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 March 31, 2000.
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 1-4422
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ROLLINS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0068479
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2170 Piedmont Road, N.E., Atlanta, Georgia
(Address of principal executive offices)
30324
(Zip Code)
(404) 888-2000
(Registrant's telephone number, including area code)
------------------------------------------
Indicate by check mark whether the registrant (1) has filed all
documents and 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 [ ]
Rollins, Inc. had 30,026,650 shares of its $1 Par Value Common Stock outstanding
as of April 28, 2000.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
------------
Item 1. Financial Statements
Consolidated Statements of Financial Position as of
March 31, 2000 and December 31, 1999 2
Consolidated Statements of Income and Earnings
Retained for the Quarters Ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows for the Quarters
Ended March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share data)
(Unaudited)
March 31, December 31,
2000 1999
------------------ ------------------
ASSETS
Cash and Short-Term Investments $ 7,608 $ 5,689
Marketable Securities 2,190 12,967
Trade Receivables, Net 46,280 44,878
Materials and Supplies 13,593 13,429
Deferred Income Taxes 19,454 19,644
Other Current Assets 12,665 11,142
------------------ ------------------
Current Assets 101,790 107,749
Equipment and Property, Net 48,845 46,245
Goodwill and Other Intangible Assets 114,809 112,024
Deferred Income Taxes 44,934 45,015
Other Assets 3,095 1,907
------------------ ------------------
Total Assets $ 313,473 $ 312,940
================== ==================
LIABILITIES
Capital Lease Obligations $ 3,225 $ 3,638
Accounts Payable 18,381 15,275
Accrued Insurance 10,418 11,165
Accrued Payroll 18,709 23,100
Unearned Revenue 25,307 20,441
Other Expenses 38,664 37,822
------------------ ------------------
Current Liabilities 114,704 111,441
Capital Lease Obligations 1,385 2,450
Accrued Insurance 43,631 43,745
Accrual for Termite Contracts 52,447 54,352
Long-Term Accrued Liabilities 27,304 29,162
------------------ ------------------
Total Liabilities 239,471 241,150
------------------ ------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 30,034,379 and 29,881,402
shares issued at March 31, 2000 and December 31,
1999, respectively 30,034 29,881
Earnings Retained 43,968 41,909
------------------ ------------------
Total Stockholders' Equity 74,002 71,790
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 313,473 $ 312,940
================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND EARNINGS RETAINED
(In thousands except share and per share data)
(Unaudited)
Quarters Ended
March 31,
------------------------------------------
2000 1999
------------------- ------------------
REVENUES
Customer Services $ 149,550 $ 129,886
------------------- ------------------
COSTS AND EXPENSES
Cost of Services Provided 87,003 76,832
Depreciation and Amortization 4,267 2,997
Sales, General and Administrative 57,028 50,431
Interest Income (29) (1,125)
------------------- ------------------
148,269 129,135
------------------- ------------------
INCOME BEFORE INCOME TAXES 1,281 751
------------------- ------------------
PROVISION (BENEFIT) FOR INCOME TAXES
Current (63) (1,395)
Deferred 550 1,679
------------------- ------------------
487 284
------------------- ------------------
NET INCOME $ 794 $ 467
=================== ==================
EARNINGS RETAINED
Balance at Beginning of Period 41,909 49,746
Cash Dividends (1,492) (1,524)
Common Stock Purchased and Retired -- (143)
Other 2,757 (121)
------------------- ------------------
BALANCE AT END OF PERIOD $ 43,968 $ 48,425
=================== ==================
EARNINGS PER SHARE - BASIC AND DILUTED $ 0.03 $ 0.02
=================== ==================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 29,934,120 30,486,038
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 29,937,330 30,493,701
The accompanying notes are an integral part of these
consolidated financial statements.
3
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarters Ended
March 31,
--------------------------------------
2000 1999
--------------- ---------------
OPERATING ACTIVITIES
Net Income $ 794 $ 467
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 4,267 2,997
Provision for Deferred Income Taxes 550 1,679
Other, Net 604 (133)
(Increase) Decrease in Assets:
Trade Receivables (1,275) 3,839
Materials and Supplies (164) (856)
Other Current Assets (1,950) (2,754)
Other Non-Current Assets 362 64
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (1,723) 691
Unearned Revenue 4,866 2,617
Accrued Insurance (861) 3,779
Accrual for Termite Contracts (1,905) (4,285)
Long-Term Accrued Liabilities (2,131) (3,536)
------------------ ------------------
Net Cash Provided by Operating Activities 1,434 4,569
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INVESTING ACTIVITIES
Purchases of Equipment and Property (4,990) (3,208)
Net Cash Used for Acquisition of Companies (2,424) (169)
Marketable Securities, Net 10,894 684
------------------ ------------------
Net Cash Provided by (Used in) Investing
Activities 3,480 (2,693)
------------------ ------------------
FINANCING ACTIVITIES
Dividends Paid (1,492) (1,524)
Common Stock Purchased and Retired -- (143)
Payments on Capital Leases (1,478) (835)
Other (25) 28
------------------ ------------------
Net Cash Used in Financing Activities (2,995) (2,474)
------------------ ------------------
Net Increase (Decrease) in Cash and Short-Term
Investments 1,919 (598)
Cash and Short-Term Investments
at Beginning of Period 5,689 1,244
------------------ ------------------
Cash and Short-Term Investments
at End of Period $ 7,608 $ 646
================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
4
ROLLINS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION
The consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange
Commission. Footnote disclosures normally included in the
financial statements prepared in accordance with accounting
principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations.
These consolidated financial statements should be read in
conjunction with the financial statements and related notes
contained in the Company's annual report on Form 10-K for the
year ended December 31, 1999.
In the opinion of management, the consolidated financial
statements included herein contain all normal recurring
adjustments necessary to present fairly the financial position
of the Company as of March 31, 2000 and December 31, 1999, and
the results of operations and cash flows for the quarters
ended March 31, 2000 and 1999. Operating results for the
quarter ended March 31, 2000 are not necessarily indicative of
the results that may be expected for the year ended December
31, 2000.
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income," effective for fiscal
years beginning after December 15, 1997. For the quarters
ended March 31, 2000 and 1999, comprehensive income is not
materially different from net income and, as a result, the
impact of SFAS 130 is not reflected in the Company's
consolidated financial statements included herein.
Certain amounts for prior periods have been reclassified to
conform with the current period consolidated financial
statement presentation. Such reclassifications had no effect
on previously reported net income.
NOTE 2. PROVISION FOR INCOME TAXES
The book provision for income taxes includes the liability for
state income taxes, net of the federal income tax benefit. The
deferred provision for income taxes arises from the changes
during the year in the Company's net deferred tax asset or
liability.
5
NOTE 3. EARNINGS PER SHARE
Pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," the number
of weighted average shares used in computing basic and diluted
earnings per share (EPS) are as follows (in thousands):
Quarters Ended March 31,
2000 1999
------------ ------------
Basic EPS 29,934 30,486
Effect of Dilutive Stock Options 3 8
------------ ------------
Diluted EPS 29,937 30,494
============ ============
NOTE 4. LEGAL PROCEEDINGS
One of the Company's subsidiaries, Orkin Exterminating
Company, Inc., is a named defendant in Helen Cutler and Mary
Lewin v. Orkin Exterminating Company., Inc. et al. pending in
the District Court of Houston County, Alabama. The plaintiffs
in the above mentioned case filed suit in March of 1996 and
are seeking monetary damages and injunctive relief for alleged
breach of contract arising out of alleged missed or inadequate
reinspections. The attorneys for the plaintiffs contend that
the case is suitable for a class action and the court has
ruled that the plaintiffs would be permitted to pursue a class
action lawsuit against Orkin. The Company believes this case
to be without merit and intends to defend itself vigorously at
trial. At this time, the final outcome of the litigation
cannot be determined. However, it is the opinion of Management
that the ultimate resolution of this action will not have a
material adverse effect on the Company's financial position,
results of operations or liquidity.
Additionally, in the normal course of business, the Company is
a defendant in a number of lawsuits which allege that
plaintiffs have been damaged as a result of the rendering of
services by Company personnel and equipment. The Company is
actively contesting these actions. It is the opinion of
Management that the outcome of these actions will not have a
material adverse effect on the Company's financial position,
results of operations or liquidity.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Company reported net income of $794,000 or $0.03 per share for the quarter
compared to net income of $467,000 or $0.02 per share for the comparable quarter
in 1999. Revenues for the first quarter ended March 31, 2000 increased 15.1% to
$149.6 million.
The improvement in earnings for the quarter resulted primarily from
quarter-over-quarter increases in both pest and termite control revenue and Cost
of Services Provided and Selling, General and Administrative margin
improvements. The improvements in revenue and Cost of Services Provided and
Selling, General and Administrative margins were partially offset by a decrease
in Interest Income and a $203,000 increase in Provision (Benefit) for Income
Taxes.
The Company's revenue improvement for the eighth consecutive quarter continued
the positive momentum initiated in 1998. The Company believes the improvements
in revenue and net income resulted from last year's acquisitions and the
strategic programs initiated in 1998 and 1997 to build recurring revenue, expand
the Company's commercial pest control business and contain termite claims costs.
Results of Operations
Revenues increased to $149.6 million for the first quarter 2000 from $129.9
million for the same period of 1999, primarily as a result of increases in pest
control customer base and in average termite completion and annual renewal
prices. The Company believes the increase in pest control customer base resulted
from last year's acquisitions and the success of its more consumer-friendly
selling and treatment programs.
Cost of Services Provided was approximately $10.2 million higher than the prior
year quarter but improved to represent 58.2% of revenues compared with 59.2% for
the same quarter of the prior year. The improvement was primarily attributable
to reductions in termite claims experience and operating insurance costs,
partially offset by increased pest service salaries resulting from increased
revenue and headcount.
Selling, General and Administrative increased $6.6 million or 13.1% but
decreased as a percentage of revenues to 38.1% compared with 38.8% for the same
quarter of the prior year. The improvement as a percentage of revenues was
primarily due to better leveraging of fixed costs due to higher revenues.
Interest Income decreased $1.1 million primarily due to lower invested funds
over the same period of the prior year.
The Company's net tax provision of $487,000 for the quarter reflects increased
taxable income, as compared to a provision of $284,000 for the same quarter in
1999.
7
- -------------------------------------------------------------------------------------------------------------------------------
Financial Condition
March 31, December 31,
(In thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Cash and Short-Term Investments $ 7,608 $ 5,689
Marketable Securities 2,190 12,967
----------------- ---------------
9,798 18,656
Current Ratio 0.9 1.0
- -------------------------------------------------------------------------------------------------------------------------------
The Company believes its current cash balances, future cash flows from operating
activities and line of credit will be sufficient to finance its current
operations and obligations, and fund expansion of the business for the
foreseeable future. The Company experienced positive cash flow from operating
activities during the first quarter 2000 of $1.4 million, compared with cash
provided by operating activities of approximately $4.6 million in the same
period of 1999. This decrease resulted primarily from unfavorable changes in
working capital related primarily to differences in the timing of accounts
receivable, accounts payable and other accrued expenses, partially offset by
higher net income from operations, adjusted for non-cash items.
The Company invested approximately $7.4 million in capital expenditures and
acquisitions in the first quarter 2000, and expects to invest between $20.0 and
$25.0 million in the remainder of 2000, inclusive of improvements to its
management information systems. Capital expenditures in the first quarter 2000
consisted primarily of equipment replacements and upgrades and improvements to
the Company's management information systems. A total of $1.5 million was paid
in cash dividends during the first quarter 2000. The capital expenditures,
acquisitions and cash dividends were primarily funded through existing cash
balances, marketable securities and operating activities. The Company maintains
a $40.0 million line of credit, which is available for future acquisitions and
growth, if needed.
In 1997 and 1998, Orkin and other pest control industry companies received
letters from the Federal Trade Commission (FTC) advising of its investigation of
the pest control industry - more specifically, the termite and moisture control
practices of the industry - and requesting certain information voluntarily from
the Company. Orkin has voluntarily provided the information requested and has
advised the FTC of the Company's intention to continue to cooperate fully with
this investigation. At this point in time, management does not believe this
investigation will have a material effect upon its results of operations or
financial condition. In addition, the Company is aggressively defending a class
action lawsuit filed in Dothan, Alabama. For further discussion, see Note 4 to
the accompanying consolidated financial statements.
Year 2000 Issues
Aware that the Year 2000 (Y2K) information technology programming issue could
have a significant potential impact on its future operations and financial
reporting, the Company began its assessment and remediation processes in 1997
regarding its primary financial and operating systems. The Company's assessment
activities included (1) identifying all software and operating systems - both
information technology (IT) systems and non-IT systems with embedded technology
- - which are critical to operations and/or financial reporting, (2) testing of
such software and systems for Y2K compliance, and (3) obtaining assurances from
the Company's vendors and its large commercial customers. The Company's
remediation activities included replacing certain software and operating
systems, followed by testing to ensure the Y2K compliancy of the replacements.
As of April 28, 2000, the Company has not experienced any material adverse
effects as a result of Y2K related problems. Although the Company has not
endured any material adverse Y2K effects and does not anticipate any such
problems, it is possible that certain Y2K problems may exist but have not yet
materialized. The total amount of Y2K expenditures as of March 31, 2000 was
approximately $19.7 million. Any additional Y2K expenditures are not expected to
have a material impact on the Company's results of operations, cash flows or
financial position.
8
Impact of Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In second quarter 1999, the Financial Accounting Standards Board
voted to delay the effective date of this standard to fiscal years beginning
after June 15, 2000. The adoption of this standard, effective for the Company as
of January 1, 2001, is not expected to materially impact the results of
operations or financial condition of the Company.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements regarding the expected impact of the outcome of
litigation arising in the ordinary course of business and the outcome of the
Helen Cutler and Mary Lewin v. Orkin Exterminating Company., Inc., et al.
("Cutler") litigation on the Company's financial condition, and the Company's
ability to fund current operations and obligations and proposed expansion. The
actual results of the Company could differ materially from those indicated by
the forward-looking statements because of various risks and uncertainties
including, without limitation, the possibility of a court ruling against the
Company in litigation or in the Cutler litigation; general economic conditions;
market risk; changes in industry practices or technologies; the degree of
success of the Company's termite process reforms and pest control selling and
treatment methods; the Company's ability to identify potential acquisitions;
climate and weather trends; competitive factors and pricing practices; the
failure of the Company or its major suppliers or customers to adequately address
the Year 2000 programming issue; potential increases in labor costs; and changes
in various government laws and regulations, including environmental regulations.
All of the foregoing risks and uncertainties are beyond the ability of the
Company to control, and in many cases the Company cannot predict the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company maintains an investment portfolio, comprised of U.S. government and
corporate debt securities, which is subject to interest rate risk exposure. This
risk is managed through conservative policies to invest in high-quality
obligations. The Company has performed an interest rate sensitivity analysis
using a duration model over the near term with a 10% change in interest rates.
The Company's portfolio is not subject to material interest rate risk exposure
based on this analysis, and no material changes in market risk exposures or how
those risks are managed are expected.
9
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 to Part I, Item 1 for discussion of certain
litigation.
Item 2. Changes in Securities and Use of Proceeds.
On March 1, 2000, the Company acquired the pest elimination
business of R-S Exterminating Company, partially in exchange
for 152,675 shares of the Company's Common Stock. The market
value of the Common Stock issued was approximately $2.4
million, which the Company believes approximates the fair
value of the net assets acquired. Since the issuance of these
shares was not a public issuance, these shares of Common Stock
were exempt from registration under the Securities Act of
1933, as amended, Section 4, Paragraph 2.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(3)(i) Restated Certificate of Incorporation of
Rollins, Inc. is incorporated herein by
reference to Exhibit 3 (i) as filed with its
Form 10-K for the year ended December 31,
1997.
(ii) By-laws of Rollins, Inc. are incorporated
herein by reference to Exhibit (3) (ii) as
filed with its Form 10-Q for the quarterly
period ended March 31, 1999.
(4) Form of Common Stock Certificate of Rollins,
Inc. is incorporated herein by reference to
Exhibit (4) as filed with its Form 10-K for
the year ended December 31, 1998.
(27)(a) Financial Data Schedule (For Commission Use
Only).
(27)(b) Restated Financial Data Schedule (For
Commission Use Only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or were
required to be filed during the first quarter
of 2000.
10
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.
ROLLINS, INC.
(Registrant)
Date: May 12, 2000 By: /s/ Gary W. Rollins
-------------------------------------
Gary W. Rollins
President and Chief Operating Officer
(Member of the Board of Directors)
Date: May 12, 2000 By: /s/ Harry J. Cynkus
-------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
11