Exhibit 13 FIVE-YEAR FINANCIAL SUMMARY Rollins, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------- (In thousands except per share data) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------- OPERATIONS SUMMARY Revenues $ 549,136 $ 538,639 $ 532,785 $ 529,788 $ 507,722 Income (Loss) from Continuing Operations After Income Taxes 3,177 (104,781) 22,386 38,661 46,017 Income From Discontinued Operations After Income Taxes 3,410 106,278 409 616 3,544 Net Income 6,587 1,497 22,795 39,277 49,561 Earnings (Loss) Per Share: Continuing Operations 0.10 (3.09) 0.63 1.08 1.29 Discontinued Operations 0.11 3.13 0.01 0.02 0.10 --------- --------- --------- --------- --------- Basic and Diluted 0.21 0.04 0.64 1.10 1.39 Dividends per Share 0.50 0.60 0.58 0.56 0.50 - ------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Total Assets $ 327,265 $ 432,680 $ 296,656 $ 306,111 $ 285,922 Working Capital 84,015 170,900 117,176 140,865 132,879 Long-Term Debt -- -- -- -- -- Stockholders' Equity 80,235 145,644 190,290 214,318 193,633 Shares Outstanding at Year-End 30,489 33,279 34,594 35,858 35,826 - -------------------------------------------------------------------------------------------------------------
2 QUARTERLY INFORMATION - -------------------------------------------------------------------------------- STOCK PRICES AND DIVIDENDS (Rounded to the nearest 1/8)
Stock Prices Dividends Stock Prices Dividends 1998 High Low Paid 1997 High Low Paid - --------------------------------------------------------------------------------------------------------------------- First Quarter $ 21 5/8 $ 19 1/2 $ .15 First Quarter $ 19 7/8 $ 18 3/4 $ .15 Second Quarter 21 1/8 19 1/2 .15 Second Quarter 20 1/8 18 5/8 .15 Third Quarter 20 7/8 16 7/8 .15 Third Quarter 24 5/8 19 1/4 .15 Fourth Quarter 17 7/8 15 1/4 .05 Fourth Quarter 24 1/2 19 7/8 .15
THE NUMBER OF STOCKHOLDERS OF RECORD AS OF DECEMBER 31, 1998 WAS 3,061.
- ------------------------------------------------------------------------------------------------------ PROFIT AND LOSS INFORMATION (In thousands except per share data) First Second Third Fourth - ------------------------------------------------------------------------------------------------------ 1998 Revenues $ 122,965 $ 155,050 $ 144,493 $ 126,628 Income (Loss) from Continuing Operations (1,764) 6,913 880 (2,852) Income from Discontinued Operations -- -- -- 3,410 Net Income (Loss) (1,764) 6,913 880 558 Earnings (Loss) per Share Continuing Operations (.05) .21 .03 (.09) Discontinued Operations .00 .00 .00 .11 --------- --------- --------- --------- Basic and Diluted (.05) .21 .03 .02 - ------------------------------------------------------------------------------------------------------ 1997 Revenues $ 126,951 $ 154,371 $ 140,287 $ 117,030 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 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 - ------------------------------------------------------------------------------------------------------
8 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS
% Change From Prior Year Increase/(Decrease) (IN THOUSANDS) 1998 1997 1996 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Revenues $ 549,136 $ 538,639 $ 532,785 1.9 % 1.1 % Income (Loss) From Continuing Operations After Income Taxes 3,177 (104,781) 22,386 103.0 N/M Income From Discontinued Operations After Income Taxes 3,410 106,278 409 (96.8) N/M Net Income 6,587 1,497 22,795 340.0 (93.4) - -----------------------------------------------------------------------------------------------------------------
GENERAL OPERATING COMMENTS The Company strengthened its single focus on its Orkin Pest Control (Orkin) business in 1998 by its non-pest control business divestitures in 1997, a renewed emphasis on building recurring revenue, a further expansion of its commercial business, and aggressive termite control claims reduction initiatives. Revenue grew 1.9% to $549.1 million in 1998 and 8.2% in the fourth quarter compared to the same period last year. The revenue increase positively impacted income from continuing operations and net income. During the year, the Company announced the hiring and appointment of James A. McKinney and Harry J. Cynkus to the respective positions of Chief Operating Officer of Orkin and Chief Financial Officer, and the promotion of Michael W. Knottek to the position of Vice President and Secretary. These executives have distinguished backgrounds in the management of service corporations and broaden the strong pool of talented managers already in place at Rollins, Inc. CONTINUING OPERATIONS - 1998 VERSUS 1997 The Company's 1.9% increase in revenues was due primarily to growth in recurring pest control revenue resulting from the success of our more consumer-friendly selling and treatment programs and to an increase in termite renewal revenue resulting from higher average renewal prices. Revenue was also impacted positively by the Company's ten pest control acquisitions in 1998, including two companies in Canada. These revenue increases were partially offset by a decline in termite sales revenue caused by placing our emphasis on changing contracts and sales practices that were initiated in response to the capabilities of modern-day termiticides, new building materials and construction practices. Cost of Services Provided decreased on both a dollar and percentage of revenues basis, primarily due to reductions in termite claims experience and operating insurance costs. Sales, General and Administrative expenses also decreased on both a dollar and percentage of revenues basis, primarily due to reduced expenditures related to Year 2000 system modifications and to lower bad debt expense. The Company's net tax provision of $1.9 million, as compared to a benefit of $64.2 million in 1997, reflects increased taxable income in 1998. Key programs implemented in 1998 included improved sales and service programs to meet the changing demands of today's busy customers. We also introduced a premium brand of service for our commercial customers, Acurid-SM-; related activities included the opening of additional commercial branches, improved service technology, expanded guarantees, and new vehicle and uniform identification. As a result of these programs, we achieved strong gains in customer base and revenues in this division. We implemented aggressive changes in sales policies, treatment standards and guarantees offered in termite control. These internal enhancements, along with extensive reinspection, retreatment and repair programs, in conjunction with the establishment of our national quality control department, allow us to more effectively provide termite control service to all our new and existing customers. These termite remediation expenditures in 1998 were charged against the Accrual for Termite Contracts. We provided an advanced termite training course, developed exclusively by the Company in partnership with Texas A&M, to Orkin employees who have previously completed both in-branch and classroom termite control training. This program provides the best termite training in the industry. We began an evaluation of our management information systems in 1998 to improve communications with the branches and strengthen management reporting and focus. These improvements will provide branch managers with timely, key data needed to more efficiently manage daily operations. Through the investments made in 1998 and the successes we have seen to date in regards to increased sales, improved customer service and satisfaction, and improved employee retention, we believe that the Company is better positioned for long-term growth in customer base, revenues and profits. The quarter-over-quarter improvement in revenue and profit achieved in the fourth quarter provides positive momentum for 1999. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) CONTINUING OPERATIONS - 1997 VERSUS 1996 The Company's revenues increased 1.1% over 1996 due primarily to increases in customer base and recurring pest control and termite renewal revenues, partially offset by the continuing decrease in termite sales revenue resulting from a disappointing termite season in 1997 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 were expanded nationwide in 1998. Additionally, the field management organization was strengthened via the reorganization of three previous residential divisions into six new geographic divisions. 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 negative impact of post-Chlordane termiticides, which may only last for a few years instead of decades; and laws and regulations restricting certain retreatment practices. All of the above factors have caused termite service providers to experience elevated levels of termite claims. The Company responded to these industry-wide conditions by undertaking 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 mid-1997. As a result of the factors described above and new information which became available in 1997, a Provision for Termite Contracts of $117.0 million 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. The termite protection guarantee period on new sales was also changed in order to 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 $15.0 million was provided for estimated liabilities related to the Company's self-insurance program for automobile, workers' compensation, and general liability. Additionally, reserves for bad debts were strengthened by $8.0 million during the fourth quarter. DISCONTINUED OPERATIONS In 1997, the Company estimated its liabilities associated with its divested operations and recorded a Gain on Disposal, net of taxes, of $106.1 million on the sales of the Orkin Lawn Care and Plantscaping businesses and the Rollins Protective Services division. These divestitures were completed as part of the Company's shift towards a single operational focus on its core pest control business. In the fourth quarter of 1998, the Company recorded an additional gain, net of taxes, of $3.4 million as a result of the reevaluation of the Company's liabilities for costs associated with these discontinued operations. YEAR 2000 ISSUES Aware that the Year 2000 (Y2K) information technology programming issue could have a significant potential impact on its future operations and financial reporting, the Company began its assessment and remediation processes in 1997 regarding its primary financial and operating systems. The Company's assessment activities have included (1) identifying all software and operating systems - both information technology (IT) systems and non-IT systems with embedded technology - which are critical to operations and/or financial reporting, (2) testing of such software and systems for Y2K compliancy, and (3) obtaining assurances from the Company's vendors and its large commercial customers. The Company's remediation activities have included replacing certain software and operating systems, followed by testing to ensure the Y2K compliancy of the replacements. Based on its assessment and remediation activities to date, the Company believes that its critical internal software and operating systems are Y2K compliant with the exception of its bad debt collection system, its branch personal computers (PCs), and its commercial division's national accounts system. The Company's bad debt collection system is currently being updated and is expected to be Y2K compliant by the end of the first quarter 1999, and the branch PCs are expected to be replaced by the end of the second quarter 1999. The Company is currently formulating an information technology plan for its national accounts system. This plan is expected to be finalized by the end of the first quarter 1999, and any necessary remediation efforts are expected to be concluded by the end of 1999. The total cost of Y2K expenditures to date as of December 31, 1998 was approximately $19.0 million; the remaining Y2K remediation costs are anticipated to be approximately $1.0 million. Based on assurances from the majority of its vendors and large commercial customers to date, the Company does not anticipate any material Y2K impact on its operations or financial reporting at this time. The Company believes that the worst case scenario will be some minor nuisances experienced by a small number of its branches in January 2000. The Company expects to have contingency plans in place by the end of 1999 that address potential short-term business disruptions resulting from losses of electricity and system malfunctions related to the ordering and delivering of operating supplies and the printing of sales orders. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) FINANCIAL CONDITION
% Change From Prior Year Increase/(Decrease) (DOLLARS IN THOUSANDS) 1998 1997 1996 1998 1997 - -------------------------------------------------------------------------------------------------------------- Cash and Short-Term Investments $1,244 $ 125,842 $ 12,150 Marketable Securities 110,229 75,037 84,785 ------------------------------------------ 111,473 200,879 96,935 (44.5)% 107.2% Working Capital 84,015 170,900 117,176 (50.8) 45.8 Current Ratio 1.7 2.3 2.7 (26.1) (14.8) Total Assets 327,265 432,680 296,656 (24.4) 45.9 - ----------------------------------------------------------------------------------------------------------------------
Rollins, Inc.'s financial position remains solid. The Company believes its current cash balances and future cash flows from operating activities will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future. The Company's cash flow used in operating activities was $679,000 for 1998 compared with cash flow provided of $5.7 million and $51.9 million for 1997 and 1996, respectively. The 1998 decrease resulted from working capital changes related primarily to lower divestiture and remediation liabilities, partially offset by higher income from continuing operations, adjusted for non-cash items. The 1997 decrease was due primarily to decreased income. Interest income increased 18.4% due to the increase in average funds invested in short-term investments and marketable securities, largely from the 1997 divestitures. Net trade receivables decreased $6.8 million in 1998, due primarily to decreased financed termite sales. Trade receivables include amounts due subsequent to one year from the balance sheet date, approximating $9.0 million and $13.9 million at the end of 1998 and 1997, respectively. The Company invested $13.9 million in capital expenditures and acquisitions in 1998 and expects to invest between $30 and $40 million in 1999, inclusive of improvements to its management information systems. A total of $16.1 million was paid in cash dividends in 1998. In the fourth quarter of 1998, regular quarterly dividends were reduced from 15 cents per share to 5 cents per share to better balance the relationship between earnings, dividends and future stock repurchases. During the year, a total of $56.2 million was paid for repurchases of 2.8 million shares, or 8.3%, of the Company's Common Stock. These repurchased shares were retired in 1998; an additional 1.6 million shares may be repurchased under the current authorization. The capital expenditures, acquisitions, cash dividends and stock repurchases were primarily funded through existing cash balances. The Company maintains a $40.0 million unused line of credit, which is available for future acquisitions and growth, if needed. In 1997 and 1998, Orkin received letters from the Federal Trade Commission (FTC) advising of its investigation of the pest control industry - more specifically, the termite and moisture control practices of the industry--and requesting certain information voluntarily from the Company. Orkin has voluntarily provided the information requested and has advised of the Company's intention to continue to cooperate fully with this investigation. At this point in time, it is too early to determine the impact, if any, of this investigation. MARKET RISK The Company maintains an investment portfolio, comprised of U.S. Government and corporate debt securities, which is subject to interest rate risk exposure. This risk is managed through conservative policies to invest in high-quality obligations. The Company has performed an interest rate sensitivity analysis using a duration model over the near term with a 10% change in interest rates. The Company's portfolio is not subject to material interest rate risk exposure based on this analysis, and no material changes in market risk exposures or how those risks are managed is expected. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of this standard, effective as of January 1, 2000, is not expected to materially impact the results of operations or financial condition of the Company. FORWARD-LOOKING STATEMENTS This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including without limitation, general economic conditions; market risk; changes in industry practices or technologies; the degree of success of the Company's termite process reforms; climate and weather trends; competitive factors and pricing practices; the Year 2000 programming issue; potential increases in labor costs; uncertainties of litigation; and changes in various government laws and regulations, including environmental regulations. All of the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. 11 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ROLLINS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------- At December 31, (In thousands except share data) 1998 1997 - -------------------------------------------------------------------------------------------------------- ASSETS Cash and Short-Term Investments $ 1,244 $ 125,842 Marketable Securities 110,229 75,037 Trade Receivables, Net 42,353 49,166 Materials and Supplies 13,335 15,010 Deferred Income Taxes 20,083 24,826 Other Current Assets 11,864 11,737 --------- --------- Current Assets 199,108 301,618 Equipment and Property, Net 35,466 34,639 Intangible Assets 40,602 39,383 Deferred Income Taxes 44,369 49,072 Other Assets 7,720 7,968 --------- --------- Total Assets $ 327,265 $ 432,680 --------- --------- --------- --------- _______________________________________________________________________________________________________ LIABILITIES Capital Lease Obligations $ 3,419 $ 3,138 Accounts Payable 10,890 25,420 Accrued Insurance 18,348 21,225 Accrued Payroll 18,400 16,013 Unearned Revenue 15,210 13,831 State Income Taxes Payable 7,188 12,057 Accrual for Termite Contracts 25,800 26,000 Other Expenses 15,838 13,034 --------- --------- Current Liabilities 115,093 130,718 Capital Lease Obligations 6,090 9,239 Accrued Insurance 38,975 30,878 Accrual for Termite Contracts 66,350 91,000 Long-Term Accrued Liabilities 20,522 25,201 --------- --------- Total Liabilities 247,030 287,036 --------- --------- _______________________________________________________________________________________________________ Commitments and Contingencies STOCKHOLDERS' Common Stock, par value $1 per share; 99,500,000 EQUITY shares authorized; 30,488,741 and 33,279,281 shares issued 30,489 33,279 Earnings Retained 49,746 112,365 --------- --------- Total Stockholders' Equity 80,235 145,644 --------- --------- Total Liabilities and Stockholders' Equity $ 327,265 $ 432,680 --------- --------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 12 CONSOLIDATED STATEMENTS OF INCOME ROLLINS, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------- Years Ended December 31, (In thousands except per share data) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- REVENUES Customer Services $ 549,136 $ 538,639 $ 532,785 --------- --------- --------- COSTS AND EXPENSES Cost of Services Provided 327,463 362,225 302,929 Depreciation and Amortization 8,934 8,382 7,046 Provision for Termite Contracts -- 117,000 -- Sales, General and Administrative 216,596 227,622 192,669 Interest Income (8,981) (7,588) (5,967) --------- --------- --------- 544,012 707,641 496,677 --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 5,124 (169,002) 36,108 --------- --------- --------- PROVISION (BENEFIT) FOR INCOME TAXES Current (4,937) 6,021 15,273 Deferred 6,884 (70,242) (1,551) --------- --------- --------- 1,947 (64,221) 13,722 --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS 3,177 (104,781) 22,386 --------- --------- --------- DISCONTINUED OPERATIONS Operating Income, Less Income Tax Expense of $119 and $250 in 1997 and 1996, Respectively -- 192 409 Gain on Disposal, Less Income Tax Expense of $2,090 and $70,214 in 1998 and 1997, Respectively 3,410 106,086 -- --------- --------- --------- INCOME FROM DISCONTINUED OPERATIONS 3,410 106,278 409 --------- --------- --------- NET INCOME $ 6,587 $ 1,497 $ 22,795 --------- --------- --------- --------- --------- --------- EARNINGS (LOSS) PER SHARE Continuing Operations $ .10 $ (3.09) $ .63 Discontinued Operations .11 3.13 .01 --------- --------- --------- EARNINGS PER SHARE - BASIC AND DILUTED $ .21 $ .04 $ .64 --------- --------- --------- --------- --------- ---------
CONSOLIDATED STATEMENTS OF EARNINGS RETAINED ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------- Years Ended December 31, (In thousands except per share data) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Balance at Beginning of Year $ 112,365 $ 155,696 $ 224,009 Net Income 6,587 1,497 22,795 Cash Dividends (16,064) (20,360) (20,669) Common Stock Purchased and Retired (53,429) (24,733) (24,916) Common Stock in Treasury Retired -- -- (45,371) Other 287 265 (152) --------- --------- --------- Balance at End of Year $ 49,746 $ 112,365 $ 155,696 --------- --------- --------- --------- --------- --------- DIVIDENDS PER SHARE $ .50 $ .60 $ .58 --------- --------- --------- --------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 13 CONSOLIDATED STATEMENTS OF CASH FLOWS ROLLINS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net Income $ 6,587 $ 1,497 $ 22,795 Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities: Provision for Termite Contracts - 117,000 - Provision for Self-Insurance Reserves - 15,000 - Provision for Bad Debts - 8,000 - Depreciation and Amortization 8,934 8,382 7,046 Provision (Benefit) for Deferred Income Taxes 8,974 (69,228) 1,061 Discontinued Operations, Net of Taxes (3,410) (106,278) (409) Other, Net 5,121 7,169 3,330 (Increase) Decrease in Assets: Trade Receivables 7,087 7,505 9,313 Materials and Supplies 1,719 (3,388) (535) Other Current Assets 1,638 (2,034) 4,250 Other Non-Current Assets 3,044 - (3,063) Increase (Decrease) in Liabilities: Accounts Payable and Accrued Expenses (15,167) 11,608 4,669 Unearned Revenue 1,379 2,154 525 Accrued Insurance 5,220 9,629 3,507 Accrual for Termite Contracts (24,850) - - Long-Term Accrued Liabilities (6,955) (1,336) (558) -------------------------------------------------- Net Cash Provided by (Used in) Operating Activities (679) 5,680 51,931 -------------------------------------------------- -------------------------------------------------- ________________________________________________________________________________________________________________________________ INVESTING ACTIVITIES Purchases of Equipment and Property (10,402) (8,956) (8,292) Net Cash Used for Acquisition of Companies (3,517) (1,440) (2,373) Net Proceeds from Sale of Discontinued Operations, Net of Current Taxes Paid - 156,469 - Marketable Securities, Net (35,033) 9,846 (19,661) -------------------------------------------------- Net Cash Provided by (Used in) Investing Activities (48,952) 155,919 (30,326) -------------------------------------------------- -------------------------------------------------- ________________________________________________________________________________________________________________________________ FINANCING ACTIVITIES Dividends Paid (16,064) (20,360) (20,669) Common Stock Purchased and Retired (56,195) (26,083) (26,200) Proceeds from Capital Leases - - 5,500 Payments on Capital Leases (2,868) (2,521) (1,314) Other 160 300 420 -------------------------------------------------- Net Cash Used in Financing Activities (74,967) (48,664) (42,263) -------------------------------------------------- NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS - 757 (815) -------------------------------------------------- Net Increase (Decrease) in Cash and Short-Term Investments (124,598) 113,692 (21,473) Cash and Short-Term Investments at Beginning of Year 125,842 12,150 33,623 -------------------------------------------------- Cash and Short-Term Investments at End of Year $ 1,244 $ 125,842 $ 12,150 -------------------------------------------------- --------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996, ROLLINS, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES BUSINESS DESCRIPTION - Rollins, Inc. (the Company) is a national service company with headquarters located in Atlanta, Georgia, providing pest control and termite control services to both residential and commercial customers. In 1998, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related Information." As the Company has only one reportable segment - its pest and termite control business - the majority of the disclosures required by SFAS 131 do not apply to the Company. In regard to the general disclosures required by SFAS 131, the Company's results of operations and its financial condition are not significantly reliant upon any single customer or the Company's foreign operations. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of the Company include the accounts of Rollins, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated. ESTIMATES USED IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS - The preparation of the consolidated 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 consolidated 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. These estimated outstanding claims have been reflected in the Consolidated Statements of Financial Position in the line items entitled Accrued Insurance. ADVERTISING - Advertising expenses are charged to income during the year in which they are incurred. The total advertising costs were approximately $27.5 million in 1998 and 1997, and $26.3 million in 1996. INCOME TAXES - The Company follows the practice of providing for income taxes based on Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. EARNINGS PER SHARE - In 1997, the Company adopted Statement of Financial Accounting Standards No. 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 is as follows:
(IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------ Basic EPS 31,973 33,896 35,478 Effect of Dilutive Stock Options 30 28 46 ---------- -------- ---------- Diluted EPS 32,003 33,924 35,524 ---------- -------- ---------- ---------- -------- ----------
STOCK-BASED COMPENSATION - During 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". See Note 9 to the consolidated financial statements for additional information. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996, ROLLINS, INC. AND SUBSIDIARIES COMPREHENSIVE INCOME - In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. For the years ended December 31, 1998, 1997 and 1996, comprehensive income is not materially different from net income and, as a result, the impact of SFAS 130 is not reflected in the Company's consolidated financial statements. RECLASSIFICATIONS - Certain amounts for previous years have been reclassified to conform with the 1998 consolidated financial statement presentation. 2. CHANGES IN ACCOUNTING ESTIMATES In the fourth quarter of 1997, the Company made certain changes in accounting estimates totaling $23.0 million 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 $15.0 million. This provision has been reflected in the Consolidated Statements of Income in the line item entitled Cost of Services Provided. The provision for bad debts was also increased by $8.0 million and has been reflected in the Consolidated Statements of Income in the line item entitled Sales, General and Administrative. In the fourth quarter of 1997, a provision for termite contracts of $117.0 million 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 reflected the Company's response to current trends in the termite treatment area of its operations and the pest control industry. The provision was reflected in the 1997 Consolidated Statements of Income in the line item entitled Provision for Termite Contracts. The related liabilities at December 31, 1998 and 1997, reflecting the estimated costs incurred but as yet unpaid related to termite work performed prior to these dates, have been reflected in the Consolidated Statements of Financial Position in the line items entitled Accrual for Termite Contracts. 3. DISCONTINUED OPERATIONS In October 1997, the Company sold its Rollins Protective Services (RPS) business segment for approximately $200.0 million in cash. In July 1997, the Company sold its Lawn Care and Plantscaping divisions for approximately $37.0 million in cash. In 1997, the Company estimated its liabilities associated with these divested operations and recorded a gain from the sales of RPS and the Lawn Care and Plantscaping divisions of $106.1 million, net of taxes. In the fourth quarter of 1998, the Company reevaluated its liabilities associated with these divested operations and recorded an additional gain of $3.4 million, net of taxes. The Company's results of operations for the years ended December 31, 1997 and 1996 have been restated for the divestitures of the RPS business segment and the Lawn Care and Plantscaping divisions. The results of operations of these divested operations and the gains on their disposal have been reflected in the Consolidated Statements of Income in the section entitled Discontinued Operations. Summarized financial information for the discontinued operations is as follows:
(IN THOUSANDS) 1997 1996 - ----------------------------------------------------------------- Revenues $ 64,721 $ 94,646 Income Before Income Taxes 311 659 Net Income 192 409 Assets - 35,321 Liabilities - 12,127 Net Assets of Discontinued Operations $ - $ 23,194
4. TRADE RECEIVABLES Trade receivables, net, at December 31, 1998, totaling $42.4 million and at December 31, 1997, totaling $49.2 million are net of allowances for doubtful accounts of $5.3 million and $9.3 million, respectively. Trade receivables include installment receivable amounts which are due subsequent to one year from the balance sheet dates. These amounts were approximately $9.0 million and $13.9 million at the end of 1998 and 1997, respectively. The carrying amount of installment receivables approximates fair value because the interest rates approximate market rates. 5. EQUIPMENT AND PROPERTY Equipment and property are presented at cost less accumulated depreciation and are detailed as follows:
(IN THOUSANDS) 1998 1997 - ----------------------------------------------------------------- Buildings $ 9,759 $ 7,584 Operating Equipment 44,805 42,163 Furniture and Fixtures 8,542 9,790 Computer Equipment Under Capital Leases 8,736 8,736 ------------ ----------- 71,842 68,273 Less - Accumulated Depreciation 39,704 37,002 ------------ ----------- 32,138 31,271 Land 3,328 3,368 ------------ ----------- $35,466 $34,639 ------------ ----------- ------------ -----------
16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996, ROLLINS, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------- 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 (Benefit) for Income Taxes is as follows:
(IN THOUSANDS) 1998 1997 1996 - ----------------------------------------------------------------- Federal Income Taxes at Statutory Rate $ 1,595 $ (64,680) $12,790 State Income Taxes (Net of Federal Benefit) 367 268 1,368 Other (15) 191 (436) -------- --------- ----------- $ 1,947 $ (64,221) $13,722 -------- --------- ----------- -------- --------- -----------
The Provision (Benefit) 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, 1998, 1997 and 1996. The effective income tax rate differs from the annual federal statutory tax rate primarily because of state income taxes. During 1998, the Company received a refund of income taxes of $2.4 million, net of payments. Income taxes remitted, related to both continuing and discontinued operations, were $85.2 million and $9.4 million for the years ended December 31, 1997 and 1996, respectively. Components of the net deferred income tax assets (liabilities) at December 31, 1998 and 1997 include:
(IN THOUSANDS) 1998 1997 - ----------------------------------------------------- Termite Accrual $40,125 $ 49,720 Insurance Reserves 31,909 34,629 Safe Harbor Lease (11,449) (14,128) Other 3,867 3,677 --------- --------- $ 64,452 $73,898 --------- --------- --------- ---------
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, 1998, are summarized as follows:
Capitalized Operating (In Thousands) Leases Leases - -------------------------------------------------------------- 1999 $ 3,918 $ 18,989 2000 3,918 14,736 2001 2,231 9,157 2002 303 7,219 2003 - 6,272 Thereafter - 38,611 --------- ------------ 10,370 $ 94,984 ------------ ------------ Amount Representing Interest (861) --------- Present Value of Obligation 9,509 Portion Due Within One Year (3,419) --------- Long-Term Obligations $6,090 --------- ---------
Total rental expense under operating leases charged to operations was $25.4 million, $23.5 million, and $22.2 million for the years ended December 31, 1998, 1997 and 1996, 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. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996, ROLLINS, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------- 9. EMPLOYEE BENEFIT PLANS The Company maintains a noncontributory tax-qualified defined benefit retirement plan (the Plan) covering all employees meeting certain age and service requirements. The 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 funded status of the Plan and the resulting accrued benefit liability are summarized as follows at December 31:
(IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------ CHANGE IN BENEFIT OBLIGATION Benefit Obligation at Beginning of Year $66,908 $57,309 Service Cost 3,611 3,221 Interest Cost 5,182 4,437 Actuarial Loss 4,258 4,576 Benefits Paid (2,671) (2,635) ----------- --------- Benefit Obligation at End of Year 77,288 66,908 ----------- --------- CHANGE IN PLAN ASSETS Fair Value of Plan Assets at Beginning of Year 59,741 54,876 Actual Return on Plan Assets 6,188 7,500 Benefits Paid (2,671) (2,635) ----------- --------- Fair Value of Plan Assets at End of Year 63,258 59,741 ----------- --------- Funded Status (14,030) (7,167) Unrecognized Net Actuarial Loss 8,621 5,485 Unrecognized Prior Service Cost (226) (262) ----------- --------- Accrued Benefit Liability $ (5,635) $ (1,944) ----------- --------- ----------- ---------
Accrued benefit liabilities at December 31, 1998 and 1997 of $5.6 million and $1.9 million, respectively, have been reflected in the Consolidated Statements of Financial Position in the line item entitled Other Expenses. The weighted-average assumptions as of December 31 were as follows:
(IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------- Discount Rate 7.0% 7.5% 7.5% Expected Return on Plan Assets 9.5% 9.5% 9.5% Rate of Compensation Increase 4.0% 4.5% 4.5%
The components of net periodic benefit cost for the past three years are summarized as follows:
(IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------ Service Cost $ 3,611 $ 3,221 $3,141 Interest Cost 5,182 4,437 4,081 Expected Return on Plan Assets (5,269) (5,007) (4,615) Net Amortizations: Amortization of Net Asset - (575) (1,150) Amortization of Net Loss 203 - - Amortization of Net Prior Service Cost (36) (31) (31) --------- --------- ----------- Net Periodic Benefit Cost $ 3,691 $ 2,045 $1,426 --------- --------- ----------- --------- --------- -----------
In 1998, the Company adopted Financial Accounting Standards Board No. 132 (SFAS 132), "Employers' Disclosures About Pensions and Other Postretirement Benefits." The 1997 and 1996 amounts shown in the tables above have been restated in accordance with the disclosures required by SFAS 132. At December 31, 1998, 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, Inc. Common Stock with a market value of $5.3 million. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996, 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 approximately $1.5 million in 1998, $1.7 million in 1997, and $1.6 million in 1996. The Company has two Employee Incentive Stock Option Plans, the first adopted in January 1994 (1994 Plan) and the second adopted in April 1998 (1998 Plan) as a supplement to the 1994 Plan. An aggregate of 3.0 million shares of Common Stock may be granted under various stock incentive programs sponsored by these plans, at a price not less than the market value of the underlying stock on the date of grant. Options may be issued under the 1994 Plan and the 1998 Plan through January 2004 and April 2008, respectively, and expire ten years from the date of grant, if not exercised. Options are also outstanding under a prior Employee Incentive Stock Option Plan (1984 Plan). Under this plan, 1.2 million shares of Common Stock were subject to options 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 1998, 1994 and 1984 Plans are summarized as follows:
1998 1997 1996 - -------------------------------------------------------------------------------- Number of Shares Under Stock Options: Outstanding at Beginning of Year 359,785 300,132 257,611 Granted 890,000 197,600 75,000 Exercised (3,550) (7,657) (5,037) Cancelled (101,615) (130,290) (27,442) ----------- ----------- -------------- Outstanding at End of Year 1,144,620 359,785 300,132 Exercisable at End of Year 106,960 80,405 92,458 Weighted-Average Exercise Price: Granted $ 19.69 $ 19.25 $ 20.87 Exercised 13.18 12.47 12.95 Cancelled 20.77 22.57 24.47 Outstanding at End of Year 20.42 22.29 24.18 Exercisable at End of Year 23.40 23.31 21.40 ----------- ----------- -------------- ----------- ----------- --------------
Information with respect to options outstanding and options exercisable at December 31, 1998 is as follows:
Average Remaining Exercise Number Contractual Number Price Outstanding Life Exercisable - ------------------------------------------------------------------------ $12.25 3,180 1.08 years 3,180 13.25 11,740 2.08 11,740 19.08 4,200 3.08 4,200 25.50 3,100 4.08 3,100 28.38 103,600 5.08 54,480 24.25 5,000 6.08 1,800 20.88 47,000 7.08 6,960 19.25 136,800 8.08 21,500 19.69 830,000 9.33 - - -------- ----------- -------------- ------------- 1,144,620 106,960 - -------- ----------- -------------- ------------- - -------- ----------- -------------- -------------
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 consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date of its stock options granted in 1998, 1997 and 1996 under SFAS 123 (See Note 1 to the consolidated financial statements), the Company's net income, as disclosed on the Consolidated Statements of Income, would have been reduced by approximately $578,000 in 1998, $103,000 in 1997 and $45,000 in 1996. Earnings per share would have been reduced by $.02 in 1998, with no earnings per share effect in 1997 and 1996. The per share weighted-average fair value of stock options granted during 1998, 1997 and 1996 was $6.07, $5.34 and $6.37, respectively, on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1998 1997 1996 - -------------------------------------------------------------------------------- Risk-Free Interest Rate 6.04% 5.69% 5.63% Expected Life, in Years 8 8 8 Expected Volatility 23.22% 18.55% 21.44% Expected Dividend Yield 2.37% 2.17% 1.99% - --------------------------------------------------------------------------------
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, 1998, 1997, and 1996. The opinion of Arthur Andersen LLP, the Company's independent accountants, 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 accountants. 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 benefit to be derived. We believe the Company's system provides this appropriate balance. The Board of Directors pursues its review and over sight 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 accountants have direct access to the Audit Committee. /s/ R. Randall Rollins /s/ Harry J. Cynkus - -------------------------- ------------------------- R. Randall Rollins Harry J. Cynkus CHAIRMAN OF THE BOARD AND CHIEF FINANCIAL OFFICER CHIEF EXECUTIVE OFFICER AND TREASURER Atlanta, Georgia February 16, 1999 REPORT OF INDEPENDENT ACCOUNTANTS 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, 1998 and 1997 and the related statements of income, earnings retained and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Atlanta, Georgia February 16 , 1999 20 - ---------------------------------------------------------------------------- Board of Director's Photograph - ---------------------------------------------------------------------------- (Standing from left): James B. Williams, Gary W. Rollins, John W. Rollins and Henry B. Tippie; (Seated from left): R. Randall Rollins, Bill J. Dismuke and Wilton Looney. 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 U 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 U Honorary Chairman of the Board of Genuine Parts Company (automotive parts distributor) James B. Williams U Chairman of the Executive Committee 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 U 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 Harry J. Cynkus Chief Financial Officer and Treasurer Michael W. Knottek Vice President and Secretary STOCKHOLDERS' INFORMATION ANNUAL MEETING The Annual Meeting of the Stockholders will be held at 9:30 a.m. Tuesday, April 27, 1999, 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 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, at the above address or write to the Chief Financial Officer 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 Chief Financial Officer 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