UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________.
Commission file number 1-3208.
NATIONAL SERVICE INDUSTRIES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-0364900
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1420 Peachtree Street, N.E., Atlanta, Georgia 30309-3002
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(404) 853-1000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - $1.00 Par Value 10,327,867* shares as of December 31, 2001.
* Outstanding shares as of December 31, 2001 have been adjusted to reflect the
impact of the Company's one-for-four reverse stock split effected on
January 7, 2001
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited) -
NOVEMBER 30, 2001 AND AUGUST 31, 2001 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) -
THREE MONTHS ENDED NOVEMBER 30, 2001 AND 2000 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -
THREE MONTHS ENDED NOVEMBER 30, 2001 AND 2000 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15-17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 18
INDEX TO EXHIBITS 19
Page 3
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
NATIONAL SERVICE INDUSTRIES, INC.
(In thousands, except share data)
November 30, August 31,
2001 2001
------------ -----------
ASSETS
Current Assets:
Receivables, less reserves for doubtful accounts of $1,922 at
November 30, 2001 and $1,798 at August 31, 2001 $ 62,202 $ 60,406
Inventories, at the lower of cost (on a first-in,
first-out basis) or market 18,791 19,195
Linens in service, net of amortization 54,063 56,910
Deferred income taxes 13,789 9,138
Prepayments 4,239 11,300
Insurance receivable (Note 8) 27,269 28,616
Other current assets 3,257 804
----------- -----------
Total Current Assets 183,610 186,369
Property, Plant, and Equipment, at cost:
Land 12,898 12,775
Buildings and leasehold improvements 55,635 57,433
Machinery and equipment 258,806 258,344
----------- -----------
Total Property, Plant, and Equipment 327,339 328,552
Less - Accumulated depreciation and amortization 161,785 157,507
----------- -----------
Property, Plant, and Equipment - net 165,554 171,045
Other Assets:
Goodwill -- 28,432
Other intangibles 8,148 8,629
Insurance receivable (Note 8) 66,585 66,574
Other 37,203 37,049
----------- -----------
Total Other Assets 111,936 140,684
Net assets of discontinued operations (Note 5) -- 400,296
----------- -----------
Total Assets $ 461,100 $ 898,394
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (Note 7) $ 1,033 $ 1,011
Notes payable (Note 7) 2,240 1,999
Accounts payable 23,319 28,164
Accrued salaries, commissions, and bonuses 7,274 7,050
Current portion of self-insurance reserves 3,269 3,119
Environmental reserve (Note 9) 6,967 7,291
Current portion of litigation reserve (Note 8) 27,439 30,453
Other accrued liabilities 26,578 19,561
----------- -----------
Total Current Liabilities 98,119 98,648
Long-Term Debt, less current maturities (Note 7) 1,723 1,990
----------- -----------
Deferred Income Taxes 23,098 32,431
----------- -----------
Self-Insurance Reserves, less current portion 13,100 12,477
----------- -----------
Litigation Reserve, less current portion (Note 8) 83,091 82,917
----------- -----------
Other Long-Term Liabilities 7,164 7,303
----------- -----------
Commitments and Contingencies (Notes 8 and 9)
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, 14,479,745 shares issued (Note 11) 14,480 14,480
Paid-in capital 72,495 72,860
Retained earnings 565,183 995,537
Unearned compensation on restricted stock (137) (880)
Accumulated other comprehensive income (43) (43)
----------- -----------
651,978 1,081,954
Less - Treasury stock, at cost (4,151,878 shares at
November 30, 2001 and 4,173,299 shares at August 31, 2001) 417,173 419,326
----------- -----------
Total Stockholders' Equity 234,805 662,628
----------- -----------
Total Liabilities and Stockholders' Equity $ 461,100 $ 898,394
=========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
Page 4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per-share data)
THREE MONTHS ENDED
NOVEMBER 30
------------------------------
2001 2000
--------- --------
Sales and Service Revenues:
Service revenues $ 78,836 $ 81,107
Net sales of products 55,553 59,580
--------- --------
Total Revenues 134,389 140,687
--------- --------
Costs and Expenses:
Cost of services 47,764 46,433
Cost of products sold 42,016 46,036
Selling and administrative expenses 44,758 41,403
Restructuring expense and other charges (Note 10) 5,820 --
Amortization expense 481 715
Interest expense 111 439
Other (income) expense, net (481) 1,924
--------- --------
Total Costs and Expenses 140,469 136,950
--------- --------
(Loss) income from continuing operations before income taxes
and cumulative effect of a change in accounting principle (6,080) 3,737
Income tax (benefit) expense (2,432) 1,383
--------- --------
(Loss) income from continuing operations before cumulative effect
of a change in accounting principle (3,648) 2,354
--------- --------
Discontinued Operations (Note 5):
Income from discontinued operations, net of tax of $7,066
in 2001 and $8,329 in 2000 11,534 14,183
Costs associated with effecting the spin-off, net of
tax benefit of $717 (19,069) --
--------- --------
Total Discontinued Operations (7,535) 14,183
--------- --------
Cumulative effect of a change in accounting principle, net of
tax benefit of $10,830 (17,602) --
--------- --------
Net (Loss) Income $ (28,785) $ 16,537
========= ========
Basic and diluted earnings per share (split adjusted):
(Loss) earnings per share from continuing operations before
cumulative effect of a change in accounting principle $ (0.35) $ 0.23
Discontinued operations:
Income from discontinued operations, net of tax 1.12 1.39
Costs associated with effecting the spin-off, net of tax benefit (1.85) --
--------- --------
Total Discontinued Operations (0.73) 1.39
--------- --------
Cumulative effect of a change in accounting principle,
net of tax benefit (1.71) --
--------- --------
Net (Loss) Income $ (2.79) $ 1.62
========= ========
Basic Weighted Average Number of Shares Outstanding 10,305 10,235
========= ========
Diluted Weighted Average Number of Shares Outstanding 10,305 10,239
========= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
THREE MONTHS ENDED
NOVEMBER 30
-------------------------
2001 2000
-------- --------
Cash Provided by (Used for) Operating Activities:
Net (loss) income from continuing operations $ (3,648) $ 2,354
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Depreciation and amortization 6,534 6,929
Provision for losses on accounts receivable 495 590
(Gain) loss on the sale of property, plant, and equipment (78) 1,707
Restructuring expense and other charges 5,820 --
Change in assets and liabilities, net of effect of acquisitions and divestitures-
Receivables (2,291) (3,468)
Inventories and linens in service, net 2,975 1,943
Deferred income taxes (2,437) 4,928
Prepayments and other current assets (2,043) (2,194)
Accounts payable and accrued liabilities (2,199) 155
Self-insurance reserves and other long-term liabilities 663 (3,290)
-------- --------
Net Cash Provided by Continuing Operations 3,791 9,654
Net Cash Provided by Discontinued Operations 6,935 7,312
-------- --------
Net Cash Provided by Operating Activities 10,726 16,966
-------- --------
Cash Provided by (Used for) Investing Activities:
Purchases of property, plant, and equipment (4,996) (3,312)
Sale of property, plant, and equipment 354 183
Acquisitions -- (200)
Change in other assets (149) (844)
-------- --------
Net Cash Used for Investing Activities (4,791) (4,173)
-------- --------
Cash Provided by (Used for) Financing Activities:
Borrowings of notes payable, net 241 --
Repayments of long-term debt (245) --
Treasury stock transactions, net 679 754
Cash dividends paid (6,610) (13,547)
-------- --------
Net Cash Used for Financing Activities (5,935) (12,793)
-------- --------
Net Change in Cash and Cash Equivalents -- --
Cash and Cash Equivalents at Beginning of Period -- --
-------- --------
Cash and Cash Equivalents at End of Period $ -- $ --
======== ========
Supplemental Cash Flow Information:
Income taxes paid during the period $ 3,443 $ 3,308
Interest paid during the period 12,888 9,674
Noncash Activities:
Treasury shares issued under long-term incentive plan $ 1,109 $ 4,551
Cumulative effect of a change in accounting principle 28,432 --
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except per-share data and
information contained in Note 8)
1. BASIS OF PRESENTATION
On November 7, 2001, management of National Service Industries, Inc. ("NSI" or
the "Company") 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 was effected on November 30, 2001 through a
tax-free distribution ("Distribution") of 100% of the outstanding shares of
common stock of Acuity Brands, Inc. ("Acuity"), a wholly-owned subsidiary of
NSI owning and operating the lighting equipment and chemicals businesses. Each
NSI stockholder of record as of November 16, 2001, the record date for the
distribution, received one share of Acuity common stock for each share of NSI
common stock held at that date.
Certain NSI corporate assets, liabilities, and expenses have been allocated to
Acuity based on an estimate of the proportion of corporate amounts allocable to
Acuity, utilizing such factors as revenues, number of employees, and other
relevant factors. As a result of the spin-off, the Company's financial
statements have been prepared with Acuity's net assets, results of operations,
and cash flows presented as discontinued operations. All historical statements
have been restated to conform with this presentation. In the opinion of
management, the allocations have been made on a reasonable basis.
The interim consolidated financial statements included herein have been
prepared by the Company without audit and the consolidated balance sheet as of
August 31, 2001 has been derived from audited statements. These statements
reflect all adjustments, all of which are of a normal, recurring nature, which
are, in the opinion of management, necessary to present fairly the consolidated
financial position as of November 30, 2001, the consolidated results of
operations for the three months ended November 30, 2001 and 2000, and the
consolidated cash flows for the three months ended November 30, 2001 and 2000.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended August 31, 2001.
The results of operations for the three months ended November 30, 2001 are not
necessarily indicative of the results to be expected for the full fiscal year
because the Company's revenues and income are generally higher in the second
half of its fiscal year and because of the uncertainty of general business
conditions.
2. RECENT ACCOUNTING STANDARDS
NEWLY ADOPTED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141 ("SFAS 141") "Business Combinations," and Statement No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 prospectively
prohibits the pooling of interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 142 requires companies to
cease amortizing goodwill that existed at June 30, 2001 and establishes a new
method for testing goodwill for impairment on an annual basis (or an interim
basis if an event occurs that might reduce the fair value of a reporting unit
below its carrying value.) Any goodwill resulting from acquisitions completed
after June 30, 2001 will not be amortized. SFAS 142 also requires that an
identifiable intangible asset that is determined to have an indefinite useful
economic life not be amortized, but separately tested for impairment using a
fair value based approach.
Page 7
The Company adopted SFAS 142 as of September 1, 2001. Summarized information
for the Company's acquired intangible assets is as follows:
Acquired Intangible Assets
November 30, 2001 August 31, 2001
-------------------------------- -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets
Customer contracts $10,215 $(2,707) $10,215 $(2,348)
Other 1,428 (788) 1,428 (666)
------- ------- ------- -------
Total $11,643 $(3,495) $11,643 $(3,014)
======= ======= ======= =======
The Company amortizes customer contracts over estimated useful lives of seven
years. Other acquired intangible assets consisting primarily of restrictive
covenant agreements are amortized over the lives of the agreements, which
average approximately four years. The Company recorded amortization expense of
$481 and $417 related to intangible assets in the first three months of fiscal
2002 and fiscal 2001, respectively.
The changes in the carrying amount of goodwill during the period are summarized
as follows:
Textile
Rental Envelope Total
------- -------- --------
Balance as of August 31, 2001 $ 4,162 $ 24,270 $ 28,432
Goodwill acquired during the quarter -- -- --
Transitional impairment losses (4,162) (24,270) (28,432)
------- -------- --------
Balance as of November 30, 2001 $ -- $ -- $ --
======= ======== ========
The textile rental and envelope segments each tested goodwill for impairment
during the first quarter of 2002 as required by SFAS 142 upon adoption,
utilizing a combination of valuation techniques including the expected present
value of future cash flows, a market multiple approach and a comparable
transaction approach. As a result of this valuation process as well as the
application of the remaining provisions of SFAS 142, the Company recorded a
pre-tax transitional impairment loss of $28,432, representing the write-off of
all of the Company's existing goodwill. This write-off was reported as a
cumulative effect of a change in accounting principle, on a net of tax basis,
in the Company's Consolidated Statement of Income for the three months ended
November 30, 2001.
Prior to the adoption of SFAS 142 in September 2001, the Company amortized
goodwill over estimated useful lives ranging from 10 years to 30 years. Had the
Company accounted for goodwill consistent with the provisions of SFAS 142 in
prior periods, the Company's income from continuing operations and net income
would have been affected as follows:
Three Months Ended
November 30,
----------------------------
2001 2000
-------- -------
Reported (loss) income from
continuing operations $ (3,648) $ 2,354
Add back: Goodwill amortization -- 188
-------- -------
Adjusted (loss) income from
continuing operations $ (3,648) $ 2,542
======== =======
Adjusted net (loss) income $(28,785) $16,725
======== =======
Basic and diluted earnings per share:
Reported (loss) income from
continuing operations $ (0.35) $ 0.23
Add back: Goodwill amortization -- --
-------- -------
Adjusted (loss) income from
continuing operations $ (0.35) $ 0.23
======== =======
Adjusted net (loss) income $ (2.79) $ 1.62
======== =======
Page 8
3. BUSINESS SEGMENT INFORMATION
The following tables summarize the Company's business segment information from
continuing operations:
DEPRECIATION CAPITAL
SALES AND OPERATING AND EXPENDITURES
SERVICE PROFIT AMORTIZATION INCLUDING
THREE MONTHS ENDED NOVEMBER 30, 2001 REVENUES (LOSS) EXPENSE ACQUISITIONS
--------- -------- ------------ ------------
Textile Rental $ 78,836 $(5,379) $4,117 $4,105
Envelope 55,553 2,154 2,204 838
--------- ------- ------ ------
134,389 (3,225) 6,321 4,943
Corporate -- (2,744) 213 53
Interest expense -- (111) -- --
--------- ------- ------ ------
Total $ 134,389 $(6,080) $6,534 $4,996
========= ======= ====== ======
DEPRECIATION CAPITAL
SALES AND OPERATING AND EXPENDITURES
SERVICE PROFIT AMORTIZATION INCLUDING
THREE MONTHS ENDED NOVEMBER 30, 2000 REVENUES (LOSS) EXPENSE ACQUISITIONS
--------- -------- ------------ ------------
Textile Rental $ 81,107 $ 3,727 $4,147 $2,071
Envelope 59,580 1,712 2,325 1,084
-------- ------- ------ ------
140,687 5,439 6,472 3,155
Corporate -- (1,263) 457 357
Interest expense -- (439) -- --
-------- ------- ------ ------
Total $140,687 $ 3,737 $6,929 $3,512
======== ======= ====== ======
Total Assets
-------------------------------
November 30, August 31,
2001 2001
------------ ----------
Textile Rental $215,486 $231,422
Envelope 114,414 141,945
-------- --------
Subtotal 329,900 373,367
Corporate 131,200 124,731
-------- --------
Total $461,100 $498,098
======== ========
4. INVENTORIES
Major classes of inventory as of November 30, 2001 and August 31, 2001 were as
follows:
November 30, August 31,
2001 2001
------------ ---------
Raw Materials and Supplies $ 7,666 $ 6,716
Work-in-Process 1,398 817
Finished Goods 9,727 11,662
------- -------
Total $18,791 $19,195
======= =======
5. 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 was
effected on November 30, 2001 through a tax-free distribution of 100% of the
outstanding shares of common stock of Acuity, a wholly-owned subsidiary of the
Company owning and operating the lighting equipment and chemicals businesses.
Each NSI stockholder of record as of November 16, 2001, the record date for the
Distribution, received one share of the 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 financial statements
have been prepared with these businesses' net assets, results of operations,
and cash flows presented as discontinued operations through the effective date
of the Distribution, November 30, 2001. All historical statements have been
restated to conform with this presentation.
Page 9
Summarized financial information for discontinued operations is as follows:
August 31,
2001
---------
Current Assets $ 559,116
Property, Plant, and Equipment - net 248,423
Goodwill and Other Intangibles 468,944
Other Long-Term Assets 54,092
Current Liabilities (442,067)
Long-Term Debt, less current maturities (373,707)
Other Long-Term Liabilities (131,503)
Accumulated Other Comprehensive Income Items 16,998
---------
Net Assets of Discontinued Operations $ 400,296
=========
A summary of the operating results of the discontinued operations is as
follows:
Three Months Ended November 30,
-------------------------------
2001 2000
-------- --------
Sales $481,691 $502,646
======== ========
Income before provision for income taxes $ 18,600 $ 22,512
Provision for income taxes 7,066 8,329
-------- --------
Income from discontinued operations $ 11,534 $ 14,183
======== ========
In conjunction with the spin-off, the Company and Acuity entered 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 entered into a put option agreement, whereby NSI
has the option to require Acuity to purchase the property where NSI's corporate
headquarters are located for a purchase price 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.
6. EARNINGS PER SHARE
The Company accounts for earnings per share using Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Under this statement, basic
earnings per share is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed similarly but reflects the
potential dilution that would occur if dilutive options were exercised.
Page 10
The following table calculates basic earnings per common share and diluted
earnings per common share at November 30, and reflects the January 7, 2002
one-for-four reverse stock split further described in note 11:
Three Months Ended
November 30
---------------------------------
2001 2000
---------- ----------
Basic weighted average shares outstanding 10,305 10,235
Add: Shares of common stock assumed issued upon exercise of dilutive stock
options -- 4
---------- ----------
Diluted weighted average shares outstanding 10,305 10,239
========== ==========
Basic earnings per common share:
(Loss) income from continuing operations before cumulative effect of a change
in accounting principle $ (0.35) $ 0.23
---------- ----------
Income from discontinued operations, net of tax 1.12 1.39
Costs associated with effecting the spin-off, net of tax (1.85) --
---------- ----------
Total discontinued operations (0.73) 1.39
---------- ----------
Cumulative effect of a change in accounting principle, net of tax (1.71) --
---------- ----------
Net (loss) income $ (2.79) $ 1.62
========== ==========
Diluted earnings per common share:
(Loss) income from continuing operations before cumulative effect of a change
in accounting principle $ (0.35) $ 0.23
---------- ----------
Income from discontinued operations, net of tax 1.12 1.39
Costs associated with effecting the spin-off, net of tax (1.85) --
---------- ----------
Total discontinued operations (0.73) 1.39
---------- ----------
Cumulative effect of a change in accounting principle, net of tax (1.71) --
---------- ----------
Net (loss) income $ (2.79) $ 1.62
========== ==========
7. LONG-TERM DEBT
Outstanding borrowings at November 30, 2001 included approximately $2,756 in
notes payable at 8.5%.
In October 2001, the Company negotiated a $40,000, three-year committed credit
facility with a single major US bank that became 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. Approximately $2,240 was
outstanding under this facility at November 30, 2001.
8. LEGAL PROCEEDINGS
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
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 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
Page 11
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. As of December 31, 2001,
the Company has contributed approximately $5.3 million to the CCR for this
purpose, and it may make further such payments in the future. Payments made
since August 31, 2001 have been applied against the Company's accrual for
asbestos liabilities established as of August 31, 2001. 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 $5.3 million 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.
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). As of August 31,
2001, there were approximately 35,000 open claims pending against the Company
(including approximately 1,000 claims that were settled in principle after
February 1, 2001 but not finalized) and approximately 12,000 additional claims
that were settled in principle prior to February 1, 2001 but not finalized.
During the quarter ended November 30, 2001, the Company was served with
approximately 2,300 asbestos-related claims and resolved approximately 13,600
claims for an average of approximately $785 per claim (including approximately
11,300 claims that were dismissed with no payment as previously disclosed). As
of November 30, 2001, there were approximately 23,700 open claims pending
against the Company (including approximately 2,900 claims that were settled in
principle after February 1, 2001 but not finalized) and approximately 11,200
additional claims that were settled in principle prior to February 1, 2001 but
not finalized.
As of November 30, 2001 and August 31, 2001, an estimated accrual of $110.5
million and $113.4 million, respectively, 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
Page 12
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 November 30, 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 $93.9 million and $95.2 million has been reflected in the
accompanying financial statements as of November 30, 2001 and August 31, 2001,
respectively, 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 of asbestos-related liabilities. Approximately $27.3 million and $28.6
million of the aggregate insurance recovery and $27.4 million and $30.5 million
of the asbestos-related accrual have been classified as current assets and
liabilities in the accompanying balance sheet as of November 30, 2001 and
August 31, 2001, respectively.
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.
9. 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 $6,967 and $7,291 at November 30, 2001 and August 31,
2001, 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.
Page 13
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 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 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 the Company'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.
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.
("Serv-All") 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 and therefore has no liability with respect to the Blydenburgh
Landfill and 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.
In February 2001, 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, issuing a declaratory judgment that the Company is a successor to
Serv-All. Subsequently, the Company and the State of New York each filed a
cross-motion for summary judgment on the Company's liability under the
Comprehensive Environmental Response, Compensation, and Liability Act. On
December 12, 2001, the Court granted summary judgment for the State. At a
January 9, 2002 status conference, the Court verbally denied the Company's
motion for summary judgment, and, explicitly recognizing that the issues
presented by this case were appropriate for judicial review, ordered that
judgment against the Company be entered but that execution of the judgment be
stayed pending appeal to the Second Circuit Court of Appeals.
The Company will immediately appeal this order. Among other things, the Company
will argue that the trial court erred in declaring the Company is a successor
to Serv-All and in its verbal finding that the State's claims were not barred
by the statute of limitations.
Furthermore, even if the Company were eventually found liable for the total
amount claimed by the State, the Company would have a right to seek recovery of
these costs from the many other parties whose wastes were disposed of at the
Landfill. At this point, 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.
10. RESTRUCTURING EXPENSE 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
Page 14
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
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.
During the first quarter of fiscal 2002, the Company closed two facilities in
the textile rental segment and recorded a related charge of $5,820. The charge
included severance costs of $11 for four employees, all of whom were terminated
prior to the end of the first quarter, and $1,396 in exit expenses to close and
consolidate facilities. Exit expenses primarily include costs of lease
terminations and costs to dispose of facilities. Additionally, as a further
result of the closure of the two textile rental facilities, the Company
recognized long-lived asset impairments totaling $4,413. Textile rental 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 an analysis of expected future
cash flows.
The major components of the fiscal 2001 and 2002 restructuring charges and
related activity are as follows:
Reserve, Cash Reserve,
August 31, 2001 Payments Expense November 30, 2001
--------------- -------- ------- -----------------
Severance costs $2,969 $(1,479) $ 11 $1,501
Exit costs $1,582 $ (776) $1,396 $2,202
The losses resulting from the restructuring activities and asset impairments
are included in "Restructuring expense and other charges" in the Consolidated
Statements of Income.
11. SUBSEQUENT EVENT
On January 3, 2002, the Company's shareholders approved a one-for-four reverse
stock split of NSI common stock, which began trading on a reverse split basis on
January 7, 2002. As a result of the stock split, every four shares of NSI common
stock were replaced with one share of NSI common stock. The reverse split did
not change the number of authorized shares of NSI common stock or the par value
per share of NSI common stock. All references to common stock, common shares
outstanding, average numbers of common stock shares outstanding and per share
amounts in these Consolidated Financial Statements and Notes to Consolidated
Financial Statements prior to the effective date of the reverse stock split have
been restated to reflect the one-for-four common stock reverse split on a
retroactive basis.
Page 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes.
National Service Industries ("NSI" or the "Company") is a diversified service
and manufacturing company operating in two segments: textile rental and
envelopes. The Company remained in solid financial condition at November 30,
2001. Net working capital was $85.5 million, down slightly from $87.7 million
at August 31, 2001, and the current ratio remained constant at 1.9.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141 ("SFAS 141") "Business Combinations," and Statement No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 prospectively
prohibits the pooling of interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 142 requires companies to
cease amortizing goodwill that existed at June 30, 2001 and establishes a new
method for testing goodwill for impairment on an annual basis (or an interim
basis if an event occurs that might reduce the fair value of a reporting unit
below its carrying value.) Any goodwill resulting from acquisitions completed
after June 30, 2001 will not be amortized. SFAS 142 also requires that an
identifiable intangible asset that is determined to have an indefinite useful
economic life not be amortized, but separately tested for impairment using a
fair value based approach.
The textile rental and envelope segments each tested goodwill for impairment
during the first quarter of 2002 as required by SFAS 142 upon adoption,
utilizing a combination of valuation techniques including the expected present
value of future cash flows, a market multiple approach and a comparable
transaction approach. As a result of this valuation process, as well as the
application of the remaining provisions of SFAS 142, the Company recorded a
pre-tax transitional impairment loss of $28.4 million, representing the
write-off of all of the Company's existing goodwill. This write-off was
reported as a cumulative effect of a change in accounting principle, on a net
of tax basis, in the Company's Consolidated Statement of Income for the three
months ended November 30, 2001 (see note 2).
On November 7, 2001, the Company's board of directors approved the spin-off its
lighting equipment and chemicals businesses into a separate publicly-traded
company with its own management and board of directors. The spin-off was
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 owning and operating the lighting
equipment and chemicals businesses. Each NSI stockholder of record as of
November 16, 2001, the record date for the distribution, received one share of
Acuity common stock for each share of NSI common stock held at that date (see
note 5).
In conjunction with the spin-off, the Company and Acuity entered 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. Under the tax disaffiliation
agreement, Acuity will indemnify NSI for certain taxes and liabilities that may
arise related to the Distribution. The agreement also sets out each party's
rights and obligations with respect to deficiencies and refunds, if any, of
federal, state, local, or foreign taxes for periods before and after the
Distribution. The transition services agreement provides that NSI and Acuity
will provide each other services in such areas as information management and
technology, employee benefits administration, payroll, financial accounting and
reporting, claims administration and reporting, legal, and other areas where
NSI and Acuity may need transitional assistance and support. Management
believes the amounts paid or received associated with these services are
representative of the fair value of the services provided.
In addition, Acuity and NSI entered into a put option agreement, whereby NSI
has the option to require Acuity to purchase the property where NSI's corporate
headquarters are located for a purchase price 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.
As a result of the November 2001 spin-off, the Company's financial statements
have been prepared with these businesses' net assets, results of operations,
and cash flows presented as discontinued operations. Accordingly, the results
of operations and liquidity and capital resources information presented below
reflect only the continuing operations of the Company.
On January 3, 2002, the Company's shareholders approved a one-for-four reverse
stock split of NSI common stock, which began trading on a reverse split basis
on January 7, 2002. As a result of the stock split, every four shares of NSI
common stock were replaced with one share of NSI common stock. The reverse
split did not change the number of authorized shares of NSI common stock or the
par value per share of NSI common stock. All references to common stock, common
shares outstanding, average numbers of common stock shares outstanding and per
share amounts in these Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations prior to the effective date of the reverse
stock split have been restated to reflect the one-for-four common stock reverse
split on a retroactive basis.
Page 16
RESULTS OF OPERATIONS
NSI generated revenue of $134.4 million in the three months ended November 30,
2001, compared to revenue of $140.7 million in the previous year. The decrease
was related to the overall softer economy and lost revenues from the closure of
two envelope manufacturing facilities in the fourth quarter of fiscal 2001.
Losses from continuing operations totaled $3.6 million, or $0.35 per diluted
share, for the three months ended November 30, 2001, compared to income from
continuing operations of $2.4 million, or $0.23 per diluted share, for the
three months ended November 30, 2000. Income from continuing operations
declined $6.0 million primarily as a result of lower overall revenues and costs
associated with restructuring activities in the Company's textile rental
segment.
Textile rental segment first quarter revenues of $78.8 million decreased 2.8
percent compared to last year's $81.1 million. The operating loss was $5.4
million compared to last year's operating profit of $3.7 million. Reported
operating profit reflects severance and restructuring charges of $5.8 million
for the first quarter related to the closure of two facilities. Excluding these
charges, the decline in operating profit reflects the impact of lower revenues,
primarily as a result of the soft economy and increases in labor and benefits
costs.
The restructuring charge included severance costs of $11 thousand for four
employees, all of whom were terminated prior to the end of the first quarter,
and $1.4 million in exit expenses to close and consolidate facilities. Exit
expenses primarily include costs of lease terminations and costs to dispose of
closed facilities.
Additionally, as a further result of the closure of the two textile rental
facilities, the Company recognized long-lived asset impairments totaling $4.4
million. Textile rental 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 an analysis of expected future cash flows.
The envelope segment first quarter revenues of $55.6 million decreased 6.8
percent from last year's results of $59.6 million. Operating profit was $2.2
million, up $442,000 from the prior year. Last year's results included $880,000
of costs associated with the reorganization of the Miami, Florida facility and
approximately $240,000 of goodwill amortization. The revenue decline reflects
lower volumes from the courier market and the impact of the closure of two
non-performing plants during the last half of fiscal 2001. Excluding the prior
year reorganization costs and goodwill amortization, which ceased upon the
adoption of SFAS No. 142, profits decreased approximately $678,000 as a result
of the lower overall revenue and increased benefits costs.
Corporate expenses were $2.7 million for the first quarter compared to last
year's $1.3 million. The planned increase is representative of on-going,
stand-alone corporate costs.
First quarter net interest expense of $111,000 decreased from last year's
$439,000 due to lower overall rates. Additionally, the provision for income
taxes increased to 40 percent of income from continuing operations for the
first quarter compared to 37 percent in the prior year as a result of the loss
of certain state tax benefits associated with the spin-off.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Continuing operations provided cash of $3.8 million during the first quarter of
fiscal 2002 compared with $9.7 million during the respective period of the
prior year. Fiscal 2002 operating cash flow was lower primarily because of a
decrease in net income.
Investing Activities
Investing activities used cash of $4.8 million versus $4.2 million in the prior
year. The increase in spending was due mainly to increased capital spending in
the textile rental segment.
Capital expenditures totaled $5.0 million compared to $3.3 million in the first
quarter of last year. In the first quarter of fiscal 2002, the textile rental
segment invested primarily in replacing old equipment and delivery truck
purchases and refurbishment. Capital expenditures in the envelope segment were
primarily related to manufacturing equipment purchases and information systems.
In the first quarter of fiscal 2001, capital expenditures in the envelope
segment related primarily to manufacturing process improvements and information
systems. The textile rental segment's expenditures were mainly attributable to
building improvements, replacing old equipment and information systems.
Page 17
Financing Activities
Cash used by financing activities totaled $5.9 million in the current-year
first quarter compared to cash used of $12.8 million in fiscal 2001 primarily
as a result of lower dividends. First quarter dividend payments totaled $6.6
million, or $0.64 per share, compared with $13.5 million, or $1.32 per share,
for the prior-year period.
Upon completion of the spin-off on November 30, 2001, approximately $371.3
million of long-term debt was assumed by Acuity, leaving approximately $2.8
million outstanding for the Company.
In October 2001, the Company negotiated a $40 million, three-year committed
credit facility with a single major US bank that became 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. Approximately $2.2
million was outstanding under this facility at November 30, 2001.
Management believes anticipated cash flows from operations, and the committed
credit facilities are sufficient to meet the Company's planned level of capital
spending and general operating cash requirements, including but not limited to
cash requirements related to litigation as further described in note 8 to the
financial statements, for the next twelve months.
On January 3, 2002, the Company's shareholders approved a one-for-four reverse
stock split of NSI common stock, which began trading on a reverse split basis
on January 7, 2002. As a result of the stock split, every four shares of NSI
common stock were replaced with one share of NSI common stock. The reverse
split did not change the number of authorized shares of NSI common stock or the
par value per share of NSI common stock.
Legal Proceedings
For information concerning legal proceedings, including trends and developments
involving legal proceedings, see note 8 to the financial statements included in
this filing.
Environmental Matters
For information concerning environmental matters, see note 9 to the financial
statements included in this filing.
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 is subject to interest rate fluctuations. These
fluctuations expose the Company to changes in interest expense and cash flows.
The Company's variable-rate debt amounted to $2.2 million at November 30, 2001.
Based on outstanding borrowings at November 30, 2001, a 10 percent adverse
change in effective market interest rates would result in an immaterial amount
of additional interest expense.
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 or other commodities 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."
Cautionary Statement Regarding Forward-Looking Information
This filing contains forward-looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995, that involve risks and
uncertainties. Consequently, actual results may differ materially from those
indicated by the forward-looking statements. 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, interest rate changes, and fluctuations in commodity and raw
material prices and; (b) unexpected developments and outcomes in the Company's
legal and environmental proceedings.
Page 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning legal proceedings, including trends and developments
involving legal proceedings, see note 8 to the financial statements included in
this filing.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held January 3, 2002, all nominees for
director were elected to the board without opposition and Arthur Andersen LLP's
appointment as independent auditor for the current fiscal year was ratified.
The elected board members are as follows:
Brock A. Hattox, Chairman Joia M. Johnson
Dennis R. Beresford Michael Z. Kay
John E. Cay, III Betty L. Seigel
Don L. Chapman
In addition, stockholders voted on the following:
Votes Cast
-----------------------------------------------
Affirmative Negative Abstentions
----------- -------- -----------
National Service Industries, Inc. 2001 Nonemployee
Directors' Stock Incentive Plan 6,889,750 1,622,016 114,883
Amendment of the Corporation's Restated Certificate of
Incorporation to effect a reverse stock split 5,861,876 2,662,016 102,758
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 19).
(b) A Form 8-K was filed on December 14, 2001 related to the completion of
the distribution of the common stock of Acuity Brands, Inc. A Form 8-K was
filed on January 7, 2002 related to the completion of a one-for-four reverse
stock split of its common stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL SERVICE INDUSTRIES, INC.
-------------------------------------------
REGISTRANT
DATE January 11, 2002 /s/ CAROL ELLIS MORGAN
-------------------------------------------
CAROL ELLIS MORGAN
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
DATE January 11, 2002 /s/ CHESTER J. POPKOWSKI
-------------------------------------------
CHESTER J. POPKOWSKI
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER
Page 19
INDEX TO EXHIBITS
EXHIBIT 10(iii)A (1) Restricted Stock Award Agreement under the National Service Filed with the Securities and
Industries, Inc. Long-Term Achievement Incentive Plan Exchange Commission as part of
this Form 10-Q
(2) Amendment No. 1 to the National Service Industries, Inc. Long-Term Filed with the Securities and
Achievement Incentive Plan (As amended and restated as of January Exchange Commission as part of
5, 2000) effective January 7, 2002 this Form 10-Q
(3) National Service Industries, Inc. 2001 Nonemployee Directors' Filed with the Securities and
Stock Incentive Plan effective November 27, 2001 Exchange Commission as part of
this Form 10-Q