Five-Year Financial Summary
Rollins, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Operations Summary
Revenues $ 538,639 $ 532,785 $529,788 $ 507,722 $ 479,809
Income (Loss) From Continuing Operations
After Income Taxes (104,781) 22,386 38,661 46,017 42,036
Income From Discontinued Operations
After Income Taxes 106,278 409 616 3,544 2,433
Net Income 1,497 22,795 39,277 49,561 44,469
Earnings (Loss) per Share
Continuing Operations (3.09) .63 1.08 1.29 1.18
Discontinued Operations 3.13 .01 .02 .10 .07
---------------------------------------------------------------
Basic and Diluted .04 .64 1.10 1.39 1.25
Dividends per Share .60 .58 .56 .50 .44
- ------------------------------------------------------------------------------------------------------------------
Financial Position
Total Assets $ 432,680 $ 296,656 $306,111 $ 285,922 $ 261,893
Working Capital 170,900 117,176 140,865 132,879 98,941
Long-Term Debt -- -- -- -- --
Stockholders' Equity 145,644 190,290 214,318 193,633 160,508
Shares Outstanding at Year-End 33,279 34,594 35,858 35,826 35,673
- ------------------------------------------------------------------------------------------------------------------
Table of Contents
Letter to Stockholders.......................................... 2
Termite Control................................................. 4
Pest Control.................................................... 6
Quarterly Information........................................... 8
Management's Discussion and Analysis............................ 9
Consolidated Financial Statements and Notes..................... 12
Reports of Management and Independent Auditors.................. 20
Directors, Officers, and Stockholders' Information.............. 21
Quarterly Information
Stock Prices
And Dividends
(Rounded to the nearest 1/8)
- ------------------------------------------------------------------------------------------------
Stock Prices Dividends Stock Prices Dividends
1997 High Low Paid 1996 High Low Paid
- ------------------------------------------------------------------------------------------------
First Quarter $ 19 7/8 $ 18 3/4 $.15 First Quarter $ 24 7/8 $ 20 3/4 $.14 1/2
Second Quarter 20 1/8 18 5/8 .15 Second Quarter 23 7/8 21 3/4 .14 1/2
Third Quarter 24 5/8 19 1/4 .15 Third Quarter 23 1/2 20 .14 1/2
Fourth Quarter 24 1/2 19 7/8 .15 Fourth Quarter 20 7/8 18 1/4 .14 1/2
The number of stockholders of record as of December 31, 1997 was 3,139.
- -------------------------------------------------------------------------------------------------
Profit And Loss
Information
(In thousands except per share data) First Second Third Fourth
- -------------------------------------------------------------------------------------------------
1997
Revenues $ 126,951 $ 154,371 $ 140,287 $ 117,030
Operating Income (Loss) 9,042 11,332 (18,188) (169,060)
Income (Loss) From Continuing Operations 5,095 6,219 (11,863) (104,232)
Income From Discontinued Operations 49 100 9,529 96,600
Net Income (Loss) 5,144 6,319 (2,334) (7,632)
Earnings (Loss) per Share
Continuing Operations .15 .19 (.36) (3.07)
Discontinued Operations .00 .00 .29 2.84
- -------------------------------------------------------------------------------------------------
Basic and Diluted .15 .19 (.07) (.23)
- -------------------------------------------------------------------------------------------------
1996
Revenues $ 119,978 $ 153,929 $ 138,728 $ 120,150
Operating Income 12,186 21,471 6,401 652
Income From Continuing Operations 6,183 12,716 3,355 132
Income (Loss) From Discontinued Operations 204 125 (49) 129
Net Income 6,387 12,841 3,306 261
Earnings per Share
Continuing Operations .17 .36 .09 .01
Discontinued Operations .01 .00 .00 .00
- -------------------------------------------------------------------------------------------------
Basic and Diluted .18 .36 .09 .01
- -------------------------------------------------------------------------------------------------
1995
Revenues $ 120,863 $ 152,434 $ 139,170 $ 117,321
Operating Income 16,513 33,555 5,668 13,464
Income From Continuing Operations 8,806 20,072 2,726 7,057
Income (Loss) From Discontinued Operations (999) 1,030 728 (143)
Net Income 7,807 21,102 3,454 6,914
Earnings (Loss) per Share
Continuing Operations .25 .56 .07 .20
Discontinued Operations (.03) .03 .02 .00
- -------------------------------------------------------------------------------------------------
Basic and Diluted .22 .59 .09 .20
- -------------------------------------------------------------------------------------------------
Management's Discussion and Analysis
- -------------------------------------------------------------------------------
Results of Operations
% Change From Prior Year
Increase/(Decrease)
(In thousands) 1997 1996 1995 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 538,639 $ 532,785 $ 529,788 1.1% 0.6%
Income (Loss) From Continuing
Operations After Income Taxes (104,781) 22,386 38,661 N/M (42.1)
Income From Discontinued Operations
After Income Taxes 106,278 409 616 N/M (33.6)
Net Income 1,497 22,795 39,277 (93.4) (42.0)
- ---------------------------------------------------------------------------------------------------------------------------
General Operating Comments
The divestitures of the Orkin Lawn Care and Plantscaping divisions in July
1997 and Rollins Protective Services (RPS) segment in October 1997 marked the
Company's return to a single operational focus. Accordingly, the results
reported in the table above are presented on a continuing operations basis.
Rollins, Inc.'s consolidated Revenues From Continuing Operations of $538.6
million were 1.1% higher than in 1996. Income (Loss) From Continuing Operations
After Income Taxes was ($104.8) million, $127.2 million worse than the prior
year. Income From Discontinued Operations After Income Taxes was $106.3 million.
Net income of $1.5 million was $21.3 million worse than the prior year.
Continuing Operations -- 1997 Versus 1996
The Company's 1.1% increase in revenues over 1996 was primarily due to
increases in customer base and recurring pest control and termite renewal
revenues significantly offset by the continuing decrease in termite sales
revenue resulting from a disappointing termite season, and restrictive changes
in sales policies in response to rising termite claims. The shortfall in termite
sales, increased insurance costs and termite claims, and other operating expense
increases correspondingly impacted income.
Programs in development during 1997 were designed to address customer
retention issues and to explore alternative sales and service strategies. Test
results for those programs were favorable, and they are being expanded
nationwide in 1998. Additionally, the field management organization was
strengthened via the reorganization of three previous residential divisions into
six new geographic divisions.
Through the investments made in 1997 and the successes we have seen in
testing these new marketing, customer satisfaction, employee training, and
employee retention programs, the Company has better positioned itself for
long-term growth in revenues, profits, and customer base.
During the year, the Company recorded expenses of $15,600,000 ($9,672,000
after tax or $0.28 per share) for expenditures related to the company-wide
computer systems modification to address the year 2000 programming issue. As a
result of this project, the Company's primary financial systems are now
essentially compliant with computer system requirements necessary to address the
new millennium.
Over the past several years, the termite treatment segment of the pest
control industry has faced great challenges in solving property owners' termite
problems. Some of the reasons for the increased difficulty in protecting
structures have been changes in building practices and materials that have
increased the property owners' potential for termites, the loss of Chlordane
from the market in 1987 which resulted in the use of termiticides that may only
last for a few years under some conditions, instead of decades, and laws and
regulations restricting certain retreatment practices. All of the above factors
have subjected termite service providers to experience elevated levels of
termite claims.
The Company's response to these industry-wide conditions is to undertake
broad changes in its own termite processes. New quality control and field
training programs, more thorough communication to customers concerning conducive
conditions, and restrictions on the sale of certain structures were initiated
during 1997.
9
Management's Discussion and Analysis (continued)
- -------------------------------------------------------------------------------
As a result of the factors described above and new information which became
available in 1997, a Provision for Termite Contracts of $117,000,000
($72,540,000 after tax or $2.14 per share) was recorded related to the
anticipated costs of reinspections, repair obligations, and associated labor,
chemicals, and other costs incurred relative to termite work performed prior to
December 31, 1997.
Going forward, changes to the termite protection period on new sales should
bring warranties for our customers more in line with the confirmed effectiveness
of the newer termiticide chemicals that have been used since 1987.
During the fourth quarter of 1997, an additional $15,000,000 ($9,300,000
after tax or $0.27 per share) was provided for estimated liabilities related to
the Company's self-insurance program for automobile, workers' compensation, and
general liability, and is included in Cost of Services Provided on the
Statements of Income. Additionally, reserves for bad debts were strengthened by
$8,000,000 ($4,960,000 after tax or $0.15 per share) during the fourth quarter,
with this amount being included in Sales, General and Administrative expenses.
Continuing Operations -- 1996 Versus 1995
The Company's 0.6% increase in revenues over 1995 was due to increases in
recurring pest control and termite renewal revenues in excess of the decrease in
termite sales revenue resulting from a substandard termite season. Customer base
increased over 1995 as a result of the Company's market expansion efforts. Orkin
Pest Control opened twenty-four new branches and added seven franchises in 1996.
In addition, eight business acquisitions were completed including locations in
Canada and Mexico.
The Company's pest control business strategies in 1996 were focused
primarily on commercial growth opportunities, new service technology and
employee training and development. A separate Orkin Commercial Division was
formed in 1996 to increase market share and better meet the specific needs of
commercial pest control customers. As a direct result, commercial sales and
margins as well as customer retention were all improved over 1995. The Company
plans to continue to aggressively seek growth opportunities in the commercial
market as part of its future expansion plans. In order to capitalize on these
opportunities, Orkin increased its investment in data processing and
communication technology.
Improvements in sales and service training were also initiated. The Orkin
University education program was instituted in 1996 to develop employees'
ongoing position-related knowledge through required and elective training.
Discontinued Operations
During the third quarter of 1997, the Company recorded the disposal of its
Lawn Care and Plantscaping businesses. The gain on the sale was $15,300,000
($9,486,000 after tax or $0.28 per share). These divestitures were completed as
part of the Company's shift towards a single operational focus on its core pest
and termite control business.
During the fourth quarter of 1997, the Company completed the sale of its
Rollins Protective Services (RPS) division. The gain on the sale was
$161,000,000 ($96,600,000 after tax or $2.84 per share). The divestiture of
RPS was in response to a major consolidation in the home security market,
triggered in part by deregulation permitting the regional Bell phone
companies to enter the industry. These circumstances, along with an
above-market purchase offer, made 1997 the appropriate time to exit this
segment of the consumer services market.
Revenues and Operating Income From Discontinued Operations After Income
Taxes for 1997 were $64,721,000 and $192,000, respectively. Income From
Discontinued Operations After Income Taxes for 1996 and 1995 were $409,000 and
$616,000, respectively.
10
Management's Discussion and Analysis (continued)
- -------------------------------------------------------------------------------
Financial Condition
% Change From Prior Year
Increase/(Decrease)
(Dollars in thousands) 1997 1996 1995 1997 1996
- ------------------------------------------------------------------------------------------------
Cash and Short-Term Investments $ 125,842 $ 12,150 $ 33,623
Marketable Securities 75,037 84,785 65,743
----------------------------------
200,879 96,935 99,366 N/M% (2.4)%
Working Capital 170,900 117,176 140,865 45.8 (16.8)
Current Ratio 2.3 2.7 3.2 (14.8) (15.6)
Total Assets 432,680 296,656 306,111 45.9 (3.1)
Rollins, Inc. maintains a strong financial position. The Company's operations
have historically provided a significant positive cash flow, which represents
the Company's principal source of funds. Interest income increased 27.2% due to
the increase in average funds invested in short-term investments and marketable
securities. These increases were largely the result of the business divestitures
which occurred during 1997.
Net trade receivables decreased $15.2 million or 23.7% compared with December
31, 1996. Trade receivables include installment receivables which are due
subsequent to one year from the balance sheet date. These amounts were
approximately $13.9 million and $19.5 million at the end of 1997 and 1996,
respectively. The decrease in receivables is primarily the result of decreased
financed sales, the increased provision for doubtful accounts, and the effect of
revisions to the Company's credit policies.
During 1997, the Company invested $10.4 million in capital expenditures and
acquisitions compared to $10.7 million in 1996. Also, $20.4 million was paid in
cash dividends and approximately 1.4 million shares of the Company's common
stock were purchased and retired in 1997. 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, if needed.
During the fourth quarter of 1997, Orkin received a letter from the Federal
Trade Commission (FTC) advising of their investigation of the pest control
industry - more specifically, the termite control practices of the industry. The
FTC has requested certain information voluntarily from Orkin and they have been
advised of our intention to cooperate fully with their investigation. At this
point in time, it is too early to determine the impact, if any, of this
investigation.
Impact of Recent Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in 1997. The adoption of these standards
effective with the year-end financial statements dated December 31, 1998 are not
expected to materially impact the results of operations or financial condition
of the Company.
Forward-Looking Statements
The Company may make forward-looking statements, as defined in the Private
Securities Litigation Reform Act of 1995, that are subject to certain risks,
trends, and uncertainties that could cause actual results to differ materially
from those anticipated. Among such risks, trends, and uncertainties are general
economic conditions, changes in industry practices or technologies, climate and
weather trends, competitive factors and pricing pressures, uncertainties of
litigation and changes in various government laws and regulations, including
environmental regulations.
11
Statements Of Financial Position
Rollins, Inc. and Subsidiaries
At December 31, (In thousands except share data) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and Short-Term Investments $ 125,842 $ 12,150
Marketable Securities 75,037 84,785
Trade Receivables, Net 49,166 64,400
Materials and Supplies 15,010 11,593
Deferred Income Taxes 24,826 4,379
Other Current Assets 11,737 9,699
--------------------------------------
Current Assets 301,618 187,006
Equipment and Property, Net 34,639 36,567
Intangible Assets 39,383 39,849
Deferred Income Taxes 49,072 --
Other Assets 7,968 10,040
Net Assets of Discontinued Operations -- 23,194
--------------------------------------
Total Assets $ 432,680 $ 296,656
--------------------------------------
--------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities
Capital Lease Obligations $ 3,138 $ 2,735
Accounts Payable 25,420 13,781
Accrued Insurance Expenses 21,225 15,053
Accrued Payroll 17,913 11,906
Unearned Revenue 13,831 11,677
Other Expenses 49,191 14,678
--------------------------------------
Current Liabilities 130,718 69,830
Capital Lease Obligations 9,239 12,163
Long-Term Accrued Liabilities 147,079 18,153
Deferred Income Taxes -- 6,220
--------------------------------------
Total Liabilities 287,036 106,366
--------------------------------------
--------------------------------------
Commitments and Contingencies
Stockholders' Equity
Common Stock, par value $1 per share; 99,500,000 shares
authorized; 33,279,281 and 34,594,481 shares issued 33,279 34,594
Earnings Retained 112,365 155,696
--------------------------------------
Total Stockholders' Equity 145,644 190,290
--------------------------------------
Total Liabilities and Stockholders' Equity $ 432,680 $ 296,656
--------------------------------------
--------------------------------------
The accompanying notes are an integral part of these statements.
12
Statements Of Income
Rollins, Inc. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues
Customer Services $538,639 $532,785 $529,788
----------------------------------------------
Costs and Expenses
Cost of Services Provided 362,225 302,929 272,709
Depreciation and Amortization 8,382 7,046 6,069
Provision for Termite Contracts 117,000 -- --
Sales, General and Administrative 227,622 192,669 193,641
Interest Income (7,588) (5,967) (4,988)
----------------------------------------------
707,641 496,677 467,431
----------------------------------------------
Income (Loss) From Continuing
Operations Before Income Taxes (169,002) 36,108 62,357
----------------------------------------------
Provision (Credit) for Income Taxes
Current 6,021 15,273 31,542
Deferred (70,242) (1,551) (7,846)
----------------------------------------------
(64,221) 13,722 23,696
----------------------------------------------
Income (Loss) From Continuing Operations (104,781) 22,386 38,661
----------------------------------------------
Discontinued Operations
Operating Income, Less Income Tax Expense
of $119, $250, and $377, Respectively 192 409 616
Gain on Disposal, Less Income Tax Expense
of $70,214 106,086 -- --
----------------------------------------------
Income From Discontinued Operations 106,278 409 616
----------------------------------------------
Net Income $ 1,497 $ 22,795 $ 39,277
----------------------------------------------
Earnings (Loss) per Share
Continuing Operations $ (3.09) $ .63 $ 1.08
Discontinued Operations 3.13 .01 .02
----------------------------------------------
Earnings per Share-Basic and Diluted $ .04 $ .64 $ 1.10
----------------------------------------------
Statements Of Earnings Retained
Rollins, Inc. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Year $ 155,696 $ 224,009 $ 203,582
Net Income 1,497 22,795 39,277
Cash Dividends (20,360) (20,669) (20,076)
Common Stock Purchased and Retired (24,733) (24,916) --
Common Stock in Treasury Retired -- (45,371) --
Other 265 (152) 1,226
----------------------------------------------
Balance at End of Year $ 112,365 $ 155,696 $ 224,009
Dividends per Share $ .60 $ .58 $ .56
----------------------------------------------
The accompanying notes are an integral part of these statements.
13
Statements Of Cash Flows
Rollins, Inc. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Net Income $ 1,497 $ 22,795 $ 39,277
Activities Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Termite Contracts 117,000 -- --
Provision for Self-Insurance Reserves 15,000 -- --
Provision for Bad Debts 8,000 -- 12,000
Depreciation and Amortization 8,382 7,046 6,069
Provision (Credit) for Deferred Income Taxes (69,228) 1,061 (14,926)
Discontinued Operations, Net of Taxes (106,278) (409) (616)
Other, Net 7,169 3,330 5,603
(Increase) Decrease in Assets:
Trade Receivables 7,505 9,313 (536)
Materials and Supplies (3,388) (535) 887
Other Current Assets (2,034) 4,250 (859)
Other Non-Current Assets -- (3,063) (1,167)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 17,780 5,408 3,147
Unearned Revenue 2,154 525 (884)
Long-Term Accrued Liabilities 2,121 2,210 (5,528)
--------------------------------------------------
Net Cash Provided by Operating Activities 5,680 51,931 42,467
--------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Investing Purchases of Equipment and Property (8,956) (8,292) (5,377)
Activities Net Cash Used for Acquisition of Companies (1,440) (2,373) (1,475)
Net Proceeds from Sale of Discontinued Operations,
Net of Current Taxes Paid 156,469 -- --
Marketable Securities, Net 9,846 (19,661) (12,463)
--------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 155,919 (30,326) (19,315)
--------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Financing Dividends Paid (20,360) (20,669) (20,076)
Activities Common Stock Purchased and Retired (26,083) (26,200) --
Proceeds from Capital Lease -- 5,500 --
Payments on Capital Leases (2,521) (1,314) --
Other 300 420 573
--------------------------------------------------
Net Cash Used in Financing Activities (48,664) (42,263) (19,503)
Net Cash Provided by (Used in)
Discontinued Operations 757 (815) (1,943)
--------------------------------------------------
Net Increase (Decrease) in Cash and
Short-Term Investments 113,692 (21,473) 1,706
Cash and Short-Term Investments
at Beginning of Year 12,150 33,623 31,917
--------------------------------------------------
Cash and Short-Term Investments
at End of Year $125,842 $ 12,150 $ 33,623
--------------------------------------------------
The accompanying notes are an integral part of these statements.
14
Notes To Financial Statements
Years ended December 31, 1997, 1996, and 1995, Rollins, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Business Description - Rollins, Inc. is a national service company with
headquarters located in Atlanta, Georgia, providing pest control and termite
control services to both residential and commercial customers.
Principles of Consolidation - The consolidated financial statements include
the accounts of Rollins, Inc. (the Company) and its subsidiaries. In July 1997,
the Company sold the assets of its Lawn Care and Plantscaping divisions. In
October 1997, the Company sold the alarm monitoring assets of its Rollins
Protective Services (RPS) business segment. The results of operations for the
Company for the years ended December 31, 1997, 1996, and 1995 have been restated
for these divestitures, with the results of the RPS business segment and its
Lawn Care and Plantscaping operations being shown as discontinued operations.
All significant intercompany transactions and balances have been eliminated.
Estimates Used in the Preparation of Financial Statements - The preparation
of the financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
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 market value.
Marketable Securities - 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.
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 which includes the
amortization of assets recorded under capital leases 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 is
included in the long-term accrued liabilities balance shown on the Statements of
Financial Position.
Advertising - Advertising expenses are charged to income during the year in
which they are incurred. The total advertising costs were approximately
$27,462,000, $26,253,000, and $25,440,000 in 1997, 1996, and 1995, respectively.
Income Taxes - The Company follows the practice of providing for income
taxes based on 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.
Earnings per Share - In 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share" (EPS) which
requires companies to present basic EPS and diluted EPS. Basic EPS is computed
on the basis of weighted-average shares outstanding. Diluted EPS is computed on
the basis of weighted-average shares outstanding plus common stock options
outstanding during the year which, if exercised, would have a dilutive effect on
EPS. Basic and diluted EPS are the same for all years reported. A reconciliation
of the number of weighted average shares used in computing basic and diluted EPS
are as follows:
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Basic EPS 33,896 35,478 35,849
Effect of dilutive stock options 137 46 55
--------------------------------------------
Diluted EPS 34,033 35,524 35,904
--------------------------------------------
--------------------------------------------
15
Notes To Financial Statements (continued)
Years ended December 31, 1997, 1996, and 1995, Rollins, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Stock-Based Compensation - In 1996, the Company adopted the disclosure-only
requirements of Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation." As permitted by SFAS 123, the Company
continues to account for employee stock compensation plans using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
Reclassifications - Certain amounts for previous years have been
reclassified to conform with the 1997 financial statement presentation.
2. Changes In Accounting Estimates
In the fourth quarter of 1997, the Company made certain changes in
accounting estimates totalling $23,000,000 ($14,260,000 after tax or $0.42 per
share) due to 1997 events and new information becoming available. The Company's
provision for its self-insurance program for automobile, workers' compensation,
and general liability was increased by $15,000,000. This provision has been
reflected on the Statements of Income in the line item entitled Cost of Services
Provided. The provision for bad debts was also increased by $8,000,000 and is
reflected on the Statements of Income in the line item entitled Sales, General
and Administrative expenses.
In the fourth quarter of 1997, a provision for termite contracts of
$117,000,000 ($72,540,000 after tax or $2.14 per share) was recorded related to
the estimated costs of reinspections, reapplications, repair claims and
associated labor, chemicals, and other costs incurred relative to termite work
performed prior to December 31, 1997. These anticipated costs reflect the
Company's response to current trends in the termite treatment segment of its
operations and the pest control industry. This provision has been reflected on
the Statements of Income in the line item entitled Provision for Termite
Contracts and on the Statements of Financial Position in Other Expenses
($26,000,000) and Long-Term Accrued Liabilities ($91,000,000) at December 31,
1997.
3. Discontinued Operations
In July 1997, the Company completed the sale of its Lawn Care and
Plantscaping divisions. The results of operations for these divisions are
reported on the Statements of Income in the section entitled Discontinued
Operations. The gross proceeds related to the sale of Lawn Care and Plantscaping
were approximately $37.0 million. The gain on the sale was $15,300,000
($9,486,000 after tax or $0.28 per share).
In October 1997, the Company completed the sale of its Rollins Protective
Services (RPS) business segment. The results of operations for RPS and the gain
on disposal are reported on the Statements of Income in the section entitled
Discontinued Operations. The gross proceeds related to the sale of RPS were
approximately $200.0 million. The gain on the sale was $161,000,000 ($96,600,000
after tax or $2.84 per share).
Summarized financial information for the discontinued operations is as
follows:
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Revenues $ 64,721 $ 94,646 $ 90,647
Income Before
Income Taxes 311 659 993
Net Income 192 409 616
Assets -- 35,321 30,784
Liabilities -- 12,127 8,814
Net Assets of
Discontinued Operations $ -- $ 23,194 $ 21,970
4. Trade Receivables
Trade receivables, net, at December 31, 1997, totalling $49,166,000 and at
December 31, 1996, totalling $64,400,000 are net of allowances for doubtful
accounts of $9,326,000 and $4,457,000, respectively. Trade receivables include
installment receivable amounts which are due subsequent to one year from the
balance sheet dates. These amounts were approximately $13,930,000 and
$19,533,000 at the end of 1997 and 1996, respectively. The carrying amount of
installment receivables approximates fair value because the interest rates
approximate market rates.
16
Notes To Financial Statements (continued)
Years ended December 31, 1997, 1996, and 1995, Rollins, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
5. Equipment And Property
Equipment and property are presented at cost less accumulated depreciation
and are detailed as follows:
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
Buildings $ 7,584 $ 8,143
Operating equipment 42,163 37,087
Furniture and fixtures 9,790 9,604
Computer equipment under
capital leases 8,736 10,482
----------------------------
68,273 65,316
Less - accumulated
depreciation 37,002 32,011
----------------------------
31,271 33,305
Land 3,368 3,262
----------------------------
$ 34,639 $ 36,567
----------------------------
6. 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.
7. Income Taxes
A reconciliation between taxes computed at the statutory rate on the Income
(Loss) From Continuing Operations Before Income Taxes and the Provision (Credit)
for Income Taxes is as follows:
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Federal income taxes
at statutory rate $ (64,680) $ 12,790 $ 21,861
State income taxes
(net of federal benefit) 268 1,368 2,949
Other 191 (436) (1,114)
-------------------------------------
$ (64,221) $ 13,722 $ 23,696
-------------------------------------
The Provision (Credit) for Income Taxes was based on a 38.0% estimated
effective income tax rate on Income (Loss) From Continuing Operations Before
Income Taxes for the years ended December 31, 1997, 1996, and 1995. The
effective income tax rate differs from the annual federal statutory tax rate
primarily because of state income taxes.
Income taxes remitted, related to both continuing and discontinued
operations, were $85,183,000, $9,354,000, and $37,708,000, for the years ended
December 31, 1997, 1996, and 1995, respectively.
Components of the net deferred income tax assets (liabilities) at December
31, 1997 and 1996 include:
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
Deferred tax assets (liabilities)
Termite provision $ 49,720 $ --
Insurance reserves 34,629 13,466
Safe harbor lease (14,128) (15,460)
Other 3,677 153
-----------------------
$ 73,898 $ (1,841)
-----------------------
-----------------------
State income taxes payable of $12,057,000 and $8,446,000 are included in
Other Expenses on the Statements of Financial Position at December 31, 1997 and
1996, respectively.
17
Notes To Financial Statements (continued)
Years ended December 31, 1997, 1996, and 1995, Rollins, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
8. Commitments And Contingencies
The Company has capitalized lease obligations and several operating leases.
The minimum lease payments under the capital leases and non-cancelable operating
leases with terms in excess of one year, in effect at December 31, 1997, are
summarized as follows:
Capitalized Operating
(In thousands) Leases Leases
- -------------------------------------------------------------------------------
1998 $ 3,819 $ 19,746
1999 3,819 16,088
2000 3,819 10,973
2001 2,132 7,850
2002 295 6,997
Thereafter -- 44,649
--------------------------------
$ 13,884 $ 106,303
------------
------------
Amount representing interest (1,507)
-----------
Present value of obligations 12,377
Portion due within one year (3,138)
-----------
Long-term obligations $ 9,239
-----------
-----------
Total rental expense under operating leases charged to operations was
$23,524,000, $22,234,000 and $21,054,000, for the years ended December 31, 1997,
1996, and 1995, respectively.
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.
9. 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) 1997 1996 1995
- -------------------------------------------------------------------------------
Service cost-benefits
earned during the period $ 3,221 $ 3,141 $ 2,844
Interest cost on projected
benefit obligation 4,437 4,081 3,958
Actual return on plan assets (7,500) (5,185) (9,236)
Net amortization
of transition asset (606) (1,181) (1,181)
Deferral of net
investment gain (loss) 2,493 570 4,778
------------------------------
Net pension expense $ 2,045 $ 1,426 $ 1,163
------------------------------
The funded status of the Plan is summarized as follows at December 31:
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$52,923 in 1997 and
$44,420 in 1996 $ (56,893) $ (48,011)
Effect of projected future
compensation levels (10,015) (9,298)
-------------------------
Projected benefit obligation (66,908) (57,309)
Plan assets at fair value 59,741 54,876
-------------------------
Plan assets in excess of (less than)
projected obligation (7,167) (2,433)
Unrecognized net loss 5,485 3,401
Unrecognized net asset at transition
being amortized over 10 years -- (575)
Unrecognized prior service cost (262) (293)
------------------------
Accrued pension (liability) asset $ (1,944) $ 100
------------------------
At December 31, 1997, 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 $6,175,000.
The expected long-term rate of return on Plan assets was 9.5% in 1997, 1996, and
1995. The weighted-average discount rate used in determining the projected
benefit obligation was 7.5% in 1997, 1996, and 1995. This rate closely
approximates the rate on high-quality, long-term obligations. The assumed growth
rate of compensation was 4.5% in 1997, 1996, and 1995.
18
Notes To Financial Statements (continued)
Years ended December 31, 1997, 1996, and 1995, Rollins, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 $1,665,000 in 1997, $1,592,000 in 1996, and
$1,627,000 in 1995.
The Company has an Employee Incentive Stock Option Plan (1994 Plan), adopted
in January 1994, under which 1,200,000 shares of common stock were subject to
grants through the ten-year period ended January 2004 under various stock
incentive programs. 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. Options are also outstanding under the prior Plan, (1984
Plan). Under this plan, 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 grant and expire
ten years from the date of grant, if not exercised. No additional options will
be granted under the 1984 Plan.
Option transactions during the last three years for the 1994 and 1984 Plans
are summarized as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Number of shares under stock options:
Outstanding at beginning of year 300,132 257,611 266,957
Granted 197,600 75,000 17,000
Exercised (7,657) (5,037) (6,696)
Cancelled (130,290) (27,442) (19,650)
---------------------------------------
Outstanding at end of year 359,785 300,132 257,611
Exercisable at end of year 80,405 92,458 71,641
Weighted average exercise price:
Granted $ 19.25 $ 20.87 $ 24.25
Exercised 12.47 12.95 12.51
Cancelled 22.57 24.47 24.42
Outstanding at end of year 22.29 24.18 24.87
Exercisable at end of year 23.31 21.40 18.14
- -------------------------------------------------------------------------------
Information with respect to options outstanding and options exercisable at
December 31, 1997 is as follows:
Weighted
Exercise Number Average Remaining Number
Price Outstanding Contractual Life Exercisable
- -----------------------------------------------------------------------------
$11.25 1,350 .58 years 1,350
12.25 4,995 2.08 4,995
13.25 14,800 3.08 14,800
19.08 4,440 4.08 4,440
25.50 4,700 5.08 3,760
28.37 118,400 6.08 46,140
24.25 5,000 7.08 1,200
20.87 52,000 8.08 3,720
19.25 154,100 9.08 --
- -----------------------------------------------------------------------------
359,785 80,405
- ---------------------------------------------------------------------------------------------------------------------------
The Company applied Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for its stock options and,
accordingly, no compensation cost has been recognized for stock options in the
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date of its stock options granted in 1997, 1996, and
1995 under SFAS 123, "Accounting for Stock-Based Compensation," the Company's
net income would have been reduced by approximately $103,000 in 1997, $45,000 in
1996, and $9,000 in 1995, with no earnings per share effect in any of the
reported years.
The per share weighted-average fair value of stock options granted during
1997, 1996, and 1995 was $5.34, $6.37, and $7.37, respectively, on the date of
grant, using the Black Scholes option-pricing model with the following
weighted-average assumptions:
1997 1996 1995
- -------------------------------------------------------------------------------
Risk-free interest rate 5.69% 5.63% 5.58%
Expected life, in years 8 8 8
Expected volatility 18.55% 21.44% 21.66%
Expected dividend yield 2.17% 1.99% 2.01%
- -------------------------------------------------------------------------------
19
Report of Management
- -------------------------------------------------------------------------------
To the Stockholders of Rollins, Inc.:
We have prepared the accompanying financial statements and related
information included herein for the years ended December 31, 1997, 1996 and
1995. 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 insure
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.
/s/ Randall Rollins /s/ Gene L. Smith
R. Randall Rollins Gene L. Smith
Chairman of the Board and Chief Financial Officer,
Chief Executive Officer Secretary, and Treasurer
Atlanta, Georgia
February 16, 1998
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, 1997
and 1996 and the related statements of income, earnings retained and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
February 16, 1998
20
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 of Dover Downs
Entertainment, Inc. (entertainment complex)
Henry B. Tippie +
Chairman of the Board and Chief Executive Officer of Tippie Services, Inc.
(management services)
R. Randall Rollins *
Chairman of the Board and Chief Executive Officer of Rollins, Inc., Chairman of
the Board and Chief Executive Officer of RPC, 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 of the Board and Chief Executive Officer of SunTrust Banks, Inc. (bank
holding company)
Gary W. Rollins *
President and Chief Operating Officer of Rollins, Inc.
Bill J. Dismuke
Retired 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
28, 1998, 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:
SunTrust Bank, Atlanta
Stock Transfer 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 SunTrust Bank, Atlanta 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
21