EXHIBIT (13)
Report Of Management
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To the Stockholders of Rollins, Inc.:
We have prepared the accompanying financial statements and related
information included herein for the years ended December 31, 1994, 1993 and
1992. The opinion of Arthur Andersen LLP, the Company's independent auditors,
on those financial statements is included herein. The primary responsibility
for the integrity of the financial information included in this annual report
rests with management. Such information was prepared in accordance with
generally accepted accounting principles, appropriate in the circumstances,
based on our best estimates and judgements and giving due consideration to
materiality.
Rollins, Inc. maintains internal accounting control systems which are
adequate to provide reasonable assurance that assets are safeguarded from
loss or unauthorized use and which produce records adequate for preparation
of financial information. The system and controls and compliance therewith
are reviewed by an extensive program of internal audits and by our
independent auditors. There are limits inherent in all systems of internal
accounting control based on the recognition that the cost of such a system
should not exceed the benefits to be derived. We believe the Company's system
provides this appropriate balance.
The Board of Directors pursues its review and oversight role for these
financial statements through an Audit Committee composed of three outside
directors. The Audit Committee's duties include recommending to the Board of
Directors the appointment of an independent accounting firm to audit the
financial statements of Rollins, Inc. The Audit Committee meets periodically
with management and the Board of Directors. It also meets with
representatives of the internal and independent auditors and reviews the work
of each to ensure that their respective responsibilities are being carried
out and to discuss related matters. Both the internal and independent
auditors have direct access to the Audit Committee.
R. Randall Rollins
R. Randall Rollins
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Gene L. Smith
Gene L. Smith
CHIEF FINANCIAL OFFICER, SECRETARY, AND TREASURER
February 13, 1995
Quarterly Information
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Stock Prices and Dividends
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(Rounded to the nearest 1/8) Stock Prices
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High Low Dividends Paid
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1994
First Quarter $30 3/4 $26 3/4 $.12 1/2
Second Quarter 28 3/8 24 3/8 .12 1/2
Third Quarter 26 1/8 23 1/4 .12 1/2
Fourth Quarter 25 1/2 22 1/8 .12 1/2
1993
First Quarter $26 7/8 $23 5/8 $.11
Second Quarter 25 7/8 21 1/2 .11
Third Quarter 26 22 1/2 .11
Fourth Quarter 27 3/4 21 3/4 .11
THE NUMBER OF STOCKHOLDERS OF RECORD AS OF DECEMBER 31, 1994 WAS 3,956.
12
Quarterly Information (CONTINUED)
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Profit and Loss Information
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(in thousands except per share data) First Second Third Fourth
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1994
Revenues $136,443 $171,874 $158,002 $139,008
Operating Income 13,755 36,285 22,906 15,984
Net Income 6,888 21,066 13,011 8,596
Earnings per Share .19 .59 .36 .25
1993
Revenues $127,295 $163,248 $151,808 $133,451
Operating Income 11,872 32,708 21,228 15,312
Net Income 5,867 19,071 11,688 7,843
Earnings per Share .16 .54 .33 .22
1992
Revenues $117,449 $150,204 $137,732 $122,281
Operating Income 10,502 28,712 18,706 12,782
Net Income 5,087 16,382 10,295 6,238
Earnings per Share .14 .47 .28 .18
Management's Discussion And Analysis
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Results of Operations
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Selected Industry Segment Data % Change From Prior Year
increase/(decrease)
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(in thousands) 1994 1993 1992 1994 1993
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REVENUES
Orkin $530,099 $506,399 $461,971 4.7% 9.6%
Rollins Protective 61,692 57,698 55,942 6.9 3.1
Other 13,536 11,705 9,753 15.6 20.0
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$605,327 $575,802 $527,666 5.1 9.1
-------- -------- --------
-------- -------- --------
OPERATING INCOME
Orkin $ 78,711 $ 70,720 $ 61,687 11.3 14.6
Rollins Protective 6,579 5,896 5,398 11.6 9.2
Other 3,640 4,504 3,617 (19.2) 24.5
-------- -------- --------
$ 88,930 $ 81,120 $ 70,702 9.6% 14.7%
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13
Management's Discussion And Analysis (CONTINUED)
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GENERAL OPERATING COMMENTS
Rollins, Inc.'s consolidated revenues of $605.3 million were 5.1% higher than
in 1993. Operating income increased $7.8 million or 9.6% over the prior year.
Operating margins improved 4.3% over 1993 compared to 1993's improvement over
1992 of 5.2%.
Despite the impact of the extremely cold winter and spring on the pest
season, the Company was able to produce consistent earnings increases. These
earnings increases affirm the emphasis that management and employees place on
customer service, improved productivity, training, efficient sales and marketing
programs, and improved cost controls.
Operating profit margins for the Orkin business segment increased 5.7%
over the prior year. This compares to a 4.5% margin improvement from 1993
over 1992. Rollins Protective Services' operating margins increased 4.9% over
1993. This compares to 6.3% margin improvement from 1993 over 1992.
ORKIN 1994 VERSUS 1993
Orkin revenues increased 4.7% to $530.1 million and operating income
increased 11.3% to $78.7 million for the year ended December 31, 1994,
compared to the same period last year. Orkin experienced a disappointing pest
season unlike any in its history; however, Pest Control and Termite services
increased their sales dollars and customer base for the year. Orkin
maintained its commitment to expanding existing operations by entering new
geographic markets with the opening of nine new branches. Future growth will
come form internal and external expansion.
The fundamentals and financial position of the Pest Control business
remain very strong. Orkin is motivated to take full advantage of market
opportunities through alternative services such as the Agribusiness service,
which produced strong revenue gains again in 1994. Success with other new
marketing and service programs also contributed to revenue and operating
income improvements. These programs included the introduction of a 24-hour
1-800-34ORKIN service and a neighborhood solicitation campaign. The
neighborhood campaign was expanded during the summer of 1994 in selected
markets and exceeded sales expectations. Orkin utilized its telemarketing
program to make customer quality assurance calls which provided both customer
satisfaction confirmation and the expansion of Orkin services. Additionally,
sales benefits of cross-marketing other Rollins services were achieved.
Approximately 98% of the customers surveyed reported that they are pleased
with our service, which creates an ideal prospect for additional Rollins
services.
Orkin Plantscaping focused on sales and service basics in 1994, including
formalizing sales proposals, developing new sales brochures, and managing the
quality and selection of plant inventory. To address a soft year,
Plantscaping concentrated on training employees to better address customers
needs and improve creative sales skills. With a renewed focus and a favorable
economic outlook in 1995, management expects improved operating results.
Effective December 31, 1994, Orkin Lawn Care completed the strategic
restructuring of the operation by selling eleven Northern locations, to
strengthen the focus on the more profitable locations, principally in the
Sunbelt. Management believes that with a stronger base of recurring revenue and
a clearer focus on their markets and customers, Lawn Care will have a favorable
operating performance in 1995.
ORKIN 1993 VERSUS 1992
The Orkin business segment had 1993 revenues and operating income increases
of 9.6% and 14.6%, respectively, over the results achieved in 1992. Orkin
Pest Control's revenue increases were the result of our continued emphasis on
providing premium services, improved customer service, opening new branches,
expanding our customer base, and the successful introduction of new
services. Marketing programs included an effective, highly focused national
advertising campaign, the money-back guarantee expanded to termite control,
and our new Agribusiness service. Operating income benefited from increased
employee productivity, further improvement in the control of operating costs,
and revenue growth resulting from new customers and new services.
Orkin Plantscaping's operating results were impacted by slowdowns in
commercial real estate construction. Revenues increased primarily due to
expanded Holiday, Exterior Color, and National Accounts Programs.
Cross-marketing efforts by Orkin Pest Control and Orkin Plantscaping have
enabled Plantscaping to increase its national corporate customer list. During
1993, Plantscaping continued to improve operational efficiencies, enhance
service delivery and efficiency, and provide internal standardization among
its nine major markets.
Orkin Lawn Care sustained its improving trends with increased sales,
customer retention, better cost controls, and employee productivity.
Additionally, the Lawn Care division introduced new services during 1993
which increased revenues and operating income.
14
Management's Discussion And Analysis (CONTINUED)
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ROLLINS PROTECTIVE SERVICES 1994 VERSUS 1993
Rollins Protective Services (RPS) had 1994 revenues of $61.7 million, an
increased of 6.9%, and operating income improved 11.6% to $6.6 million.
Revenue growth in 1994 was driven by the expansion of the commercial and
National Accounts programs and the opening of two new locations. RPS enjoys
one of the highest customer retention rates in the industry. Customer
acceptance of the new Vision 2000 system, a state-of-the-art home
surveillance security system, has been strong and should strengthen the 1995
operating results.
RPS plans to introduce several new security system products in 1995, which
should enable the Company to build on the 1994 operating results and remain a
leading provider of residential and commercial security systems. RPS will
extend several successful programs tested in 1994, targeted at customer
retention, National Accounts and residential sales. New branch openings are
also planned in 1995.
ROLLINS PROTECTIVE SERVICES 1993 VERSUS 1992
RPS had 1993 revenues and operating income increases of 3.1% and 9.2%,
respectively, over the results achieved in 1992. Operational improvements were
reported by the RPS division in 1993 primarily due to improvements made in the
third and fourth quarters with more effective sales programs and a concentration
on improved service delivery resulting in stronger customer retention.
Financial Condition
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% Change From Prior Year
increase/(decrease)
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(Dollars in thousands) 1994 1993 1992 1994 1993
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Cash and Short-Term Investments $ 31,917 $ 18,102 $ 20,061
Marketable Securities 51,820 50,991 30,657
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$ 83,737 $ 69,093 $ 50,718 21.2% 36.2%
Working Capital $148,010 $117,528 $ 89,944 25.9 30.7
Current Ratio 3.2 2.8 2.4 14.3 16.7
Cash Provided by Operations $ 39,340 $ 40,034 $ 33,319 (1.7)% 20.2%
Rollins, Inc.'s financial position remained solid. The Company's operations
have historically provided a strong positive cash flow which represents the
Company's principal source of funds.
Net trade receivables increased $14.4 million or 16.4% at December 31, 1994
compared with the prior year. Trade receivables include installment
receivable amounts which are due subsequent to one year from the balance
sheet date. These amounts were approximately $33.8 million and $28.7 million
at the end of 1994 and 1993, respectively. The increase in receivables was
attributed to increased revenue and the expansion of Orkin termite and
Rollins Protective Services financed customer marketing programs. During the
fourth quarter 1994, management performed a major evaluation of the Company's
credit and internal operating policies within the credit service center.
Management instituted a revision of these credit policies which refines
marketing efforts toward stronger customer demographics, while providing a
higher average contract price. The objectives of these changes are to
increase our average dollar sales unit purchased, and reduce doubtful account
exposure. Corporate management will ensure that these operational and policy
changes are effectively implemented.
During 1994, the Company invested $9.0 million in capital expenditures and
acquisitions. Also, $17.9 million was paid out in cash dividends. The Company
has and expects to continue funding these cash requirements from operations.
In addition to a very strong cash position, the Company maintains a $40.0
million unused line of credit. This source of funds has not been used but is
available for future acquisitions and growth.
15
Statements Of Financial Position
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ROLLINS, INC. AND SUBSIDIARIES
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At December 31, (in thousands except share data) 1994 1993
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Assets
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Cash and Short-Term Investments $ 31,917 $ 18,102
Marketable Securities 51,820 50,991
Trade Receivables, Net 101,900 87,518
Materials and Supplies 16,250 15,829
Deferred Income Taxes 4,445 4,980
Other Current Assets 8,567 7,112
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Current Assets 214,899 184,532
Equipment and Property, Net 27,989 28,890
Intangible Assets 42,092 42,171
Other Assets 10,285 11,601
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Total Assets $295,265 $267,194
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-------- --------
Liabilities
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Accounts Payable $ 12,002 $ 12,279
Accrued Insurance Expenses 14,258 13,600
Accrued Payroll 12,700 15,519
Unearned Revenue 15,567 12,854
Other Expenses 12,362 12,752
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Current Liabilities 66,889 67,004
Deferred Income Taxes 12,205 12,983
Long-Term Accrued Liabilities 22,538 26,699
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Total Liabilities 101,632 106,686
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Commitments and Contingencies
Stockholders' Equity
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Common Stock, par value $1 per share; authorized
99,500,000 shares; 41,431,814 shares issued 41,432 41,432
Earnings Retained 203,582 171,862
-------- --------
245,014 213,294
Less -- Common Stock in Treasury, at Cost,
5,605,412 shares in 1994; 5,758,619 shares in 1993 51,381 52,786
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Total Stockholders' Equity 193,633 160,508
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Total Liabilities and Stockholders' Equity $295,265 $267,194
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
16
Statements Of Income
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ROLLINS, INC. AND SUBSIDIARIES
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Years Ended December 31, (in thousands except per share data) 1994 1993 1992
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Revenues
Customer Services $605,327 $575,802 $527,666
-------- -------- --------
Costs and Expenses
Cost of Services Provided 311,315 293,499 271,518
Sales, General and Administrative Expenses 208,289 203,483 187,238
Depreciation and Amortization 8,130 8,310 7,966
Interest Income (2,994) (2,390) (1,870)
-------- -------- --------
524,740 502,902 464,852
-------- -------- --------
Income Before Income Taxes 80,587 72,900 62,814
-------- -------- --------
Provision (Credit) For Income Taxes
Current 30,201 30,339 25,317
Deferred 825 (1,908) (505)
-------- -------- --------
31,026 28,431 24,812
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Net Income $ 49,561 $ 44,469 $ 38,002
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Earnings per Share $ 1.39 $ 1.25 $ 1.07
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Average Shares Outstanding 35,770 35,638 35,569
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Statements Of Earnings Retained
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ROLLINS, INC. AND SUBSIDIARIES
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Years Ended December 31, (in thousands except per share data) 1994 1993 1992
------------- -------------- --------------
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Balance at Beginning of Year $171,862 $141,999 $131,602
Net Income 49,561 44,469 38,002
Cash Dividends (17,887) (15,680) (14,226)
Other 46 1,074 445
Adjustment for Three-for-Two-Stock Split -- -- (13,824)
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Balance at End of Year $203,582 $171,862 $141,999
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Dividends per Share $ .50 $ .44 $ .40
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
17
Statements Of Cash Flows
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ROLLINS, INC. AND SUBSIDIARIES
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Years Ended December 31, (in thousands) 1994 1993 1992
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Operating Activities
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Net Income $ 49,561 $ 44,469 $38,002
Noncash Charges (Credits) to Earnings:
Depreciation and Amortization 8,130 8,310 7,966
Deferred Income Taxes 825 (1,908) (505)
Other, Net 2,382 3,152 3,292
(Increase) Decrease in:
Trade Receivables (14,257) (20,474) (13,966)
Materials and Supplies (421) 1,477 (2,643)
Other Current Assets (3,183) 3,473 (3,821)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses (2,676) 924 3,597
Unearned Revenue 2,713 3,347 1,009
Non-Current Deferred Income Taxes 1,076 (5,767) 753
Long-Term Accrued Liabilities (4,277) 3,643 837
Other Non-Current Assets (533) (612) (1,202)
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Net Cash Provided by Operating Activities 39,340 40,034 33,319
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Investing Activities
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Purchases of Equipment and Property (8,256) (7,690) (6,645)
Net Cash Used for Acquisition of Companies (740) (397) (4,299)
Marketable Securities, Net (1,910) (20,334) (30,657)
Proceeds from Sale of Equipment and Property 1,152 288 339
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Net Cash Used in Investing Activities (9,754) (28,133) (41,262)
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Financing Activities
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Dividends Paid (17,887) (15,680) (14,226)
Treasury Stock Issued to Benefit Plans 2,116 1,820 1,000
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Net Cash Used in Financing Activities (15,771) (13,860) (13,226)
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Net Increase (Decrease) in Cash and
Short-Term Investments 13,815 (1,959) (21,169)
Cash and Short-Term Investments
at Beginning of Year 18,102 20,061 41,230
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Cash and Short-Term Investments
at End of Year $ 31,917 $ 18,102 $ 20,061
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-------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
18
Notes To Financial Statements
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YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992. ROLLINS, INC. AND SUBSIDIARIES
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Rollins, Inc. (the Company) and its subsidiaries. All
significant intercompany transactions and balances have been eliminated.
REVENUES-Revenue is recognized at the time services are performed.
CASH AND SHORT-TERM INVESTMENTS - The Company considers all investments
with a maturity of three months or less to be cash equivalents. Short-term
investments are stated at cost which approximates fair value.
MARKETABLE SECURITIES-Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under this statement, the
Company's marketable securities are classified as "available-for-sale" and
have been recorded at current market value with an offsetting adjustment to
stockholders' equity. The adoption of this statement did not have a material
effect on the Company's financial position.
MATERIALS AND SUPPLIES-Materials and supplies are recorded at the lower of
cost (first-in, first-out basis) or market.
EQUIPMENT AND PROPERTY-Depreciation and amortization are provided
principally on a straight-line basis over the estimated useful lives of the
related assets. Annual provisions for depreciation are computed using the
following asset lives: buildings, 10 to 40 years; and furniture, fixtures,
and operating equipment, 3 to 10 years. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation and
amortization are eliminated from the accounts in the year of disposal with
the resulting gain or loss credited or charged to income. Expenditures for
additions, major renewals and betterments are capitalized and expenditures
for maintenance and repairs are expensed as incurred.
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 non-current portion of these
estimated outstanding claims comprises most of the long-term accrued liabilities
balance shown on the Statements of Financial Position.
INCOME TAXES-Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". SFAS 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial and tax basis using enacted tax rates in effect for the year in
which the differences are expected to reverse. These differences are more
inclusive in nature than differences determined under previously applicable
accounting principles.
COMMON STOCK-Earnings per share is computed on the basis of
weighted-average shares outstanding. Stock options outstanding do not have a
significant dilutive effect.
2. TRADE RECEIVABLES
Trade receivables, net, at December 31, 1994, totalling $101,900,000 and at
December 31, 1993, totalling $87,518,000 are net of allowances for doubtful
accounts of $5,944,000 and $4,548,000, respectively. Trade receivables
include installment receivable amounts which are due subsequent to one year
from the balance sheet dates. These amounts were approximately $33,849,000
and $28,737,000 at the end of 1994 and 1993, respectively. The carrying
amount of installment receivables approximates fair value because the
interest rates approximate market rates.
3. EQUIPMENT AND PROPERTY
Equipment and property are presented at cost less accumulated depreciation
and are detailed as follows:
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(in thousands) 1994 1993
---------------------------------------
---------------------------------------
Buildings $ 9,014 $ 8,666
Operating equipment 59,168 55,932
Furniture and fixtures 10,688 11,078
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78,870 75,676
Less-accumulated depreciation 54,016 49,881
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24,854 25,795
Land 3,135 3,095
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$27,989 $28,890
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------- -------
19
4. INTANGIBLE ASSETS
Intangible assets represent goodwill arising from acquisitions and are
stated at cost less accumulated amortization. Intangibles which arose from
acquisitions prior to November, 1970 are not being amortized for financial
statement purposes, since, in the opinion of management, there has been no
decrease in the value of the acquired businesses. Intangibles arising from
acquisitions since November, 1970 are being amortized over forty years.
5. INCOME TAXES
A reconciliation between taxes computed at the statutory rate on the income
before income taxes and the provision for income taxes is as follows:
---------------------------------------
(in thousands) 1994 1993 1992
---------------------------------------
---------------------------------------
Federal income taxes
at statutory rate $28,205 $25,515 $21,357
State income taxes
(net of federal benefit) 3,286 3,137 3,148
Other (465) (221) 307
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$31,026 $28,431 $24,812
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------- ------- -------
The provision for income taxes was based on a 38.5%, 39.0% and 39.5%
estimated effective income tax rate on income before income taxes for the
years ended December 31, 1994, 1993, and 1992, respectively. The effective
income tax rate differs from the annual federal statutory tax rate primarily
because of state income taxes.
The deferred income tax debits (credits) for the three year period ended
December 31, 1994 are due to differences between financial and income tax
reporting. A summary of those deferred income tax debits (credits) is as
follows:
---------------------------------------
(in thousands) 1994 1993 1992
---------------------------------------
---------------------------------------
Self-insurance $ 1,775 $ 1,761 $ 1,752
Safe harbor lease (1,464) (1,274) (1,085)
Depreciation (335) (593) (544)
Other 849 (1,802) (628)
------- ------- -------
$ 825 $(1,908) $ (505)
------- ------- -------
------- ------- -------
Income taxes remitted were $33,915,000, $25,796,000, and $24,447,000 for
the years ended December 31, 1994, 1993, and 1992, respectively.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". The
cumulative effect of the change in the method of accounting for income taxes
attributable to years prior to 1993 was not material.
The tax effect of the temporary differences which comprise the current and
non-current deferred income tax debits (credits) amounts is as follows:
---------------------------------------
(in thousands) 1994 1993
---------------------------------------
---------------------------------------
Deferred Tax Assets (Liabilities)
Insurance reserves $ 13,801 $ 13,551
Safe harbor lease (16,955) (17,268)
Accruals (6,233) (5,685)
Payroll and related accruals 745 1,571
Other 882 (172)
-------- -------
$ (7,760) $(8,003)
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-------- -------
During 1982, the Company entered into a twenty-year "Safe Harbor" lease
agreement under the Economic Recovery Tax Act of 1981 for the purchase of
federal income tax benefits. The Company has invested $29,096,000 in the
lease. The investment in tax benefits from the safe harbor lease agreement
has been allocated between investment tax credit benefits and tax deduction
timing benefits. The investment amount has been reflected as a reduction in
non-current deferred income taxes. Amortization of timing benefits into
expense is computed at a constant rate of return.
20
6. COMMITMENTS AND CONTINGENCIES
Minimum annual rentals for non-cancelable leases with terms in excess of one
year, in effect at December 31, 1994, are summarized as follows:
-----------------------------------------------------
(in thousands) Real Estate Vehicles Other Total
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-----------------------------------------------------
1995 $ 9,362 $ 8,491 $ 930 $18,783
1996 8,762 5,319 451 14,532
1997 8,122 1,938 50 10,110
1998 7,186 335 16 7,537
1999 6,084 -- 8 6,092
Thereafter 38,666 -- -- 38,666
------- ------- ------- -------
$78,182 $16,083 $ 1,455 $95,720
------- ------- ------- -------
------- ------- ------- -------
Total rental expense charged to operations was $24,867,000, $24,274,000,
and $23,384,000 for the years ended December 31, 1994, 1993, and 1992,
respectively.
On May 26, 1993, the Attorney General of Missouri and several Missouri
residents who received termite treatment from Orkin, on behalf of themselves
and an alleged class, filed an action in the City of St. Louis Circuit Court.
The Attorney General has alleged violations of the Missouri Merchandising
Practices Act. The private plaintiffs have alleged fraud and breach of
certain termite extermination contracts. The Plaintiffs' claims are based on
allegations that the Company failed to apply termiticides in accordance with
termiticide labels and its advertising. Plaintiffs are collectively seeking
restitution for claimed losses, civil penalties, compensatory and punitive
damages, and litigation expenses, including attorneys' fees. On June 1, 1994,
the Court ruled Plaintiffs' would be permitted to pursue a class action
lawsuit against Orkin. The class was limited to those Missouri customers who
purchased termite extermination services between January 1, 1987 and May 15,
1993, inclusively, and who have basement or crawl space foundation walls, in
which an organophosphate termiticide was used.
The Company is vigorously defending this lawsuit. Except for the class
certification, the judicial system has not ruled on any substantive issues in
this case. Due to the preliminary nature of this action, the final outcome
of the litigation cannot be determined at this time. 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 and will take an extended time to resolve.
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.
7. Business Segment Information
The Company operates two major business segments. Certain information with
respect to the Company's business segments is as follows:
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(in thousands) 1994 1993 1992
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---------------------------------------
REVENUES
Orkin $530,099 $506,399 $461,971
Rollins Protective 61,692 57,698 55,942
Other 13,536 11,705 9,753
-------- -------- --------
$605,327 $575,802 $527,666
-------- -------- --------
-------- -------- --------
OPERATING INCOME
Orkin $ 78,711 $ 70,720 $ 61,687
Rollins Protective 6,579 5,896 5,398
Other 3,640 4,504 3,617
-------- -------- --------
88,930 81,120 70,702
OTHER
Corporate expenses, net (11,337) (10,610) (9,758)
Interest income 2,994 2,390 1,870
Income before
income taxes $ 80,587 $ 72,900 $ 62,814
-------- -------- --------
-------- -------- --------
IDENTIFIABLE ASSETS
Orkin $169,750 $161,850 $145,115
Rollins Protective 21,236 18,420 18,535
Other 104,279 86,924 72,641
-------- -------- --------
$295,265 $267,194 $236,291
-------- -------- --------
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21
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(in thousands) 1994 1993 1992
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----------------------------------
DEPRECIATION AND
AMORTIZATION EXPENSE
Orkin $6,556 $6,992 $6,163
Rollins Protective 448 433 1,076
Other 1,126 885 727
------ ------ ------
$8,130 $8,310 $7,966
------ ------ ------
------ ------ ------
CAPITAL EXPENDITURES
Orkin $6,530 $5,919 $5,320
Rollins Protective 466 413 349
Other 1,372 1,395 1,373
------ ------ ------
$8,368 $7,727 $7,042
------ ------ ------
------ ------ ------
8. Employee Benefit Plans
The Company maintains a noncontributory, tax-qualified defined benefit
retirement plan covering all employees meeting certain age and service
requirements. The qualified plan provides benefits based on the average
compensation for the highest five years during the last ten years of credited
service (as defined) in which compensation was received, and the average
anticipated Social Security covered earnings. The Company funds the Plan with
at least the minimum amount required by ERISA.
The Company's net pension expense for the past three years is summarized as
follows:
----------------------------------
(in thousands) 1994 1993 1992
----------------------------------
----------------------------------
Service cost-benefits
earned during the period $ 2,749 $ 2,345 $ 2,057
Interest cost on projected
benefit obligation 3,524 3,248 2,827
Actual return on plan assets 1,445 (4,218) (4,976)
Net amortization
of transition asset (1,181) (1,099) (1,099)
Deferral of net
investment gain (loss) (5,718) 227 1,255
------- ------- --------
Net pension expense $ 819 $ 503 $ 64
------- ------- --------
------- ------- --------
The funded status of the Plan is summarized as follows at December 31:
---------------------
(in thousands) 1994 1993
---------------------
---------------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation
including vested benefits of
$32,261 in 1994 and
$31,265 in 1993 $(34,994) $(33,989)
Effect of projected future
compensation levels (8,412) (8,468)
-------- --------
Projected benefit obligation (43,406) (42,457)
Plan assets at fair value 44,837 48,153
-------- --------
Plan assets in excess of
projected obligation 1,431 5,696
Unrecognized net loss 4,489 1,574
Unrecognized net asset at transition
being amortized over 10 years (2,876) (4,026)
Unrecognized prior service cost (355) 264
-------- --------
Prepaid pension expense
included in other assets $ 2,689 $ 3,508
-------- --------
-------- --------
At December 31, 1994, the Plan's assets were comprised of listed common
stocks and U.S. Government and corporate securities. Included in the assets
of the Plan were shares of Rollins common stock with a market value of
$7,000,000. The expected long-term rate of return on plan assets was 9.5%
in 1994, 1993, and 1992. The weighted-average discount rate used in determining
the projected benefit obligation was decreased from 8.5% in 1992 to 8.0% in
1993 and increased to 8.5% in 1994 to more closely approximate rates on high-
quality, long-term obligations. The assumed growth rate of compensation
decreased from 6.0% in 1992 to 5.5% in 1993 and 1994.
The Company sponsors a deferred compensation 401(k) plan that is available
to substantially all employees with six months of service. The charges to
expense for the Company match were $1,465,000 in 1994, $1,379,000 in 1993, and
$1,320,000 in 1992.
22
The Company has an Employee Incentive Stock Option Plan (1984 Plan), adopted
in October, 1984, under which 1,200,000 shares of common stock were subject to
options to be granted during the ten-year period ended October, 1994. The
options were granted at the fair market value of the shares on the date of the
grant and expire ten years from the date of the grant, if not exercised. No
additional options will be granted under this Plan.
On January 25, 1994, the Company adopted a new Employee Stock Incentive Plan
(1994 Plan) under which 1,200,000 shares of common stock are subject to grants
through January 25, 2004 under various stock incentive programs. During 1994,
200,900 grant units were initially awarded under stock incentive programs at
a grant price of $28 3/8. None of these awards were exercisable nor vested as
of December 31, 1994 due to the specific progams' requirements.
Option transactions during the last three years for the 1984 Plan are
summarized as follows:
-------------------------------------
(Number of shares) 1994 1993 1992
-------------------------------------
-------------------------------------
Outstanding at
January 1, 114,206 117,781 129,915
Granted -- 9,900 9,900
Exercised (36,009) (9,965) (17,715)
Cancelled (4,340) (3,510) (4,319)
-------- -------- --------
Outstanding at
December 31, 73,857 114,206 117,781
Exercisable at
December 31, 46,857 70,976 68,671
-------- -------- --------
Option price ranges per share:
Granted $ -- $ 25.50 $ 19.08
Exercised 5.92-25.50 5.92-13.25 5.92-13.25
Cancelled 5.92-25.50 12.58-25.50 5.92-13.25
Outstanding 7.00-25.50 5.92-25.50 5.92-19.08
Report of Independent Auditors
- --------------------------------------------------------------------------------
To the Directors and Stockholders of Rollins, Inc.:
We have audited the accompanying statements of financial position of Rollins,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1993
and the related statements of income, earnings retained and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rollins, Inc. and
subsidiaries as of December 31, 1994 and 1993 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Atlanta, Georgia
February 13, 1995
23
Five-Year Financial Summary
- --------------------------------------------------------------------------------
Rollins, Inc. and Subsidiaries
------------------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------------------
------------------------------------------------------------
Operations Summary
- -------------------------------------------
(in thousands except per share data)
Revenues $605,327 $575,802 $527,666 $475,555 $436,398
Cost of Services Provided 311,315 293,499 271,518 247,994 230,107
Sales, General and
Administrative 208,289 203,483 187,238 169,825 155,904
Depreciation and
Amortization 8,130 8,310 7,966 7,806 7,482
Interest Income (2,994) (2,390) (1,870) (2,134) (2,460)
-------- -------- -------- -------- --------
Income Before
Income Taxes 80,587 72,900 62,814 52,064 45,365
Income Taxes 31,026 28,431 24,812 20,565 17,919
-------- -------- -------- -------- --------
Net Income $ 49,561 $ 44,469 $ 38,002 $ 31,499 $ 27,446
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings per Share $ 1.39 $ 1.25 $ 1.07 $ .89 $ .77
Dividends per Share $ .50 $ .44 $ .40 $ .39 $ .37
Cash Provided by
Operations $ 39,340 $ 40,034 $ 33,319 $ 31,987 $ 36,350
Capital Expenditures $ 8,368 $ 7,727 $ 7,042 $ 8,536 $ 8,929
Total Assets $295,265 $267,194 $236,291 $204,577 $177,961
Long-Term Debt -- -- -- -- --
Stockholders' Equity $193,633 $160,508 $129,899 $105,137 $ 86,718
Selected Ratio Analysis
- -------------------------------------------
(As a % of revenues except return on
average equity)
Cost of Services Provided 51.5% 51.0% 51.5% 52.1% 52.7%
Sales, General and
Administrative 34.4 35.3 35.5 35.7 35.7
Depreciation and
Amortization 1.3 1.4 1.5 1.6 1.7
Interest Income (0.5) (0.4) (0.4) (0.4) (0.6)
Income Before
Income Taxes 13.3 12.7 11.9 11.0 10.5
Net Income 8.2 7.7 7.2 6.6 6.3
Return on Average Equity 28.0 30.6 32.3 32.8 34.5
Shares Outstanding
- -------------------------------------------
(In thousands)
Average 35,770 35,638 35,569 35,510 35,465
At Year End 35,826 35,673 35,592 35,532 35,478
24
Directors, Officers and Stockholders' Information
- --------------------------------------------------------------------------------
DIRECTORS
JOHN W. ROLLINS
Chairman of the Board and Chief Executive Officer of Rollins Truck Leasing Corp.
(vehicle leasing and transportation), Chairman of the Board and Chief Executive
Officer of Rollins Environmental Services, Inc. (hazardous waste treatment and
disposal)
HENRY B. TIPPIE+
Chairman of the Board and Chief Executive Officer of Tippie Communications, Inc.
et. al. (radio stations)
R. RANDALL ROLLINS*
Chairman of the Board and Chief Executive Officer of Rollins, Inc., Chairman of
the Board and Chief Executive Officer of RPC Energy Services, Inc. (oil and gas
field services, and boat manufacturing)
WILTON LOONEY+
Honorary Chairman of the Board of Genuine Parts Company (automotive parts
distributor)
JAMES B. WILLIAMS+
Chairman, Chief Executive Officer, and Director of SunTrust Banks, Inc. (bank
holding company)
GARY W. ROLLINS*
President and Chief Operating Officer of Rollins, Inc.
BILL J. DISMUKE
President of Edwards Baking Company
*MEMBER OF THE EXECUTIVE COMMITTEE
+MEMBER OF THE AUDIT AND COMPENSATION COMMITTEES
OFFICERS
R. RANDALL ROLLINS
Chairman of the Board and Chief Executive Officer
GARY W. ROLLINS
President and Chief Operating Officer
GENE L. SMITH
Chief Financial Officer, Secretary, and Treasurer
STOCKHOLDERS' INFORMATION
ANNUAL MEETING
The Annual Meeting of the Stockholders will be held at 9:30 a.m. Tuesday, April
25, 1995, at the Company's corporate offices in Atlanta, Georgia.
TRANSFER AGENT AND REGISTRAR
For inquiries related to stock certificates, including changes of address, lost
certificates, dividends, and tax forms, please contact:
Trust Company Bank
Corporate Trust Department
P.O. Box 4625
Atlanta, Georgia 30302
Telephone: 1-800-568-3476
STOCK EXCHANGE INFORMATION
The Common Stock of the Company is listed on the New York and Pacific Stock
Exchanges and traded on the Philadelphia, Chicago and Boston Exchanges under the
symbol ROL.
DIVIDEND REINVESTMENT PLAN
This Plan provides a simple, convenient, and inexpensive way for stockholders to
invest cash dividends in additional Rollins, Inc. shares. For further
information, contact Trust Company Bank at the above address or write to the
Secretary at the Company's mailing address.
FORM 10-K
The Company's annual report on Form 10-K to the Securities and Exchange
Commission provides certain additional information. Stockholders may obtain a
copy by contacting the Secretary at the Company's mailing address.
CORPORATE OFFICES
Rollins, Inc.
2170 Piedmont Road, N.E.
Atlanta, Georgia 30324
MAILING ADDRESS
Rollins, Inc.
P.O. Box 647
Atlanta, Georgia 30301
TELEPHONE
(404) 888-2000
25