Page 1 of 70
Exhibit Index on Page 14
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For quarter ended November 30, 1998 Commission file number 1-3208
NATIONAL SERVICE INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 58-0364900
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
1420 Peachtree Street, N. E., Atlanta, Georgia 30309-3002
(Address of Principal Executive Offices) (Zip Code)
(404) 853-1000
(Registrant's Telephone Number, Including Area Code)
None
(Former Name,Former Address and Former Fiscal Year,if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes - X No -
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - $1.00 Par Value - 41,174,672 shares as of December 31, 1998.
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS -
NOVEMBER 30, 1998 AND AUGUST 31, 1998 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9-11
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
Page 3
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
November 30, August 31,
1998 1998
----------------- -------------
Assets (Unaudited)
Current Assets:
Cash and cash equivalents $ 32,041 $ 19,146
Short-term investments - -
Receivables, less reserves for doubtful accounts of $5,910 at November 30, 1998
and $4,631 at August 31, 1998 306,263 307,140
Inventories, at the lower of cost (on a first-in, first-out basis) or market 219,633 197,950
Linens in service, net of amortization 58,086 58,826
Deferred income taxes 14,861 17,542
Prepayments 12,121 6,447
----------------- -------------
Total Current Assets 643,005 607,051
----------------- -------------
Property, Plant, and Equipment, at cost:
Land 21,418 21,450
Buildings and leasehold improvements 150,424 150,326
Machinery and equipment 496,687 485,271
----------------- -------------
Total Property, Plant, and Equipment 668,529 657,047
Less-Accumulated depreciation and amortization 392,449 385,176
----------------- -------------
Property, Plant, and Equipment-net 276,080 271,871
----------------- -------------
Other Assets:
Goodwill and other intangibles 111,096 88,280
Other 41,952 43,482
----------------- -------------
Total Other Assets 153,048 131,762
================= =============
Total Assets $1,072,133 $1,010,684
================= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 100 $ 98
Notes payable 8,257 7,883
Accounts payable 104,349 95,217
Accrued salaries, commissions, and bonuses 35,050 34,820
Current portion of self-insurance reserves 12,212 11,253
Accrued taxes payable 12,945 -
Other accrued liabilities 74,438 72,724
----------------- -------------
Total Current Liabilities 247,351 221,995
----------------- -------------
Long-Term Debt, less current maturities 106,074 78,092
----------------- -------------
Deferred Income Taxes 39,552 40,404
----------------- -------------
Self-Insurance Reserves, less current portion 43,497 44,573
----------------- -------------
Other Long-Term Liabilities 49,143 46,719
----------------- -------------
Stockholders' Equity:
Series A participating preferred stock, $.05 stated value, 500,000 shares
authorized, none issued
Preferred stock, no par value, 500,000 shares authorized, none issued
Common stock, $1 par value, 80,000,000 shares authorized, 57,918,978
shares issued 57,919 57,919
Paid-in capital 28,953 28,521
Retained earnings 916,825 903,974
Accumulated other comprehensive income items (9,324) (11,357)
----------------- -------------
994,373 979,057
Less-Treasury stock, at cost (16,646,273 shares at November 30, 1998 and
16,457,340 shares at August 31, 1998) 407,857 400,156
----------------- -------------
Total Stockholders' Equity 586,516 578,901
================= =============
Total Liabilities and Stockholders' Equity $1,072,133 $1,010,684
================= =============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
Page 4
National Service Industries, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED
NOVEMBER 30
-----------------------------
1998 1997
------------- -------------
Sales and Service Revenues:
Net sales of products $ 443,457 $ 409,518
Service revenues 75,469 78,066
------------- -------------
Total Revenues 518,926 487,584
------------- -------------
Costs and Expenses:
Cost of products sold 266,996 249,091
Cost of services 43,737 45,148
Selling and administrative expenses 164,912 152,628
Interest (income) expense, net 2,342 (2,002)
Other expense, net 9 364
------------- -------------
Total Costs and Expenses 477,996 445,229
------------- -------------
Income before Provision for Income Taxes 40,930 42,355
Provision for Income Taxes 15,226 15,687
------------- -------------
Net Income $ 25,704 $ 26,668
============= =============
Per Share:
Basic earnings per share $ .62 $ .61
============= =============
Basic Weighted Average Number of Shares Outstanding 41,407 43,652
============= =============
Diluted earnings per share $ .62 $ .60
============= =============
Diluted Weighted Average Number of Shares Outstanding 41,614 44,104
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 5
National Service Industries, Inc. and subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
THREE MONTHS ENDED
NOVEMBER 30
-----------------------------
1998 1997
------------- -------------
Cash Provided by (Used for) Operating Activities
Net income $ 25,704 $ 26,668
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization 14,444 11,831
Provision for losses on accounts receivable 1,430 1,172
Gain on the sale of property, plant, and equipment (60) (2,106)
Gain on the sale of businesses - (1,011)
Change in noncurrent deferred income taxes (853) 8,965
Change in assets and liabilities net of effect of acquisitions and divestitures-
Receivables 2,854 (3,716)
Inventories and linens in service, net (17,045) (19,795)
Deferred income taxes 2,681 (5,542)
Prepayments and other (5,453) (3,529)
Accounts payable and accrued liabilities 19,564 (31,056)
Self-insurance reserves and other long-term liabilities 1,348 (2,616)
------------- ---------------
Net Cash Provided by (Used for) Operating Activities 44,614 (20,735)
------------- ---------------
Cash Provided by (Used for) Investing Activities
Change in short-term investments - 53,216
Purchases of property, plant, and equipment (15,284) (14,034)
Sale of property, plant, and equipment 362 1,499
Sale of businesses - 1,440
Acquisitions (28,498) (6,077)
Change in other assets 1,433 1,809
------------- ---------------
Net Cash Provided by (Used for) Investing Activities (41,987) 37,853
------------- ---------------
Cash Provided by (Used for) Financing Activities
Borrowings of notes payable, net 374 109
Borrowings (repayments) of long-term debt, net 27,984 (25)
Purchase of treasury stock, net (7,270) (52,836)
Cash dividends paid (12,853) (13,301)
------------- ---------------
Net Cash Provided by (Used for) Financing Activities 8,235 (66,053)
------------- ---------------
Effect of Exchange Rate Changes on Cash 2,033 (187)
------------- ---------------
Net Change in Cash and Cash Equivalents 12,895 (49,122)
Cash and Cash Equivalents at Beginning of Period 19,146 57,123
------------- ---------------
Cash and Cash Equivalents at End of Period $ 32,041 $ 8,001
============= ===============
Supplemental Cash Flow Information:
Income taxes paid (received) during the period $ (419) $ 38,017
Interest paid during the period 2,742 1,822
Noncash Investing and Financing Activities:
Noncash aspects of acquisitions--
Liabilities assumed or incurred $ 5,418 $ 2,061
Treasury stock issued 845 -
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 6
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share and per share data)
1. BASIS OF PRESENTATION:
The interim consolidated financial statements included herein have been prepared
by the company without audit and the condensed consolidated balance sheet as of
August 31, 1998 has been derived from audited statements. These statements
reflect all adjustments, all of which are of a normal, recurring nature, which
are, in the opinion of management, necessary to present fairly the consolidated
financial position as of November 30, 1998, the consolidated results of
operations for the three months ended November 30, 1998 and 1997, and the
consolidated cash flows for the three months ended November 30, 1998 and 1997.
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the company's Annual Report on Form 10-K for the fiscal year
ended August 31, 1998.
The results of operations for the three months ended November 30, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year
because the company's revenues and income are generally higher in the second
half of its fiscal year and because of the uncertainty of general business
conditions.
2. BUSINESS SEGMENT INFORMATION:
Three Months Ended November 30, 1998 and 1997
---------------------------------------------------------
Sales and Service
Revenues Operating Profit (Loss) Identifiable Assets
------------------------ -------------------------- ---------------------------------
November 30, August 31,
1998 1997 1998 1997 1998 1998
----------- ----------- ----------- ----------- ----------------- ------------
Lighting Equipment $ 284,077 $ 268,658 $ 29,479 $ 27,637 $ 450,919 $ 397,962
Chemical 116,744 105,859 8,536 8,614 228,169 235,269
Textile Rental 75,469 78,066 6,719 6,131 197,274 193,347
Envelope 42,636 35,001 3,536 2,534 106,743 103,087
----------- ----------- ----------- ----------- ------------- ------------
$ 518,926 487,584 48,270 44,916 983,105 929,665
=========== ===========
Corporate (4,998) (4,563) 89,028 81,019
Interest income(expense), net (2,342) 2,002
----------- ----------- ------------- ------------
Total $ 40,930 $ 42,355 $ 1,072,133 $ 1,010,684
=========== =========== ============= ============
3. INVENTORIES:
Major classes of inventory as of November 30, 1998 and August 31, 1998 were as
follows:
November 30, August 31,
1998 1998
------------ ------------
Raw Materials and Supplies $ 87,282 $ 78,730
Work-in-Process 10,616 10,725
Finished Goods 121,735 108,495
------------ ------------
Total $ 219,633 $ 197,950
============ ============
Page 7
4. EARNINGS PER SHARE
During the quarter ended February 28, 1998, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Prior
period amounts have been restated in accordance with this Statement. Basic
earnings per share is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed similarly but reflects the
potential dilution that could occur if dilutive options were exercised. The
following table calculates basic earnings per common share and diluted earnings
per common share at November 30:
Three Months Ended
November 30
------------------------------
1998 1997
------------ ------------
Basic earnings per common share:
Net income $ 25,704 $ 26,668
Basic weighted average shares outstanding, including shares
contingently issuable (in thousands) 41,407 43,652
============ ============
Basic earnings per common share $ .62 $ .61
============ ============
Diluted earnings per common share:
Net income $ 25,704 $ 26,668
Basic weighted average shares outstanding (in thousands) 41,407 43,652
Add - Shares of common stock issuable upon assumed
exercise of dilutive stock options (in thousands) 207 452
------------ ------------
Diluted weighted average shares outstanding (in thousands) 41,614 44,104
------------ ------------
Diluted earnings per common share $ .62 $ .60
============ ============
5. COMPREHENSIVE INCOME
The company adopted SFAS No. 130, "Reporting Comprehensive Income," in the first
quarter of fiscal 1999. SFAS No. 130 requires the reporting of a measure of all
changes in equity of an entity that result from recognized transactions and
other economic events other than transactions with owners in their capacity as
owners. Other comprehensive income (loss) for the quarters ended November 30,
1998 and 1997 includes only foreign currency translation adjustments. The
calculation of comprehensive income is as follows:
Three Months Ended
November 30
----------------------------
1998 1997
----------- -----------
Net income $ 25,704 $ 26,668
Other comprehensive income (loss) 2,033 (187)
----------- -----------
Comprehensive Income $ 27,737 $ 26,481
=========== ===========
6. ENVIRONMENTAL MATTERS
The company's operations, as well as other similar operations, are subject to
comprehensive laws and regulations relating to the generation, storage,
handling, transportation, and disposal of hazardous substances and solid and
hazardous wastes and to the remediation of contaminated sites. Permits and
environmental controls are required for certain of the company's operations to
prevent or reduce air and water pollution, and these permits are subject to
modification, renewal, and revocation by issuing authorities. The company
believes that it is in substantial compliance with all material environmental
laws, regulations, and permits. On an ongoing basis, the company incurs capital
and operating costs relating to environmental compliance. Environmental laws and
regulations have generally become stricter in recent years, and the cost of
responding to future changes may be substantial.
Page 8
The company's environmental reserves totaled $11,300 and $12,600 at November 30,
1998 and August 31, 1998, respectively. The actual cost of environmental issues
may be substantially lower or higher than that reserved due to the difficulty in
estimating such costs, potential changes in the status of government
regulations, and the inability to determine the extent to which contributions
will be available from other parties. The company does not believe that any such
amount below or in excess of that accrued is reasonably estimable.
Certain environmental laws, such as Superfund, can impose liability for the
entire cost of site remediation upon each of the current or former owners or
operators of a site or parties who sent waste to a site where a release of a
hazardous substance has occurred regardless of fault or the lawfulness of the
original disposal activity. Generally, where there are a number of financially
viable potentially responsible parties ("PRPs"), liability has been apportioned
based on the type and amount of waste disposed of by each party at such disposal
site and the number of financially viable parties, although no assurance can be
given as to any particular site.
The company is currently a party to, or otherwise involved in, legal proceedings
in connection with several state and federal Superfund sites, two of which are
located on property owned by the company. Except for the Crymes Landfill matter
in Georgia, the company believes its liability is de minimis at each of the
sites which it does not own where it has been named as a PRP. At the Crymes
Landfill Site, since the matter is currently in the investigative phase, the
company does not know whether its liability is de minimis but believes that its
exposure at the site is not likely to result in a material adverse effect on the
company. For the property which the company owns on Seaboard Industrial
Boulevard in Atlanta, Georgia, the company has agreed to conduct an
investigation on its and adjoining properties pursuant to the Georgia Hazardous
Site Response Act. Until that investigation is completed, the company will not
be able to determine if remediation will be required, if the company will be
solely responsible for the cost of such remediation, or whether such cost is
likely to result in a material adverse effect on the company. For the property
which the company owns on East Paris Street in Tampa, Florida, the company has
been requested by the State of Florida to clean up chlorinated solvent
contamination in the groundwater on the property and on surrounding property
known as Seminole Heights Solvent Site and to reimburse costs already incurred
by the State of Florida in connection with such contamination. The company
believes that it has a strong defense due to likely off-site sources of the
contamination and because contamination from the property, if any, was due to
prior owners and not the company's operations. At this time, it is too early to
quantify the company's potential exposure or the likelihood of an adverse
result.
The company is currently evaluating emissions of volatile organic compounds from
its manufacturing operations in the Atlanta area to determine whether it will
need to install pollution control equipment or modify its operations to comply
with federal and state air pollution regulations. Until the current evaluations
are completed, the company is not able to quantify the possible cost of
compliance. However, based upon currently available information, the company
does not expect any expenditures which may have to be made to achieve compliance
to be material.
In connection with the sale of the North Bros. business and 29 of the company's
textile rental plants in 1997, the company has retained certain environmental
liabilities. The company has received notice from the buyer of the textile
rental plants of the alleged presence of perchloroethylene contamination on one
of the properties involved in the sale. The company has since asserted an
indemnification claim against the company from which it bought the property. At
this time, it is too early to quantify the company's potential exposure in this
matter, the likelihood of an adverse result, or the possibility that the company
may be fully or partially indemnified.
In November 1997, the Environmental Protection Agency ("EPA") proposed stringent
new wastewater discharge limits, which would become effective in the future,
that could apply to certain facilities operated by the company. While the
company does not believe that these regulations should apply to its operations,
if the regulations are adopted as proposed, following adoption, the company's
cost to comply with them could be as much as $6,000 to $9,000 of equipment
expenditures spread over a three-year period, which the company does not believe
would be material to its financial condition or results of operations.
7. SUBSEQUENT EVENT - INCREASE IN SHARES AUTHORIZED
On January 6, 1999, the stockholders approved an amendment to the corporation's
Restated Certificate of Incorporation to increase the corporation's authorized
shares of common stock from 80,000,000 to 120,000,000. The additional shares
will be available for potential acquisitions, stock dividends and splits, and
other purposes determined by the board of directors to be in the best interests
of the corporation.
Page 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes.
National Service Industries is a diversified service and manufacturing company
operating in four segments: lighting equipment, chemicals, textile rental, and
envelopes. The company continued to be in strong financial condition at November
30, 1998. Net working capital was $395.7 million, up from $385.1 million at
August 31, 1998, and the current ratio was 2.6 compared with 2.7 at August 31,
1998. At November 30, 1998, the company's debt to capitalization increased to
16.3 percent compared with 12.9 percent at August 31, 1998.
Results of Operations
National Service Industries generated quarterly revenue of $518.9 million in the
first quarter of fiscal 1999 compared with quarterly revenue of $487.6 million
in the first quarter of fiscal 1998. The revenue increase was primarily due to
higher revenue in the lighting equipment and chemical segments. Additionally,
revenue increased due to the September 1998 acquisition of GTY Industries (d/b/a
"Hydrel") and the March 1998 acquisition of Allen Envelope, which were not
included in the prior-year results.
Net income for the quarter ended November 30, 1998 was $25.7 million ($.62 per
basic and diluted share) compared to net income for the quarter ended November
30, 1997 of $26.7 million ($.61 per basic share and $.60 per diluted share).
Increased earnings in the lighting equipment and envelope segments were more
than offset by increased interest expense during the quarter, causing net income
to remain relatively unchanged. Basic and diluted earnings per share increased
due to a reduction of 2.2 million basic and 2.5 million diluted average shares
outstanding.
The lighting equipment segment reported record first quarter revenue of $284.1
million, an increase of 5.7 percent over last year's first quarter revenue of
$268.7 million. This increase resulted from continued strength in the
non-residential construction market, particularly in non-fluorescent products,
as well as the acquisition of Hydrel. Operating profit increased 6.7 percent to
$29.5 million driven by the additional sales and a slightly better product mix.
The non-residential construction market remains strong, and order rates continue
to be solid.
First quarter chemical segment revenue of $116.7 million increased 10.3 percent
from last year's $105.9 million, primarily due to higher revenue from retail
distribution channels. Operating profit of $8.5 million was slightly lower than
last year's results due to increased operating costs required to support the
retail distribution channels and changes in the product mix.
Textile rental segment revenue decreased 3.3 percent to $75.5 million, while
operating profit of $6.7 million increased 9.6 percent compared to the
prior-year period. The decrease in revenue was related in part to last year's
sale of several industrial contracts, continued efforts to eliminate low-margin
customer accounts, and the temporary, negative impact of two hurricanes on nine
southeastern plants. Excluding non-recurring gains in each of the periods,
operating profit rates remained relatively unchanged at approximately seven
percent. During the current quarter, fiscal 1997 year-end restructuring reserves
were reduced by a minimal amount for payments related to plant consolidations.
Envelope segment revenue increased 21.8 percent to $42.6 million, while
operating profit increased 39.5 percent to $3.5 million over the prior year's
$2.5 million. Revenue increased due to additional sales resulting from the Allen
Envelope acquisition, which was completed in March 1998, and additional volume
in the base business, offset by the effect of lower paper prices. The increase
in operating profit was the result of the increased volume as well as
incremental material cost savings.
Corporate expenses remained relatively consistent in comparison to the same
period in the prior year.
Net interest expense was $2.3 million in the quarter ended November 30, 1998
compared with $2.0 million of interest income in the quarter ended November 30,
1997. The increase in net interest expense is due to lower interest income,
resulting from the use of the short-term investments generated from the textile
rental segment's 1997 divestiture proceeds, combined with higher interest
expense from the increased borrowings to fund acquisitions, share repurchases,
and internal growth.
The provision for income taxes was 37.2 percent of pretax income for the quarter
compared with 37.0 percent in the prior-year period.
Page 10
Liquidity and Capital Resources
Operating Activities
Operations provided cash of $44.6 million during the first quarter of fiscal
1999 and used cash of $20.7 million during the first quarter of fiscal 1998. The
increase in cash flow for the quarter ended November 30, 1998 was primarily
attributable to the absence of tax payments of $38.0 million reflected in the
first quarter of the prior year related to the 1997 textile rental segment
divestitures. Additionally, the current quarter change in accounts payable and
accrued liabilities includes a $12.9 million increase in accrued taxes due in
the second quarter.
Investing Activities
Investing activities used cash of $42.0 million for the three months ended
November 30, 1998 compared with cash provided of $37.9 million in the three
months ended November 30, 1997. The decrease in cash flow in the first quarter
of fiscal 1999 was primarily the result of the liquidation of short-term
investments in the first quarter of fiscal 1998, which provided cash of $53.2
million for share repurchases. Additionally, acquisition spending in the first
quarter of fiscal 1999 totaled $28.5 million compared to $6.1 million in the
same quarter of the prior year. Current quarter acquisition spending was
primarily related to the September 1998 purchase by the lighting equipment
segment of the assets of Hydrel, a manufacturer of architectural-grade light
fixtures for landscape, in-grade, and underwater applications. The company also
made minor acquisitions related to the textile rental segment. Prior-year
acquisition spending of $6.1 million was due to the chemical segment's purchase
of Pure Corporation, a specialty chemical company with its core businesses in
Indiana, Pennsylvania, and New York.
Capital expenditures were $15.3 million in the first three months of fiscal 1999
compared with $14.0 million in the first three months of fiscal 1998. Capital
spending in the first quarter of fiscal 1999 was primarily attributable to the
lighting equipment, textile rental, and envelope segments. The lighting
equipment segment's capital expenditures related to upgrading of old tooling
equipment as well as purchases of new tooling equipment for capacity expansion.
Expenditures in the textile rental segment were for implementation of new
technology, production enhancements, and delivery truck purchases and
refurbishments. The envelope segment's expenditures related primarily to new
folding capacity, manufacturing process improvements, and information systems.
Capital spending in the first quarter of fiscal 1998 consisted primarily of
facility expansions and manufacturing process improvements in the lighting
equipment segment, efficiency improvements and replacements of processing
equipment and information systems in the textile rental segment, and facility
and machinery replacements in the envelope segment. Capital expenditures for
fiscal 1999 are estimated to be $90 million. Management believes current cash
balances, anticipated cash flows from operations, and available funds from the
credit facility, complementary lines of credit, and the shelf registration are
sufficient to meet the company's planned level of capital spending and general
operating cash requirements for the next twelve months.
Financing Activities
Cash provided by financing activities was $8.2 million in the first quarter of
fiscal 1999 compared with cash used of $66.1 million in the first quarter of
fiscal 1998. Contributing to the change were net purchases of treasury stock
which were $7.3 million in the current quarter versus $52.8 million in the same
quarter of the prior year. During the current quarter, the company repurchased
250,000 of its common shares. Additionally, for the quarter ended November 30,
1998, the company borrowed $28.0 million primarily to fund acquisitions, share
repurchases, and internal growth.
Dividend payments totaled $12.9 million, or 31 cents per share, compared with
$13.3 million, or 30 cents per share, for the prior-year period. On January 6,
1999, the regular quarterly dividend rate was increased 3.2 percent to 32 cents
per share, or an annual calendar year rate of $1.28 per share.
Environmental Matters
See Note 6:Environmental Matters for a discussion of the company's environmental
issues.
Impact of the Year 2000 Issue
The "Year 2000 Issue" resulted from the use of two digits rather than four
digits to define the applicable year in certain computer programs. With the
coming millennium, any of the company's computer programs that have two-digit
date-sensitive software may interpret a date of "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
causing disruption of the operation of computer hardware and software, as well
as intelligent manufacturing equipment and processes, and telephony.
Page 11
Management is addressing the Year 2000 Issue in four phases: awareness,
assessment, action plan, and plan implementation. At November 30, 1998, all
areas of the company had completed the first three phases and implementation of
the plan was approximately 80 percent complete. Management estimates that the
total cost to be incurred in connection with the Year 2000 Issue will range from
$3 million to $5 million, and substantially all major systems are expected to be
in compliance prior to the end of calendar year 1999. Approximately one-third of
the total cost reflects the redeployment of existing internal information
technology resources and should not be incremental costs to the company. At
November 30, 1998, the company had spent approximately $2.0 million on the Year
2000 Issue. The cost of the project is being funded through operating cash
flows.
Management has evaluated the potential exposure of the company to related
problems of its customers and suppliers and has implemented a vendor
certification process. While management believes that its plan is sufficient to
address the Year 2000 Issue, a contingency plan is currently being developed to
address the potential for unforeseen issues that may arise. There can be no
assurance, however, that such exposures or the costs of remediating any problems
associated therewith will not materially affect the company's future business,
financial condition, or results of operations.
Cautionary Statement Regarding Forward-Looking Information
From time to time, the company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
capital expenditures, technological developments, new products, research and
development activities, and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements.
Statements herein which may be considered forward-looking include: (a)
statements made regarding the company's current expectations or beliefs with
respect to the outcome and impact on the company's business, financial
condition, or results of operations of the Year 2000 Issue and environmental
issues; (b) statements made concerning management's expectations with respect to
the company's plan for strategic growth; and (c) statements made regarding
management's expectations with regard to projected capital expenditures and
future cash flows. In order to comply with the terms of the safe harbor, the
company notes that a variety of factors could cause the company's actual results
and experience to differ materially from the anticipated results or other
expectations expressed in the company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development, and
results of the company's business include without limitation the following: (a)
the uncertainty of general business and economic conditions, particularly the
potential for a slow down in non-residential construction awards; and (b) the
ability to achieve strategic initiatives, including but not limited to the
ability to achieve sales growth across the business segments through a
combination of increased pricing, enhanced sales force, new products, and
improved customer service, as well as share repurchases and acquisitions.
Page 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On October 15, 1998 the company issued 26,495 unregistered shares of common
stock as payment of $845,000 to the sellers of Clearwater Linen & Uniform
Supply, Inc. as consideration for the acquisition. The company relied on Section
4(2) of the Securities Act of 1933 as its exemption from the registration
requirements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 14).
(b) There were no reports on Form 8-K for the three months ended November 30,
1998.
Page 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL SERVICE INDUSTRIES, INC.
REGISTRANT
DATE January 13, 1999 /s/ David Levy
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE January 13, 1999 /s/ Brock Hattox
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 14
INDEX TO EXHIBITS
Page No.
EXHIBIT 3 (a) Certificate of Amendment of Restated Certificate of Incorporation 15
(b) By-Laws as Amended and Restated June 21, 1989 and Amended March 24, 1998 and 17
January 6, 1999
EXHIBIT 10(iii)A (1) Incentive Stock Option Agreement for Executive Officers Effective Beginning 33
September 22, 1998 between National Service Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
(2) Nonqualified Stock Option Agreement for Executive Officers Effective Beginning 40
September 22, 1998 between National Service Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
(3) Aspiration Achievement Incentive Award Agreements between National Service 46
Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
[a confidential portion of which has been omitted and filed separately with the
Securities and Exchange Commission]
(4) Amendment No. 3 to Benefits Protection Trust Agreement between National Service 57
Industries, Inc. and Wachovia Bank, N.A. (formerly Wachovia Bank and Trust
Company), Dated January 6, 1999.
(5) Amendment No. 2 to Executive Benefits Trust Agreement between National Service 63
Industries, Inc. and Wachovia Bank, N.A. (formerly Wachovia Bank and Trust
Company), Dated January 6, 1999.
EXHIBIT 12 Ratio of Earnings to Fixed Charges 69
EXHIBIT 27 Financial Data Schedule 70