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, 2002.
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
------------------------------------------
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 30,240,685 shares of its $1 Par Value Common Stock outstanding
as of July 15, 2002.
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, 2002 and December 31, 2001 2
Condensed Consolidated Statements of Income and Retained Earnings
for the Three and Six Months Ended June 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 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 6. Exhibits and Reports on Form 8-K. 10
SIGNATURES 11
1
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,
2002 2001
-------------------- ------------------
ASSETS
Cash and Short-Term Investments $ 46,010 $ 8,650
Trade Receivables, Net 53,862 48,479
Materials and Supplies 11,596 11,895
Deferred Income Taxes 20,138 21,044
Other Current Assets 8,131 10,415
-------------------- ------------------
Current Assets 139,737 100,483
Equipment and Property, Net 41,318 44,273
Goodwill and Other Intangible Assets, Net 110,515 112,450
Deferred Income Taxes 37,751 39,309
Other Assets 0 44
-------------------- ------------------
Total Assets $ 329,321 $ 296,559
==================== ==================
LIABILITIES
Accounts Payable 15,416 12,920
Accrued Insurance 12,739 9,912
Accrued Payroll 30,765 30,921
Unearned Revenue 39,705 27,470
Accrual for Termite Contracts 15,000 15,000
Other Current Liabilities 14,515 12,313
-------------------- ------------------
Current Liabilities 128,140 108,536
Accrued Insurance 30,412 32,713
Accrual for Termite Contracts 36,715 35,875
Long-Term Accrued Liabilities 34,161 33,937
-------------------- ------------------
Total Liabilities 229,428 211,061
-------------------- ------------------
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000 shares
authorized; 30,099,885 and 30,069,990 shares issued at
June 30, 2002 and December
31, 2001, respectively 30,100 30,070
Accumulated Other Comprehensive Income (4,673) (4,822)
Retained Earnings 74,466 60,250
-------------------- ------------------
Total Stockholders' Equity 99,893 85,498
-------------------- ------------------
Total Liabilities and Stockholders' $ 329,321 $ 296,559
Equity
==================== ==================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
(In thousands except share and per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- -----------------
REVENUES
Customer Services $ 185,027 $ 181,349 $ 338,842 $ 332,322
---------------- ---------------- ---------------- -----------------
COSTS AND EXPENSES
Cost of Services Provided 98,023 98,719 182,576 184,993
Depreciation and Amortization 5,446 4,744 10,873 9,893
Sales, General & Administrative 62,740 63,410 118,559 119,748
Interest (Income) / Expense (39) (101) 10 (149)
---------------- ---------------- ---------------- -----------------
166,170 166,772 312,018 314,485
---------------- ---------------- ---------------- -----------------
INCOME BEFORE INCOME TAXES 18,857 14,577 26,8240 17,837
---------------- ---------------- ---------------- -----------------
PROVISION FOR INCOME TAXES
Current 5,942 3,851 7,746 4,129
Deferred 1,224 1,688 2,447 2,649
---------------- ---------------- ---------------- -----------------
7,166 5,539 10,193 6,778
---------------- ---------------- ---------------- -----------------
NET INCOME $ 11,691 $ 9,038 $ 16,631 $ 11,059
================ ================ ================ =================
RETAINED EARNINGS
Balance at Beginning of Period 65,352 51,033 60,250 48,563
Cash Dividends (1,509) (1,509) (3,016) (3,018)
Common Stock Purchased (1,223) 0 (1,223) 0
Other 155 (1,024) 1,824 934
---------------- ---------------- ---------------- -----------------
BALANCE AT END OF PERIOD $ 74,466 $ 57,538 $ 74,466 $ 57,538
================ ================ ================ =================
EARNINGS PER SHARE - BASIC AND
DILUTED $ 0.39 $ 0.30 $ 0.55 $ 0.37
================ ================ ================ =================
WEIGHTED SHARES OUTSTANDING - BASIC 30,151,607 30,179,147 30,140,954 30,144,319
WEIGHTED SHARES OUTSTANDING - DILUTED 30,361,858 30,319,912 30,343,983 30,294,240
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,
----------------------------------------
2002 2001
------------------ -----------------
OPERATING ACTIVITIES
Net Income $ 16,631 $ 11,059
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 10,873 9,893
Provision for Deferred Income Taxes 2,463 3,273
Other, Net 173 70
(Increase) Decrease in Assets:
Trade Receivables (5,328) (4,651)
Materials and Supplies 309 (153)
Other Current Assets 2,284 374
Other Non-Current Assets 94 (1,282)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 6,276 6,703
Unearned Revenue 12,235 8,825
Accrued Insurance 526 (3,103)
Accrual for Termite Contracts 841 81
Long-Term Accrued Liabilities 224 (5,417)
------------------ -----------------
Net Cash Provided by Operating Activities 47,601 25,672
------------------ -----------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (4,611) (3,872)
Net Cash Used for Acquisition of Companies (1,358) (345)
Marketable Securities, Net 0 0
------------------ -----------------
Net Cash Used in Investing Activities
(5,969) (4,217)
------------------ -----------------
FINANCING ACTIVITIES
Dividends Paid (3,016) (3,018)
Common Stock Purchased (1,292) 0
Payments on Capital Leases (256) (1,070)
Payments, Net of Borrowings,
under Line of Credit Agreement 0 (1,400)
Other 292 (967)
------------------ -----------------
Net Cash Used in Financing Activities (4,272) (6,455)
------------------ -----------------
Net Increase in Cash and Short-Term
Investments 37,360 15,000
Cash and Short-Term Investments
at Beginning of Period 8,650 399
------------------ -----------------
Cash and Short-Term Investments
at End of Period $ 46,010 $ 15,399
================== =================
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, 2001.
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, 2002 and December 31, 2001, and the
results of operations for the three and six months ended June 30,
2002 and 2001 and cash flows for the six months ended June 30,
2002 and 2001. Operating results for the three and six months
ended June 30, 2002 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2002.
Comprehensive income includes amounts subject to foreign currency
translation. For the three and six months ended June 30, 2002 and
2001, comprehensive income is not materially different from net
income.
In June 2001 the Financial Accounting Standards Board (FASB)
approved Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 prospectively prohibits
the pooling of interests method of accounting for business
combinations initiated after June 30, 2001. The amortization of
existing goodwill ceased on January 1, 2002. Any goodwill
resulting from acquisitions completed after June 30, 2001 is not
being amortized. SFAS No. 142 also establishes a new method of
testing goodwill for impairment on an annual basis or on an
interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its
carrying value. The adoption of SFAS No. 142 has resulted in the
Company's discontinuation of amortization of its goodwill;
however, the Company is required to test its goodwill for
impairment under the new standard beginning in 2002. The expected
impact in 2002 from the application is a decrease in amortization
expense of approximately $2.3 million. Also, per SFAS No. 142,
the expected life of customer contracts was reviewed and they
will be amortized over a life between 8 to 12.5 years dependent
upon customer type. The expected impact in 2002 of this review is
an increase in amortization expense of $2.1 million. The Company
does not believe that the net result of the decrease in
amortization of goodwill and increase in amortization of customer
contracts will have a material impact on its annual financial
statements. The impact of SFAS No. 142 was not material to the
Company's financial statements for the three and six months ended
June 30, 2002.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective June 15, 2002 that addresses obligations
associated with the retirement of tangible long-lived assets and
associated retirement costs. The FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
effective for fiscal years beginning after December 15, 2001 that
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," effective for
fiscal years beginning May 15, 2002 or later that rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment
of Debt, FASB Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements, and FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This
Statement Amends FASB Statement No. 4 and FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The
Company does not believe the impact of adopting SFAS No. 143,
SFAS No. 144, or SFAS No. 145 will have a material impact on its
financial statements.
5
Certain amounts for prior periods have been reclassified to
conform with current period condensed consolidated financial
statement presentation. Such reclassifications had no effect on
previously reported net income.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that
a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and
nullifies EITF 94-3. The Company plans to adopt SFAS No. 146 in
January 2003. Management believes that the adoption of this
statement will not have a material effect on the Company's future
results of operations.
NOTE 2. PROVISION FOR INCOME TAXES
The book provision for income taxes includes the liability for
federal, foreign 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.
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,
------------------------------------ ------------------------------------
2002 2001 2002 2001
---------------- --------------- ---------------- ----------------
Basic EPS 30,152 30,179 30,141 30,144
Effect of Dilutive Stock Options 210 141 203 150
---------------- --------------- ---------------- ----------------
Diluted EPS 30,362 30,320 30,344 30,294
================ =============== ================ ================
NOTE 4. LEGAL PROCEEDINGS
Orkin, one of the Company's subsidiaries, 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.
Orkin is also 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 Court ruled in early April 2002,
certifying the class action lawsuit against Orkin. The Company
intends to appeal this ruling to the Florida Second District
Court of Appeals. Moreover, 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.
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,
however, 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 $11.7 million or $0.39 per share for the
second quarter of 2002, compared to net income of $9.0 million or $0.30 per
share for the comparable quarter in 2001, a 29.4% increase. Net income for the
first six months of 2002 increased 50.4% to $16.6 million or $0.55 per share
compared to $11.1 million or $0.37 per share for the same period in 2001.
Revenues for the second quarter and six months ended June 30, 2002 showed an
increase of 2.0% as compared to the second quarter and six months ended June 30,
2001.
The improvement in earnings for the quarter and first six months resulted
primarily from an increase in revenue and pest and termite initiatives that have
decreased costs, increased productivity, and improved customer retention. The
Cost of Services Provided and Sales, General and Administrative decreases both
resulted in margin improvements that were partially offset by an increase in the
Provision for Income Taxes.
Results of Operations
Revenues increased to $185.0 million for the second quarter of 2002 from $181.3
million for the same quarterly period of 2001. For the first six months of 2002,
the Company generated revenues of $338.8 million, up 2.0% from last year's
amount of $332.3 million. The revenue growth was primarily due to increased
recurring revenues in both pest and termite control. Pest control benefited from
improvement in customer retention while termite increased mainly through our
termite baiting program.
Cost of Services Provided in the second quarter of 2002 was approximately
$700,000 less than in the prior year quarter and improved to represent 53.0% of
revenues compared with 54.4% for the same quarter of the prior year. For the
first six months of 2002, Cost of Services Provided decreased $2.4 million and
improved to represent 53.9% of revenues compared to 55.7% for the prior year
period. Improvement for the second quarter and six months ended June 30, 2002
can be mainly attributed to programs that have increased productivity while
reducing headcount, service salaries, materials and supplies, and fleet expense
which were partially offset by higher insurance and claims expense.
Sales, General and Administrative in the second quarter of 2002 decreased
$670,000 and as a percentage of revenues was 33.9% compared to 35.0% for the
same quarter of the prior year. This improvement can be mainly attributed to
reductions in sales promotions, fleet expense, and administrative salaries. For
the first six months of 2002, Sales, General and Administrative decreased $1.2
million and as a percentage of revenues was 35.0% compared to 36.0% for the
prior year period. In addition to the factors discussed above, the improvement
can also be attributed to reductions in bad debt expense.
Depreciation and Amortization expenses for the second quarter of 2002 were
approximately $702,000 higher than the prior year quarter. For the first six
months of 2002, Depreciation and Amortization expenses were approximately
$980,000 higher than the prior year period. The increase was primarily due to
the amortization of the depreciation associated with FOCUS, the Company's new
proprietary branch computer system. The rollout of FOCUS to the branches was
completed in the fourth quarter of 2001. For further discussion, see Note 1 to
the accompanying financial statements.
Net income for the quarter ended June 30, 2002 includes the effects of adopting
Statement of Financial Accounting Standards (SFAS) No. 142, which did not have a
material impact to the Company's overall results of operations. In addition, if
SFAS No. 142 had been adopted in the quarter ended June 30, 2001, it would not
have had a material impact to net income previously reported for the quarter
ended June 30, 2001.
The Company's net tax provision of $7.2 million for the quarter and $10.2
million for the six month period reflects increased taxable income over the
prior year period. The effective tax rate of 38% was consistent between periods
presented.
Impact of Recent Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board (FASB) approved Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interests method of accounting for business
combinations initiated after June 30, 2001. The amortization of existing
goodwill ceased on January 1, 2002. Any goodwill resulting from acquisitions
completed after June 30, 2001 is not being amortized. SFAS No. 142 also
establishes a new method of testing goodwill for impairment on an annual basis
or on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value. The adoption
of SFAS No. 142 has resulted in the Company's discontinuation of amortization of
its goodwill; however, the Company is required to test its goodwill for
impairment under the new standard beginning in 2002. The expected impact in 2002
from the application is a decrease in amortization expense of approximately $2.3
million. Also, per SFAS No. 142, the expected life of customer contracts was
reviewed and they will be amortized over a life between 8 to 12.5 years
dependent upon customer type. The expected impact in 2002 of this review is an
increase in amortization expense of $2.1 million. The Company does not believe
that the net result of the decrease in amortization of goodwill and increase in
7
amortization of customer contracts will have a material impact on its annual
financial statements. The impact of SFAS No. 142 was not material to the
Company's financial statements for the three and six months ended June 30, 2002.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective June 15, 2002 that addresses obligations associated with the
retirement of tangible long-lived assets and associated retirement costs. The
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective for fiscal years beginning after December 15, 2001
that addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. The FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," effective for fiscal years beginning May 15, 2002 or later that
rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of
Debt, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements, and FASB Statement No. 44, Accounting for Intangible
Assets of Motor Carriers. This Statement Amends FASB Statement No. 4 and FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company does not believe the impact of adopting SFAS No. 143,
SFAS No. 144, or SFAS No. 145 will have a material impact on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies EITF 94-3. The Company plans to adopt SFAS No. 146 in
January 2003. Management believes that the adoption of this statement will not
have a material effect on the Company's future results of operations.
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 $47.6 million for
the first six months of 2002 compared with cash provided by operating activities
of $25.7 million in the same period of 2001. 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 differences
in the timing of unearned revenue and other accrued expenses. A customer of the
Company, Kmart, recently declared bankruptcy which did not have a significant
impact on the Company or its liquidity.
The Company invested approximately $4.6 million in capital expenditures during
the first six months of 2002, and expects to invest between $5.0 and $6.0
million for the remainder of 2002, inclusive of improvements to its management
information systems. Capital expenditures in the first six months of 2002
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 ($0.05 a quarter) during the first six months of 2002. The
capital expenditures, acquisitions and cash dividends were primarily funded
through existing cash balances and operating activities. The Company maintains a
$40 million credit facility with a commercial bank, of which we have no
borrowings outstanding as of July 31, 2002.
Orkin, one of the Company's subsidiaries, is aggressively defending a class
action lawsuit filed in Hillsborough County, Tampa, Florida. In early April,
2002, the Circuit Court of Hillsborough County certified the class action status
of Butland et al. v. Orkin Exterminating Company, Inc. et al. Orkin is also a
defendant in Helen Cutler and Mary Lewin v. Orkin Exterminating Company, Inc. et
al pending in the District Court of Houston County, Alabama. For further
discussion, see Note 4 to the accompanying financial statements.
In late April of 2002, the Company initiated a restructuring of the Home Office
at its corporate headquarters in Atlanta. As part of this reorganization,
positions were eliminated and a new organization was implemented to provide more
effective support to the field. In a continuing effort to improve the efficiency
and quality of the support the Home Office provides the field, the Company is
currently evaluating its Home Office processes. It is the opinion of Management
that the reorganization will not have a material effect on the Company's
financial position, results of operations or liquidity in the near term, though
ultimately improving the profitability and cash flow of the Company.
Critical Accounting Policies
We view critical accounting policies to be those policies which are very
important to the portrayal of our financial condition and results of operations,
and require management's most difficult, complex or subjective judgments. The
circumstances that make these judgments difficult or complex relate to the need
for management to make estimates about the effect of matters that are inherently
uncertain. We believe our critical accounting policies to be as follows:
8
Accrual for Termite Contracts - The Company maintains an accrual for
termite contracts representing the estimated costs of reapplications,
repair claims and associated labor, chemicals, and other costs
incurred relative to termite services performed prior to the balance
sheet date. The Company contracts an independent third party actuary
to provide the Company a range of estimated liability based upon
historical claims information. The actuarial study is a major
consideration, however, along with Management's knowledge of changes
in business practices, contract changes, ongoing claims and termite
remediation trends are used in the determination of the accrual.
Management makes judgments utilizing these operational factors but
recognizes that they are inherently subjective due to the litigious
nature of settlements and awards. Other factors that may impact future
cost include chemical life expectancy and governmental regulation. It
is significant that the actual number of claims has decreased in
recent years due to changes in the Company's business practices.
However, it is not possible to predict future catastrophic claims.
These positive changes to our business practices include revisions
made to our contracts, more effective treatment methods that include a
directed-liquid baiting program, more effective termiticides, and
expanded training methods and techniques.
Accrued Insurance - The Company self-insures, up to specified limits,
certain risks related to general liability, workers' compensation and
vehicle liability. The estimated costs of existing and future claims
under the self-insurance program are accrued based upon historical
trends as incidents occur, whether reported or unreported (although
actual settlement of the claims may not be made until future periods)
and may be subsequently revised based on developments relating to such
claims. The Company contracts an independent third party actuary to
provide the Company a range of estimated liability based upon
historical claims information. The actuarial study is a major
consideration, along with Management's knowledge of changes in
business practice and existing claims compared to current balances.
The reserve is established based on all these factors. Management's
judgment is inherently subjective and a number of factors are outside
Management's knowledge and control. Additionally, historical
information is not always an accurate indication of future events. It
should be noted that the number of claims has been decreasing due to
the Company's proactive risk management to develop and maintain
ongoing programs. However, it is not possible to predict future
catastrophic claims. Initiatives, which have been implemented, include
an annual Motor Vehicle Registration program, utilization of a Global
Positioning System in the majority of our company vehicles, post-offer
physicals for new employees, and post-accident drug testing. The
Company has improved the time required to report a claim by utilizing
a "Red Alert" program that provides for 24/7 serious accident
assessment and has instituted a modified duty program that enables
employees to go back to work on a limited-duty basis.
Forward-Looking Statements
This Quarterly Report 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") and the Butland et al. v. Orkin Exterminating Company, Inc. et al.
("Butland") litigation on the Company's financial condition, results of
operations and liquidity; the adequacy of the company's resources to fund
operations and obligations; the impact of the corporate restructuring on
liquidity and results of operations; and the Company's projected 2002 capital
expenditures. 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 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; the Company's ability to identify potential
acquisitions; climate and weather trends; competitive factors and pricing
practices; the cost reduction benefits of the corporate restructuring may not be
as great as expected or eliminated positions may have to be reinstated in the
future; 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, 2002, 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 million
credit facility. Due to the absence of such borrowings as of July 31, 2002 and
since no borrowings are currently anticipated through December 31, 2002, 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
23, 2002. At the meeting, stockholders elected two Class I
Directors for the three-year term expiring in 2005 and one
Class II Director for the one-year term expiring in 2003.
Results of the voting were as follows:
Election of Class I and II Directors: For Withheld
--------------------------------------- ---------------------- -------------------------
R. Randall Rollins 27,435,459 1,254,573
James B. Williams 28,063,111 626,921
Henry B. Tippie 28,062,314 627,718
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 2002.
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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: July 31, 2002 By: /s/ Gary W. Rollins
--------------------------------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
Date: July 31, 2002 By: /s/ Harry J. Cynkus
--------------------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
11