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 June 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 1-4422
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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 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 30,179,147 shares of its $1 Par Value Common Stock outstanding
as of July 31, 2001.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
--------------
Item 1. Financial Statements.
Condensed Consolidated Statements of Financial Position as of June
30, 2001 and December 31, 2000 2
Condensed Consolidated Statements of Income and Earnings Retained
for the Three and Six Months Ended June 30, 2001 and 2000 3
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and 2000 4
Notes to Condensed 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 4. Submission of Matters to a Vote of Security Holders. 10
Item 5. Other Information. 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
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share data)
(Unaudited)
June 30, December 31,
2001 2000
------------------ ------------------
ASSETS
Cash and Short-Term Investments $ 15,399 $ 399
Trade Receivables, Net 54,750 50,099
Materials and Supplies 13,134 12,980
Deferred Income Taxes 16,791 18,472
Other Current Assets 9,877 7,019
------------------ ------------------
Current Assets 109,951 88,969
Equipment and Property, Net 48,417 49,349
Goodwill and Other Intangible Assets, Net 113,925 115,966
Deferred Income Taxes 41,052 42,645
Other Assets 124 1,890
------------------ ------------------
Total Assets $ 313,469 $ 298,819
================== ==================
LIABILITIES
Capital Lease Obligations $ 1,015 $ 1,829
Accounts Payable 17,978 15,302
Accrued Insurance 10,378 10,126
Accrued Payroll 22,398 21,195
Unearned Revenue 35,206 28,381
Other Current Liabilities 34,514 33,973
------------------ ------------------
Current Liabilities 121,489 110,806
Capital Lease Obligations - 256
Accrued Insurance 36,000 39,400
Accrual for Termite Contracts 42,732 42,651
Long-Term Accrued Liabilities 25,531 27,107
------------------ ------------------
Total Liabilities 225,752 220,220
------------------ ------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 30,179,147 and 30,036,241
shares issued at June 30, 2001 and December
31, 2000, respectively 30,179 30,036
Earnings Retained 57,538 48,563
------------------ ------------------
Total Stockholders' Equity 87,717 78,599
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 313,469 $ 298,819
================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EARNINGS RETAINED
(In thousands except share and per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
REVENUES
Customer Services $ 181,349 $ 180,528 $ 332,322 $ 330,078
------------- ------------- ------------- -------------
COSTS AND EXPENSES
Cost of Services Provided 98,720 99,129 184,993 185,523
Depreciation and Amortization 4,744 4,604 9,893 8,871
Sales, General and Administrative 63,308 63,728 119,599 121,336
------------- ------------- ------------- -------------
166,772 167,461 314,485 315,730
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 14,577 13,067 17,837 14,348
------------- ------------- ------------- -------------
PROVISION FOR INCOME TAXES
Current 3,851 4,415 4,129 4,352
Deferred 1,688 550 2,649 1,100
------------- ------------- ------------- -------------
5,539 4,965 6,778 5,452
------------- ------------- ------------- -------------
NET INCOME $ 9,038 $ 8,102 $ 11,059 $ 8,896
============= ============= ============= =============
EARNINGS RETAINED
Balance at Beginning of Period 51,033 43,968 48,563 41,909
Cash Dividends (1,509) (1,532) (3,018) (3,024)
Common Stock Purchased and Retired - (144) - (144)
Other (1,024) (49) 934 2,708
------------- ------------- ------------- -------------
BALANCE AT END OF PERIOD $ 57,538 $ 50,345 $ 57,538 $ 50,345
============= ============= ============= =============
EARNINGS PER SHARE - BASIC AND
DILUTED $ 0.30 $ 0.27 $ 0.37 $ 0.30
============= ============= ============= =============
WEIGHTED SHARES OUTSTANDING - BASIC 30,179,147 30,029,576 30,144,319 29,982,112
WEIGHTED SHARES OUTSTANDING - DILUTED 30,319,912 30,030,229 30,294,240 29,984,044
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------------------------
2001 2000
------------------ ------------------
OPERATING ACTIVITIES
Net Income $ 11,059 $ 8,896
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 9,893 8,871
Provision for Deferred Income Taxes 2,649 1,100
Other, Net 70 521
(Increase) Decrease in Assets:
Trade Receivables (4,651) (9,653)
Materials and Supplies (153) (1,237)
Other Current Assets (2,737) (6,231)
Other Non-Current Assets (779) 1,340
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 8,075 5,216
Unearned Revenue 6,825 8,685
Accrued Insurance (3,147) (1,704)
Accrual for Termite Contracts 81 (4,437)
Long-Term Accrued Liabilities (1,513) (2,416)
------------------ ------------------
Net Cash Provided by Operating Activities 25,672 8,951
------------------ ------------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (3,872) (8,600)
Net Cash Used for Acquisition of Companies (345) (3,374)
Marketable Securities, Net - 11,923
------------------ ------------------
Net Cash Used in Investing Activities (4,217) (51)
------------------ ------------------
FINANCING ACTIVITIES
Dividends Paid (3,018) (3,024)
Common Stock Purchased and Retired - (154)
Payments on Capital Leases (1,070) (2,306)
Payments, Net of Borrowings,
under Line of Credit Agreement (1,400) -
Other (967) 201
------------------ ------------------
Net Cash Used in Financing Activities (6,455) (5,283)
------------------ ------------------
Net Increase in Cash and Short-Term
Investments 15,000 3,617
Cash and Short-Term Investments
at Beginning of Period 399 5,689
------------------ ------------------
Cash and Short-Term Investments
at End of Period $ 15,399 $ 9,306
================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ROLLINS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION
The condensed 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 condensed 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, 2000.
The Company has only one reportable segment, its pest and termite
control business. The Company's results of operations and its
financial condition are not reliant upon any single customer or a few
customers or the Company's foreign operations.
In the opinion of management, the condensed consolidated financial
statements included herein contain all normal recurring adjustments
necessary to present fairly the financial position of the Company as
of June 30, 2001 and December 31, 2000, and the results of operations
for the three and six months ended June 30, 2001 and 2000 and cash
flows for the six months ended June 30, 2001 and 2000. Operating
results for the three months and six months ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the
year ended December 31, 2001.
For the three and six months ended June 30, 2001 and 2000,
comprehensive income is not materially different from net income and,
as a result, the impact of SFAS 130, "Reporting Comprehensive Income,"
is not reflected in the Company's consolidated financial statements
included herein.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. The adoption of this standard,
effective for the Company as of January 1, 2001, did not impact the
results of operations or financial condition of the Company as the
Company is not a party to any derivative transactions that fall under
the provisions of this statement.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" (effective July 1, 2001) and SFAS No.
142, "Goodwill and Other Intangible Assets" (effective for the Company
on January 1, 2002). SFAS No. 141 prohibits pooling-of- interests
accounting for acquisitions. SFAS No. 142 specifies that goodwill and
some intangible assets will no longer be amortized but instead will be
subject to periodic impairment testing. The Company is in the process
of evaluating the financial statement impact of adoption of SFAS No.
142.
Certain amounts for prior periods have been reclassified to conform
with the current period condensed 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 federal
and state income taxes. 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):
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
2001 2000 2001 2000
---------------- --------------- ---------------- ----------------
Basic EPS 30,179 30,029 30,144 29,982
Effect of Dilutive Stock Options 141 1 150 2
---------------- --------------- ---------------- ----------------
Diluted EPS 30,320 30,030 30,294 29,984
================ =============== ================ ================
NOTE 4. LEGAL PROCEEDINGS
One of the Company's subsidiaries, Orkin Exterminating Company, Inc.,
is a named defendant in Butland et al. v. Orkin Exterminating Company,
Inc. et al. pending in the Circuit Court of Hillsborough County,
Tampa, Florida. The plaintiffs filed suit in March of 1999 and are
seeking monetary damages in excess of $15,000 for each named plaintiff
and injunctive relief for alleged breach of contract, fraud and
various violations of Florida State law. The attorneys for the
plaintiffs contend that the case is suitable for a class action. The
Court may rule in December 2001 on whether the class should be
certified and their case should proceed as a class action. The Company
believes this case to be without merit and intends to defend itself
aggressively through trial, if necessary. 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.
The Company is not subject to any other material litigation, except
for the two cases disclosed in the Company's annual report on Form
10-K for the year ended December 31, 2000. There has been no material
change regarding these two cases since the filing of the Form 10-K.
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, and the cases described in the Company's Form 10-K for the
year ended December 31, 2000, 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 $9.0 million or $0.30 per share for the
quarter compared to net income of $8.1 million or $0.27 per share for the
comparable quarter in 2000. Net income for the first six months of 2001
increased 24.3% to $11.1 million or $0.37 per share compared to $8.9 million or
$0.30 per share for the same period in 2000. Revenues for the second quarter and
six months ended June 30, 2001, increased 0.5% and 0.7%, respectively.
The improvement in earnings for the quarter and first six months resulted
primarily from new pest and termite initiatives that have increased productivity
and improved customer retention. The Cost of Services Provided and Sales,
General and Administrative both reflect margin improvements that were partially
offset by an increase in the Provision for Income Taxes.
Results of Operations
Revenues increased to $181.3 million for the second quarter of 2001 from $180.5
million for the same quarterly period of 2000. For the first six months of 2001,
the Company generated revenues of $332.3 million, up 0.7% from last year's
amount of $330.1 million. Revenue growth was reflective of the slowing economy.
Cost of Services Provided was approximately $409,000 less than the prior year
quarter and improved to represent 54.4% of revenues compared with 54.9% for the
same quarter of the prior year. Improvement can be mainly attributed to
increased service technician productivity and reduced travel expense which was
partially offset by higher insurance and claims experience. For the first six
months of 2001, Cost of Services Provided improved to represent 55.7% of
revenues compared to 56.2% for the prior year period. The improvement can
primarily be attributed to reductions, as a percentage of revenues, in service
salaries, personnel related expenses, and travel expense partially offset by
higher insurance and claims experience.
Sales, General and Administrative decreased $420,000 and as a percentage of
revenues was 34.9% compared to 35.3% for the same quarter of the prior year. For
the first half of 2001, Sales, General and Administrative decreased as a
percentage of revenues to 36.0% compared with 36.8% for the prior year period.
The improvements as a percentage of revenues for the quarter and year-to-date
resulted primarily from reductions in sales salaries, personnel related
experience, sales promotions, and bad debt expense.
Depreciation and Amortization expenses for the second quarter of 2001 were
$140,000 higher than the prior year quarter. For the first six months of 2001,
Depreciation and Amortization expenses were $1.0 million higher than the prior
year period. The increase was primarily due to the amortization of intangible
assets associated with the Company's July 2000 acquisition of Johnson Wax
Professional's interest in the Acurid Retail Services, L.L.C. joint venture and
to the depreciation associated with FOCUS, the Company's new proprietary branch
computer system.
The Company's net tax provisions of $5.5 million for the quarter and $6.8
million for the first six months reflect increased taxable income over the prior
year periods.
7
Liquidity and Capital Resources
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's operations generated cash of $25.7 million for
the first six months of 2001 compared with cash provided by operating activities
of $9.0 million in the same period of 2000. This increase resulted primarily
from favorable changes in working capital related primarily to higher net income
from operations that has been adjusted for non-cash items as well as
improvements in accounts receivable collections and differences in the timing of
accounts payable and other accrued expenses.
The Company invested approximately $4.2 million in capital expenditures and
acquisitions during the first six months of 2001, and expects to invest between
$7.5 and $10.0 million for the remainder of 2001, inclusive of improvements to
its management information systems. Capital expenditures in the first six months
of 2001 consisted primarily of equipment replacements and upgrades and
improvements to the Company's management information systems. A total of $3.0
million was paid in cash dividends during the first six months of 2001. The
capital expenditures, acquisitions and cash dividends were primarily funded
through existing cash balances and operating activities. The Company maintains a
$40.0 million line of credit, of which the full amount is available for
borrowing as of July 31, 2001.
The Company is aggressively defending a class action lawsuit filed in Houston
County, Alabama and is appealing a judgment rendered against the Company by the
Circuit Court of Macon County, Alabama. Additionally, the Company intends to
defend itself aggressively through trial, if necessary, in a potential class
action matter pending in the Circuit Court of Hillsborough County, Florida. For
further discussion, see Note 4 to the accompanying consolidated financial
statements.
8
Impact of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and
Other Intangible Assets" (effective for the Company on January 1, 2002). SFAS
No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142
specifies that goodwill and some intangible assets will no longer be amortized
but instead will be subject to periodic impairment testing. The Company is in
the process of evaluating the financial statement impact of adoption of SFAS No.
142, which cannot be determined at this time.
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
outstanding litigation on the Company's financial condition, results of
operations and liquidity; and the Company's projected 2001 capital expenditures,
performance, and borrowings. 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 an adverse ruling against the Company in the Cutler, Butland, Jeter or other
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; climate and
weather trends; competitive factors and pricing practices; 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.
As of July 31, 2001, the Company no longer maintains a material investment
portfolio subject to interest rate risk exposure. The Company is, however,
subject to interest rate risk exposure through borrowings on its $40.0 million
line of credit. Due to the absence of such borrowings at July 31, 2001 and as
currently anticipated at December 31, 2001, this risk is not expected to have a
material effect upon the Company's results of operations or financial position
going forward.
9
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 to Part I, Item 1 for discussion of certain litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on April 24, 2001. At the meeting, stockholders
elected two Class III Directors for the three-year term expiring in 2004.
Results of the voting were as follows:
Election of Class III Directors: For Withheld
------------------------------------------- ------------------------- --------------------------
Wilton Looney 28,746,448 100,503
Bill J. Dismuke 28,607,166 239,785
Item 5. Other Information.
Gary W. Rollins, 56, president and chief operating officer, was named to the additional post of
chief executive officer effective July 24, 2001. He succeeded R. Randall Rollins who continues as
chairman of the board.
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. is incorporated herein by reference to Exhibit (3) (ii) as filed
with its Form 10-Q for the quarterly period ended March 31, 1999.
(iii) Amendment to the By-laws of Rollins, Inc. is incorporated herein by reference to Exhibit (3)
(iii) as filed with its Form 10-Q for the quarterly period ended March 31, 2001.
(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.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or were required to be filed during the second quarter of
2001.
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: August 13, 2001 By: /s/ Gary W. Rollins
-----------------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
Date: August 13, 2001 By: /s/ Harry J. Cynkus
-----------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
11