the translation are included in retained earnings and are excluded from net income. Gains or losses resulting from foreign currency transactions are included in "Other (income) expense, net" in the consolidated statements of income and amounted to gains of $249,000 in 1996 and $201,000 in 1995 and a loss of $379,000 in 1994. Pension and Profit Sharing Plans The company has several pension plans covering hourly and salaried employees. Benefits paid under these plans are based generally on employees' years of service and/or compensation during the final years of employment. The company makes annual contributions to the plans to the extent indicated by actuarial valuations. Plan assets are invested primarily in equity and fixed income securities. Net pension (income) expense for 1996, 1995, and 1994 included the following components: (In thousands) 1996 1995 1994 Service cost of benefits earned during the period $ 2,719 $ 2,648 $ 2,466 Interest cost on projected benefit obligation ... 7,438 7,277 7,262 Return on plan assets ........................... (28,255) (12,178) (1,929) Net amortization and deferral ................... 17,383 2,257 (8,215) Net pension (income) expense .................... $ (715) $ 4 $ (416) The following schedule reconciles the funded status of the plans as of June 1, 1996 and 1995, with amounts reported in the company's balance sheets at August 31, 1996 and 1995: 1996 1995 Plan Accumulated Plan Accumulated Assets Benefit Assets Benefit Exceed Obligation Exceed Obligation Accumulated Exceeds Accumulated Exceeds Benefit Plan Benefit Plan (In thousands) Obligation Assets Obligation Assets Actuarial present value of benefit obligations as of June 1: Vested ..................................................... $ (91,127) $(3,784) $ (77,505) $(3,879) Nonvested .................................................. (4,281) (1,407) (6,585) (90) Accumulated benefit obligation ..................................... (95,408) (5,191) (84,090) (3,969) Effect of projected salary increases ............................... (7,431) (1,640) (6,295) (1,731) Total projected benefit obligation ................................. (102,839) (6,831) (90,385) (5,700) Fair value of plan assets .......................................... 134,426 -- 113,510 -- Plan assets greater (less) than projected benefit obligation ....... 31,587 (6,831) 23,125 (5,700) Unrecognized transition (asset) liability .......................... (9,475) 74 (10,777) 86 Unrecognized prior service cost obligation ......................... 3,056 2,528 2,847 2,262 Unrecognized net loss (gain) ....................................... 6,471 (371) 13,549 (755) Adjustment required to recognize minimum liability ................. -- (918) -- (426) Prepaid (accrued) pension expense at August 31 ..................... $ 31,639 $(5,518) $ 28,744 $(4,533) For all periods presented, the discount rate used to determine the projected benefit obligation is 8 percent, the assumed growth rate of compensation is 5.5 percent, and the expected long-term rate of return on plan assets is 9.5 percent. During 1996, the company implemented the widely used, more conservative GA83 mortality table. The company also has profit sharing and 401(k) plans to which both employees and the company contribute. At August 31, 1996, assets of the 401(k) plans included shares of the company's common stock with a market value of approximately $11,412,000. The company's cost of these plans was $4,595,000 in 1996, $3,810,000 in 1995, and $3,133,000 in 1994. 25 Page 66 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. Postretirement Healthcare and Life Insurance Benefits The company's retiree medical plans are financed entirely by retiree contributions; therefore, the company has no liability in connection with them. Several programs provide limited retiree life insurance benefits. The liability for these plans is not significant. Postemployment Benefits During fiscal 1995, the company adopted Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits," requiring the accrual of the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement. The accrual, which is not material, relates primarily to severance agreements and the liability for life insurance coverage for certain eligible employees. Interest Expense, Net Interest expense, net is comprised primarily of interest expense on long-term debt and short-term line of credit borrowings and interest income on cash, cash equivalents, and short-term investments. Other (Income) Expense, Net Other (income) expense, net is comprised primarily of amortization of intangible assets net of gains resulting from the sale of fixed assets and businesses and casualty loss insurance proceeds. Accounting Standards Yet to Be Adopted During fiscal 1997, the company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121 requires that long-lived assets and certain intangibles be reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In the opinion of management, the adoption of SFAS No. 121 is not expected to have a material impact on the company's financial position or results of operations. Reclassifications Certain amounts in the 1995 and 1994 financial statements and notes have been reclassified to conform with the 1996 presentation. NOTE 2. Long-Term Debt and Lines of Credit Long-term debt at August 31, 1996 and 1995, consisted of the following: (In thousands) 1996 1995 6.5% to 9.25% mortgage notes, payable in installments through 2000 (secured in part by property, plant, and equipment having a net book value of $632,000 at August 31, 1996) $ 148 $ 244 3.55% to 8.5% other notes, payable in installments to 2021 24,818 26,619 24,966 26,863 Less-Amounts payable within one year included in current liabilities 46 87 $24,920 $26,776 The annual maturities of long-term debt are as follows: (In thousands) Amounts Year Ending August 31 1997 $ 46 1998 5,500 1999 25 2000 28 2001 16 Later years 19,351 $24,966 Late in fiscal 1996, the company negotiated a $250,000,000 multi-currency committed credit facility, of which $187,500,000 has been provided through domestic banks and $62,500,000 through foreign banks. The company had no outstanding borrowings under the facility at August 31, 1996. The company has complimentary lines of credit totaling $132,000,000, of which $110,000,000 has been provided domestically and $22,000,000 is available on a multi-currency basis primarily from a European bank. At August 31, 1996 the company had foreign currency short-term bank borrowings equivalent to $6,696,000 at an average interest rate of 4.0%. Under one of the domestic lines of credit, up to $40,000,000 may be used for letters of credit. At August 31, 1996, $16,683,000 in letters of credit associated with the company's self-insurance program (Note 4) was outstanding and $23,317,000 was available under the line of credit. 26 Page 67 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. Long-term debt recorded in the accompanying balance sheets approximates fair value based on the borrowing rates currently available to the company for bank loans with similar terms and average maturities. NOTE 3. Common Stock and Related Matters The company has a shareholder rights plan under which one preferred stock purchase right is presently attached to and trades with each outstanding share of the company's common stock. The rights become exercisable and transferable apart from the common stock ten days after a person or group, without the company's consent, acquires beneficial ownership of, or the right to obtain beneficial ownership of, 20 percent or more of the company's common stock or announces or commences a tender offer or exchange offer that could result in 20 percent ownership (unless such date is extended by the Board of Directors). Once exercisable, each right entitles the holder to purchase one one-hundredth share of Series A Participating Preferred Stock at an exercise price of $80, subject to adjustment to prevent dilution. The rights have no voting power and, until exercised, no dilutive effect on net income per common share. The rights expire on May 19, 1998, and are redeemable under certain circumstances. If a person acquires 20 percent ownership, except in an offer approved by the company under the plan, each right not owned by the acquirer or related parties will entitle its holder to purchase, at the right's exercise price, common stock or common stock equivalents having a market value immediately prior to the triggering of the right of twice that exercise price. In addition, after an acquirer obtains 20 percent ownership, if the company is involved in certain mergers, business combinations, or asset sales, each right not owned by the acquirer or related persons will entitle its holder to purchase, at the right's exercise price, shares of common stock of the other party to the transaction having a market value immediately prior to the triggering of the right of twice that exercise price. The company has 1,000,000 shares of preferred stock authorized, 500,000 of which have been reserved for issuance under the shareholder rights plan. No shares of preferred stock had been issued at August 31, 1996. 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. 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. Under both plans, the options expire ten years from the date of the grant and have an exercise price equal to the fair market value on the date of the grant. Stock option transactions for the stock option plans and stock option agreements during the years ended August 31, 1996, 1995, and 1994 were as follows: 1996 1995 1994 Options outstanding at September 1 1,088,773 820,752 680,139 Granted 513,200 325,400 214,700 Exercised 185,044 23,598 21,705 Canceled 150,886 33,781 52,382 Options outstanding at August 31 1,266,043 1,088,773 820,752 Option price range at August 31 $19.75-$39.75 $19.75-$29.00 $19.75-$29.00 Options exercisable at August 31 466,377 513,665 316,024 Options available for grant at August 31 300,408 657,565 949,184 Potential dilution of earnings per share applicable to these stock options is not significant. In 1996, the Board of Directors adopted the National Service Industries, Inc. Nonemployee Director Deferred Stock Unit Plan under which eligible directors are required to defer into the plan a portion of their annual directors fees and may defer an additional optional amount. At quarterly intervals, participants are granted stock units equal to one-fourth of the annual deferred amount divided by the fair market value at the date of the grant. At each dividend payment date, the deferred stock units are further increased based on the dividend rate and the fair market value of the company's common stock at the dividend payment date. The deferred stock units have no voting rights and vest one year from the date of grant. Upon termination, participants receive a cash payment for vested deferred stock units at the fair market value at that date. At August 31, 1996, participants had been credited with 708 deferred stock units. During fiscal 1996, there was no related compensation expense. 27 Page 68 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. NOTE 4. Commitments and Contingencies Self Insurance It is the policy of the company to self insure for certain insurable risks consisting primarily of physical loss to property; business interruptions resulting from such loss; and workers' compensation, comprehensive general, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. Based on an independent actuary's estimate of the aggregate liability for claims incurred, a provision for claims under the self-insured program is recorded and revised annually. Based on the 1996 actuarial review, reserves relating to prior years were reduced by $14,100,000 as a result of improved claims experience. Expense associated with the program was $13,677,000 in 1996, $22,800,000 in 1995, and $25,588,000 in 1994. 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, 1996, are as follows: (In thousands) Amount Year Ending August 31 1997 $ 9,524 1998 7,389 1999 5,769 2000 4,246 2001 3,462 Later years 9,015 Total minimum lease payments $39,405 Total rent expense was $10,907,000 in 1996, $11,607,000 in 1995, and $10,585,000 in 1994. Litigation The company is involved in various legal matters primarily arising in the normal course of business. In the opinion of management, the company's liability in any of these matters will not have a material adverse effect on its financial condition or results of operations. NOTE 5. Divestitures and Acquisitions In September 1996, the company announced its intention to divest the North Bros. insulation business. The company does not expect the sale to have a material impact on earnings. Acquisitions during 1996 related to the Textile Rental segment and were not material. During 1996 and 1995, the company divested several non-strategic or unprofitable businesses, primarily in the Textile Rental segment, generating cash of $15,250,000 and $14,044,000, respectively. In May 1995, the company acquired the assets of Infranor Canada Inc., a Canadian lighting products manufacturer based in Saint Hyacinthe, Quebec. The operating results of Infranor were included in the Lighting Equipment segment for the fourth quarter of fiscal 1995. Full-year acquisition spending of $2.7 million also included several small purchases for the Textile Rental segment. 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. NOTE 6. Income Taxes Income taxes are reconciled with the Federal statutory rate as follows: (In thousands) 1996 1995 1994 Federal income tax computed at statutory rate $56,647 $52,674 $46,269 Increase (decrease) in taxes: State income tax, net of Federal income tax benefit 5,368 4,308 4,693 Other, net (1,315) (582) (1,462) $60,700 $56,400 $49,500 The following summarizes the components of income tax expense: (In thousands) 1996 1995 1994 Provision for current Federal taxes $50,899 $55,921 $40,253 Provision for current state taxes 8,258 6,628 7,220 Provision (credit) for deferred taxes 1,543 (6,149) 2,027 $60,700 $56,400 $49,500 28 Page 69 Exhibit 13 Notes to Consolidated Financial Statements (continued) National Service Industries, Inc. Components of the net deferred income tax liability at August 31, 1996 and 1995 include: (In thousands) 1996 1995 Deferred tax liabilities: Depreciation $ 43,790 $ 45,125 Safe harbor lease 39,030 43,303 Amortization of linens 19,116 11,933 Pension 10,906 7,522 Total deferred tax liabilities 112,842 107,883 Deferred tax assets: Self insurance (30,249) (34,551) Deferred compensation (7,966) (3,706) Bonuses (2,816) (5,145) Foreign tax losses (2,483) (4,414) Other assets (8,133) (4,532) Total deferred tax assets (51,647) (52,348) Net deferred tax liability $ 61,195 $ 55,535 At August 31, 1996, the company had foreign net operating loss carryforwards of $12,974,000 expiring in fiscal years 1997 through 2004. Current income taxes payable were $5,374,000 and $11,257,000 at August 31, 1996 and 1995, respectively. NOTE 7. Quarterly Financial Data (Unaudited) Sales and Income (In thousands, except Service Gross before Net Earnings earnings per share) Revenues Profit Taxes Income per Share 1996 1st Quarter $492,550 $190,747 $37,095 $23,269 $ .48 2nd Quarter 482,206 180,258 30,720 19,250 .40 3rd Quarter(1) 516,870 202,378 44,336 27,677 .58 4th Quarter(1) 521,936 202,393 49,697 30,952 .66 1995 1st Quarter $480,984 $185,951 $33,735 $21,114 $ .43 2nd Quarter 465,810 174,793 28,031 17,578 .36 3rd Quarter 505,798 196,903 41,064 25,627 .53 4th Quarter(2) 518,035 204,424 47,667 29,778 .62 (1) Results for the third and fourth quarters include favorable self-insurance reserve adjustments of $6,302,000 and $7,644,000, respectively. (2) Results include favorable self-insurance reserve adjustment of $4,592,000. NOTE 8. Business Segment Information Depreciation Capital Sales and and Expenditures Service Operating Identifiable Amortization Including (In thousands) Revenues Profit(Loss) Assets Expense Acquisitions 1996 Lighting Equipment $ 867,771 $ 76,085 $ 332,006 $15,224 $20,800 Textile Rental(1) 530,625 42,198 420,169 29,753 28,418 Chemical 367,682 38,611 170,327 8,127 5,744 Other 247,484 15,283 80,694 4,151 6,980 2,013,562 172,177 1,003,196 57,255 61,942 Corporate (8,764) 91,450 1,173 3,624 Interest Expense, net (1,565) $ 2,013,562 $ 161,848 $1,094,646 $58,428 $65,566 1995 Lighting Equipment $ 851,363 $ 61,313 $ 340,187 $14,205 $23,098 Textile Rental(1) 546,447 51,016 422,108 30,787 28,144 Chemical 352,670 35,227 169,376 6,711 4,527 Other 220,147 14,351 83,400 3,827 4,120 1,970,627 161,907 1,015,071 55,530 59,889 Corporate (9,762) 116,275 1,600 21 Interest Expense, net (1,648) $ 1,970,627 $ 150,497 $1,131,346 $57,130 $59,910 1994 Lighting Equipment $ 763,592 $ 50,092 $ 323,335 $15,460 $13,183 Textile Rental(1) 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 (8,964) 100,396 1,248 339 Interest Expense, net (1,960) $ 1,881,864 $ 132,198 $1,101,261 $60,548 $42,518 (1) Textile Rental segment operating profit includes one-time gains, primarily resulting from the sale of fixed assets and businesses, of $7,800,000 in 1996, $6,300,000 in 1995, and $1,250,000 in 1994. 29 Page 70 Exhibit 13 Report of Management National Service Industries, Inc. The management of National Service Industries, Inc. is responsible for the integrity and objectivity of the financial information in this annual report. These financial statements are prepared in conformity with generally accepted accounting principles, using informed judgements and estimates where appropriate. The information in other sections of this report is consistent with the financial statements. The company maintains a system of internal controls and accounting policies and procedures designed to provide reasonable assurance that assets are safeguarded and transactions are executed and recorded in accordance with management's authorization. The audit committee of the Board of Directors, composed entirely of outside directors, is responsible for monitoring the company's accounting and reporting practices. The audit committee meets regularly with management, the internal auditors, and the independent public accountants to review the work of each and to assure that each performs its responsibilities. Both the internal auditors and Arthur Andersen LLP have unrestricted access to the audit committee allowing open discussion, without management's presence, on the quality of financial reporting and the adequacy of internal accounting controls. /s/ James S. Balloun James S. Balloun Chairman, President, and Chief Executive Officer /s/ Brock Hattox Brock Hattox Executive Vice President and Chief Financial Officer /s/ Mark R. Bachmann Mark R. Bachmann Vice President and Controller Report of Independent Public Accountants To the Stockholders of National Service Industries, Inc.: We have audited the accompanying consolidated balance sheets of National Service Industries, Inc. (a Delaware corporation) and subsidiaries as of August 31, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1996. 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, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1996 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Atlanta, Georgia October 21, 1996 30 Page 71 Exhibit 13 Management's Discussion and Analysis of Financial Condition and Results of Operations National Service Industries, Inc. Financial Condition National Service Industries' financial condition remained sound at August 31, 1996. Net working capital was $409.0 million, down from $437.8 million at August 31, 1995, and the current ratio was 3.1, compared with 3.2 at last year end. Cash and short-term investments were reduced to $59.2 million, from $83.0 million at the prior year end, as the company accelerated its share repurchases. During 1996, the company invested $66.1 million in capital expenditures and acquisitions. The percent of short-term and long-term debt to total capitalization was 4.2 percent at August 31, 1996 and 4.3 percent at the prior year end. Cash provided by operating activities rose to $153.0 million from $145.9 million in 1995 and $133.5 million in 1994. The 1996 improvement was due in large part to better management of inventories and higher net income. The improvement in 1995 resulted primarily from a lower rate of investment in inventories and linens in service and a decrease in prepayments. Capital expenditures, exclusive of acquisition spending, were $65.5 million in 1996, $58.8 million in 1995, and $42.5 million in 1994. During 1996, Lighting Equipment segment spending included expansion of its production facility in Monterrey, Mexico, as well as continued investment in equipment replacements, process improvements, and tooling for new products. The Textile Rental segment invested substantially in facility improvements and replacement of equipment and vehicles. In the prior year, the Lighting Equipment segment invested in manufacturing equipment replacements and improvements and the construction of its Mexican production facility, which began production in the fourth quarter of 1995. Textile Rental segment expenditures for 1995 included fleet upgrades, facility improvements, and information system enhancements. Cash payments in connection with acquisitions totaled $.6 million in 1996, $2.7 million in 1995, and $.6 million in 1994. All three years included spending for small acquisitions in the Textile Rental segment. In 1995, the company acquired the assets of Infranor Canada Inc., a Canadian lighting products manufacturer based in Saint Hyacinthe, Quebec. The operating results of this acquisition were included in the Lighting Equipment segment beginning with the fourth quarter of fiscal 1995. During 1996 and 1995, the company divested several non-strategic businesses, primarily in the Textile Rental segment, generating cash of $15.3 million and $14.0 million, respectively. During 1996, the company distributed 129 percent of net income to shareholders through dividends and share repurchases. The company accelerated its share repurchase program, spending $75.2 million for the full 2,000,000 shares authorized annually. Last year, the company spent $24.1 million on the repurchase of approximately 949,000 shares of its common stock. Dividend payments totaled $55.3 million, or $1.15 per share, in 1996, $54.2 million, or $1.11 per share, in 1995, and $53.0 million, or $1.07 per share, in 1994. The fiscal 1996 dividend of $1.15 per share was a 3.6 percent increase. For the periods presented, capital expenditures, working capital needs, dividends, acquisitions, and share repurchases were financed primarily with internally generated funds. European operations were supplemented by short-term borrowings in the European market. The Infranor acquisition was a cash transaction. Contractual commitments for capital and acquisition spending for fiscal 1997 total $17.3 million. The company expects actual capital expenditures in 1997 to be somewhat higher than the 1996 level. Late in fiscal 1996, the company negotiated a $250 million multi-currency committed credit facility, of which 31 Page 72 Exhibit 13 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Service Industries, Inc. $187.5 million has been provided through domestic banks and $62.5 million through foreign banks. The company has complimentary lines of credit totaling $132 million, of which $110 million has been provided domestically and $22 million is available on a multi-currency basis primarily from a European bank. Current liquid assets, internally generated funds, and the available credit are expected to meet most of the anticipated general operating cash requirements for the next twelve months. Results of Operations National Service Industries posted a record $2.01 billion in revenues for the fiscal year ended August 31, 1996. Total year revenues increased $42.9 million, or 2.2 percent, from $1.97 billion in 1995, primarily as a result of higher pricing in the Lighting Equipment segment and volume gains across the Chemical and Envelope segments. Fiscal 1995 revenues rose 4.7 percent from 1994's $1.88 billion, as a result of volume gains in the Lighting Equipment and Chemical segments and pricing improvements in the Envelope segment. Adjusted for the divestiture of the Marketing Services division, which contributed $32 million to 1994 sales, the 1995 sales gain was 6.5 percent. Net income for fiscal 1996 increased $7.1 million, or 7.5 percent, to a record $101.1 million, or $2.11 per share. Earnings per share grew at the greater rate of 9.2 percent, benefiting from an average of 755,000 fewer shares outstanding for the year. The performance of all segments was enhanced by improved workers' compensation claims experience, which resulted in a $14.1 million reduction in expense. For fiscal 1995, net income grew 13.8 percent to $94.1 million, or $1.93 per share. Lighting Equipment segment sales grew 1.9 percent to a record $868 million from $851 million in 1995. Pricing gains were offset somewhat by lower unit volumes. Sales for 1995 increased 11.5 percent from 1994 on the strength of volume gains. For 1996, operating profit advanced 24.1 percent to 8.8 percent of revenues, compared with 7.2 percent of revenues in 1995 and 6.6 percent in 1994. Current-year margin improvements resulted from a more favorable product mix and lower manufacturing costs. In 1995, higher unit volumes more than compensated for higher product and selling costs. Textile Rental segment revenues declined 2.9 percent to $531 million largely due to lost sales from previously divested branches and continued price pressure. Revenues for 1995 were $546 million, compared with $544 million in 1994, and reflected pricing gains offset by declining volumes, particularly in the hospital market. For 1996, operating income decreased 17.3 percent to 8.0 percent of revenues, compared with 9.3 percent of revenues in 1995 and 9.0 percent in 1994. The decline resulted from lower selling prices and cost increases for labor and merchandise, which were partially offset by lower workers' compensation costs and one-time gains on asset sales. The improvement in 1995 was due to reduced labor and workers' compensation costs and gains related to plant divestitures. Chemical segment revenues advanced 4.3 percent to $368 million, from $353 million in 1995, which was a 6.1 percent increase from 1994's $332 million. The gains in both periods resulted from higher unit volumes, predominantly in domestic operations. Operating income grew 9.6 percent to 10.5 percent of revenues, from 10.0 percent of revenues in 1995 and 10.6 percent in 1994. Margins benefited from the volume 32 Page 73 Exhibit 13 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Service Industries, Inc. increases and lower material and operating costs. The margin decline in 1995 resulted from the segment's increased investment in recruiting and training sales representatives and because of increases in certain raw material costs. The Envelope and Insulation Service businesses combined for a 12.4 percent sales increase. Revenues were $247 million in 1996, $220 million in 1995, and $242 million in 1994. The decline in 1995 resulted from the divestiture of Marketing Services. Operating profit increased to $15.3 million in 1996, largely as a result of volume increases in the Envelope business. Operating profit was $14.4 million in 1995 and $8.8 million in 1994. The 1995 profit gain was due primarily to margin improvements on pricing gains. The company recently announced that it is in the process of selling the North Bros. insulation service business. The company does not expect the sale to have a material impact on earnings. 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 $32 million in 1994 and an immaterial operating loss. Corporate income increased in 1996 and declined in 1995 mainly because of 1995 accruals for higher business taxes. During both 1996 and 1995, the company benefited from higher average levels of short-term investments although interest rates declined somewhat in 1996. Interest expense increased only slightly in 1996 and 1995 compared with 1994. Consolidated income before taxes and net income grew 7.5 percent in 1996 compared with 13.8 percent for both measures in 1995. The year-to-year decline was due primarily to a lower rate of growth in segment operating profits. The provision for income taxes was 37.5 percent of pretax income in 1996 and 1995, compared with 37.4 percent in 1994. During fiscal 1997, the company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121 requires that long-lived assets and certain intangibles be reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In the opinion of management, the adoption of SFAS No. 121 is not expected to have a material impact on the company's financial position or results of operations. Outlook With a new management team, NSI has implemented an economic profit-based compensation program, a financial strategy geared toward leverage, and in-depth strategic reviews to establish an environment that fosters profitable growth. The company has begun to measure and reward its operating units on economic profit to better align their actions with the interests of shareholders. With 1997 operating plan reviews completed, continued growth is anticipated in the Lighting Equipment, Chemical, and Envelope segments, while the Textile Rental segment's profit forecast is flat as the improving operating rate of the segment is not expected to offset 1996's favorable one-time events. These factors are expected to result in modest 1997 earnings per share growth and continued growth in economic profit. 33 Page 74 Exhibit 13 Ten-Year Financial Summary National Service Industries, Inc. (Dollar amounts in thousands, except per-share data) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 Operating Results Net sales of products $1,482,937 $1,424,180 $1,337,410 $1,257,906 $1,189,684 $1,164,181 $1,250,833 $1,183,666 $1,093,163 $1,032,145 Service revenues ..... 530,625 546,447 544,454 546,916 444,127 437,534 396,981 355,845 321,025 294,713 Total revenues 2,013,562 1,970,627 1,881,864 1,804,822 1,633,811 1,601,715 1,647,814 1,539,511 1,414,188 1,326,858 Cost of products sold 933,405 908,869 875,055 832,264 810,552 791,355 832,867 800,385 741,383 690,689 Cost of services ..... 304,381 299,687 286,519 281,551 236,474 240,376 219,673 198,262 179,793 159,019 Selling and administrative expenses(2) ......... 616,513 601,143 576,463 556,162 462,240 456,622 438,949 397,160 361,845 350,466 Interest expense (income),net (2)..... 1,565 1,648 2,788 3,645 (837) (4,332) (3,712) (3,805) (2,429) (1,315) Restructuring expense -- -- -- -- -- 63,467 -- -- -- -- Other (income) expense,net(2)....... (4,150) 8,783 8,841 11,684 8,474 5,591 4,322 (509) 374 (4,391) Income before taxes .. 161,848 150,497 132,198 119,516 116,908 48,636 155,715 148,018 133,222 132,390 Income taxes ......... 60,700 56,400 49,500 44,400 42,800 16,400 56,000 53,300 47,100 56,700 Net income ...........$ 101,148 $ 94,097 $ 82,698 $ 75,116 $ 74,108 $ 32,236 $ 99,715 $ 94,718 $ 86,122 $ 75,690 Per-Share Data(1) Net income ...........$ 2.11 $ 1.93 $ 1.67 $ 1.52 $ 1.50 $ .65 $ 2.02 $ 1.92 $ 1.75 $ 1.54 Cash dividends ....... 1.15 1.11 1.07 1.03 .99 .95 .90 .82 .73 .62 Stockholders' equity . 15.45 15.41 14.77 14.21 13.79 13.33 13.68 12.44 11.33 10.31 Financial Ratios Current ratio ........ 3.1 3.2 3.2 2.9 3.5 3.4 4.5 4.8 5.0 5.1 Net income as a percent of sales ..... 5.0% 4.8% 4.4% 4.2% 4.5% 2.0% 6.1% 6.2% 6.1% 5.7% Return on average stockholders' equity .. 13.6% 13.0% 11.6% 10.9% 11.1% 4.8% 15.6% 16.3% 16.3% 15.7% Dividends as a percent of current-year earnings 54.6% 57.6% 64.1% 67.9% 66.3% 146.2% 44.6% 42.6% 41.8% 40.2% Percent of debt to total capitalization . 4.2% 4.3% 4.3% 4.7% 4.2% 5.0% 4.2% 3.5% 3.9% 4.3% 34 Page 75 Exhibit 13 Ten-Year Financial Summary (continued) National Service Industries, Inc. (Dollar amounts in thousands, except per-share data) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 Financial Position Increase (decrease) in: Cash and cash equivalents ....$ (20,740)$ 20,783 $ 42,766 $ (85,284)$ 27,617 $ (50,437)$ 23,433 $ 14,612 $ (24,786)$ 16,318 Short-term investments (3,047) 1,019 (2,197) (3,736) (5,551) 12,813 (27,247) (19,633) 35,971 5,160 Net working capital ... 408,955 437,840 413,114 363,575 399,893 386,306 447,800 450,185 439,990 416,801 Short-term debt ......$ 6,742 $ 6,486 $ 5,765 $ 6,196 $ 1,434 $ 3,254 $ 2,253 $ 1,372 $ 1,237 $ 1,443 Long-term debt ....... 24,920 26,776 26,863 28,418 28,359 31,373 27,465 20,765 21,391 21,466 Total debt ........... 31,662 33,262 32,628 34,614 29,793 34,627 29,718 22,137 22,628 22,909 Stockholders' equity . 718,008 744,404 727,385 704,023 682,954 660,567 675,444 612,668 558,160 508,219 Capitalization .......$ 749,670 $ 777,666 $ 760,013 $ 738,637 $ 712,747 $ 695,194 $ 705,162 $ 634,805 $ 580,788 $ 531,128 Other Data Capital expenditures (including acquisitions)........$ 65,566 $ 59,910 $ 42,508 $ 82,171 $ 49,789 $ 90,229 $ 82,932 $ 66,491 $ 55,394 $ 45,258 Depreciation and amortization.......... 58,428 57,130 60,548 62,097 53,816 50,249 42,821 36,260 31,037 27,333 Total assets ..........1,094,646 1,131,346 1,101,261 1,081,510 1,036,908 1,008,319 960,622 886,358 823,906 758,659 Deferred income taxes . 63,347 65,756 73,319 78,286 87,150 96,627 99,277 101,320 103,021 102,374 Self-insurance reserves 63,369 67,830 61,081 56,335 47,638 38,428 15,222 15,213 15,016 13,574 Other long-term liabilities .......... 27,576 24,010 22,940 27,110 28,677 22,015 16,067 17,964 15,330 12,042 Weighted average number of shares outstanding (in thousands)(1)..... 47,941 48,696 49,547 49,556 49,539 49,540 49,389 49,255 49,258 49,278 Shareholders .......... 6,281 6,655 7,034 7,262 7,554 7,996 8,248 8,459 8,851 9,164 Employees ............. 20,600 21,100 22,000 22,200 20,100 20,900 21,800 20,800 20,400 19,400 Use of Total Revenues Salaries and wages ...$ 580,571 $ 568,616 $ 565,859 $ 572,163 $ 502,709 $ 501,502 $ 491,334 $ 465,522 $ 428,325 $ 399,968 Materials and supplies 875,658 832,668 783,610 760,551 700,338 683,871 713,310 668,655 616,223 574,179 Other operating expenses 340,563 364,849 347,600 299,977 273,330 258,919 246,288 219,270 201,478 188,414 Restructuring expense . -- -- -- -- -- 63,467 -- -- -- -- Taxes and licenses .... 115,621 110,397 102,097 97,015 83,326 59,889 97,167 91,346 82,040 88,607 Dividends paid ........ 55,272 54,156 53,042 51,041 49,105 47,124 44,506 40,389 35,960 30,428 Retained earnings ..... 45,877 39,941 29,656 24,075 25,003 (13,057) 55,209 54,329 50,162 45,262 $2,013,562 $1,970,627 $1,881,864 $1,804,822 $1,633,811 $1,601,715 $1,647,814 $1,539,511 $1,414,188 $1,326,858 (1)Restated to reflect stock splits of 3 for 2 effective January 13, 1987 (2)Prior-year amounts have been restated to conform to current-year presentation. 35 Page 76 Exhibit 13 Shareholder Information Executive Offices NSI Center 1420 Peachtree Street, N.E. Atlanta, Georgia 30309 (404) 853-1000 Transfer Agent and Registrar Wachovia Bank of North Carolina, N.A. P.O. Box 8217 Boston, Massachusetts 02266-8217 (800) 633-4236 Independent Public Accountants Arthur Andersen LLP 133 Peachtree Street, N.E. Atlanta, Georgia 30303 (404) 658-1776 Annual Meeting 10:00 a.m., Wednesday, January 8, 1997 High Museum of Art 1280 Peachtree Street, N.E. Atlanta, Georgia 30309 Listing New York Stock Exchange. Ticker Symbol: NSI. Shareholders of Record The number of shareholders of record holding NSI common stock was 6,281 as of September 27, 1996. Reports Available to Stockholders Copies of the following company reports may be obtained, without charge: 1996 Annual Report to the Securities and Exchange Commission, filed on Form 10-K; andQuarterly Reports to the Securities and Exchange Commission, filed on Form 10-Q. Requests should be directed to: National Service Industries, Inc. Attention: Investor Relations 1420 Peachtree Street, N.E. Atlanta, Georgia 30309 (404) 853-1216 Dividend Reinvestment Plan An automatic dividend reinvestment plan is available to all stockholders of record. Dividends can be automatically reinvested in NSI common stock. Participants also may add cash for the purchase of additional shares. For more information, contact the Transfer Agent at (800) 633-4236. Cash Dividends NSI now offers direct deposit of dividends to your bank, savings, or money market account. For more information, contact the Transfer Agent at (800) 633-4236. Common Share Prices and Dividends per Share Dividends Price per Share Paid per High Low Share 1996 First Quarter .................... $32 3/4 $28 5/8 $ .28 Second Quarter ................... 35 1/4 30 3/4 .29 Third Quarter .................... 39 7/8 32 1/2 .29 Fourth Quarter ................... 40 1/4 37 1/2 .29 1995 First Quarter .................... $27 3/8 $25 3/8 $ .27 Second Quarter ................... 27 1/2 24 7/8 .28 Third Quarter .................... 29 1/8 26 1/2 .28 Fourth Quarter ................... 30 5/8 28 1/8 .28 The above common share prices are as quoted on the New York Stock Exchange.