UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K/A
Amendment No. 1
(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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file No. 1-4422
--------------------------
ROLLINS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0068479
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2170 Piedmont Road, N.E., Atlanta, Georgia 30324
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 888-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $1 Par Value The New York Stock Exchange
The Pacific Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Rollins, Inc. Common Stock held by
non-affiliates on February 29, 2000, was $220,694,369 based on the closing price
on the New York Stock Exchange on such date of $16 3/16 per share.
Rollins, Inc. had 29,881,458 shares of Common Stock outstanding as of
February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Rollins, Inc.'s Annual Report to Stockholders for the calendar
year ended December 31, 1999 are incorporated by reference into Part I, Item 1,
Part II, Items 5-7, and Part IV, Item 14.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
of Rollins, Inc. are incorporated by reference into Part III, Items 10-13.
<PAGE>
The purpose of this amendment is to amend Item 8 of the Registrant's Form 10-K
for the year ended December 31, 1999, which was filed with the Commission on
March 20, 2000, in order to add Footnote 11 to the financial statements
regarding the disclosure of a subsequent event.
Item 8. Financial Statements and Supplementary Data
consolidated statements of financial position
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
At December 31, (In thousands except share data) 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Short-Term Investments $ 5,689 $ 1,244
Marketable Securities 12,967 110,229
Trade Receivables, Net 44,878 42,353
Materials and Supplies 13,429 13,335
Deferred Income Taxes 19,644 20,083
Other Current Assets 11,142 11,864
------------------------------------
Current Assets 107,749 199,108
Equipment and Property, Net 46,245 35,466
Goodwill and Other Intangible Assets 112,024 47,092
Deferred Income Taxes 45,015 44,369
Other Assets 1,907 1,230
------------------------------------
Total Assets $ 312,940 $ 327,265
====================================
LIABILITIES
Capital Lease Obligations $ 3,638 $ 3,419
Accounts Payable 15,275 10,890
Accrued Insurance 11,165 18,348
Accrued Payroll 23,100 18,400
Accrued Pension 6,523 5,635
Unearned Revenue 20,441 15,210
State Income Taxes Payable 6,295 7,188
Accrual for Termite Contracts 15,000 25,800
Other Expenses 10,004 10,203
------------------------------------
Current Liabilities 111,441 115,093
Capital Lease Obligations 2,450 6,090
Accrued Insurance 43,745 38,975
Accrual for Termite Contracts 54,352 66,350
Long-Term Accrued Liabilities 29,162 20,522
------------------------------------
Total Liabilities 241,150 247,030
------------------------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 29,881,402 and 30,488,741
shares issued 29,881 30,489
Earnings Retained 41,909 49,746
------------------------------------
Total Stockholders' Equity 71,790 80,235
------------------------------------
Total Liabilities and Stockholders' Equity $ 312,940 $ 327,265
-------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE>
consolidated statements of income
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31, (In thousands except per share data) 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Customer Services $ 586,639 $ 549,136 $ 538,639
------------------------------------------------------------
COSTS AND EXPENSES
Cost of Services Provided 341,487 327,353 362,161
Depreciation and Amortization 13,433 11,458 10,712
Provision for Termite Contracts - - 117,000
Sales, General and Administrative 223,235 214,182 225,356
Interest Income (3,048) (8,981) (7,588)
------------------------------------------------------------
575,107 544,012 707,641
------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 11,532 5,124 (169,002)
------------------------------------------------------------
PROVISION (BENEFIT) FOR INCOME TAXES
Current (2,694) (4,937) 6,021
Deferred 7,076 6,884 (70,242)
------------------------------------------------------------
4,382 1,947 (64,221)
------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 7,150 3,177 (104,781)
------------------------------------------------------------
DISCONTINUED OPERATIONS
Operating Income, Less Income Tax Expense of $119 - - 192
Gain on Disposal, Less Income Tax Expense of
$2,090 and $70,214 in 1998 and 1997, Respectively - 3,410 106,086
------------------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS - 3,410 106,278
------------------------------------------------------------
NET INCOME $ 7,150 $ 6,587 $ 1,497
============================================================
EARNINGS (LOSS) PER SHARE
Continuing Operations $ .24 $ .10 $ (3.09)
Discontinued Operations - .11 3.13
------------------------------------------------------------
EARNINGS PER SHARE - BASIC AND DILUTED $ .24 $ .21 $ .04
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
consolidated statements of earnings retained
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31, (In thousands except per share data) 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $ 49,746 $ 112,365 $ 155,696
Net Income 7,150 6,587 1,497
Cash Dividends (6,076) (16,064) (20,360)
Common Stock Purchased and Retired (11,076) (53,429) (24,733)
Common Stock Issued for Acquisition of Companies 1,892 - -
Other 273 287 265
------------------------------------------------------------
Balance at End of Year $ 41,909 $ 49,746 $ 112,365
============================================================
DIVIDENDS PER SHARE $ .20 $ .50 $ .60
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
13
<PAGE>
consolidated statements of cash flows
ROLLINS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31, (In thousands) 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 7,150 $ 6,587 $ 1,497
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities:
Provision for Termite Contracts - - 117,000
Provision for Self-Insurance Reserves - - 15,000
Provision for Bad Debts - - 8,000
Depreciation and Amortization 13,433 11,458 10,712
Provision (Benefit) for Deferred Income Taxes 7,076 8,974 (69,228)
Discontinued Operations, Net of Taxes - (3,410) (106,278)
Other, Net 1,471 5,121 7,169
(Increase) Decrease in Assets:
Trade Receivables 2,243 7,087 7,505
Materials and Supplies 1,310 1,719 (3,388)
Other Current Assets (759) 1,638 (2,034)
Other Non-Current Assets (6,611) 520 (2,330)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (1,186) (15,167) 11,608
Unearned Revenue 5,134 1,379 2,154
Accrued Insurance (2,413) 5,220 9,629
Accrual for Termite Contracts (22,798) (24,850) -
Long-Term Accrued Liabilities 4,112 (6,955) (1,336)
------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 8,162 (679) 5,680
============================================================
INVESTING ACTIVITIES
Purchases of Equipment and Property (18,818) (10,402) (8,956)
Net Cash Used for Acquisition of Companies (60,964) (3,517) (1,440)
Net Proceeds from Sale of Discontinued Operations,
Net of Current Taxes Paid - - 156,469
Marketable Securities, Net 97,145 (35,033) 9,846
------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 17,363 (48,952) 155,919
============================================================
FINANCING ACTIVITIES
Dividends Paid (6,076) (16,064) (20,360)
Common Stock Purchased and Retired (11,795) (56,195) (26,083)
Payments on Capital Leases (3,421) (2,868) (2,521)
Other 212 160 300
------------------------------------------------------------
Net Cash Used in Financing Activities (21,080) (74,967) (48,664)
============================================================
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - - 757
------------------------------------------------------------
Net Increase (Decrease) in Cash and Short-Term Investments 4,445 (124,598) 113,692
Cash and Short-Term Investments at Beginning of Year 1,244 125,842 12,150
------------------------------------------------------------
Cash and Short-Term Investments at End of Year $ 5,689 $ 1,244 $ 125,842
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
14
<PAGE>
notes to consolidated financial statements
Years Ended December 31, 1999, 1998 and 1997 ROLLINS, INC. AND SUBSIDIARIES
1. SIGNIFICANT ACCOUNTING POLICIES
Business Description - Rollins, Inc. (the Company) is a national service company
with headquarters located in Atlanta, Georgia, providing pest and termite
control services to both residential and commercial customers.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information." As the Company has only one reportable segment - its pest and
termite control business - the majority of the disclosures required by SFAS 131
do not apply to the Company. In regard to the general disclosures required by
SFAS 131, the Company's results of operations and its financial condition are
not significantly reliant upon any single customer or the Company's foreign
operations.
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of Rollins, Inc. and its subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Estimates Used in the Preparation of Consolidated Financial Statements - The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires Management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenues - Revenue is recognized at the time services are performed.
Cash and Short-Term Investments - The Company considers all investments with a
maturity of three months or less to be cash equivalents. Short-term investments
are stated at cost which approximates fair market value.
Marketable Securities - The Company's marketable securities are classified as
"available for sale" and have been recorded at current market value with an
offsetting adjustment to stockholders' equity.
Materials and Supplies - Materials and supplies are recorded at the lower of
cost (first-in, first-out basis) or market.
Equipment and Property - Depreciation and amortization, which includes the
amortization of assets recorded under capital leases, are provided principally
on a straight-line basis over the estimated useful lives of the related assets.
Annual provisions for depreciation are computed using the following asset lives:
buildings, ten to forty years; and furniture, fixtures, and operating equipment,
three to ten years. The cost of assets retired or otherwise disposed of and the
related accumulated depreciation and amortization are eliminated from the
accounts in the year of disposal with the resulting gain or loss credited or
charged to income. Expenditures for additions, major renewals and betterments
are capitalized and expenditures for maintenance and repairs are expensed as
incurred.
Insurance - The Company self-insures, up to specified limits, certain risks
related to general liability, workers' compensation and vehicle liability. The
estimated costs of existing and future claims under the self-insurance program
are accrued based upon historical trends as incidents occur, whether reported or
unreported (although actual settlement of the claims may not be made until
future periods) and may be subsequently revised based on developments relating
to such claims. These estimated outstanding claims have been reflected in the
Consolidated Statements of Financial Position in the line items entitled Accrued
Insurance.
Advertising - Advertising expenses are charged to income during the year in
which they are incurred. The total advertising costs were approximately $28.3
million in 1999 and $27.5 million for each of the years 1998 and 1997.
Income Taxes - The Company follows the practice of providing for income taxes
based on SFAS 109, "Accounting for Income Taxes", which requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the consolidated financial statements or tax
returns.
Earnings Per Share - In 1997, the Company adopted SFAS 128, "Earnings Per
Share" (EPS), which requires companies to present basic EPS and diluted EPS.
Basic EPS is computed on the basis of weighted-average shares outstanding.
Diluted EPS is computed on the basis of weighted-average shares outstanding plus
common stock options outstanding during the year which, if exercised, would have
a dilutive effect on EPS. Basic and diluted EPS are the same for all years
reported.
A reconciliation of the number of weighted-average shares used in computing
basic and diluted EPS is as follows:
(In thousands) 1999 1998 1997
--------------------------------------------------------------------------------
Basic EPS 30,325 31,973 33,896
Effect of Dilutive
Stock Options 7 30 28
-------------------------------------
Diluted EPS 30,332 32,003 33,924
--------------------------------------------------------------------------------
Stock-Based Compensation - As permitted by SFAS 123, "Accounting for
Stock-Based Compensation," the Company accounts for employee stock compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 10 to the
consolidated financial statements for additional information.
Comprehensive Income - In 1997, the Financial Accounting Standards Board
issued SFAS 130, "Reporting Comprehensive Income," effective for fiscal years
beginning after December 15, 1997. For the years ended December 31, 1999, 1998
and 1997, comprehensive income is not materially different from net
15
<PAGE>
notes to consolidated financial statements (continued)
Years Ended December 31, 1999, 1998 and 1997 ROLLINS, INC. AND SUBSIDIARIES
income and, as a result, the impact of SFAS 130 is not reflected in the
Company's consolidated financial statements.
Reclassifications - Certain amounts for previous years have been reclassified
to conform with the 1999 consolidated financial statement presentation.
2. CHANGES IN ACCOUNTING ESTIMATES
In the fourth quarter of 1997, the Company made certain changes in accounting
estimates totaling $23.0 million due to 1997 events and new information becoming
available. The Company's provision for its self-insurance program for
automobile, workers' compensation, and general liability was increased by $15.0
million. This provision has been reflected in the Consolidated Statements of
Income in the line item entitled Cost of Services Provided. The provision for
bad debts was also increased by $8.0 million and has been reflected in the
Consolidated Statements of Income in the line item entitled Sales, General and
Administrative.
In the fourth quarter of 1997, a provision for termite contracts of $117.0
million was recorded related to the estimated costs of reinspections,
reapplications, repair claims and associated labor, chemicals, and other costs
incurred relative to termite work performed prior to December 31, 1997. These
anticipated costs reflected the Company's response to current trends in the
termite treatment area of its operations and the pest control industry. The
provision was reflected in the 1997 Consolidated Statements of Income in the
line item entitled Provision for Termite Contracts. The related liabilities at
December 31, 1999 and 1998, reflecting the estimated costs incurred but as yet
unpaid related to termite work performed prior to these dates, have been
reflected in the Consolidated Statements of Financial Position in the line items
entitled Accrual for Termite Contracts.
3. ACQUISITIONS AND JOINT VENTURE
On April 30, 1999, the Company and Johnson Wax Professional entered into a joint
venture, Acurid Retail Services, L.L.C. (Acurid Retail), created to sell and
provide pest elimination services to customers in the retail market and jointly
contributed existing customers to the joint venture. The Company owns 50% of the
joint venture, which is accounted for using the equity method. In addition, on
April 30, 1999, the Company's wholly-owned subsidiary, Orkin Exterminating
Company, Inc. (Orkin), acquired the remaining pest elimination business
operations of PRISM, a subsidiary of Johnson Wax Professional, for approximately
twenty-four million dollars. The acquisition was accounted for as a purchase
with the results of operations of the business acquired included from the
effective date of the acquisition. The acquisition resulted in excess costs over
net assets acquired of approximately sixteen million dollars which are being
amortized over a life of twenty years using the straight-line method.
On October 29, 1999, Orkin acquired PCO Services, Inc. (PCO), a subsidiary of
Johnson Wax Professional. Orkin acquired all the shares of capital stock of PCO
for approximately twenty-five million dollars. The acquisition was accounted for
as a purchase with the results of operations of the business acquired included
from the effective date of the acquisition. The acquisition resulted in excess
costs over net assets acquired of approximately five hundred thousand dollars
which are being amortized over a life of twenty years using the straight-line
method.
On December 3, 1999, Orkin acquired the pest control business operations of
Redd Pest Control Company, Inc. (Redd) for approximately thirteen million
dollars, of which approximately seven million dollars was paid in cash. Under
the terms of the agreement, Orkin acquired all the pest control customers
of Redd, together with certain assets. The acquisition was accounted for as a
purchase with the results of operations of the business acquired included from
the effective date of the acquisition. The acquisition resulted in excess costs
over net assets acquired of approximately eight million dollars which are being
amortized over a life of twenty years using the straight-line method.
4. DISCONTINUED OPERATIONS
In October 1997, the Company sold its Rollins Protective Services (RPS) business
segment for approximately $200.0 million in cash. In July 1997, the Company sold
its Lawn Care and Plantscaping divisions for approximately $37.0 million in
cash. In 1997, the Company estimated its liabilities associated with these
divested operations and recorded a gain from the sales of RPS and the Lawn Care
and Plantscaping divisions of $106.1 million, net of taxes. In the fourth
quarter of 1998, the Company reevaluated its liabilities associated with these
divested operations and recorded an additional gain of $3.4 million, net of
taxes.
The Company's results of operations for the year ended December 31, 1997 have
been restated for the divestitures of the RPS business segment and the Lawn Care
and Plantscaping divisions. The results of operations of these divested
operations and the gains on their disposal have been reflected in the
Consolidated Statements of Income in the section entitled Discontinued
Operations.
Summarized financial information for the discontinued operations is as
follows:
<TABLE>
<CAPTION>
(In thousands) 1997
--------------------------------------------------------------------------------
<S> <C>
Revenues $ 64,721
Income Before Income Taxes 311
Net Income 192
Assets -
Liabilities -
Net Assets of Discontinued Operations $ -
--------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
notes to consolidated financial statements (continued)
Years Ended December 31, 1999, 1998 and 1997 ROLLINS, INC. AND SUBSIDIARIES
5. TRADE RECEIVABLES
Trade receivables, net, at December 31, 1999, totaling $44.9 million and at
December 31, 1998, totaling $42.4 million are net of allowances for doubtful
accounts of $4.9 million and $5.3 million, respectively. Trade receivables
include installment receivable amounts which are due subsequent to one year from
the balance sheet dates. These amounts were approximately $6.7 million and $9.0
million at the end of 1999 and 1998, respectively. The carrying amount of
installment receivables approximates fair value because the interest rates
approximate market rates.
6. EQUIPMENT AND PROPERTY
Equipment and property are presented at cost less accumulated depreciation and
are detailed as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Buildings $ 10,158 $ 9,759
Operating Equipment 56,445 44,805
Furniture and Fixtures 10,186 8,542
Computer Equipment Under
Capital Leases 7,787 8,736
-------------------------------
84,576 71,842
Less - Accumulated
Depreciation 41,912 39,704
-------------------------------
42,664 32,138
Land 3,581 3,328
-------------------------------
$ 46,245 $ 35,466
--------------------------------------------------------------------------------
</TABLE>
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of cost over net assets of businesses acquired
and is stated at cost less accumulated amortization. Goodwill which arose from
acquisitions prior to November 1970 is not being amortized for financial
statement purposes, since, in the opinion of Management, there has been no
decrease in the value of the acquired businesses. Goodwill arising from
acquisitions since November 1970 is being amortized from fifteen to forty years.
Other intangible assets include trademarks, customer contracts and
non-compete agreements and are being amortized from three to twenty years.
8. INCOME TAXES
A reconciliation between taxes computed at the statutory rate on the Income
(Loss) From Continuing Operations Before Income Taxes and the Provision
(Benefit) for Income Taxes is as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Income Taxes
at Statutory Rate $ 4,036 $ 1,595 $ (64,680)
State Income Taxes
(Net of Federal Benefit) 697 367 268
Other (351) (15) 191
----------------------------------------
$ 4,382 $ 1,947 $ (64,221)
--------------------------------------------------------------------------------
</TABLE>
The Provision (Benefit) for Income Taxes was based on a 38.0% estimated
effective income tax rate on Income (Loss) From Continuing Operations Before
Income Taxes for the years ended December 31, 1999, 1998 and 1997. The effective
income tax rate differs from the annual federal statutory tax rate primarily
because of state income taxes.
During 1999, the Company paid income taxes of $662,000, net of refunds
received. For 1998, the Company received a refund of income taxes of $2.4
million, net of payments. Income taxes remitted, related to both continuing and
discontinued operations, were $85.2 million for the year ended December 31,
1997.
Components of the net deferred income tax assets (liabilities) at December 31,
1999 and 1998 include:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Termite Accrual $ 34,322 $ 40,125
Insurance Reserves 35,035 31,909
Safe Harbor Lease (9,847) (11,449)
Other 5,149 3,867
-------------------------------
$ 64,659 $ 64,452
--------------------------------------------------------------------------------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company has capitalized lease obligations and several operating leases. The
minimum lease payments under the capital leases and non-cancelable operating
leases with terms in excess of one year, in effect at December 31, 1999, are
summarized as follows:
<TABLE>
<CAPTION>
Capitalized Operating
(In thousands) Leases Leases
--------------------------------------------------------------------------------
<S> <C> <C>
2000 $ 3,918 $ 22,618
2001 2,231 19,837
2002 307 14,239
2003 - 9,682
2004 - 6,751
Thereafter - 34,390
----------------------------
$ 6,456 $107,517
==========
Amount Representing Interest (368)
----------
Present Value of Obligations 6,088
Portion Due Within One Year (3,638)
----------
Long-Term Obligations $ 2,450
--------------------------------------------------------------------------------
</TABLE>
Total rental expense under operating leases charged to operations was $25.6
million, $25.4 million and $23.5 million for the years ended December 31, 1999,
1998 and 1997, respectively.
The Company is aggressively defending a lawsuit filed in Dothan, Alabama, in
which the plaintiffs seek compensatory damages for alleged breach of contract
arising out of alleged missed or inadequate reinspections. The attorneys for the
plaintiffs contend that the case is suitable for a class action and the court
has ruled that the plaintiffs would be permitted to pursue a class action
lawsuit against Orkin. The Company believes this
17
<PAGE>
notes to consolidated financial statements (continued)
Years Ended December 31, 1999, 1998 and 1997 ROLLINS, INC. AND SUBSIDIARIES
case to be without merit and intends to defend itself vigorously at trial. At
this time, the final outcome of the litigation cannot be determined. However, it
is the opinion of Management that the ultimate resolution of this action will
not have a material adverse effect on the Company's financial position, results
of operations or liquidity.
The Company is involved in other litigation matters incidental to its
business. With respect to such other suits, Management does not believe the
litigation in which it is involved will have a material effect upon its results
of operations or financial condition.
10. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory tax-qualified defined benefit retirement
plan (the Plan) covering all employees meeting certain age and service
requirements. The Plan provides benefits based on the average compensation for
the highest five years during the last ten years of credited service (as
defined) in which compensation was received, and the average anticipated Social
Security covered earnings. The Company funds the Plan with at least the minimum
amount required by ERISA.
The funded status of the Plan and the resulting accrued benefit liability are
summarized as follows at December 31:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year $ 77,288 $ 66,908
Service Cost 4,379 3,611
Interest Cost 5,694 5,182
Actuarial (Gain) Loss (8,263) 4,258
Benefits Paid (3,672) (2,671)
-------------------------------
Benefit Obligation at End of Year 75,426 77,288
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets at
Beginning of Year 63,258 59,741
Actual Return on Plan Assets 2,928 6,188
Employer Contribution 4,000 -
Benefits Paid (3,672) (2,671)
-------------------------------
Fair Value of Plan Assets at End of Year 66,514 63,258
-------------------------------
Funded Status (8,912) (14,030)
Unrecognized Net Actuarial Loss 2,546 8,621
Unrecognized Prior Service Cost (157) (226)
-------------------------------
Accrued Benefit Liability $ (6,523) $ (5,635)
--------------------------------------------------------------------------------
</TABLE>
Accrued benefit liabilities at December 31, 1999 and 1998 of $6.5 million and
$5.6 million, respectively, have been reflected in the Consolidated Statements
of Financial Position in the line item entitled Accrued Pension.
The weighted-average assumptions as of December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount Rate 8.0% 7.0% 7.5%
Expected Return on Plan Assets 9.5% 9.5% 9.5%
Rate of Compensation Increase 5.0% 4.0% 4.5%
--------------------------------------------------------------------------------
</TABLE>
The components of net periodic benefit cost for the past three years are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 4,379 $ 3,611 $ 3,221
Interest Cost 5,694 5,182 4,437
Expected Return on
Plan Assets (5,751) (5,269) (5,007)
Net Amortizations:
Amortization of Net Asset - - (575)
Amortization of Net Loss 634 203 -
Amortization of Net
Prior Service Cost (69) (36) (31)
---------------------------------------
Net Periodic Benefit Cost $ 4,887 $ 3,691 $ 2,045
--------------------------------------------------------------------------------
</TABLE>
In 1998, the Company adopted SFAS 132, "Employers' Disclosures About Pensions
and Other Postretirement Benefits." The 1997 amounts shown in the tables above
have been restated in accordance with the disclosures required by SFAS 132.
At December 31, 1999, the Plan's assets were comprised of listed common
stocks and U.S. government and corporate securities. Included in the assets of
the Plan were shares of Rollins, Inc. Common Stock with a market value of $4.5
million.
The Company sponsors a deferred compensation 401(k) plan that is available to
substantially all employees with six months of service. The charges to expense
for the Company match were approximately $2.2 million in 1999, $1.5 million in
1998 and $1.7 million in 1997.
The Company has two Employee Incentive Stock Option Plans, the first adopted
in January 1994 (1994 Plan) and the second adopted in April 1998 (1998 Plan) as
a supplement to the 1994 Plan. An aggregate of 3.0 million shares of Common
Stock may be granted under various stock incentive programs sponsored by these
plans, at a price not less than the market value of the underlying stock on the
date of grant. Options may be issued under the 1994 Plan and the 1998 Plan
through January 2004 and April 2008, respectively, and expire ten years from the
date of grant, if not exercised.
18
<PAGE>
notes to consolidated financial statements (continued)
Years Ended December 31, 1999, 1998 and 1997 ROLLINS, INC. AND SUBSIDIARIES
Options are also outstanding under a prior Employee Incentive Stock Option
Plan (1984 Plan). Under this plan, 1.2 million shares of Common Stock were
subject to options granted during the ten-year period ended October 1994. The
options were granted at the fair market value of the shares on the date of grant
and expire ten years from the date of grant, if not exercised. No additional
options will be granted under the 1984 Plan.
Option transactions during the last three years for the 1998, 1994 and 1984
Plans are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of Shares Under
Stock Options:
Outstanding at
Beginning of Year 1,144,620 359,785 300,132
Granted 874,000 890,000 197,600
Exercised (246) (3,550) (7,657)
Cancelled (252,200) (101,615) (130,290)
----------------------------------------
Outstanding at End of Year 1,766,174 1,144,620 359,785
Exercisable at End of Year 263,834 106,960 80,405
Weighted-Average
Exercise Price:
Granted $ 16.31 $ 19.69 $ 19.25
Exercised 13.25 13.18 12.47
Cancelled 18.53 20.77 22.57
Outstanding at End of Year 18.66 20.42 22.29
Exercisable at End of Year 21.29 23.40 23.31
--------------------------------------------------------------------------------
</TABLE>
Information with respect to options outstanding and options exercisable at
December 31, 1999 is as follows:
Exercise Number Average Remaining Number
Price Outstanding Contractual Life Exercisable
$12.25 3,180 0.08 years 3,180
13.25 11,494 1.08 11,494
19.08 4,200 2.08 4,200
25.50 2,900 3.08 2,900
28.38 78,900 4.08 57,900
24.25 4,000 5.08 1,920
20.88 40,000 6.08 9,360
19.25 117,000 7.08 36,880
19.69 715,000 8.33 136,000
16.31 789,500 9.08 -
--------------------------------------------------------------------------------
1,766,174 263,834
--------------------------------------------------------------------------------
The Company applied Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", in accounting for its stock options and,
accordingly, no compensation cost has been recognized for stock options in the
consolidated financial statements. Had the Company determined compensation cost
based on the fair value at the grant date of its stock options granted in 1999,
1998 and 1997 under SFAS 123 (See Note 1 to the consolidated financial
statements), the Company's net income, as disclosed on the Consolidated
Statements of Income, would have been reduced by approximately $1.2 million in
1999, $578,000 in 1998 and $103,000 in 1997. Earnings per share would have been
reduced by $.04 in 1999 and $.02 in 1998, with no earnings per share effect in
1997.
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $4.30, $6.07 and $5.34, respectively, on the date of
grant, using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-Free Interest Rate 5.12% 6.04% 5.69%
Expected Life, in Years 8 8 8
Expected Volatility 21.30% 23.22% 18.55%
Expected Dividend Yield 2.49% 2.37% 2.17%
--------------------------------------------------------------------------------
</TABLE>
11. SUBSEQUENT EVENT
On May 14, 1999 a lawsuit was filed in the Circuit Court of Macon County,
Alabama against the Company's subsidiary, Orkin Exterminating Company, Inc.
("Orkin")alleging breach of contract and fraud. The suit asserts a failure to
treat and inspect the residence of the plaintiff and to repair the termite
damage and alleges that Orkin concealed alleged misconduct by suppressing
material facts. On August 18, 2000, the jury in the matter of The Estate of
Artie Mae Jeter v. Orkin Exterminating Company, Inc. and Bill Maxwell, returned
a verdict of $80.8 million against Orkin. The award consisted of $800,000
in compensatory damages (including property damage and mental anguish) and $80.0
million in punitive damages. The jury found simply that the contract had been
breached and Orkin had committed fraud.
It is Orkin's position that it complied with its contractual obligations
and that it did not attempt to conceal alleged misconduct or suppress material
facts. Orkin will vigorously pursue post-trial relief and its right to
appeal. However, if the verdict is permitted to stand, it would have a material
adverse impact on the Company and Orkin. Although, it is the opinion
of management and Orkin's attorneys involved in the case that this verdict
will be substantially reduced and that the ultimate resolution of this
litigation will not have a material impact on the Company and Orkin, there is no
assurance that the verdict will be reduced or reversed on appeal.
19
<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, 1999, 1998 and 1997. The
opinion of Arthur Andersen LLP, the Company's independent public accountants, on
those financial statements is included herein. The primary responsibility for
the integrity of the financial information included in this annual report rests
with management. Such information was prepared in accordance with generally
accepted accounting principles, appropriate in the circumstances, based on our
best estimates and judgments and giving due consideration to materiality.
Rollins, Inc. maintains internal accounting control systems which are adequate
to provide reasonable assurance that assets are safeguarded from loss or
unauthorized use and which produce records adequate for preparation of financial
information. The system and controls and compliance therewith are reviewed by an
extensive program of internal audits and by our independent public accountants.
There are limits inherent in all systems of internal accounting control based on
the recognition that the cost of such a system should not exceed the benefit to
be derived. We believe the Company's system provides this appropriate balance.
The Board of Directors pursues its review and oversight role for these financial
statements through an Audit Committee composed of three outside directors. The
Audit Committee's duties include recommending to the Board of Directors the
appointment of an independent accounting firm to audit the financial statements
of Rollins, Inc. The Audit Committee meets periodically with management and the
Board of Directors. It also meets with representatives of the internal auditors
and independent public accountants and reviews the work of each to insure that
their respective responsibilities are being carried out and to discuss related
matters. Both the internal auditors and independent public accountants have
direct access to the Audit Committee.
/s/ R. Randall Rollins /s/ Harry J. Cynkus
---------------------- -------------------
R. Randall Rollins Harry J. Cynkus
Chairman of the Board and Chief Financial Officer
Chief Executive Officer and Treasurer
Atlanta, Georgia
February 16, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Directors and Stockholders of Rollins, Inc.:
We have audited the accompanying statements of financial position of Rollins,
Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1999 and 1998
and the related statements of income, earnings retained and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rollins, Inc. and subsidiaries
as of December 31, 1999 and 1998 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Atlanta, Georgia
February 16, 2000 (except with respect to the matter discussed in Note 11, as to
which the date is October 30, 2000)
20
<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/ GARY W. ROLLINS
---------------------------
Gary W. Rollins
President and Chief Operating
Officer
(Member of the Board of Directors)
Date: November 3, 2000
By: /s/ HARRY J. CYNKUS
---------------------------
Harry J. Cynkus
Chief Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)
Date: November 3, 2000
