<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT
<TABLE>
<C> <S>
(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, 1996
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
</TABLE>
COMMISSION FILE NO. 1-4422
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ROLLINS, INC.
------------
<TABLE>
<S> <C>
INCORPORATED I.R.S. EMPLOYER
IN IDENTIFICATION NUMBER
DELAWARE 51-0068479
</TABLE>
2170 PIEDMONT ROAD, N.E., ATLANTA, GEORGIA 30324
TELEPHONE NUMBER -- (404) 888-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
- -------------------------------------------------------- --------------------------------------------------------
The New York Stock Exchange
Common Stock, $1 Par Value The Pacific Stock Exchange
</TABLE>
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 28, 1997 was $360,733,583, based on the closing price
on the New York Stock Exchange on such date of $18 7/8 per share.
Rollins, Inc. had 34,413,481 shares of common stock outstanding as of
February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Rollins, Inc.'s Annual Report to Stockholders for the calendar
year ended December 31, 1996 are incorporated by reference into Part I, Items
1(b) and 1(c), Part II, Items 5-8, and Part IV, Item 14.
Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
of Rollins, Inc. are incorporated by reference into Part III, Items 10, 11, 12
and 13.
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<PAGE>
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS.
Since the beginning of the calendar year, Rollins, Inc. and its subsidiaries
have continued to operate and grow in the same principal services for homes and
businesses.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The response to Item 1.(b) is incorporated by reference from the table under
the caption "Business Segment Information," on page 21 of the 1996 Annual Report
to Stockholders.
(C) NARRATIVE DESCRIPTION OF BUSINESS.
(1)(i) The Registrant is a national company with headquarters located in
Atlanta, Georgia, providing services to both residential and commercial
customers. The four primary services provided are termite and pest control,
protective services, lawn care and plantscaping. Additionally, the revenues by
business segment are incorporated by reference to the table under the caption
"Business Segment Information" on page 21 of the 1996 Annual Report to
Stockholders.
Orkin Exterminating Company, Inc., a wholly owned subsidiary (Orkin),
founded in 1901, is one of the world's largest termite and pest control
companies. It provides customized services to approximately 1.6 million
customers through a network of 417 branches serving customers in 49 states, the
District of Columbia, the Bahamas, Canada, Mexico, and Puerto Rico. It provides
customized pest control services to homes and businesses, including hotels, food
service establishments, dairy farms and transportation companies. Orkin's
continuous regular service provides protection against household pests, rodents
and termites. Orkin's Lawn Care Division provides fertilization, weed and insect
control, seeding, aeration of lawns, and tree and shrub care from 23 branches
serving customers in 9 states. Orkin's Plantscaping Division designs, installs
and maintains green and flowering plants from 10 branches and services customers
in 21 states and the District of Columbia. It provides services to hotels,
shopping malls, restaurants, and office buildings.
Rollins Protective Services, a division of the Registrant, was established
in 1969. Services are provided from 50 branches serving customers in 41 states
and the District of Columbia. A pioneer in developing customized wired and
wireless electronic security systems, it provides full-service capabilities from
system design and installation to maintenance and monitoring services.
Full-service includes guaranteed maintenance programs, 24-hour emergency
repairs, and 24-hour alarm monitoring services.
(ii) The Registrant has made no announcement of, nor did any information
become public about, a new line of business or product requiring the
investment of a material amount of the Registrant's total assets.
(iii) Sources and availability of raw materials present no particular
problem to the Registrant, since its businesses are primarily in
service-related industries.
(iv) Governmental licenses, patents, trademarks and franchises are of
minor importance to the Registrant's service operations. Local licenses and
permits are required in order for the Registrant to conduct its termite and
pest control, protective services, lawn care and plantscaping operations in
certain localities. In view of the widespread operations of the Registrant's
service operations, the failure of a few local governments to license a
facility would not have a material adverse effect on the results of
operations of the Registrant.
(v) The business of the Registrant is affected by the seasonal nature of
the Registrant's termite and pest control, lawn care and plantscaping
service operations (Orkin Exterminating Company, Inc.).
2
<PAGE>
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 Registrant's
termite and pest control operations during such period. Lawn care services
are seasonal and coincide with the growing seasons of lawns. Plantscaping
operations experience seasonal increases in revenues and operating income
generated by the division's Exterior Color and Holiday programs offered
during the spring and late fall.
(vi) Inapplicable.
(vii) The Registrant and its subsidiaries do not have a material part of
their business that is dependent upon a single customer or a few customers, the
loss of which would have a material effect on the business of the Registrant.
(viii) The dollar amount of service contracts and backlog orders as of the
end of the Registrant's 1996 and 1995 calendar years was approximately
$16,712,000 and $15,508,000, respectively. Backlog services and orders are
usually provided within the month following the month of receipt, except in the
area of prepaid pest control and alarm monitoring where services are usually
provided within twelve months of receipt.
(ix) Inapplicable.
(x) The Registrant believes that each of its businesses competes favorably
with competitors within its respective area. Orkin Exterminating Company, Inc.
is one of the world's largest termite and pest control companies. Rollins
Protective Services is a pioneer and one of the leaders in residential and
commercial security. Orkin Lawn Care is one of the largest lawn care companies
in the United States. Orkin Plantscaping is the industry's second largest
company with operations in ten major markets.
The principal methods of competition in the Registrant's termite and pest
control business are service and guarantees, including the money-back guarantee
on termite and pest control, and the termite retreatment and damage repair
guarantee to qualified homeowners. Competition in the plantscaping and lawn care
businesses is based on providing customized services together with guarantees,
with the Registrant offering the same money-back guarantee for the services. The
principal method of competition in the residential protection business of the
Registrant is the provision of customized emergency protection services to meet
the particular needs of each customer.
(xi) Expenditures by the Registrant 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 Registrant.
(xii) The capital expenditures, earnings and competitive position of the
Registrant and its subsidiaries are 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.
(xiii) The number of persons employed by the Registrant and its subsidiaries
as of the end of 1996 was 9,525.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
Inapplicable.
ITEM 2. PROPERTIES.
The Registrant's administrative headquarters and central warehouse, both of
which are owned by the Registrant, are located at 2170 Piedmont Road, N.E.,
Atlanta, Georgia 30324. The Registrant owns or leases several hundred branch
offices and operating facilities used in its businesses. None of the branch
3
<PAGE>
offices, individually considered, represents a materially important physical
property of the Registrant. The facilities are suitable and adequate to meet the
current and reasonably anticipated future needs of the Registrant.
ITEM 3. LEGAL PROCEEDINGS.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
ITEM 4.A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Each of the executive officers of the Registrant 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 Registrant and their ages, offices with the Registrant, and the
dates from which they have continually served in their present offices with the
Registrant.
<TABLE>
<CAPTION>
DATE FIRST
ELECTED
NAME AGE OFFICE WITH REGISTRANT TO PRESENT OFFICE
- --------------------------- ----------- --------------------------------------------------------- -----------------
<S> <C> <C> <C>
R. Randall Rollins (1)..... 65 Chairman of the Board and Chief Executive Officer 10/22/91
Gary W. Rollins (1)........ 52 President and Chief Operating Officer 1/24/84
Gene L. Smith (2).......... 51 Chief Financial Officer, 1/22/91
Secretary, and Treasurer 1/26/93
</TABLE>
- ------------------------
(1) R. Randall Rollins and Gary W. Rollins are brothers.
(2) Gene L. Smith served as the Registrant's Vice President of Finance for the
period 12/30/85 to 1/21/91.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information containing dividends and stock prices on page 12 and the
principal markets on which common shares are traded on page 25 of the 1996
Annual Report to Stockholders are incorporated herein by reference. The number
of stockholders of record on December 31, 1996 was 3,405.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data on pages 10 and 11 of the 1996 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations included on pages 13 through 15 of the 1996 Annual Report to
Stockholders is incorporated herein by reference. The effects of inflation on
operations were not material for the periods being reported.
4
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and supplementary data of
the Registrant and its consolidated subsidiaries, included in the 1996 Annual
Report to Stockholders, are incorporated herein by reference.
Financial Statements:
Statements of Income for each of the three years in the period ended
December 31, 1996, page 17.
Statements of Earnings Retained for each of the three years in the period
ended December 31, 1996, page 17.
Statements of Financial Position as of December 31, 1996 and 1995, page
16.
Statements of Cash Flows for each of the three years in the period ended
December 31, 1996, page 18.
Notes to Financial Statements, pages 19 through 23.
Report of Independent Auditors, page 24.
Supplementary Data:
Quarterly Information, page 12.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The response to Item 10, applicable to the Directors of the Registrant, is
incorporated herein by reference to the information set forth under the caption
"Election of Directors" in the Proxy Statement for the Annual Meeting of
Stockholders to be held April 22, 1997. Additional information concerning
executive officers is included in Part I, Item 4.A. of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The response to Item 11 is incorporated herein by reference to the
information set forth under the caption "Executive Compensation" in the Proxy
Statement for the Annual Meeting of Stockholders to be held April 22, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to Item 12 is incorporated herein by reference to the
information set forth under the captions "Capital Stock" and "Election of
Directors" in the Proxy Statement for the Annual Meeting of Stockholders to be
held April 22, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section entitled "Compensation Committee Interlocks and Insider
Participation" in the Proxy Statement for the Annual Meeting of Stockholders to
be held April 22, 1997, and related footnotes and information are incorporated
herein by reference.
5
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following are filed as part of this report:
(a) 1. Financial Statements
The following financial statements are incorporated herein by reference to
portions of the 1996 Annual Report to Stockholders included with this Form 10-K:
Statements of Income for each of the three years in the period ended
December 31, 1996, page 17.
Statements of Earnings Retained for each of the three years in the
period ended December 31, 1996, page 17.
Statements of Financial Position as of December 31, 1996 and 1995,
page 16.
Statement of Cash Flows for each of the three years in the period
ended December 31, 1996, page 18.
Notes to Financial Statements, pages 19 through 23.
Report of Independent Auditors, page 24.
(a) 2. Financial Statement Schedule
II Valuation and Qualifying Accounts
Schedules not listed above have been omitted as either not applicable,
immaterial or disclosed in the financial statements or notes thereto.
(a) 3. Exhibits
<TABLE>
<C> <S>
(3)(i) The Company's Certificate of Incorporation is incorporated herein by
reference to Exhibit (3)(a) as filed with its Form 10-K for the year ended
December 31, 1992.
(ii) By-laws of Rollins, Inc. are incorporated herein by reference to Exhibit
3(b) as filed with its Form 10-K for the year ended December 31, 1993.
(10) Rollins, Inc. 1984 Employee Incentive Stock Option Plan.
(10)(a) Rollins, Inc. 1994 Employee Stock Incentive Plan is incorporated herein by
reference to Exhibit A of the March 18, 1994 Proxy Statement for the Annual
Meeting of Stockholders held on April 26, 1994.
(13) Portions of the Annual Report to Stockholders for the year ended December
31, 1996 which are specifically incorporated herein by reference.
(21) Subsidiaries of Registrant.
(23) Consent of Independent Public Accountants.
(24) Powers of Attorney for Directors.
(27) Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were required to be filed by the Company for the
quarter ended December 31, 1996.
6
<PAGE>
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)
March
26,
1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C>
/s/ R. RANDALL ROLLINS /s/ GENE L. SMITH
- ------------------------------------------- -------------------------------------------
R. Randall Rollins Gene L. Smith
Chairman of the Board of Directors Chief Financial Officer, Secretary, and
(Principal Executive Officer) Treasurer
March 26, 1997 (Principal Financial and Accounting Officer)
March 26, 1997
</TABLE>
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.
Wilton Looney, Director
John W. Rollins, Director
Henry B. Tippie, Director
James B. Williams, Director
Bill J. Dismuke, Director
<TABLE>
<S> <C>
/s/ GARY W. ROLLINS
- ------------------------------------------
Gary W. Rollins, As Attorney-in-Fact
& Director, President and
Chief Operating Officer
March 26, 1997
</TABLE>
7
<PAGE>
ROLLINS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS OF ROLLINS, INC. AND SUBSIDIARIES:
The Registrant's 1996 Annual Report to Stockholders, portions of which are
filed with this Form 10-K, contains on pages 16 through 24 the consolidated
financial statements for the years ended December 31, 1996, 1995 and 1994 and
the report of Arthur Andersen LLP on the financial statements for the years then
ended. These financial statements and the report of Arthur Andersen LLP are
incorporated herein by reference. The financial statements include the
following:
Statements of Income for each of the three years in the period ended
December 31, 1996.
Statements of Earnings Retained for each of the three years in the period
ended December 31, 1996.
Statements of Financial Position as of December 31, 1996 and 1995.
Statements of Cash Flows for each of the three years in the period ended
December 31, 1996.
Notes to Financial Statements.
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE, Page 9.
SCHEDULE
<TABLE>
<CAPTION>
SCHEDULE
NUMBER
- ---------
<C> <S>
II Valuation and Qualifying Accounts, Page 10.
</TABLE>
Schedules not listed above have been omitted as either not applicable,
immaterial or disclosed in the financial statements or notes thereto.
8
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REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
To the Directors and the Stockholders of Rollins, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements included in Rollins, Inc.'s annual report to
stockholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 17, 1997. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
Item 14 of this Form 10-K 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.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 17, 1997
9
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ROLLINS, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) PERIOD
- ----------------------------------------------- ----------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts.............. $ 9,991 $ 8,205 $ -- $ 12,235 $ 5,961
----------- ------------ ----------- ------------- -----------
Year ended December 31, 1995
Allowance for doubtful accounts.............. $ 5,944 $ 22,101(2) $ -- $ 18,054 $ 9,991
----------- ------------ ----------- ------------- -----------
Year ended December 31, 1994
Allowance for doubtful accounts.............. $ 4,548 $ 7,823 $ -- $ 6,427 $ 5,944
----------- ------------ ----------- ------------- -----------
</TABLE>
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NOTE: (1) Deductions represent the write-off of uncollectible receivables, net
of recoveries.
(2) Includes a Special Charge of $12,000,000 ($7,440,000 after tax
benefit or $.21 per share) relating to the write-off of doubtful
accounts at September 30, 1995, in the consumer finance operation,
Rollins Acceptance Company.
10
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EXHIBIT INDEX
Exhibit Number
- --------------
(3)(i) The Certificate of Incorporation of Rollins, Inc. is incorporated
herein by reference to Exhibit (3)(a) as filed with its Form 10-K
for the year ended December 31, 1992.
(ii) By-laws of Rollins, Inc. are incorporated herein by reference to
Exhibit (3)(b) as filed with its form 10-K for the year ended
December 31, 1993.
(10) Rollins, Inc. 1984 Employee Incentive Stock Option Plan.
(10)(a) Rollins, Inc. 1994 Employee Stock Incentive Plan is incorporated
herein by reference to Exhibit A to the March 18, 1994 Proxy
Statement for the Annual Meeting of Stockholders held on April
26, 1994.
(13) Portions of the Annual Report to Stockholders for the year ended
December 31, 1996 which are specifically incorporated herein by
reference.
(21) Subsidiaries of Registrant.
(23) Consent of Independent Public Accountants.
(24) Powers of Attorney for Directors.
(27) Financial Data Schedule
<PAGE>
EMPLOYEE INCENTIVE STOCK OPTION PLAN
ROLLINS, INC.
1. PURPOSE
This Employee Incentive Stock Option Plan (the "Plan") is intended as an
incentive and to encourage stock ownership by certain officers and other key
employees of Rollins, Inc. (the "Corporation"), or of its subsidiary
corporations (the "Subsidiary" or "Subsidiaries") as that term is defined in
section 425(f) of the Internal Revenue Code of 1954 (the "Code") so that they
may acquire or increase their proprietary interest in the Corporation, and to
reward them properly for meritorious or profit producing services to the
Corporation or the Subsidiaries. It is further intended that options issued
pursuant to this Plan shall constitute incentive stock options within the
meaning of Sec. 422A of the Code.
2. ADMINISTRATION.
The Plan shall be administered by a committee appointed by the Board of
Directors of the Corporation (the "Committee"). The Committee shall consist of
not less than three members of the Corporation's Board of Directors. The Board
of Directors may from time to time remove members from or add members to the
Committee. Vacancies on the Committee, howsoever caused, shall be filled by the
Board of Directors. The Committee shall select one of its members as Chairman
and shall hold meetings at such times and places as it may determine. The
action of a majority of the Committee at which a quorum is present, or acts
reduced to or approved in writing by a majority of the members of the Committee,
shall be the valid acts of the Committee. Each Director while a member of the
Committee shall meet the definition of "disinterested person" contained in Rule
16B-3 of the Securities Exchange Commission. The Committee shall from time to
time at its discretion designate the key employees who shall be granted options
and the number of shares subject to such options.
1
<PAGE>
The interpretation and construction by the Committee of any provisions of
the Plan or of any option granted under it shall be final. No member of the
Committee shall be liable for any act or omission of any other member of the
Committee or for any act or omission on the member's part, including, but not
limited to, the exercise of any power or discretion given the member under the
Plan, except those resulting from the member's own gross negligence or willful
misconduct.
3. ELIGIBILITY
The Persons who shall be eligible to receive options shall be such key
employees (including officers, whether or not they are Directors) of the
Corporation or its subsidiaries as the Committee shall select from time to time
("Optionee" or "Optionees"). An Optionee may hold more than one option, but
only on the terms and subject to the restrictions hereafter set forth.
4. STOCK
The Stock subject to the Options under the Plan shall be shares of the
Corporation's authorized and unissued or reacquired one dollar ($1.00) par value
voting common stock (the term "Shares" as used herein shall refer to the said
one dollar ($1.00) par value voting common stock of the Corporation, the term
"Shares" shall refer to shares which are subject to an option granted under the
Plan). The aggregate number of shares which may be issued pursuant to the
exercise of options under the Plan shall not exceed 800,000 shares. The
limitations established by each of the preceding sentences shall be subject to
adjustment as provided in Section 6(I) of the Plan.
In the event that any outstanding option under the Plan for any reason
expires or is terminated, the Shares allocable to the unexercised portion of
such option may again be subject to an option under the Plan.
5. ANNUAL LIMITATION.
2
<PAGE>
No Optionee shall be granted, in any calendar year, options to purchase
shares having an aggregate fair market value (determined at the date of grant of
such options) in excess of (i) $100,000 plus (ii) any unused carryover limit to
such year computed in accordance with section 422A of the Code.
6. TERMS AND CONDITIONS OF OPTION.
Options granted pursuant to the Plan shall be authorized by the Committee
and shall be evidenced by agreements in such form as the Committee shall from
time to time approve, which agreements shall contain specifically or be subject
to, the following terms and conditions:
(a) NUMBER OF SHARES. Each option shall state the number of Shares to
which it pertains.
(b) OPTION PRICE. Each option shall state the option price, which shall
be not less than 100% of the fair market value of the Shares subject to the
option; provided that options granted to Optionees owning more than 10% of the
voting stock of the Corporation shall have an option price of at least 110% of
the fair market value of the Shares subject to the Option. The "fair market
value" of the Shares subject to an option shall be the closing price of shares
of the Corporation as reported in THE WALL STREET JOURNAL for the trading day on
which the option is granted. If the option is not granted on a trading day,
"fair market value" shall be the closing price of the Shares on the trading day
immediately before the option is granted as reported in THE WALL STREET JOURNAL.
Subject to the foregoing, the Committee, in fixing the option price, shall have
full authority and discretion and be fully protected in doing so.
(c) MEDIUM AND TIME OF PAYMENT. The option price may be paid (i) in
United States Dollars in cash or by check or (ii) by transferring a number of
shares, valued as provided in Section 6(b) above, as of the date of transfer
having a value equal to the option price, or (iii) by part payment in cash or
check as provided in (i) above and by payment of the balance by transferring
shares to the Corporation as provided in (ii) above.
3
<PAGE>
(d) EXERCISE OF OPTION. Options shall be exercised by the delivery of
written notice to the Corporation setting forth the number of Shares with
respect to which the option is to be exercised, together with (i) cash,
certified check, bank draft or postal or express money order payable to the
order of the Corporation for the amount of the option price to be paid in cash
for such Shares, (ii) stock certificates duly endorsed for transfer to the
Corporation for shares of a value as determined under Section 6(b) equal to the
amount of the option price not paid in cash, and specifying the address to which
the certificates for such Shares are to be mailed. Such notice may be delivered
in person to a member of the Committee, or the Treasurer of the Corporation, or
may be sent by registered mail, return receipt requested, to a member of the
Committee, or the Treasurer of the Corporation, in which case delivery shall be
deemed made on the date such notice is deposited in the mail. As promptly as
practicable after receipt of such notice and payment, the Corporation shall
deliver to the Optionee certificates for the number of Shares with respect to
which such option has been exercised, issued in the Optionee's name. Such
delivery shall be deemed effective for all purposes upon the deposit of such
certificates by the stock transfer agent of the Corporation in the United States
mail, addressed to the Optionee, at the address specified in the notice above
referenced.
(e) CONDITIONS TO EXERCISE OF OPTIONS.
(1) No option granted pursuant to this Plan shall be exercised in whole or
in part more than ten years after it is granted, and such option shall be
subject to such further terms and conditions as to its exercise as the Committee
may prescribe; provided, however, that options granted to Optionees owning more
than ten percent (10%) of the voting power of all classes of stock of the
Corporation shall be exercisable for a period of no longer than five years from
the date of grant.
(2) In order to exercise an option granted hereunder, in whole or in part,
all of the following conditions must be fulfilled at the time of exercise:
(X) The Optionee must be in the employ of the Corporation or one of
its Subsidiaries. However, any Optionee who is totally and permanently disabled
at the time of exercise of an option and who has ceased to work for the
Corporation or one of its Subsidiaries as a result of such disability shall not
be required to be employed by the
4
<PAGE>
Corporation at the time he exercises such option as long as he was employed by
the Corporation or one of its Subsidiaries within one year prior to the date of
exercise of such option. Permanent and total disability for such purposes shall
mean that such Optionee, at the time he ceased his employment by the
Corporation, was unable to engage in any substantial gainful activity by reason
of a medically determinable physical or mental impairment which could be
expected to result in death or which at such time could be expected to last for
a continuous period of not less than twelve (12) months. Such Optionee shall
furnish proof of his disability in form and substance satisfactory to the
Committee.
(Y) The Optionee shall have met any additional specific conditions
imposed by the Committee at the time of the granting of the option.
(f) PRIOR OUTSTANDING OPTION. No option (for purposes of this section
6(f) called "New Option") shall be exercisable while there is outstanding any
Incentive Stock Option (as defined in Sec. 422A of the Code), which Incentive
Stock Option was granted, before the granting of the New Option, to the person
to whom the New Option is granted, to purchase shares of the Corporation or of a
corporation which, at the time the New Option is granted, is a parent or
subsidiary corporation (as those terms are defined in Sec. 425 of the Code) of
the Corporation, or is a predecessor corporation of the Corporation or such
parent or subsidiary corporation. An Incentive Stock Option shall be treated as
outstanding until such option is exercised in full or expires by reason of a
lapse of time.
(g) TERMINATION OF EMPLOYMENT EXCEPT BY DEATH, DISABILITY OR RETIREMENT.
In the event that an Optionee shall cease to be employed by the Corporation or
any of its Subsidiaries for any reason other than his death, disability (as
defined in Section 6(e)(2)(X)), or retirement in good standing (as hereinafter
provided), such Optionee shall not have the right to exercise any unexercised
portion of an option previously granted to the Optionee under this Plan.
Whether authorized leave of absence or absence for military or governmental
service shall constitute termination of employment, for the purpose of the Plan,
shall be determined by the Committee, whose determination shall be final and
conclusive. If, before the date of expiration of the option, the Optionee shall
be retired in good standing from the employment of the Company under the
established rules of the
5
<PAGE>
Company, the option shall terminate on the earlier of such date of expiration or
one day less than three months after the date of such retirement, and the
Optionee shall have the right prior to such termination to exercise the option
only to the extent he was entitled to do so immediately prior to his retirement.
(h) DEATH OF OPTIONEE AND TRANSFER OF OPTION. If the Optionee shall die
while in the employ of the Corporation or a Subsidiary and shall not have fully
exercised an option granted under this Plan, such option may be exercised,
subject to paragraph 6 (e) (1), to the extent that the Optionee's right to
exercise such option had accrued pursuant to this Section 6 of the Plan at the
time of his death, by the executors or administrators of the Optionee or by any
person or persons who shall have acquired the option directly from the Optionee
by bequest or inheritance.
No option shall be transferable by the Optionee otherwise than by will or
under the laws of descent and distribution.
(i) RECAPITALIZATION. Subject to any required action by the stockholders,
the number of shares covered by each outstanding option, and the price per
Share thereof, shall be proportionately adjusted for any increase or decrease
in the number of issued shares of the Corporation resulting from a subdivision
or consolidation of shares or the payment of a stock dividend (but only on the
shares) or any other increase or decrease in the number of issued shares
accomplished without receipt of consideration by the Corporation.
Subject to any required action by the stockholders, if the Corporation
shall be the surviving corporation in any merger or consolidation, each
outstanding option shall pertain to and apply to the stock or securities to
which a holder of the same number of shares as those subject to the option would
have been entitled under the terms of the agreement of merger or consolidation.
In general, if the Corporation is merged into or consolidated with another
corporation under circumstances in which the Corporation is not the surviving
corporation, or if the Corporation is liquidated, or sells or otherwise
disposes of substantially all of its assets to another corporation (all
Transactions) while unexercised options are outstanding under the Plan, after
the effective date of a Non-Acquiring Transaction each holder of an outstanding
option shall be entitled, upon
6
<PAGE>
exercise of such option, to receive such stock as those Shares subject to the
option shall be entitled to receive in such Non-Acquiring transaction based upon
the agreed upon conversion ratio or per share distribution. However, in the
discretion of the Board of Directors, any limitations imposed pursuant to
paragraph 6(e)(2)(Y) hereof may be waived so that all options, from and after a
date prior to the effective date of such Non-Acquiring Transaction shall be
exercisable in full, and the right to exercise shall be given to each holder of
an option during a 30-day period may be cancelled by the Board of Directors as
of the effective date of any such Non-Acquiring Transaction.
In the event of a change in the shares of the Corporation as presently
constituted, which is limited to a change of all of its authorized shares with
par value into the same number of shares with a different par value or without
par value, the shares resulting from any such change shall be deemed to be the
shares within the meaning of the Plan.
To the extent that the foregoing adjustments relate to stock or securities
of the Corporation, such adjustments shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive, provided
that each option granted pursuant to this Plan shall not be adjusted in a manner
that causes the option to fail to continue to qualify as an Incentive Stock
Option within the meaning of Sec. 422A of the Code.
Except as herinbefore expressly provided in this Section 6, the Optionee
shall have no rights by reason of any subdivision or consolidation of shares of
stock of any class or the payment of any stock dividend or any other increase or
decrease in the number of shares of stock of any class or by reason of any
dissolution, liquidation, merger, or consolidation or spinoff of stock of
another corporation, and no issue by the Corporation of shares of stock of any
class shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of Shares subject to the option.
The grant of any option pursuant to the Plan shall not affect in any way
the right or power of the Corporation to make adjustment, reclassifications,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part
of its business or assets; provided, however, that if any such adjustment
shall result in a fractional share for any Optionee under any
7
<PAGE>
option hereunder, such fraction shall be completely disregarded and Optionee
shall only be entitled to the whole number of shares resulting from such
adjustment.
(j) RIGHTS AS A STOCKHOLDER. An Optionee or transferee of an option shall
have no rights as a stockholder with respect to any Shares covered by his option
until the date of the issuance of a stock certificate to him for such Shares.
No adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the such stock certificate is issued, except as
otherwise provided in Section 6 hereof.
(k) INVESTMENT PURPOSE. The Corporation shall not be obligated to sell or
issue any shares pursuant to any option unless the Shares with respect to which
the option is being exercised are at that time effectively registered or exempt
from registration under the Securities Act of 1933, as amended.
(viii) Optionee shall not sell, transfer, give or otherwise
convey any of the Shares acquired under this Plan for a period of two
years from the date of the issuance of such Shares to him pursuant to
the exercise of an option, except that this restriction may be
waived, in the sole discretion of the Committee, in cases of extreme
hardship. The certificates representing the Shares shall bear the
following legend reflecting the above-described restriction on the
transfer of the Shares:
"The shares represented by this certificate are acquired for
investment only and may not be sold, transferred, given or otherwise
conveyed for a period of two years from the date of issuance as set
forth on this certificate"; and
(ix) the purchase of Shares pursuant to the exercise of
an option shall be for investment purposes, and not with a view
to resale or distribution except that in the event the Shares
subject to such option are registered under the Securities Act of
1933, as amended, or in the event a resale of such Shares
without such registration would otherwise be permissible, such
condition shall be inoperative if in the opinion of counsel for
the Securities Act of 1933 or any other applicable law,
regulation, or rule of any governmental agency.
(1) OTHER PROVISIONS. Options authorized under the Plan shall contain
8
<PAGE>
such other provisions, including, without limitation, restrictions upon the
exercise of the option, as the committee or the Board of Directors of the
Corporation shall deem advisable subject to any limitation on the discretion of
the Board of Directors required by Rule 16B-3. Any such option agreement shall
contain such limitations and restrictions upon the exercise of the option as
shall be necessary in order that such option will be an Incentive Stock Option
as defined in Sec. 422A of the Code or to conform to any change in the law and
shall contain any provisions, restrictions or limitations which shall prevent
such option from being an Incentive Stock Option as aforesaid.
7. TERM OF PLAN.
Options may be granted pursuant to the Plan from time to time within a
period of ten years from the date the Plan is adopted by the Board of Directors
of the Corporation.
8. INDEMNIFICATION OF COMMITTEE.
In addition to such other rights of indemnification as they may have as
Directors or as members of the Committee, the members of the Committee shall be
indemnified by the Corporation against the reasonable expenses, including
attorneys' fees actually and necessarily incurred in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any option
granted thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by the independent legal counsel selected
by the Corporation) or paid by them in satisfaction of a judgment in any such
action, suit or proceeding, except in relation to matters as to which it shall
be adjudged in such action, suit or proceeding that such Committee member is
liable for gross negligence or willful misconduct in the performance of his
duties; provided that within sixty (60) days after institution of any
9
<PAGE>
such action, suit or proceeding a Committee member shall in writing offer the
Corporation the opportunity, at its own expense, to handle and defend the same.
9. AMENDMENT TO THE PLAN.
The Board of Directors of the Corporation may, insofar as permitted by law,
from time to time, with respect to any shares at the time not subject to
options, suspend or discontinue the Plan or revise or amend it in any respect
whatsoever except that, without approval of the stockholders, no such revision
or amendment shall change the number of shares subject to the Plan, change the
designation of the class of employees eligible to receive options, decrease the
price at which Options may be granted, remove the administration of the Plan
from the Committee, or render any member of the Committee eligible to receive an
option under the Plan while serving thereon. Furthermore, the Plan may not,
without the approval of the stockholders, be amended in any manner that will
cause options issued under it to fail to meet the requirements of Incentive
Stock Options as defined in Sec. 422A of the Code.
10. APPLICATION OF FUNDS.
The proceeds received by the Corporation from the sale of Shares pursuant
to options will be used for general corporate purposes.
11. NO OBLIGATION TO EXERCISE OPTION.
The granting of an option shall impose no obligation upon the Optionee to
exercise such option.
12. APPROVAL OF STOCKHOLDERS.
The Plan shall not take effect until approved by the holders of a majority
of the
10
<PAGE>
outstanding shares which approval must occur within the period beginning twelve
months before and ending twelve months after the date the Plan is adopted by the
Board of Directors.
11
<PAGE>
TEN-YEAR FINANCIAL SUMMARY
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS SUMMARY
(In thousands except per share data)
Revenues $ 627,431 $ 620,435 $ 605,327
Cost of Services Provided 358,783 325,889 311,315
Depreciation and Amortization 8,612 7,950 8,130
Special Charge -- 12,000 --
Sales, General and Administrative 229,237 216,234 208,289
Interest Expense (Income), Net (5,967) (4,988) (2,994)
---------------------------------------
Income Before Income Taxes 36,766 63,350(1) 80,587
Income Taxes 13,971 24,073 31,026
---------------------------------------
Net Income $ 22,795 $ 39,277(1) $ 49,561
---------------------------------------
---------------------------------------
Earnings per Share $ .64 $ 1.10(1) $ 1.39
Dividends per Share $ .58 $ .56 $ .50
Cash Provided by Operations $ 58,067 $ 46,910 $ 39,340
Capital Expenditures $ 12,115 $ 18,026 $ 8,368
Total Assets $ 308,783 $ 314,925 $ 295,265
Long-Term Debt -- -- --
Stockholders' Equity $ 190,290 $ 214,318 $ 193,633
--------------------------------------------------------------------------------------------------
SELECTED RATIO ANALYSIS
(As a % of revenues except return on average equity)
Cost of Services Provided 57.2% 52.5% 51.5%
Sales, General and Administrative 36.5 34.9 34.4
Net Income 3.6 6.3(1) 8.2
Net Income without Special Charge 3.6 7.5 8.2
Return on Average Equity 11.3 19.3 28.0
--------------------------------------------------------------------------------------------------
SHARES OUTSTANDING
(In thousands)
Average 35,478 35,849 35,770
At Year End 34,594 35,858 35,826
--------------------------------------------------------------------------------------------------
</TABLE>
(1) INCLUDES A SPECIAL CHARGE OF $12,000,000 ($7,440,000 AFTER TAX
BENEFIT OR $.21 PER SHARE) AT SEPTEMBER 30, 1995.
10
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$575,802 $527,666 $475,555 $436,398 $402,324 $380,834 $354,303
293,499 271,518 247,994 230,107 211,604 193,829 180,513
8,310 7,966 7,806 7,482 7,509 7,013 6,935
-- -- -- -- -- -- --
203,483 187,238 169,825 155,904 146,658 140,158 126,355
(2,390) (1,870) (2,134) (2,460) (2,215) (1,693) (781)
- -----------------------------------------------------------------------------------------------------------
72,900 62,814 52,064 45,365 38,768 41,527 41,281
28,431 24,812 20,565 17,919 15,236 16,819 19,177
- -----------------------------------------------------------------------------------------------------------
$ 44,469 $ 38,002 $ 31,499 $ 27,446 $ 23,532 $ 24,708 $ 22,104
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
$ 1.25 $ 1.07 $ .89 $ .77 $ .67 $ .70 $ .63
$ .44 $ .40 $ .39 $ .37 $ .36 $ .34 $ .33
$ 40,034 $ 33,319 $ 31,987 $ 36,350 $ 31,955 $ 24,323 $ 29,852
$ 7,727 $ 7,042 $ 8,536 $ 8,929 $ 9,747 $ 7,825 $ 8,864
$267,194 $236,291 $204,577 $177,961 $160,121 $146,526 $130,953
-- -- -- -- -- -- --
$160,508 $129,899 $105,137 $ 86,718 $ 72,228 $ 61,082 $ 48,455
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
51.0% 51.5% 52.1% 52.7% 52.6% 50.9% 50.9%
35.3 35.5 35.7 35.7 36.5 36.8 35.7
7.7 7.2 6.6 6.3 5.8 6.5 6.2
7.7 7.2 6.6 6.3 5.8 6.5 6.2
30.6 32.3 32.8 34.5 35.3 45.1 50.5
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
35,638 35,569 35,510 35,465 35,438 35,418 35,232
35,673 35,592 35,532 35,478 35,453 35,426 35,412
- -----------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
QUARTERLY INFORMATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK PRICES Stock Prices Dividends Stock Prices Dividends
AND DIVIDENDS 1996 High Low Paid 1995 High Low Paid
(Rounded to the nearest 1/8) ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $ 24 7/8 $ 20 3/4 $ .14 1/2 First Quarter $ 27 1/2 $ 22 $ .14
Second Quarter 23 7/8 21 3/4 .14 1/2 Second Quarter 28 5/8 22 1/8 .14
Third Quarter 23 1/2 20 .14 1/2 Third Quarter 25 1/4 23 .14
Fourth Quarter 20 7/8 18 1/4 .14 1/2 Fourth Quarter 25 18 7/8 .14
</TABLE>
THE NUMBER OF STOCKHOLDERS OF RECORD AS OF DECEMBER 31, 1996 WAS 3,405.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PROFIT AND LOSS
INFORMATION (In thousands except per share data) First Second Third Fourth
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Revenues $ 142,502 $ 177,847 $ 162,514 $ 144,568
Operating Income 12,515 21,673 6,320 861
Net Income 6,387 12,841 3,306 261
Earnings per Share .18 .36 .09 .01
--------------------------------------------------------------------------------------------------
1995
Revenues $ 142,654 $ 175,350 $ 162,333 $ 140,098
Operating Income 14,901 35,217 6,842(1) 13,233
Net Income 7,807 21,102 3,454(1) 6,914
Earnings per Share .22 .59 .09(1) .20
--------------------------------------------------------------------------------------------------
1994
Revenues $ 136,443 $ 171,874 $ 158,002 $ 139,008
Operating Income 13,755 36,285 22,906 15,984
Net Income 6,888 21,066 13,011 8,596
Earnings per Share .19 .59 .36 .25
--------------------------------------------------------------------------------------------------
</TABLE>
(1) INCLUDES A SPECIAL CHARGE OF $12,000,000 ($7,440,000 AFTER TAX BENEFIT
OR $.21 PER SHARE) AT SEPTEMBER 30, 1995.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Selected Industry Segment Data % Change From Prior Year
Increase/(Decrease)
(In thousands) 1996 1995 1994 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Orkin $ 553,522 $ 547,797 $ 530,099 1.0% 3.3%
Rollins Protective 63,662 59,233 61,692 7.5 (4.0)
Other 10,247 13,405 13,536 (23.6) (1.0)
--------------------------------------------
$ 627,431 $ 620,435 $ 605,327 1.1 2.5
--------------------------------------------
--------------------------------------------
OPERATING INCOME
Orkin $ 38,844 $ 76,754 $ 78,711 (49.4) (2.5)
Rollins Protective 3,994 4,476 6,579 (10.8) (32.0)
Other (1,469) (11,037) 3,640 N/M N/M
--------------------------------------------
$ 41,369 $ 70,193 $ 88,930 (41.1) (21.1)
--------------------------------------------
--------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
GENERAL OPERATING COMMENTS
The Company's investments in its core businesses contributed to lower than
anticipated operating income and profit margin for 1996. Expenditures for
growth related programs and market expansion initiatives as well as a
substandard termite season negatively impacted 1996 operating income and
margins. Higher insurance costs and termite claims also had an adverse impact
on operating income.
Rollins, Inc.'s consolidated revenues of $627.4 million were 1.1% higher
than in 1995. Operating income decreased $28.8 million or 41.1% over the prior
year. Profit margins declined 41.6% from 1995 as compared to a decline of 23.1%
(9.8% without the Special Charge) from 1994 to 1995.
Orkin revenues increased 1.0% to $553.5 million while operating income and
profit margins decreased 49.4% and 50.0%, respectively, over the prior year.
This compares to a 5.4% margin decrease from 1994 to 1995. Rollins Protective
Services' (RPS) revenues increased 7.5% while operating income and margins
declined 10.8% and 17.1%, respectively, from 1995. This compares to a 29.0%
margin decline from 1994 to 1995. RPS' 1996 margin deterioration is primarily
due to investments in new dedicated commercial branches, related market
development, and acquisition costs.
ORKIN 1996 VERSUS 1995
Orkin's 1.0% increase in revenues over 1995 was due to increases in recurring
pest control and termite renewal revenues offset by a decrease in termite sales
revenue resulting from a substandard termite season. Orkin's customer base
increased over 1995 as a result of the Company's market expansion efforts.
Orkin Pest Control opened twenty-four new branches and added seven franchises in
1996. In addition, eight business acquisitions were completed including
locations in Canada and Mexico.
Orkin's pest control business strategies in 1996 were focused primarily on
commercial growth opportunities, new technology and employee training and
development. A separate Orkin Commercial Division was formed in 1996 to
increase market share and better meet the specific needs of commercial pest
control customers. As a direct result, commercial sales and margins for 1996
increased, as well as customer retention. Orkin plans to continue to
aggressively seek growth opportunities in the commercial market as part of their
future expansion plans. In order to capitalize on future opportunities, Orkin
increased their investment in data processing and communication technology. New
computers that directly interface with the Atlanta Rollins Customer Satisfaction
Department were installed in all pest control branches. This interface enables
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
management to react quickly to daily operational issues while providing timely
and accurate information for superior customer service. Improvements in
specialized sales and service training for all service, sales and management
employees were also initiated. The Orkin University education program was
instituted in 1996 to develop employees' industry knowledge through required
and elective training. Orkin will continue to enhance its employee training
and compensation programs since this investment directly translates into
better service, more satisfied customers and lower turnover. Through the
investments made in 1996, Orkin is positioning itself for long-term growth
in revenues, profits and customer base.
In 1996, Orkin Plantscaping completed a major training initiative for all
sales and service personnel in order to improve sales and customer retention.
Lawn Care concentrated on improving sales generation activity in a more
focused geographic market that included new customer leads developed by the
Rollins Customer Satisfaction Department.
ORKIN 1995 VERSUS 1994
For 1995, Orkin's pest control and termite sales and customer base increased,
despite a second consecutive year of an unusually cold and wet spring. This
weather situation negatively impacted the seasonal termite business. A renewed
emphasis was placed on the monthly recurring pest control business with
resulting gains. Orkin intensified its focus on the commercial market segment
through the creation of a Director of Commercial Pest Control. A record year of
pest control customer growth was achieved that included the opening of nine
new branch facilities and one region. In addition, Orkin completed its first
acquisition in Canada and successfully initiated a national franchise program.
Strategic investments were made in 1995 to increase employee sales and
service staffing, enhance training, target marketing efforts and improve
customer satisfaction. The million-dollar Rollins Customer Satisfaction
Department began operations in the first quarter 1995 to initiate customer
satisfaction feedback and to provide cross-marketing opportunities for all the
Rollins, Inc. divisions. Orkin employee training efforts were consolidated
under one department, Orkin Quality and Training, in order to improve the
training's content, accountability and efficiency.
Orkin Plantscaping initiated a Company-wide training program targeted to
improve sales and retain current customers. Also, a veteran senior Orkin
executive took over the Division in the fourth quarter of 1995. Orkin Lawn Care
restructured its business, with adjustments to management's span of control and
sales and service staffing, to fit a smaller, more tightly focused geographic
market.
ROLLINS PROTECTIVE SERVICES (RPS)
1996 VERSUS 1995
RPS' revenues and customer base increased in 1996 while operating income
decreased compared to last year primarily due to market expansion and
acquisition costs. RPS' customer retention rate reached the highest level in
their history as a result of a very successful customer service program. Three
acquisitions in New England and the Mid-Atlantic areas augment RPS' internal
growth.
RPS focused its resources in 1996 on business development and new product
technology. Several strategic partnerships were formed with various cable and
new home construction businesses. These successful ventures have positioned RPS
for unique growth opportunities in existing and new markets. For example, RPS'
joint marketing program with a major U.S. cable company provides them with a
vast marketing potential for recurring revenue within existing branch locations
and new expansion markets. RPS also partnered with upscale home builders
through the Builders Program to provide security and fire protection for new
home owners. RPS will continue to seek new partnerships that allow them to
increase their market share in a rapidly growing, changing industry. RPS also
met the challenges of a changing industry through new product technology. Safe
Start, a value-priced advanced wireless security system, was introduced in 1996.
RPS is anticipating tomorrow's challenges and consumer interest with research
and development and new product testing with leading security equipment
manufacturers.
ROLLINS PROTECTIVE SERVICES (RPS)
1995 VERSUS 1994
RPS focused its efforts in 1995 on customer service, product development and
business expansion. Three separate central alarm monitoring stations and their
national customer service department were consolidated into a single,
state-of-the art, integrated National
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- ------------------------------------------------------------------------------
Customer Support Center. A new premium residential alarm system, the System
VII, was introduced to the market in the fourth quarter 1995. Also, RPS
completed seven modest acquisitions and consequently restructured their field
organization to better meet the needs of the new customers as well as existing
customers.
OTHER 1996 VERSUS 1995
Revenue and operating income were negatively impacted by more stringent credit
standard policies within the consumer finance area, Rollins Acceptance Company
(RAC), and a disappointing termite season. The lower volume of Company financed
sales for the year in conjunction with the decline in termite sales revenue
contributed to RAC's results.
OTHER 1995 VERSUS 1994
Revenue decreased due to revisions of the Company's credit and internal
operating policies within the consumer finance area, Rollins Acceptance Company
(RAC). These revisions were a result of the changing customer demographics, in
conjunction with lower than expected termite demand. A one-time special charge
in 1995 of $12.0 million, which related to the write-off of doubtful accounts
receivable, negatively impacted other businesses' operating income.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION % Change From Prior Year
Increase/(Decrease)
(Dollars in thousands) 1996 1995 1994 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and Short-Term Investments $ 12,150 $ 33,623 $ 31,917
Marketable Securities 84,785 65,743 51,820
----------------------------------------
$ 96,935 $ 99,366 $ 83,737 (2.4)% 18.7%
Working Capital $126,217 $ 151,756 $ 148,010 (16.8) 2.5
Current Ratio 2.6 3.1 3.2 (16.1) (3.1)
Cash Provided by Operations $ 58,067 $ 46,910 $ 39,340 23.8 19.2
</TABLE>
Rollins, Inc. maintains a strong financial position. The Company's operations
have historically provided a strong positive cash flow which represents the
Company's principal source of funds. Interest income increased 19.6% due to the
increase in average funds invested in short-term investments and marketable
securities.
Net trade receivables decreased $9.7 million or 10.9% compared with
December 31, 1995. Trade receivables include installment receivables which are
due subsequent to one year from the balance sheet date. These amounts were
approximately $19.0 million and $26.2 million at the end of 1996 and 1995,
respectively. The decrease in receivables is primarily the result of decreased
financed sales, the effect of the revisions to the Company's credit standard
policies, and improved collections.
During 1996, the Company invested $19.7 million in capital expenditures,
capital leases, and acquisitions compared to $22.2 million in 1995. Also, $20.7
million was paid out in cash dividends and approximately 1.3 million shares of
the Company's common stock were purchased and retired in 1996. The Company
maintains a $40.0 million unused line of credit. This source of funds has not
been used, but is available for future acquisitions and growth, if needed.
15
<PAGE>
STATEMENTS OF FINANCIAL POSITION
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
At December 31, (In thousands except share data) 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Cash and Short-Term Investments $ 12,150 $ 33,623
Marketable Securities 84,785 65,743
Trade Receivables, Net 78,856 88,542
Materials and Supplies 15,006 13,924
Deferred Income Taxes 4,379 7,447
Other Current Assets 10,560 13,486
------------------------------
Current Assets 205,736 222,765
Equipment and Property, Net 41,042 37,799
Intangible Assets 41,931 42,013
Other Assets 20,074 12,348
-----------------------------
Total Assets $ 308,783 $ 314,925
-----------------------------
-----------------------------
- ----------------------------------------------------------------------------------------------------
LIABILITIES Capital Lease Obligations $ 2,735 $ 1,314
Accounts Payable 15,897 13,334
Accrued Insurance Expenses 15,053 14,314
Accrued Payroll 12,957 12,028
Unearned Revenue 15,614 14,695
Other Expenses 17,263 15,324
------------------------------
Current Liabilities 79,519 71,009
Capital Lease Obligations 12,163 7,422
Long-Term Accrued Liabilities 20,591 15,936
Deferred Income Taxes 6,220 6,240
------------------------------
Total Liabilities 118,493 100,607
------------------------------
Commitments and Contingencies
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' Common Stock, par value $1 per share; 99,500,000 shares
EQUITY
authorized; 34,594,481 and 41,431,814 shares issued 34,594 41,432
Earnings Retained 155,696 224,009
------------------------------
190,290 265,441
Less - Common Stock in Treasury, at Cost,
5,573,589 shares in 1995 -- 51,123
------------------------------
Total Stockholders' Equity 190,290 214,318
------------------------------
Total Liabilities and Stockholders' Equity $ 308,783 $ 314,925
------------------------------
------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
16
<PAGE>
STATEMENTS OF INCOME
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands except per share data) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Customer Services $ 627,431 $ 620,435 $ 605,327
---------------------------------------
COSTS AND EXPENSES
Cost of Services Provided 358,783 325,889 311,315
Depreciation and Amortization 8,612 7,950 8,130
Special Charge -- 12,000 --
Sales, General and Administrative 229,237 216,234 208,289
Interest Income (5,967) (4,988) (2,994)
---------------------------------------
590,665 557,085 524,740
---------------------------------------
INCOME BEFORE INCOME TAXES 36,766 63,350 80,587
---------------------------------------
PROVISION (CREDIT) FOR INCOME TAXES
Current 15,522 31,919 30,201
Deferred (1,551) (7,846) 825
---------------------------------------
13,971 24,073 31,026
---------------------------------------
NET INCOME $ 22,795 $ 39,277 $ 49,561
---------------------------------------
---------------------------------------
EARNINGS PER SHARE $ .64 $ 1.10 $ 1.39
---------------------------------------
---------------------------------------
AVERAGE SHARES OUTSTANDING 35,478 35,849 35,770
---------------------------------------
---------------------------------------
</TABLE>
STATEMENTS OF EARNINGS RETAINED
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands except per share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $ 224,009 $ 203,582 $ 171,862
Net Income 22,795 39,277 49,561
Cash Dividends (20,669) (20,076) (17,887)
Common Stock Purchased and Retired (24,916) -- --
Common Stock in Treasury Retired (45,371) -- --
Other (152) 1,226 46
-----------------------------------------
Balance at End of Year $ 155,696 $ 224,009 $ 203,582
-----------------------------------------
-----------------------------------------
DIVIDENDS PER SHARE $ .58 $ .56 $ .50
-----------------------------------------
-----------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
17
<PAGE>
STATEMENTS OF CASH FLOWS
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING Net Income $ 22,795 $ 39,277 $ 49,561
ACTIVITIES
Noncash Charges (Credits) to Earnings:
Special Charge -- 12,000 --
Depreciation and Amortization 8,612 7,950 8,130
Deferred Income Taxes (1,551) (7,846) 825
Other, Net 4,394 4,461 2,382
(Increase) Decrease in Assets:
Trade Receivables 9,996 1,476 (14,257)
Materials and Supplies (995) 2,422 (421)
Other Current Assets 4,108 (622) (3,183)
Other Non-Current Assets (2,934) (1,167) (533)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 6,833 3,681 (2,676)
Unearned Revenue 542 (1,040) 2,713
Long-Term Accrued Liabilities 3,655 (6,602) (4,277)
Non-Current Deferred Income Taxes 2,612 (7,080) 1,076
-------------------------------------
Net Cash Provided by Operating Activities 58,067 46,910 39,340
-------------------------------------
-------------------------------------
- -------------------------------------------------------------------------------------------------------------------
INVESTING Purchases of Equipment and Property (9,982) (9,080) (8,256)
ACTIVITIES
Net Cash Used for Acquisition of Companies (7,950) (4,373) (740)
Marketable Securities, Net (19,661) (12,463) (1,910)
Proceeds from Sale of Equipment and Property 316 215 1,152
---------------------------------------
Net Cash Used in Investing Activities (37,277) (25,701) (9,754)
---------------------------------------
---------------------------------------
- -------------------------------------------------------------------------------------------------------------------
FINANCING Dividends Paid (20,669) (20,076) (17,887)
ACTIVITIES
Common Stock Purchased and Retired (26,200) -- --
Proceeds from Capital Lease 5,500 -- --
Payments on Capital Lease (1,314) -- --
Other 420 573 2,116
---------------------------------------
Net Cash Used in Financing Activities (42,263) (19,503) (15,771)
---------------------------------------
---------------------------------------
Net Increase (Decrease) in Cash and
Short-Term Investments (21,473) 1,706 13,815
Cash and Short-Term Investments
at Beginning of Year 33,623 31,917 18,102
---------------------------------------
Cash and Short-Term Investments
at End of Year $ 12,150 $ 33,623 $ 31,917
-----------------------------------------
-----------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994, ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION - Rollins, Inc. Is a national company with
headquarters located in Atlanta, Georgia, providing services to both residential
and commercial customers. The four primary services provided are termite and
pest control, protective services, lawn care, and plantscaping.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Rollins, Inc. (the Company) and its subsidiaries. All
significant intercompany transactions and balances have been eliminated.
ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation
of the financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
REVENUES - Revenue is recognized at the time services are performed.
CASH AND SHORT-TERM INVESTMENTS - The Company considers all investments
with a maturity of three months or less to be cash equivalents. Short-term
investments are stated at cost which approximates fair value.
MARKETABLE SECURITIES - Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under this statement, the Company's
marketable securities are classified as "available for sale" and have been
recorded at current market value with an offsetting adjustment to stockholders'
equity. The adoption of this statement did not have a material effect on the
Company's financial position.
MATERIALS AND SUPPLIES - Materials and supplies are recorded at the lower
of cost (first-in, first-out basis) or market.
EQUIPMENT AND PROPERTY - Depreciation and amortization which includes the
amortization of assets recorded under capital leases are provided principally on
a straight-line basis over the estimated useful lives of the related assets.
Annual provisions for depreciation are computed using the following asset lives:
buildings, 10 to 40 years; and furniture, fixtures, and operating equipment, 3
to 10 years. The cost of assets retired or otherwise disposed of and the
related accumulated depreciation and amortization are eliminated from the
accounts in the year of disposal with the resulting gain or loss credited or
charged to income. Expenditures for additions, major renewals and betterments
are capitalized and expenditures for maintenance and repairs are expensed as
incurred.
INSURANCE - The Company self-insures, up to specified limits, certain risks
related to general liability, workers' compensation and vehicle liability.
The estimated costs of existing and future claims under the self-insurance
program are accrued based upon historical trends as incidents occur, whether
reported or unreported (although actual settlement of the claims may not be made
until future periods) and may be subsequently revised based on developments
relating to such claims. The non-current portion of these estimated outstanding
claims comprises most of the long-term accrued liabilities balance shown on the
Statements of Financial Position.
ADVERTISING - Advertising expenses are charged to income during the year in
which they are incurred. The total advertising costs were approximately
$28,332,000, $27,292,000, and $25,834,000 in 1996, 1995, and 1994, respectively.
INCOME TAXES - The Company follows the practice of providing for income
taxes based on Statement of Financial Accounting Standards No. 109 (SFAS No.
109), "Accounting for Income Taxes." SFAS No. 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns.
COMMON STOCK - Earnings per share is computed on the basis of
weighted-average shares outstanding. Stock options outstanding do not have a
significant dilutive effect.
STOCK-BASED COMPENSATION - During October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation." This Statement establishes a
fair value based method of accounting for employee stock-based compensation.
However, the Statement allows companies to continue following the accounting
prescribed by Accounting Principles Bulletin (APB) Opinion No. 25. The Company
has adopted the disclosure-only option of SFAS No. 123 and will continue to use
the accounting treatment outlined in APB Opinion No. 25. If the accounting
provisions of the new Statement had been adopted as of the beginning of 1996,
the effect on 1996 net earnings would have been immaterial. Further, based on
current and anticipated use of stock-based compensation, it is not envisioned
that the impact of the Statement's accounting provisions would be material in
any future period.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994, ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
2. SPECIAL CHARGE
A special charge of $12,000,000 ($7,440,000 after tax benefit or $.21 per
share) was recorded in the third quarter 1995 to write off doubtful accounts
receivable in the consumer finance operation, Rollins Acceptance Company, (RAC),
as a result of management's actions and assessment of the estimated realizable
value of the financed receivables portfolio at September 30, 1995.
3. TRADE RECEIVABLES
Trade receivables, net, at December 31, 1996, totalling $78,856,000 and at
December 31, 1995, totalling $88,542,000 are net of allowances for doubtful
accounts of $5,961,000 and $9,991,000, respectively. Trade receivables include
installment receivable amounts which are due subsequent to one year from the
balance sheet dates. These amounts were approximately $19,030,000 and
$26,209,000 at the end of 1996 and 1995, respectively. The carrying amount of
installment receivables approximates fair value because the interest rates
approximate market rates.
4. EQUIPMENT AND PROPERTY
Equipment and property are presented at cost less accumulated depreciation
and are detailed as follows:
(In Thousands) 1996 1995
- -------------------------------------------------------------------------------
Buildings $ 9,461 $ 9,238
Operating equipment 55,056 55,339
Furniture and fixtures 12,539 12,018
Computer equipment under
capital leases 10,482 8,736
-----------------------
87,538 85,331
Less - accumulated depreciation 49,758 50,715
-----------------------
37,780 34,616
Land 3,262 3,183
-----------------------
$ 41,042 $ 37,799
-----------------------
-----------------------
5. 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.
6. INCOME TAXES
A reconciliation between taxes computed at the statutory rate on the income
before income taxes and the provision for income taxes is as follows:
(In Thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Federal income taxes
at statutory rate $ 12,868 $ 22,172 $ 28,205
State income taxes
(net of federal benefit) 1,539 3,015 3,286
Other (436) (1,114) (465)
--------------------------------------
$ 13,971 $ 24,073 $ 31,026
--------------------------------------
--------------------------------------
The provision for income taxes was based on a 38.0% estimated effective
income tax rate on income before income taxes for the years ended December 31,
1996 and 1995, and a 38.5% estimated effective income tax rate for the year
ended December 31, 1994. The effective income tax rate differs from the annual
federal statutory tax rate primarily because of state income taxes.
Income taxes remitted were $9,354,000, $37,708,000, and $33,915,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
The tax effect of the temporary differences which comprise the current and
non-current deferred income tax debits (credits) amounts is as follows:
(In Thousands) 1996 1995
- ------------------------------------------------------------------------------
Deferred Tax Assets (Liabilities)
Insurance reserves $ 13,466 $ 11,925
Safe harbor lease (15,460) (16,374)
Other 153 5,656
------------------------
$ (1,841) $ 1,207
------------------------
------------------------
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994, ROLLINS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
7. 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, 1996, are
summarized as follows:
Capitalized Operating
(In thousands) Leases Leases
- -------------------------------------------------------------------------------
1997 $3,470 $ 19,255
1998 3,760 14,823
1999 3,760 9,944
2000 3,760 7,184
2001 2,073 6,082
Thereafter 288 42,747
-----------------------
$ 17,111 $ 100,035
---------
---------
Amount representing interest (2,213)
--------
Present value of obligations 14,898
Portion due within one year (2,735)
--------
Long-term obligations $ 12,163
--------
--------
Effective December 1996, the Company entered into a five year contract for
the acquisition of information systems equipment and services. This contract
was classified as a capital lease. As part of the lease agreement, the Company
received cash for the financing of future purchases of various third party
software and services as well as actual equipment. Therefore, as of
December 31, 1996, only the delivered computer equipment and services were
recorded as assets.
Total rental expense under operating leases charged to operations was
$26,751,000, $25,701,000, and $24,867,000 for the years ended December 31, 1996,
1995, and 1994, 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.
8. BUSINESS SEGMENT INFORMATION
The Company operates two major business segments. Certain information with
respect to the Company's business segments is as follows:
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
REVENUES
Orkin $ 553,522 $ 547,797 $ 530,099
Rollins Protective 63,662 59,233 61,692
Other 10,247 13,405 13,536
-----------------------------------------
$ 627,431 $ 620,435 $ 605,327
---------------------------------------
---------------------------------------
OPERATING INCOME
Orkin $ 38,844 $ 76,754 $ 78,711
Rollins Protective 3,994 4,476 6,579
Other (1,469) (11,037)(1) 3,640
----------------------------------------
41,369 70,193 88,930
OTHER
Corporate expenses, net (10,570) (11,831) (11,337)
Interest income 5,967 4,988 2,994
----------------------------------------
Income before
income taxes $ 36,766 $ 63,350(1) $ 80,587
----------------------------------------
----------------------------------------
IDENTIFIABLE ASSETS
Orkin $ 158,086 $ 167,037 $ 169,750
Rollins Protective 26,468 22,618 21,236
Other 124,229 125,270 104,279
----------------------------------------
$ 308,783 $ 314,925 $ 295,265
----------------------------------------
----------------------------------------
DEPRECIATION AND
AMORTIZATION EXPENSE
Orkin $ 6,486 $ 6,154 $ 6,654
Rollins Protective 755 634 448
Other 1,371 1,162 1,028
----------------------------------------
$ 8,612 $ 7,950 $ 8,130
----------------------------------------
----------------------------------------
CAPITAL EXPENDITURES
Orkin $ 7,284 $ 14,413 $ 6,530
Rollins Protective 912 1,923 466
Other 3,919 1,690 1,372
----------------------------------------
$ 12,115 $ 18,026 $ 8,368
----------------------------------------
----------------------------------------
(1) INCLUDES A SPECIAL CHARGE OF $12,000,000 ($7,440,000 AFTER TAX BENEFIT OR
$.21 PER SHARE) AT SEPTEMBER 30, 1995.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994, ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory tax-qualified defined benefit
retirement plan covering all employees meeting certain age and service
requirements. The qualified plan provides benefits based on the average
compensation for the highest five years during the last ten years of credited
service (as defined) in which compensation was received, and the average
anticipated Social Security covered earnings. The Company funds the Plan with
at least the minimum amount required by ERISA.
The Company's net pension expense for the past three years is summarized as
follows:
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Service cost-benefits
earned during the period $ 3,141 $ 2,844 $ 2,749
Interest cost on projected
benefit obligation 4,081 3,958 3,524
Actual return on plan assets (5,185) (9,236) 1,445
Net amortization
of transition asset (1,181) (1,181) (1,181)
Deferral of net
investment gain (loss) 570 4,778 (5,718)
-------------------------------------
Net pension expense $ 1,426 $ 1,163 $ 819
-------------------------------------
-------------------------------------
The funded status of the Plan is summarized as follows at December 31:
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation
including vested benefits of
$44,420 in 1996 and
$41,850 in 1995 $ (48,011) $ (45,553)
Effect of projected future
compensation levels (9,298) (9,131)
------------------------
Projected benefit obligation (57,309) (54,684)
Plan assets at fair value 54,876 52,056
------------------------
Plan assets less than
projected obligation (2,433) (2,628)
Unrecognized net loss 3,401 6,204
Unrecognized net asset at transition
being amortized over 10 years (575) (1,725)
Unrecognized prior service cost (293) (325)
------------------------
Prepaid pension expense
included in other assets $ 100 $ 1,526
------------------------
------------------------
At December 31, 1996, the Plan's assets were comprised of listed common
stocks and U.S. Government and corporate securities. Included in the assets of
the Plan were shares of Rollins common stock with a market value of $6,054,000.
The expected long-term rate of return on plan assets was 9.5% in 1996, 1995, and
1994. The weighted-average discount rate used in determining the projected
benefit obligation decreased from 8.5% in 1994 to 7.5% in 1995 and 1996 to more
closely approximate rates on high-quality, long-term obligations. The assumed
growth rate of compensation was 5.5% in 1994 and 4.5% in 1995 and 1996.
The Company sponsors a deferred compensation 401(k) plan that is available
to substantially all employees with six months of service. The charges to
expense for the Company match were $1,592,000 in 1996, $1,627,000 in 1995, and
$1,465,000 in 1994.
The Company has an Employee Incentive Stock Option Plan (1984 Plan), adopted
in October, 1984, under which 1,200,000 shares of common stock were subject to
options to be granted during the ten-year period ended October, 1994. The
options were granted at the fair market value of the shares on the date of the
grant and expire ten years from the date of the grant, if not exercised. No
additional options will be granted under this Plan.
Option transactions during the last three years for the 1984 Plan are
summarized as follows:
(Number of shares) 1996 1995 1994
- --------------------------------------------------------------------------------
Outstanding at
January 1, 62,611 73,857 114,206
Granted -- -- --
Exercised (5,037) (6,696) (36,009)
Cancelled (5,542) (4,550) (4,340)
--------------------------------------------
Outstanding at
December 31, 52,032 62,611 73,857
Exercisable at
December 31, 48,418 50,501 46,857
--------------------------------------------
Option price ranges per share:
Granted $ -- $ -- $ --
Exercised 11.25-19.08 7.00-19.08 5.92-25.50
Cancelled 11.25-25.50 11.25-25.50 5.92-25.50
Outstanding 11.25-25.50 8.50-25.50 7.00-25.50
--------------------------------------------
--------------------------------------------
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994, ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
On January 25, 1994, the Company adopted a new Employee Stock Incentive Plan
(1994 Plan) under which 1,200,000 shares of common stock are subject to grants
through January 25, 2004 under various stock incentive programs. The options
were granted at the fair market value of the shares on the date of the grant and
expire ten years from the date of the grant, if not exercised.
Grant and option transactions during the last three years for the 1994
Plan are summarized as follows:
(Number of shares) 1996 1995 1994
- --------------------------------------------------------------------------------
Outstanding at
January 1, 195,000 193,100 --
Granted 75,000 17,000 200,900
Exercised -- -- --
Cancelled (21,900) (15,100) (7,800)
------------------------------------------
Outstanding at
December 31, 248,100 195,000 193,100
Exercisable at
December 31, 44,040 21,140 --
------------------------------------------
Option price ranges per share:
Granted $20.88-28.38 $ 24.25 $ 28.38
Exercised -- -- --
Cancelled 20.88-28.38 24.25-28.38 28.38
Outstanding 20.88-28.38 24.25-28.38 28.38
------------------------------------------
------------------------------------------
23
<PAGE>
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, 1996, 1995 and
1994. The opinion of Arthur Andersen LLP, the Company's independent auditors,
on those financial statements is included herein. The primary responsibility
for the integrity of the financial information included in this annual report
rests with management. Such information was prepared in accordance with
generally accepted accounting principles, appropriate in the circumstances,
based on our best estimates and judgements and giving due consideration to
materiality.
Rollins, Inc. maintains internal accounting control systems which
are adequate to provide reasonable assurance that assets are safeguarded from
loss or unauthorized use and which produce records adequate for preparation of
financial information. The system and controls and compliance therewith are
reviewed by an extensive program of internal audits and by our independent
auditors. There are limits inherent in all systems of internal accounting
control based on the recognition that the cost of such a system should not
exceed the benefits to be derived. We believe the Company's system provides
this appropriate balance.
The Board of Directors pursues its review and oversight role for these
financial statements through an Audit Committee composed of three outside
directors. The Audit Committee's duties include recommending to the Board of
Directors the appointment of an independent accounting firm to audit the
financial statements of Rollins, Inc. The Audit Committee meets periodically
with management and the Board of Directors. It also meets with representatives
of the internal and independent auditors and reviews the work of each to insure
that their respective responsibilities are being carried out and to discuss
related matters. Both the internal and independent auditors have direct access
to the Audit Committee.
/s/ R. Randall Rollins /s/ Gene L. Smith
R. Randall Rollins Gene L. Smith
CHAIRMAN OF THE BOARD AND CHIEF FINANCIAL OFFICER
CHIEF EXECUTIVE OFFICER SECRETARY, AND TREASURER
Atlanta, Georgia
February 17, 1997
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Directors and Stockholders of Rollins, Inc.:
We have audited the accompanying statements of financial position of
Rollins, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995 and the related statements of income, earnings retained and cash flows
for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
February 17, 1997
24
<PAGE>
DIRECTORS, OFFICERS, AND STOCKHOLDERS' INFORMATION
- --------------------------------------------------------------------------------
DIRECTORS
JOHN W. ROLLINS
Chairman of the Board and Chief Executive Officer of
Rollins Truck Leasing Corp. (vehicle leasing and transportation),
Chairman of the Board and Chief Executive Officer of Rollins
Environmental Services, Inc. (hazardous waste treatment and
disposal)
HENRY B. TIPPIE+
Chairman of the Board and Chief Executive Officer of Tippie Services,
Inc. (management services)
R. RANDALL ROLLINS*
Chairman of the Board and Chief Executive Officer of Rollins, Inc., Chairman
of the Board and Chief Executive Officer of RPC, Inc. (oil and gas field
services, and boat manufacturing)
WILTON LOONEY+
Honorary Chairman of the Board of Genuine Parts Company (automotive parts
distributor)
JAMES B. WILLIAMS+
Chairman of the Board and Chief Executive Officer of Sun Trust Banks, Inc.
(bank holding company)
GARY W. ROLLINS*
President and Chief Operating Officer of Rollins, Inc.
BILL J. DISMUKE
Retired President of Edwards Baking Company
* Member of the Executive Committee
+ Member of the Audit and Compensation Committees
OFFICERS
R. RANDALL ROLLINS
Chairman of the Board and Chief Executive Officer
GARY W. ROLLINS
President and Chief Operating Officer
GENE L. SMITH
Chief Financial Officer, Secretary, and Treasurer
STOCKHOLDERS' INFORMATION
ANNUAL MEETING
The Annual Meeting of the Stockholders will be held at 9:30 a.m. Tuesday,
April 22, 1997, 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, Atlanta, at the above address or write to
the Secretary at the Company's mailing address.
FORM 10-K
The Company's annual report on Form 10-K to the Securities and Exchange
Commission provides certain additional information. Stockholders may obtain a
copy by contacting the Secretary at the Company's mailing address.
CORPORATE OFFICES
Rollins, Inc.
2170 Piedmont Road, N.E.
Atlanta, Georgia 30324
MAILING ADDRESS
Rollins, Inc.
P.O. Box 647
Atlanta, Georgia 30301
TELEPHONE
(404) 888-2000
<PAGE>
EXHIBIT 21
List of Subsidiaries
of
Rollins, Inc.
The following list sets forth subsidiaries of Rollins, Inc.
Each corporation whose name is indented is a wholly-owned subsidiary of the
corporation next above which is not indented.
Name State/Country of
---- Incorporation
----------------
Orkin Exterminating Company, Inc. Delaware
Orkin Systems, Inc. Delaware
Dettelbach Pesticide Corporation Georgia
Kinro Advertising Company Delaware
Orkin Expansion, Inc. Delaware
Orkin S.A. de C.V. Mexico
Orkin International, Inc. Delaware
Orkin Canada, Inc. Canada
Orkin (Bahamas) Limited Bahamas
Rollins Continental, Inc. New York
Rollins Expansion, Inc. Delaware
Rollins Supply, Inc. Delaware
Red Diamond Insurance Co. Vermont
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports, included (or incorporated by reference) in this Form 10-K, into the
Company's previously filed Form S-8 Registration Statement (No. 33-6404), Form
S-8 Registration Statement (No. 33-26056), Form S-8 Registration Statement (No.
33-52355), and Form S-3 Registration Statement (No. 33-15360).
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 26, 1997
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned constitutes and
appoints R. Randall Rollins and/or Gary W. Rollins, or either of them as his
true and lawful attorney-in-fact and agent in any and all capacities to sign
filings by Rollins, Inc. of Form 10-K Annual Reports and any and all amendments
thereto (including post-effective amendments) and to file the same, with all
exhibits, and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney, in
the capacities indicated, as of this 20 day of FEB, 1997.
/s/ Wilton Looney
--------------------------
Wilton Looney, Director
Witness:
/s/ Norma S. Cook
- ---------------------
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned constitutes and
appoints R. Randall Rollins and/or Gary W. Rollins, or either of them as his
true and lawful attorney-in-fact and agent in any and all capacities to sign
filings by Rollins, Inc. of Form 10-K Annual Reports and any and all amendments
thereto (including post-effective amendments) and to file the same, with all
exhibits, and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney, in
the capacities indicated, as of this 24 day of FEB, 1997.
/s/ Henry B. Tippie
--------------------------
Henry B. Tippie, Director
Witness:
/s/ Linda M. Potts
- -------------------
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned constitutes and
appoints R. Randall Rollins and/or Gary W. Rollins, or either of them as his
true and lawful attorney-in-fact and agent in any and all capacities to sign
filings by Rollins, Inc. of Form 10-K Annual Reports and any and all amendments
thereto (including post-effective amendments) and to file the same, with all
exhibits, and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney, in
the capacities indicated, as of this 19th day of February, 1997.
/s/ Bill J. Dismuke
--------------------------
Bill J. Dismuke, Director
Witness:
/s/ Sue Dismuke
- -----------------
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned constitutes and
appoints R. Randall Rollins and/or Gary W. Rollins, or either of them as his
true and lawful attorney-in-fact and agent in any and all capacities to sign
filings by Rollins, Inc. of Form 10-K Annual Reports and any and all amendments
thereto (including post-effective amendments) and to file the same, with all
exhibits, and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney, in
the capacities indicated, as of this 21 day of February, 1997.
/s/ John W. Rollins
--------------------------
John W. Rollins, Director
Witness:
/s/ Cindy L. Alfonso
- ---------------------
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned constitutes and
appoints R. Randall Rollins and/or Gary W. Rollins, or either of them as his
true and lawful attorney-in-fact and agent in any and all capacities to sign
filings by Rollins, Inc. of Form 10-K Annual Reports and any and all amendments
thereto (including post-effective amendments) and to file the same, with all
exhibits, and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney, in
the capacities indicated, as of this 20th day of February, 1997.
/s/ James B. Williams
---------------------------
James B. Williams, Director
Witness:
/s/ Judy M. Gilbert
- ----------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AND STATEMENTS OF INCOME AND
EARNINGS RETAINED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,150
<SECURITIES> 84,785
<RECEIVABLES> 84,817
<ALLOWANCES> 5,961
<INVENTORY> 15,006
<CURRENT-ASSETS> 205,736
<PP&E> 90,800
<DEPRECIATION> 49,758
<TOTAL-ASSETS> 308,783
<CURRENT-LIABILITIES> 79,519
<BONDS> 0
0
0
<COMMON> 34,594
<OTHER-SE> 155,696
<TOTAL-LIABILITY-AND-EQUITY> 308,783
<SALES> 0
<TOTAL-REVENUES> 627,431
<CGS> 0
<TOTAL-COSTS> 358,783
<OTHER-EXPENSES> 231,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 36,766
<INCOME-TAX> 13,971
<INCOME-CONTINUING> 22,795
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,795
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
