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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NO. 1-4422
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ROLLINS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0068479
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2170 PIEDMONT ROAD, N.E., ATLANTA, GEORGIA 30324
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 888-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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Common Stock, $1 Par Value The New York Stock Exchange
The Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of Rollins, Inc. Common Stock held by non-affiliates
on February 26, 2001, was $287,175,814 based on the closing price on the New
York Stock Exchange on such date of $19.93 per share.
Rollins, Inc. had 30,144,966 shares of Common Stock outstanding as of
February 26, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Rollins, Inc.'s Annual Report to Stockholders for the calendar year
ended December 31, 2000 are incorporated by reference into Part II, Item 6.
Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders of
Rollins, Inc. are incorporated by reference into Part III, Items 10-13.
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PART I
ITEM 1. BUSINESS.
GENERAL
Rollins, Inc. (the Company) is a national service company with headquarters
located in Atlanta, Georgia, providing pest and termite control services to both
residential and commercial customers.
Orkin Exterminating Company, Inc. (Orkin), a wholly-owned subsidiary founded
in 1901, is one of the world's largest pest and termite control companies. It
provides customized services from over 400 locations to approximately
1.6 million customers. Orkin serves customers in the United States, Canada, and
Mexico, providing essential pest control services and protection against termite
damage, rodents and insects to homes and businesses, including hotels, food
service establishments, dairy farms and transportation companies. Orkin operates
under the Orkin(R), PCO Services, Inc.(R), and Acurid Retail Services, L.L.C.(R)
trademarks and the Acurid(SM) service mark.
The Company has only one reportable segment, its pest and termite control
business. Revenue, operating profit and identifiable assets for this segment are
included in Item 8 of this document on pages 14 and 15. The Company's results of
operations and its financial condition are not reliant upon any single customer
or a few customers or the Company's foreign operations.
The dollar amount of service contracts and backlog orders as of the end of
the Company's 2000 and 1999 calendar years was approximately $18,237,393 and
$17,750,960, respectively. Backlog services and orders are usually provided
within the month following the month of receipt, except in the area of prepaid
pest control where services are usually provided within twelve months of
receipt. The Company does not have a material portion of its business that may
be subject to renegotiation of profits or termination of contracts at the
election of a governmental entity.
SEASONALITY
The business of the Company is affected by the seasonal nature of the
Company's pest and termite control services. The metamorphosis of termites in
the spring and summer (the occurrence of which is determined by the timing of
the change in seasons) has historically resulted in an increase in the revenue
and income of the Company's pest and termite control operations during such
periods.
INVENTORIES
The Company maintains a sufficient level of chemicals, materials and other
supplies to fulfill its servicing needs and to alleviate any potential
short-term shortage in availability from its national network of suppliers.
COMPETITION
The Company believes that Orkin competes favorably with competitors as one
of the world's largest pest and termite control companies.
The principal methods of competition in the Company's pest and termite
control business are quality of service and guarantees, including the money-back
guarantee on pest and termite control, and the termite retreatment and damage
repair guarantee to qualified homeowners.
RESEARCH AND DEVELOPMENT
Expenditures by the Company on research activities relating to the
development of new products or services are not significant. Some of the new and
improved service methods and products are researched, developed and produced by
unaffiliated universities and companies. Also, a portion of these methods and
products are produced to the specifications provided by the Company.
6
GOVERNMENTAL REGULATION
Local governmental licenses and permits are required in order for the
Company to conduct its pest and termite control services in certain localities.
In view of the widespread operations of the Company's service operations, the
failure of any local governments to license a facility would not have a material
adverse effect on the results of operations of the Company.
Other than the impact on the Company of governmental regulation of the use
of pesticides, the Company is not materially affected by compliance with
federal, state and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment.
EMPLOYEES
The number of persons employed by the Company as of February 26, 2001 was
approximately 9,000.
ITEM 2. PROPERTIES.
The Company's administrative headquarters and central warehouse, both of
which are owned by the Company, are located at 2170 Piedmont Road, N.E.,
Atlanta, Georgia 30324. The Company owns or leases several hundred branch
offices and operating facilities used in its business. None of the branch
offices, individually considered, represents a materially important physical
property of the Company. The facilities are suitable and adequate to meet the
current and reasonably anticipated future needs of the Company.
ITEM 3. LEGAL PROCEEDINGS.
Orkin, one of the Company's subsidiaries, is a named defendant in HELEN
CUTLER AND MARY LEWIN V. ORKIN EXTERMINATING COMPANY, INC. ET AL. pending in the
District Court of Houston County, Alabama. The plaintiffs in the above mentioned
case filed suit in March of 1996 and are seeking monetary damages and injunctive
relief for alleged breach of contract arising out of alleged missed or
inadequate reinspections. The attorneys for the plaintiffs contend that the case
is suitable for a class action and the court has ruled that the plaintiffs would
be permitted to pursue a class action lawsuit against Orkin. The Company
believes this case to be without merit and intends to defend itself vigorously
at trial. At this time, the final outcome of the litigation cannot be
determined. However, it is the opinion of Management that the ultimate
resolution of this action will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity.
On May 14, 1999, a lawsuit was filed in the Circuit Court of Macon County,
Alabama against Orkin alleging breach of contract and fraud. The suit asserts a
failure to treat and inspect the residence of the plaintiff and to repair the
termite damage and alleges that Orkin concealed alleged misconduct by
suppressing material facts. In particular, the plaintiff alleges that Orkin
failed to adequately perform the initial treatment; failed to tell her about the
extent of damages; failed to perform required reinspections; and failed to
perform repairs as required. In general, the plaintiff claims to have been
misled as to the quality of work performed. Orkin defended itself by asserting
that the plaintiff had not been misled and was told about the damages. Orkin
also presented evidence that there was structural damage not attributable to
termites, that there were significant conditions conducive to termites present
in and around the structure and that there was no evidence of live termites
found in the damaged areas since 1989. On August 18, 2000, the jury in the
matter of THE ESTATE OF ARTIE MAE JETER V. ORKIN EXTERMINATING COMPANY, INC. AND
BILL MAXWELL, returned a verdict of $80.8 million against Orkin. The award
consisted of $800,000 in compensatory damages including property damage and
mental anguish and $80.0 million in punitive damages. The jury found for the
plaintiff on the two counts alleged.
Subsequent to the judgment, Orkin filed post trial motions, including a
motion to reduce the judgment. On December 11, 2000, the trial judge issued an
order reducing the total amount of the award to $4.4 million against Orkin. This
amount consists of $400,000 in compensatory damages and $4.0 million
7
in punitive damages. It remains Orkin's position that it complied with its
obligations and that it did not attempt to conceal any misconduct or suppress
any material facts. Orkin plans to appeal this reduced judgment to the Supreme
Court of Alabama. There is no guarantee that the Alabama Supreme Court will
further reduce the judgment rendered in the trial court. It is the opinion of
Management, however, that the ultimate resolution of this litigation will not
have a material impact on the financial condition, results of operations or
liquidity of the Company.
Additionally, in the normal course of business, the Company is a defendant
in a number of lawsuits which allege that plaintiffs have been damaged as a
result of the rendering of services by Company personnel and equipment. The
Company is actively contesting these actions. It is the opinion of Management,
however, that the outcome of these actions will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2000.
ITEM 4.A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Each of the executive officers of the Company was elected by the Board of
Directors to serve until the Board of Directors' meeting immediately following
the next annual meeting of stockholders or until his earlier removal by the
Board of Directors or his resignation. The following table lists the executive
officers of the Company and their ages, offices with the Company, and the dates
from which they have continually served in their present offices with the
Company.
DATE FIRST ELECTED
NAME AGE OFFICE WITH REGISTRANT TO PRESENT OFFICE
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R. Randall Rollins (1) 69 Chairman of the Board and Chief 10/22/91
Executive Officer
Gary W. Rollins (1) 56 President and Chief Operating 1/24/84
Officer
Harry J. Cynkus (2) 51 Chief Financial Officer and 5/28/98
Treasurer
Michael W. Knottek (3) 56 Vice President and Secretary 5/28/98
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(1) R. Randall Rollins and Gary W. Rollins are brothers.
(2) Harry J. Cynkus joined the Company in April 1998 and, in May 1998, was
elected Chief Financial Officer and Treasurer. From 1996 to 1998,
Mr. Cynkus served as Chief Financial Officer of Mayer Electric Company, a
$300 million wholesaler of electrical supplies. From 1994 to 1996, he served
as Vice President--Information Systems for Brach & Brock Confections, the
acquirer of Brock Candy Company, where Mr. Cynkus served as Vice
President--Finance and Chief Financial Officer from 1992 to 1994. From 1989
to 1992, he served as Vice President--Finance of Initial USA, a division of
an international support services company. Mr. Cynkus is a Certified Public
Accountant.
(3) Michael W. Knottek joined the Company in June 1997 as Vice President and, in
addition, was elected Secretary in May 1998. From 1992 to 1997, Mr. Knottek
held a variety of executive management positions with National Linen
Service, including Senior Vice President of Finance and Administration and
Chief Financial Officer. Prior to 1992, he held a variety of senior
positions with Initial USA, finally serving as President from 1991 to 1992.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company is listed on the New York and Pacific Stock
Exchanges and is traded on the Philadelphia, Chicago and Boston Exchanges under
the symbol ROL. The high and low prices of the Company's common stock and
dividends paid for each quarter in the years ended December 31, 2000 and 1999
were as follows:
STOCK PRICES AND DIVIDENDS
Rounded to the nearest 1/16
Stock Price Dividends Stock Price Dividends
------------------- Paid ------------------- Paid
2000 High Low Per Share 1999 High Low Per Share
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First Quarter $16 3/8 $12 7/8 $.05 First Quarter $17 3/4 $14 3/4 $.05
Second Quarter 15 1/16 11 1/8 .05 Second Quarter 17 3/8 15 1/2 .05
Third Quarter 15 1/2 14 1/4 .05 Third Quarter 17 1/8 15 5/16 .05
Fourth Quarter 22 3/8 14 11/16 .05 Fourth Quarter 16 3/4 14 3/4 .05
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THE NUMBER OF STOCKHOLDERS OF RECORD AS OF FEBRUARY 26, 2001 WAS 1,927.
ITEM 6. SELECTED FINANCIAL DATA.
The information contained under the heading, "5-Year Financial Summary", on
page 4 of the 2000 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
% Change
From Prior
Year Increase
(Decrease)
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(IN THOUSANDS) 2000 1999 1998 2000 1999
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Revenues $649,558 $586,639 $549,136 10.7% 6.8%
Income From Continuing Operations After
Income Taxes 9,550 7,150 3,177 33.6 125.1
Income From Discontinued Operations After
Income Taxes -- -- 3,410 -- (100.0)
Net Income 9,550 7,150 6,587 33.6 8.5
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GENERAL OPERATING COMMENTS
The successful integration of the strategic acquisitions completed in 1999,
along with the Company's continued emphasis on building revenues, led to an
increase in revenues of 10.7%, the highest annual revenue growth in seven years.
The financial results for the fourth quarter 2000 represent the eleventh
consecutive quarter-over-quarter improvements in both revenues and income from
continuing operations.
For the year ended December 31, 2000, the Company recognized net income of
$9.5 million, a 33.6% increase over 1999. The overall improvement in
profitability is largely a result of improved revenues as well as improved Cost
of Services Provided and Sales, General & Administrative expenses as a
percentage of revenues, partially offset by lower interest income and higher
depreciation and income taxes.
9
CONTINUING OPERATIONS--2000 VERSUS 1999
The 10.7% increase in revenues for the year ended December 31, 2000 was due
to increases in both pest and termite control revenues. The continuing customer
acceptance of the Company's alternate service offering in 2000 resulted in
higher residential pest control revenues. The Company's commercial pest control
division continues to be its fastest growing division, with a substantial
revenue improvement over last year. The Company's continued emphasis on its
commercial pest control operations was evidenced by the growth in customer base
and a higher average sales price. On July 1, 2000, the Company further expanded
its commercial operations through the acquisition of the remaining 50% of its
joint venture, Acurid Retail Services, L.L.C., created to sell and provide pest
elimination services to customers in the retail market.
Termite control sales significantly increased in 2000, due primarily to the
success of the Company's directed-liquid termite baiting program, partially
offset by a lower customer base. As this new approach to termite control becomes
more established, the Company anticipates further demand for the service and a
potential increase in related termite control revenues. This treatment method
creates monthly recurring monitoring revenues that are deferred to the balance
sheet in the form of unearned revenue, which is recognized in future periods
when the service is rendered.
Over the past couple of years, the Company has acquired several pest control
companies in the United States and Canada. The Company currently has no plans to
continue its acquisition activities as aggressively as in 2000 and 1999;
however, should an unusually attractive acquisition opportunity present itself,
it will be given due consideration. With the slowing of our acquisition activity
and the full absorption of our prior year acquisitions, the Company expects to
see its revenue growth rates become more comparable to historical levels.
Cost of Services Provided increased $32.7 million over last year, but
improved to represent 57.6% of revenues compared to 58.2% last year. This
improvement as a percentage of revenues was primarily attributable to margin
improvement in service salaries, personnel related expenses, insurance and
claims and improved inventory management.
Depreciation and Amortization increased approximately $5.0 million or 37.1%
over the prior year, due primarily to an increase in amortization of goodwill
and other intangibles as a result of the Company's prior year acquisitions. With
the implementation of our new proprietary branch computer system, the Company
can expect some continued increase in depreciation as the remainder of the
system is placed into service over the course of 2001.
Sales, General and Administrative increased $18.8 million over last year,
but improved to represent 37.3% of revenues compared to 38.1% last year. This
improvement as a percentage of revenues resulted primarily from better
leveraging of fixed costs due to higher revenues and improved efficiencies in
sales salaries and other personnel related costs.
Interest income declined $2.6 million or 85.2% during the year primarily due
to a decrease in invested funds over the prior year. The decrease in invested
funds resulted principally from the conversion of investments to cash to fund
acquisitions during the last part of 1999, and to fund the recent upgrades to
our management information systems.
The Company's net tax provision of $5.9 million as compared to $4.4 million
in 1999, reflects increased taxable income in 2000.
In 2001 the Company plans to further expand its alternate service program,
which is becoming a larger part of the Company's residential pest control
business with its improved profit margins. The Company will also continue to
emphasize its commercial pest control business with the national launch of
Acurid(SM), a new high end service that offers businesses a customized approach
to pest control.
10
FOCUS, our new proprietary branch computer system, was introduced in
selected branches in 2000 and is scheduled to be introduced Company-wide in
2001. One of the many expected benefits of FOCUS is that it will provide the
Company with the ability to identify customer trends, which can then be used to
adopt and refine new strategies and business practices. The efficiency and
productivity of the Company's core operations is also expected to be
strengthened in 2001 with the implementation of the Company's new routing and
scheduling software, which works in conjunction with FOCUS.
CONTINUING OPERATIONS--1999 VERSUS 1998
Revenues from both the Company's pest and termite control operations
experienced increases during the year. Factors contributing to the Company's
overall 6.8% revenue growth were increases in customer base and average sales
price.
The Company's continued efforts to provide services that best fit our
customers' needs, along with the positive impact of acquisitions, have led to an
increase in our residential and commercial pest control customer base.
The increase in termite control revenue is primarily a result of our new
service offering, the directed-liquid termite baiting program. Termite baiting
was implemented in selected markets during 1999 and was offered Company-wide in
2000.
Cost of Services Provided was approximately $14.1 million higher than the
prior year but improved to represent 58.2% of revenues compared to 59.6% for the
prior year. This improvement as a percentage of revenues was primarily due to
lower termite claim provisions, lower operating insurance costs and lower
material and supply costs as well as better leveraging of fixed costs due to
higher revenues.
Sales, General and Administrative increased $9.1 million but decreased as a
percent of revenues to 38.1% compared to 39.0% for the prior year. This
improvement as a percentage of revenues resulted primarily from better
leveraging of our fixed costs due to higher revenues and improved efficiencies
in sales, fleet and telephone costs. These cost savings were partially offset by
additional costs related to various new service and marketing programs
throughout the Company.
Interest Income declined $5.9 million or 66.1% during the year primarily due
to a decrease in invested funds over the prior year. The decrease in invested
funds resulted primarily from the conversion of investments to cash to fund
acquisitions.
The Company's net tax provision of $4.4 million, as compared to
$1.9 million in 1998, reflected increased taxable income in 1999.
DISCONTINUED OPERATIONS
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 the operations divested in 1997.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. The adoption of this standard, effective for the
Company as of January 1, 2001, did not impact the results of operations or
financial condition of the Company as the Company is not a party to any
derivative transactions that fall under the provisions of this statement.
During 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements,"
which clarified the basic criteria for recognizing revenues.
11
In 2000, the Company evaluated its revenue recognition practices and determined
that these practices were in compliance with this bulletin.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its current cash balances, future cash flows from
operating activities and availability under its line of credit will be
sufficient to finance its current operations and obligations, and fund expansion
of the business for the foreseeable future. The Company experienced positive
cash flow from operating activities during the year in the amount of
$11.4 million. This increase in cash flow is an improvement over cash flow
provided by operating activities of $8.2 million in 1999 and cash flow used in
operating activities of $679,000 in 1998. The 2000 increase resulted primarily
from higher net income from continuing operations in 2000, adjusted for non-cash
items.
During the year, cash used in investing activities was approximately
$8.8 million compared with cash provided by investing activities of
$17.4 million last year. The decrease in cash provided by investing activities
is the result primarily of a decline in the conversion of marketable securities
to cash to fund acquisitions, partially offset by a decline in expenditures for
capital assets and acquisitions. In 2000, cash provided by the sale of
marketable securities was approximately $13.1 million, compared to
$97.1 million in 1999. For the year ended December 31, 2000, the Company
invested $21.8 million in acquisitions and capital expenditures and expects to
invest between $7.5 and $10.0 million in 2001, inclusive of improvements to its
management information systems. Acquisition expenditures consisted primarily of
the acquisition of Acurid Retail. See Note 2 to the accompanying consolidated
financial statements for further discussion. Capital expenditures in 2000
consisted primarily of equipment replacements and upgrades and improvements to
the Company's management information systems.
In 2000, the Company experienced an improvement of approximately
$13.1 million in cash used in financing activities. This improvement in cash
used is a result of a decrease in the Company's common stock repurchases and
retirements and an increase in the use of its credit facilities. Of total cash
used in financing activities, approximately $154,000 was paid for repurchases of
10,177 shares of the Company's Common Stock as part of an odd-lot buy-back
program, compared to $11.8 million used to repurchase 718,900 shares of stock
during 1999. These repurchased shares were retired in 2000; an additional
870,923 shares may be repurchased under the current authorization. The capital
expenditures, acquisitions, cash dividends and stock repurchases were primarily
funded through existing cash balances, marketable securities, operating
activities and borrowings under the Company's $40.0 million line of credit, of
which the full amount was available for borrowing as of February 26, 2001.
In 1997 and 1998, Orkin and other pest control industry companies 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 the FTC of the Company's intention to continue to cooperate fully with
this investigation. Since providing the FTC with the information requested, the
Company has not received any further communication from the FTC regarding this
matter. At this point in time, management does not believe this investigation
will have a material effect upon its results of operations or financial
condition. In addition, the Company is aggressively defending a class action
lawsuit filed in Houston County, Alabama and is appealing a judgment that was
rendered against the Company by the Circuit Court of Macon County, Alabama. For
further discussion of these legal proceedings, see Part I, Item 3 beginning on
page 7 of this Form 10-K.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements regarding the expected impact of the outcome of
litigation arising in the ordinary course of business and the outcome of
12
the HELEN CUTLER AND MARY LEWIN V. ORKIN EXTERMINATING COMPANY., INC., ET AL.
("CUTLER") litigation and the outcome of THE ESTATE OF ARTIE MAE JETER V. ORKIN
EXTERMINATING COMPANY, INC. AND BILL MAXWELL ("JETER") appeals process on the
Company's financial condition, results of operations and liquidity; the
Company's potential for recurring revenue; and the Company's projected 2001
capital expenditures and performance. The actual results of the Company could
differ materially from those indicated by the forward-looking statements because
of various risks and uncertainties including, without limitation, the
possibility of an adverse ruling against the Company in the CUTLER or other
litigation; the possibility that the appellate court does not further reduce the
judgment rendered by the trial court in the JETER litigation; general economic
conditions; market risk; changes in industry practices or technologies; the
degree of success of the Company's termite process reforms and pest control
selling and treatment methods; the Company's ability to identify potential
acquisitions; climate and weather trends; competitive factors and pricing
practices; potential increases in labor costs; and changes in various government
laws and regulations, including environmental regulations. All of the foregoing
risks and uncertainties are beyond the ability of the Company to control, and in
many cases the Company cannot predict the risks and uncertainties that could
cause its actual results to differ materially from those indicated by the
forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK
As of December 31, 2000, the Company no longer maintains a material
investment portfolio subject to interest rate risk exposure. The Company is,
however, subject to interest rate risk exposure through borrowings on its
$40.0 million line of credit. Due to the immaterial amount of such borrowings as
of December 31, 2000 and as currently anticipated at December 31, 2001, this
risk is not expected to have a material effect upon the Company's results of
operations or financial position going forward.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ROLLINS, INC. AND SUBSIDIARIES
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AT DECEMBER 31, (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) 2000 1999
----------------------
ASSETS
Cash and Short-Term Investments $ 399 $ 5,689
Marketable Securities -- 12,967
Trade Receivables, Net 50,099 44,878
Materials and Supplies 12,980 13,429
Deferred Income Taxes 18,472 19,644
Other Current Assets 7,019 8,150
----------------------
Current Assets 88,969 104,757
Equipment and Property, Net 49,349 46,245
Goodwill and Other Intangible Assets 115,966 112,024
Deferred Income Taxes 42,645 45,015
Other Assets 1,890 1,907
----------------------
Total Assets $298,819 $309,948
----------------------
LIABILITIES
Capital Lease Obligations $ 1,829 $ 3,638
Accounts Payable 15,302 15,275
Accrued Insurance 10,126 11,165
Accrued Payroll 21,195 23,100
Accrued Pension 3,823 6,523
Unearned Revenue 28,381 20,441
State Income Taxes Payable 6,181 6,295
Accrual for Termite Contracts 15,000 15,000
Other Expenses 8,969 7,012
----------------------
Current Liabilities 110,806 108,449
Capital Lease Obligations 256 2,450
Accrued Insurance 39,400 43,745
Accrual for Termite Contracts 42,651 54,352
Long-Term Accrued Liabilities 27,107 29,162
----------------------
Total Liabilities 220,220 238,158
----------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000 shares
authorized; 30,036,241 and 29,881,402 shares issued and
outstanding at December 31, 2000 and 1999, respectively 30,036 29,881
Earnings Retained 48,563 41,909
----------------------
Total Stockholders' Equity 78,599 71,790
----------------------
Total Liabilities and Stockholders' Equity $298,819 $309,948
----------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
14
CONSOLIDATED STATEMENTS OF INCOME
ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, (IN THOUSANDS EXCEPT PER SHARE DATA) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
REVENUES
Customer Services $649,558 $586,639 $549,136
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COSTS AND EXPENSES
Cost of Services Provided 374,141 341,475 327,353
Depreciation and Amortization 18,421 13,433 11,458
Sales, General and Administrative 242,043 223,247 214,182
Interest Income (450) (3,048) (8,981)
------------------------------------
634,155 575,107 544,012
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 15,403 11,532 5,124
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PROVISION FOR INCOME TAXES
Current 3,182 (2,694) (4,937)
Deferred 2,671 7,076 6,884
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5,853 4,382 1,947
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INCOME FROM CONTINUING OPERATIONS 9,550 7,150 3,177
------------------------------------
DISCONTINUED OPERATIONS
Gain on Disposal, Less Income Tax Expense of $2,090 -- -- 3,410
------------------------------------
INCOME FROM DISCONTINUED OPERATIONS -- -- 3,410
------------------------------------
NET INCOME $ 9,550 $ 7,150 $ 6,587
------------------------------------
EARNINGS PER SHARE--BASIC AND DILUTED:
Continuing Operations $ 0.32 $ 0.24 $ 0.10
Discontinued Operations -- -- 0.11
------------------------------------
Net Income $ 0.32 $ 0.24 $ 0.21
------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS RETAINED
ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, (IN THOUSANDS EXCEPT PER SHARE DATA) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Balance at Beginning of Year $ 41,909 $ 49,746 $112,365
Net Income 9,550 7,150 6,587
Cash Dividends (6,031) (6,076) (16,064)
Common Stock Purchased and Retired (144) (11,076) (53,429)
Common Stock Issued for Acquisition of Companies 2,307 1,892 --
Other 972 273 287
------------------------------------
Balance at End of Year $ 48,563 $ 41,909 $ 49,746
------------------------------------
DIVIDENDS PER SHARE $ .20 $ .20 $ .50
------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 9,550 $ 7,150 $ 6,587
Adjustments to Reconcile Net Income to Net Cash Provided
by (Used in) Operating Activities:
Depreciation and Amortization 18,421 13,433 11,458
Provision for Deferred Income Taxes 2,671 7,076 8,974
Discontinued Operations, Net of Taxes -- -- (3,410)
Other, Net 1,102 1,471 5,121
(Increase) Decrease in Assets:
Trade Receivables (3,210) 2,243 7,087
Materials and Supplies 614 1,310 1,719
Other Current Assets 948 (2,576) 2,726
Other Non-Current Assets (232) (6,611) 520
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (7,129) 631 (16,255)
Unearned Revenue 7,940 5,134 1,379
Accrued Insurance (5,411) (2,413) 5,220
Accrual for Termite Contracts (11,489) (22,798) (24,850)
Long-Term Accrued Liabilities (2,328) 4,112 (6,955)
------------------------------------
Net Cash Provided by (Used in) Operating Activities 11,447 8,162 (679)
------------------------------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (14,411) (18,818) (10,402)
Net Cash Used for Acquisition of Companies (7,437) (60,964) (3,517)
Marketable Securities, Net 13,084 97,145 (35,033)
------------------------------------
Net Cash Provided by (Used in) Investing Activities (8,764) 17,363 (48,952)
------------------------------------
FINANCING ACTIVITIES
Dividends Paid (6,031) (6,076) (16,064)
Common Stock Purchased and Retired (154) (11,795) (56,195)
Payments on Capital Leases (3,397) (3,421) (2,868)
Net Borrowings Under Line of Credit Agreement 1,400 -- --
Other 209 212 160
------------------------------------
Net Cash Used in Financing Activities (7,973) (21,080) (74,967)
------------------------------------
Net Increase (Decrease) in Cash and Short-Term
Investments (5,290) 4,445 (124,598)
Cash and Short-Term Investments at Beginning of Year 5,689 1,244 125,842
------------------------------------
Cash and Short-Term Investments at End of Year $ 399 $ 5,689 $ 1,244
------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998, 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 and termite
control services to both residential and commercial customers.
Orkin Exterminating Company, Inc. (Orkin), a wholly-owned subsidiary founded
in 1901, is one of the world's largest pest and termite control companies. It
provides customized services from over 400 locations to approximately
1.6 million customers. Orkin serves customers in the United States, Canada, and
Mexico, providing essential pest control services and protection against termite
damage, rodents and insects to homes and businesses, including hotels, food
service establishments, dairy farms and transportation companies. Orkin operates
under the Orkin(R), PCO Services, Inc.(R), and Acurid Retail Services, L.L.C.(R)
trademarks and the Acurid(SM) service mark.
The Company has only one reportable segment, its pest and termite control
business. The Company's results of operations and its financial condition are
not reliant upon any single customer or a few customers or the Company's foreign
operations.
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
accounting principles generally accepted in the United States 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 of $11.4 million in 2000 and $9.8 million for
each of the years 1999 and 1998 have been reflected in the Consolidated
Statements of Income in the line item entitled Depreciation and Amortization.
These annual provisions for depreciation are computed using the following asset
lives: buildings, ten to forty years; and furniture, fixtures, and operating
equipment, three to ten 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
17
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
$30.8 million, $28.3 million and $27.5 million in 2000, 1999, and 1998,
respectively.
INCOME TAXES--The Company follows the practice of providing for income taxes
based on SFAS 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 accordance with SFAS 128, "Earnings Per Share" (EPS), the
Company presents 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) 2000 1999 1998
- ----------------------------------------------------------------------------------
Basic EPS 30,009 30,325 31,973
Effect of Dilutive Stock Options 37 7 30
------------------------------
Diluted EPS 30,046 30,332 32,003
- ----------------------------------------------------------------------------------
STOCK-BASED COMPENSATION--As permitted by SFAS 123, "Accounting for Stock-Based
Compensation," the Company accounts 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 10 to the
consolidated financial statements for additional information.
COMPREHENSIVE INCOME--For the years ended December 31, 2000, 1999, and 1998,
comprehensive income is not materially different from net income and, as a
result, the impact of SFAS 130, "Reporting Comprehensive Income," is not
reflected in the Company's consolidated financial statements.
NEW ACCOUNTING STANDARD--The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities,"as amended. The adoption of this standard,
effective for the Company as of January 1, 2001, did not impact the results of
operations or financial condition of the Company as the Company is not a party
to any derivative transactions that fall under the provisions of this statement.
RECLASSIFICATIONS--Certain amounts for previous years have been reclassified to
conform with the 2000 consolidated financial statement presentation.
2. ACQUISITIONS AND JOINT VENTURE
On April 30, 1999, the Company and Johnson Wax Professional entered into a
joint venture, Acurid Retail Services, L.L.C. (Acurid Retail), created to sell
and provide pest elimination services to customers in the retail market and
jointly contributed existing customers to the joint venture. The Company owned
50% of the joint venture, which was accounted for using the equity method. On
July 1, 2000, the Company further expanded its commercial operations through the
acquisition of the remaining 50% of the joint venture. The acquisition was
accounted for as a purchase with the results of operations of the business
acquired included from the effective date of the acquisition.
In addition, on April 30, 1999, the Company's wholly-owned subsidiary, Orkin
Exterminating Company, Inc. (Orkin), acquired the remaining pest elimination
business operations of PRISM, a subsidiary of Johnson Wax Professional, for
approximately twenty-four million dollars. The acquisition was
18
accounted for as a purchase with the results of operations of the business
acquired included from the effective date of the acquisition. The acquisition
resulted in excess costs over net assets acquired of approximately sixteen
million dollars which are being amortized over a life of twenty years using the
straight-line method.
On October 29, 1999, Orkin acquired PCO Services, Inc. (PCO), a subsidiary
of Johnson Wax Professional. Orkin acquired all the shares of capital stock of
PCO for approximately twenty-five million dollars. The acquisition was accounted
for as a purchase with the results of operations of the business acquired
included from the effective date of the acquisition. The acquisition resulted in
excess costs over net assets acquired of approximately five hundred thousand
dollars which are being amortized over a life of twenty years using the
straight-line method.
On December 3, 1999, Orkin acquired the pest control business operations of
Redd Pest Control Company, Inc. (Redd) for approximately thirteen million
dollars, of which approximately seven million was paid in cash. Under the terms
of the agreement, Orkin acquired all the pest control customers of Redd,
together with certain assets. The acquisition was accounted for as a purchase
with the results of operations of the business acquired included from the
effective date of the acquisition. The acquisition resulted in excess costs over
net assets acquired of approximately eight million dollars which are being
amortized over a life of twenty years using the straight-line method.
3. DISCONTINUED OPERATIONS
In the fourth quarter of 1998, the Company reevaluated its liabilities
associated with the operations divested in 1997 and recorded an additional gain
of $3.4 million, net of taxes.
4. TRADE RECEIVABLES
Trade receivables, net, at December 31, 2000, totaling $50.1 million and at
December 31, 1999, totaling $44.9 million are net of allowances for doubtful
accounts of $8.7 million and $4.9 million, respectively. Trade receivables
include installment receivable amounts which are due subsequent to one year from
the balance sheet dates. These amounts were approximately $7.2 million and
$6.7 million at the end of 2000 and 1999, 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) 2000 1999
- -------------------------------------------------------------------------------
Buildings $10,009 $10,158
Operating Equipment 62,309 56,445
Furniture and Fixtures 7,414 10,186
Computer Equipment Under Capital Leases 7,787 7,787
--------------------
87,519 84,576
Less--Accumulated Depreciation 42,046 41,912
--------------------
45,473 42,664
Land 3,876 3,581
--------------------
$49,349 $46,245
- -------------------------------------------------------------------------------
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of cost over net assets of businesses
acquired and is stated at cost less accumulated amortization. Goodwill which
arose from acquisitions prior to November 1970 is not being amortized for
financial statement purposes, since, in the opinion of Management, there has
been no
19
decrease in the value of the acquired businesses. Goodwill arising from
acquisitions since November 1970 is being amortized from fifteen to forty years.
Other intangible assets include trademarks, customer contracts and
non-compete agreements and are being amortized from three to twenty years.
7. INCOME TAXES
A reconciliation between taxes computed at the statutory rate on the Income
From Continuing Operations Before Income Taxes and the Provision for Income
Taxes is as follows:
(IN THOUSANDS) 2000 1999 1998
- ----------------------------------------------------------------------------------
Federal Income Taxes at Statutory Rate $5,391 $4,036 $1,595
State Income Taxes (Net of Federal Benefit) 885 697 367
Other (423) (351) (15)
------------------------------
$5,853 $4,382 $1,947
- ----------------------------------------------------------------------------------
The Provision for Income Taxes was based on a 38.0% estimated effective
income tax rate on Income From Continuing Operations Before Income Taxes for the
years ended December 31, 2000, 1999 and 1998. The effective income tax rate
differs from the annual federal statutory tax rate primarily because of state
income taxes. For the year ended December 31, 2000, the Company received a
refund of income taxes of $2.8 million, net of payments. During 1999, the
Company paid income taxes of $662,000, net of refunds received. For 1998, the
Company received a refund of income taxes of $2.4 million, net of payments.
Components of the net deferred income tax assets (liabilities) at
December 31, 2000 and 1999 include:
(In thousands) 2000 1999
- -------------------------------------------------------------------------------
Termite Accrual $31,757 $34,322
Insurance Reserves 28,216 35,035
Safe Harbor Lease (6,557) (9,847)
Other 7,701 5,149
--------------------
$61,117 $64,659
- -------------------------------------------------------------------------------
8. ACCRUAL FOR TERMITE CONTRACTS
The Company maintains an accrual for termite contracts representing the
estimated costs incurred but as yet unpaid related to termite work performed.
The related liabilities at December 31, 2000 and 1999 have been reflected in the
Consolidated Statements of Financial Position in the line items entitled Accrual
for Termite Contracts.
20
9. 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, 2000, are
summarized as follows:
Capitalized Operating
(In thousands) Leases Leases
- -------------------------------------------------------------------------------
2001 $ 1,899 $22,122
2002 258 17,025
2003 -- 12,370
2004 -- 9,175
2005 -- 6,463
Thereafter -- 29,437
------- -------
$ 2,157 $96,592
-------
Amount Representing Interest (72)
-------
Present Value of Obligations 2,085
Portion Due Within One Year $(1,829)
-------
Long-Term Obligations $ 256
- -------------------------------------------------------------------------------
Total rental expense under operating leases charged to operations was
$29.4 million, $25.6 million and $25.4 million for the years ended December 31,
2000, 1999, and 1998, respectively.
The Company maintains a line of credit with a bank that allows it to borrow
up to $40.0 million on an unsecured basis at the bank's prime rate of interest
or the indexed London Interbank Offered Rate (LIBOR). As of December 31, 2000,
outstanding borrowings of $1.4 million under this credit facility were reflected
in the Consolidated Statements of Financial Position in the line item entitled
Other Expenses. No amounts were outstanding under this credit facility as of
December 31, 1999.
The Company is aggressively defending a lawsuit filed in the District Court
of Houston County, Alabama. At this time, the final outcome of the litigation
cannot be determined. The Company is also planning to appeal to the Supreme
Court of Alabama a $4.4 million judgment rendered against it by the Circuit
Court of Macon County, Alabama. There is no guarantee that the Alabama Supreme
Court will further reduce the judgment rendered by the trial court. However, it
is the opinion of Management that the ultimate resolution of the Houston County
and Macon County lawsuits will not have a material impact on the financial
condition, results of operations or liquidity of the Company. For further
discussion of these legal proceedings, see Part I, Item 3 beginning on page 7 of
this Form 10-K.
The Company is involved in other litigation matters incidental to its
business. With respect to such other suits, Management does not believe the
litigation in which it is involved will have a material adverse effect upon its
results of operations or financial condition.
10. 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.
21
The funded status of the Plan and the resulting accrued benefit liability
are summarized as follows as of December 31:
(IN THOUSANDS) 2000 1999
- -----------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year $75,426 $77,288
Service Cost 4,097 4,379
Interest Cost 6,307 5,694
Actuarial (Gain) Loss 3,172 (8,263)
Benefits Paid (3,356) (3,672)
-----------------
Benefit Obligation at End of Year 85,646 75,426
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets at Beginning of Year 66,514 63,258
Actual Return on Plan Assets 4,380 2,928
Employer Contribution 6,528 4,000
Benefits Paid (3,356) (3,672)
-----------------
Fair Value of Plan Assets at End of Year 74,066 66,514
-----------------
Funded Status (11,580) (8,912)
Unrecognized Net Actuarial Loss 7,832 2,546
Unrecognized Prior Service Cost (75) (157)
-----------------
Accrued Benefit Liability $(3,823) $(6,523)
- -----------------------------------------------------------------------------
Accrued benefit liabilities at December 31, 2000 and 1999 of $3.8 million
and $6.5 million, respectively, have been reflected in the Consolidated
Statements of Financial Position in the line item entitled Accrued Pension.
The weighted-average assumptions as of December 31 were as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Discount Rate 7.75% 8.00% 7.00%
Expected Return on Plan Assets 9.50% 9.50% 9.50%
Rate of Compensation Increase 4.75% 5.00% 4.00%
- --------------------------------------------------------------------------------
The components of net periodic benefit cost for the past three years are
summarized as follows:
(IN THOUSANDS) 2000 1999 1998
- ----------------------------------------------------------------------------------
Service Cost $4,097 $4,379 $3,611
Interest Cost 6,307 5,694 5,182
Expected Return on Plan Assets (6,494) (5,751) (5,269)
Net Amortizations:
Amortization of Net Loss -- 634 203
Amortization of Net Prior Service Cost (82) (69) (36)
------------------------------
Net Periodic Benefit Cost $3,828 $4,887 $3,691
- ----------------------------------------------------------------------------------
In 1998, the Company adopted SFAS 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits." At December 31, 2000, 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 $6.1 million.
22
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 $2.1 million in 2000,
$2.2 million in 1999 and $1.5 million in 1998.
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:
2000 1999 1998
- -----------------------------------------------------------------------------------
Number of Shares Under Stock Options:
Outstanding at Beginning of Year 1,766,174 1,114,620 359,785
Granted 197,500 874,000 890,000
Exercised (1,784) (246) (3,550)
Cancelled (126,450) (252,200) (101,615)
------------------------------------------
Outstanding at End of Year 1,835,440 1,766,174 1,144,620
Exercisable at End of Year 547,480 263,834 106,960
Weighted-Average Exercise Price:
Granted $ 14.75 $ 16.31 $ 19.69
Exercised 13.25 13.25 13.18
Cancelled 16.83 18.53 20.77
Outstanding at End of Year 18.08 18.66 20.42
Exercisable at End of Year 19.10 21.29 23.40
- -----------------------------------------------------------------------------------
Information with respect to options outstanding and options exercisable at
December 31, 2000 is as follows:
Average
Remaining
Number Contractual Life Number
Exercise Price Outstanding (In Years) Exercisable
- ------------------------------------------------------------------------------
$13.25 10,640 .08 10,640
19.08 4,200 1.08 4,200
25.50 2,900 2.08 2,900
28.38 77,900 3.08 57,200
24.25 4,000 4.08 2,400
20.88 39,000 5.08 12,000
19.25 114,800 6.08 54,240
19.69 695,000 7.33 264,000
16.31 699,500 8.08 139,900
14.75 187,500 9.08 --
- ------------------------------------------------------------------------------
1,835,440 547,480
- ------------------------------------------------------------------------------
23
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 2000,
1999, and 1998 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 $1.4 million in
2000, $1.2 million in 1999, and $578,000 in 1998. Earnings per share would have
been reduced by $.05 in 2000, $.04 in 1999 and $.02 in 1998.
The per share weighted-average fair value of stock options granted during
2000, 1999, and 1998 was $5.62, $4.30, and $6.07, respectively, on the date of
grant, using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2000 1999 1998
- ----------------------------------------------------------------------------------
Risk-Free Interest Rate 6.90% 5.12% 6.04%
Expected Life, in Years 8 8 8
Expected Volatility 20.66% 21.30% 23.22%
Expected Dividend Yield 1.25% 2.49% 2.37%
- ----------------------------------------------------------------------------------
11. UNAUDITED QUARTERLY DATA
PROFIT AND LOSS INFORMATION
(In thousands except per share data) First Second Third Fourth
- ----------------------------------------------------------------------------------------------------
2000
Revenues $149,550 $180,528 $172,373 $147,107
Net Income (Loss) 794 8,102 2,363 (1,709)
Earnings (Loss) per Share--Basic and Diluted 0.03 0.27 0.08 (0.06)
- ----------------------------------------------------------------------------------------------------
1999
Revenues $129,886 $162,342 $154,102 $140,309
Net Income (Loss) 467 7,623 1,432 (2,372)
Earnings (Loss) per Share--Basic and Diluted 0.02 0.25 0.05 (0.08)
- ----------------------------------------------------------------------------------------------------
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--Basic and Diluted:
Continuing Operations (0.05) 0.21 0.03 (0.09)
Discontinued Operations -- -- -- 0.11
--------------------------------------------------
Net Income (Loss) (0.05) 0.21 0.03 0.02
- ----------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under the captions "Election of Directors" included on pages
4 and 5 and "Section 16(a) Beneficial Ownership Reporting Compliance" included
on page 13 of the Proxy Statement for the Annual Meeting of Stockholders to be
held April 24, 2001 is incorporated herein by reference. Additional information
concerning executive officers is included in Part I, Item 4.A. of this
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the caption "Executive Compensation" included on pages
10 through 12 of the Proxy Statement for the Annual Meeting of Stockholders to
be held April 24, 2001 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the captions "Capital Stock" and "Election of
Directors" included on pages 2 through 3 and pages 4 through 5, respectively, of
the Proxy Statement for the Annual Meeting of Stockholders to be held April 24,
2001 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Compensation Committee Interlocks and
Insider Participation" included on page 9 of the Proxy Statement for the Annual
Meeting of Stockholders to be held April 24, 2001 is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND
EXHIBITS.
1. Consolidated financial statements listed in the accompanying Index to
Consolidated Financial Statements and Schedule are filed as part of
this report.
2. The financial statement schedule listed in the accompanying Index to
Consolidated Financial Statements and Schedule is filed as part of
this report.
3. Exhibits listed in the accompanying Index to Exhibits are filed as
part of this report. The following such exhibits are management
contracts or compensatory plans or arrangements:
(10) (a) Rollins, Inc. 1984 Employee Incentive Stock Option Plan is
incorporated herein by reference to Exhibit 10 as filed with
its Form 10-K for the year ended December 31, 1996.
(10) (b) Rollins, Inc. 1994 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit (10)(b) as filed
with its Form 10-K for the year ended December 31, 1999.
(10) (c) Rollins, Inc. 1998 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit A of the March
24, 1998 Proxy Statement for the Annual Meeting of
Stockholders held on April 28, 1998.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed or were required to be filed during
the fourth quarter of calendar year 2000.
25
(c) Exhibits (inclusive of item 3 above):
(2)(a) Asset Purchase Agreement by and between Orkin Exterminating
Company, Inc. and PRISM Integrated Sanitation Management,
Inc. is incorporated herein by reference to Exhibit (2) as
filed with its Form 10-Q filed on August 16, 1999.
(b) Stock Purchase Agreement as of September 30, 1999, by and
among Orkin Canada, Inc., Orkin Expansion, Inc., S.C.
Johnson Commercial Markets, Inc., and S.C. Johnson
Professional, Inc. is incorporated herein by reference to
Exhibit (2)(b) as filed with its Form 10-K for the year
ended December 31, 1999.
(c) Asset Purchase Agreement as of October 19, 1999 by and
between Orkin Exterminating Company, Inc., Redd Pest Control
Company, Inc., and Richard L. Redd is incorporated herein by
reference to Exhibit (2)(c) as filed with its Form 10-K for
the year ended December 31, 1999.
(d) First Amendment to Asset Purchase Agreement dated as of
December 1, 1999, by and among Orkin Exterminating Company,
Inc., Redd Pest Control Company, Inc. and Richard L. Redd is
incorporated herein by reference to Exhibit (2)(d) as filed
with its Form 10-K for the year ended December 31, 1999.
(e) Asset Purchase Agreement, dated as of October 1, 1997, by
and among Rollins, Ameritech Monitoring Services, Inc. and
Ameritech Corporation is incorporated herein by reference to
Exhibit 2.1 as filed with its Form 8-K Current Report filed
October 16, 1997.
(3)(i) Restated Certificate of Incorporation of Rollins, Inc. is
incorporated herein by reference to Exhibit (3)(i) as filed
with its Form 10-K for the year ended December 31, 1997.
(ii) By-laws of Rollins, Inc. are incorporated herein by
reference to Exhibit (3) (ii) as filed with its Form 10-Q
for the quarterly period ended March 31, 1999.
(4) Form of Common Stock Certificate of Rollins, Inc. is
incorporated herein by reference to Exhibit (4) as filed
with its Form 10-K for the year ended December 31, 1998.
(10)(a) Rollins, Inc. 1984 Employee Incentive Stock Option Plan is
incorporated herein by reference to Exhibit (10) as filed
with its Form 10-K for the year ended December 31, 1996.
(10)(b) Rollins, Inc. 1994 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit (10)(b) as filed
with its Form 10-K for the year ended December 31, 1999.
(10)(c) Rollins, Inc. 1998 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit A of the March
24, 1998 Proxy Statement for the Annual Meeting of
Stockholders held on April 28, 1998.
(13) Portions of the Annual Report to Stockholders for the year
ended December 31, 2000 which are specifically incorporated
herein by reference.
(21) Subsidiaries of Registrant.
(23) Consent of Independent Public Accountants.
(24) Powers of Attorney for Directors.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROLLINS, INC.
By: /s/ R. Randall Rollins
R. Randall Rollins
CHAIRMAN OF THE BOARD OF DIRECTORS
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 19, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: By: /s/ Harry J. Cynkus
/s/ R. Randall Rollins Harry J. Cynkus
R. RANDALL ROLLINS CHIEF FINANCIAL OFFICER AND TREASURER
CHAIRMAN OF THE BOARD OF DIRECTORS (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 19, 2001 Date: March 19, 2001
The Directors of Rollins, Inc. (listed below) executed a power of attorney
appointing Gary W. Rollins their attorney-in-fact, empowering him to sign this
report on their behalf.
- --------------------------------------------------------------------------------
/s/ Gary W. Rollins
Gary W. Rollins
AS ATTORNEY-IN-FACT & DIRECTOR
March 19, 2001
27
ROLLINS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
(ITEM 14)
Page Number From
This Form 10-K
----------------
(1) CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Position as of
December 31, 2000 and 1999 14
Consolidated Statements of Income for each of the
three years in the period ended December 31, 2000 15
Consolidated Statements of Earnings Retained for each
of the three years in the period ended December 31,
2000 15
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2000 16
Notes to Consolidated Financial Statements 17-24
Report of Independent Public Accountants on
Consolidated Financial Statements 32
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts 29
Report of Independent Public Accountants on Financial
Statement Schedule 32
Schedules not listed above have been omitted as either not applicable,
immaterial or disclosed in the Consolidated Financial Statements or notes
thereto.
28
ROLLINS, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(IN THOUSANDS OF DOLLARS)
ADDITIONS
BALANCE ------------------------
AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
- ----------- --------- ---------- ----------- ------------- ----------
Year ended December 31,
2000 Allowance for
doubtful accounts $4,929 $8,056 $1,850 $6,106 $8,729
------ ------ ------ ------ ------
Year ended December 31,
1999 Allowance for
doubtful accounts $5,347 $6,551 $ 434 $7,403 $4,929
------ ------ ------ ------ ------
Year ended December 31,
1998 Allowance for
doubtful accounts $9,326 $4,502 $ -- $8,481 $5,347
------ ------ ------ ------ ------
- ------------------------
NOTE: (1) Charged to Other Accounts represents beginning balances of
allowances for doubtful accounts of acquired companies.
(2) Deductions represent the write-off of uncollectible receivables,
net of recoveries.
29
ROLLINS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT NUMBER
------------------------------------------------------------
(2)(a) Asset Purchase Agreement by and between Orkin Exterminating
Company, Inc. and PRISM Integrated Sanitation Management,
Inc. is incorporated by reference to Exhibit (2) as filed
with its Form 10-Q filed on August 16, 1999.
(b) Stock Purchase Agreement as of September 30, 1999, by and
among Orkin Canada, Inc., Orkin Expansion, Inc., S.C.
Johnson Commercial Markets, Inc., and S.C. Johnson
Professional, Inc. is incorporated herein by reference to
Exhibit (2)(b) as filed with its Form 10-K for the year
ended December 31, 1999.
(c) Asset Purchase Agreement as of October 19, 1999 by and
between Orkin Exterminating Company, Inc., Redd Pest Control
Company, Inc., and Richard L. Redd is incorporated herein by
reference to Exhibit (2)(c) as filed with its Form 10-K for
the year ended December 31, 1999.
(d) First Amendment to Asset Purchase Agreement dated as of
December 1, 1999, by and among Orkin Exterminating Company,
Inc., Redd Pest Control Company, Inc. and Richard L. Redd is
incorporated herein by reference to Exhibit (2)(d) as filed
with its Form 10-K for the year ended December 31, 1999
(e) Asset Purchase Agreement, dated as of October 1, 1997, by
and among Rollins, Ameritech Monitoring Services, Inc. and
Ameritech Corporation is incorporated herein by reference to
Exhibit 2.1 as filed with its Form 8-K Current Report filed
October 16, 1997.
(3)(i) Restated Certificate of Incorporation of Rollins, Inc. is
incorporated herein by reference to Exhibit (3)(i) as filed
with its Form 10-K for the year ended December 31, 1997.
(ii) By-laws of Rollins, Inc. are incorporated herein by
reference to Exhibit (3) (ii) as filed with its Form 10-Q
for the quarterly period ended March 31, 1999.
(4) Form of Common Stock Certificate of Rollins, Inc. is
incorporated herein by reference to Exhibit (4) as filed
with its Form 10-K for the year ended December 31, 1998.
(10)(a) Rollins, Inc. 1984 Employee Incentive Stock Option Plan is
incorporated herein by reference to Exhibit (10) as filed
with its Form 10-K for the year ended December 31, 1996.
(10)(b) Rollins, Inc. 1994 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit (10)(b) as filed
with its Form 10-K for the year ended December 31, 1999.
(10)(c) Rollins, Inc. 1998 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit A of the March
24, 1998 Proxy Statement for the Annual Meeting of
Stockholders held on April 28, 1998.
(13) Portions of the Annual Report to Stockholders for the year
ended December 31, 2000 which are specifically incorporated
herein by reference.
(21) Subsidiaries of Registrant.
(23) Consent of Independent Public Accountants.
(24) Powers of Attorney for Directors.
30
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, 2000, 1999, and
1998. The opinion of Arthur Andersen LLP, the Company's independent public
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 accounting principles generally accepted in the United States, appropriate
in the circumstances, based on our best estimates and judgments 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
public 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 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 auditors and independent public accountants and reviews the work
of each to insure that their respective responsibilities are being carried out
and to discuss related matters. Both the internal auditors and independent
public accountants have direct access to the Audit Committee.
/s/ R. Randall Rollins /s/ Harry J. Cynkus
CHAIRMAN OF THE BOARD AND CHIEF FINANCIAL OFFICER
CHIEF EXECUTIVE OFFICER AND TREASURER
Atlanta, Georgia
February 16, 2001
31
REPORT OF INDEPENDENT PUBLIC 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, 2000
and 1999 and the related statements of income, earnings retained and cash flows
for each of the three years in the period ended December 31, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule listed in Item 14 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
February 16, 2001
32