[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 --- NSI ANNOUNCES AGREEMENT TO BE ACQUIRED BY CALIFORNIA INVESTMENT FUND, LLC FOR $10.00 / SHARE REPORTS SECOND QUARTER RESULTS --- 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