- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
<Table>
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
</Table>
COMMISSION FILE NUMBER 1-3208.
---------------------
NATIONAL SERVICE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 58-0364900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1420 PEACHTREE STREET, N.E., ATLANTA, GEORGIA 30309-3002
(Address of principal executive offices) (Zip Code)
(404) 853-1000
(Registrant's telephone number, including area code)
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE SECURITIES EXCHANGE ACT
OF 1934:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock ($1.00 Par Value) New York Stock Exchange
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing price of $20.65 as quoted on the New York Stock
Exchange on September 28, 2001, the aggregate market value of the voting stock
held by nonaffiliates of the registrant, was $846,202,721.
The number of shares outstanding of the registrant's common stock, $1.00
par value, was 41,225,781 shares as of September 30, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
<Table>
<Caption>
LOCATION IN FORM 10-K INCORPORATED DOCUMENT
--------------------- ---------------------
Part III, Items 10, 11, 12, and 13 2001 Proxy Statement
</Table>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
NO.
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 2
Item 3. Legal Proceedings........................................... 3
Item 4. Submission of Matters to a Vote of Security Holders......... 3
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 3
Item 6. Selected Financial Data..................................... 4
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 4
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 11
Item 8. Financial Statements and Supplementary Data................. 13
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 42
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 42
Item 11. Executive Compensation...................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13. Certain Relationships and Related Transactions.............. 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 44
Signatures................................................................. 62
Financial Statement Schedules.............................................. 64
List of Subsidiaries....................................................... 66
Consent of Independent Public Accountants.................................. 67
</Table>
PART I
ITEM 1. BUSINESS
National Service Industries, Inc. (the "Company" or "NSI") occupies
leadership positions in the textile rental and envelope markets. NSI is
headquartered in Atlanta, Georgia, and provides products and services throughout
the United States. Of the Company's fiscal 2001 revenues of $563.3 million, the
textile rental segment contributed 59 percent and the envelope segment
contributed 41 percent.
On November 7, 2001, the board of directors of National Service Industries,
Inc. approved the spin-off of its lighting equipment and chemicals businesses
into a separate publicly-traded company with its own management and board of
directors. The spin-off will be effected on November 30, 2001 through a tax-free
distribution of 100% of the outstanding shares of common stock of Acuity Brands,
Inc. ("Acuity"), which is a wholly-owned subsidiary of NSI that operates the
lighting equipment and chemicals businesses. Each NSI stockholder of record as
of November 16, 2001, the record date for the distribution, will receive one
share of Acuity common stock for each share of NSI common stock held at that
date. The historical financial statements of NSI have been restated to reflect
Acuity as a discontinued operation.
The Company's principal executive offices are located at 1420 Peachtree
Street, N.E., Atlanta, Georgia 30309-3002 and the telephone number is (404)
853-1000.
BUSINESS SEGMENTS
TEXTILE RENTAL
National Linen Service ("NLS") is a leading United States multi-service
textile rental company, with fiscal 2001 revenues of $334.8 million. NLS serves
over 50,000 customers in the dining, lodging, and healthcare industries. Its
customers include restaurants, hotels, country clubs, retail stores, hospitals,
clinics, and doctors' offices. Operating in 22 states, NLS delivers clean
products including napkins, table and bed linens, bath towels, pillow cases, bar
towels, scrubs and surgical drapery, mats, mops, and restroom supplies, and
retrieves soiled linens for cleaning. NLS sells its services directly to end
users through a salaried and commissioned sales force.
ENVELOPE
Atlantic Envelope Company ("AECO") is a leading United States manufacturer
of custom envelopes and office products, serving the energy, finance,
transportation, direct mail and package delivery markets. Products include
custom business and courier envelopes, as well as specialty filing products.
AECO has eight state-of-the-art manufacturing facilities located throughout the
United States. AECO's customers include major airlines, banks, credit card
companies and express delivery companies. Products are sold directly to
end-users by a commissioned sales team. Specialty products are also sold through
dealers. Revenues for fiscal 2001 totaled $228.5 million.
FINANCIAL RESULTS BY INDUSTRY SEGMENT
Sales and service revenues, operating profit (loss), total assets, and
related data for each of the Company's business segments for the three years
ended August 31, 2001 are included in Note 11, Business Segment Information, of
the Notes to the Consolidated Financial Statements on page 41.
RAW MATERIALS
Paper comprises a significant portion of the envelope segment's material
requirements. However, the Company purchases its paper from numerous suppliers
and there were no significant shortages of materials during the three years
ended August 31, 2001.
1
SEASONALITY
Financial results for any particular quarter are not necessarily indicative
of results to be expected for the full year and, typically, the Company's
revenues are higher in the second half of its fiscal year.
CUSTOMERS
No single customer accounted for more than 10 percent of consolidated
revenues during the fiscal years ended August 31, 2001, 2000, and 1999. However,
two customers of the envelope segment represented 27 percent and 18 percent of
its fiscal 2001 and fiscal 2000 revenues, respectively. The loss of either
customer would adversely affect the segment.
BACKLOG
Sales order backlog at August 31, 2001 and 2000 was $27.8 million and $53.7
million, respectively, in the envelope segment.
COMPETITION
While each of the Company's businesses is highly competitive, the
competitive conditions and the Company's relative position and market share vary
widely from business to business. Most competitors are smaller companies that
frequently specialize in one industry or geographic area, which in many
instances increases the intensity of competition. The principal methods of
competition include price, quality, and customer responsiveness.
RESEARCH AND DEVELOPMENT
The Company conducts research and development related to present and future
products for its envelope segment. Research and development expenses were
immaterial during the fiscal years ended August 31, 2001, 2000, and 1999.
ENVIRONMENTAL MATTERS
Management does not anticipate that compliance with current environmental
laws and regulations will materially affect the capital expenditures or results
of operations of the Company or its subsidiaries during the fiscal year ending
August 31, 2002. See Note 6, Commitments and Contingencies, of the Notes to the
Consolidated Financial Statements on page 32.
EMPLOYMENT
As of August 31, 2001, the Company employed approximately 7,700 people.
ITEM 2. PROPERTIES
The general offices of the Company are located in Atlanta, Georgia. Because
of the diverse nature of the operations and the large number of individual
locations, it is neither practical nor meaningful to
2
describe each of the operating facilities owned or leased by the Company. The
following listing summarizes the significant facility categories by business:
<Table>
<Caption>
NUMBER OF
FACILITIES
DIVISION OWNED LEASED NATURE OF FACILITIES
- -------- ----- ------ ------------------------
Textile Rental.............................. 34 5 Linen Processing Plants
2 27 Linen Service Centers
Envelope.................................... 7 1 Manufacturing Plants
-- 2 Warehouses
1 1 Offices
Corporate Office............................ 1 -- Corporate Headquarters
</Table>
None of the Company's individual properties is considered to have a value
that is significant in relation to the Company's assets as a whole. The Company
believes that its properties are well maintained, are in good working condition,
and are deemed to be suitable and adequate for its present needs. The Company
believes that it has additional capacity available at most of the Company's
production facilities and that it could significantly increase production
without substantial capital expenditures.
ITEM 3. LEGAL PROCEEDINGS
See Note 6, Commitments and Contingencies, of the Notes to the Consolidated
Financial Statements on page 32.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three
months ended August 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
National Service Industries' common stock is listed on the New York Stock
Exchange under the symbol "NSI." At August 31, 2001, there were 5,647
stockholders of record. The following table sets forth the New York Stock
Exchange high and low stock prices and the dividend payments for NSI's common
stock for the periods indicated.
<Table>
<Caption>
PRICE PER SHARE*
--------------------- DIVIDENDS
HIGH LOW PER SHARE
--------- --------- ---------
2001
First Quarter...................................... $ 20.8125 $ 18.3125 $.33
Second Quarter..................................... 26.0200 20.5625 .33
Third Quarter...................................... 25.7000 21.5400 .33
Fourth Quarter..................................... 25.7300 20.0000 .33
2000
First Quarter...................................... $ 34.0000 $ 29.2500 $.32
Second Quarter..................................... 30.1875 20.5000 .33
Third Quarter...................................... 24.3750 20.3750 .33
Fourth Quarter..................................... 23.3750 18.2500 .33
</Table>
- ---------------
* Price per share information does not reflect any adjustment as a result of the
spin-off of the Company's lighting equipment and chemicals businesses, the
effectiveness of which will be November 30, 2001.
3
ITEM 6. SELECTED FINANCIAL DATA
<Table>
<Caption>
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Dollar amounts in thousands, except per-share data)
OPERATING RESULTS(1)
Revenue from Continuing Operations
Service revenues........................ $ 334,820 $ 321,522 $ 309,115 $ 312,746 $ 493,535
Net sales of products................... 228,462 225,190 204,510 161,037 190,212
---------- ---------- ---------- ---------- ----------
Total revenues................. $ 563,282 $ 546,712 $ 513,625 $ 473,783 $ 683,747
========== ========== ========== ========== ==========
Net Income
(Loss) income from continuing
operations............................ $ (15,291) $ 17,073 $ 34,918 $ 27,169 $ 37,672
Discontinued operations, net of tax..... 42,304 82,797 89,425 81,551 69,606
---------- ---------- ---------- ---------- ----------
Net Income..................... $ 27,013 $ 99,870 $ 124,343 $ 108,720 $ 107,278
========== ========== ========== ========== ==========
PER-SHARE DATA
Basic earnings per share(1)(2):
(Loss) income from continuing
operations............................ $ (.37) $ .42 $ .85 $ .64 $ .83
Discontinued operations, net of tax..... 1.03 2.03 2.19 1.92 1.54
---------- ---------- ---------- ---------- ----------
Net income..................... $ .66 $ 2.45 $ 3.04 $ 2.56 $ 2.37
========== ========== ========== ========== ==========
Diluted earnings per share (1)(2):
(Loss) income from continuing
operations............................ $ (.37) $ .42 $ .85 $ .63 $ .83
Discontinued operations, net of tax..... 1.03 2.03 2.18 1.90 1.53
---------- ---------- ---------- ---------- ----------
Net income..................... $ .66 $ 2.45 $ 3.03 $ 2.53 $ 2.36
========== ========== ========== ========== ==========
Cash dividends.......................... $ 1.32 $ 1.31 $ 1.27 $ 1.23 $ 1.19
Stockholders' equity.................... $ 15.66 $ 16.37 $ 15.22 $ 13.96 $ 15.20
TOTAL ASSETS(1)
Continuing operations................... $ 498,098 $ 398,904 $ 364,218 $ 319,690 $ 474,514
Discontinued operations................. 1,330,575 1,422,880 1,337,038 700,112 638,636
---------- ---------- ---------- ---------- ----------
Total.......................... $1,828,673 $1,821,784 $1,701,256 $1,019,802 $1,113,150
========== ========== ========== ========== ==========
TOTAL DEBT(1)
Continuing operations................... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
Discontinued operations................. 608,830 636,434 544,577 81,073 27,086
---------- ---------- ---------- ---------- ----------
Total.......................... $ 613,830 $ 641,434 $ 549,577 $ 86,073 $ 32,086
========== ========== ========== ========== ==========
</Table>
- ---------------
(1) On November 7, 2001 management approved the spin-off the Company's lighting
and chemical businesses. Accordingly, the Company's results of operations
have been prepared with the net assets, results of operations, and cash
flows related to the lighting and chemical businesses presented as
discontinued operations. Prior period amounts have been restated to conform
to this presentation.
(2) In 1998, the Company adopted Financial Accounting Standard No. 128,
"Earnings per Share." Prior period amounts have been restated in accordance
with this statement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
National Service Industries, Inc. is a service and manufacturing company
operating in the textile rental and envelope segments.
On November 7, 2001, the board of directors of National Service Industries,
Inc. approved the spin-off of its lighting equipment and chemicals businesses
into a separate publicly traded company with its own management and board of
directors. The spin-off will be effected on November 30, 2001 through a tax-free
4
distribution of 100% of the outstanding shares of common stock of Acuity Brands,
Inc. ("Acuity"), which is a wholly-owned subsidiary of NSI that operates the
lighting equipment and chemicals businesses. Each NSI stockholder of record as
of November 16, 2001, the record date for the distribution, will receive one
share of Acuity common stock for each share of NSI common stock held at that
date.
As a result of the approval of the spin-off subsequent to August 31, 2001
but prior to the release of the Company's financial statements, the net assets
and results of operations of the lighting equipment and chemicals businesses
have been reflected as discontinued operations for all periods presented herein.
The Company's continuing operations consist of its textile rental and envelope
segments.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes.
The continuing operations of NSI, the textile rental and envelope segments,
continued in strong financial condition at August 31, 2001. Net working capital
increased to $87.7 million at August 31, 2001 as compared to $65.7 million at
August 31, 2000, and the current ratio remained constant at 1.9.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Continuing operations used cash of $29.1 million in 2001, compared with
cash provided of $40.9 million in 2000 and $58.9 million in 1999. The reduction
in 2001 related to a decrease in net income, an increase in prepayments and
other current assets, an increase in payments related to employee medical and
casualty insurance, and an increase in income tax payments. Prepayments and
other current assets increased over the prior year as the Company incurred costs
related to the spin-off of the lighting and chemical businesses. The increase in
income tax payments relates to the resolution of various tax matters, all of
which were fully accrued in prior periods. The decrease in cash provided by
operating activities during 2000 primarily resulted from the decrease in net
income.
INVESTING ACTIVITIES
Investing activities used cash of $24.7 million in 2001, $60.7 million in
2000, and $42.3 million in 1999. The change in fiscal 2001 investing cash flows
primarily related to a decrease in capital expenditures and acquisition spending
and an increase in cash provided by the sale of businesses. The change in
investing cash flows during 2000 was a result of the significant increase in
capital expenditures coupled with a decrease in cash provided by the sale of
businesses. These items were offset somewhat by a decrease in acquisition
spending during fiscal 2000.
Acquisition spending during fiscal 2001 was $5.6 million and related
primarily to the textile rental segment's purchase of several plants in Florida.
Prior year acquisition spending of $10.1 million also related to several small
acquisitions in the textile rental segment. Acquisition spending in 1999 totaled
$20.6 million ($19.8 million in cash and 26,495 shares valued at $0.8 million).
In February 1999, the envelope segment acquired substantially all of Gilmore
Envelope, an envelope manufacturer headquartered in Los Angeles, California, for
approximately $10.6 million. The Company also made several acquisitions in the
textile rental segment during fiscal 1999 for approximately $10.0 million.
Capital expenditures were $23.1 million in 2001, compared with $45.5
million in 2000 and $33.7 million in 1999. Current-year capital expenditures in
the envelope segment related to manufacturing process improvements and
information systems. The textile rental segment invested in building
improvements, equipment upgrades, and information systems. Fiscal 2000 capital
expenditures in the envelope segment primarily related to manufacturing process
improvements, new folding capacity, and information systems. Prior-year
expenditures in the textile rental segment related to replacing old equipment
and delivery truck purchases and refurbishments. During 1999, the envelope
segment invested in manufacturing process improvements, information systems,
facility expansion, and new folding capacity and the textile rental segment's
capital expenditures were for the implementation of new technology, production
enhancements, and delivery truck purchases and refurbishments.
5
In 2002, capital expenditures are expected to approximate $20.3 million as
the Company continues to invest capital in technology and equipment. Contractual
commitments for capital spending for fiscal year 2002 approximate $4.2 million.
FINANCING ACTIVITIES
Financing activities used cash of $51.4 million, $49.5 million, and $90.2
million during 2001, 2000, and 1999, respectively. Cash used by financing
activities during fiscal 2001 and 2000 primarily related to the payment of
dividends offset somewhat by cash provided by Employee Stock Purchase Plan share
issuances and stock option exercises. In addition to the payment of dividends,
cash used by financing activities during 1999 also included the purchase of
treasury shares under the Company's treasury share repurchase program which was
suspended in the third quarter of fiscal 1999.
LONG-TERM DEBT AND THE SPIN-OFF
Upon completion of the spin-off on November 30, 2001, approximately $374.1
million of long-term debt will be assumed by Acuity, leaving approximately $3.0
million outstanding for the Company. The following provides a discussion of
liquidity and capital resources segregated between continuing and discontinued
operations.
CONTINUING OPERATIONS
In October 2001, NSI negotiated a $40.0 million, three-year committed
credit facility with a single major US bank that will become effective at the
time of the spin-off. The facility contains financial covenants including a
leverage ratio, a ratio of income available for fixed charges to fixed charges,
and a minimum net worth. Interest rates under the facility are based on the
LIBOR rate or other rates, at the Company's option. The Company will pay an
annual fee on the commitment based on the Company's leverage ratio. No amounts
were outstanding under this facility at August 31, 2001, and it is expected that
at the time of the spin-off approximately $2.0 million will be outstanding.
Outstanding borrowings at August 31, 2001 included approximately $3.0
million in notes payable at 8.5 percent and approximately $2.0 million in
uncommitted credit facility borrowings at a weighted-average interest rate of
4.95 percent.
Management believes anticipated cash flows from operations and available
funds from the committed credit facility are sufficient to meet the Company's
planned level of capital spending and general operating cash requirements,
including but not limited to any cash requirements related to litigation as
further described in Note 6 to the financial statements, for at least the next
twelve months.
DISCONTINUED OPERATIONS
In anticipation of the spin-off, management has, or is in the process of
amending the following agreements which were in place for the Company as of
August 31, 2001. The material terms of the agreements are expected to be
consistent subsequent to the spin-off for Acuity, who will be the borrower.
In May 2001, the Company entered into a three-year agreement (the
"Receivables Facility") to borrow, on an ongoing basis, up to $150.0 million
secured by undivided interests in a defined pool of trade accounts receivable of
the lighting equipment and chemical segments. At August 31, 2001, net trade
accounts receivable pledged as security for the borrowings under the Receivables
Facility totaled approximately $227.8 million. Outstanding borrowings under the
Receivables Facility at August 31, 2001 were $105.1 million. Interest rates
under the Receivables Facility vary with commercial paper rates plus an
applicable margin and the interest rate was 3.90 percent at August 31, 2001.
Effective at the time of the spin-off, Acuity will assume all of NSI's
borrowings and other obligations under the Receivables Facility.
In July 1999, the Company entered into a $250.0 million, 364-day committed
credit facility, which was renewed in June 2001 and expires in June 2002. The
credit facility permits certain subsidiaries of the Company to borrow under such
facility, and the Company guarantees these borrowings. Interest rates under
6
the credit facility 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
credit rating for unsecured long-term public debt. Outstanding borrowings under
the facility at August 31, 2001 were $105.0 million at an interest rate of 4.1
percent. No amounts were outstanding under the facility at August 31, 2000. This
facility will be discontinued at the time of the spin-off.
In October 2001, NSI, on behalf of Acuity, negotiated a $240.0 million,
364-day committed credit facility with six domestic and international banks that
will become effective and will replace the Company's $250.0 million credit
facility at the time of the spin-off. The facility includes an option for
additional lenders to enter the agreement to provide up to a total of $300.0
million of commitments. The facility contains financial covenants including a
leverage ratio of total indebtedness to EBITDA and an interest coverage ratio.
Interest rates under the facility are based on the LIBOR rate or other rates, at
Acuity's option. Acuity will pay an annual fee on the commitment based on
Acuity's credit rating for unsecured long-term public debt. The principal
lighting equipment subsidiary and the principal chemicals subsidiary of Acuity
are guarantors of the facility.
NSI's commercial paper program was discontinued in July 2001. Amounts
outstanding under the commercial paper program were replaced by borrowings under
the committed credit facility. The $236.7 million outstanding under the
Company's commercial paper program at August 31, 2000 had a weighted-average
interest rate of 6.8 percent.
At August 31, 2001, the Company had uncommitted lines of credit totaling
$111.2 million for general operating purposes, of which $16.8 million is
designated as multi-currency. Outstanding borrowings under the uncommitted
credit facilities at August 31, 2001 were $24.7 million, at a weighted-average
interest rate of 4.95 percent. At August 31, 2001, $74.4 million in letters of
credit was outstanding, primarily under the domestic uncommitted line of credit.
In January 1999, the Company issued $160.0 million in ten-year publicly
traded notes bearing a coupon rate of 6.0 percent. In August 2000, the Company
issued $200.0 million in ten-year publicly traded notes bearing a coupon rate of
8.375 percent.
Management believes current cash balances, anticipated cash flows from
operations, and available funds from the committed credit facilities and the
uncommitted lines of credit are sufficient to meet Acuity's planned level of
cash requirements for the next twelve months.
7
RESULTS OF CONTINUING OPERATIONS
<Table>
<Caption>
YEAR ENDED AUGUST 31
------------------------
2001 2000 1999
------ ------ ------
(IN MILLIONS, EXCEPT
PER-SHARE AMOUNTS)
SALES AND SERVICE REVENUES:
Textile Rental............................................ $334.8 $321.5 $309.1
Envelope.................................................. 228.5 225.2 204.5
------ ------ ------
$563.3 $546.7 $513.6
====== ====== ======
OPERATING (LOSS) PROFIT:
Textile Rental............................................ $ 12.6 $ 28.2 $ 42.9
Envelope.................................................. (13.2) 5.1 17.7
------ ------ ------
(0.6) 33.3 60.6
Corporate................................................. (21.9) (3.8) (3.5)
Interest expense, net..................................... (1.8) (1.6) (1.4)
------ ------ ------
(24.3) 27.9 55.7
====== ====== ======
(LOSS) INCOME FROM CONTINUING OPERATIONS.................... (15.3) 17.1 34.9
INCOME FROM DISCONTINUED OPERATIONS......................... 42.3 82.8 89.4
------ ------ ------
NET INCOME.................................................. $ 27.0 $ 99.9 $124.3
====== ====== ======
EARNINGS PER SHARE:
Basic:
(Loss) income from continuing operations............... $ (.37) $ .42 $ .85
Discontinued operations................................ 1.03 2.03 2.19
------ ------ ------
Net income............................................. $ .66 $ 2.45 $ 3.04
====== ====== ======
Diluted:
(Loss) income from continuing operations............... $ (.37) $ .42 $ .85
Discontinued operations................................ 1.03 2.03 2.18
------ ------ ------
Net income............................................. $ .66 $ 2.45 $ 3.03
====== ====== ======
</Table>
8
National Service Industries posted revenues of $563.3 million for the
fiscal year ended August 31, 2001 representing a $16.6 million increase from the
prior year, primarily in the textile rental segment. Revenues in 2000 were
$546.7 million, representing a 6.4 percent increase in comparison to 1999, with
revenues from both segments contributing to the increase. The fiscal 2001 loss
from continuing operations represents a decrease in net income of $32.4 million
compared to last year. The significant decrease in operating profit during the
current fiscal year related to numerous factors including a weakening economy,
higher medical and casualty insurance costs, restructuring charges and asset
impairments, and a charge associated with estimated uninsured settlements and
other related costs associated with the Company's asbestos litigation.
TEXTILE RENTAL SEGMENT
Textile rental segment revenues, representing all of the Company's service
revenues, increased 4.1 percent during 2001 to $334.8 million, as a result of
additional volume associated with several new large customer accounts, price
increases, and revenues associated with acquired businesses. Fiscal 2001
operating profit was $12.6 million compared to last year's operating profit of
$28.2 million. Higher employee medical and casualty insurance costs, increased
labor and energy costs, a sales tax audit assessment, and severance and
restructuring costs, partially offset by a gain related to a reduction in the
segment's environmental liabilities, were primarily responsible for the decrease
in fiscal 2001 operating profit.
During the second quarter of 2001, management performed a review of the
environmental liabilities recorded in connection with the textile rental
segment's 1997 uniform plants divestiture. Based on the advice of the Company's
environmental experts, the Company decreased its estimates for certain
environmental exposures and, as a result, reduced the related liability and
recorded a gain of approximately $2.1 million. The gain is included in "Gain on
sale of businesses" in the accompanying "Consolidated Statements of Income."
During the fourth quarter of fiscal 2001, management took actions to better
position the segment for the future. These actions included a $1.2 million
pretax charge related to the termination of 216 home office and field operations
employees, all of whom were terminated prior to the end of the fiscal year. None
of the accrual had been paid to employees as of August 31, 2001. Additionally,
the segment sold two linen facilities resulting in a pre-tax loss of $0.3
million. Management plans to close two additional facilities, whose business
would continue to be serviced by other existing facilities. The cost to close
these facilities is estimated to be between $6.0 million and $7.0 million.
Management expects to finalize it plans and complete the transfer of business to
the other existing facilities during the first quarter of fiscal 2002, at which
time the Company would record these restructure costs.
The losses resulting from the restructuring activities and impairments in
2001 are included in "Restructuring expense, asset impairments, and other
charges (income)" in the "Consolidated Statements of Income."
Revenues during 2000 increased 4.0 percent to $321.5 million as a result of
several small acquisitions and growth in the segment's core business. Operating
profit decreased $14.7 million during this period as a result of unusual gains
included in 1999 results that were not repeated in 2000. The unusual gains
related to the 1997 uniform plants divestiture, 1997 restructuring activities,
and other gains associated with the sale of businesses. Excluding the unusual
gains, fiscal 2000 operating profit increased by $3.8 million as a result of the
increase in revenue, lower workers compensation expense, and productivity
improvements, offset somewhat by increased fuel costs.
ENVELOPE SEGMENT
Envelope segment revenues remained essentially flat with last year as
higher sales volumes to strategic partners during the first quarter were offset
by lower volumes in the courier and direct mail markets throughout the remainder
of the year. Operating profit decreased by $18.3 million to a loss of $13.2
million. Contributing to the fiscal 2001 loss were $10.9 million in pretax
charges, which included
9
$4.9 million of charges associated with closing four facilities, $3.4 million
for the write-off of non-performing assets, and $2.6 million for inventory
obsolescence. In addition, the segment experienced higher medical and casualty
insurance costs, higher raw materials costs during the first half of the year,
and costs related to reorganizing the Miami, Florida manufacturing facility.
During the fourth quarter of fiscal 2001, management finalized its plans to
restructure its operations to better position the segment for a continued
near-term economic slowdown. Accordingly, the segment recorded a charge of $4.9
million related to its restructure activities. This charge was comprised of $1.9
million associated with terminating 151 manufacturing and salaried employees,
all of whom were terminated prior to the end of the fiscal year, $1.6 million in
exit expenses to close and consolidate facilities, and $1.4 million in
impairments related to equipment located in the closed facilities. As of August
31, 2001, approximately $0.1 million of the accrual for severance costs had been
paid to employees. Exit expenses primarily include costs of lease terminations,
costs to dispose of facilities, and other union-related costs associated with
closing the facilities. Impairments were recognized for those assets where the
sum of the estimated undiscounted future cash flows was less than the carrying
amount of the assets. Fair market values were determined based on expected
future cash flows discounted at the Company's cost of capital.
Unrelated to the restructure activities discussed above, the envelope
segment also recorded a charge of $3.4 million primarily related to certain
costs associated with the implementation of an enterprise-wide software package.
During fiscal 2001, management decided to materially alter the operating
methodology of the system. This change in methodology required an extensive
reconfiguration of the base software and all the processes associated with the
operating system.
The losses resulting from the restructuring activities and impairments in
2001 are included in "Restructuring expense, asset impairments, and other
charges (income)" and the charge related to inventory obsolescence was included
in "Cost of products sold" in the "Consolidated Statements of Income."
Envelope segment revenues increased $20.7 million, or 10.1 percent, during
2000 due to acquisitions during fiscal 1999 and growth in the segment's core
business. Operating profit decreased $12.6 million to $5.1 million as a result
of lower average margins from prior year acquisitions and higher paper prices,
labor costs, and costs associated with initiatives to improve future
productivity. In addition, fiscal 1999 operating profit included a $2.0 million
pretax gain on the sale of Techno-Aide/Stumb Metal Products.
CORPORATE
Allocated corporate expenses in 2001 increased $18.1 million primarily due
to a $16.1 million charge during the fourth quarter largely related to an
increased allocated share of asbestos-related settlements previously reached by
the Center for Claims Resolution on behalf of its members for which insurance
coverage is uncertain. See Note 6: Commitments and Contingencies in the Notes to
the Consolidated Financial Statements for a discussion of the Company's legal
proceedings. In addition, allocated corporate expenses were higher due to
increased employee medical and casualty insurance costs and higher costs related
to strategic and operational initiatives. Allocated corporate expenses in 2000
approximated those in 1999. Interest expense remained relatively flat during
fiscal years 2001, 2000, and 1999.
As reported, corporate expenses represent an allocation of total Company
corporate expenses using allocation methodologies believed reasonable by
management. The Company anticipates that future corporate expenses will be
higher than the allocated amounts.
ENVIRONMENTAL MATTERS
See Note 6: Commitments and Contingencies in the Notes to the Consolidated
Financial Statements for a discussion of environmental matters.
10
OUTLOOK
Management continues to execute its strategic plan to grow internally.
Fiscal 2002 sales from the existing businesses are expected to remain in line
with fiscal 2001 results due to a forecasted continuing weak economy. Excluding
discontinued operations and future restructuring charges, management expects the
Company to earn between 15 to 20 cents per share. This forecast includes the
anticipated impact of the adoption of the recent accounting standard that no
longer requires companies to amortize goodwill as well as a higher tax rate of
40 percent due to the loss of certain state tax benefits. The Company is
planning to close two additional linen facilities, whose business would be
serviced by other existing facilities. The cost to close these facilities is
expected to be between $6.0 million and $7.0 million. Additionally, the Company
expects to record a pretax charge of approximately $19.0 million upon completion
of the spin-off transaction.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain information contained herein constitutes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are inherently uncertain and involve risks.
Consequently, actual results may differ materially from those indicated by the
forward-looking statements. Statements that may be considered forward-looking
include statements concerning: (a) management's expectations with regard to
projected capital expenditures and future cash flows; (b) the material terms of
Acuity's financing arrangements subsequent to the spin-off; (c) the timing of
and estimated costs associated with management's plans to close two additional
textile rental facilities; (d) the Company's expectations or beliefs with
respect to the outcome and impact of environmental issues and legal proceedings
on the Company's business, financial condition, or results of operations; (e)
the expected benefit of management's actions to better position the textile
rental and envelope businesses for the future; (f) expected future revenue and
earnings per share; (g) the expected $19.0 million pretax charge associated with
the spin-off transaction; (h) expectations regarding an economic slowdown; and
(i) anticipated future corporate expenses. A variety of risks and uncertainties
could cause the Company's actual results to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties include without
limitation the following: (a) the uncertainty of general business and economic
conditions, including fluctuations in commodity and raw materials prices and
interest rate changes; (b) unexpected developments or outcomes in the Company's
legal or environmental proceedings; (c) the Company's ability to realize the
anticipated benefits of strategic initiatives related to increased productivity,
new product development, technological advances, cost synergies, and the
achievement of sales growth across the business segments; and (d) underlying
assumptions or expectations related to the spin-off transaction proving to be
inaccurate or unrealized.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risks that may impact the
"Consolidated Balance Sheets," "Consolidated Statements of Income," and
"Consolidated Statements of Cash Flows" primarily relate to changing interest
rates and commodity prices. The Company does not enter into derivative
arrangements for trading or speculative purposes.
INTEREST RATES
The Company's credit line and fixed-rate notes 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 $2.0 million at August 31, 2001. Based on
outstanding borrowings at year end, a 10 percent adverse change in effective
market interest rates at August 31, 2001 would result in an immaterial amount of
additional interest expense.
11
COMMODITY PRICE RISK
From time to time, the Company's textile rental segment enters into
arrangements locking in for specified periods the prices the Company will pay
for the volume of natural gas to which the contract relates. The contracts are
structured to reduce the segment's exposure to changes in the price of natural
gas. However, these contracts also limit the benefit the segment might have
otherwise received from decreases in the price of natural gas. The Company does
not believe a 10 percent adverse change in market rates of natural gas would
have a material impact on its "Consolidated Balance Sheets" or "Consolidated
Statements of Income."
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Report of Management........................................ 14
Report of Independent Public Accountants.................... 15
Consolidated Balance Sheets -- August 31, 2001 and 2000..... 16
Consolidated Statements of Income for the years ended August
31, 2001, 2000, and 1999.................................. 17
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended August 31, 2001,
2000, and 1999............................................ 18
Consolidated Statements of Cash Flows for the years ended
August 31, 2001, 2000, and 1999........................... 19
Notes to Consolidated Financial Statements.................. 20
</Table>
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.
Where applicable, 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.
<Table>
James S. Balloun Brock A. Hattox Robert R. Burchfield
Chairman, President, and Executive Vice President and Vice President and Controller
Chief Executive Officer Chief Financial Officer
</Table>
14
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, 2001 and 2000 and the related consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the
three years in the period ended August 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated 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, 2001 and 2000 and the
results of their operations and their cash flows for each of the three years in
the period ended August 31, 2001 in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Atlanta, Georgia
November 29, 2001
15
NATIONAL SERVICE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AUGUST 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
Current Assets:
Receivables, less reserves for doubtful accounts of $1,798
in 2001 and $739 in 2000................................ $ 60,406 $ 61,291
Inventories, at the lower of cost (on a first-in,
first-out basis) or market.............................. 19,195 20,723
Linens in service, net of amortization.................... 56,910 57,162
Deferred income taxes..................................... 9,138 --
Prepayments............................................... 11,300 3,058
Insurance receivable (Note 6)............................. 28,616 --
Other current assets...................................... 804 156
---------- ----------
Total Current Assets................................ 186,369 142,390
Property, Plant, and Equipment, at cost:
Land...................................................... 12,775 13,607
Buildings and leasehold improvements...................... 57,433 58,845
Machinery and equipment................................... 258,344 258,537
---------- ----------
Total Property, Plant, and Equipment................ 328,552 330,989
Less -- Accumulated depreciation and amortization......... 157,507 148,958
---------- ----------
Property, Plant, and Equipment - net...................... 171,045 182,031
Other Assets:
Goodwill and other intangibles (Note 1)................... 37,061 38,685
Insurance receivable (Note 6)............................. 66,574 --
Other..................................................... 37,049 35,798
---------- ----------
Total Other Assets.................................. 140,684 74,483
Net assets of discontinued operations (Note 2)............ 400,296 455,543
---------- ----------
Total Assets........................................ $ 898,394 $ 854,447
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt...................... $ 1,011 $ 201
Commercial paper.......................................... -- 1,075
Notes payable............................................. 1,999 --
Accounts payable.......................................... 28,164 26,901
Accrued salaries, commissions, and bonuses................ 7,050 8,905
Current portion of self-insurance reserves................ 3,119 2,540
Environmental reserve (Note 6)............................ 7,291 10,125
Litigation reserve (Note 6)............................... 30,453 1,787
Deferred income taxes..................................... -- 5,346
Other accrued liabilities................................. 19,561 19,824
---------- ----------
Total Current Liabilities........................... 98,648 76,704
Long-Term Debt, less current maturities..................... 1,990 3,724
---------- ----------
Deferred Income Taxes....................................... 32,431 59,251
---------- ----------
Self-Insurance Reserves, less current portion............... 12,477 19,394
---------- ----------
Litigation Reserve (Note 6)................................. 82,917 7,148
---------- ----------
Other Long-Term Liabilities................................. 7,303 7,016
---------- ----------
Commitments and Contingencies (Note 6)
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 2001 and 2000............... 57,919 57,919
Paid-in capital........................................... 29,421 29,657
Retained earnings......................................... 995,537 1,022,974
Unearned compensation on restricted stock (Note 5)........ (880) --
Accumulated other comprehensive income items.............. (43) (37)
---------- ----------
1,081,954 1,110,513
Less -- Treasury stock, at cost (16,693,197 shares in 2001
and 17,090,414 shares in 2000).......................... 419,326 429,303
---------- ----------
Total Stockholders' Equity.......................... 662,628 681,210
---------- ----------
Total Liabilities and Stockholders' Equity.......... $ 898,394 $ 854,447
========== ==========
</Table>
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
16
NATIONAL SERVICE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEAR ENDED AUGUST 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Sales and Service Revenues:
Service revenues.......................................... $334,820 $321,522 $309,115
Net sales of products..................................... 228,462 225,190 204,510
-------- -------- --------
Total sales and service revenues.................. 563,282 546,712 513,625
-------- -------- --------
Costs and Expenses:
Cost of services.......................................... 192,664 183,867 180,770
Cost of products sold..................................... 183,357 177,359 154,003
Selling and administrative expenses....................... 182,106 157,121 143,989
Amortization expense...................................... 2,807 2,411 1,829
Interest expense.......................................... 1,770 1,578 1,371
Gain on sale of businesses................................ (2,359) (356) (11,220)
Restructuring expense, asset impairments, and other
charges (income)....................................... 26,073 -- (9,291)
Other expense (income), net............................... 1,135 (3,165) (3,562)
-------- -------- --------
Total costs and expenses.......................... 587,553 518,815 457,889
-------- -------- --------
(Loss) income before income tax (benefit) expense........... (24,271) 27,897 55,736
Income tax (benefit) expense................................ (8,980) 10,824 20,818
-------- -------- --------
(Loss) income from continuing operations.................... (15,291) 17,073 34,918
Income from discontinued operations, net of income taxes of
$26,848 in 2001, $52,494 in 2000, and $53,160 in 1999
(Note 2).................................................. 42,304 82,797 89,425
-------- -------- --------
Net Income.................................................. $ 27,013 $ 99,870 $124,343
======== ======== ========
BASIC EARNINGS PER SHARE
(Loss) income from continuing operations.................. $ (.37) $ .42 $ .85
Discontinued operations................................... 1.03 2.03 2.19
-------- -------- --------
Net income................................................ $ .66 $ 2.45 $ 3.04
======== ======== ========
Basic Weighted Average Number of Shares
Outstanding..................................... 41,068 40,708 40,899
DILUTED EARNINGS PER SHARE
(Loss) income from continuing operations.................. $ (.37) $ .42 $ .85
Discontinued operations................................... 1.03 2.03 2.18
-------- -------- --------
Net income................................................ $ .66 $ 2.45 $ 3.03
======== ======== ========
Diluted Weighted Average Number of Shares
Outstanding..................................... 41,068 40,727 41,093
</Table>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
17
NATIONAL SERVICE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<Table>
<Caption>
UNEARNED
COMPENSATION ACCUMULATED
ON OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED RESTRICTED COMPREHENSIVE TREASURY
INCOME STOCK CAPITAL EARNINGS STOCK INCOME ITEMS STOCK TOTAL
------------- ------- ------- ---------- ------------ ------------- --------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
BALANCE, AUGUST 31, 1998... $57,919 $28,521 $ 903,974 $ -- $(43) $(400,156) $590,215
Comprehensive income:
Net income.............. $124,343 -- -- 124,343 -- -- -- 124,343
Other comprehensive
income, net of tax:
Minimum pension
liability adjustment
(net of tax of
$4)................. 9 -- -- -- -- 9 -- 9
--------
Comprehensive
income............ $124,352
========
Treasury stock
purchased(1)............ -- -- -- -- -- (41,954) (41,954)
Stock options
exercised(2)............ -- 58 -- -- -- 435 493
Treasury stock issued in
connection with
acquisition(3).......... -- 200 -- -- -- 645 845
Employee Stock Purchase
Plan issuances(4)....... -- 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 -- (34) (438,235) 625,166
Comprehensive income:
Net income.............. $ 99,870 -- -- 99,870 -- -- -- 99,870
Other comprehensive
income, net of tax:
Minimum pension
liability adjustment
(net of tax of
$1)................. (3) -- -- -- -- (3) -- (3)
--------
Comprehensive
income............ $ 99,867
========
Stock options
exercised(5)............ -- 98 -- -- -- 643 741
Treasury stock issued in
connection with Long-
Term Incentive
Program(6).............. -- 1,245 -- -- -- 4,422 5,667
Employee Stock Purchase
Plan issuances(7)....... -- (741) -- -- -- 3,867 3,126
Cash dividends of $1.31
per share paid on common
stock................... -- -- (53,357) -- -- -- (53,357)
------- ------- ---------- ------- ---- --------- --------
BALANCE, AUGUST 31, 2000... 57,919 29,657 1,022,974 -- (37) (429,303) 681,210
Comprehensive income:
Net income.............. $ 27,013 -- -- 27,013 -- -- -- 27,013
Other comprehensive
income, net of tax:
Minimum pension
liability adjustment
(net of tax of
$3)................. (6) -- -- -- -- (6) -- (6)
--------
Comprehensive
income............ $ 27,007
========
Stock options
exercised(8)............ -- (14) -- -- -- 48 34
Treasury stock issued in
connection with Long-
Term Incentive
Program(9).............. -- (963) -- -- -- 4,600 3,637
Restricted stock issued in
connection with
Long-Term Incentive
Program(10)............. -- (9) -- (1,195) -- 1,204 --
Amortization and
forfeitures of
restricted stock
grants.................. -- -- -- 315 -- -- 315
Issuance of compensatory
stock options........... -- 1,855 -- -- -- -- 1,855
Employee Stock Purchase
Plan issuances(11)...... -- (1,105) -- -- -- 4,125 3,020
Cash dividends of $1.32
per share paid on
common stock.......... -- -- (54,450) -- -- -- (54,450)
------- ------- ---------- ------- ---- --------- --------
BALANCE, AUGUST 31, 2001... $57,919 $29,421 $ 995,537 $ (880) $(43) $(419,326) $662,628
======= ======= ========== ======= ==== ========= ========
</Table>
- ---------------
(1) 1,153,099 shares, (2) 21,357 shares, (3) 26,495 shares, (4) 112,835 shares,
(5) 29,350 shares, (6) 176,033 shares, (7) 153,955 shares, (8) 1,945 shares,
(9) 183,124 shares, (10) 47,920 shares, (11) 164,228 shares.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
18
NATIONAL SERVICE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
Net (loss) income from continuing operations............. $ (15,291) $ 17,073 $ 34,918
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 27,633 25,227 22,526
Provision for losses on accounts receivable........... 2,345 2,125 906
Loss (gain) on the sale of property, plant, and
equipment........................................... 996 (1,098) (1,168)
Gain on sale of businesses............................ (2,359) (356) (11,220)
Restructuring expense, asset impairments, and other
charges (income).................................... 26,073 - (9,291)
Change in assets and liabilities net of effect of
acquisitions and divestitures --
Receivables......................................... (1,484) (4,126) (5,046)
Inventories and linens in service, net.............. 786 1,940 (1,478)
Deferred income taxes............................... (41,304) (1,343) 35,695
Prepayments and other current assets................ (13,946) 93 (2,309)
Accounts payable and accrued liabilities............ (5,358) 2,000 (1,062)
Self-insurance reserves and other long-term
liabilities...................................... (7,228) (648) (3,585)
--------- --------- ---------
Net Cash (Used for) Provided by Continuing
Operations..................................... (29,137) 40,887 58,886
Net Cash Provided by Discontinued Operations..... 105,187 69,296 72,970
--------- --------- ---------
Net Cash Provided by Operating Activities........ 76,050 110,183 131,856
--------- --------- ---------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Purchases of property, plant, and equipment.............. (23,053) (45,485) (33,730)
Sale of property, plant, and equipment................... 1,289 1,948 3,619
Sale of businesses....................................... 4,888 - 11,962
Acquisitions............................................. (5,596) (10,130) (19,762)
Change in other assets................................... (2,182) (7,026) (4,390)
--------- --------- ---------
Net Cash Used for Investing Activities........... (24,654) (60,693) (42,301)
--------- --------- ---------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Issuance (purchase) of treasury stock, net............... 3,054 3,867 (38,390)
Cash dividends paid...................................... (54,450) (53,357) (51,856)
--------- --------- ---------
Net Cash Used for Financing Activities........... (51,396) (49,490) (90,246)
--------- --------- ---------
Net Change in Cash and Cash Equivalents.................... -- -- (691)
Cash and Cash Equivalents at Beginning of Year............. -- -- 691
--------- --------- ---------
Cash and Cash Equivalents at End of Year................... $ -- $ -- $ --
========= ========= =========
Supplemental Cash Flow Information:
Income taxes paid during the year..................... $ 68,348 $ 66,705 $ 40,799
Interest paid during the year......................... 45,186 43,977 15,660
Noncash Investing and Financing Activities:
Treasury shares issued under long-term incentive
plan................................................ $ 3,637 $ 5,667 $ --
</Table>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
19
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA OR AS OTHERWISE INDICATED)
NOTE 1: SUMMARY OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company's continuing operations are in two business segments -- textile
rental and envelope -- each of which is a leading competitor in its respective
market. 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 and office products
in the United States. The envelope segment's customers include major airlines,
banks, credit card companies and express delivery companies.
REVENUE RECOGNITION
The Company records revenues as products are shipped or as services are
rendered.
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 accounting
principles generally accepted in the United States 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. In particular, as further discussed in Note 6:
Commitments and Contingencies, the Company has made significant estimates
related to the ultimate resolution of numerous asserted and unasserted claims,
as well as the ultimate reimbursement for these claims from its insurers. 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 sheets 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, 2001 and 2000, and all cash balances have been
attributed to discontinued operations.
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, 2001, the Company does not consider itself to have
any significant concentrations of credit risk.
20
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001 and 2000:
<Table>
<Caption>
2001 2000
------- -------
Raw materials and supplies.................................. $ 6,716 $ 5,477
Work in progress............................................ 817 585
Finished goods.............................................. 11,662 14,661
------- -------
$19,195 $20,723
======= =======
</Table>
Linens in service are recorded at cost and are generally amortized over
their estimated useful lives of 15 to 50 months.
GOODWILL AND OTHER INTANGIBLES
The following table summarizes net goodwill and intangible assets including
the useful life associated with each as of August 31:
<Table>
<Caption>
USEFUL LIFE
2001 2000 (IN YEARS)
------- ------- -----------
Goodwill.............................................. $28,432 $29,648 10-30
Customer lists........................................ 7,866 7,964 7
Other................................................. 763 1,073 3-5
------- -------
$37,061 $38,685
======= =======
</Table>
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. An impairment loss is recognized when the undiscounted future
cash flows estimated to be generated by the asset are not sufficient to recover
the unamortized balance of the asset. An impairment loss would be recognized
based on the difference between the carrying value of the asset and the
estimated fair value, which would be determined based on either the discounted
future cash flows or other appropriate fair value methods. If the asset being
tested for recoverability was acquired in a business combination, intangible
assets and goodwill resulting from the acquisition that are related to the asset
are included in the assessment. The Company also evaluates the amortization
periods assigned to its intangible assets to determine whether events or
circumstances warrant revised estimates of useful lives.
DEPRECIATION
For financial reporting purposes, depreciation is determined principally on
a straight-line basis using estimated useful lives of plant and equipment (33
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 $749, $536, and $415 during 2001, 2000, and
1999, respectively.
21
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS
Substantially all of 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
and medical 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.
OTHER EXPENSE (INCOME), NET
Other expense (income), net, is comprised primarily of gains or losses
resulting from the sale of fixed assets.
FREIGHT BILLED TO CUSTOMERS AND FREIGHT EXPENSE
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF 00-10, "Accounting for Shipping and Handling Fees and Costs."
Specifically, EITF 00-10 addresses how the seller of goods should classify
amounts billed to a customer for shipping and handling. The EITF concluded that
amounts billed to a customer in a sale transaction related to shipping and
handling represents revenues earned for the goods provided and should be
classified as revenue. The Company adopted EITF 00-10 in fiscal 2001.
Historically, the Company netted certain shipping and handling revenues charged
to customers in selling and administrative expenses, and such amounts have been
reclassified for all periods presented. The adoption of EITF 00-10 resulted in
an increase in sales and a corresponding increase in selling and administrative
expenses of $4,383, $3,242, and $2,781 for the fiscal years ended August 31,
2001, 2000, and 1999, respectively, with no impact on net income. The Company
includes freight expense in selling and administrative expenses. Freight expense
amounted to $8,574, $8,232 and $6,945 in fiscal 2001, 2000, and 1999,
respectively.
ACCOUNTING STANDARDS YET TO BE ADOPTED
In July 2001, the FASB issued Statement No. 141 ("SFAS 141"), "Business
Combinations," and Statement No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." SFAS 141 eliminates pooling of interest accounting and
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. SFAS 142 eliminates the amortization of
goodwill and certain other intangible assets and requires the Company to
evaluate goodwill for impairment on an annual basis by applying a fair value
test. SFAS 142 also requires that an identifiable intangible asset which is
determined to have an indefinite useful economic life not be amortized, but
separately tested for impairment using a fair value-based approach.
The Company will adopt SFAS 142 effective September 1, 2001. As a result,
the amortization of existing goodwill and intangibles with indefinite useful
lives will cease on August 31, 2001, which will result in an estimated decrease
in amortization expense of approximately $975 during fiscal 2002. However, the
Company will be required to test its goodwill and intangibles with indefinite
useful lives for impairment under the new standard beginning in the first
quarter of fiscal 2002, which could have an adverse effect on the Company's
future results of operations if these assets are deemed impaired.
22
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain prior period amounts in the financial statements and notes have
been reclassified to conform with the 2001 presentation.
NOTE 2: DISCONTINUED OPERATIONS
On November 7, 2001, the Company's board of directors approved the spin-off
of its lighting equipment and chemicals businesses into a separate
publicly-traded company with its own management and board of directors. The
spin-off will be effected on November 30, 2001 through a tax-free distribution
of 100% of the outstanding shares of common stock of Acuity Brands, Inc.
("Acuity"), a wholly-owned subsidiary of the Company operating the lighting
equipment and chemicals businesses. Each NSI stockholder of record as of
November 16, 2001, the record date for the distribution, will receive one share
of Acuity common stock for each share of NSI common stock held at that date.
As a result of the November 2001 spin-off, the Company's August 31, 2001
financial statements have been prepared with these businesses' net assets,
results of operations, and cash flows presented as discontinued operations. All
historical statements have been restated to conform with this presentation.
Summarized financial information for discontinued operations is as follows
(in thousands):
<Table>
<Caption>
AUGUST 31,
---------------------
2001 2000
--------- ---------
Current Assets.............................................. $ 559,116 $ 620,979
Property, Plant, and Equipment -- net....................... 248,423 245,028
Goodwill and Other Intangibles.............................. 468,944 497,324
Other Long-Term Assets...................................... 54,092 59,549
Current Liabilities......................................... (442,067) (465,594)
Long-Term Debt, less current maturities..................... (373,707) (380,518)
Other Long-Term Liabilities................................. (131,503) (133,966)
Accumulated other comprehensive income items................ 16,998 12,741
--------- ---------
Net assets of discontinued operations....................... $ 400,296 $ 455,543
========= =========
</Table>
A summary of the operating results of the discontinued operations is as
follows:
<Table>
<Caption>
YEAR ENDED AUGUST 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Sales.......................................... $1,982,700 $2,023,644 $1,701,568
========== ========== ==========
Income before provision for income taxes....... $ 69,152 $ 135,291 $ 142,585
Provision for income taxes..................... 26,848 52,494 53,160
---------- ---------- ----------
Net income..................................... $ 42,304 $ 82,797 $ 89,425
========== ========== ==========
</Table>
In conjunction with the spin-off, the Company and Acuity will enter into
various agreements that address the allocation of assets and liabilities between
them and that define their relationship after the separation, including a
distribution agreement, a tax disaffiliation agreement, an employee benefits
agreement, and a transition services agreement.
In addition, Acuity and NSI will enter into a put option agreement, whereby
NSI will have the option to require Acuity to purchase the property where NSI's
corporate headquarters are located for a purchase price
23
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equal to 85 percent of the agreed-upon fair market value of the property. This
put option will commence on June 1, 2002 and expire on May 31, 2003.
NOTE 3: 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, 2001 and 2000:
<Table>
<Caption>
2001 2000
------- -------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $53,542 $53,018
Service cost................................................ 1,482 1,637
Interest cost............................................... 4,270 3,862
Actuarial loss.............................................. 5,784 872
Benefits paid............................................... (4,210) (5,946)
Other....................................................... (1,136) 99
------- -------
Benefit obligation at end of year........................... $59,732 $53,542
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $82,323 $80,510
Actual return on plan assets................................ 1,185 7,427
Employer contributions...................................... 199 42
Employee contributions...................................... 144 290
Benefits paid............................................... (4,210) (5,946)
Other....................................................... (691) --
------- -------
Fair value of plan assets at end of year.................... $78,950 $82,323
======= =======
FUNDED STATUS:
Funded status............................................... $19,218 $28,781
Unrecognized actuarial loss................................. 14,399 3,715
Unrecognized transition asset............................... (1,577) (2,209)
Unrecognized prior service cost............................. 1,287 1,194
------- -------
Prepaid pension expense..................................... $33,327 $31,481
======= =======
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS
CONSIST OF:
Prepaid benefit cost........................................ $34,465 $32,466
Accrued benefit liability................................... (1,485) (1,331)
Intangible asset............................................ 279 287
Accumulated other comprehensive income...................... 68 59
------- -------
Prepaid pension expense..................................... $33,327 $31,481
======= =======
</Table>
24
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The projected benefit obligation and accumulated benefit obligation for
defined benefit pension plans with accumulated benefit obligations in excess of
plan assets were $915 and $816, respectively, as of August 31, 2001, and $1,485
and $754, respectively, as of August 31, 2000.
Components of net periodic benefit cost for the fiscal years ended August
31, 2001, 2000, and 1999 included the following:
<Table>
<Caption>
2001 2000 1999
------- ------- -------
Service cost............................................ $ 1,482 $ 1,637 $ 1,914
Interest cost........................................... 4,270 3,862 3,885
Expected return on plan assets.......................... (7,653) (7,506) (7,831)
Amortization of prior service cost...................... 90 83 86
Amortization of transitional asset...................... (625) (837) (862)
Recognized actuarial loss............................... 346 212 10
------- ------- -------
Net periodic pension benefit............................ $(2,090) $(2,549) $(2,798)
======= ======= =======
</Table>
Weighted average assumptions in 2001 and 2000 included the following:
<Table>
<Caption>
2001 2000
---- ----
Discount rate............................................... 7.75% 8.25%
Expected return on plan assets.............................. 9.50% 9.50%
Rate of compensation increase............................... 4.40% 4.70%
</Table>
It is the Company's policy to adjust, on an annual basis, the discount rate
used to determine the projected benefit obligation to approximate rates on
high-quality, long-term obligations.
The Company also has profit sharing and 401(k) plans to which both
employees and the Company contribute. At August 31, 2001, assets of the 401(k)
plans included shares of the Company's common stock with a market value of
approximately $3,670. The Company recorded expense related to these plans of
$822 in 2001, $438 in 2000, and $221 in 1999.
25
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt at August 31, 2001 and 2000, consisted of the following:
<Table>
<Caption>
2001 2000
------------------------- -------------------------
CONTINUING DISCONTINUED CONTINUING DISCONTINUED
OPERATIONS OPERATIONS OPERATIONS OPERATIONS
---------- ------------ ---------- ------------
6% notes due February 2009 with an
effective rate of 6.04%, net of
unamortized discount of $310 in 2001
and $351 in 2000...................... $ -- $159,690 $ -- $159,649
8.375% notes due August 2010 with an
effective rate of 8.398%, net of
unamortized discount of $219 in 2001
and $244 in 2000...................... -- 199,781 -- 199,756
4.3% to 8.5% other notes, payable in
installments to 2026.................. 3,001 14,593 3,925 21,113
------ -------- ------ --------
3,001 374,064 3,925 380,518
Less -- Amounts payable within one year
included in current liabilities....... 1,011 357 201 --
------ -------- ------ --------
$1,990 $373,707 $3,724 $380,518
====== ======== ====== ========
</Table>
Future annual principal payments of long-term debt are as follows:
<Table>
<Caption>
CONTINUING DISCONTINUED
FISCAL YEAR OPERATIONS OPERATIONS
- ----------- ---------- ------------
2002........................................................ $1,011 $ 357
2003........................................................ 1,102 341
2004........................................................ 888 2,687
2005........................................................ -- --
2006........................................................ -- --
2007 and beyond............................................. -- 370,679
------ --------
$3,001 $374,064
====== ========
</Table>
Upon completion of the spin-off in November 2001, approximately $374,064 of
long-term debt will be assumed by Acuity, leaving approximately $3,001
outstanding for the Company. The following provides a discussion of long-term
debt segregated between continuing and discontinued operations.
CONTINUING OPERATIONS
Outstanding borrowings at August 31, 2001 included approximately $3,001 in
notes payable at 8.5 percent and $1,999 in uncommitted credit facility
borrowings at a weighted-average interest rate of 4.95 percent.
DISCONTINUED OPERATIONS
In anticipation of the spin-off, management has amended, or is in the
process of amending, the following agreements which were in place for NSI as of
August 31, 2001. The material terms of the agreements are expected to be
consistent subsequent to the spin-off for Acuity, who will be the borrower.
26
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 2001, NSI entered into a three-year agreement (the "Receivables
Facility") to borrow, on an ongoing basis, up to $150,000 secured by undivided
interests in a defined pool of trade accounts receivable of the lighting
equipment and chemical segments. At August 31, 2001, net trade accounts
receivable pledged as security for the borrowings under the Receivables Facility
totaled $227,754. Outstanding borrowings under the Receivables Facility at
August 31, 2001 were $105,100. Interest rates under the Receivables Facility
vary with commercial paper rates plus an applicable margin and the interest rate
was 3.90 percent at August 31, 2001. Effective at the time of the spin-off,
Acuity will assume all of NSI's borrowings and other obligations under the
Receivables Facility.
In July 1999, NSI entered into a $250,000, 364-day committed credit
facility, which was renewed in June 2001 and expires in June 2002. The credit
facility permits certain subsidiaries of NSI to borrow under such facility, and
NSI guarantees these borrowings. Interest rates under the credit facility are
based on the LIBOR rate or other rates, at NSI's option. NSI pays an annual fee
on the commitments based on NSI's credit rating for unsecured long-term public
debt. Outstanding borrowings under the facility at August 31, 2001 were $105,000
at an interest rate of 4.1 percent. No amounts were outstanding under the
facility at August 31, 2000. This facility will be discontinued at the time of
the spin-off.
In October 2001, NSI, on behalf of Acuity, negotiated a $240,000, 364-day
committed credit facility with six domestic and international banks that will
become effective and will replace the Company's $250,000 credit facility at the
time of the spin-off. The facility includes an option for additional lenders to
enter the agreement to provide up to a total of $300,000 of commitments. The
facility contains financial covenants including a leverage ratio of total
indebtedness to EBITDA and an interest coverage ratio. Interest rates under the
facility are based on the LIBOR rate or other rates, at Acuity's option. Acuity
will pay an annual fee on the commitment based on Acuity's credit rating for
unsecured long-term public debt. The principal lighting equipment subsidiary and
the principal chemicals subsidiary of Acuity are guarantors of the facility.
NSI's commercial paper program was discontinued in July 2001. Amounts
outstanding under the commercial paper program were replaced by borrowings under
the committed credit facility. The $236,706 outstanding under the Company's
commercial paper program at August 31, 2000 had a weighted-average interest rate
of 6.8 percent.
At August 31, 2001, NSI had complimentary uncommitted lines of credit
totaling $111,169 for general operating purposes, of which $16,779 is designated
as multi-currency. Outstanding borrowings under the uncommitted credit
facilities at August 31, 2001 were $24,666, at a weighted-average interest rate
of 4.95 percent. At August 31, 2001, $74,390 in letters of credit was
outstanding, primarily under the domestic uncommitted line of credit.
In January 1999, NSI issued $160,000 in ten-year publicly traded notes
bearing a coupon rate of 6.0 percent. In August 2000, NSI issued $200,000 in
ten-year publicly traded notes bearing a coupon rate of 8.375 percent. The fair
values of the $160,000 and $200,000 notes, based on quoted market prices, were
approximately $152,016 and $219,380, respectively, at August 31, 2001. Excluding
the $160,000 and $200,000 notes, long-term debt recorded in the accompanying
balance sheets approximates fair value based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities.
NOTE 5: 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
27
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in December 1997 and extended to May 19, 2008.
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, 2001 and 2000.
28
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
The following table represents a reconciliation of basic and diluted
earnings per share at August 31:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Basic weighted average shares outstanding
(thousands)....................................... 41,068 40,708 40,899
Add: Shares of common stock assumed issued upon
exercise of dilutive stock options (thousands).... -- 19 194
-------- -------- --------
Diluted weighted average shares outstanding
(thousands)....................................... 41,068 40,727 41,093
======== ======== ========
(Loss) income from continuing operations............ $(15,291) $ 17,073 $ 34,918
Income from discontinued operations, net of tax..... 42,304 82,797 89,425
-------- -------- --------
Net income.......................................... $ 27,013 $ 99,870 $124,343
======== ======== ========
Earnings per Share:
Basic:
(Loss) income from continuing operations....... $ (.37) $ .42 $ .85
Income from discontinued operations............ 1.03 2.03 2.19
-------- -------- --------
Net income..................................... $ .66 $ 2.45 $ 3.04
======== ======== ========
Diluted:
(Loss) income from continuing operations....... $ (.37) $ .42 $ .85
Income from discontinued operations............ 1.03 2.03 2.18
-------- -------- --------
Net income..................................... $ .66 $ 2.45 $ 3.03
======== ======== ========
</Table>
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. On January 5, 2000, the stockholders approved an amendment to the
plan which, in addition to other modifications, increased the number of shares
authorized for issuance under the plan from 1,750,000 to 5,750,000. Treasury
shares have been reserved for issuance under the 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. Amounts (credited) charged to compensation
expense for 2001, 2000 and 1999 were approximately ($328), $500 and $1,100,
respectively. During fiscal 2001 and 2000, 183,124 and 176,033 shares were
issued under the award for the performance cycles ended August 31, 2000 and
1999, respectively. In addition, during fiscal 2001 certain participants elected
to receive at-the-money options in lieu of cash or share awards. As a result,
$1,855 previously accrued was reclassified to paid in capital. No shares were
issued under this award as of August 31, 1999.
Generally, the stock options granted under both long-term incentive
programs become exercisable in four equal annual installments beginning one year
from the date of the grant.
29
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1993, stockholders approved the National Service Industries,
Inc. 1992 Nonemployee Directors' Stock Option Plan. The stock options granted
under that plan become exercisable one year from the date of the grant. There
were 100,000 treasury shares reserved for issuance under the plan. During fiscal
2001, 2000, and 1999 15,000, 16,500 and 11,000 options were granted,
respectively, under this plan.
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
grant as options under all plans were 2,336,144 in 2001, 3,517,152 in 2000, and
694,279 in 1999, less shares required for the payment of outstanding Aspiration
Achievement Incentive Awards (approximately 270,644 at August 31, 2001).
Stock option transactions for the stock option plans and stock option
agreements during the years ended August 31, 2001, 2000, and 1999 were as
follows:
<Table>
<Caption>
OUTSTANDING EXERCISABLE
-------------------------- --------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
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
========= ====== ========= ======
Granted............................ 1,144,598 $27.51
Exercised.......................... (29,350) 27.44
Cancelled.......................... (27,533) 32.14
--------- ------ --------- ------
Outstanding at August 31, 2000....... 3,353,299 $32.40 1,752,011 $32.28
========= ====== ========= ======
Granted............................ 1,874,163 $19.38
Exercised.......................... (1,945) 19.75
Cancelled.......................... (693,130) 31.26
--------- ------ --------- ------
Outstanding at August 31, 2001....... 4,532,387 $27.17 2,188,543 $31.15
========= ====== ========= ======
Range of option exercise prices:
Officers and other key employees --
$19.31 -- $29.72 (average
life -- 8.1 years)............ 3,026,371 $22.46 1,013,152 $24.83
$29.72 -- $41.61 (average
life -- 5.5 years)............ 1,094,016 $34.63 860,641 $34.56
$41.61 -- $46.63 (average
life -- 5.9 years)............ 339,000 $44.35 255,250 $44.35
Nonemployee directors --
$22.13 -- $30.98 (average
life -- 5.9 years)............ 46,000 $25.99 32,500 $27.42
$35.40 -- $44.25 (average
life -- 4.7 years)............ 27,000 $39.49 27,000 $39.49
</Table>
30
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2001, 2000, and
1999, consistent with the provisions of SFAS No. 123, the total Company's net
income and earnings per share would have been reduced to the following pro forma
amounts:
<Table>
<Caption>
2001 2000 1999
------- ------- --------
Pro Forma Information:
Net income.......................................... $21,452 $94,166 $120,141
Basic earnings per share............................ $ .52 $ 2.31 $ 2.94
Diluted earnings per share.......................... $ .52 $ 2.31 $ 2.92
</Table>
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 $5.25, $9.18, and $13.70, respectively.
The following weighted average assumptions were used to estimate fair
value:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Dividend yield........................................ 3.5% 2.6% 2.6%
Expected volatility................................... 26.6% 24.4% 36.2%
Risk-free interest rate............................... 5.8% 6.9% 5.2%
Expected life of options.............................. 10 years 10 years 10 years
Turnover rate......................................... 5.0% 5.0% 5.0%
</Table>
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 1,054,698 shares remain available for purchase
at August 31, 2001.
RESTRICTED STOCK
In October 2000, the Company awarded 256,800 shares of restricted stock to
officers and other key employees under the National Service Industries, Inc.
Long-Term Achievement Incentive Plan. The shares are granted in 20 percent
increments when the Company's stock price equals or exceeds certain stock price
targets ranging from $22.14 to $38.50 for thirty consecutive calendar days. The
shares vest ratably in four equal annual installments beginning one year from
the date of grant. During the vesting period, the participants have voting
rights and receive dividends, but the shares may not be sold, assigned,
transferred, pledged or otherwise encumbered. If the stock price targets are not
reached on or before the fifth anniversary of the award date, the corresponding
shares are not granted. Additionally, granted but unvested shares are forfeited
upon termination of employment, unless certain retirement criteria are met.
The fair value of the restricted shares on the date of grant is amortized
ratably over the vesting period. In January 2001, the first stock price target
was achieved and 51,260 restricted shares were granted. Unearned compensation of
$1,195 on restricted stock was recorded in fiscal 2001 based on the market
31
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the shares on the date of grant and is generally being amortized over
four years. The unamortized balance of unearned compensation on restricted stock
is included as a separate component of stockholders' equity.
The preceding information with regards to stock based compensation related
to the Company as a whole. Certain balances have been allocated to discontinued
operations using allocation methodologies believed to be reasonable by
management.
NOTE 6: 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 activity in the self-insurance liability for each of the years ended
August 31 was as follows:
<Table>
<Caption>
2001 2000 1999
-------- ------- --------
Reserve, beginning of period......................... $ 21,934 $24,005 $ 27,116
Expense.............................................. 10,944 5,216 2,684
Payments............................................. (17,282) (7,287) (5,795)
-------- ------- --------
Reserve, end of period............................... $ 15,596 $21,934 $ 24,005
======== ======= ========
</Table>
LEASES
The Company leases certain of its buildings and equipment under
noncancelable lease agreements. Minimum lease payments under noncancelable
leases related to continuing operations for years subsequent to August 31, 2001,
are as follows: 2002 -- $2,955; 2003 -- $2,255; 2004 -- $1,926; 2005 -- $1,595;
2006 -- $1,596; after 2006 -- $5,735.
Total rent expense was $5,582 in 2001, $4,524 in 2000, and $4,236 in 1999.
LITIGATION
The Company is subject to various legal claims arising in the normal course
of business out of the conduct of its current and prior businesses, including
patent infringement and product liability claims. Based on information currently
available, it is the opinion of management that the ultimate resolution of
pending and threatened legal proceedings will not have a material adverse effect
on the Company's financial condition or results of operations. However, in the
event of unexpected future developments, it is possible that the ultimate
resolution of such matters, if unfavorable, could have a material adverse effect
on the Company's results of operations in a particular future period. The
Company reserves for legal claims when payments associated with the claims
become probable and the costs can be reasonably estimated for financial
statement purposes. While management believes that its reserves are appropriate
based on information currently available, the actual costs of resolving pending
and future legal claims against the Company may differ substantially from the
amounts reserved.
Among the product liability claims to which the Company is subject are
claims for personal injury or wrongful death arising from the installation and
distribution of asbestos-containing insulation, primarily in the southeastern
United States, by a previously divested business of the Company. Most claims
against the
32
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company seek both substantial compensatory damages and punitive damages. The
Company believes that many of the claims against it are without merit. The
Company believes its conduct with respect to asbestos containing insulation was
consistent with recognized safety standards at the relevant times, and the
Company believes there is no basis for imposing punitive damages against it in
connection with asbestos claims. In addition, the Company believes that it has
substantial legal defenses against many of these claims, including that the
Company did not manufacture any asbestos-containing building products, that the
Company did not distribute or install products at certain sites where exposure
is alleged, and that statutes of repose in some states bar the claims. However,
there is no assurance that the Company will be successful in asserting defenses
to these claims.
Prior to February 1, 2001, the Center for Claims Resolution (the "CCR")
handled the processing and settlement of claims on behalf of the Company and
retained local counsel for the defense of claims. Pursuant to a written
agreement among CCR members, the Company was responsible for varying percentages
of defense and liability payments on a claim-by-claim basis for each claim in
which it was named in accordance with predetermined sharing formulae.
Substantially all of the Company's portion of those payments were paid directly
by the Company's insurers. Since February 1, 2001, the Company has begun to
retain trial counsel directly, rather than through the CCR, to defend
asbestos-related claims against the Company and has engaged another outside
consultant to provide claims processing and administration services for
asbestos-related claims. Now that it is no longer a member of the CCR, the
Company intends to be more vigorous in defending asbestos-related claims and
will seek to dismiss without any settlement payment claims arising in
jurisdictions or involving worksites where the Company did not distribute or
install asbestos-containing products.
During the past two years, some members or former members of the CCR have
failed, by reason of bankruptcy or otherwise, to make payments to the CCR for
their shares of certain settlement agreements the CCR had reached on behalf of
its members with plaintiffs. Consequently, with respect to some settlement
agreements, the CCR has been unable to make the full payments contemplated by
those agreements. In some circumstances, the Company and other members of the
CCR have contributed additional funds to the CCR to permit it to make certain
payments contemplated by the settlement agreements. The Company has contributed
approximately $500,000 to the CCR for this purpose, and it may make further such
payments in the future. Some plaintiffs who are parties to settlement agreements
with the CCR that contemplate payments that the CCR has been unable to make have
commenced litigation against the CCR, the Company, and other members to recover
amounts due under these settlement agreements. The Company believes that it
should not be liable for settlement payments attributable to other members or
former members of the CCR, and the Company has joined a joint defense group with
other CCR members to defend these claims.
The Company believes that any amount it pays, including the $500,000 it has
already contributed to the CCR, on account of payments contemplated by
settlement agreements entered into by the CCR on behalf of its members, should
be covered either by the Company's insurance or by surety bonds and collateral
provided by those former members who failed to meet their obligations. There can
be no assurance, however, that the Company can actually recover any of these
amounts. Accordingly, no insurance or other recovery with respect to these
amounts has been recorded as an asset in the Company's financial statements.
The amount of the Company's liability on account of payments contemplated
by settlement agreements entered into by the CCR is uncertain. The Company has
included in its reserves its estimate of the Company's potential liability in
this respect, but the Company's ultimate liability for these matters could be
greater than estimated if more CCR members or former members fail to meet their
obligations or if the courts determine that the Company could be liable for
settlement payments that were attributable to other CCR members.
33
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Several significant companies that are traditional co-defendants in
asbestos claims, both members of the CCR and non-members, have sought protection
under Chapter 11 of the federal bankruptcy code during the past two years.
Litigation against such co-defendants generally is stayed or restricted as a
result of their bankruptcy filings. The absence of these traditional defendants
may increase the number of claims filed against other defendants, including the
Company, and may increase the cost of resolving such claims. Due to the
uncertainties surrounding the ultimate effect of these bankruptcies on remaining
asbestos defendants, the effect on the amount of the Company's liabilities
cannot be determined.
During the fiscal year ended August 31, 2001, the Company was served with
approximately 30,000 asbestos-related claims and settled approximately 16,000
claims for an average of approximately $1,035 per claim (including approximately
200 claims that were dismissed with no payment). Since the unwinding of the
joint defense arrangements of the CCR effective February 1, 2001, the average
settlement per claim has been approximately $1,350. As of August 31, 2001, there
were approximately 34,000 open claims pending against the Company and
approximately 13,000 additional claims that had been settled in principle (but
not finalized) for amounts generally consistent with recent historical per-claim
settlement costs. Of the open pending claims, approximately 12,000 claims were
voluntarily dismissed in October 2001 without any settlement payment.
As of August 31, 2001, an estimated accrual of $113.4 million for
asbestos-related liabilities, before consideration of insurance recoveries, has
been reflected in the accompanying financial statements, primarily in long-term
liabilities. The amount of the accrual is based on the following: the Company's
estimate of indemnity payments and defense costs associated with pending and
future asbestos-related claims to be paid through 2004; settlements agreed to
but not paid as of August 31, 2001; the Company's expected payment on account of
settlement obligations of defaulting CCR members; interest on settlement
payments that are subject to ongoing dispute resolution with certain insurance
providers; and other legal fees and expenses. The Company's estimates of
indemnity payments and defense costs associated with pending and future asbestos
claims are based on the Company's estimate of the number of future
asbestos-related claims and the type of disease, if any, alleged or expected to
be alleged in such claims, assumptions regarding the timing and amounts of
settlement payments, the status of ongoing litigation and settlement
initiatives, and the advice of outside counsel with respect to the current state
of the law related to asbestos claims. The ultimate liability for all pending
and future claims cannot be determined with certainty due to the difficulty of
forecasting the numerous variables that can affect the amount of liability.
There are inherent uncertainties involved in estimating these amounts, and the
Company's actual costs in future periods could exceed the Company's estimates
due to changes in facts and circumstances after the date of each estimate.
The Company believes that it has insurance coverage available to recover
most of its asbestos-related costs. The Company has reached settlement
agreements with substantially all of its relevant insurers providing for payment
of substantially all asbestos-related claims (subject to retentions) up to the
various policy limits, except for the Company's payments on account of
settlement obligations of defaulting CCR members, as discussed above. The timing
and amount of future recoveries from insurance carriers will depend on the pace
of claims review and processing by such carriers and on the resolution of any
remaining disputes regarding coverage under such policies. The Company believes
that substantial recoveries from the insurance carriers are probable. The
Company reached this conclusion after considering its prior insurance-related
recoveries in respect of asbestos-related claims, existing insurance policies,
settlement agreements with insurers, the apparent viability of its insurers, the
advice of outside counsel with respect to the applicable insurance coverage law
relating to terms and conditions of those policies, and a general assessment by
the Company and its advisors of the financial condition of the relevant
insurers. Accordingly, an estimated aggregate insurance recovery of $95.2
million has been reflected in the accompanying financial statements as of August
31, 2001, with respect to previously paid claims and pending and future claims
estimated to be paid through 2004 and the other items included in the accrual
34
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of asbestos-related liabilities. Approximately $28.6 million of the aggregate
insurance recovery and $30.5 million of the asbestos-related accrual have been
classified as current assets and liabilities in the accompanying balance sheet
as of August 31, 2001.
Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. As additional information becomes available,
the Company will reassess its liability and revise its estimates as appropriate.
Management currently believes that, based on the factors discussed in the
preceding paragraphs and taking into account the accruals reflected as of August
31, 2001 the resolution of asbestos-related uncertainties and the incurrence of
asbestos-related costs net to related insurance recoveries should not have a
material adverse effect on the Company's consolidated financial position or
results of operations. However, as the Company's estimates are periodically
re-evaluated, additional accruals to the liabilities reflected in the Company's
financial statements may be necessary, and such accruals could be material to
the results of the period in which they are recorded. Given the number and
complexity of factors that affect the Company's liability and its available
insurance, the actual liability and insurance recovery may differ substantially
from the Company's estimates. No assurance can be given that the Company will
not be subject to significant additional asbestos litigation and material
additional liabilities. If actual liabilities significantly exceed the Company's
estimates or if expected insurance recoveries become unavailable, due to
insolvencies among the Company's primary or excess insurance carriers, disputes
with carriers or otherwise, the Company's results of operations, liquidity and
financial condition could be materially adversely affected.
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 $7.3 million and $10.1 million at August 31, 2001 and 2000,
respectively. The actual cost of environmental issues may be lower or higher
than that reserved due to the difficulty in estimating such costs and potential
changes in the status of government regulations.
Certain environmental laws can impose liability regardless of fault. The
federal Superfund law is an example of such an environmental law. However,
liability under Superfund is mitigated by the presence of other parties who will
share in the costs associated with clean-up of sites. The extent of liability is
determined on a case-by-case basis taking into account many factors, including
the number of other parties whose status or activities also subjects them to
liability regardless of fault.
The Company is currently a party to, or otherwise involved in, legal
proceedings in connection with state and federal Superfund sites, one of which
is located on property owned by the Company. Except for the Blydenburgh Landfill
matter in New York (which is discussed below), the Company believes its
liability is de minimis at each of the currently active sites which it does not
own where it has been named as a potentially responsible party ("PRP") due to
its limited involvement at the site and/or the number of viable PRPs. For
property which the Company owns on East Paris Street in Tampa, Florida, the
Company was
35
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requested by the State of Florida to clean up chlorinated solvent contamination
in the groundwater beneath the property and beneath surrounding property known
as Seminole Heights Solvent Site and to reimburse approximately $430 thousand of
costs already incurred by the State of Florida in connection with such
contamination. The Company presented expert evidence to the State of Florida in
1998 that the Company is not the source of the contamination, and the State has
referred this matter to the Environmental Protection Agency for review. At this
point in time, it is not possible to quantify the extent, if any, of the
Company's exposure.
In connection with the sale of certain assets, including 29 of the
Company's textile rental plants in 1997, the Company has retained environmental
liabilities arising from events occurring prior to the closing, subject to
certain exceptions. The Company has received notice from the buyer of the
textile rental plants of the alleged presence of perchloroethylene contamination
on two of the properties in Texas involved in the sale. Because the Company is
not the source of contamination, the Company asserted indemnification claims
against the company from which it bought the properties. The prior owner is
currently addressing the contamination at its expense at one of the properties,
subject to a reservation of rights, and is currently reviewing NSI's claim
regarding the other property. At this time, it is too early to quantify the
Company's potential exposure in these matters, the likelihood of an adverse
result, or the outcome of the Company's indemnification claims against the prior
owner.
During the second quarter of 2001, management performed a review of the
other environmental liabilities recorded in connection with the textile rental
segment's 1997 uniform plants divestiture. Based on the advice of the Company's
environmental experts, the Company decreased its estimates for certain
environmental exposures and, as a result, reduced the related liability and
recorded a gain of approximately $2.1 million. The gain is included in "Gain on
sale of businesses" in the accompanying "Consolidated Statements of Income."
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 potential
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. The Company has also
asserted an indemnification claim against the parent of Initial Services
Investments, Inc., which the Company acquired in 1992 and which had previously
purchased and sold certain assets of Serv-All Uniform Rental Corp. The federal
district court in the Eastern District of New York denied the Company's motion
for summary judgment on the issue of successor liability and granted the State
of New York's motion for partial summary judgment and for a declaratory judgment
that the Company is a successor to Serv-All Uniform Rental Corp. The Company and
the State of New York have each filed a cross-motion for summary judgment on
NSI's liability under the Comprehensive Environmental Response, Compensation,
and Liability Act, which motions are currently pending. In addition, the Company
retains the right to appeal the district court's judgment on successor liability
once there is an appealable order entered in the case. At this stage, it is too
early to quantify the Company's potential exposure, the likelihood of an adverse
result, or the outcome of the Company's indemnification claim.
NOTE 7: RESTRUCTURING EXPENSE, ASSET IMPAIRMENTS, AND OTHER CHARGES
During 2001, management conducted reviews of its continuing operations as
part of management's strategic initiative to examine under-performing operations
and to position the Company for an economic slowdown. As a result of these
reviews, the Company approved a significant restructuring program and recorded a
related charge of $5,014 during the fourth quarter of fiscal 2001. The accrual
included severance costs of $3,087 for 367 employees of the textile rental and
envelope segments, all of whom were terminated prior to the end of the fiscal
year, $1,582 in exit expenses to close and consolidate facilities in
36
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the envelope segment, and $345 in losses related to the sale of two textile
rental businesses. As of August 31, 2001, approximately $118 of the severance
accrual had been paid to employees. Exit expenses primarily include costs of
lease terminations, costs to dispose of facilities, and union-related costs
associated with closing facilities.
Additionally, as a further result of the 2001 reviews, the Company
recognized long-lived asset impairments totaling $1,602. Textile rental and
envelope assets to be disposed of were reduced to state them at their estimated
fair value less costs to sell. Assets to be disposed of primarily related to
equipment located in the facilities included in the restructuring program noted
above. After the charge, the remaining net book value of these assets was
immaterial. Estimated fair market values were established based on independent
appraisals or an analysis of expected future cash flows.
Unrelated to the restructure activities discussed above, the envelope
segment also recorded a charge of $3,341 related to certain costs associated
with the implementation of an enterprise-wide software package after management
decided to materially alter the operating methodology of the system. This change
in methodology required an extensive reconfiguration of the base software and
all the processes associated with the operating system.
The losses resulting from the restructuring activities and asset
impairments are included in "Restructuring expense, asset impairments, and other
charges (income)" in the "Consolidated Statements of Income."
In connection with the Company's 2001 assessment of the asbestos related
matters further described in Note 6, a $16,116 charge related to the estimate of
potential liabilities in excess of insurance recoveries has been included in
"Restructuring expense, asset impairments, and other charges (income)" in the
"Consolidated Statements of Income."
During 1999, management performed an extensive review of the assets that
were to be disposed of and the restructuring accruals established in 1997 as
part of the Company's review of its textile rental, European chemical, and
corporate operations. In addition to realizing lower than anticipated costs,
management determined that it was 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 of
income was recorded and included in "Restructuring expense, asset impairments,
and other charges (income)" in the "Consolidated Statements of Income."
NOTE 8: ACQUISITIONS AND DIVESTITURES
The Company accounts for its acquisitions as purchases. Accordingly, for
each of the following acquisitions, the purchase price was allocated to the
assets acquired and liabilities assumed based on estimated fair values.
Acquisition spending in 2001 totaled $5,596 and related primarily to the
textile rental segment's purchase of several plants in Florida. These
acquisitions resulted in goodwill of $352 that is being amortized over periods
ranging from 10 to 20 years. Identifiable intangibles of $1,676 are being
amortized over periods ranging from 3 to 7 years and primarily include customer
lists and restrictive covenants.
Divestitures in 2001 primarily related to the sale of a textile rental
plant located in Arkansas resulting in proceeds of approximately $2,286 and a
pre-tax gain of $290. In addition, the textile rental segment restructured its
operations in the fourth quarter of fiscal 2001. As part of this restructure
plan, the Company sold two textile rental businesses in August 2001 resulting in
proceeds of $2,602 and a net pre-tax loss of $345 which is included in
"Restructuring expense, asset impairments, and other charges (income)" in the
accompanying "Consolidated Statements of Income."
37
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 2001, management performed a review of the environmental liabilities
recorded in connection with the textile rental segment's 1997 uniform plants
divestiture. Based on the advice of the Company's environmental experts, the
Company decreased its estimates for certain environmental exposures and, as a
result, reduced the related liability and recorded a gain of approximately
$2,069. The gain is included in "Gain on sale of businesses" in the accompanying
"Consolidated Statements of Income."
Acquisition spending in 2000 of $10,130 related to several small
acquisitions in the textile rental segment. Goodwill of $2,554 was recorded and
is being amortized over periods ranging from 10 to 20 years. Identifiable
intangibles of $5,539 are being amortized over periods ranging from 3 to 7 years
and primarily include customer lists and non-compete agreements.
Acquisition spending in 1999 totaled $20,607 ($19,762 in cash and 26,495
shares valued at $845). In February 1999, the envelope segment acquired
substantially all of Gilmore Envelope, an envelope manufacturer headquartered in
Los Angeles, California, for approximately $10,557. The Company also made
several acquisitions in the textile rental segment during fiscal 1999 for
approximately $10,050 resulting in additional intangibles of $4,486 related
primarily to customer lists. These intangibles are being amortized over periods
ranging from 3 to 7 years.
Divestitures in 1999 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 pre-tax gain of $1,990 on the transaction. Other
divestitures during 1999 primarily related to the sale of industrial contracts
in the textile rental segment resulting in proceeds of approximately $7,771 and
a pre-tax gain of $4,388.
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 realized lower costs than originally anticipated associated with these
items and, as a result, reduced the liability and recorded a gain of $3,511.
The combined preliminary purchase price allocations related to the
Company's acquisitions during the last three years was as follows:
<Table>
<Caption>
2001 2000 1999
-------------- -------------- -------------------------
TEXTILE RENTAL TEXTILE RENTAL TEXTILE RENTAL ENVELOPE
SEGMENT SEGMENT SEGMENT SEGMENT
-------------- -------------- -------------- --------
Current assets....................... $ 911 $ 1,759 $ 1,644 $ 8,779
Property, plant and equipment........ 2,938 847 3,920 8,287
Intangibles.......................... 1,676 5,539 4,486 100
Goodwill............................. 352 2,554 -- --
Liabilities.......................... (281) (569) -- (6,609)
------ ------- ------- -------
$5,596 $10,130 $10,050 $10,557
====== ======= ======= =======
</Table>
NOTE 9: INCOME TAXES
The Company accounts for income taxes using the liability approach as
prescribed by SFAS No. 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.
38
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes from continuing operations
consists of the following components:
<Table>
<Caption>
2001 2000 1999
-------- ------- -------
Provision for current Federal taxes................... $ 2,884 $ 8,743 $13,833
Provision for current state taxes..................... 222 427 831
(Benefit) provision for deferred taxes................ (12,086) 1,654 6,154
-------- ------- -------
Total (benefit) provision for income taxes............ $ (8,980) $10,824 $20,818
======== ======= =======
</Table>
A reconciliation from the Federal statutory rate to the total provision for
income taxes is as follows:
<Table>
<Caption>
2001 2000 1999
------- ------- -------
Federal income tax computed at statutory rate.......... $(8,495) $ 9,762 $19,507
State income tax, net of Federal income tax benefit.... (471) 689 730
Other, net............................................. (14) 373 581
------- ------- -------
Total (benefit) provision for income taxes............. $(8,980) $10,824 $20,818
======= ======= =======
</Table>
Components of the net deferred income tax liability at August 31, 2001 and
2000 include:
<Table>
<Caption>
2001 2000
------- -------
Deferred tax liabilities:
Depreciation.............................................. $18,960 $27,619
Amortization of linens.................................... 23,264 22,941
Pension................................................... 11,412 12,306
Intangibles............................................... 622 --
Other..................................................... 5,993 31,716
------- -------
Total deferred tax liabilities............................ 60,251 94,582
------- -------
Deferred tax assets:
Self-insurance............................................ (9,752) (11,473)
Deferred compensation..................................... (2,382) (955)
Bonuses................................................... (1,340) --
Restructuring and asset impairment........................ (21,535) (15,213)
Asset disposition reserves................................ (111) (191)
Other assets.............................................. (1,838) (2,153)
------- -------
Total deferred tax assets................................. (36,958) (29,985)
------- -------
Net deferred tax liability.................................. $23,293 $64,597
======= =======
</Table>
39
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
INCOME
SALES AND (LOSS) FROM DISCONTINUED NET
SERVICE GROSS CONTINUING OPERATIONS, INCOME
REVENUES PROFIT OPERATIONS NET OF TAX (LOSS)
--------- ------- ----------- ------------ --------
2001
1st Quarter................... $140,687 $48,218 $ 2,354 $14,183 $ 16,537
2nd Quarter................... 135,142 44,918 2,090 13,735 15,825
3rd Quarter................... 144,329 51,330 4,902 7,669 12,571
4th Quarter................... 143,124 42,795 (24,637) 6,717 (17,920)
2000
1st Quarter................... $133,319 $45,342 $ 4,483 $19,907 $ 24,390
2nd Quarter................... 132,455 45,276 4,398 15,878 20,276
3rd Quarter................... 140,356 48,335 4,341 16,435 20,776
4th Quarter................... 140,582 46,533 3,851 30,577 34,428
</Table>
<Table>
<Caption>
BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE
----------------------------------- -----------------------------------
INCOME INCOME
(LOSS) FROM DISCONTINUED NET (LOSS) FROM DISCONTINUED NET
CONTINUING OPERATIONS, INCOME CONTINUING OPERATIONS, INCOME
OPERATIONS NET OF TAX (LOSS) OPERATIONS NET OF TAX (LOSS)
----------- ------------ ------ ----------- ------------ ------
2001
1st Quarter............ $.06 $.34 $ .40 $ .06 $.34 $ .40
2nd Quarter............ .05 .34 .39 .05 .33 .38
3rd Quarter............ .12 .19 .31 .12 .18 .30
4th Quarter............ (.60) .16 (.44) (.60) .16 (.44)
2000
1st Quarter............ $.11 $.49 .60 $ .11 $.49 $ .60
2nd Quarter............ .11 .39 .50 .11 .39 .50
3rd Quarter............ .11 .40 .51 .11 .40 .51
4th Quarter............ .09 .75 .84 .09 .75 .84
</Table>
- ---------------
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share in fiscal 2001
does not equal the total computed for the year.
40
NATIONAL SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: BUSINESS SEGMENT INFORMATION
The following table summarizes the Company's business segment information
from continuing operations:
<Table>
<Caption>
CAPITAL
SALES AND EXPENDITURES
SERVICE OPERATING TOTAL DEPRECIATION AMORTIZATION AND
REVENUES PROFIT (LOSS) ASSETS EXPENSE EXPENSE ACQUISITIONS
--------- ------------- --------- ------------ ------------ ------------
2001
Textile Rental(1).... $334,820 $ 12,553 $ 231,422 $ 14,655 $1,828 $22,559
Envelope(2).......... 228,462 (13,145) 141,945 8,652 979 5,476
-------- -------- --------- -------- ------ -------
563,282 (592) 373,367 23,307 2,807 28,035
Corporate(3)......... (21,909) 124,731 1,519 614
Interest Expense..... (1,770)
-------- -------- --------- -------- ------ -------
$563,282 $(24,271) $ 498,098 $ 24,826 $2,807 $28,649
======== ======== ========= ======== ====== =======
2000
Textile Rental(1).... $321,522 $ 28,208 $ 222,957 $ 14,154 $1,432 $30,795
Envelope(2).......... 225,190 5,096 151,003 6,892 979 22,890
-------- -------- --------- -------- ------ -------
546,712 33,304 373,960 21,046 2,411 53,685
Corporate............ (3,829) 24,944 1,770 1,930
Interest Expense..... (1,578)
-------- -------- --------- -------- ------ -------
$546,712 $ 27,897 $ 398,904 $ 22,816 $2,411 $55,615
======== ======== ========= ======== ====== =======
1999
Textile Rental(1).... $309,115 $ 42,935 $ 203,509 $ 13,666 $ 860 $20,669
Envelope(2).......... 204,510 17,662 139,755 5,319 969 32,592
-------- -------- --------- -------- ------ -------
513,625 60,597 343,264 18,985 1,829 53,261
Corporate............ (3,490) 20,954 1,712 231
Interest Expense..... (1,371)
-------- -------- --------- -------- ------ -------
$513,625 $ 55,736 $ 364,218 $ 20,697 $1,829 $53,492
======== ======== ========= ======== ====== =======
</Table>
- ---------------
(1) Gains resulting from the sale of businesses were $2,359 in 2001, $170 in
2000, and $9,230 in 1999. 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 8: Acquisitions and Divestitures. Textile rental segment 2001
operating profit included $1,667 of charges related to restructuring
activities and asset impairments. Textile rental segment 1999 operating
profit included $9,291 of income related to the reversal of restructuring
reserves and asset impairments.
(2) Envelope segment operating profit included gains resulting from the sale of
businesses of $186 in 2000 and $1,990 in 1999. Operating profit during 2001
included $8,290 of charges related to restructuring activities and asset
impairments.
(3) Corporate expense during 2001 included $16,116 of charges related to an
increased allocated share of asbestos-related settlements previously reached
by the Center for Claims Resolution on behalf of its members for which
insurance coverage is uncertain. See Note 6: Commitments and Contingencies.
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item, with respect to directors, is
included under the caption "Information Concerning Nominees" of the Company's
proxy statement for the annual meeting of stockholders to be held January 3,
2002, filed with the Commission pursuant to Regulation 14A, and is incorporated
herein by reference.
The information required by this item, with respect to beneficial ownership
reporting, is included under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Company's proxy statement for the annual meeting of
stockholders to be held January 3, 2002, filed with the Commission pursuant to
Regulation 14A, and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of the Company are elected at the annual organizational
meeting of the Board of Directors.
<Table>
<Caption>
NAME AND AGE OF EACH EXECUTIVE OFFICER BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS DURING THE FIVE
AND POSITIONS HELD WITH THE COMPANY YEARS ENDED AUGUST 31, 2001 AND TERM IN OFFICE
- -------------------------------------- ---------------------------------------------------------
James S. Balloun, age 63..................... Mr. Balloun was elected Chairman and Chief Executive
Chairman, President, and Officer effective February, 1996 and assumed the role of
Chief Executive Officer President in October, 1996. Previously, he served
and Director McKinsey & Company as a Director.
Brock A. Hattox, age 53...................... Mr. Hattox was elected Executive Vice President and Chief
Executive Vice President and Financial Officer effective September, 1996. Previously,
Chief Financial Officer he served McDermott International, Inc. as Chief
Financial Officer from 1991 to 1996.
Kenneth W. Honeycutt, age 50................. Mr. Honeycutt has served as President of Lithonia
Executive Vice President and Lighting since June 2000. He has been with Lithonia since
President of Acuity Lighting Group 1972 in a variety of positions covering a broad range of
processes and products.
John K. Morgan, age 47....................... Mr. Morgan has served as President of Holophane since
Executive Vice President and June 2000 and served as Executive Vice President of the
President of Holophane Lithonia Lighting Group from 1999 to 2001. He joined
Lithonia Lighting in 1977 and held a variety of senior
management positions prior to 1999.
James H. Heagle, age 57...................... Mr. Heagle has served as President of Acuity Specialty
Executive Vice President and Products Group since May 2000. He previously served as
President of Acuity Specialty Products President and Chief Operating Officer of Calgon
Group Corporation from 1996 to 2000. Prior to Calgon, Mr.
Heagle spent 24 years in various management positions
with Mobil Chemical.
</Table>
42
<Table>
<Caption>
NAME AND AGE OF EACH EXECUTIVE OFFICER BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS DURING THE FIVE
AND POSITIONS HELD WITH THE COMPANY YEARS ENDED AUGUST 31, 2001 AND TERM IN OFFICE
- -------------------------------------- ---------------------------------------------------------
Richard LeBer, age 43........................ Mr. LeBer has served as President of National Linen
Executive Vice President and Service since January 2000. He previously served as Vice
President of National Linen Service President of Business Development from 1996 to 2000. From
1994 to 1996, Mr. LeBer was President and CEO of Equibase
Co., a privately-held information services company. He
previously served as a consultant with McKinsey & Company
in Atlanta.
J. Randolph Zook, age 56..................... Mr. Zook has served as President of Atlantic Envelope
Executive Vice President and Company since 1989. He has been with Atlantic Envelope
President of Atlantic Envelope Company Company since 1970 in a variety of positions including
Sales Manager, General Manager, Director of the ATENCO
Filing Systems product line, and Vice President.
Mr. Kenyon W. Murphy, age 44................. Mr. Murphy was elected Senior Vice President and General
Senior Vice President and Counsel effective April 2000. Prior to that role, he
General Counsel served as Vice President and Associate Counsel from 1996
until April 2000 and as Secretary from 1992 until 1998.
Mr. Murphy joined NSI in 1985.
Joseph G. Parham, Jr., age 52................ Mr. Parham has served as Senior Vice President of Human
Senior Vice President, Resources since May, 2000. Previously, he served Polaroid
Human Resources Eyewear as President and Chief Operating Officer.
</Table>
In connection with the spin-off, each of the executive officers of the
Corporation, except Brock Hattox, Richard LeBer, and J. Randolph Zook, will
resign from all positions with NSI and join Acuity in similar positions.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the captions
"Compensation of Directors," "Other Information Concerning the Board and its
Committees," "Compensation Committee Interlocks and Insider Participation,"
"Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated
Option Exercises and Fiscal Year-End Option Values," "Long-Term Incentive Plans
- - Awards in Last Fiscal Year," "Employment Contracts, Severance Arrangements,
and Other Agreements," and "Pension and Supplemental Retirement Benefits" of the
Company's proxy statement for the annual meeting of stockholders to be held
January 3, 2002, filed with the Commission pursuant to Regulation 14A, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
"Beneficial Ownership of NSI Common Stock" of the Company's proxy statement for
the annual meeting of stockholders to be held January 3, 2002, filed with the
Commission pursuant to Regulation 14A, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption
"Certain Relationships and Transactions" of the Company's proxy statement for
the annual meeting of stockholders to be held January 3, 2002, filed with the
Commission pursuant to Regulation 14A, and is incorporated herein by reference.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Report of Management
Report of Independent Public Accountants
Consolidated Balance Sheets -- August 31, 2001 and 2000
Consolidated Statements of Income for the years ended August 31,
2001, 2000, and 1999
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended August 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows for the years ended August 31,
2001, 2000, and 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Report of Independent Public Accountants on Schedule II
SCHEDULE NUMBER
II Valuation and Qualifying Accounts
Any of schedules I through V not listed above have been omitted
because they are not applicable or the required information is
included in the consolidated financial statements or notes
thereto.
(3) Exhibits filed with this report (begins on next page):
Copies of such materials will be furnished to stockholders upon
request at a nominal rate. Requests should be sent to Carol Morgan,
Senior Vice President, General Counsel and Secretary, National Service
Industries, Inc., P.O. Box 7158, Midtown Station, Atlanta, Georgia
30357-0158.
44
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
EXHIBIT 3 (a) Restated Certificate of Filed with the Securities and
Incorporation Exchange Commission as part of
this Form 10-K.
(b) By-Laws as Amended and Restated Filed with the Securities and
October 16, 2001 Exchange Commission as part of
this Form 10-K.
EXHIBIT 4 (a) Amended and Restated Rights Reference is made to Exhibit 4.1
Agreement dated as of December 17, 1997 of registrant's Form 8-A/A as
between National Service Industries, filed with the Commission on
Inc. and Wachovia Bank, N.A. (replacing December 17, 1997, which is
Wachovia Bank, N.A. with First Chicago incorporated herein by reference.
Trust Company)
(b) First Amendment dated as of April Reference is made to Exhibit 1 of
30, 1998 between National Service registrant's Form 8-A/A-3 as
Industries, Inc. and First Chicago Trust filed with the Commission on June
Company of New York, to the Amended and 22, 1998, which is incorporated
Restated Rights Agreement, dated as of herein by reference.
December 17, 1997 between National
Service Industries, Inc. and Wachovia
Bank, N.A
(c) Second Amendment dated as of January Reference is made to Exhibit 1 of
6, 1999 between National Service registrant's Form 8-A/A-4 as
Industries, Inc. and First Chicago Trust filed with the Commission on
Company of New York, to the Amended and January 12, 1999, which is
Restated Rights Agreement, dated as of incorporated herein by reference.
December 17, 1997 between National
Service Industries, Inc. and First
Chicago Trust Company of New York, as
Rights Agent, as amended.
EXHIBIT 10(i)A (1) US$250,000,000 Credit Agreement, Reference is made to Exhibit
dated as of July 15, 1999, among (b)(8) of Amendment No. 2 to
National Service Industries, registrant's Schedule 14D-1 as
Inc., Wachovia Bank, N.A., The filed with the Commission on July
First National Bank of Chicago, 20, 1999, which is incorporated
Banc One Capital Markets, Inc., herein by reference.
Wachovia Securities, Inc.,
Commerzbank AG, New York Branch,
ABN Amro, N.V., and the other
banks listed therein.
(2) First Amendment to US$250,000,000 Filed with the Securities and
Credit Agreement, dated as of Exchange Commission as part of
July 14, 2000, among National this Form 10-K.
Service Industries, Inc., Certain
Listed Banks, Bank One, NA, as
Syndication Agent and Wachovia
Bank, NA, as Administrative
Agent.
(3) Second Amendment to Filed with the Securities and
US$250,000,000 Credit Agreement, Exchange Commission as part of
dated as of April 18, 2001 among this Form 10-K.
National Service Industries,
Inc., NSI Leasing, Inc., and NSI
Enterprises, Inc., Certain Listed
Banks, Wachovia Bank, N.A. as
Administrative Agent,
</Table>
45
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
Bank One, NA, as Syndication
Agent, and Commerzbank
Aktiengesellschaft, New York
Branch, and ABN Amro, N.V., as
Co-agents.
(4) Third Amendment to US$250,000,000 Reference is made to Exhibit
Credit Agreement, dated as of 10(i)A(1) of registrant's Form
June 27, 2001, among National 10-Q for the quarter ended May
Service Industries, Inc., Certain 31, 2001, which is incorporated
of its Subsidiaries, Certain herein by reference.
Listed Banks, Bank One, NA, as
Administrative Agent, Wachovia
Bank, N.A., as Syndication Agent,
and SunTrust Bank, as
Documentation Agent.
(5) Receivables Sale Agreement Reference is made to Exhibit
between NSI Enterprises, Inc., as 10(i)A(2) of registrant's Form
seller, and National Service 10-Q for the quarter ended May
Industries, Inc., as purchaser, 31, 2001, which is incorporated
dated as of May 2, 2001. herein by reference.
(6) Receivables Sale and Contribution Reference is made to Exhibit
Agreement between National 10(i)A(3) of registrant's Form
Service Industries, Inc., as 10-Q for the quarter ended May
seller, and NSI Funding, Inc., as 31, 2001, which is incorporated
buyer, dated as of May 2, 2001. herein by reference.
(7) Credit and Security Agreement, Reference is made to Exhibit
dated as of May 2, 2001, among 10(i)A(4) of registrant's Form
NSI Funding, Inc., National 10-Q for the quarter ended May
Service Industries, Inc., Blue 31, 2001, which is incorporated
Ridge Asset Funding Corporation, herein by reference.
Certain Liquidity Banks, and
Wachovia Bank, N.A., as Agent.
(8) Amendment No. 1, dated May 24, Reference is made to Exhibit
2001, to the Credit and Security 10(i)A(5) of registrant's Form
Agreement between NSI Funding, 10-Q for the quarter ended May
Inc., National Service 31, 2001, which is incorporated
Industries, Inc., Blue Ridge herein by reference.
Asset Funding Corporation, and
Wachovia Bank, N.A., as Agent.
(9) Performance Undertaking, dated as Reference is made to Exhibit
of May 2, 2001, between National 10(i)A(6) of registrant's Form
Service Industries, Inc. and NSI 10-Q for the quarter ended May
Funding, Inc. 31, 2001, which is incorporated
herein by reference.
(10) $40,000,000 Credit Agreement Filed with the Securities and
dated as of October 31, 2001 Exchange Commission as part of
among National Service this Form 10-K.
Industries, Inc. and Wachovia
Bank, N.A., as Administrative
Agent and Letter of Credit
Issuer.
</Table>
46
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
(11) Omnibus Amendment, dated as of Filed with the Securities and
August 31, 2001, between National Exchange Commission as part of
Service Industries, Inc., NSI this Form 10-K.
Enterprises, Inc., L&C Spinco,
Inc., The Zep Group, Inc., L&C
Lighting Group, Inc., L&C
Funding, Inc., Blue Ridge Asset
Funding Corporation, and Wachovia
Bank, N.A.
EXHIBIT 10(iii)A Management Contracts and Compensatory
Arrangements:
(1) Restricted Stock Award Agreement Reference is made to Exhibit
Effective Beginning October 24, 10(iii)A(4) of registrant's Form
2000 between National Service 10-Q for the quarter ended
Industries, Inc. and: November 30, 2000, which is
incorporated herein by reference.
(a) James S. Balloun
(b) Brock A. Hattox
(c) James H. Heagle
(d) Kenneth W. Honeycutt
(e) Richard W. LeBer
(f) John K. Morgan
(g) Kenyon W. Murphy
(h) Joseph G. Parham, Jr.
(i) J. Randolph Zook
(2) Amended and Restated Executives' Reference is made to Exhibit
Deferred Compensation Plan, 10(iii)A(1) of registrant's Form
Effective as of October 4, 2000 10-K for the fiscal year ended
August 31, 2000, which is
incorporated herein by reference.
(3) Amendment No. 1 to the National Reference is made to Exhibit
Service Industries, Inc. 10(iii)A(2) of registrant's Form
Executives' Deferred Compensation 10-Q for the quarter ended
Plan (as Amended and Restated February 28, 2001, which is
October 4, 2000) Dated December incorporated herein by reference.
21, 2000
(4) (a) Restated and Amended Reference is made to Exhibit
Supplemental Retirement Plan for 10(iii)A(c)-(i) of registrant's
Executives of National Service Form 10-K for the fiscal year
Industries, Inc. ended August 31, 1993, which is
incorporated herein by reference.
(b) Amendment to Restated and Reference is made to Exhibit
Amended Supplemental Retirement 10(iii)A(a) of registrant's Form
Plan for Executives of National 10-Q for the quarter ended
Service Industries, Inc. February 28, 1994, which is
incorporated herein by reference.
(c) Amendment No. 2 to Restated Reference is made to Exhibit
and Amended Supplemental 10(iii)A(3)(e) of registrant's
Retirement Plan for Executives of Form 10-K for the fiscal year
National Service Industries, ended August 31, 1996, which is
Inc., Dated August 31, 1996 incorporated herein by reference.
</Table>
47
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
(d) Amendment No. 3 to Restated Reference is made to Exhibit
and Amended Supplemental 10(iii)A(1)(a) of registrant's
Retirement Plan for Executives of Form 10-Q for the quarter ended
National Service Industries, May 31, 2000, which is
Inc., Dated September 18, 1996 incorporated herein by reference.
(e) Amendment No. 4 to Restated Reference is made to Exhibit
and Amended Supplemental 10(iii)A(1)(b) of registrant's
Retirement Plan for Executives of Form 10-Q for the quarter ended
National Service Industries, May 31, 2000, which is
Inc., Dated December 1, 1996 incorporated herein by reference.
(f) Appendix B to Restated and Reference is made to Exhibit
Amended Supplemental Retirement 10(iii)A(e) of registrant's Form
Plan for Executives of National 10-Q for the quarter ended
Service Industries, Inc., February 29, 1996, which is
Effective February 1, 1996 incorporated herein by reference.
(g) Appendix C to Restated and Reference is made to Exhibit
Amended Supplemental Retirement 10(iii)A(d) of registrant's Form
Plan for Executives of National 10-Q for the quarter ended May
Service Industries, Inc., 31, 1996, which is incorporated
Effective May 31, 1996 herein by reference.
(h) Appendix D to Restated and Reference is made to Exhibit
Amended Supplemental Retirement 10(iii)A(1)(c) of registrant's
Plan for Executives of National Form 10-Q for the quarter ended
Service Industries, Inc., May 31, 2000, which is
Effective October 18, 1996 incorporated herein by reference.
(i) Appendix E to Restated and Filed with the Securities and
Amended Supplemental Retirement Exchange Commission as part of
Plan for Executives of National this Form 10-K.
Service Industries, Inc.
effective September 18, 1996 and
as amended and restated June 29,
2001.
(j) Appendix F to Restated and Reference is made to Exhibit
Amended Supplemental Retirement 10(iii)A(g) of registrant's Form
Plan for Executives of National 10-K for the fiscal year ended
Service Industries, Inc. August 31, 1999, which is
effective June 1, 1999. incorporated herein by reference.
(k) Appendix G to Restated and Reference is made to Exhibit
Amended Supplemental Retirement 10(iii)A(1)(d) of registrant's
Plan for Executives of National Form 10-Q for the quarter ended
Service Industries, Inc., May 31, 2000, which is
Effective May 15, 2000. incorporated herein by reference.
(l) Appendix H to Restated and Filed with the Securities and
Amended Supplemental Retirement Exchange Commission as part of
Plan for Executives of National this Form 10-K.
Service Industries, Inc.,
Effective May 1, 2000.
</Table>
48
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
(5) (a) The National Service Reference is made to Exhibit
Industries, Inc. Senior 10(iii)A(f) of registrant's Form
Management Benefit Plan, Dated 10-K for the fiscal year ended
August 15, 1985 August 31, 1985, which is
incorporated herein by reference.
(b) First Amendment to National Reference is made to Exhibit
Service Industries, Inc. Senior 10(iii)A(e)-(ii) of registrant's
Management Benefit Plan, Dated Form 10-K for the fiscal year
September 21, 1989 ended August 31, 1989, which is
incorporated herein by reference.
(c) Second Amendment to National Reference is made to Exhibit
Service Industries, Inc. Senior 10(iii)A(d)(iii) of registrant's
Management Benefit Plan, Dated Form 10-K for the fiscal year
September 16, 1994 ended August 31, 1994, which is
incorporated herein by reference.
(d) Third Amendment to National Reference is made to Exhibit
Service Industries, Inc. Senior 10(iii)A(4)(d) of registrant's
Management Benefit Plan, Dated Form 10-K for the fiscal year
August 31, 1996 ended August 31, 1996, which is
incorporated herein by reference.
(6) (a) Severance Protection Reference is made to Exhibit
Agreement between National 10(iii)A(c) of registrant's Form
Service Industries, Inc. and 10-Q for the quarter ended
James S. Balloun (February 1, February 29, 1996, which is
1996) incorporated herein by reference.
(b) Amendment to Severance Reference is made to Exhibit
Protection Agreement, Dated 10(iii)A(6)(b) of registrant's
August 31, 1996 Form 10-K for the fiscal year
ended August 31, 1996, which is
incorporated herein by reference.
(7) Severance Protection Agreements Reference is made to Exhibit
between National Service 10(iii)A(34) of registrant's Form
Industries, Inc. and 10-K for the fiscal year ended
August 31, 1999, which is
incorporated herein by reference.
(a) Brock A. Hattox
(b) James H. Heagle
(c) Kenneth W. Honeycutt
(d) Richard W. LeBer
(e) John K. Morgan
(f) Kenyon W. Murphy
(g) Joseph G. Parham, Jr.
(h) J. Randolph Zook
(8) (a) Bonus Letter Agreement Reference is made to Exhibit
between National Service 10(iii)A(j) of registrant's Form
Industries, Inc. and James S. 10-K for the fiscal year ended
Balloun August 31, 1989, and to Exhibit
10(iii)A(d) of the registrant's
Form 10-Q for the quarter ended
</Table>
49
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
February 29, 1996, which are
incorporated herein by reference.
(b) Supplemental Letter Reference is made to Exhibit
Agreement, Dated August 31, 1996 10(iii)A(7)(b) of registrant's
Form 10-K for the fiscal year
ended August 31, 1996, which is
incorporated herein by reference.
(9) Bonus Letter Agreements between Reference is made to Exhibit
National Service Industries, Inc. 10(iii)A(35) of registrant's Form
and 10-K for the fiscal year ended
August 31, 1999, which is
incorporated herein by reference.
(a) Brock A. Hattox
(b) James H. Heagle
(c) Joseph G. Parham, Jr.
(10) (a) Long-Term Incentive Program, Reference is made to Exhibit
Dated September 20, 1989 10(iii)A(k) of registrant's Form
10-K for the fiscal year ended
August 31, 1989, which is
incorporated herein by reference.
(b) Amendment No. 1 to Long-Term Reference is made to Exhibit
Incentive Program, Dated 10(iii)A(h)(ii) of registrant's
September 21, 1994 Form 10-K for the fiscal year
ended August 31, 1994, which is
incorporated herein by reference.
(11) National Service Industries, Inc. Reference is made to Exhibit A of
Long-Term Achievement Incentive registrant's Schedule 14A as
Plan as Amended and Restated, filed with the Commission on
Effective as of January 5, 2000 November 22, 1999, which is
incorporated herein by reference.
(12) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning December 18, Exchange Commission as part of
1991 between National Service this Form 10-K.
Industries, Inc. and
(a) Kenneth W. Honeycutt
(b) J. Randolph Zook
(13) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning September 16, Exchange Commission as part of
1992 between National Service this Form 10-K.
Industries, Inc. and
(a) Kenneth W. Honeycutt
(b) John K. Morgan
(c) Kenyon W. Murphy
(d) J. Randolph Zook
(14) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning September 15, Exchange Commission as part of
1993 between National Service this Form 10-K.
Industries, Inc. and
</Table>
50
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
(a) Kenyon W. Murphy
(b) J. Randolph Zook
(15) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning September 21, Exchange Commission as part of
1994 between National Service this Form 10-K.
Industries, Inc. and
(a) Kenneth W. Honeycutt
(b) Kenyon W. Murphy
(c) J. Randolph Zook
(16) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning March 15, Exchange Commission as part of
1995 between National Service this Form 10-K.
Industries, Inc. and John K.
Morgan
(17) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning September 20, Exchange Commission as part of
1995 between National Service this Form 10-K.
Industries, Inc. and
(a) Kenneth W. Honeycutt
(b) Kenyon W. Murphy
(c) J. Randolph Zook
(18) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning March 20, Exchange Commission as part of
1996 between National Service this Form 10-K.
Industries, Inc. and John K.
Morgan
(19) Incentive Stock Option Agreement Reference is made to Exhibit
between National Service 10(iii)A(1) of registrant's Form
Industries, Inc. and Brock A. 10-K for the fiscal year ended
Hattox August 31, 1989, which is
incorporated herein by reference.
(20) Amendment to Incentive Stock Filed with the Securities and
Option Agreement between National Exchange Commission as part of
Service Industries, Inc. and this Form 10-K.
Brock A. Hattox
(21) (a) Incentive Stock Option Reference is made to Exhibit
Agreements for Executive Officers 10(iii)A(5) of registrant's Form
and Business Unit Presidents 10-Q for the quarter ended
Effective Beginning September 17, November 30, 1996, which is
1996 between National Service incorporated herein by reference.
Industries, Inc. and
(i) James S. Balloun
(ii) Randolph Zook
(22) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning September 17, Exchange Commission as part of
1996 between National Service this Form 10-K.
Industries, Inc. and
(a) Kenneth W. Honeycutt
(b) Richard W. LeBer
</Table>
51
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
(c) John K. Morgan
(d) Kenyon W. Murphy
(23) Incentive Stock Option Agreements Reference is made to Exhibit
for Executive Officers and 10(iii)A(7) of registrant's Form
Business Unit Presidents 10-Q for the quarter ended
Effective Beginning September 23, November 30, 1997, which is
1997 between National Service incorporated herein by reference.
Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) J. Randolph Zook
(24) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning September 23, Exchange Commission as part of
1997 between National Service this Form 10-K.
Industries, Inc. and
(a) Kenneth W. Honeycutt
(b) Richard W. LeBer
(c) John K. Morgan
(d) Kenyon W. Murphy
(25) Incentive Stock Option Agreements Reference is made to Exhibit
for Executive Officers and 10(iii)A(1) of registrant's Form
Business Unit Presidents 10-Q for the quarter ended
Effective Beginning September 22, November 30, 1998, which is
1998 between National Service incorporated herein by reference.
Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) J. Randolph Zook
(26) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning September 22, Exchange Commission as part of
1998 between National Service this Form 10-K.
Industries, Inc. and
(a) Kenneth W. Honeycutt
(b) Richard W. LeBer
(c) John K. Morgan
(d) Kenyon W. Murphy
(27) Incentive Stock Option Agreement Reference is made to Exhibit
for Executive Officers and 10(iii)A(4) of registrant's Form
Business Unit Presidents 10-Q for the quarter ended
Effective Beginning January 5, February 29, 2000, which is
2000 between National Service incorporated herein by reference.
Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) Richard W. LeBer
(d) J. Randolph Zook
(28) Incentive Stock Option Agreements Filed with the Securities and
Effective Beginning January 5, Exchange Commission as part of
2000 between National Service this Form 10-K.
Industries, Inc. and
</Table>
52
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
(a) Kenneth W. Honeycutt
(b) John K. Morgan
(c) Kenyon W. Murphy
(29) Incentive Stock Option Agreement Filed with the Securities and
for Executive Officers Effective Exchange Commission as part of
beginning May 1, 2000 between this Form 10-K.
National Service Industries, Inc.
and James H. Heagle
(30) Incentive Stock Option Agreement Reference is made to Exhibit
for Executive Officers Effective 10(iii)A(5) of registrant's Form
beginning May 15, 2000 between 10-Q for the quarter ended May
National Service Industries, Inc. 31, 2000, which is incorporated
and Joseph G. Parham, Jr. herein by reference.
(31) Incentive Stock Option Agreements Reference is made to Exhibit
for Executive Officers and 10(iii)A(1) of registrant's Form
Business Unit Presidents 10-Q for the quarter ended
Effective Beginning October 24, November 30, 2000, which is
2000 between National Service incorporated herein by reference.
Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) James H. Heagle
(d) Kenneth W. Honeycutt
(e) John K. Morgan
(f) Kenyon W. Murphy
(g) Joseph G. Parham, Jr.
(h) J. Randolph Zook
(32) Nonqualified Stock Option Reference is made to Exhibit
Agreement for Corporate Officers 10(iii)A(j) of registrant's Form
between National Service 10-K for the fiscal year ended
Industries, Inc. and Brock A. August 31, 1992, which is
Hattox incorporated herein by reference.
(33) Nonqualified Stock Option Filed with the Securities and
Agreements Effective Beginning Exchange Commission as part of
September 20, 1995 between this Form 10-K.
National Service Industries, Inc.
and
(a) Kenneth W. Honeycutt
(b) J. Randolph Zook
(34) Nonqualified Stock Option Reference is made to Exhibit
Agreement Effective January 3, 10(iii)A(b) of registrant's Form
1996 between National Service 10-Q for the quarter ended
Industries, Inc. and James S. February 28, 1996, which is
Balloun incorporated herein by reference.
(35) Nonqualified Stock Option Reference is made to Exhibit
Agreements for Executive Officers 10(iii)A(6) of registrant's Form
and Business Unit Presidents 10-Q for the quarter ended
Effective Beginning September 17, November 30, 1996, which is
1996 between National Service incorporated herein by reference.
Industries, Inc. and
</Table>
53
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
(a) James S. Balloun
(b) Brock A. Hattox
(c) J. Randolph Zook
(36) Amendment to Stock Option Filed with the Securities and
Agreement for Executive Officers Exchange Commission as part of
Effective Beginning September 17, this Form 10-K.
1996 between National Service
Industries, Inc. and Brock A.
Hattox
(37) Nonqualified Stock Option Filed with the Securities and
Agreements Effective Beginning Exchange Commission as part of
September 17, 1996 between this Form 10-K.
National Service Industries, Inc.
and
(a) Kenneth W. Honeycutt
(b) Kenyon W. Murphy
(38) Nonqualified Stock Option Reference is made to Exhibit
Agreements For Executive Officers 10(iii)A(8) of registrant's Form
and Business Unit Presidents 10-Q for the quarter ended
Effective Beginning September 23, November 30, 1997, which is
1997 between National Service incorporated herein by reference.
Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) J. Randolph Zook
(39) Nonqualified Stock Option Filed with the Securities and
Agreements Effective Beginning Exchange Commission as part of
September 23, 1997 between this Form 10-K.
National Service Industries, Inc.
and
(a) Kenneth W. Honeycutt
(b) Kenyon W. Murphy
(40) Nonqualified Stock Option Reference is made to Exhibit
Agreements for Executive Officers 10(iii)A(2) of registrant's Form
Effective Beginning September 22, 10-Q for the quarter ended
1998 between National Service November 30, 1998, which is
Industries, Inc. and incorporated herein by reference.
(a) James S. Balloun
(b) Brock A. Hattox
(c) J. Randolph Zook
(41) Nonqualified Stock Option Filed with the Securities and
Agreements Effective Beginning Exchange Commission as part of
September 22, 1998 between this Form 10-K.
National Service Industries, Inc.
and
(a) Kenneth W. Honeycutt
(b) John K. Morgan
(c) Kenyon W. Murphy
(42) Nonqualified Stock Option Reference is made to Exhibit
Agreements (Surrendered 10(iii)A(3) of registrant's Form
Aspiration Award) between 10-Q for the quarter ended
National Service
</Table>
54
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
Industries, Inc. and: February 29, 2000, which is
incorporated herein by reference.
(a) James S. Balloun
(b) Brock A. Hattox
(43) Amendment to Stock Option Filed with the Securities and
Agreement (Surrendered Aspiration Exchange Commission as part of
Award) between National Service this Form 10-K.
Industries, Inc. and Brock A.
Hattox
(44) Nonqualified Stock Option Reference is made to Exhibit
Agreements for Executive Officers 10(iii)A(5) of registrant's Form
and Business Unit Presidents 10-Q for the quarter ended
Effective Beginning January 5, February 29, 2000, which is
2000 between National Service incorporated herein by reference.
Industries, Inc. and:
(a) James S. Balloun
(b) Brock A. Hattox
(c) Richard W. LeBer
(d) J. Randolph Zook
(45) Nonqualified Stock Option Filed with the Securities and
Agreements Effective Beginning Exchange Commission as part of
January 5, 2000 between National this Form 10-K.
Service Industries, Inc. and
(a) Kenneth W. Honeycutt
(b) John K. Morgan
(c) Kenyon W. Murphy
(46) Nonqualified Stock Option Reference is made to Exhibit
Agreements for Executive Officers 10(iii)A(2) of registrant's Form
Effective Beginning October 4, 10-Q for the quarter ended
2000 between National Service November 30, 2000, which is
Industries, Inc. and: incorporated herein by reference.
(a) James S. Balloun
(b) Brock A. Hattox
(47) Nonqualified Stock Option Reference is made to Exhibit
Agreements for Executive Officers 10(iii)A(3) of registrant's Form
and Business Unit Presidents 10-Q for the quarter ended
Effective Beginning October 24, November 30, 2000, which is
2000 between National Service incorporated herein by reference.
Industries, Inc. and:
(a) James S. Balloun
(b) Brock A. Hattox
(c) James H. Heagle
(d) Kenneth W. Honeycutt
(e) John K. Morgan
(f) Kenyon W. Murphy
(g) Joseph G. Parham, Jr.
(h) J. Randolph Zook
(48) (a) Benefits Protection Trust Reference is made to Exhibit
Agreement Dated July 5, 1990, 10(iii)A(n) of registrant's Form
between National Service 10-K for the fiscal year ended
Industries,
</Table>
55
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
Inc. and Wachovia Bank and Trust August 31, 1990, which is
Company incorporated herein by reference.
(b) Amendment to Benefits Reference is made to Exhibit
Protection Trust Agreement 10(iii)A(12)(c) of registrant's
between National Service Form 10-K for the fiscal year
Industries, Inc. and Wachovia ended August 31, 1996, which is
Bank and Trust Company and incorporated herein by reference.
Adoption, Dated August 31, 1996
(c) Amendment No. 2 to Benefits Reference is made to Exhibit
Protection Trust Agreement 10(iii)A(3) of registrant's Form
between National Service 10-Q for the quarter ended
Industries, Inc. and Wachovia November 30, 1997, which is
Bank and Trust Company, Dated incorporated herein by reference.
September 23, 1997
(d) Amended Schedule 1 of Reference is made to Exhibit
Benefits Protection Trust 10(iii)A(4) of registrant's Form
Agreement between National 10-Q for the quarter ended
Service Industries, Inc. and November 30, 1997, which is
Wachovia Bank and Trust Company, incorporated herein by reference.
Dated September 23, 1997
(e) Amendment No. 3 to Benefits Reference is made to Exhibit
Protection Trust Agreement 10(iii)A(4) of registrant's Form
between National Service 10-Q for the quarter ended
Industries, Inc. and Wachovia November 30, 1998, which is
Bank, N.A. (formerly Wachovia incorporated herein by reference.
Bank and Trust Company), Dated
January 6, 1999.
(49) (a) Executive Benefits Trust Reference is made to Exhibit
Agreement Dated July 5, 1990, 10(iii)A(o) of registrant's Form
between National Service 10-K for the fiscal year ended
Industries, Inc. and Wachovia August 31, 1990, which is
Bank and Trust Company incorporated herein by reference.
(b) Amendment to Executive Reference is made to Exhibit
Benefits Trust Agreement between 10(iii)A(13) of registrant's Form
National Service Industries, Inc. 10-K for the fiscal year ended
and Wachovia Bank and Trust August 31, 1996, which is
Company and Adoption, Dated incorporated herein by reference.
August 31, 1996
(c) Amended Schedule 1 of Reference is made to Exhibit
Executive Benefits Trust 10(iii)A(5) of registrant's Form
Agreement between National 10-Q for the quarter ended
Service Industries, Inc. and November 30, 1997, which is
Wachovia Bank, N.A. (formerly incorporated herein by reference.
Wachovia Bank and Trust Company),
Dated September 23, 1997
(d) Amendment No. 2 to Executive Reference is made to Exhibit
Benefits Trust Agreement between 10(iii)A(5) of registrant's Form
National Service Industries, Inc. 10-Q for the quarter ended
and Wachovia Bank, N.A. (formerly November 30, 1998, which is
Wachovia Bank and Trust Company), incorporated herein by reference.
Dated January 6, 1999.
(50) (a) National Service Industries, Reference is made to Exhibit
Inc. 1992 Nonemployee Directors' 10(iii)A(o) of registrant's Form
Stock Option Plan, Effective 10-K for the fiscal year ended
September 16,
</Table>
56
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
1992 August 31, 1992, which is
incorporated herein by reference.
(b) First Amendment to the Reference is made to Exhibit
National Service Industries, Inc. 10(iii)A(13)(b) of registrant's
1992 Nonemployee Directors' Stock Form 10-K for the fiscal year
Option Plan, Dated March 24, 1998 ended August 31, 1998, which is
incorporated herein by reference.
(c) Second Amendment to the Reference is made to Exhibit
National Service Industries, Inc. 10(iii)A(1) of registrant's Form
1992 Nonemployee Directors' Stock 10-Q for the quarter ended
Option Plan, Dated January 5, November 30, 1999, which is
2000 incorporated herein by reference.
(51) Nonemployee Directors' Stock Reference is made to Exhibit
Option Agreement between National 10(iii)A(q) of registrant's Form
Service Industries, Inc. and 10-K for the fiscal year ended
August 31, 1994, which is
(a) John L. Clendenin incorporated herein by reference.
(b) Robert M. Holder, Jr.
(c) James C. Kennedy
(d) Bernard Marcus
(e) John G. Medlin, Jr.
(f) Dr. Betty L. Siegel
(g) Barrie A. Wigmore
(h) Thomas C. Gallagher
(i) Herman J. Russell
(j) Samuel A. Nunn
(52) Stock Option Agreement for Reference is made to Exhibit
Nonemployee Directors Dated March 10(iii)A of registrant's Form
19, 1997 between National Service 10-Q for the quarter ended May
Industries, Inc. and 31, 1997, which is incorporated
herein by reference.
(a) John L. Clendenin
(b) Samuel A. Nunn
(53) Nonemployee Directors' Stock Reference is made to Exhibit
Option Agreement Dated January 5, 10(iii)A(1) of the registrant's
2000 between National Service Form 10-Q for the quarter ended
Industries, Inc. and February 29, 2000, which is
incorporated herein by reference.
(a) Leslie M. Baker, Jr.
(b) John L. Clendenin
(c) Thomas C. Gallagher
(d) Bernard Marcus
(e) Samuel A. Nunn
(f) Ray M. Robinson
(g) Herman J. Russell
(h) Betty L. Siegel
(i) Kathy Brittain White
(j) Barrie A. Wigmore
(k) Neil Williams
(54) Nonemployee Directors' Stock Reference is made to Exhibit
Option Agreement Dated December 10(iii)A(1) of registrant's
21, 2000
</Table>
57
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
between National Service Form 10-Q for the quarter ended
Industries, Inc. and February 28, 2001, which is
incorporated herein by reference.
(a) Leslie M. Baker, Jr.
(b) John L. Clendenin
(c) Thomas C. Gallagher
(d) Samuel A. Nunn
(e) Roy Richards, Jr.
(f) Ray M. Robinson
(g) Betty L. Siegel
(h) Neil Williams
(55) (a) National Service Industries, Reference is made to Exhibit
Inc. Executive Savings Plan, 10(iii)A(s) of registrant's Form
Effective September 1, 1994 10-K for the fiscal year ended
August 31, 1994, which is
incorporated herein by reference.
(b) Amendment No. 1 to National Reference is made to Exhibit
Service Industries, Inc. 10(iii)A(17)(b) of registrant's
Executive Savings Plan, Dated Form 10-K for the fiscal year
August 31, 1996 ended August 31, 1996, which is
incorporated herein by reference.
(56) (a) National Service Industries, Reference is made to Exhibit
Inc. Nonemployee Director 10(iii)A(26) of registrant's Form
Deferred Stock Unit Plan, 10-K for the fiscal year ended
Effective June 1, 1996 August 31, 1996, which is
incorporated herein by reference.
(b) Amendment No. 1 to National Reference is made to Exhibit
Service Industries, Inc. 10(iii)A(6) of registrant's Form
Nonemployee Director Deferred 10-Q for the quarter ended
Stock Unit Plan, Effective November 30, 1997, which is
December 1, 1997 incorporated herein by reference.
(c) Amendment No. 2 to National Reference is made to Exhibit
Service Industries, Inc. 10(iii)A(19)(c) of registrant's
Nonemployee Director Deferred Form 10-K for the fiscal year
Stock Unit Plan, Effective ended August 31, 1998, which is
December 31, 1997 incorporated herein by reference.
(57) Employment Letter Agreement Reference is made to Exhibit
between National Service 10(iii)A(28) of registrant's Form
Industries, Inc. and Brock A. 10-K for the fiscal year ended
Hattox, Dated August 26, 1996 August 31, 1996, which is
incorporated herein by reference.
(58) Employment Letter Agreement Reference is made to Exhibit
between National Service 10(iii)A(2) of registrant's Form
Industries, Inc. and James S. 10-Q for the quarter ended
Balloun, Dated February 1, 1996 November 30, 1997, which is
incorporated herein by reference.
[refiled to disclose confidential
information previously omitted
and
</Table>
58
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
filed separately with the
Securities and Exchange
Commission]
(59) Employment Letter Agreement Filed with the Securities and
between National Service Exchange Commission as part of
Industries, Inc. and James H. this Form 10-K.
Heagle Dated March 28, 2000
(60) Employment Letter Agreement Reference is made to Exhibit
between National Service 10(iii)A(2) of registrant's Form
Industries, Inc. and Joseph G. 10-Q for the quarter ended May
Parham, Jr., Dated May 3, 2000 31, 2000, which is incorporated
herein by reference.
(61) Employment Letter Agreement Filed with the Securities and
between National Service Exchange Commission as part of
Industries, Inc. and Brock A. this Form 10-K.
Hattox Effective as of November
30, 2001
(62) (a) Aspiration Achievement Filed with the Securities and
Incentive Award Agreements for Exchange Commission as part of
the Performance Cycle beginning this Form 10-K.
September 1, 1998 between
National Service Industries, Inc.
and
(i) James S. Balloun
(ii) Brock A. Hattox
(iii) Kenneth W. Honeycutt
(iv) Richard W. LeBer
(v) John K. Morgan
(vi) J. Randolph Zook
[refiled to disclose confidential
information previously omitted
and filed separately with the
Securities and Exchange
Commission]
(b) Amendment of the Aspiration Filed with the Securities and
Achievement Incentive Award Exchange Commission as part of
Agreements for the Performance this Form 10-K.
Cycle Ending August 31, 2001
between National Service
Industries, Inc. and
(i) James S. Balloun
(ii) Brock A. Hattox
(iii) Kenneth W. Honeycutt
(iv) Richard W. LeBer
(v) John K. Morgan
[refiled to disclose confidential
information previously omitted
and filed separately with the
Securities and Exchange
Commission]
(63) Aspiration Achievement Incentive Reference is made to Exhibit
Award Agreements for the 10(iii)A(40) of registrant's Form
Performance Cycle beginning 10-K for the fiscal year ended
September 1, 1999 between August 31, 1999, which is
National incorporated herein
</Table>
59
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
Service Industries, Inc. and by reference, for James S.
Balloun and Brock A. Hattox.
Aspiration Achievement Award
Agreements for Kenneth W.
Honeycutt, Richard W. LeBer, John
K. Morgan, Kenyon W. Murphy, and
J. Randolph Zook were filed with
the Securities and Exchange
Commission as part of this Form
10-K.
(a) James S. Balloun
(b) Brock A. Hattox
(c) Kenneth W. Honeycutt
(d) Richard W. LeBer
(e) John K. Morgan
(f) Kenyon W. Murphy
(g) J. Randolph Zook
[a confidential portion of which
has been omitted and filed
separately with the Securities
and Exchange Commission]
(64) Aspiration Achievement Incentive Filed with the Securities and
Award Agreement for the Exchange Commission as part of
Performance Cycle beginning this Form 10-K.
September 1, 1998 between
National Service Industries, Inc.
and James H. Heagle, Dated May 1,
2000
(65) Aspiration Achievement Incentive Filed with the Securities and
Award Agreement for the Exchange Commission as part of
Performance Cycle beginning this Form 10-K.
September 1, 1998 between
National Service Industries, Inc.
and Joseph G. Parham, Jr., Dated
May 15, 2000
[refiled to disclose confidential
information previously omitted
and filed separately with the
Securities and Exchange
Commission]
(66) Aspiration Achievement Incentive Filed with the Securities and
Award Agreement for the Exchange Commission as part of
Performance Cycle beginning this Form 10-K.
September 1, 1999 between
National Service Industries, Inc.
and James H. Heagle, Dated May 1,
2000
[a confidential portion of which
has been omitted and filed
separately with the Securities
and Exchange Commission]
(67) Aspiration Achievement Incentive Reference is made to Exhibit
Award Agreement for the 10(iii)A(7) of registrant's Form
Performance Cycle beginning 10-Q for the quarter ended May
31,
</Table>
60
NATIONAL SERVICE INDUSTRIES, INC.
EXHIBIT LIST
<Table>
September 1, 1999 between 2000, which is incorporated
National Service Industries, Inc. herein by reference.
and Joseph G. Parham, Jr., Dated
May 15, 2000
[a confidential portion of which
has been omitted and filed
separately with the Securities
and Exchange Commission]
(68) (a) National Service Industries, Reference is made to Exhibit
Inc. Supplemental Deferred 10(iii)A(9) of registrant's Form
Savings Plan, Effective September 10-Q for the quarter ended
18, 1996 November 30, 1996, which is
incorporated herein by reference.
(b) Amendment No. 1 to National Reference is made to Exhibit
Service Industries, Inc. 10(iii)A(23)(b) of registrant's
Supplemental Deferred Savings Form 10-K for the fiscal year
Plan, Dated December 29, 1997 ended August 31, 1999, which is
incorporated herein by reference.
(69) National Service Industries, Inc. Reference is made to Exhibit
Management Compensation and 10(iii)A(31) of registrant's Form
Incentive Plan as Amended and 10-K for the fiscal year ended
Restated, Effective as of August 31, 1998, which is
September 1, 1998. incorporated herein by reference.
(70) Severance Letter Agreements Dated Filed with the Securities and
as of October 5, 2001 Between Exchange Commission as part of
National Service Industries, Inc. this Form 10-K.
and
(a) Richard W. LeBer
(b) J. Randolph Zook
(71) Employment Letter Agreement, Filed with the Securities and
Dated October 24, 2001, between Exchange Commission as part of
National Service Industries, Inc. the Form 10-K.
and John Morgan
EXHIBIT 12 Ratio of Earnings to Fixed Reference is made to Exhibit 12
Charges of registrant's Form 10-Q for the
quarter ended May 31, 2000, which
is incorporated herein by
reference.
EXHIBIT 21 List of Subsidiaries 66
EXHIBIT 23 Consent of Independent Public 67
Accountants
EXHIBIT 24 Powers of Attorney Filed with the Securities and
Exchange Commission as part of
this Form 10-K.
</Table>
(b) An 8-K was filed on June 29, 2001 related to the board of director's
authorization for management to pursue a plan to spin-off the Company's lighting
equipment and chemicals businesses.
(c) Exhibits 2, 9, 11, 13, 18, and 22 have been omitted because they are
not applicable.
(d) Not applicable.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL SERVICE INDUSTRIES, INC.
BY: /s/ HELEN D. HAINES
------------------------------------
HELEN D. HAINES
Vice President and Secretary
Date: November 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman, President, and Chief November 29, 2001
------------------------------------------------ Executive Officer and Director
James S. Balloun
* Executive Vice President and November 29, 2001
------------------------------------------------ Chief Financial Officer
Brock Hattox
* Vice President and Controller November 29, 2001
------------------------------------------------
Robert R. Burchfield
* Director November 29, 2001
------------------------------------------------
John L. Clendenin
* Director November 29, 2001
------------------------------------------------
Thomas C. Gallagher
* Director November 29, 2001
------------------------------------------------
Neil Williams
* Director November 29, 2001
------------------------------------------------
Roy Richards, Jr.
* Director November 29, 2001
------------------------------------------------
L. M. Baker, Jr.
* Director November 29, 2001
------------------------------------------------
Betty L. Siegel
* Director November 29, 2001
------------------------------------------------
Ray M. Robinson
</Table>
62
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director November 29, 2001
------------------------------------------------
Kathy Brittain White
* Director November 29, 2001
------------------------------------------------
Peter C. Browning
*By: /s/ KENYON W. MURPHY Attorney-in-Fact
-----------------------------------------
Kenyon W. Murphy
</Table>
63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II
To National Service Industries, Inc.:
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements included in NATIONAL
SERVICE INDUSTRIES, INC. and subsidiaries' Form 10-K, and have issued our report
thereon dated November 29, 2001. Our audit was made for the purpose of forming
an opinion on those statements taken as a whole. The schedule listed in Item 14
in this Form 10-K is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
Arthur Andersen LLP
Atlanta, Georgia
November 29, 2001
64
SCHEDULE II
NATIONAL SERVICE INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 2001, 2000, AND 1999
(IN THOUSANDS)
<Table>
<Caption>
ADDITIONS CHARGED TO
BALANCE AT ----------------------- BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
---------- --------- ----------- ------------- ----------
YEAR ENDED AUGUST 31, 2001:
Deducted in the balance sheet from
the asset to which it applies --
Reserve for doubtful accounts.... $739 2,345 19 1,305 $1,798
==== ===== ===== ===== ======
YEAR ENDED AUGUST 31, 2000:
Deducted in the balance sheet from
the asset to which it applies --
Reserve for doubtful accounts.... $639 2,125 -- 2,025 $ 739
==== ===== ===== ===== ======
YEAR ENDED AUGUST 31, 1999:
Deducted in the balance sheet from
the asset to which it applies --
Reserve for doubtful accounts.... $665 906 113 1,045 $ 639
==== ===== ===== ===== ======
</Table>
- ---------------
(1) Recoveries credited to reserve, reserves recorded in acquisitions, and
reserves removed in sale of businesses.
(2) Uncollectible accounts written off.
65