Page 101
Exhibit 13
CONSOLIDATED BALANCE SHEETS
National Service Industries, Inc.
August 31
---------- ----------
(In thousands, except share and per-share data) 1999 1998
Assets
Current Assets:
Cash and cash equivalents ........................................................... $ 2,254 $ 19,146
Receivables, less reserves for doubtful accounts of $6,306 in 1999 and $4,631 in 1998 382,188 307,140
Inventories, at the lower of cost (on a first-in, first-out basis) or market ........ 218,191 197,950
Linens in service, net of amortization .............................................. 58,875 58,826
Deferred income taxes ............................................................... 10,271 17,542
Prepayments ......................................................................... 8,634 6,447
---------- ----------
Total Current Assets ........................................................... 680,413 607,051
---------- ----------
Property, Plant, and Equipment, at cost:
Land ................................................................................ 25,764 21,450
Buildings and leasehold improvements ................................................ 186,776 150,326
Machinery and equipment ............................................................. 587,719 485,271
---------- ----------
Total Property, Plant, and Equipment ........................................... 800,259 657,047
Less - Accumulated depreciation and amortization .................................... 417,946 385,176
---------- ----------
Property, Plant, and Equipment - net ........................................... 382,313 271,871
---------- ----------
Other Assets:
Goodwill and other intangibles ...................................................... 551,995 88,280
Other ............................................................................... 81,068 43,482
---------- ----------
Total Other Assets ............................................................. 633,063 131,762
---------- ----------
Total Assets .............................................................. $1,695,789 $1,010,684
---------- ----------
Page 102
Exhibit 13
CONSOLIDATED BALANCE SHEETS (continued)
National Service Industries, Inc.
August 31
----------- -----------
(In thousands, except share and per-share data) 1999 1998
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt ......................................................... $ 368 $ 98
Commercial paper, short-term ................................................................. 102,539 --
Notes payable ................................................................................ 11,471 7,883
Accounts payable ............................................................................. 128,122 95,217
Accrued salaries, commissions, and bonuses ................................................... 65,458 34,820
Current portion of self-insurance reserves ................................................... 8,785 11,253
Accrued taxes payable ........................................................................ 12,203 --
Other accrued liabilities .................................................................... 94,939 72,724
----------- -----------
Total Current Liabilities ............................................................... 423,885 221,995
----------- -----------
Long-Term Debt, less current maturities ............................................................ 435,199 78,092
----------- -----------
Deferred Income Taxes .............................................................................. 95,557 40,404
----------- -----------
Self-Insurance Reserves, less current portion ...................................................... 38,828 44,573
----------- -----------
Other Long-Term Liabilities ........................................................................ 86,446 46,719
----------- -----------
Commitments and Contingencies (Note 5)
Stockholders' Equity:
Series A participating preferred stock, $.05 stated value, 500,000 shares
authorized, none issued
Preferred stock, no par value, 500,000 shares authorized, none issued
Common stock, $1 par value, 120,000,000 shares authorized, 57,918,978 shares
issued in 1999 and 1998 ................................................................ 57,919 57,919
Paid-in capital .............................................................................. 29,055 28,521
Retained earnings ............................................................................ 976,461 903,974
Accumulated other comprehensive income items ................................................. (9,326) (11,357)
----------- -----------
1,054,109 979,057
----------- -----------
Less - Treasury stock, at cost (17,449,752 shares in 1999 and 16,457,340 shares in 1998) .. 438,235 400,156
----------- -----------
Total Stockholders' Equity .......................................................... 615,874 578,901
----------- -----------
Total Liabilities and Stockholders' Equity ....................................... $ 1,695,789 $ 1,010,684
----------- -----------
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
Page 103
Exhibit 13
CONSOLIDATED STATEMENTS OF INCOME
National Service Industries, Inc.
Years Ended August 31
------------ ----------- -----------
(In thousands, except per-share data) 1999 1998 1997
Sales and Service Revenues:
Net sales of products ..................................... $ 1,910,114 $ 1,718,564 $ 1,542,644
Service revenues .......................................... 309,115 312,746 493,535
----------- ----------- -----------
Total Sales and Service Revenues ..................... 2,219,229 2,031,310 2,036,179
----------- ----------- -----------
Costs and Expenses:
Cost of products sold ..................................... 1,146,080 1,023,765 924,505
Cost of services .......................................... 180,770 183,470 283,024
Selling and administrative expenses ....................... 698,196 654,511 655,029
Interest expense, net ..................................... 14,067 749 1,624
Gain on sale of businesses ................................ (11,220) (2,449) (75,097)
Restructuring expense, asset impairments, and other charges (9,291) -- 63,091
Other (income) expense, net ............................... 2,305 (1,857) 4,925
----------- ----------- -----------
Total Costs and Expenses ............................. 2,020,907 1,858,189 1,857,101
----------- ----------- -----------
Income before Provision for Income Taxes ........................ 198,322 173,121 179,078
Provision for Income Taxes ...................................... 73,979 64,401 71,800
----------- ----------- -----------
Net Income ...................................................... $ 124,343 $ 108,720 $ 107,278
----------- ----------- -----------
Basic Earnings per Share ........................................ $ 3.04 $ 2.56 $ 2.37
----------- ----------- -----------
Basic Weighted Average Number of Shares Outstanding ............. 40,899 42,462 45,191
----------- ----------- -----------
Diluted Earnings per Share ...................................... $ 3.03 $ 2.53 $ 2.36
----------- ----------- -----------
Diluted Weighted Average Number of Shares Outstanding ........... 41,093 43,022 45,534
----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 104
Exhibit 13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
National Service Industries, Inc.
(In thousands, except share and per-share data)
Accumulated
Other
Comprehensive Common Paid-in Retained Comprehensive Treasury
Income Stock Capital Earnings Income Items Stock Total
------------ -------- -------- --------- ------------- --------- ----------
Balance August 31, 1996 $57,919 $11,021 $794,801 $ (3,434) $(142,299) $718,008
Comprehensive income:
Net income $107,278 - - 107,278 - - 107,278
Other comprehensive income, net of tax:
Foreign currency translation adjustments (3,378) - - - (3,378) - (3,378)
---------
Other comprehensive income (3,378)
=========
Comprehensive income 103,900
=========
Treasury stock purchased (1) - - - - (121,668) (121,668)
Stock options exercised (2) - 2,588 - - 2,685 5,273
Treasury stock issued in
connection with acquisition (3) - 11,912 - - 8,610 20,522
Cash dividends of $1.19 per
share paid on common stock - - (54,222) - - (54,222)
-------- -------- --------- -------------- --------- ---------
Balance August 31, 1997 57,919 25,521 847,857 (6,812) (252,672) 671,813
Comprehensive income:
Net income 108,720 - - 108,720 - - 108,720
Other comprehensive income, net of tax:
Foreign currency translation adjustments (4,528) - - - (4,528) - (4,528)
Minimum pension liability adjustment
(net of tax of $10) (17) - - - (17) - (17)
---------
Other comprehensive income (4,545)
=========
Comprehensive income 104,175
=========
Treasury stock purchased (4) - - - - (154,032) (154,032)
Stock options exercised (5) - 625 - - 3,305 3,930
Treasury stock issued in connection
with acquisition (6) - 2,104 - - 2,896 5,000
Employee Stock Purchase Plan issuances (7) - 271 - - 347 618
Cash dividends of $1.23 per share paid on common stock - - (52,603) - - (52,603)
-------- -------- --------- ------------- ----------- --------
Balance August 31, 1998 57,919 28,521 903,974 (11,357) (400,156) 578,901
Comprehensive income:
Net income 124,343 - - 124,343 - - 124,343
Other comprehensive income, net of tax:
Foreign currency translation adjustments 2,022 - - - 2,022 2,022
Minimum pension liability adjustment
(net of tax of $4) 9 - - - 9 - 9
---------
Other comprehensive income 2,031
---------
Comprehensive income $126,374
=========
Treasury stock purchased (8) - - - - (41,954) (41,954)
Stock options exercised (9) - 58 - - 435 493
Treasury stock issued in connection
with acquisition (10) - 200 - - 645 845
Employee Stock Purchase Plan issuances (11) - 276 - - 2,795 3,071
Cash dividends of $1.27 per share paid on common stock - - (51,856) - - (51,856)
-------- -------- --------- ------------- ---------- ---------
Balance August 31, 1999 $57,919 $29,055 $976,461 $ (9,326) $(438,235) $615,874
-------- -------- --------- ------------- ---------- ---------
(1) 3,000,000 shares. (2) 190,330 shares. (3) 536,872 shares. (4) 3,025,162 shares. (5) 142,568 shares. (6) 130,804 shares.
(7) 14,284 shares. (8) 1,153,099 shares. (9) 21,357 shares. (10) 26,495 shares. (11) 112,835 shares.
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 105
Exhibit 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
National Service Industries, Inc.
Years Ended August 31
--------- --------- ----------
(In thousands) 1999 1998 1997
Cash Provided by (Used for) Operating Activities
Net income ........................................................................... $ 124,343 $ 108,720 $ 107,278
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................... 55,822 48,846 57,981
Provision for losses on accounts receivable ..................................... 3,651 3,558 2,276
(Gain) loss on the sale of property, plant, and equipment ....................... (1,098) (3,400) 1,233
Gain on sale of businesses ...................................................... (11,220) (2,449) (75,097)
Restructuring expense, asset impairments, and other charges ..................... (9,291) -- 63,091
Change in non-current deferred income taxes ..................................... 4,860 6,311 (25,219)
Change in assets and liabilities net of effect of acquisitions and divestitures -
Receivables ................................................................ (24,207) (47,564) (14,338)
Inventories and linens in service, net ..................................... 10,371 (16,995) (12,167)
Current deferred income taxes .............................................. 12,486 (4,383) (10,926)
Prepayments ................................................................ 517 493 (146)
Accounts payable and accrued liabilities ................................... 42,323 (64,830) 32,543
Self-insurance reserves and other long-term liabilities .................... (360) (1,944) (1,021)
---------- --------- ---------
Net Cash Provided by Operating Activities ............................ 208,197 26,363 125,488
---------- --------- ---------
Cash Provided by (Used for) Investing Activities
Sales (purchases) of short-term investments .......................................... -- 205,302 (204,751)
Purchases of property, plant, and equipment .......................................... (72,285) (82,034) (48,806)
Sale of property, plant, and equipment ............................................... 3,996 6,814 5,370
Sale of businesses ................................................................... 11,962 3,064 311,382
Acquisitions ......................................................................... (534,132) (45,305) (4,320)
Change in other assets ............................................................... (7,527) (6,532) 2,208
---------- --------- ---------
Net Cash (Used for) Provided by Investing Activities ............................ $(597,986) $ 81,309 $ 61,083
---------- --------- ---------
Page 106
Exhibit 13
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
National Service Industries, Inc.
Years Ended August 31
---------- --------- ---------
(In thousands) 1999 1998 1997
Cash Provided by (Used for) Financing Activities
Proceeds from (repayments of) notes payable, net ........ $ 3,588 $ 805 $ (11,021)
Proceeds from issuances of commercial paper, net ........ 352,265 -- --
Proceeds from issuances of long-term debt ............... 267,585 52,000 1,563
Repayments of long-term debt ............................ (160,304) (957) (6,190)
Recovery of investment in tax benefits .................. -- -- 661
Deferred income taxes from investment in tax benefits ... -- -- (1,972)
Purchase of treasury stock, net ......................... (38,390) (144,484) (116,395)
Cash dividends paid ..................................... (51,856) (52,603) (54,222)
--------- --------- ---------
Net Cash Provided by (Used for) Financing Activities 372,888 (145,239) (187,576)
--------- --------- ---------
Effect of Exchange Rate Changes on Cash ....................... 9 (410) (534)
--------- --------- ---------
Net Change in Cash and Cash Equivalents ....................... (16,892) (37,977) (1,539)
Cash and Cash Equivalents at Beginning of Year ................ 19,146 57,123 58,662
--------- --------- ---------
Cash and Cash Equivalents at End of Year ...................... $ 2,254 $ 19,146 $ 57,123
--------- --------- ---------
Supplemental Cash Flow Information:
Income taxes paid during the year ....................... $ 40,799 $ 100,270 $ 68,475
Interest paid during the year ........................... 15,660 7,025 5,614
Noncash Investing and Financing Activities:
Noncash aspects of sale of businesses-
Receivables incurred ............................... $ 396 $ -- $ 391
Liabilities assumed ................................ 954 166 22,637
Noncash aspects of acquisitions -
Liabilities assumed or incurred .................... $ 125,261 $ 5,885 $ 22,440
Treasury stock issued .............................. 845 5,000 20,522
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Page 107
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
National Service Industries, Inc.
(In thousands, except share and per-share data)
Note 1: Summary of Accounting Policies
Description of Business
The company operates in four business segments - lighting equipment, chemicals,
textile rental, and envelopes - each of which is a leading competitor in its
respective markets. The lighting equipment segment produces a variety of
fluorescent and non-fluorescent fixtures for markets throughout the United
States, Canada, Mexico, and overseas. The chemical segment produces maintenance,
sanitation, and water treatment products for customers throughout the United
States, Canada, Puerto Rico, Western Europe, and Australia. The textile rental
segment provides linens and dust control products to healthcare, lodging, and
dining customer segments in the United States. The envelope segment produces
business and specialty envelopes in the United States.
Revenue Recognition and Product Warranty
The company records revenues as products are shipped or as services are
rendered. A provision for estimated returns, allowances, and warranty costs is
recorded when products are shipped.
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 and is included in the accompanying 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 and less than a year are
considered short-term investments. There were no short-term investments at
August 31, 1999 and 1998.
Concentrations of Credit Risk
Concentrations of credit risk with respect to receivables are limited due to the
wide variety of customers and markets using the company's products and services,
as well as their dispersion across many different geographic areas. As a result,
as of August 31, 1999, 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, 1999 and 1998:
1999 1998
- -------------------------------------------------- ------------ --------------
Raw materials and supplies $ 99,249 $ 78,730
Work in progress 16,718 10,725
Finished goods 102,224 108,495
- -------------------------------------------------- ------------ --------------
$ 218,191 $ 197,950
------------ --------------
Linens in service are recorded at cost and are amortized over their
estimated useful lives of 15 to 50 months.
Goodwill and Other Intangibles
Goodwill of $3,460 was recognized in connection with a 1969 acquisition and is
not being amortized. Remaining amounts of goodwill ($385,380 in 1999 and
$71,059 in 1998) and other intangible assets are being amortized on a
straight-line basis over various periods ranging from 2 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 cash flows over the remaining life of the goodwill in measuring
whether the goodwill is recoverable. During fiscal 1997, goodwill and other
intangibles of $8,800 were written off due to the impairment of related
long-lived assets (See Note 6: Restructuring Expense and Asset Impairments).
Page 108
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
National Service Industries, Inc.
Depreciation
For financial reporting purposes, depreciation is determined principally on a
straight-line basis using estimated useful lives of plant and equipment (20 to
40 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.
Research and Development
Research and development costs are expensed as incurred. Research and
development expenses amounted to $8,482, $13,577, and $8,561 during 1999, 1998,
and 1997, respectively.
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 "Accumulated Other Comprehensive
Income Items" in the Consolidated Statements of Stockholders' Equity 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
were insignificant in 1999, 1998, and 1997.
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 material.
Postemployment Benefits
Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers'
Accounting for Postemployment Benefits," requires the accrual of the estimated
cost of benefits provided by an employer to former or inactive employees after
employment but before retirement. The company's 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, credit facility borrowings, commercial paper, and line of credit
borrowings offset by 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.
Accounting Standards Adopted
During 1999, the company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which 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. The disclosures required
by SFAS No. 130 are presented in the Consolidated Statements of Stockholders'
Equity.
The company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which requires the reporting of financial
information on the basis that it is used internally for evaluating segment
performance and the allocation of resources to segments. The disclosures
required by SFAS No. 131 are presented in Note 10: Business Segment Information.
The company adopted SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." SFAS No. 132 amends SFAS Nos. 87, 88, and
106 by standardizing the disclosure requirements for pensions and other
postretirement benefits, requiring additional information on changes in
benefit obligations and fair values of plan assets, and eliminating certain
other disclosures. The disclosures required by SFAS No. 132 are presented in
Note 2: Pension and Profit Sharing Plans.
The company also adopted Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," issued by
the American Institute of Certified Public Accountants. This statement requires
the capitalization of certain internal use software costs. The adoption of this
statement did not have a material impact on the consolidated financial
statements or results of operations.
Accounting Standards Yet to be Adopted
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. However, the company does not currently
participate in any significant hedging activities, nor does it utilize any
significant derivative financial instruments.
Reclassifications
Certain prior period amounts in the financial statements and notes have been
reclassified to conform with the 1999 presentation.
Page 109
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
National Service Industries, Inc.
Note 2: 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.
The following tables reflect the status of the company's pension plans at
August 31, 1999 and 1998:
1999 1998
- -------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $124,545 $109,826
Service cost 3,822 3,091
Interest cost 8,592 8,509
Acquisition 11,869 -
Actuarial (gain) loss (6,589) 14,929
Benefits paid (11,840) (11,810)
Other 182 -
- -------------------------------------------------------------------------------------
Benefit obligation at end of year $130,581 $124,545
---------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $150,101 $133,214
Actual return on plan assets 9,466 26,435
Employer contributions 564 1,864
Benefits paid (11,440) (11,412)
Acquisition 13,663 -
Other 213 -
- -------------------------------------------------------------------------------------
Fair value of plan assets at end of year $162,567 $150,101
---------------------------
Funded status: $ 31,987 $ 25,556
Unrecognized actuarial loss 6,655 8,863
Unrecognized transition asset (4,030) (5,040)
Unrecognized prior service cost 3,670 4,148
- -------------------------------------------------------------------------------------
Prepaid pension expense $ 38,282 $ 33,527
---------------------------
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid benefit cost $ 45,086 $ 39,136
Accrued benefit liability (7,713) (6,501)
Intangible asset 854 824
Accumulated other comprehensive income 55 68
- -------------------------------------------------------------------------------------
Prepaid pension expense $ 38,282 $ 33,527
---------------------------
The projected benefit obligation and accumulated benefit obligation for
unfunded defined benefit pension plans were $8.7 million and $7.4 million,
respectively, as of August 31, 1999, and $8.1 million and $5.9 million,
respectively, as of August 31, 1998.
Components of net periodic benefit cost for the fiscal years ended
August 31, 1999, 1998, and 1997 included the following:
1999 1998 1997
- ------------------------------------------------------------------------------------------
Service cost $ 3,822 $ 3,091 $ 3,636
Interest cost 8,592 8,509 8,505
Expected return on plan assets (13,893) (12,344) (12,463)
Amortization of prior service cost 477 444 517
Amortization of transitional asset (1,011) (1,131) (1,289)
Recognized actuarial loss 236 55 74
- ------------------------------------------------------------------------------------------
Net periodic benefit cost $ (1,777) $ (1,376) $ (1,020)
------------------------------------------
Weighted average assumptions in 1999 and 1998 included the following:
1999 1998
- ---------------------------------------------------------------------------
Discount rate 7.5% 7.0%
Expected return on plan assets 9.2% 9.5%
Rate of compensation increase 5.1% 5.0%
---------------------------
During 1999, the discount rate used to determine the projected benefit
obligation was increased to 7.5 percent to more closely approximate rates on
high-quality, long-term obligations.
Page 110
Exhibit 13
The company also has profit sharing and 401(k) plans to which both
employees and the company contribute. At August 31, 1999, assets of the 401(k)
plans included shares of the company's common stock with a market value of
approximately $11,479. The company's cost of these plans was $4,521 in 1999,
$4,292 in 1998, and $5,020 in 1997.
Note 3: Long-Term Debt and Lines of Credit
Long-term debt at August 31, 1999 and 1998, consisted of the following:
1999 1998
- ------------------------------------------------------------------------------------
Commercial paper with an average interest rate of 5.5% at
August 31, 1999 $ 249,726 $ -
6% notes due February 2009 with an effective rate of 6.04%,
net of unamortized discount of $393 159,607 -
3.2% to 8.5% other notes, payable in installments to 2026
(secured in part by property, plant and equipment having a
net book value of $176 at August 31, 1999) 26,234 78,190
- ------------------------------------------------------------------------------------
435,567 78,190
Less-Amounts payable within one year included in current
liabilities 368 98
- ------------------------------------------------------------------------------------
$ 435,199 $78,092
----------------------
The annual principal payments of long-term debt for the five-year period
ending August 31, 2004 are: 2000 - $368; 2001 - $207; 2002 - $107; 2003 - $95;
2004 - $103.
In 1996, the company negotiated a $250,000 multi-currency committed credit
facility (the "Credit Facility") with ten domestic and international banks. The
Credit Facility has a term of five years, expiring in July 2001, with no
provision for a reduction in commitments. The Credit Facility contains
restrictions on the incurrence of indebtedness by subsidiaries, as well as
financial and other covenants, including the restriction that the company's
ratio of total debt to capitalization may not exceed 60 percent at any time.
During the fourth quarter of 1998, the company filed a registration
statement (the "shelf registration"), which became effective September 8, 1998,
with the Securities and Exchange Commission to allow the company to offer for
sale, from time to time, up to $400,000 of unsecured senior debt securities or
unsecured senior subordinated debt securities (the "Debt Securities") consisting
of notes, debentures, or other evidence of indebtedness, of which $240,000
remains available at August 31, 1999. The Debt Securities may be convertible
into or exchangeable for shares of the company's common stock, shares of its
preferred stock, or other Debt Securities. The Debt Securities may be offered as
a single series or as two or more separate series in amounts, at prices and on
terms to be determined at the time of the offering. The Debt Securities may be
sold to or through one or more agents designated from time to time.
In January 1999, the company issued $160,000 in ten-year publicly traded
notes bearing a coupon rate of 6.0 percent. Proceeds from this issuance were
used for the repayment of $80,000 in borrowings under the Credit Facility, of
which $52,000 was outstanding under the domestic line of credit, discussed
below, at August 31, 1998. The remainder was used for general corporate purposes
including working capital requirements, capital expenditures, acquisitions, and
share repurchases. In July 1999, the company entered into an additional
$250,000, 364-day committed credit facility (the "Revolving Credit Facility")
expiring in July 2000. The combined $500,000 under the Credit Facility and the
Revolving Credit Facility support the company's commercial paper program, which
was initiated in July 1999. Interest rates under the credit facilities are based
on the LIBOR rate or other rates, at the company's option. The company pays an
annual fee on the commitments based on the company's debt rating and leverage
ratio. No amounts were outstanding under either facility at August 31, 1999 and
1998.
At August 31, 1999, the company had $352,265 outstanding under its
commercial paper program, of which $249,726 was classified as long-term as the
company intends to refinance this amount through long-term debt instruments or
availability under the Credit Facility which matures in 2001. Short-term
commercial paper of $102,539 had an average interest rate of 5.8 percent.
At August 31, 1999, the company had complimentary lines of credit totaling
$125,672 for general operating purposes, of which $25,672 is designated as
multi-currency. At August 31, 1999, $76,890 in letters of credit were
outstanding, primarily under the domestic line of credit. The company had
$10,864 of foreign currency short-term bank borrowings under the multi-currency
line of credit at a weighted-average interest rate of 3.8 percent at August 31,
1999.
Except for the $160,000 notes, long-term debt recorded in the accompanying
Consolidated Balance Sheets approximates fair value based on the borrowing rates
currently available to the company for bank loans with similar terms and average
maturities. The fair value of the $160,000 notes, based on quoted market prices,
was approximately $145,424 at August 31, 1999.
Note 4: Common Stock and Related Matters
Shares Authorized
In January 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.
Shareholder Rights Plan
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 plan, which was to have expired May 19, 1998,
was amended and extended to May 19, 2008.
Page 111
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
National Service Industries, Inc.
The rights become exercisable and transferable apart from the common stock
(a) on the date that a person or group announces that they have acquired 15
percent or more of the company's common stock or (b) ten days after a person or
group makes an unsolicited offer to acquire beneficial ownership of, or the
right to obtain beneficial ownership of, 15 percent or more of the company's
common stock (unless such date is extended by the board of directors) or (c) 20
business days before the date on which a business combination is reasonably
expected to be consummated involving a person who, if the business combination
is consummated, has or would acquire beneficial ownership of, or the right to
obtain beneficial ownership of, 15 percent or more of the company's common stock
and that person has directly or indirectly nominated a director of the company
at the time the business combination is considered. The rights are not triggered
if the board of directors is notified that reaching the trigger threshold was
inadvertent and divestiture of sufficient stock is thereafter made. Once
exercisable, each right entitles the holder to purchase one one-thousandth share
of Series A Participating Preferred Stock at an exercise price of $160, 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, 2008, and are redeemable under certain circumstances.
If a person acquires 15 percent ownership, except in an offer approved
under the plan by a majority of the nonemployee directors, 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 15 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.
Preferred Stock
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, 1999 and 1998.
Earnings per Share
During fiscal 1998, the company adopted SFAS No. 128, "Earnings per Share." SFAS
No. 128 superseded Accounting Principles Board ("APB") Opinion No. 15, "Earnings
per Share," and promulgated new accounting standards for the computation and
manner of presentation of the company's earnings per share. Upon adoption, the
company was required to restate previously reported annual and interim earnings
per share in accordance with the provisions of SFAS No. 128. The adoption of
SFAS No. 128 did not have a material impact on the computation or manner of
presentation of the company's earnings per share as previously presented under
APB 15.
The following table represents a reconciliation of basic and diluted
earnings per share at August 31:
1999 1998 1997
- -----------------------------------------------------------------------------------------------
Basic weighted average shares outstanding (thousands) 40,899 42,462 45,191
Add: Shares of common stock assumed issued
upon exercise of stock options (thousands) 194 560 343
------------ ----------- ----------
Diluted weighted average shares outstanding (thousands) 41,093 43,022 45,534
============ =========== ==========
Net income used in the computation of basic and
diluted earnings per share $ 124,343 $ 108,720 $107,278
============ =========== ==========
Earnings per Share:
Basic $ 3.04 $ 2.56 $ 2.37
============ =========== ==========
Diluted $ 3.03 $ 2.53 $ 2.36
============ =========== ==========
Stock-Based Compensation
In 1990, 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.
In 1997, stockholders approved the National Service Industries, Inc.
Long-Term Achievement Incentive Plan for the benefit of officers and other key
employees. There were 1,750,000 treasury shares reserved for issuance under that
plan.
Aspiration Achievement Incentive Awards were granted annually beginning in
September 1996 under the Long-Term Achievement Incentive Plan. Shares may be
earned and issued to participants based on a level of achievement of performance
over three year performance cycles. In some cases, the shares may be exchanged
for stock options. Amounts charged to compensation expense for 1999, 1998, and
1997 were $9,244, $7,203, and $3,841, respectively, of which approximately half
related to the stock portion of the award. No shares were issued under the award
as of August 31, 1999.
Generally, the stock options granted under both the incentive programs
become exercisable in four equal annual installments beginning one year from the
date of the grant.
In January 1993, stockholders approved the National Service Industries,
Inc. 1992 Nonemployee Directors' Stock Option Plan, under which 100,000 treasury
shares were reserved for issuance. The stock options granted under that plan
become exercisable one year from the date of the grant.
Under all stock option plans, the options expire ten years from the date of
the grant and have an exercise price equal to the fair market value of the
company's stock on the date of the grant. At August 31, shares available for
issuance under all plans were 694,279 in 1999, 1,236,574 in 1998, and 1,732,574
in 1997.
Page 112
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
National Service Industries, Inc.
Stock option transactions for the stock option plans and stock option
agreements during the years ended August 31, 1999, 1998, and 1997 were as
follows:
Outstanding Exercisable
------------------------ --------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
------------------------ --------------------------
Outstanding at August 31, 1996 1,266,043 $ 27.74
Granted 324,500 $ 37.96
Exercised (196,115) $ 25.96
Cancelled (7,214) $ 31.46
------------------------ --------------------------
Outstanding at August 31, 1997 1,387,214 $ 30.35 731,914 $ 27.11
------------------------ --------------------------
Granted 500,000 $ 44.50
Exercised (142,568) $ 26.32
Cancelled - -
------------------------ --------------------------
Outstanding at August 31, 1998 1,744,646 $ 34.74 876,721 $ 29.05
------------------------ --------------------------
Granted 665,250 $ 35.24
Exercised (21,357) $ 27.71
Cancelled (122,955) $ 39.24
------------------------ --------------------------
Outstanding at August 31, 1999 2,265,584 $ 34.78 1,110,084 $ 31.30
------------------------ --------------------------
Range of option exercise prices:
$19.75-$39.75 (average
life-6.6 years) 1,812,084 $ 32.35 989,959 $ 29.70
$44.25-$59.44 (average
life-8.1 years) 453,500 $ 44.49 120,125 $ 44.47
During fiscal 1997, the company adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for these stock option plans. Had
compensation cost for the company's stock option plans been determined based on
the fair value at the grant date for awards in fiscal years 1999, 1998, and 1997
consistent with the provisions of SFAS No. 123, the company's net income and
earnings per share would have been reduced to the following pro forma amounts:
1999 1998 1997
- ------------------------------------------------------------------------------------
Pro Forma Information:
Net income $ 120,141 $ 106,297 $ 105,793
Basic earnings per share $ 2.94 $ 2.50 $ 2.34
Diluted earnings per share $ 2.92 $ 2.47 $ 2.32
------------------------------------------
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. The weighted average grant date
fair value of options was $13.70, $12.23, and $9.69 for 1999, 1998, and 1997,
respectively. The following weighted average assumptions were used to estimate
fair value:
1999 1998 1997
- ------------------------------------------------------------------------------------
Dividend yield 2.630% 2.809% 3.350%
Expected volatility 36.2% 18.1% 16.8%
Risk-free interest rate 5.20% 6.10% 6.73%
Expected life of options 10 years 10 years 10 years
Turnover rate 5.0% 5.0% 5.0%
-------------------------------------------
Employee Stock Purchase Plan
In 1998, stockholders approved the National Service Industries, Inc. Employee
Stock Purchase Plan for the benefit of eligible employees. Under the plan,
employees may purchase, through payroll deduction, the company's common stock at
a 15 percent discount. Shares are purchased quarterly at 85 percent of the lower
of the fair market value of the company's common stock on the first business day
of the quarterly plan period or on the last business day of the quarterly plan
period. There were 1,500,000 treasury shares reserved for purchase under the
plan, of which 1,372,881 shares remain available for purchase at August 31,
1999.
Note 5: Commitments and Contingencies
Self-Insurance
It is the company's policy 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.
The major components of the self-insurance liability at August 31 were as
follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Reserve, beginning of period $ 55,826 $ 69,596 $ 78,765
Expense 5,302 3,482 7,900
Payments (13,515) (17,252) (17,069)
- --------------------------------------------------------------------------------
Reserve, end of period $ 47,613 $ 55,826 $ 69,596
------------------------------------
Page 113
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
National Service Industries, Inc.
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, 1999, are as follows: 2000 - $13,902; 2001 - $11,542;
2002 - $8,260; 2003 - $6,170; 2004 - $4,624; after 2004 - $6,686.
Total rent expense was $16,536 in 1999, $12,237 in 1998, and $11,327 in
1997.
Collective Bargaining Agreements
Approximately 55 percent of the company's total work force is covered by
collective bargaining agreements. Collective bargaining agreements representing
13 percent of the company's total work force will expire within one year.
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
these matters will not have a material adverse effect on its financial condition
or results of operations.
Environmental Matters
The company's operations, as well as similar operations of other companies, are
subject to comprehensive laws and regulations relating to the generation,
storage, handling, transportation, and disposal of hazardous substances and
solid and hazardous wastes and to the remediation of contaminated sites. Permits
and environmental controls are required for certain of the company's operations
to limit air and water pollution, and these permits are subject to modification,
renewal, and revocation by issuing authorities. The company believes that it is
in substantial compliance with all material environmental laws, regulations, and
permits. On an ongoing basis, the company incurs capital and operating costs
relating to environmental compliance. Environmental laws and regulations have
generally become stricter in recent years, and the cost of responding to future
changes may be substantial.
The company's environmental reserves, which are included in current
liabilities, totaled $11,000 and $12,600 at August 31, 1999 and 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 amount of such costs below or in
excess of that accrued is reasonably estimable.
Certain environmental laws, such as Superfund, can impose liability for
the entire cost of site remediation upon each of the current or former owners or
operators of a site or parties who sent waste to a site where a release of a
hazardous substance has occurred regardless of fault or the lawfulness of the
original disposal activity. Generally, where there are a number of potentially
responsible parties ("PRPs") that are financially viable, liability has been
apportioned based on the type and amount of waste disposed of by each party at
such disposal site and the number of financially viable PRPs, although no
assurance can be given as to any particular site.
The company is currently a party to, or otherwise involved in, legal
proceedings in connection with several state and federal Superfund sites, two of
which are located on property owned by the company. Except for the Crymes
Landfill and M&J Solvents matters in Georgia, the company believes its liability
is de minimis at each of the sites which it does not own where it has been named
as a PRP. At the Crymes Landfill and M&J Solvents sites in Georgia, since the
matters are currently in the investigative phase, the company does not know
whether its liability is de minimis but believes that its exposure at each of
the sites is not likely to result in a material adverse effect on the company
due to its limited involvement at the sites and the number of viable PRPs. For
property which the company owns on Seaboard Industrial Boulevard in Atlanta,
Georgia, the company has conducted an investigation on its and adjoining
properties and submitted a Compliance Status Report ("CSR") to the State of
Georgia Environmental Protection Division ("EPD") pursuant to the Georgia
Hazardous Site Response Act. Until EPD's review and approval of the CSR are
completed, which are not subject to a deadline, the company will not be able to
determine if remediation will be required, if the company will be solely
responsible for the cost of such remediation, or whether such cost is likely to
result in a material adverse effect on the company. For property which the
company owns on East Paris Street in Tampa, Florida, the company has been
requested by the State of Florida to clean up chlorinated solvent contamination
in the groundwater on the property and on surrounding property known as Seminole
Heights Solvent Site and to reimburse approximately $430 of costs already
incurred by the State of Florida in connection with such contamination. The
company believes that it has a strong defense due to likely off-site sources of
the contamination and because contamination from the property, if any, was due
to prior owners and not the company's operations. At this time, it is too early
to quantify the company's potential exposure or the likelihood of an adverse
result.
The company is currently evaluating emissions of volatile organic
compounds from its manufacturing operations in the Atlanta, Georgia, area to
determine whether it will need to install pollution control equipment or modify
its operations to comply with federal and state air pollution regulations. Until
the current evaluations are completed, the company is not able to quantify the
possible cost of compliance. However, based upon currently available
information, the company does not expect that any material expenditures will be
required to achieve compliance.
Page 114
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
National Service Industries, Inc.
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 arising from events occurring prior to the closing,
subject to certain exceptions. The company has received notice from the buyer of
the textile rental plants of the alleged presence of perchloroethylene
contamination on one of the properties involved in the sale. The company has
since asserted an indemnification claim against the company from which it bought
the property. The prior owner is currently conducting an investigation of the
contamination at its expense, subject to a reservation of rights. At this time,
it is too early to quantify the company's potential exposure in this matter, the
likelihood of an adverse result, or the possibility that the company may be
fully or partially indemnified.
The State of New York has filed a lawsuit against the company alleging
that the company is responsible as a successor to Serv-All Uniform Rental Corp.
for past and future response costs in connection with the release or threatened
release of hazardous substances at and from the Blydenburgh Landfill in Islip,
New York. The company believes that it is not a successor to Serv-All Uniform
Rental Corp. and therefore has no liability with respect to the Blydenburgh
Landfill, and it has responded to the lawsuit accordingly. At this stage of the
litigation, it is too early to quantify the company's potential exposure or the
likelihood of an adverse result.
Note 6: Restructuring Expense and Asset Impairments
During 1997, the company conducted reviews of the textile rental, European
chemical, and corporate operations as a part of management's strategic
initiatives to examine under-performing operations and to position the company
for growth. As a result of the reviews, the company approved a significant
restructuring program and recorded a related charge of $9,600 during the fourth
quarter of 1997. The accrual included severance and union-related costs totaling
$2,950 for 120 employees of the textile rental, chemical, and envelope segments,
all of whom have since been terminated, and $6,650 in exit expenses to close
certain facilities and consolidate the operations of others in the textile
rental segment. Exit expenses include costs of unexpired leases and costs to
dispose of facilities.
The major components of the 1997 restructuring charges and related
activity are as follows:
Reserve, Reserve,
Beginning Cash Non-Cash End of
of Period Charge Payments Adjustments Period
- -------------------------------------------------------------------------------------
1999
Severance and union
related costs $ 630 - (290) (177) (1) $ 163
Exit costs $ 3,600 - (378) (2,758) (1) $ 464
1998
Severance and union
related costs $ 2,745 - (2,115) - $ 630
Exit costs $ 4,740 - (390) (750) (1) $ 3,600
1997
Severance and union
related costs $ - 2,950 (205) - $ 2,745
Exit costs $ - 6,650 (1,910) - $ 4,740
(1) The restructuring reserves were reduced because the company realized lower
costs than originally anticipated and also revised its estimate for certain
expenses included in the original restructuring plan due to lease terminations
or other changes.
As a further result of the 1997 reviews, the company recognized long-lived
asset impairments totaling $43,500. Textile rental assets to be disposed of in
under-performing branches were reduced by $22,300 to state them at their
estimated fair value less costs to sell. After the charge, the remaining net
book value of these assets was immaterial. Fixed assets held for use by the
textile rental, European chemical, and corporate units were reduced by $12,400
and related intangibles were reduced by $8,800. Impairments were recognized for
those assets where the sum of estimated undiscounted future cash flows was less
than the carrying amount of the assets, including related goodwill. Fair market
values were established based on independent appraisals, comparable sales or
purchases, and expected future cash flows discounted at the company's cost of
capital. Factors leading to the impairments were a combination of the results of
the reviews discussed above, historical losses, anticipated future losses, and
inadequate cash flows.
The losses resulting from the accruals and impairments are included in
"Restructuring expense, asset impairments, and other charges" in the
Consolidated Statements of Income.
During 1999, management performed an extensive review of the assets that
were to be disposed of and the remaining restructuring accruals. In addition to
realizing lower than anticipated costs, management has determined that it is
currently more economically feasible to continue to operate certain locations
that were to be disposed of in the original plan. As a result, in 1999 the
related reserve and impairments were reversed and $9,291 in income was recorded
and is included in "Restructuring expense, asset impairments, and other charges"
in the Consolidated Statements of Income.
Page 115
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
National Service Industries, Inc.
Note 7: Acquisitions and Divestitures
Acquisition spending in 1999 totaled $534,977 ($534,132 in cash and 26,495
shares valued at $845) and was primarily related to the lighting equipment and
envelope segments. The acquisitions were accounted for as purchases and,
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on estimated fair values.
The lighting equipment segment acquired four companies during 1999. The
largest acquisition was Holophane Corporation ("Holophane"), a manufacturer of
premium quality, highly engineered lighting fixtures and systems, which was
purchased in July 1999 for approximately $470,811. The preliminary allocation of
the purchase price resulted in additional goodwill of $251,781, which is being
amortized over 40 years, and identifiable intangibles of $145,725, which are
being amortized over periods ranging from 2 to 40 years. Identifiable
intangibles include trade names, trademarks, patented technology, distribution
network, trained workforce, and restrictive covenants. Results of operations
after the acquisition date of Holophane are included in the Consolidated
Statements of Income. The following pro forma information has been prepared
assuming the Holophane acquisition had taken place at the beginning of the
respective fiscal year of the company. The pro forma information includes
adjustments for interest expense on debt incurred to effect the acquisition, the
interest income foregone on the cash portion paid for the acquisition,
additional depreciation based on the fair market value of property, plant, and
equipment, and amortization of goodwill and intangibles resulting from this
transaction. The pro forma financial information does not purport to reflect the
financial position or results of operations that actually would have resulted
had the transaction occurred as of the date indicated or to project the results
of operations for any future period.
1999 1998
- -----------------------------------------------------------------------------
Pro Forma Information (Unaudited):
Sales and Service Revenues $ 2,422,991 $ 2,240,322
Net Income $ 118,403 $ 102,102
Basic earnings per share $ 2.90 $ 2.40
Diluted earnings per share $ 2.88 $ 2.37
------------------------------------
Other acquisitions in the lighting equipment segment included the
September 1998 purchase of certain assets of GTY Industries (d/b/a "Hydrel"), a
manufacturer of architectural-grade light fixtures for landscape, in-grade, and
underwater applications; the April 1999 purchase of certain assets of Peerless
Corporation, a manufacturer of high performance indirect/direct suspended
lighting products; and the July 1999 purchase of C&G Carandini SA, a
manufacturer of exterior lighting fixtures. In February 1999, the envelope
segment acquired substantially all of Gilmore Envelope, an envelope manufacturer
headquartered in Los Angeles, California. The company also made several minor
acquisitions in the textile rental segment.
Divestitures primarily related to the envelope segment's sale of
Techno-Aide/Stumb Metal Products in June 1999 for approximately $4,191. The
envelope segment recognized a pretax gain of $1,990 on the transaction. Other
divestitures during 1999 related to the sale of industrial contracts in the
textile rental segment and were not material.
During 1999, management performed an extensive review of the liabilities
recorded in connection with the textile rental segment's 1997 uniform plants
divestiture. In 1997, the textile rental segment accrued for items related to
the sale of its uniform plants including environmental exposures, severance
agreements, and costs to return leased facilities to pre-lease condition. The
company has realized lower costs than originally anticipated associated with
these items and, as a result, reduced the liability and recorded a gain of
$3,511.
Acquisition spending in 1998 totaled $45,305 and was primarily related to
the chemical and envelope segments. In November 1997, the chemical segment
purchased Pure Corporation, a speciality chemical company with its core
businesses in Indiana, Pennsylvania, and New York. In March 1998, the envelope
segment purchased Allen Envelope Corporation, a single-plant, Pennsylvania-based
envelope manufacturer, providing the segment with access to markets in the
Northeast. In July 1998, the company purchased Calman Australia Pty Ltd
("Calman"). Calman, located in Victoria, Australia is a manufacturer of
cleaning, maintenance, sanitation and industrial products, chemicals, supplies,
and accessories. Additionally, the company paid certain performance payments
associated with a prior year chemical acquisition. Divestitures during 1998
related to the textile rental segment and excess properties and were not
material.
In February 1997, the company sold the North Bros. insulation business for
$27,113 in cash. An immaterial gain was realized on the sale. The business had
1997 sales of $57,000 and operating income of $1,900. Additionally, immaterial
gains were recognized as the company divested several non-strategic textile
rental locations.
In July 1997, the company sold 29 textile rental plants to G & K Services,
Inc. at a pretax gain of $74,044. The following condensed pro forma consolidated
statements of income present reported results for the respective fiscal years to
remove both the gain on the transaction and the results of the operations sold:
Condensed Pro Forma Consolidated Statements of Income
(Unaudited) 1997 1996
- ------------------------------------------------------------ ----------- ------------
Sales and Service Revenues $1,859,653 $1,803,034
Other Costs and Expenses 1,708,672 1,648,460
Restructuring Expense, Asset Impairments, and Other Charges 63,091 -
- ------------------------------------------------------------ ----------- ------------
Income before Provision for Income Taxes 87,890 154,574
Provision for Income Taxes 32,172 57,988
- ------------------------------------------------------------ ----------- ------------
Net Income $ 55,718 $96,586
----------- ------------
Basic Earnings per Share $ 1.23 $ 2.01
----------- ------------
Basic Weighted Average Number of Shares Outstanding
(thousands) 45,191 47,941
----------- ------------
Diluted Earnings per Share $ 1.22 $ 2.00
----------- ------------
Diluted Weighted Average Number of Shares Outstanding
(thousands) 45,534 48,189
----------- ------------
Page 116
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (continued)
National Service Industries, Inc.
The pro forma statements are not necessarily indicative of the financial
position and results of operations that would have been attained had the
divestiture been consummated on the dates indicated or that may be attained in
the future.
In 1997, cash acquisition spending totaled $4,320 and was the result of
the chemical segment's purchase of chemical products companies in Ohio and
Canada and the lighting equipment segment's acquisition of a small emergency
lighting products manufacturer in Canada. The company also issued 536,872 shares
of common stock valued at $20,522 to acquire Enforcer Products, Inc.
("Enforcer"), a specialty chemical company with a retail focus. The operating
results of Enforcer were included in the chemical segment beginning with the
third quarter of fiscal 1997.
Note 8: Income Taxes
The company accounts for income taxes using the asset and liability approach as
prescribed by SFAS 109, "Accounting for Income Taxes." This approach requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Using the enacted tax rates in effect for the year in which the
differences are expected to reverse, deferred tax liabilities and assets are
determined based on the differences between the financial reporting and the tax
basis of an asset or liability.
The provision for income taxes consists of the following components:
1999 1998 1997
- -------------------------------------------------------------------------------------
Provision for current Federal taxes $ 49,221 $ 54,997 $ 94,426
Provision for current state taxes 2,957 3,143 11,994
Provision for current foreign taxes 2,373 1,952 1,598
Provision (credit) for deferred taxes 19,428 4,309 (36,218)
---------------------------
Total provision for income taxes $ 73,979 $ 64,401 $ 71,800
---------------------------
A reconciliation from the Federal statutory rate to the total provision
for income taxes is as follows:
1999 1998 1997
- -------------------------------------------------------------------------------------
Federal income tax computed at statutory rate $ 69,414 $ 60,592 $ 62,677
State income tax, net of Federal income tax benefit 2,594 2,144 5,960
Foreign and other, net 1,971 1,665 3,163
---------------------------
Total provision for income taxes $ 73,979 $ 64,401 $ 71,800
---------------------------
Components of the net deferred income tax liability at August 31, 1999 and
1998 include:
1999 1998
- ----------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 32,260 $ 26,837
Amortization of linens 25,416 21,017
Pension 14,252 12,835
Intangibles 60,239 2,279
Other 22,481 24,361
--------------------
Total deferred tax liabilities 154,648 87,329
--------------------
Deferred tax assets:
Self-insurance (22,093) (24,753)
Deferred compensation (28,684) (10,393)
Bonuses (943) (2,609)
Foreign tax losses (807) (1,014)
Restructuring and asset impairment (10,079) (14,594)
Asset disposition reserves (2,981) (4,365)
Other assets (3,775) (6,739)
--------------------
Total deferred tax assets (69,362) (64,467)
--------------------
Net deferred tax liability $ 85,286 $ 22,862
--------------------
At August 31, 1999, the company had foreign net operating loss
carryforwards of $2,207 expiring in fiscal years 2000 through 2004.
Note 9: Quarterly Financial Data (Unaudited)
Sales and Income Basic Diluted
Service Gross before Net Earnings Earnings
Revenues Profit Taxes Income per Share per Share
- ---------------------------------------------------------------------------------
1999
1st Quarter $ 518,926 $213,488 $40,930 $25,704 $ .62 $.62
2nd Quarter 510,359 201,357 39,427 24,762 .60 .60
3rd Quarter 569,838 228,849 48,635 30,541 .75 .75
4th Quarter 620,106 248,685 69,330 43,336 1.07 1.07
1998
1st Quarter $ 487,584 $198,408 $42,355 $26,668 $ .61 $.60
2nd Quarter 479,411 191,200 37,312 23,488 .55 .54
3rd Quarter 521,608 212,474 44,789 28,139 .67 .66
4th Quarter 542,707 221,993 48,665 30,425 .73 .72
Page 117
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (continued)
National Service Industries, Inc.
Note 10: Business Segment Information
Capital
Sales and Operating Expemditures
Service Profit Identifiable Depreciation Amortization Including
Revenues (Loss) Assets Expense Expense Acquisitions
- ----------------------------------------------------------------------------------------------------------
1999
Lighting Equipment $1,220,602 $ 121,755 $ 1,073,936 $ 20,351 $ 2,322 $ 541,649
Chemical 487,783 45,206 233,461 6,681 3,480 10,980
Textile Rental (1) 309,115 42,935 203,509 13,666 860 20,669
Envelope (3) 201,729 17,662 139,755 5,319 969 32,592
--------------------------------------------------------------------------------------
2,219,229 227,558 1,650,661 46,017 7,631 605,890
Corporate (15,169) 45,128 2,174 527
Interest Expense, net (14,067)
--------------------------------------------------------------------------------------
$2,219,229 $ 198,322 $ 1,695,789 $ 48,191 $ 7,631 $ 606,417
--------------------------------------------------------------------------------------
1998
Lighting Equipment $1,105,255 $ 109,286 $ 397,962 $ 18,819 $ 295 $ 37,541
Chemical 454,532 36,460 235,269 6,387 2,807 20,217
Textile Rental (1) 312,746 29,734 193,347 12,836 1,076 21,595
Envelope 158,777 13,293 103,087 3,895 488 47,111
--------------------------------------------------------------------------------------
2,031,310 188,773 929,665 41,937 4,666 126,464
Corporate (14,903) 81,019 2,243 875
Interest Expense, net (749)
--------------------------------------------------------------------------------------
$2,031,310 $ 173,121 $ 1,010,684 $ 44,180 $ 4,666 $ 127,339
--------------------------------------------------------------------------------------
1997
Lighting Equipment $ 952,026 $ 92,372 $ 353,224 $ 16,446 $ 276 $ 21,688
Chemical (2) 402,569 31,647 202,769 6,064 2,615 12,875
Textile Rental (1) 493,535 60,792 190,139 20,567 6,447 13,050
Envelope (3) 131,015 10,190 55,271 3,287 10 7,159
Other 57,034 1,096 -- 611 -- 509
--------------------------------------------------------------------------------------
2,036,179 196,907 801,403 46,975 9,348 $ 55,281
Corporate (4) (16,205) 304,949 1,658 1,709
Interest Expense, net (1,624)
--------------------------------------------------------------------------------------
$2,036,179 $ 179,078 $ 1,106,352 $ 48,633 $ 9,348 $ 56,990
--------------------------------------------------------------------------------------
(1) Textile rental segment 1999 operating profit included $9,291 of income
related to the reversal of restructuring reserves and asset impairments.
Textile rental segment 1997 operating profit included one-time charges of
$17,800 for restructuring, environmental matters, and other and $31,800 for
asset impairments. Gains resulting from the sale of businesses were $9,230
in 1999, $2,449 in 1998, and $75,097 in 1997. Gains on sale of businesses
for 1999 included $3,511 related to the 1997 sale of textile rental plants
to G&K Services, Inc. See Note 7: Acquisitions and Divestitures.
(2) Chemical segment 1997 operating profit included one-time charges of $1,500
for restructuring and $8,100 for asset impairments.
(3) Envelope segment 1999 operating profit included gains resulting from
the sale of businesses of $1,990. Envelope segment 1997 operating profit
included one-time charges of $230 for restructuring.
(4) Corporate operating profit included one-time charges of $3,700 for asset
impairments.
The geographic distribution of the company's sales and service revenues,
operating profit (loss), and identifiable assets is summarized in the following
tables:
1999 1998 1997
- -----------------------------------------------------------------------------
Sales and service revenues
United States $2,061,774 $1,898,947 $1,914,203
Canada 85,829 79,435 71,067
European countries 46,723 39,936 44,503
Other 24,903 12,992 6,406
---------------------------------------
$2,219,229 $2,031,310 $2,036,179
---------------------------------------
Operating profit(loss)
United States $ 195,470 $ 174,447 $185,987
Canada 1,170 152 101
European countries 934 (2,562) (7,188)
Other 748 1,084 178
---------------------------------------
$ 198,322 $ 173,121 $179,078
---------------------------------------
Identifiable assets
United States $1,551,003 $ 938,802 $1,040,726
Canada 46,982 40,747 37,756
European countries 67,558 23,556 25,028
Other 30,246 7,579 2,842
---------------------------------------
$1,695,789 $1,010,684 $1,106,352
---------------------------------------
Sales are attributed to each country based on the selling location.
Page 118
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 judgments and estimates where appropriate.
The information in other sections of this report is consistent with the
financial statements. The company maintains a system of internal controls and
accounting policies and procedures designed to provide reasonable assurance that
assets are safeguarded and transactions are executed and recorded in accordance
with management's authorization. The audit committee of the Board of Directors,
composed entirely of outside directors, is responsible for monitoring the
company's accounting and reporting practices. The audit committee meets
regularly with management, the internal auditors, and the independent 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 /S/ Brock A. Hattox /s/ Mark R. Bachmann
James S. Balloun Brock A. Hattox Mark R. Bachmann
Chairman, President, and Executive Vice President and Vice President and
Chief Executive Officer Chief Financial Officer 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, 1999
and 1998 and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended August
31, 1999. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1999 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
October 8, 1999
Page 119
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
National Service Industries is a diversified service and manufacturing company
operating in four segments: lighting equipment, chemicals, textile rental, and
envelopes. The company continued to be in solid financial condition at August
31, 1999. Although down from last year, net working capital remained strong at
$256.5 million at August 31, 1999, and the current ratio was 1.6, compared with
2.7 at the prior year end. The decrease in net working capital was primarily the
result of a decrease in cash and an increase in debt to fund acquisitions,
capital expenditures, share repurchases, and payment of dividends. At August 31,
1999, the company's debt to capitalization increased to 47.2 percent compared
with 12.9 percent at the prior year end.
Strategic Transactions
The company periodically implements strategic transactions that, it believes,
afford it the opportunity to redeploy resources to create value and position the
company for future growth. During the three-year period ending August 31, 1999,
the following transactions occurred:
Acquisitions
Acquisition spending in 1999 totaled $534.9 million ($534.1 million in cash and
$0.8 million in stock) and was primarily related to the lighting equipment and
envelope segments. In July 1999, the lighting equipment segment purchased
Holophane Corporation ("Holophane"), a manufacturer of premium quality, highly
engineered lighting fixtures and systems, for approximately $471 million. Other
acquisitions in the lighting equipment segment included the September 1998
purchase of certain assets of GTY Industries (d/b/a "Hydrel"), a manufacturer of
architectural-grade light fixtures for landscape, in-grade, and underwater
applications; the April 1999 purchase of certain assets of Peerless Corporation
("Peerless"), a manufacturer of high performance indirect/direct suspended
lighting products; and the July 1999 purchase of C&G Carandini SA, a
manufacturer of exterior lighting fixtures. In February 1999, the envelope
segment acquired substantially all of Gilmore Envelope, an envelope manufacturer
headquartered in Los Angeles, California. The company also made several minor
acquisitions in the textile rental segment.
In 1998, acquisition spending totaled $45.3 million and was primarily
related to the chemical and envelope segments. In November 1997, the chemical
segment purchased Pure Corporation, a specialty chemical company with its core
businesses in Indiana, Pennsylvania, and New York. In March 1998, the envelope
segment purchased Allen Envelope Corporation ("Allen"), a single-plant,
Pennsylvania-based envelope manufacturer, providing the segment with access to
markets in the Northeast. In July 1998, the company purchased Calman Australia
Pty Ltd ("Calman"). Calman, located in Victoria, Australia, is a manufacturer of
cleaning, maintenance, sanitation and industrial products, chemicals, supplies,
and accessories. Additionally, the company paid certain performance payments
associated with a prior year chemical acquisition.
In 1997, acquisition spending totaled $4.3 million and resulted from the
chemical segment's purchase of chemical products companies in Ohio and Canada
and the lighting equipment segment's acquisition of a small emergency lighting
products manufacturer in Canada. In March 1997, the company also issued 536,872
shares of common stock valued at $20.5 million to acquire Enforcer Products,
Inc. ("Enforcer"), a specialty chemical company with a retail focus.
Divestitures
In 1999, proceeds from divestitures totaled $12.0 million and primarily related
to the envelope segment's sale of Techno-Aide/Stumb Metal Products in June 1999
resulting in proceeds of $4.2 million and a pretax gain of $2.0 million. Other
divestitures during 1999 related to the sale of industrial contracts in the
textile rental segment and were not material.
During 1999, management performed an extensive review of the liabilities
recorded in connection with the textile rental segment's 1997 uniform plants
divestiture. In 1997, the textile rental segment accrued for items related to
its uniform plants including environmental exposures, severance agreements, and
costs to return leased facilities to pre-lease condition. The company realized
lower costs than originally anticipated associated with these items and, as a
result, has reduced the liability and recorded a gain of $3.5 million.
In 1998, divestitures of non-strategic textile rental operations and excess
properties resulted in net proceeds of $3.1 million and pretax gains of $2.4
million.
In February 1997, the company sold the North Bros. insulation business for
cash of $27.1 million, recognizing an immaterial gain. The business had 1997
sales of $57.0 million and operating income of $1.9 million through the date of
sale.
In July 1997, the company sold 29 textile rental plants to G&K Services,
Inc. for approximately $280.0 million, recognizing a pretax gain of $74.0
million. The divested locations had 1997 sales of $176.5 million and operating
income of $9.4 million through the date of sale.
Additionally, in 1997, the company divested other non-strategic businesses
in the textile rental segment generating cash of $4.3 million.
Liquidity and Capital Resources
Operating Activities
Operations provided cash of $208.2 million in 1999, compared with cash provided
of $26.4 million in 1998 and $125.5 million in 1997. The increase in 1999
primarily resulted from additional tax payments made in 1998 related to the 1997
textile rental segment divestitures, improved working capital management in the
lighting equipment and chemical segments, and an increase in net income. The
decrease in 1998 compared with 1997 was primarily the result of the tax payments
and an increase in accounts receivable commensurate with the increased revenue
in the lighting equipment and chemical segments.
Investing Activities
Investing activities used cash of $598.0 million in 1999 and provided cash of
$81.3 million and $61.1 million in 1998 and 1997, respectively. The decrease in
1999 was a result of the significant increase in acquisition spending coupled
with the liquidation of short-term investments during 1998 that was not repeated
during the current year. The increase in 1998 compared with 1997 is the result
of the liquidation of $205.3 million of short-term investments, generated by
1997 divestitures, to fund acquisitions, capital expenditures, share
repurchases, and payment of dividends. Capital expenditures were $72.3 million
in 1999, compared with $82.0 million in 1998 and $48.8 million in 1997. Capital
spending during 1999 was primarily attributable to the lighting equipment,
textile rental, and envelope segments. The lighting equipment segment's capital
expenditures related to the purchase of land and buildings for a new plant,
manufacturing improvements and upgrades for capacity expansion, and
implementation of new technology. Expenditures in the textile rental segment
were for implementation of new technology, production enhancements, and delivery
truck purchases and refurbishments. The envelope segment's expenditures related
primarily to manufacturing process improvements, information systems, facility
expansion, and new folding capacity. During 1998, the lighting equipment segment
invested in facility expansions and manufacturing process improvements, the
textile rental segment invested in a merchandise tracking system and fleet
refurbishment, and the envelope segment invested in facility and machinery
replacements. Capital spending in 1997 consisted primarily of lighting equipment
segment facilities and process improvements, equipment replacements, and tooling
for new products and textile
Page 120
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
rental segment facilities improvements and equipment replacements. In 2000,
capital expenditures are expected to approximate $110 million as the company
continues to invest capital in technology and facilities. Contractual
commitments for capital and acquisition spending for fiscal year 2000
approximate $24 million.
As noted under "Acquisitions" and "Divestitures," the company has
completed a number of strategic transactions. The company spent $534.1 million,
$45.3 million, and $4.3 million in 1999, 1998, and 1997, respectively, on
acquisitions. Additionally, the company received $12.0 million, $3.1 million,
and $311.4 million in connection with dispositions of non-strategic assets in
1999, 1998, and 1997, respectively.
Financing Activities
Financing activities provided cash of $372.9 million during 1999 and used cash
of $145.2 million and $187.6 million in 1998 and 1997, respectively. In the
three years ending August 31, 1999, the company distributed approximately $476.3
million to stockholders through share repurchases and dividends. Cash of $42.0
million, $154.0 million, and $121.7 million was utilized in 1999, 1998, and
1997, respectively, for share repurchases of 1.2 million, 3.0 million, and 3.0
million shares, respectively. Although the company has a standing annual
authorization to repurchase 2.0 million shares plus the number of new shares
issued in any one year, the company does not plan to purchase additional shares
until its ratio of total debt to capitalization is within the company's stated
objective of 30 to 40 percent. Included in the 1998 and 1997 amounts was a
supplemental authorization for the repurchase of 1.25 million shares granted as
a result of the textile rental divestiture transaction. Additionally, the
company distributed cash of $51.9 million, $52.6 million, and $54.2 million in
1999, 1998, and 1997, respectively, to the company's stockholders in the form of
dividends. The increase in dividends to $1.27 per share in 1999 from $1.23 per
share in 1998 represented an increase of 3.3 percent, marking the sixty-third
consecutive year of quarterly dividends without a decrease.
In 1996, the company negotiated a $250 million multi-currency committed
credit facility (the "Credit Facility") with ten domestic and international
banks. The Credit Facility has a term of five years, expiring in July 2001, with
no provision for a reduction in commitments. The Credit Facility contains
restrictions on the incurrence of indebtedness by subsidiaries, as well as
financial and other covenants, including the restriction that the company's
ratio of total debt to capitalization may not exceed 60 percent at any time.
During the fourth quarter of 1998, the company filed a registration
statement (the "shelf registration"), which became effective September 8, 1998,
with the Securities and Exchange Commission to allow the company to offer for
sale, from time to time, up to $400 million of unsecured senior debt securities
or unsecured senior subordinated debt securities (the "Debt Securities")
consisting of notes, debentures, or other evidence of indebtedness, of which
$240 million remains available at August 31, 1999. The Debt Securities may be
convertible into or exchangeable for shares of the company's common stock,
shares of its preferred stock, or other Debt Securities. The Debt Securities may
be offered as a single series or as two or more separate series in amounts, at
prices and on terms to be determined at the time of the offering. The Debt
Securities may be sold to or through one or more agents designated from time to
time.
In January 1999, the company issued $160.0 million in ten-year publicly
traded notes bearing a coupon rate of 6.0 percent. Proceeds were used for the
repayment of $80.0 million in borrowings under the Credit Facility, of which
$52.0 million was outstanding under the domestic line of credit at August 31,
1998. The remainder was used for general corporate purposes including working
capital requirements, capital expenditures, acquisitions, and share repurchases.
In July 1999, the company entered into an additional $250.0 million, 364-day
committed credit facility (the "Revolving Credit Facility") expiring in July
2000. The combined $500.0 million under the Credit Facility and the Revolving
Credit Facility support the company's commercial paper program, which was
initiated in July 1999 primarily to fund the acquisition of Holophane.
At August 31, 1999, the company had $352.3 million outstanding under its
commercial paper program, of which $249.7 million was classified as long-term as
the company intends to refinance this amount through long-term debt instruments
or availability under the Credit Facility which matures in 2001. Short-term
commercial paper of $102.5 million had an average interest rate of 5.8 percent.
The company has complimentary lines of credit totaling $125.7 million for
general operating purposes, of which $25.7 million is designated as
multi-currency. At August 31, 1999, $76.9 million in letters of credit were
outstanding, primarily under the domestic line of credit. The company had $10.9
million of foreign currency short-term bank borrowings outstanding under the
multi-currency line of credit at a weighted average interest rate of 3.8 percent
at August 31, 1999.
Management believes current cash balances, anticipated cash flows from
operations, and available funds from the commercial paper program or the
committed credit facilities, complimentary 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.
Results of Operations Years Ended August 31
(in millions, except ---------------------------------------
per-share amounts) 1999 1998 1997
---------------------------------------
Sales and Service Revenue:
Lighting Equipment $1,220.6 $1,105.3 $ 952.0
Chemical 487.8 454.5 402.6
Textile Rental 309.1 312.7 493.5
Envelope 201.7 158.8 131.0
Other - - 57.1
---------------------------------------
$2,219.2 $2,031.3 $2,036.2
=======================================
Operating Profit (Loss):
Lighting Equipment $ 121.8 $ 109.3 $ 92.4
Chemical 45.2 36.5 31.6
Textile Rental 42.9 29.7 60.8
Envelope 17.7 13.3 10.2
Other - - 1.9
---------------------------------------
227.6 188.8 196.9
Corporate (15.2) (14.9) (16.2)
Interest expense, net (14.1) (0.8) (1.6)
=======================================
$ 198.3 $ 173.1 $ 179.1
=======================================
Net Income $ 124.3 $ 108.7 $ 107.3
=======================================
Earnings per Share:
Basic $ 3.04 $ 2.56 $ 2.37
Diluted 3.03 2.53 2.36
=======================================
Page 121
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
National Service Industries posted revenues of $2.2 billion for the fiscal
year ended August 31, 1999. The revenue increase in 1999 in comparison to the
prior year resulted from increased lighting equipment, chemical, and envelope
revenues of approximately $192 million, partially offset by a slight decrease in
revenue in the textile rental segment. Revenues in 1998 decreased slightly in
comparison with the prior year as a result of increased lighting equipment,
chemical, and envelope revenues of approximately $233 million, offset primarily
by revenues not included in 1998 as a result of 1997 divestitures.
Net income for 1999 increased $15.6 million, or 14.4 percent, to a record
level of $124.3 million, or $3.04 per basic share, $3.03 diluted. Earnings per
share grew at the higher rate of 18.8 percent per basic share and 19.8 percent
per diluted share due to a reduction of 1.6 million basic and 1.9 million
diluted average shares outstanding. Net income in 1998 increased $1.4 million,
or 1.3 percent, to $108.7 million, or $2.56 per basic share, $2.53 diluted.
Lighting equipment segment sales grew $115.3 million, or 10.4 percent, to
$1.2 billion in 1999. Continued strength in the non-residential construction
market and the acquisitions of Hydrel, Peerless, and Holophane contributed to
the growth in sales. As a result of the increased sales and manufacturing cost
savings, operating profit increased 11.4 percent in 1999. Sales for 1998
increased 16.1 percent due to strong demand in the non-residential construction
market and increased volumes resulting from new products. Operating profit for
1998 increased 18.3 percent as a result of the increased sales and ongoing
productivity improvements.
Chemical segment revenues for 1999 increased $33.3 million, or 7.3
percent, to $487.8 million. The increase in revenue was a result of continued
growth in the retail channel, higher revenue in the industrial and institutional
distribution channels, inclusion of a full year of Calman, and other
international revenue. Operating profit increased $8.7 million, or 24.0 percent,
to $45.2 million as a result of the increased revenues, lower operating costs,
and severance costs included in 1998 that were not repeated in 1999. Revenues in
1998 increased 12.9 percent as a result of the inclusion of a full year of
Enforcer as well as increased retail volumes of Enforcer and Zep Manufacturing
Company. Operating profit in 1998 increased 15.5 percent as a result of the
increased revenues and the impact of the 1997 restructuring charge on 1997
operating profit. These increases in operating profit were somewhat offset by
additional severance costs and increased selling expenses incurred in the
industrial chemical channel of the segment.
Textile rental segment revenues, representing all of the company's service
revenues, decreased 1.2 percent during 1999 to $309.1 million, primarily as a
result of the continued sale of industrial contracts and the rationalization of
unprofitable accounts. Operating profit increased 44.4 percent to $42.9 million,
primarily as a result of gains recognized on the sale of businesses and
adjustments made to amounts accrued in connection with the 1997 uniform plants
divestiture and 1997 restructuring activities. In 1997, the textile rental
segment accrued for items related to the sale of its uniform plants including
environmental exposures, severance agreements, and costs to return leased
facilities to pre-lease condition. The company realized lower costs than
originally anticipated and recorded a gain of $3.5 million as discussed in
"Strategic Transactions." In 1997, the segment also recorded an impairment
charge and accrued for items related to restructuring activities that primarily
related to branch consolidations and asset dispositions. In addition to
realizing lower than anticipated costs, management determined that it is
currently more economically feasible to continue to operate certain locations
that were to be disposed of in the original plan. As a result, in 1999 the
related reserve and impairments were reversed and $9.3 million in income was
recorded. Excluding unusual gains and other non-operating items in 1999 and
1998, operating profit increased slightly due to the segment's focus on lowering
merchandise costs and improving production efficiencies. Segment revenue in 1998
decreased 36.6 percent as a result of businesses divested in 1997. Excluding the
1997 divestiture, revenues declined approximately $4.0 million as the segment
continued to eliminate low-margin customer accounts. Operating profit in 1998
decreased 51.2 percent to $29.7 million, primarily as a result of the 1997
divestitures.
Envelope segment revenue increased $43.0 million, or 27.1 percent, in 1999
to $201.7 million primarily as a result of the acquisitions of Gilmore Envelope
in February 1999 and Allen in March 1998. Operating profit for the segment
increased 32.9 percent to $17.7 million primarily as a result of the gain on the
sale of Techno-Aide/Stumb Metal Products, as discussed in "Strategic
Transactions," the acquisition of Gilmore Envelope, and increased revenues.
Segment revenue in 1998 increased 21.2 percent due to the March 1998 purchase of
Allen, as discussed in "Strategic Transactions," and higher shipment volumes.
Operating profit increased 30.4 percent during 1998 as a result of the increased
revenues generated by the Allen acquisition.
Corporate expenses in 1999 approximated last year. In 1998, corporate
expenses decreased $1.3 million, as 1997 expense included an asset impairment
recorded to reflect the $1.2 million appraised value of an asset held for sale.
Net interest expense increased $13.3 million in 1999 as a result of higher
average debt levels coupled with lower average cash balances. Net interest
expense decreased $0.8 million in 1998 as the company benefited from higher
average levels of short-term investments, offset slightly by higher average debt
levels.
Consolidated income before taxes increased $25.2 million, or 14.6 percent,
to $198.3 million primarily due to increased income from the lighting equipment,
chemical, and envelope segments. Additionally, gains realized on the sale of
businesses and related to adjustments to restructuring reserves and impairments
originally recorded in 1997 in the textile rental segment positively affected
income. The provision for income taxes was 37.3 percent, 37.2 percent, and 40.1
percent in 1999, 1998, and 1997, respectively. The decrease in the effective
rate in 1998 was due primarily to higher rates applicable to the 1997 textile
rental divestiture.
Environmental Matters
See Note 5: Commitments and Contingencies in the Notes to the Consolidated
Financial Statements for a discussion of environmental matters.
Page 122
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Market Risk
The company is exposed to market risks that may impact the Consolidated Balance
Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash
Flows due to changing interest rates and foreign exchange rates. The company
does not currently participate in any significant hedging activities, nor does
it utilize any significant derivative financial instruments. The following
discussion provides additional information regarding the company's market risks.
Interest Rates-The company's commercial paper, notes payable, fixed-rate notes,
and other long-term debt are subject to interest rate fluctuations. These
fluctuations expose the company to changes in interest expense, cash flows, and
the fair market value of the instruments. The company's variable-rate debt
amounted to $387.0 million at August 31, 1999. Based on outstanding borrowings
at year end, a 10 percent adverse change in effective market interest rates at
August 31, 1999 would result in additional annual after-tax interest expense of
approximately $1.3 million. To address this risk, the company intends to
refinance approximately $250 million of the outstanding commercial paper on a
long-term, fixed-rate basis. Although a fluctuation in interest rates would not
affect interest expense or cash flows related to the company's $160 million
publicly traded notes, a 10 percent adverse change in effective market interest
rates at August 31, 1999 would decrease the fair value of the notes to
approximately $138.2 million.
Foreign Exchange Rates-The majority of the company's revenue, expense, and
capital purchases are transacted in U.S. dollars. International operations,
primarily the lighting equipment and chemical segments, represented
approximately 7.1 percent of sales and service revenues, 1.4 percent of
operating profit (loss), and 8.5 percent of identifiable assets. The company
does not believe a 10 percent fluctuation in average foreign currency rates
would have a material effect on its consolidated financial statements or results
of operations.
Impact of the Year 2000 Issue
The "Year 2000 Issue" resulted from the use of two digits rather than four
digits to define the applicable year in certain computer programs. With the
coming millennium, any of the company's computer programs that have two-digit
date-sensitive software may interpret a date of "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
causing disruption of the operation of computer hardware and software, as well
as intelligent manufacturing equipment and processes, and telephony.
Management is addressing the Year 2000 Issue in four phases: awareness,
assessment, action plan, and plan implementation. At August 31, 1999, all areas
of the company had completed the first three phases and implementation of the
plan was substantially complete. Management estimates that the total cost to be
incurred in connection with the Year 2000 Issue will be approximately $6
million, and all major systems are expected to be in compliance prior to the end
of calendar year 1999. At August 31, 1999, the company had spent approximately
$4.7 million on the Year 2000 Issue. The cost of the project is being funded
through operating cash flows. 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 this time, the company believes its most reasonably likely worst case
scenario is that key suppliers or service providers who have not resolved their
own Year 2000 Issue may cause a disruption of service to the company's critical
business processes. Management has evaluated the potential exposure of the
company to related problems of its customers and suppliers and has implemented a
vendor certification process. While management believes that its plan is
sufficient to address the Year 2000 Issue, management has substantially
completed a contingency plan to address the potential for unforeseen issues that
may arise. The contingency plan includes identifying alternative suppliers and
increasing inventory levels. There can be no assurance, however, that such
exposures or the costs of remediating any problems associated therewith will not
materially affect the company's future business, financial condition, or results
of operations.
Outlook
Management continues to execute its strategic plan to grow both internally and
through acquisitions. Fiscal 2000 sales from the existing businesses are
anticipated to grow at a rate in excess of 5.0 percent, led primarily by the
lighting equipment segment through continued lighting equipment market strength
and in the chemical segment by product development and growth in the retail
market. Assuming there are no significant changes in the current economic
environment, management expects earnings to be lower than 1999 results due to
the Holophane acquisition, which is expected to dilute earnings by 13 cents per
share, and unusual gains included in 1999 results that are not planned in fiscal
2000.
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, environmental
issues, and legal proceedings; (b) statements made concerning management's
expectations with respect to the company's plan for strategic growth; (c)
statements made regarding management's expectations with regard to projected
capital expenditures, future cash flows, debt refinancing, share repurchases,
and debt to capitalization objectives; and (d) statements made regarding the
acquisition of Holophane. 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, including the potential for a slowdown in
non-residential construction awards, fluctuations in commodity and raw material
prices, market demand for public debt, interest rate changes, and foreign
currency fluctuations; and (b) the ability to achieve strategic initiatives,
including but not limited to the achievement of synergies related to
acquisitions and the achievement of sales growth across the business segments
through a combination of increased pricing, enhanced sales force, new products,
improved customer service, and acquisitions.
Page 123
Exhibit 13
TEN-YEAR FINANCIAL SUMMARY
National Service Industries, Inc.
(Dollar amounts in thousands, except per-share data)
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Operating Results
Net sales of
products $1,910,114 $1,718,564 $1,542,644 $1,482,937 $1,424,180 $1,337,410 $1,257,906 $1,189,684 $1,164,181 $1,250,833
Service revenues 309,115 312,746 493,535 530,625 546,447 544,454 546,916 444,127 437,534 396,981
-----------------------------------------------------------------------------------------------------------------
Total revenues 2,219,229 2,031,310 2,036,179 2,013,562 1,970,627 1,881,864 1,804,822 1,633,811 1,601,715 1,647,814
Cost of products
sold (1) 1,146,080 1,023,765 924,505 909,870 908,869 875,055 832,264 810,552 791,355 832,867
Cost of services(1) 180,770 183,470 283,024 304,381 299,687 286,519 281,551 236,474 240,376 219,673
Selling and administrative
expenses 698,196 654,511 655,029 640,048 601,143 576,463 556,162 462,240 456,622 438,949
Interest expense (income),
net 14,067 749 1,624 1,565 1,648 2,788 3,645 (837) (4,332) (3,712)
Gain on sale of
businesses (11,220) (2,449) (75,097) (7,579) (5,726) (2,249) (1,379) - - -
Restructuring expense,
asset impairments, and
other charges (9,291) - 63,091 - - - - - 63,467 -
Other expense (income),
net 2,305 (1,857) 4,925 3,429 14,509 11,090 13,063 8,474 5,591 4,322
-----------------------------------------------------------------------------------------------------------------
Income before taxes 198,322 173,121 179,078 161,848 150,497 132,198 119,516 116,908 48,636 155,715
Provision for
income taxes 73,979 64,401 71,800 60,700 56,400 49,500 44,400 42,800 16,400 56,000
-----------------------------------------------------------------------------------------------------------------
Net Income $ 124,343 $ 108,720 $ 107,278 $ 101,148 $ 94,097 $ 82,698 $ 75,116 $ 74,108 $ 32,236 $ 99,715
-----------------------------------------------------------------------------------------------------------------
Per-Share Data
Net income: (2)
Basic $ 3.04 $ 2.56 $ 2.37 $ 2.11 $ 1.93 $ 1.67 $ 1.52 $ 1.50 $ .65 $ 2.02
Diluted 3.03 2.53 2.36 2.10 1.93 1.67 1.51 1.50 .65 2.02
Cash dividends 1.27 1.23 1.19 1.15 1.11 1.07 1.03 .99 .95 .90
Stockholders' equity 15.22 13.96 15.20 15.45 15.41 14.77 14.21 13.79 13.33 13.68
Financial Ratios
Current ratio 1.6 2.7 2.8 3.1 3.2 3.2 2.9 3.5 3.4 4.5
Net income as a percent
of sales 5.6% 5.4% 5.3% 5.0% 4.8% 4.4% 4.2% 4.5% 2.0% 6.1%
EBITDA as a percent
of sales 12.1% 11.0% 11.7% 11.0% 10.6% 10.4% 10.3% 10.4% 5.9% 11.8%
Return on average
stockholders' equity 21.2% 17.4% 15.5% 13.6% 13.0% 11.6% 10.9% 11.1% 4.8% 15.6%
Dividends as a percent of
current year earnings 41.7% 48.4% 50.5% 54.6% 57.6% 64.1% 67.9% 66.3% 146.2% 44.6%
Percent of debt to total
capitalization 47.2% 12.9% 4.6% 4.2% 4.3% 4.3% 4.7% 4.2% 5.0% 4.2%
Page 124
Exhibit 13
TEN-YEAR FINANCIAL SUMMARY (continued)
National Service Industries, Inc.
(Dollar amounts in thousands, except per-share data)
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Position
Increase (decrease) in:
Cash and cash
equivalents $ (16,892)$ (37,977) $ (1,539)$ (20,740)$ 20,783 $ 42,766 $ (85,284)$ 27,617 $ (50,437)$ 23,433
Short-term
investments - (205,302) 204,751 (3,047) 1,019 (2,197) (3,736) (5,551) 12,813 (27,247)
Net working capital 256,528 385,056 498,758 408,955 437,840 413,114 363,575 399,893 386,306 447,800
Short-term debt $ 114,378 $ 7,981 $ 5,889 $ 6,742 $ 6,486 $ 5,765 $ 6,196 $ 1,434 $ 3,254 $ 2,253
Long-term debt 435,199 78,092 26,197 24,920 26,776 26,683 28,418 28,359 31,373 27,465
---------------------------------------------------------------------------------------------------------------
Total debt 549,577 86,073 32,086 31,662 33,262 32,628 34,614 29,793 34,627 29,718
Stockholders' equity 615,874 578,901 671,813 718,008 744,404 727,385 704,023 682,954 660,567 675,444
---------------------------------------------------------------------------------------------------------------
Capitalization $ 1,165,451 $ 664,974 $ 703,899 $ 749,670 $ 777,666 $ 760,013 $ 738,637 $ 712,747 $ 695,194 $ 705,162
---------------------------------------------------------------------------------------------------------------
Other Data
Capital expenditures
(including acquisitions)$606,417 $ 127,339 $ 56,990 $ 65,566 $ 59,910 $ 42,508 $ 82,171 $ 49,789 $ 90,229 $ 82,932
Depreciation
and amortization ... 55,822 48,846 57,981 58,428 57,130 60,548 62,097 53,816 50,249 42,821
Total assets ..........1,695,789 1,010,684 1,106,352 1,094,646 1,131,346 1,101,261 1,081,510 1,036,908 1,008,319 960,622
Deferred income
tax liability ...... 95,557 40,404 34,093 63,347 67,756 73,319 78,286 87,150 96,627 99,277
Self-insurance
reserves, less
current portion ..... 38,828 44,573 57,056 63,369 67,830 61,081 56,335 47,638 38,428 15,222
Other long-term
liabilities ......... 86,446 46,719 35,193 27,576 24,010 22,940 27,110 28,677 22,015 16,067
Weighted average number of shares
outstanding (in thousands): (2)
Basic 40,899 42,462 45,191 47,941 48,696 49,547 49,556 49,539 49,540 49,389
Diluted 41,093 43,022 45,534 48,189 48,797 49,614 49,623 49,566 49,561 49,389
Stockholders 6,292 6,774 7,165 6,281 6,655 7,034 7,262 7,554 7,996 8,248
Employees 19,700 16,700 16,100 20,600 21,100 22,000 22,200 20,100 20,900 21,800
Use of Total Revenues
Salaries and wages $ 582,343 $ 552,816 $ 572,517 $ 580,571 $ 568,616 $ 565,859 $ 572,163 $ 502,709 $ 501,502 $ 491,334
Materials and supplies 1,048,817 955,307 909,082 875,658 832,668 783,610 760,551 700,338 683,871 713,310
Other operating expenses 357,854 305,888 334,503 348,143 370,575 349,849 301,356 273,330 258,919 246,288
Taxes and licenses 126,383 111,028 124,805 115,621 110,397 102,097 97,015 83,326 59,889 97,167
Gain on sale of
businesses (11,220) (2,449) (75,097) (7,579) (5,726) (2,249) (1,379) - - -
Restructuring expense, asset impairments,
and other charges (9,291) - 63,091 - - - - - 63,467 -
Dividends paid 51,856 52,603 54,222 55,272 54,156 53,042 51,041 49,105 47,124 44,506
Retained earnings 72,487 56,117 53,056 45,876 39,941 29,656 24,075 25,003 (13,057) 55,209
---------------------------------------------------------------------------------------------------------------
$ 2,219,229 $2,031,310 $2,036,179 $2,013,562 $1,970,627 $1,881,864 $1,804,822 $1,633,811 $1,601,715 $1,647,814
---------------------------------------------------------------------------------------------------------------
(1) Certain prior period amounts in the financial statements and notes have been reclassified to conform with the 1999 presentation.
(2) In 1998, the company adopted Financial Accounting Standards No. 128, "Earnings per Share." Prior period amounts have been
restated in accordance with this statement.