UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-4422
------------------------------------------
ROLLINS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0068479
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2170 Piedmont Road, N.E., Atlanta, Georgia
(Address of principal executive offices)
30324
(Zip Code)
(404) 888-2000
(Registrant's telephone number, including area code)
------------------------------------------
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 [ ]
Rollins, Inc. had 30,036,188 shares of its $1 Par Value Common Stock outstanding
as of July 31, 2000.
<PAGE>
ROLLINS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION Page No.
--------------
Item 1. Financial Statements.
Condensed Consolidated Statements of Financial Position as of June
30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Income and Earnings Retained
for the Three and Six Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 10
Item 4. Submission of Matters to a Vote of Security Holders. 10
Item 6. Exhibits and Reports on Form 8-K. 10
SIGNATURES 11
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share data)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
------------------ ------------------
<S> <C> <C> <C>
ASSETS
Cash and Short-Term Investments $ 9,306 $ 5,689
Marketable Securities 1,161 12,967
Trade Receivables, Net 54,658 44,878
Materials and Supplies 14,666 13,429
Deferred Income Taxes 18,830 19,644
Other Current Assets 14,986 11,142
------------------ ------------------
Current Assets 113,607 107,749
Equipment and Property, Net 49,536 46,245
Goodwill and Other Intangible Assets 114,054 112,024
Deferred Income Taxes 44,852 45,015
Other Assets 2,108 1,907
------------------ ------------------
Total Assets $ 324,157 $ 312,940
================== ==================
LIABILITIES
Capital Lease Obligations $ 2,767 $ 3,638
Accounts Payable 20,504 15,275
Accrued Insurance 8,369 11,165
Accrued Payroll 21,491 23,100
Unearned Revenue 29,126 20,441
Other Expenses 38,733 37,822
------------------ ------------------
Current Liabilities 120,990 111,441
Capital Lease Obligations 1,015 2,450
Accrued Insurance 44,837 43,745
Accrual for Termite Contracts 49,915 54,352
Long-Term Accrued Liabilities 27,019 29,162
------------------ ------------------
Total Liabilities 243,776 241,150
------------------ ------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share;
99,500,000 shares authorized; 30,036,188
and 29,881,402 shares issued at June 30, 2000
and December 31, 1999, respectively 30,036 29,881
Earnings Retained 50,345 41,909
------------------ ------------------
Total Stockholders' Equity 80,381 71,790
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 324,157 $ 312,940
================== ==================
</TABLE>
[FN]
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
2
<PAGE>
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
EARNINGS RETAINED (In thousands except
share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
Customer Services $ 180,528 $ 162,342 $ 330,078 $ 292,228
------------- ------------- ------------- -------------
COSTS AND EXPENSES
Cost of Services Provided 98,762 89,704 185,765 166,536
Depreciation and Amortization 4,604 3,181 8,871 6,178
Sales, General and Administrative 64,290 58,211 121,318 108,642
Interest Income (195) (1,050) (224) (2,175)
------------- ------------- ------------- -------------
167,461 150,046 315,730 279,181
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 13,067 12,296 14,348 13,047
------------- ------------- ------------- -------------
PROVISION FOR INCOME TAXES
Current 4,415 2,995 4,352 1,600
Deferred 550 1,678 1,100 3,357
------------- ------------- ------------- -------------
4,965 4,673 5,452 4,957
------------- ------------- ------------- -------------
NET INCOME $ 8,102 $ 7,623 $ 8,896 $ 8,090
============= ============= ============= =============
EARNINGS RETAINED
Balance at Beginning of Period 43,968 48,425 41,909 49,746
Cash Dividends (1,532) (1,530) (3,024) (3,054)
Common Stock Purchased and Retired (144) (3,049) (144) (3,183)
Other (49) 1,119 2,708 989
------------- ------------- ------------- -------------
BALANCE AT END OF PERIOD $ 50,345 $ 52,588 $ 50,345 $ 52,588
============= ============= ============= =============
EARNINGS PER SHARE - BASIC AND DILUTED $ 0.27 $ 0.25 $ 0.30 $ 0.27
============= ============= ============= =============
WEIGHTED SHARES OUTSTANDING - BASIC 30,029,576 30,517,760 29,982,112 30,501,965
WEIGHTED SHARES OUTSTANDING - DILUTED 30,030,229 30,525,638 29,984,044 30,509,843
</TABLE>
[FN]
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
3
<PAGE>
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 8,896 $ 8,090
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 8,871 6,178
Provision for Deferred Income Taxes 1,100 3,357
Other, Net 521 (110)
(Increase) Decrease in Assets, Net of
Acquisitions:
Trade Receivables (9,653) (517)
Materials and Supplies (1,237) (182)
Other Current Assets (4,264) (4,060)
Other Non-Current Assets 1,340 (385)
Increase (Decrease) in Liabilities, Net of
Acquisitions:
Accounts Payable and Accrued Expenses 3,249 9,383
Unearned Revenue 8,685 4,650
Accrued Insurance (1,704) (2,166)
Accrual for Termite Contracts (4,437) (9,464)
Long-Term Accrued Liabilities (2,416) 2,374
--------------- ---------------
Net Cash Provided by Operating Activities 8,951 17,148
--------------- ---------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (8,600) (5,202)
Net Cash Used for Acquisition of Companies (3,374) (26,326)
Marketable Securities, Net 11,923 26,305
--------------- ---------------
Net Cash Used in Investing Activities (51) (5,223)
--------------- ---------------
FINANCING ACTIVITIES
Dividends Paid (3,024) (3,054)
Common Stock Purchased and Retired (154) (3,392)
Payments on Capital Leases (2,306) (1,684)
Other 201 (439)
--------------- ---------------
Net Cash Used in Financing Activities (5,283) (8,569)
--------------- ---------------
Net Increase in Cash and Short-Term
Investments 3,617 3,356
Cash and Short-Term Investments
at Beginning of Period 5,689 1,244
--------------- ---------------
Cash and Short-Term Investments
at End of Period $ 9,306 $ 4,600
=============== ===============
</TABLE>
[FN]
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
4
<PAGE>
ROLLINS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION
The condensed consolidated financial statements included
herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission. Footnote disclosures normally included in
the financial statements prepared in accordance with
accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and
regulations.
These condensed consolidated financial statements should be
read in conjunction with the financial statements and related
notes contained in the Company's annual report on Form 10-K
for the year ended December 31, 1999.
In the opinion of management, the condensed consolidated
financial statements included herein contain all normal
recurring adjustments necessary to present fairly the
financial position of the Company as of June 30, 2000 and
December 31, 1999, and the results of operations for the
three and six months ended June 30, 2000 and 1999 and cash
flows for the six months ended June 30, 2000 and 1999.
Operating results for the three months and six months ended
June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000.
Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income," establishes standards
for reporting comprehensive income and its components. For the
six months ended June 30, 2000 and 1999, comprehensive income
is not materially different from net income and, as a result,
the impact of SFAS 130 is not reflected in the Company's
condensed consolidated financial statements included herein.
Certain amounts for prior periods have been reclassified to
conform with the current period condensed consolidated
financial statement presentation. Such reclassifications had
no effect on previously reported net income.
NOTE 2. PROVISION FOR INCOME TAXES
The book provision for income taxes includes the liability for
state income taxes, net of the federal income tax benefit. The
deferred provision for income taxes arises from the changes
during the year in the Company's net deferred tax asset or
liability.
5
<PAGE>
NOTE 3. EARNINGS PER SHARE
Pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," the number
of weighted average shares used in computing basic and diluted
earnings per share (EPS) are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Basic EPS 30,029 30,518 29,982 30,502
Effect of Dilutive Stock Options 1 8 2 8
---------------- --------------- ---------------- ----------------
Diluted EPS 30,030 30,526 29,984 30,510
================ =============== ================ ================
</TABLE>
NOTE 4. LEGAL PROCEEDINGS
One of the Company's subsidiaries, Orkin Exterminating
Company, Inc., is a named defendant in Helen Cutler and Mary
Lewin v. Orkin Exterminating Company., Inc. et al. pending in
the District Court of Houston County, Alabama. The plaintiffs
in the above mentioned case filed suit in March of 1996 and
are seeking monetary damages and injunctive relief for alleged
breach of contract arising out of alleged missed or inadequate
reinspections. The attorneys for the plaintiffs contend that
the case is suitable for a class action and the court has
ruled that the plaintiffs would be permitted to pursue a class
action lawsuit against Orkin. The Company believes this case
to be without merit and intends to defend itself vigorously at
trial. At this time, the final outcome of the litigation
cannot be determined. However, it is the opinion of Management
that the ultimate resolution of this action will not have a
material adverse effect on the Company's financial position,
results of operations or liquidity.
Additionally, in the normal course of business, the Company is
a defendant in a number of lawsuits which allege that
plaintiffs have been damaged as a result of the rendering of
services by Company personnel and equipment. The Company is
actively contesting these actions. It is the opinion of
Management that the outcome of these actions will not have a
material adverse effect on the Company's financial position,
results of operations or liquidity.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The Company reported net income of $8.1 million or $0.27 per share for the
quarter compared to net income of $7.6 million or $0.25 per share for the
comparable quarter in 1999. Net income for the first six months of 2000
increased 10.0% to $8.9 million or $0.30 per share compared to $8.1 million or
$0.27 per share for the same period in 1999. Revenues for the second quarter and
six months ended June 30, 2000, increased to 11.2% and 13.0%, respectively.
The improvement in earnings for the quarter and first six months resulted
primarily from quarter-over-quarter increases in both pest and termite control
revenue and Cost of Services Provided and Selling, General and Administrative
margin improvements. The improvements in Cost of Services Provided and Selling,
General and Administrative margins were partially offset by a decrease in
Interest Income and an increase in Provision for Income Taxes.
The Company's revenue improvement for the ninth consecutive quarter continued
the positive momentum initiated in 1998. The Company believes the improvements
in revenue and net income resulted from the strategic programs initiated in 1997
and 1998 to build recurring revenue, expand the Company's commercial pest
control business and contain termite claims costs.
Results of Operations
Revenues increased to $180.5 million for the second quarter 2000 from $162.3
million for the same quarterly period of 1999. For the first six months of 2000,
the Company has generated revenues of $330.1 million, up 13.0% from last year's
amount of $292.2 million. Factors contributing to the increase in revenues are
increases in the pest control commercial customer base and in average termite
completion and annual renewal prices. The increase in pest control commercial
customer base resulted from last year's acquisitions and the success of its
selling and service programs.
Cost of Services Provided was approximately $9.1 million higher than the prior
year quarter but improved to represent 54.7% of revenues compared with 55.3% for
the same quarter of the prior year. For the first six months of 2000, Cost of
Services Provided improved to represent 56.3% of revenues compared to 57.0% for
the prior year period. The improvement was primarily attributable to reductions,
as a percentage of revenues, in service salaries, termite claims experience,
operating insurance costs and improved inventory management.
Selling, General and Administrative increased $6.1 million but decreased as a
percentage of revenues to 35.6% compared to 35.9% for the same quarter of the
prior year. For the first half of 2000, Selling, General and Administrative
decreased as a percentage of revenues to 36.8% compared with 37.2% for the prior
year period. The improvements as a percentage of revenues resulted primarily
from better leveraging of fixed costs due to higher revenues.
Interest Income decreased $855,000 compared to the same quarter of the prior
year, and decreased $1.9 million for the six months ended June 30, 2000 compared
to the same period of the prior year. The decreases were primarily due to lower
invested funds over the prior year periods. The decrease in invested funds
resulted primarily from the use of cash to fund acquisitions.
The Company's net tax provisions of $5.0 million for the quarter and $5.5
million for the first six months reflect increased taxable income over the prior
year periods.
7
<PAGE>
Financial Condition
The Company believes its current cash balances, future cash flows from operating
activities and line of credit will be sufficient to finance its current
operations and obligations, and fund expansion of the business for the
foreseeable future. The Company's operations generated cash of $9.0 million for
the first six months of 2000 compared with cash provided by operating activities
of $17.1 million in the same period of 1999. This decrease resulted primarily
from unfavorable changes in working capital related primarily to differences in
the timing of accounts receivable, accounts payable and other accrued expenses,
partially offset by favorable changes in the accrual for termite contracts and
unearned revenue and higher net income from operations, adjusted for non-cash
items. The favorable changes in unearned revenue resulted primarily from our new
service offering, Directed Liquid-Termite Baiting Program, which has the benefit
of generating additional recurring revenue by deferring a portion of termite
baiting sales to the balance sheet in the form of unearned revenue. This
unearned revenue will be recognized as revenue over the life of the related
contracts.
The Company invested approximately $12.0 million in capital expenditures and
acquisitions during the first six months of 2000, and expects to invest between
$9.0 and $11.0 million during the remainder of 2000, inclusive of improvements
to its management information systems. Capital expenditures during the first six
months of 2000 consisted primarily of equipment replacements and upgrades and
improvements to the Company's management information systems. During the first
six months, cash used in financing activities was approximately $5.3 million
compared with cash used of $8.6 million for the same period of the prior year.
The primary reason for the improvement in cash used is attributable to a
decrease in the amount of the Company's common stock repurchases and
retirements. Of total cash used in financing activities, approximately $3.0
million was paid in cash dividends and $154,000 was paid for the repurchase and
retirement of 10,122 shares of the Company's Common Stock as part of an odd-lot
buy-back program. The capital expenditures, acquisitions, cash dividends and
stock repurchases were primarily funded through existing cash balances,
marketable securities and operating activities. The Company maintains a $40.0
million line of credit, of which approximately $37.0 million was available for
borrowing as of July 31, 2000.
In 1997 and 1998, Orkin and other pest control industry companies received
letters from the Federal Trade Commission (FTC) advising of its investigation of
the pest control industry - more specifically, the termite and moisture control
practices of the industry - and requesting certain information voluntarily from
the Company. Orkin has voluntarily provided the information requested and has
advised the FTC of the Company's intention to continue to cooperate fully with
this investigation. At this point in time, management does not believe this
investigation will have a material effect upon its results of operations or
financial condition. In addition, the Company is aggressively defending a class
action lawsuit filed in Dothan, Alabama. For further discussion, see Note 4 to
the accompanying condensed consolidated financial statements.
8
<PAGE>
Impact of Recent Accounting Pronouncements
------------------------------------------
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In second quarter 1999, the Financial Accounting Standards Board
voted to delay the effective date of this standard to fiscal years beginning
after June 15, 2000. The adoption of this standard, effective for the Company as
of January 1, 2001, is not expected to materially impact the results of
operations or financial condition of the Company.
Forward-Looking Statements
--------------------------
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements regarding the expected impact of the outcome of
litigation arising in the ordinary course of business and the outcome of the
Helen Cutler and Mary Lewin v. Orkin Exterminating Company., Inc., et al.
("Cutler") litigation on the Company's financial condition, and the Company's
ability to fund current operations and obligations and proposed expansion. The
actual results of the Company could differ materially from those indicated by
the forward-looking statements because of various risks and uncertainties
including, without limitation, the possibility of a court ruling against the
Company in litigation or in the Cutler litigation; general economic conditions;
market risk; changes in industry practices or technologies; the degree of
success of the Company's termite process reforms and pest control selling and
treatment methods; the Company's ability to identify potential acquisitions;
climate and weather trends; competitive factors and pricing practices; potential
increases in labor costs; and changes in various government laws and
regulations, including environmental regulations. All of the foregoing risks and
uncertainties are beyond the ability of the Company to control, and in many
cases the Company cannot predict the risks and uncertainties that could cause
its actual results to differ materially from those indicated by the
forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of July 31, 2000, the Company no longer maintains a material investment
portfolio subject to interest rate risk exposure. The Company is, however,
subject to interest rate risk exposure through its line of credit as discussed
in the liquidity section of Management's Discussion & Analysis. Due to the
immaterial amount of such borrowings as of July 31, 2000 and as currently
anticipated at December 31, 2000, this risk is not expected to have a material
effect upon the Company's results of operations or financial position going
forward.
9
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 to Part I, Item 1 for discussion of certain
litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on April
25, 2000. At the meeting, stockholders elected one Class II
Director for the three-year term expiring in 2003.
Results of the voting were as follows:
<TABLE>
<CAPTION>
Election of Class II Director: For Withheld
------------------------------------------- ------------------------- --------------------------
<S> <C> <C>
Gary W. Rollins 27,467,457 228,252
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(3) (i) Restated Certificate of Incorporation of
Rollins, Inc. is incorporated herein by
reference to Exhibit (3) (i) as filed with its
Form 10-K for the year ended December 31,
1997.
(ii) By-laws of Rollins, Inc. is incorporated
herein by reference to Exhibit (3) (ii) as
filed with its Form 10-Q for the quarterly
period ended March 31, 1999.
(4) Form of Common Stock Certificate of Rollins,
Inc. is incorporated herein by reference to
Exhibit (4) as filed with its Form 10-K for
the year ended December 31, 1998.
(27)(a) Financial Data Schedule (For Commission Use
Only).
(27)(b) Restated Financial Data Schedule (For
Commission Use Only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or were
required to be filed during the second
quarter of 2000.
10
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: August 14, 2000 By: /s/ Gary W. Rollins
--------------------------
Gary W. Rollins
President and Chief Operating Officer
(Member of the Board of Directors)
Date: August 14, 2000 By: /s/ Harry J. Cynkus
--------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
11
