[NSI LOGO]
PRESS RELEASE
INVESTOR RELATIONS CONTACT:
CHESTER J. POPKOWSKI (CHET)
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER, AND TREASURER
(404) 853-1205
WEB SITE: www.nationalservice.com
APRIL 2, 2003
NSI
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NSI ANNOUNCES AGREEMENT TO BE ACQUIRED BY
CALIFORNIA INVESTMENT FUND, LLC FOR $10.00 / SHARE
REPORTS SECOND QUARTER RESULTS
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ATLANTA -- National Service Industries, Inc. (NYSE: NSI) today announced that it
has entered into a definitive merger agreement providing for the acquisition of
NSI by an affiliate of California Investment Fund, LLC, a private investment
firm based in San Diego, California. Pursuant to the agreement, each outstanding
share of NSI common stock will be converted into the right to receive $10.00 in
cash.
The transaction originated with an unsolicited offer to NSI by
California Investment Fund, LLC. The Board of Directors of NSI has unanimously
approved and adopted the merger agreement. SunTrust Robinson Humphrey is serving
as financial advisor to NSI.
The closing of the transaction is subject to the approval of the NSI
stockholders, the receipt of certain financing, and other customary conditions.
Commitment letters have been obtained with respect to all necessary financing in
connection with the transaction. The transaction is expected to close around
midyear in calendar year 2003. Prior to the closing of the transaction, NSI is
authorized under the terms of the merger agreement to receive and consider any
alternative third-party proposals with respect to the acquisition of NSI.
NSI's businesses will continue to operate under the names National Linen
Service and Atlantic Envelope Company, and no significant operational or
management changes are expected at the business-unit level. Brock A. Hattox,
Chairman and Chief Executive Officer of NSI, intends to make his previously
announced retirement effective upon consummation of the transaction.
"Given the highly competitive industries in which we compete and the
escalating costs of operating a public company of our relatively small size,
management and the board of directors believe strongly that this transaction
represents an excellent value for NSI stockholders," said Hattox, who became CEO
following the spin-off of NSI's lighting and specialty chemical businesses to
Acuity Brands, Inc. in December 2001. "It also continues the operations of NSI's
market-leading operating companies in ways that should be seamless for
employees, suppliers and customers."
2ND QUARTER RESULTS
The Company also reported financial results today for the second quarter
ended February 28,2003. Second quarter revenues totaled $121.4 million, down 8
percent from last year's $132.0 million. Net loss for the quarter was $5.2
million, or $0.49 per diluted share, compared to last year's break-even
results.
The decrease from last year's results is primarily attributable to lower
direct mail and credit card solicitation envelope volumes, pricing pressures
and lower volumes in the textile rental industry.
TEXTILE RENTAL SEGMENT
Textile rental segment second quarter revenues of $76.1 million
decreased 1.5 percent from last year's $77.3 million. The reduction in revenues
is primarily attributable to the sale of the San Diego business in the first
quarter and the discontinuance of a significant health care segment customer at
the end of the fourth quarter last year. Additionally, volumes per customer
continue to be impacted by soft economic conditions. Operating loss for the
quarter was $1.5 million compared to last year's reported profit of $1.3
million. Last year's results included approximately $700 thousand of net gains
from a previously divested business and restructuring plans. The decrease in
operating results for 2003 is largely due to lower revenues; increased employee
benefits costs; one-time restructuring gains in 2002; and unfavorable results
from several under-performing linen plants.
ENVELOPE SEGMENT
The envelope segment second quarter revenues of $45.3 million represent
a 17.2 percent decline from last year's $54.7 million and an operating loss of
$2.1 million compared to last year's profit of $649 thousand. Operating results
decreased largely as a result of the volume reduction.
CORPORATE AND INTEREST COSTS
Corporate expenses were $4.0 million for the second quarter compared to
last year's $1.9 million due primarily to costs associated with the previously
announced retirement of the Company's chairman.
For the Company's second fiscal quarter ended February 28, 2003, the
Company failed to comply with two financial covenants in the Company's $40.0
million unsecured credit facility, which resulted in an event of default under
the credit agreement. The covenants in question require the Company, as of the
end of each fiscal quarter, to maintain a minimum ratio of Income Available For
Fixed Charges to Fixed Charges for the preceding four consecutive fiscal
quarters and a minimum amount of Stockholders' Equity (as such terms are defined
in the credit agreement). On March 28, 2003, the lender agreed to waive the
event of default pursuant to an agreement that will require the Company to
obtain the lender's approval of any additional borrowings under the credit
facility. As of February 28, 2003 and the date of this release, there were $11.4
million of letters of credit issued under the credit facility, but no other
borrowings outstanding under the credit facility. The credit facility is
expected to be terminated upon consummation of the proposed merger.
Additionally, during the quarter ended February 28, 2003, the Company
engaged external consulting economists to review the Company's expected future
asbestos claims liabilities. Based on information supplied by this study and
management's knowledge and experience regarding its asbestos liabilities, the
Company concluded that an increase in its accrued liabilities for asbestos
related costs was necessary. The increase in the liabilities resulting from
this review process was a minimum increase of $138.0 million to a maximum
increase of $209.0 million. Management does not believe any amount in the range
is more probable than any other. Therefore, as of February 28, 2003, the
Company increased its liabilities for asbestos related costs by approximately
$138.0 million, the low end of the range. The Company also believes it has
adequate insurance coverage available to cover this increase in liabilities and
therefore recorded an additional insurance recovery asset of $138.0 million.
Management continues to monitor claims activity, credit worthiness of
insurers, 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 estimates as appropriate.
"Conditions in our markets worsened since we reported our first quarter
results. Although Atlantic Envelope remains the preferred vendor for a number
of large financial
services companies, volumes have dropped significantly due to consumer concerns
over elevated personal debt levels and the uncertainty of the general economy.
Business travel has not recovered from the pre-September 11th levels, placing
significant pricing pressure on the fine dining and lodging markets served by
National Linen Service. This pressure has limited the ability to increase prices
to offset the increased costs of labor, benefits, insurance and fuel. In
addition, the inclement weather experienced during the quarter only made our
challenges greater," said Hattox. "Given this difficult operating environment,
we are continuing to focus our resources on improving our selling efforts,
resizing our operations, implementing cost reductions and improving our
operating efficiency."
FIRST HALF RESULTS
First half revenues of $241.5 million decreased 9.4 percent over the
same period a year ago. Net loss for the first six months of the fiscal year
was $7.1 million, or $0.68 per diluted share, compared to a net loss of $28.8
million, or $2.80 per diluted share, in the first six months of 2002. Excluding
the loss from discontinued operations of $7.5 million, or $0.73 per share, and
the cumulative effect of a change in accounting principle for goodwill
impairment of $17.6 million or $1.71 per share, loss from continuing operations
for the first half of fiscal 2002 totaled $3.7 million, or $0.36 per diluted
share.
"In December, we estimated that, absent any further economic
deterioration, NSI would incur losses in the first half and experience a
profitable second half, resulting in estimated full-year net earnings of
between break-even and $3.0 million," Hattox said. "As we begin the stronger
half of our fiscal year we anticipate returning to profitability for the third
and fourth quarters. However, given the uncertainty of the general economy,
conditions are too cloudy at this time to affirm or continue to furnish
full-year guidance."
CONFERENCE CALL
The Company will host a conference call on April 2, 2003 at 4:00 p.m. ET
to discuss the transaction and the second quarter results. This call will be
web cast live at the NSI website: www.nationalservice.com. A replay of the call
will also be posted to this site within two hours of the completion of the
conference call and will be archived on the site for three weeks.
INFORMATION ON THE SALE OF THE COMPANY
NSI will file a copy of the definitive merger agreement with the
Securities and Exchange Commission (SEC) as an exhibit to a Current Report on
Form 8-K.
In connection with NSI's solicitation of proxies with respect to its
special meeting of stockholders concerning the proposed merger, NSI will file a
proxy statement with the SEC and furnish NSI stockholders with a copy of the
proxy statement. NSI stockholders will be able to obtain a free copy of the
proxy statement (when available) and other relevant documents filed with the
SEC from the SEC's website at www.sec.gov. NSI stockholders may also obtain a
free copy of the proxy statement and other documents (when available) by
directing a request by mail or telephone to National Service Industries, Inc.,
1420 Peachtree Street, Atlanta, Georgia 30309, Attention: Investor Relations,
Telephone: (404) 853-1228.
AS IN ALL PROXY MATTERS, THE PROXY STATEMENT SHOULD BE READ CAREFULLY
BEFORE MAKING A DECISION CONCERNING THE MERGER. NSI STOCKHOLDERS ARE URGED TO
READ THE PROXY STATEMENT AND ANY OTHER RELEVANT DOCUMENTS RELATING TO THE
PROPOSED MERGER WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT
INFORMATION.
NSI and its directors may be deemed to be "participants" in the
solicitation of proxies from NSI stockholders in favor of the merger agreement.
Information regarding the persons who may be considered "participants" in the
solicitation of proxies will be set forth in the proxy statement when it is
filed with the SEC. Information regarding certain of these persons is also set
forth in the Schedule 14A filed by NSI on November 22, 2002 with the SEC.
* * *
National Service Industries, Inc., with fiscal year 2002 sales of $530
million, has two business segments -- textile rental and envelopes.
* * *
Certain information contained in this press release 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. Statements that are not historical facts, including
statements about management's estimates, beliefs and expectations, are
forward-looking statements. These statements include, among others, statements
regarding the expected timing of the closing of the merger transaction with
California Investment Fund, LLC and the outlook for the Company's future
operating and financial results. Forward-looking statements are only predictions
and are not guarantees of performance. These statements are based on
management's beliefs and assumptions, which in turn are based on currently
available information. Important assumptions relating to the forward-looking
statements include, among others, the timely satisfaction of the conditions set
forth in the Merger Agreement, including the receipt of all necessary financing
to complete
the Merger, assumptions regarding expected outcomes of pending litigation and
dispute resolution, the expected costs of pending and future asbestos claims,
the solvency of NSI's insurers and the resolution of allocation and coverage
issues with those insurers on a basis consistent with management's current
expectations, competitive conditions in the Company's businesses, the economic
effects of war and acts of terrorism, and general economic conditions. These
assumptions could prove inaccurate. Forward-looking statements also involve
risks and uncertainties, which could cause actual results to differ materially
from those contained in any forward-looking statement. Many of these factors are
beyond NSI's ability to control or predict. Such factors include, but are not
limited to, (a) delays in the receipt of necessary financing and third party and
governmental consents to complete the Merger, (b) unexpected developments or
outcomes in NSI's legal proceedings, (c) the risk of additional insolvencies
among NSI's insurance carriers or coverage disputes with carriers, and (d) the
risk of an increase or acceleration in the number of asbestos-related claims
filed against NSI. NSI does not undertake any obligation to publicly update or
revise any forward-looking statements because of new information, future events
or otherwise.
* * *
NATIONAL SERVICE INDUSTRIES, INC.
Condensed Consolidated Balance Sheets (unaudited)
(amounts in thousands)
FEBRUARY 28, August 31,
2003 2002
------------ ----------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 9,478 $ 20,969
Receivables, net 50,100 52,198
Inventories and Linens in Service 66,736 67,843
Insurance Receivable 95,483 42,024
Other Current Assets 12,034 5,779
-------- --------
Total Current Assets 233,831 188,813
-------- --------
Property, Plan and Equipment, net 141,150 147,956
Insurance Receivable 216,886 140,831
Other Assets 41,247 41,498
-------- --------
TOTAL ASSETS $633,114 $519,098
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Portion of Litigation Accrual $ 82,849 $ 41,288
Other Current Liabilities 57,496 64,548
Long-Term Debt and Capital Lease Obligations, Less Current Maturities 885 984
Deferred Income Taxes 11,770 7,853
Litigation Accrual, less Current Portion 249,414 166,844
Other Long-Term Liabilities 17,297 16,948
Stockholders' Equity 213,403 220,633
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $633,114 $519,098
======== ========
Condensed Consolidated Cash Flows (unaudited)
(amounts in thousands)
SIX MONTHS ENDED
--------------------------
FEBRUARY 28, February 28,
2003 2002
------------ ------------
CASH PROVIDED BY (USED FOR):
Operations-
Net loss from continuing operations $ (7,083) $ (3,689)
Depreciation and amortization 12,902 12,530
Other operating activities (14,796) (8,948)
Net cash provided by discontinued operations -- 6,935
-------- --------
Cash (Used for) Provided by Operations (8,977) 6,828
-------- --------
Investing-
Purchases of property, plant and equipment (4,478) (10,607)
Sale of property, plant and equipment 441 705
Acquisitions (356) (60)
Divestitures 4,784 1,062
Other investing activities -- (149)
-------- --------
Cash Provided by (Used for) Investing Activities 391 (9,049)
-------- --------
Financing-
Repayments of capital lease obligations (91) --
Repayments of long-term debt, net (2,077) 8,590
Treasury stock transactions, net 156 679
Cash dividends (893) (7,048)
-------- --------
Cash (Used for) Provided by Financing Activities (2,905) 2,221
-------- --------
Net Change in Cash and Cash Equivalents (11,491) --
Cash and Cash Equivalents at Beginning of Period 20,969 --
-------- --------
Cash and Cash Equivalents at End of Period $ 9,478 $--
======== ========
Asbestos Claims Summary
YEAR-TO-DATE
----------------------
2003 2002
-------- --------
Open Claims Pending, August 31, 35,300 35,000
Served 19,700 4,900
Dismissed (3,500) (11,300)
Settled (12,300) (2,800)
-------- --------
Open Claims Pending, February 28, 39,200 25,800
Claims settled but not yet finalized (9,700) (2,800)
======== ========
29,500 23,000
======== ========
CCR claims settled but not yet finalized 7,000 7,900
Year to date average resolution indemnity cost per claim $ 2,262 $ 880
======== ========
NATIONAL SERVICE INDUSTRIES, INC.
Summary of Operations (unaudited)
(amounts in thousands, except per-share data)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Sales and Service Revenues:
Textile rental $ 76,142 $ 77,335 $ 152,234 $ 156,171
Envelope 45,307 54,703 89,278 110,256
--------- --------- --------- ---------
Total Operating Revenues 121,449 132,038 241,512 266,427
--------- --------- --------- ---------
Operating Profit (Loss):
Textile rental (1,454) 1,342 (3,560) (4,037)
Envelope (2,139) 649 (3,078) 2,803
(3,593) 1,991 (6,638) (1,234)
Corporate (3,950) (1,892) (3,999) (4,636)
Interest expense, net 47 168 48 279
Loss from continuing operations before
taxes and cumulative effect of a change in
accounting principle (7,590) (69) (10,685) (6,149)
Income tax benefit (2,431) (28) (3,602) (2,460)
Loss from continuing operations before
cumulative effect of a change in accounting
principle (5,159) (41) (7,083) (3,689)
Discontinued Operations:
Income from discontinued operations, net of tax -- -- -- 11,534
Costs associated with effecting spin-off, net of
tax benefit -- -- -- (19,069)
Cumulative effect of a change in accounting
principle, net of tax benefit -- -- -- (17,602)
--------- --------- --------- ---------
Net Loss ($5,159) ($41) ($7,083) ($8,826)
========= ========= ========= =========
Basic and Diluted EPS:
Loss from continuing operations before
cumulative effect of a change in accounting
principle ($0.49) ($0.00) ($0.68) ($0.36)
Discontinued Operations:
Income from discontinued operations, net of tax -- -- -- 1.12
Costs associated with effecting spin-off, net of
tax benefit -- -- -- (1.85)
Cumulative effect of a change in accounting
principle, net of tax benefit -- -- -- (1.71)
--------- --------- --------- ---------
Net Loss ($0.49) ($0.00) ($0.68) ($2.80)
========= ========= ========= =========
Basic weighted-average shares outstanding
during period 10,436 10,317 10,402 10,310
Diluted weighted-average shares outstanding
during period 10,436 10,317 10,402 10,310
Dividends paid per share $ 0.04 $ 0.04 $ 0.08 $ 0.68
Actual shares outstanding end of period 11,186 10,946