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, 1999 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 (I.R.S. Employer incorporation 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 30,354,196 shares of its $1 Par Value Common Stock outstanding as of July 31, 1999.
ROLLINS, INC. AND SUBSIDIARIES INDEX PART I FINANCIAL INFORMATION Page No. Item 1. Financial Statements. Consolidated Statements of Financial Position as of June 30, 1999 and December 31, 1998 ................ 2 Consolidated Statements of Income and Earnings Retained for the Three and Six Months Ended June 30, 1999 and 1998 ............................. 3 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 ....................... 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 4. Submission of Matters to a Vote of Security Holders. 10 Item 6. Exhibits and Reports on Form 8-K.................... 10 SIGNATURES ............................................................ 12
PART I -- FINANCIAL INFORMATION Item 1. Financial Statements.
ROLLINS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands except share data) (Unaudited) June 30, December 31, 1999 1998 -------- -------- ASSETS Cash and Short-Term Investments ................ $ 4,600 $ 1,244 Marketable Securities .......................... 83,201 110,229 Trade Receivables, Net ......................... 45,562 42,353 Materials and Supplies ......................... 13,793 13,335 Deferred Income Taxes .......................... 18,947 20,083 Other Current Assets ........................... 15,969 11,864 -------- -------- Current Assets ............................. 182,072 199,108 Equipment and Property, Net .................... 36,769 35,466 Intangible Assets .............................. 56,060 40,602 Deferred Income Taxes .......................... 42,066 44,369 Other Assets ................................... 17,910 7,720 -------- -------- Total Assets ............................... $334,877 $327,265 ======== ======== LIABILITIES Capital Lease Obligations ...................... $ 3,527 $ 3,419 Accounts Payable ............................... 17,451 10,890 Accrued Insurance .............................. 13,050 18,348 Accrued Payroll ................................ 20,900 18,400 Unearned Revenue ............................... 19,923 15,210 Other Expenses ................................. 50,855 48,826 -------- -------- Current Liabilities ........................ 125,706 115,093 Capital Lease Obligations ...................... 4,298 6,090 Accrued Insurance .............................. 42,107 38,975 Accrual for Termite Contracts .................. 56,886 66,350 Long-Term Accrued Liabilities .................. 22,896 20,522 -------- -------- Total Liabilities .......................... 251,893 247,030 -------- -------- Commitments and Contingencies STOCKHOLDERS' EQUITY Common Stock, par value $1 per share; 99,500,000 shares authorized; 30,395,596 and 30,488,741 shares issued at June 30, 1999 and December 31, 1998, respectively ............ 30,396 30,489 Earnings Retained .............................. 52,588 49,746 -------- -------- Total Stockholders' Equity ................. 82,984 80,235 -------- -------- Total Liabilities and Stockholders'Equity ...... $334,877 $327,265 ======== ======== 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) Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ REVENUES Customer Services ................ $ 162,342 $ 155,050 $ 292,228 $ 278,015 ------------ ------------ ------------ ------------ COSTS AND EXPENSES Cost of Services Provided ........ 89,704 86,717 166,536 163,606 Depreciation and Amortization .... 3,181 2,789 6,178 5,499 Sales, General and Administrative 58,211 56,820 108,642 105,653 Interest Income .................. (1,050) (2,425) (2,175) (5,047) ------------ ------------ ------------ ------------ 150,046 143,901 279,181 269,711 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES ................ 12,296 11,149 13,047 8,304 ------------ ------------ ------------ ------------ PROVISION (BENEFIT) FOR INCOME TAXES Current .......................... 2,995 2,006 1,600 (1,305) Deferred ......................... 1,678 2,230 3,357 4,460 ------------ ------------ ------------ ------------ 4,673 4,236 4,957 3,155 ------------ ------------ ------------ ------------ NET INCOME ................................ $ 7,623 $ 6,913 $ 8,090 $ 5,149 ============ ============ ============ ============ EARNINGS RETAINED Balance at Beginning of Period ... 48,425 104,030 49,746 112,365 Cash Dividends ................... (1,530) (4,969) (3,054) (9,957) Common Stock Purchased and Retired (3,049) (11,280) (3,183) (12,876) Other ............................ 1,119 34 989 47 ------------ ------------ ------------ ------------ BALANCE AT END OF PERIOD .................. $ 52,588 $ 94,728 $ 52,588 $ 94,728 ============ ============ ============ ============ EARNINGS PER SHARE - BASIC AND DILUTED ................................... $ 0.25 $ 0.21 $ 0.27 $ 0.16 ============ ============ ============ ============ WEIGHTED SHARES OUTSTANDING - BASIC ....... 30,517,760 33,078,672 30,501,965 33,173,701 WEIGHTED SHARES OUTSTANDING - DILUTED ..... 30,525,638 33,109,672 30,509,843 33,197,701 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) Six Months Ended June 30, ---------------------------- 1999 1998 ------------ ------------ OPERATING ACTIVITIES Net Income ............................................ $ 8,090 $ 5,149 Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities: Depreciation and Amortization ..................... 6,178 5,499 Provision for Deferred Income Taxes ............... 3,358 4,460 Other, Net ........................................ (111) 646 (Increase) Decrease in Assets, Net of Acquisitions: Trade Receivables ................................. (517) 1,266 Materials and Supplies ............................ (182) (1,229) Other Current Assets .............................. (4,060) (3,553) Other Non-Current Assets .......................... (385) 20 Increase (Decrease) in Liabilities, Net of Acquisitions: Accounts Payable and Accrued Expenses ............. 9,383 3,636 Unearned Revenue .................................. 4,650 2,812 Accrued Insurance ................................. (2,166) (136) Accrual for Termite Contracts ..................... (9,464) (15,731) Long-Term Accrued Liabilities ..................... 2,374 (6,985) ------------ ------------ Net Cash Provided by (Used in) Operating Activities ..... 17,148 (4,146) ------------ ------------ INVESTING ACTIVITIES Purchases of Equipment and Property ..................... (5,202) (5,756) Net Cash Used for Acquisition of Companies .............. (26,326) (870) Marketable Securities, Net .............................. 26,305 (49,306) ------------ ------------ Net Cash Used in Investing Activities ................... (5,223) (55,932) ------------ ------------ FINANCING ACTIVITIES Dividends Paid .......................................... (3,054) (9,957) Common Stock Purchased and Retired ...................... (3,392) (13,545) Payments on Capital Leases .............................. (1,684) (1,546) Other ................................................... (439) 40 ------------ ------------ Net Cash Used in Financing Activities ................... (8,569) (25,008) ------------ ------------ Net Increase (Decrease) in Cash and Short-Term Investments ........................................... 3,356 (85,086) Cash and Short-Term Investments at Beginning of Period ............................................. 1,244 125,842 ------------ ------------ Cash and Short-Term Investments at End of Period ............................................. $ 4,600 40,756 -- -- ============ ============ 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 generally accepted accounting principles 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, 1998. 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 June 30, 1999 and December 31, 1998, and the results of operations for the three and six months ended June 30, 1999 and 1998 and cash flows for the six months ended June 30, 1999 and 1998. Operating results for the three months and six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. 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 six months ended June 30, 1999 and 1998, 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): Second Quarter Ended June 30 Six Months Ended June 30 --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Basic EPS ........ 30,518 33,079 30,502 33,174 Effect of Dilutive Stock Options .. 8 31 8 24 ------------ ------------ ------------ ------------ Diluted EPS 30,526 33,110 30,510 33,198 ============ ============ ============ ============
NOTE 4. ACQUISITION AND JOINT VENTURE On April 30, 1999, the Company and SC Johnson Professional entered into a joint venture, Acurid Retail Services, L.L.C. (Acurid Retail), created to provide pest elimination services to customers in the retail market and jointly contributed existing customers to the joint venture. The Company owns 50% of the joint venture. In addition, on April 30, 1999, the Company's wholly-owned subsidiary, Orkin Exterminating Company, Inc. (Orkin), acquired the remaining pest elimination business operations of PRISM, a subsidiary of SC Johnson Professional for approximately twenty-four million dollars. The acquisition was accounted for as a purchase and resulted in excess costs over net assets acquired of approximately sixteen million dollars which are being amortized over a life of twenty years using the straight-line method. NOTE 5. LEGAL PROCEEDINGS The Company is aggressively defending a lawsuit filed in Dothan, Alabama, in which the plaintiffs seek compensatory damages 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 case is set for trial November 15, 1999. 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. The Company is involved in other litigation matters incidental to its business. With respect to such other suits, management does not believe the litigation in which it is involved will have a material effect upon its results of operations or financial condition. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company reported net income of $7.6 million or $0.25 per share for the quarter compared to $6.9 million or $0.21 per share for the same quarter in 1998. Net income for the first half of 1999 was $8.1 million or $0.27 per share compared to $5.1 or $0.16 per share for the same period in 1998. The improvement in earnings for the quarter and year-to-date resulted primarily from increases in residential and commercial pest control revenue. Revenues increased 4.7% to $162.3 million compared to $155.1 million for the same quarterly period last year. For the first half of 1999, revenues increased 5.1% to $292.2 million. Second quarter 1999 represents the Company's fifth consecutive quarter of improvements in revenues and earnings. The Company attributes these improvements to its strategic programs initiated in 1998 and 1997 to build recurring revenue, expand the Company's commercial pest control business and contain termite claims costs. The Company is particularly pleased with these results in light of the impact of the integration of the PRISM acquisition and the creation of the Acurid Retail Sevices joint venture with SC Johnson Professional. For further discussion regarding these transactions, see Note 4 to the accompanying consolidated financial statements. Results of Operations Revenues increased to $162.3 million in second quarter 1999 from $155.1 million in the same period of 1998, and increased to $292.2 million in the first six months of 1999 from $278.0 million in the same period of 1998. These increases were primarily the result of increases in customer base and in average sales prices in both residential and commercial pest control. Cost of Services Provided was approximately $3.0 million higher than the prior year quarter but improved to represent 55.2% of revenues compared to 55.9% for the same quarter of the prior year. Year-to-date Cost of Services Provided improved to represent 57.0% of revenues compared to 58.8% for the prior year period. These improvements as a percentage of revenues were primarily due to lower termite provisions, operating insurance costs and improved inventory management. Selling, General and Administrative increased $1.4 million or 2.4% but decreased as a percentage of revenues to 35.9% compared to 36.6% for the same quarter of the prior year. For the first half of 1999, Selling, General and Administrative decreased as a percentage of revenues to 37.2% compared with 38.0% for the prior year period. The improvements as a percentage of revenues resulted primarily from improved efficiencies in sales, fleet and telephone costs and personal property tax reductions. These cost savings were partially offset by additional costs related to various new and expanded programs throughout the Company. Interest Income decreased $1.4 million or 56.7% compared to the same quarter of the prior year, and decreased $2.9 million or 56.9% for the six months ended June 30, 1999 compared to the same period of the prior year. The decreases were primarily due to lower invested funds over the prior year periods. The Company's net tax provisions of $4.7 million for the quarter and $5.0 million for the first six months reflect increased taxable income over the prior year periods. 7
- -------------------------------------------------------------------------------- Financial Condition June 30, December 31, (In thousands) 1999 1998 - -------------------------------------------------------------------------------- Cash and Short-Term Investments .. $ 4,600 $ 1,244 Marketable Securities ............ 83,201 110,229 -------------- ------------ 87,801 111,473 Working Capital .................. 56,366 84,015 Current Ratio .................... 1.4 1.7 - --------------------------------------------------------------------------------
The Company's financial position remains solid. The Company believes its current cash balances and future cash flows from operating activities will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future. The Company's cash flow provided by operating activities was $17.1 million for the first six months of 1999 compared with cash used in operating activities of $4.1 million in the same period of 1998. This increase resulted primarily from favorable changes in working capital related primarily to differences in the timing of accounts payable and other accrued expenses and higher net income from operations in 1999, adjusted for non-cash items. The Company invested approximately $31.5 million in capital expenditures and acquisitions during the first six months of 1999, and expects to invest between $40 and $50 million in 1999, inclusive of improvements to its management information systems. Capital expenditures during the first six months of 1999 consisted primarily of equipment replacements and upgrades. Acquisitions consisted primarily of the acquisition of the commercial pest elimination business operations of PRISM, a subsidiary of SC Johnson Professionals. See Note 4 to the accompanying consolidated financial statements for further discussion. During the six months ended June 30, 1999, $3.1 million was paid in cash dividends and $3.4 million was paid for repurchases of 209,000 shares of the Company's Common Stock. These repurchased shares were retired during the six months. The capital expenditures, acquisitions, cash dividends and stock repurchases were primarily funded through existing cash and marketable securities balances and operating activities. The Company maintains a $40.0 million unused line of credit, which is available for future acquisitions and growth, if needed. In 1997 and 1998, Orkin 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 of the Company's intention to continue to cooperate fully with this investigation. At this point in time, it is too early to determine the impact, if any, of this investigation. In addition, the Company is aggressively defending a class action lawsuit filed in Dothan, Alabama. For further discussion, see Note 5 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 have 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 compliancy, (3) obtaining assurances from the Company's vendors and its large commercial customers, and (4) assigning a manager for Y2K compliance and establishing a monthly readiness reporting process to ensure that top management will be aware of each area and step remaining to be done in order for the Company to become fully Y2K compliant. The Company's remediation activities have included replacing certain software and operating systems, followed by testing to ensure the Y2K compliancy of the replacements. Based on its assessment and remediation activities to date, the Company believes that its critical internal software and operating systems are Y2K compliant with the exception of its bad debt collection system, its branch personal 8 computers (PCs), and its commercial division's national accounts system. The Company's bad debt collection system is currently being updated and is expected to be Y2K compliant by the end of third quarter 1999, and the branch PCs are expected to be replaced by the end of October 1999. The Company has formulated an information technology plan for its national accounts system, and necessary remediation efforts are expected to be concluded by the end of third quarter 1999. The total cost of Y2K expenditures to date as of June 30, 1999 was approximately $19.2 million; the remaining Y2K remediation costs are anticipated to be approximately $100,000 to $500,000. Based on assurances from the majority of its vendors and large commercial customers to date, the Company does not anticipate any material Y2K impact on its operations or financial reporting at this time. The Company believes that the worst case scenario will be some minor nuisances experienced by a small number of its branches in January 2000. The Company expects to have contingency plans in place by the end of 1999 that address potential short-term business disruptions resulting from losses of electricity and system malfunctions related to the ordering and delivering of operating supplies and the printing of sales orders. 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. 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, general economic conditions; market risk; changes in industry practices or technologies; the degree of success of the Company's termite process reforms; the Company's ability to identify potential acquisitions; climate and weather trends; competitive factors and pricing practices; the Year 2000 programming issue; potential increases in labor costs; uncertainties of litigation; 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 is expected. 9 PART II -- OTHER INFORMATION Item 1. Legal Proceedings. See Note 5 to Part I, Item 1 which is incorporated herein by reference. Item 2. Changes in Securities and Use of Proceeds. On April 21, 1999, the Company acquired the pest elimination business of Home and Business Services Company in exchange for cash and 38,807 shares of the Company's Common Stock. The market value of the Common Stock issued was approximately $650,000. Since the issuance of these shares was not a public issuance, these shares of Common Stock were issued pursuant to the exemption from registration under the Securities Act of 1933, as amended, Section 4, Paragraph 2. Item 4. Submission of Matters to a Vote of Security Holders. The Company's Annual Meeting of Stockholders was held on April 27, 1999. At the meeting, stockholders elected three Class I Directors for the three-year term expiring in 2002. Results of the voting were as follows: Election of Class I Directors For Withheld ------------------------------- -------------- ---------------- R. Randall Rollins 27,974,683 258,771 Henry B. Tippie 27,971,378 262,076 James B. Williams 27,976,677 256,777 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. (2)* Asset Purchase Agreement by and between Orkin Exterminating Company, Inc. and PRISM Integrated Sanitation Management Inc. (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. (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) Financial Data Schedule (For Commission Use Only). 10 (b) Reports on Form 8-K. No reports on Form 8-K were filed during second quarter 1999. ----------- * The Company has applied for confidential treatment of portions of this Agreement. Accordingly, portions thereof have been omitted and filed separately with the Securities and Exchange Commission. In addition, in accordance with Item 601(b)(2) of Regulation S-K, the schedules have been omitted and a list briefly describing the schedules is at the end of the Exhibit. The Company will furnish supplementally a copy of any omitted schedule to the Commission upon request. 11 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 12, 1999 By: /s/ Gary W. Rollins ------------------------------ Gary W. Rollins President and Chief Operating Officer (Member of the Board of Directors) Date: August 12, 1999 By: /s/ Harry J. Cynkus ------------------------------ Harry J. Cynkus Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 12