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 March 31, 2005.
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 (I.R.S. Employer
of incorporation 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
Rollins, Inc. had 68,329,349 shares of its $1 par value Common Stock outstanding
as of April 15, 2005.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
------------
Item 1. Financial Statements.
Consolidated Statements of Financial Position as of March 31, 2005
and December 31, 2004 2
Consolidated Statements of Income for the Three Months Ended March
31, 2005 and 2004 3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2005 and 2004 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 22
Item 4. Controls and Procedures. 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 23
Item 6. Exhibits. 24
SIGNATURES 25
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share and per share data)
March 31, December 31,
2005 2004
------------------- ---------------------
(Unaudited)
ASSETS
Cash and Cash Equivalents $ 55,894 $ 56,737
Trade Receivables, Short Term, Net of Allowance for Doubtful Accounts of $3,233
and $4,032, respectively 44,308 45,469
Materials and Supplies 8,600 8,876
Deferred Income Taxes 28,089 28,355
Other Current Assets 10,398 7,368
------------------- ---------------------
Current Assets 147,289 146,805
Equipment and Property, Net 52,930 49,163
Goodwill 119,542 119,568
Customer Contracts and Other Intangible Assets, Net 73,667 75,902
Deferred Income Taxes 11,274 13,328
Trade Receivables, Long Term, Net of Allowance for Doubtful Accounts of $1,559
and $1,076, respectively 9,942 9,755
Other Assets 4,156 4,259
------------------- ---------------------
Total Assets $ 418,800 $ 418,780
=================== =====================
LIABILITIES
Accounts Payable $ 12,859 $ 15,438
Accrued Insurance 13,110 14,963
Accrued Compensation and Related Liabilities 31,943 38,453
Unearned Revenue 84,967 81,195
Accrual for Termite Contracts 11,992 11,992
Other Current Liabilities 33,361 25,939
------------------- ---------------------
Current Liabilities 188,232 187,980
Accrued Insurance, Less Current Portion 22,580 22,667
Accrual for Termite Contracts, Less Current Portion 14,147 13,319
Accrued Pension 10,579 10,579
Long-Term Accrued Liabilities 14,622 16,686
------------------- ---------------------
Total Liabilities 250,160 251,231
------------------- ---------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000 shares authorized; 69,350,351
and 69,060,112 shares issued, respectively 69,350 69,060
Treasury Stock, par value $1 per share; 1,057,348 shares at March 31, 2005 and
556,000 shares at December 31, 2004 (1,057) (556)
Additional Paid-In Capital 7,819 10,659
Accumulated Other Comprehensive Loss (15,349) (16,066)
Unearned Compensation (6,863) (3,475)
Retained Earnings 114,740 107,927
------------------- ---------------------
Total Stockholders' Equity 168,640 167,549
------------------- ---------------------
Total Liabilities and Stockholders' Equity $ 418,800 $ 418,780
=================== =====================
The accompanying notes are an integral part of these consolidated
financial statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2005 2004
------------- -------------
REVENUES
Customer Services $ 183,915 $ 160,416
-------------- -------------
COSTS AND EXPENSES
Cost of Services Provided 98,637 86,542
Depreciation and Amortization 5,963 4,657
Sales, General & Administrative 60,283 52,768
Loss on Sale of Assets 3 1
Interest Income (462) (150)
-------------- -------------
164,424 143,818
-------------- -------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN 19,491 16,598
ACCOUNTING PRINCIPLE
-------------- -------------
PROVISION FOR INCOME TAXES
Current 5,584 4,661
Deferred 2,312 2,071
-------------- -------------
7,896 6,732
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 11,595 9,866
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAXES
OF $4,017 --- (6,204)
-------------- -------------
NET INCOME $ 11,595 $ 3,662
============== =============
INCOME PER SHARE - BASIC
Income Before Cumulative Effect of Change in Accounting
Principle 0.17 0.15
Cumulative Effect of Change in Accounting Principle --- (0.09)
-------------- -------------
Net Income Per Share - Basic $ 0.17 $ 0.06
============== =============
INCOME PER SHARE - DILUTED
Income Before Cumulative Effect of Change in Accounting
Principle 0.17 0.14
Cumulative Effect of Change in Accounting Principle --- (0.09)
-------------- -------------
Net Income Per Share - Diluted $ 0.17 $ 0.05
============== =============
Weighted Average Shares Outstanding - Basic 67,942 67,947
Weighted Average Shares Outstanding - Diluted 70,063 69,964
DIVIDENDS PAID PER SHARE $ 0.05 $ 0.04
============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------------------------------
2005 2004
--------------------- -------------------
OPERATING ACTIVITIES
Net Income $ 11,595 $ 3,662
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Change in Accounting Principle, Net --- 6,204
Depreciation and Amortization 5,963 4,657
Provision for Deferred Income Taxes 3,347 1,273
Loss on Sale of Assets 3 1
Other, Net 198 63
(Increase) Decrease in Assets:
Trade Receivables 1,072 2,873
Materials and Supplies 277 (310)
Other Current Assets (3,030) (2,678)
Other Non-Current Assets 235 (446)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 229 3,761
Unearned Revenue 3,773 4,694
Accrued Insurance (1,940) (1,261)
Accrual for Termite Contracts 829 (238)
Long-Term Accrued Liabilities (2,823) (917)
--------------------- -------------------
Net Cash Provided by Operating Activities 19,728 21,338
--------------------- -------------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (6,417) (1,739)
Acquisitions/Dispositions of Companies, Net (1,291) (158)
Sale of Marketable Securities, Net --- 21,866
--------------------- -------------------
Net Cash Provided by/(Used) in Investing Activities (7,708) 19,969
--------------------- -------------------
FINANCING ACTIVITIES
Dividends Paid (3,436) (2,718)
Common Stock Purchased (10,604) ---
Other 554 (188)
--------------------- -------------------
Net Cash Used in Financing Activities (13,486) (2,906)
--------------------- -------------------
Effect of Exchange Rate Changes on Cash 623 (53)
--------------------- -------------------
Net Increase/(Decrease) in Cash and Short-Term
Investments (843) 38,348
Cash and Short-Term Investments at Beginning of Period 56,737 59,540
--------------------- -------------------
Cash and Short-Term Investments at End of Period $ 55,894 $ 97,888
===================== ===================
The accompanying notes are an integral part of these
consolidated financial statements.
4
ROLLINS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION AND OTHER
Basis of Preparation - The consolidated financial statements included
herein have been prepared by Rollins, Inc. (the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission applicable to quarterly reporting on Form 10-Q.
These consolidated financial statements have been prepared in
accordance with Statement of Financial Accounting Standard No. 94,
Consolidation of All Majority-Owned Subsidiaries ("SFAS 94") and Rule
3A-02(a) of Regulation S-X. In accordance with SFAS 94 and with Rule
3A-02(a) of Regulation S-X, the Company's policy is to consolidate all
subsidiaries and investees where it has voting control. The Company
does not have any subsidiaries or investees where it has less than a
100% equity interest or less than 100% voting control, nor does it
have any interest in other investees, joint ventures, or other
variable interest entities that require consolidation under FASB
interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46).
Footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted as permitted by
such rules and regulations. These 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, 2004.
In the opinion of management, the consolidated financial statements
included herein contain all adjustments, consisting of a normal
recurring nature, necessary to present fairly the financial position
of the Company as of March 31, 2005 and December 31, 2004, the results
of its operations for the three months ended March 31, 2005 and 2004
and cash flows for the three months ended March 31, 2005 and 2004.
Operating results for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2005.
The Company has only one reportable segment, its pest and termite
control business. The Company's results of operations and its
financial condition are not reliant upon any single customer or a few
customers or the Company's foreign operations.
The Board of Directors, at its quarterly meeting on January 25, 2005,
authorized a three-for-two stock split by the issuance on March 10,
2005 of one additional common share for each two common shares held of
record on February 10, 2005. Accordingly, the par value for additional
shares issued was adjusted to common stock, and fractional shares
resulting from the stock split were settled in cash. All share and per
share data appearing throughout this Form 10-Q have been retroactively
adjusted for this stock split.
Estimates Used in the Preparation of Consolidated Financial
Statements--The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the
United States requires Management to make estimates and assumptions
that affect the amounts reported in the accompanying notes and
financial statements. Actual results could differ from those
estimates.
Cash and Cash Equivalents--The Company considers all investments with
a maturity of three months or less to be cash equivalents. Short-term
investments, all of which are cash equivalents, are stated at cost,
which approximates fair market value.
Marketable Securities--From time to time, the Company maintains
investments held by several large, well-capitalized financial
institutions. The Company's investment policy does not allow
investment in any securities rated less than "investment grade" by
national rating services.
5
Management determines the appropriate classification of debt
securities at the time of purchase and re-evaluates such designations
as of each balance sheet date. Debt securities are classified as
available-for-sale because the Company does not have the intent to
hold the securities to maturity. Available-for-sale securities are
stated at their fair values, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity.
Realized gains and losses and declines in value judged to be other
than temporary on available-for-sale securities are included in
interest income. In the first quarter of 2004, the Company sold the
balance of its marketable securities, the proceeds of which were used
to pay the primary portion of the Western Industries, Inc. acquisition
completed in the second quarter of 2004. The cost of securities sold
is based on the specific identification method. Interest and dividends
on securities classified as available-for-sale are included in
interest income. The Company's marketable securities generally consist
of United States government, corporate and municipal debt securities.
Comprehensive Income (Loss)--Other Comprehensive Income (Loss) results
from foreign currency translations, unrealized gain/losses on
marketable securities and changes in the minimum pension liability.
New Accounting Standards-- In December 2004, the FASB issued SFAS No.
123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which
replaces SFAS No. 123, "Accounting for Stock-Based Compensation,"
("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values
beginning with the first interim or annual period after December 15,
2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. Rollins is required to adopt SFAS
123R in the first quarter of fiscal 2006, beginning January 1, 2006.
Under SFAS 123R, Rollins must determine the appropriate fair value
model to be used for valuing share-based payments, the amortization
method for compensation cost and the transition method to be used at
date of adoption. The transition methods include prospective and
retrospective adoption options. Under the retrospective option, prior
periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method requires
that compensation expense be recorded for all unvested stock options
and restricted stock at the beginning of the first quarter of adoption
of SFAS 123R, while the retrospective methods would record
compensation expense for all unvested stock options and restricted
stock beginning with the first period restated. Rollins is evaluating
the requirements of SFAS 123R and expects that the adoption of SFAS
123R will not have a material impact on Rollins' consolidated results
of operations and earnings per share. Rollins has not yet determined
the method of adoption or the effect of adopting SFAS 123R, and it has
not determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123.
Cumulative Effect of Change in Accounting Principle - Prior to 2004,
traditional termite treatments were recognized as revenue at the
renewal date and an accrual was established for estimated costs of
reapplications and repairs to be incurred. Beginning fourth quarter
2004, the Company adopted a new accounting method under which, the
revenue received is deferred and recognized on a straight-line basis
over the remaining contract term; and, the cost of reinspections,
reapplications and repairs and associated labor and chemicals are
expensed as incurred and no longer accrued. For noticed claims, an
estimate is made of the costs to be incurred (including legal costs)
based upon current factors and historical information. The performance
of reinspections tends to be close to the contract renewal date and,
while reapplications and repairs involve an insubstantial number of
the contracts, these costs are incurred over the contract term. The
newly adopted accounting principle eliminates the need to obtain
actuarial estimates of the claim costs to be incurred and management's
estimates of reapplication costs. Also, management believes the newly
adopted accounting method more closely conforms to the current pattern
under which revenues are earned and expenses are incurred, and
conforms the accounting methodology of Orkin and its recently acquired
subsidiary, Western Pest Services. The costs of providing termite
services upon renewal are compared to the expected revenue to be
received and a provision is made for any expected losses.
Due to this change, the Company recorded a cumulative effect
adjustment of $6.2 million (net of income taxes) during the fourth
quarter of 2004.
The amounts for the quarter ended March 31, 2004 reported herein have
been restated to reflect the effect of this accounting change as if it
had occurred on January 1, 2004. A reconciliation of the restatement
due to the change in accounting principle is as follows:
6
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share and per share data)
(Unaudited)
Previously Effect of As Restated
Reported Accounting
as of March 31, Change as of March 31,
2004 2004
---------------------- -------------------- ----------------------
Assets
Cash and Short-Term Investments $ 97,888 $ - $ 97,888
Trade Receivables Short Term, Net 36,349 - 36,349
Materials and Supplies 10,147 - 10,147
Deferred Income Taxes 20,580 6,752 27,332
Other Current Assets 10,092 - 10,092
---------------------- -------------------- ----------------------
Current Assets 175,056 6,752 181,808
Equipment and Property, Net 34,618 - 34,618
Goodwill 72,521 - 72,521
Customer Contracts 28,924 - 28,924
Trade Receivables Long Term, Net 9,200 - 9,200
Deferred Income Taxes 17,287 (3,533) 13,754
Other Assets 25,350 - 25,350
---------------------- -------------------- ----------------------
Total Assets $ 362,956 $ 3,219 $ 366,175
====================== ==================== ======================
Liabilities
Accounts Payable $ 15,325 $ (50) $ 15,275
Accrued Insurance 13,050 - 13,050
Accrued Payroll 26,913 50 26,963
Unearned Revenue 50,702 22,435 73,137
Accrual For Termite Contracts 21,500 (7,317) 14,183
Other Current Liabilities 23,983 - 23,983
---------------------- -------------------- ----------------------
Current Liabilities 151,473 15,118 166,591
Accrued Insurance 24,764 - 24,764
Accrual For Termite Contracts 22,135 (8,214) 13,921
Long-Term Accrued Liabilities 16,741 1,371 18,112
---------------------- -------------------- ----------------------
Total Liabilities 215,113 8,275 223,388
Stockholder's Equity
Common Stock 45,399 - 45,399
Retained Earnings and Other Equity 102,444 (5,056) 97,388
---------------------- -------------------- ----------------------
Total Stockholders' Equity 147,843 (5,056) 142,787
---------------------- -------------------- ----------------------
Total Liabilities and Stockholders' Equity $ 362,956 $ 3,219 $ 366,175
====================== ==================== ======================
7
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
Three Months Ended
Previously Effect of As Restated
Reported Accounting
March 31, Change March 31,
2004 2004
-------------------- ----------------- --------------------
Revenues $ 158,692 $ 1,724 $ 160,416
-------------------- ----------------- --------------------
Costs & Expenses
Cost of Services Provided 86,764 (222) 86,542
Depreciation & Amortization 4,657 - 4,657
Sales General & Administrative 52,768 - 52,768
(Gain)/Loss on Sales of Assets 1 - 1
Interest (Income)/Expense (150) - (150)
-------------------- ----------------- --------------------
Total Cost & Expenses $ 144,040 $(222) $143,818
-------------------- ----------------- --------------------
Income Before Taxes 14,652 1,946 16,598
Provision for Income Taxes 5,934 798 6,732
-------------------- ----------------- --------------------
Cumulative effect of change in accounting principle, net --- (6,204) (6,204)
Net Income $ 8,718 $ (5,056) $ 3,662
==================== ================= ====================
8
Franchising Program - Orkin had 53 franchises as of March 31, 2005,
including international franchises in Mexico, established in 2000, and
Panama, established in 2003. Transactions with franchises involve
sales of customer contracts to establish new franchises, initial
franchise fees and royalties. The customer contracts and initial
franchise fees are typically sold for a combination of cash and notes
due over periods ranging up to 5 years. Notes receivable from
franchises aggregated $6.4 million, $5.2 million, and $4.5 million as
of March 31, 2005, December 31, 2004, and March 31, 2004,
respectively. The Company recognizes gains from the sale of customer
contracts at the time they are sold to franchises and collection on
the notes is reasonably assured. The gain amounted to approximately
$1.3 million in the first quarter of 2005 compared to $0.9 million in
first quarter of 2004, and is included as revenues in the accompanying
Consolidated Statements of Income. Initial franchise fees are deferred
for the duration of the initial contract period and are included as
unearned revenue in the Consolidated Statements of Financial Position.
Deferred franchise fees amounted to $1.8 million, $1.6 million, and
$1.5 million at March 31, 2005, December 31, 2004, and March 31, 2004,
respectively. Royalties from franchises are accrued and recognized as
revenues as earned on a monthly basis. Revenues from royalties were
$427,000 in the first quarter of 2005 compared to $353,000 in the
first quarter of 2004. The Company's maximum exposure to loss relating
to the franchises aggregated $4.6 million, $3.6 million, and $3.0
million at March 31, 2005, December 31, 2004 and March 31, 2004,
respectively.
Fair Value of Financial Instruments--The Company's financial
instruments consist of cash, short-term investments, marketable
securities, trade and notes receivables, accounts payable and other
short-term liabilities. The carrying amounts of these financial
instruments approximate their fair values.
Seasonality-- The business of the Company is affected by the seasonal
nature of the Company's pest and termite control services. The
increase in pest pressure and activity, as well as 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 of the Company's pest and
termite control operations during such periods as evidenced by the
following chart. In addition, revenues were favorably impacted in 2004
after the acquisition of Western Pest Services on April 30, 2004.
Total Net Revenues
---------------------------------------------------
2005 2004 2003
- -----------------------------------------------------------------------
First Quarter $ 183,915 $ 160,416* $ 155,122
Second Quarter N/A 202,725* 185,105
Third Quarter N/A 203,925* 178,262
Fourth Quarter N/A 183,818 158,524
- -----------------------------------------------------------------------
* Restated for change in accounting principle.
NOTE 2. EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share ("EPS"), the
Company presents basic EPS and diluted EPS. Basic EPS is computed on
the basis of weighted-average shares outstanding. Diluted EPS is
computed on the basis of weighted-average shares outstanding plus
common stock options outstanding during the period which, if
exercised, would have a dilutive effect on EPS. Basic and diluted EPS
have been restated for the March 10, 2005, three-for-two stock split
for all periods presented (See Note 1). A reconciliation of the number
of weighted-average shares used in computing basic and diluted EPS is
as follows:
9
Three Months Ended
---------------------------
March 31,
---------------------------
(In thousands except per share data amounts) 2005 2004
- ---------------------------------------------------- ------------- -------------
Net Income available to stockholders
numerator for basic and diluted earnings per share): $11,595 $3,662
============= =============
Shares (denominator):
Weighted-average shares outstanding
(denominator for basic earnings per share) 67,942 67,947
Effect of Dilutive securities:
Employee Stock Options and Restricted Stock Awards 2,121 2,017
------------- -------------
Adjusted Weighted-Average Shares (adjusted to
reflect assumed exercises)
(denominator for diluted earnings per share) 70,063 69,964
Per share amounts:
Basic earnings per common share $0.17 $0.06
Diluted earnings per common share $0.17 $0.05
- --------------------------------------------------------------------------------
The Company bought back 641,310 shares of the Company's common stock
in the first quarter of 2005 under its authorized repurchase program.
Rollins has had a buyback program in place for a number of years and
has routinely purchased shares when it felt the opportunity was
desirable. With only 276,000 shares left under the current program,
the Board authorized the purchase of 4 million additional shares of
the Company's common stock at its quarterly meeting on April 26, 2005.
This authorization enables the Company to continue the purchase of
Rollins, Inc. shares when appropriate, which is an important benefit
resulting from the Company's strong cash flows.
NOTE 3. CONTINGENCIES
Orkin, one of the Company's subsidiaries, is a named defendant in
Butland et al. v. Orkin Exterminating Company, Inc. et al. pending in
the Circuit Court of Hillsborough County, Tampa, Florida. The
plaintiffs filed suit in March of 1999 and are seeking monetary
damages and injunctive relief. The Court ruled in early April 2002,
certifying the class action lawsuit against Orkin. Orkin appealed this
ruling to the Florida Second District Court of Appeals, which remanded
the case back to the trial court for further findings. In December the
Court issued a new ruling certifying the class action. Orkin has
appealed this new ruling to the Florida Second District Court of
Appeals. Orkin believes this case to be without merit and intends to
defend itself vigorously through trial, if necessary. At this time,
the final outcome of the litigation cannot be determined. However, in
the opinion of Management, 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, Orkin is a defendant
in a number of lawsuits, which allege that plaintiffs have been
damaged as a result of the rendering of services by Orkin. Orkin is
actively contesting these actions. Some lawsuits have been filed
(Ernest W. Warren and Dolores G. Warren et al. v. Orkin Exterminating
Company, Inc., et al.; and Francis D. Petsch, et al. v. Orkin
Exterminating Company, Inc. et al.) in which the Plaintiffs are
seeking certification of a class. The cases originate in Georgia and
Florida. An arbitration filing has also been filed in Jacksonville,
Florida, by Cynthia Garrett against Orkin (Cynthia Garrett v. Orkin,
Inc.) in which the plaintiff is seeking certification of a class. The
Company believes these matters to be without merit and intends to
vigorously contest certification and defend itself through trial or
arbitration, if necessary. In the opinion of Management, the outcome
of these actions will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
Orkin is involved in certain environmental matters primarily arising
in the normal course of business. In the opinion of Management, the
Company's liability under any of these matters would not materially
affect its financial condition, results of operations or liquidity.
10
The Company and Orkin were also named defendants in Bob J. Stevens v.
Orkin Exterminating Company, Inc. and Rollins, Inc., a lawsuit that
was filed in Texas and in which the Plaintiff was seeking
certification of a class. The parties settled this matter on an
individual basis, the class allegations were dismissed, and it is now
concluded. In the opinion of Management, the ultimate resolution of
this action did not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
NOTE 4. STOCKHOLDERS' EQUITY
During the first quarter ended March 31, 2005, the Company repurchased
641,310 shares for $10.2 million under it's stock repurchase program.
Also, during the first quarter ended March 31, 2005, approximately
487,000 shares of common stock were issued upon exercise of stock
options by employees. As permitted by SFAS No. 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. No stock-based employee compensation cost is
reflected in net income, as all options granted had an exercise price
equal to the market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended
March 31,
--------------------------
(In thousands, except per share data) 2005 2004
--------------------------
Net income, as reported $11,595 $3,662
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (146) (202)
--------------------------
Pro forma net income $11,449 $3,460
--------------------------
Earnings per share:
Basic-as reported $0.17 $0.06
Basic-pro forma $0.17 $0.05
Diluted-as reported $0.17 $0.05
Diluted-pro forma $0.16 $0.05
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists of the following (in
thousands):
Minimum Foreign Other
Pension Currency Unrealized
Liability Translation Gain/(Loss) Total
- -----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2004 $ --- $ (247) $ (67) $ (314)
Change during 2004:
Before-tax amount.. (32,124) (3,967) 109 (28,048)
Tax benefit (expense) 13,769 1,559 86 12,296
-------------------------------------------------------------------
(18,355) 2,408 195 (15,752)
Balance at December 31, 2004 $ (18,355) $ 2,161 $ 128 $ (16,066)
Change during first three months of 2005:
Before-tax amount.. --- 623 --- 623
Tax benefit (expense) --- --- 94 94
-------------------------------------------------------------------
--- 623 94 717
-------------------------------------------------------------------
Balance at March 31, 2005 $ (18,355) $ 2,784 $ 222 $ (15,349)
- -----------------------------------------------------------------------------------------------------------------------
11
NOTE 6. ACCRUAL FOR TERMITE CONTRACTS
The Company maintains an accrual for termite contracts representing
the estimated costs of reapplications, repair claims and associated
labor, chemicals, and other costs relative to termite control services
performed prior to the balance sheet date.
Prior to 2004, traditional termite treatments were recognized as
revenue at the renewal date and an accrual was established for
estimated costs of reapplications and repairs to be incurred.
Beginning fourth quarter 2004, the Company adopted a new accounting
method under which, the revenue received is deferred and recognized on
a straight-line basis over the remaining contract term; and, the cost
of reinspections, reapplications and repairs and associated labor and
chemicals are expensed as incurred. For outstanding claims, an
estimate is made of the costs to be incurred (including legal costs)
based upon current factors and historical information. The performance
of reinspections tends to be close to the contract renewal date and,
while reapplications and repairs involve an insubstantial number of
the contracts, these costs are incurred over the contract term. The
newly adopted accounting principle eliminates the need to obtain
actuarial estimates of the claim costs to be incurred and management's
estimates of reapplication costs. Also, management believes the newly
adopted accounting method more closely conforms to the current pattern
under which revenues are earned and expenses are incurred, and
conforms the accounting methodology of Orkin and its recently acquired
subsidiary, Western Pest Services. The costs of providing termite
services upon renewal are compared to the expected revenue to be
received and a provision is made for any expected losses.
Due to this change, the Company recorded a cumulative effect
adjustment of $6.2 million (net of income taxes) during the fourth
quarter of 2004.
A reconciliation of the beginning and ending balances of the accrual
for termite contracts is as follows:
Three Months Ended
March 31,
-------------------------
(In thousands) 2005 2004
- --------------------------------------------------------------------------------
Beginning Balance $ 25,311 $ 43,873
Effect of Change in Accounting Principle --- (15,309)
Current Period Provision 4,250 4,309
Settlements, Claims and Expenditures Made
During the Period (3,422) (4,769)
-------------------------
Ending Balance $ 26,139 $ 28,104
-----------------------------------------------------------------------------
NOTE 7. PENSION AND POST-RETIREMENT BENEFIT PLANS
The following represents the net periodic pension benefit costs and
related components in accordance with SFAS 132 ( R ):
Components of Net Pension Benefit Cost
Three Months Ended
March 31,
-------------------------
(in thousan 2005 2004
----------------------------------------------------------------
Service Cost $1,397 $1,297
Interest Cost 2,208 2,074
Expected Return on Plan Assets (2,464) (2,394)
Amortization of:
Prior Service Benefit (217) (217)
Unrecognized Net Loss 1,164 845
-----------------------
Net Periodic Benefit Cost $2,088 $1,605
----------------------------------------------------------------
12
NOTE 8. RELATED PARTY TRANSACTIONS
On April 28, 2004, the Company sold real estate in Okeechobee County,
Florida to LOR, Inc., a company controlled by R. Randall Rollins,
Chairman of the Board of Rollins, Inc. and Gary W. Rollins, Chief
Executive Officer, President and Chief Operating Officer of Rollins,
Inc. for $16.6 million in cash. The sale resulted in a net gain after
tax of $8.1 million or $0.11 per share since the real estate had
appreciated over approximately 30 years it had been owned by the
Company. The real estate was under a lease agreement with annual
rentals of $131,939 that would have expired June 30, 2007. On May 28,
2004, the Company sold real estate in Sussex County, Delaware to LOR,
Inc. for $111,000 in cash. The sale resulted in an immaterial net gain
after tax. The Board of Directors, at its quarterly meeting on January
27, 2004, approved the formation of a committee (the "Committee") made
up of Messrs. Bill J. Dismuke and James B. Williams, who are
independent directors, to evaluate the transactions. In addition, the
Company on October 22, 2004 purchased real estate located at 2158
Piedmont Road, N.E., Atlanta, Georgia 30324, adjacent to the Company's
headquarters, from LOR, Inc. for $4.6 million. The Committee was
furnished with full disclosure of the transactions, including
independent appraisals, and determined that the terms of the
transactions were reasonable and fair to the Company. The Company sold
an additional piece of real estate in Sussex County, Delaware to LOR,
Inc. or an entity wholly owned by LOR, Inc. for $10.6 million in cash.
The transaction took place on December 29, 2004 and resulted in a $6.3
million gain, net of costs and after taxes.
NOTE 9. ACQUISITIONS
On April 30, 2004, the Company acquired substantially all of the
assets and assumed certain liabilities of Western Pest Services
("Western"), and the Company's consolidated financial statements
include the operating results of Western from the date of the
acquisition. Neither Western nor its principals had any prior
relationship with the Company or its affiliates. Western was engaged
in the business of providing pest control services and the Company has
continued this business. The acquisition was made pursuant to an Asset
Purchase Agreement (the "Western Agreement") dated March 8, 2004,
between Rollins, Inc. and Western Industries, Inc. and affiliates. The
consideration for the assets and certain noncompetition agreements
(the "Purchase Price") was approximately $106.6 million, including
approximately $7.0 million of assumed liabilities. The Purchase Price
was funded with cash on hand, the sale of property located in
Okeechobee County, Florida and a $15.0 million senior unsecured
revolving credit facility.
Pursuant to the Western Agreement, the Company acquired substantially
all of Western's property and assets, including accounts receivable,
real property leases, seller contracts, governmental authorizations,
data and records, intangible rights and property and insurance
benefits. As described in the Western Agreement, the Company assumed
only specified liabilities of Western and obligations under disclosed
assigned contracts.
The Company engaged an independent valuation firm to determine the
allocation of the purchase price to Goodwill and identifiable
Intangible assets. Such valuation resulted in the allocation of $41.3
million to Goodwill and $55.2 million to other intangible assets,
principally customer contracts. The finite-lived intangible assets,
principally customer contracts, are being amortized over periods
principally ranging from 8 to 12.5 years on a straight-lined basis.
On April 30, 2004, in a transaction ancillary to the Western
acquisition, the Company acquired Residex Corporation ("Residex"), a
company that distributes chemicals and other products to pest
management professionals, pursuant to an Asset Purchase Agreement (the
"Residex Agreement") dated March 8, 2004, between Rollins, Inc. and
Western Industries, Inc., JBD Incorporated and Residex Corporation.
Subsequently on April 30, 2004, the Company sold Residex to an
industry distribution group. The amounts involved were not material
and no gain or loss was recognized on the transaction.
Prior to the acquisition, Western Pest Services was recognized as a
premier pest control business and ranked as the 8th largest company in
the industry. Based in Parsippany, NJ, the Company provides pest
elimination and prevention to homes and businesses to over 130,000
customers from New York to Virginia with additional operations in
Georgia and Florida. Western is primarily a commercial pest control
service company and its existing businesses complement most of the
services that Orkin offers, in an area of the country in which Orkin
has not been particularly strong, the Northeast. The Company's
consolidated statements of income include the results of operations of
Western for all periods after May 1, 2004.
13
NOTE 10. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below gives effect to
the Western acquisition as if it had occurred as of the beginning of
our fiscal year 2004. The information presented below is for
illustrative purposes only and is not necessarily indicative of
results that would have been achieved if the acquisition actually had
occurred as of the beginning of such years or results which may be
achieved in the future.
Three Months Ended
March 31,
----------------------------
2005 2004
------------- -------------
REVENUES
Customer Services $ 183,915 $ 179,408
============= =============
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE $ 19,491 $ 17,664
============= =============
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ 11,595 $ 10,527
------------- -------------
NET INCOME $ 11,595 $ 4,323
============= =============
EARNINGS PER SHARE - BASIC $ 0.17 $ 0.06
============= =============
EARNINGS PER SHARE - DILUTED $ 0.17 $ 0.06
============= =============
Average Shares Outstanding---Basic 67,942 67,947
Average Shares Outstanding---Diluted 70,063 69,964
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
The Company had improvement in both its top and bottom line results compared to
the first quarter of 2004. This was the Company's 21st consecutive quarter of
improved earnings results and reflects its progress in implementing the
Company's growth strategies, productivity initiatives and customer and employee
retention objectives.
An integral part of taking the Company to the next level involves making sure
that it invests wisely in its business's technological opportunities, and that
the Company acquires the most up to date and appropriate business tools to help
Rollins succeed. Rollins, Inc. is fortunate to have strong cash flow and
financial strength, which allows the Company to invest in its self whether it is
through acquisitions or internal infrastructure expenditures.
The Company's newest investment relates to a project to enhance our training
capabilities through the acquisition of a satellite-training delivery system.
Rollins' satellite system will enable new employees to receive training at a
faster rate, reduce training cost over the next several years and provide more
consistency in the Company's training products.
Up until now, the majority of Rollins' training has taken place in its branches
or remote classroom settings. By nature this means the Company's material is not
always delivered consistently and reliant on the individual trainer. Special
training, for example carpenter ants, mosquito, and bird control training, has
significant cost involving travel expenses, meals and lodging. Additionally, new
hires in the branches seeking initial training often have to wait for some of
their training based on locale and instructor availability. All of these
variable training circumstances also make it difficult to track an employee's
progress.
Rollins believes satellite training delivery will effectively address these
challenges. It will allow the Company to conduct training more frequently and
ensure that all employees are being trained with consistent materials and aids.
The Company will be able to immediately capture each student's progress and
completion of each course, which also has a regulatory benefit. New hires will
become productive at a much faster rate, and benefit from a superior product.
Rollins will also reduce employee down time and expense associated with offsite
classroom training.
14
The Company training courses will be conducted via an Internet direct link (IDL)
from the Rollins, Inc. Orkin University media studio in Atlanta transmitted to
various branches across North America. After the original transmission, students
will be able to "make up" courses missed, which will offer multiple
opportunities to provide training on key seasonal subjects (i.e., mice, fleas,
etc.) The students will have a one touch keypad to answer questions and interact
with the instructor when in a real time mode.
Rollins estimates the total investment to have a payback of less than 3 years.
The Company anticipates a $5 million investment and a $6.5 million savings over
the first 3 years. Beyond the financial return, the Company is excited
concerning the other soft benefits this will be provided to its employees and
customers.
Orkin was recognized in March for the third straight year by Training magazine
as one of the top 100 U.S. companies that excel at human capital development.
Orkin placed 57th on the list, garnering its highest ranking ever received. All
of the companies selected are chosen based on criteria such as training
practices, evaluation methods and outstanding training initiatives.
Rollins is implementing a system to improve employee and customer routing and
scheduling, which will be integrated into the company's FOCUS operating system.
The Company expects it to greatly improve its ability to provide premier
"on-time" service to customers. Rollins has engaged an outside vendor whose
routing and scheduling software is used by a number of large service companies
including, Sears, FedEx, QWEST, Miller Brewing and Allstate Insurance. Some of
the capabilities that can be achieved by integrating this customized software
into the Company's operating system include multiple choice appointment options
for customers and customer-bundling efficiencies that will result in
productivity and on-time performance improvements, along with mileage and
overtime reductions.
The system will be designed for both commercial and residential business;
however the Company will be rolling out commercial first. The Company plans to
begin a pilot program before the end of this fiscal year.
Another investment that is rolling out now involves automatic customer
messaging. Orkin has just completed its pilot program, and is pleased with the
results. This new phone communication process and system will greatly improve
how the Company contacts customers. Rollins knows with all the dual income
households today that effective customer communication is critical to customer
retention.
Ned, the Orkin man, that is featured in Orkin T.V. commercials, will be
delivering customized customer messages that include a reminder such as, "it is
time for your yearly termite inspection," "it is time for your pest control
service," as well as follow up calls to confirm service satisfaction or
reminding a customer that they need to pay their bill.
Auto messaging is important to the Company for a number of reasons. First, it
reinforces the Orkin brand and it will provide consistent customer communication
across all of the Orkin branches. Additionally, it will result in more timely
and efficient inspections and visits, and it will offer customers an additional
means to confirm their satisfaction.
The Company is also making an investment in improving internal accounting and
employee relations related to payroll and incentive compensation processing. To
date, the Company has been gathering and inputting this information in a
semi-manual mode. This is a labor intensive process that can result in errors,
some of which can be costly to the company. The Company further recognizes how
important it is to employees to have their paychecks accurate and on time.
Rollins will have a real time, totally automated, payroll processing system that
will be integrated into the Company's FOCUS system.
Rollins, Inc is committed to delivering environmentally safe pest control and
educating the public in this regard. The Company has announced that it is
partnering with the American Society for Healthcare Environmental Services or
(ASHES), to initially address pest services protocols in the healthcare
industry.
This partnership kicks off the development and release of Integrated Pest
Management (IPM) applications to this industry, (i.e., hospitals, nursing homes,
clinics, etc.) This will be its first collaboration in a series of future ASHES
publications. This initial edition was co-authored by entomologists from the
Orkin and Western Pest Services teams. It will be a `how to" guide for
implementing and maintaining effective IPM practices in these healthcare
facilities.
Rollins is also working with ASHES on developing releases concerning IPM for its
members in other industries. The Company will conclude this educational effort
in September at ASHES annual conference and technological exhibit where
panelists from Orkin and the IPM Institute of America will participate.
This will enable Rollins to take its commitment to IPM to a new level with the
ASHES partnership, while aiding the Orkin brand positioning and customer
communication initiatives.
15
The Company bought back 641,310 shares of the Company's common stock in the
first quarter of 2005 under its authorized repurchase program. Rollins has had a
buyback program in place for a number of years and has routinely purchased
shares when it felt the opportunity was desirable. With only 276,000 shares left
under the current program, the Board authorized the purchase of 4 million
additional shares of the Company's common stock at its quarterly meeting on
April 26, 2005. This authorization enables the Company to continue the purchase
of Rollins, Inc. shares when appropriate.
The buyback program in no way precludes the Company's acquisition efforts, which
remains a top priority. Rollins' strong cash flow and available credit lines
position the Company to pursue both strategies, depending on the available
opportunities.
In the first quarter of 2005, Rollins, Inc. net income increased 17.5% to $11.6
million, or $0.17 per diluted share, compared to income of $9.9 million, or
$0.14 per diluted share for the first quarter of 2004 before the effect of a
change in accounting principle. The cumulative effect of the accounting change,
recorded in the first quarter of 2004, was a charge against earnings of $6.2
million or $0.09 per diluted share. As a result it is now recognizing termite
revenue on a straight-line basis over 12 months. Costs of re-inspections,
re-applications and repairs and associated labor and chemicals are expensed as
incurred. All numbers presented are on a comparable basis.
The Company's revenue for the first quarter grew 14.6% to $183.9 million,
compared to revenue of $160.4 million in the first quarter of 2004. Included in
first quarter revenue for this year was Western Pest Services' contribution of
$19.6 million. For comparison purposes, Western Pest, which was acquired April
30, 2004, and taking into account the distribution business sold in the third
quarter of 2004, revenue increased 2.8%. The table below illustrates the impact
of the acquisition and disposition for comparability purposes:
Reconciliation
Revenue Excluding Western Pest Services and Dettelbach
First Quarter
------------------------
2005 2004 $B/(W) %B/(W)
-------------------------------------------
Total Net Revenues $183,915 $160,416 $23,499 14.6%
Less:
Western Acquisition 19,594 - 19,594
-------------------------------------------
Revenue Excluding
Western Pest Services $164,321 $160,416 $ 3,905 2.4%
Less:
Dettelbach - 553 (553)
-------------------------------------------
Revenue Excluding Western Pest
Services and Dettelbach $164,321 $159,863 $ 4,458 2.8%
===========================================
Gross margin, which Rollins define as total Revenues minus Cost of Services
Provided, was 46.4% of revenues in the first quarter of 2005 compared to a gross
margin of 46.1% for first quarter 2004. As a result of the Company's
distribution agreement it has seen reductions in its material and supply cost
and enjoyed continuing improvements in insurance and claims. These were
partially offset by Western's higher Cost of Services Provided as a percentage
of revenues, particularly in fleet and their material and supply cost.
While Fleet costs continued to increase primarily due to an increase in gasoline
prices, the company continues to work to minimize its impact by reducing the
number of vehicles on the road and reducing total miles driven. The future
routing and scheduling project will help to reduce these costs further in the
future.
16
Depreciation and amortization increased, reflecting $1.5 million in additional
amortization of intangibles related to the Western acquisition. As a result of
last year's acquisition, customer contracts and other intangible assets net of
amortization increased $44.7 million, to $73.7 million, the amortization of
which represents a significant non-cash charge against earnings. In 2005 total
amortization expense will be approximately $12.3 million, versus $10.9 million
in 2004. Based upon the recent stock split and fully diluted shares outstanding
as of March 10, 2005, it will represent a charge of almost 18 cents pre-tax, and
11 cents after tax to GAAP EPS this year.
The tax provision for the quarter was 40.5%.
The Company's balance sheet remains strong with cash and cash equivalents of
$55.9 million as of March 31, 2005, which positions Rollins to take advantage of
any future acquisitions that meet the company's requirements and remain a top
priority.
Capital expenditures were up in the quarter and will be for the year. As a
result of the $10.3 million gain from the sale of land in the fourth quarter of
2004, the Company has chosen to do some 1031 tax free exchanges that will save
Rollins considerable taxes. The Company will be reinvesting the gain by
purchasing some existing leased properties as well as a building to house the
West Coast division office, which will also be used for training.
Results of Operations
% Better/
Three Months Ended (Worse) as
March 31, Compared to Same
Quarter in Prior
Year
------------------------------------------
(in thousands) 2005 2004
------------------------------------------
Revenues $183,915 $160,416 14.6%
Costs:
Cost of Services Provided 98,637 86,542 (14.0)
Depreciation and Amortization 5,963 4,657 (28.0)
Sales, General and Administrative 60,283 52,768 (14.2)
Loss on Sale of Assets 3 1 (200.0)
Interest Income (462) (150) 208.0
------------------------------------------
Income Before Income Taxes 19,491 16,598 17.4
Provision for Income Taxes 7,896 6,732 (17.3)
------------------------------------------
Income Before Cumulative Effect of Change
in Accounting Principle 11,595 9,866 17.5
Cumulative Effect of Change in Accounting
Principle --- (6,204) 100.0
------------------------------------------
Net Income $ 11,595 $ 3,662 216.6%
==========================================
Revenues for the quarter ended March 31, 2005 increased to $183.9 million, an
increase of $23.5 million or 14.6% inclusive of the Western acquisition
completed on April 30, 2004, from last year's first quarter revenues of $160.4
million. For the first quarter of 2005 the primary revenue drivers were Western,
which contributed $19.6 million, as well as Orkin's residential pest control
business, which increased $2.9 million while growing 4.7%. Every-other-month
service, the Company's primary residential pest control service offering,
continues to grow in importance, comprising 85.6% of new residential pest
control sales for the first quarter of 2005 compared to 69.9% in the first
quarter 2004. The Company's foreign operations accounted for less than 7% of
total revenues during the first quarter 2005 compared to more than 6% of the
total during the first quarter 2004.
17
The revenues of the Company are affected by the seasonal nature of the Company's
pest and termite control services as, described in Note 1 to the Company's
financial statements above. The Company's revenues as a historical matter tend
to peak during the second and third quarters, as evidenced by the following
chart.
Total Net Revenues
-----------------------------------------------
2005 2004 2003
- ----------------------------------------------------------------------------
First Quarter $ 183,915 $ 160,416* $ 155,122
Second Quarter N/A 202,725* 185,105
Third Quarter N/A 203,925* 178,262
Fourth Quarter N/A 183,818 158,524
- ----------------------------------------------------------------------------
* Restated for change in accounting principle.
Cost of Services Provided for the first quarter ended March 31, 2005 increased
$12.1 million or 14.0%, compared to the quarter ended March 31, 2004, although
the expense expressed as a percentage of revenues decreased by 0.3 percentage
points, representing 53.6% of revenues for the first quarter 2005 compared to
53.9% of revenues in the prior year's first quarter. Cost of Services Provided
as a percentage of revenues decreased primarily due to improvements in insurance
and claims, lower materials and supplies costs, and from employee productivity
improvements at Orkin. These were partially offset by Western's higher Cost of
Services Provided as a percentage of revenues. One area in which the Company
experienced some minor expense increases was in its fleet of service vehicles,
which was the result of higher lease and fuel costs in general, as well as the
acquisition of Western's fleet during the second quarter of 2004.
Sales, General and Administrative for the quarter ended March 31, 2005 increased
$7.5 million or 14.2% as compared to the first quarter 2004, As a percentage of
revenues, Sales General and Administrative decreased 0.1 percentage point or
0.3%, representing 32.8% of total revenues compared to 32.9% for the prior year
quarter. The decrease in Sales, General and Administrative as a percentage of
revenue was mainly attributable to lower sales payroll costs due to
organizational changes including the expansion of the Company's call centers.
The savings were partially offset by the higher Sales, General and
Administrative costs of Western.
Depreciation and Amortization expenses for the first quarter ended March 31,
2005 increased by $1.3 million or 28.0% to $6.0 million versus the prior year
quarter. The increase was due to the addition of depreciation and amortization
from the acquisition of Western ($1.5 million) partially offset by certain
technology assets becoming fully depreciated in the last twelve months. As part
of the Western acquisition, $55.2 million of finite-lived intangible assets,
principally customer contracts, were acquired. They will be amortized over
periods principally ranging from 8 to 12.5 years. This represents a non-cash
charge and will increase the Company's amortization by approximately $2.0
million in 2005. For the quarter ended March 31, 2005 amortization of $3.9
million was 50.0% higher than in the prior period quarter.
Income Taxes. The Company's tax provision of $7.9 million for the first quarter
ended March 31, 2005 reflects increased pre-tax income over the prior year
period and a slight decrease in the effective tax rate. The effective tax rate
was 40.5% for the first quarter ended March 31, 2005, down from 40.6% for the
first quarter ended March 31, 2004.
Critical Accounting Policies
We view critical accounting policies to be those policies that are very
important to the portrayal of our financial condition and results of operations,
and that require Management's most difficult, complex or subjective judgments.
The circumstances that make these judgments difficult or complex relate to the
need for Management to make estimates about the effect of matters that are
inherently uncertain. We believe our critical accounting policies to be as
follows:
Accrual for Termite Contracts-- The Company maintains an accrual for termite
claims representing the estimated costs of reapplications, repairs and
associated labor and chemicals, settlements, awards and other costs relative to
termite control services. Factors that may impact future cost include chemical
life expectancy and government regulation. It is significant that the actual
number of claims has decreased in recent years due to changes in the Company's
business practices. However, it is not possible to precisely predict future
significant claims. Positive changes to our business practices include revisions
made to our contracts, more effective treatment methods that include a
directed-liquid and baiting program, more effective termiticides, and expanding
training.
18
Accrued 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 Company contracts an independent third party
actuary on an annual basis to provide the Company an estimated liability based
upon historical claims information. The actuarial study is a major
consideration, along with Management's knowledge of changes in business
practices and existing claims compared to current balances. The reserve is
established based on all these factors. Due to the uncertainty associated with
the estimation of future loss and expense payments and inherent limitations of
the data, actual developments may vary from the Company's projections. This is
particularly true since critical assumptions regarding the parameters used to
develop reserve estimates are largely based upon judgment. Therefore, changes in
estimates may be sufficiently material. Management's judgment is inherently
subjective and a number of factors are outside Management's knowledge and
control. Additionally, historical information is not always an accurate
indication of future events. It should be noted that the number of claims has
been decreasing due to the Company's proactive risk management to develop and
maintain ongoing programs. Initiatives that have been implemented include
pre-employment screening and an annual motor vehicle report required on all its
drivers, utilization of a Global Positioning System that has been fully deployed
to our Company vehicles, post-offer physicals for new employees, and pre-hire,
random and post-accident drug testing. The Company has improved the time
required to report a claim by utilizing a "Red Alert" program that provides
serious accident assessment twenty four hours a day and seven days a week and
has instituted a modified duty program that enables employees to go back to work
on a limited-duty basis.
Revenue Recognition-- The Company's revenue recognition policies are designed to
recognize revenues at the time services are performed. For certain revenue
types, because of the timing of billing and the receipt of cash versus the
timing of performing services, certain accounting estimates are utilized.
Residential and commercial pest control services are primarily recurring in
nature on a monthly or bi-monthly basis, while certain types of commercial
customers may receive multiple treatments within a given month. In general, pest
control customers sign an initial one-year contract, and revenues are recognized
at the time services are performed. For pest control customers, the Company
offers a discount for those customers who prepay for a full year of services.
The Company defers recognition of these advance payments and recognizes the
revenue as the services are rendered. The Company classifies the discounts
related to the advance payments as a reduction in revenues. Termite baiting
revenues are recognized based on the delivery of the individual units of
accounting. At the inception of a new baiting services contract upon quality
control review of the installation, the Company recognizes revenue for the
delivery of the monitoring stations, initial directed liquid termiticide
treatment and installation of the monitoring services. The amount deferred is
the fair value of monitoring services to be rendered after the initial service.
The amount deferred for the undelivered monitoring element is then recognized as
income on a straight-line basis over the remaining contract term, which results
in recognition of revenue in a pattern that approximates the timing of
performing monitoring visits. Baiting renewal revenue is deferred and recognized
over the annual contract period on a straight-line basis that approximates the
timing of performing the required monitoring visits.
Prior to 2004, traditional termite treatments were recognized as revenue at the
renewal date and an accrual was established for estimated costs of
reapplications and repairs to be incurred. Beginning fourth quarter 2004, the
Company adopted a new accounting method under which, the revenue received is
deferred and recognized on a straight-line basis over the remaining contract
term; and, the cost of reinspections, reapplications and repairs and associated
labor and chemicals are expensed as incurred and are no longer accrued. For
noticed claims, an estimate is made of the costs to be incurred (including legal
costs) based upon current factors and historical information. The performance of
reinspections tends to be close to the contract renewal date and, while
reapplications and repairs involve an insubstantial number of the contracts,
these costs are incurred over the contract term. The newly adopted accounting
principle eliminates the need to obtain actuarial estimates of the claim costs
to be incurred and management's estimates of reapplication costs. Also,
management believes the newly adopted accounting method more closely conforms to
the current pattern under which revenues are earned and expenses are incurred,
and conforms the accounting methodology of Orkin and its recently acquired
subsidiary, Western Pest Services. The costs of providing termite services upon
renewal are compared to the expected revenue to be received and a provision is
made for any expected losses.
Due to this change, the Company recorded a cumulative adjustment of $6.2 million
(net of income taxes) as of January 1, 2004.
Contingency Accruals-- The Company is a party to legal proceedings with respect
to matters in the ordinary course of business. In accordance with Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies, the Company
estimates and accrues for its liability and costs associated with the
litigation. Estimates and accruals are determined in consultation with outside
counsel. It is not possible to accurately predict the ultimate result of the
litigation. However, in the opinion of Management, the outcome of the litigation
will not have a material adverse impact on the Company's financial condition or
results of operations.
19
Stock-Based Compensation-- In December 2004, the FASB issued SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No.
123, "Accounting for Stock-Based Compensation," ("SFAS 123") and supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the first interim or annual period after December 15, 2005, with
early adoption encouraged. The pro forma disclosures previously permitted under
SFAS 123 no longer will be an alternative to financial statement recognition.
Rollins is required to adopt SFAS 123R in the first quarter of fiscal 2006,
beginning January 1, 2006. Under SFAS 123R, Rollins must determine the
appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be used
at date of adoption. The transition methods include prospective and
retrospective adoption options. Under the retrospective option, prior periods
may be restated either as of the beginning of the year of adoption or for all
periods presented. The prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS 123R, while the retrospective methods
would record compensation expense for all unvested stock options and restricted
stock beginning with the first period restated. Rollins is evaluating the
requirements of SFAS 123R and expects that the adoption of SFAS 123R will not
have a material impact on Rollins' consolidated results of operations and
earnings per share. Rollins has not yet determined the method of adoption or the
effect of adopting SFAS 123R, and it has not determined whether the adoption
will result in amounts that are similar to the current pro forma disclosures
under SFAS 123.
Liquidity and Capital Resources
Cash and Cash Flow
Three Months Ended March 31,
----------------------------------------
(in thousands) 2005 2004
- -------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 19,728 $ 21,338
Net Cash Provided By/(Used) in Investing Activities (7,642) 19,969
Net Cash Used in Financing Activities (13,552) (2,906)
Effect of Exchange Rate on Cash 623 (53)
------------- ---------------------
Net Increase/(Decrease) in Cash and Cash Equivalents $ (843) $ 38,348
- -------------------------------------------------------------------------------------------------
The Company believes its current cash and cash equivalents balances, future cash
flows from operating activities and available borrowings under its $70.0 million
credit facilities will be sufficient to finance its current operations and
obligations, and fund expansion of the business for the foreseeable future and
the acquisition of other select pest control businesses. The Company's operating
activities generated net cash of $19.7 million for the three months ended March
31, 2005, compared with cash provided by operating activities of $21.3 million
for the same period in 2004.
At the April 26, 2005 meeting of the Board of Directors, as part of the
Company's active management of equity capital, the Board of Directors authorized
the purchase of up to 4 million additional shares of the Company's common stock.
The Company plans to repurchase shares at times and prices considered
appropriate by the Company. There is no expiration date for the share repurchase
program. The share repurchase program is in addition to the Company's existing
plan to repurchase 4.5 million shares, of which 276,216 shares remain available
for repurchase.
The Company invested approximately $6.4 million in capital expenditures during
the first three months ended March 31, 2005, compared to $1.7 million during the
same period in 2004, and expects to invest between $18.0 million and $20.0
million for the remainder of 2005. Capital expenditures for the first three
months consisted primarily of two building purchases and the purchase of
equipment replacements and upgrades and improvements to the Company's management
information systems. During the first three months, the Company made
acquisitions totaling $1.2 million, compared to $0.2 million during the same
period in 2004. Acquisitions were funded by cash on hand. A total of $3.4
million was paid in cash dividends ($0.05 per share) during the first three
months of 2005, compared to $2.7 million or $0.04 per share during the same
period in 2004. The Company repurchased 641,310 shares of Common Stock in the
first three months of 2005 and there remain 276,216 shares authorized to be
repurchased, in addition to the 4 million shares. The capital expenditures and
cash dividends were funded entirely through existing cash balances and operating
activities. The Company maintains $70.0 million of credit facilities with
commercial banks, of which no borrowings were outstanding as of March 31, 2005
or April 15, 2005. The Company maintains approximately $34.5 million in Letters
of Credit which reduced its borrowing capacity under the credit facilities.
These Letters of Credit are required by the Company's fronting insurance
companies and/or certain states, due to the Company's self-funded status, to
secure various workers' compensation and casualty insurance contracts. These
letters of credit are established by the bank for the Company's fronting
insurance companies as collateral, although the Company believes that it has
adequate liquid assets, funding sources and insurance accruals to accommodate
such claims.
20
On April 28, 2004, the Company entered into a $15.0 million senior unsecured
revolving credit facility. The entire amount of the credit facility was used to
fund a portion of the Western Industries, Inc. acquisition that the Company
closed on April 30, 2004. The Company repaid the full amount of the credit
facility in May 2004.
On April 28, 2004, the Company sold real estate in Okeechobee County, Florida to
LOR, Inc., a company controlled by R. Randall Rollins, Chairman of the Board of
Rollins, Inc. and Gary W. Rollins, Chief Executive Officer, President and Chief
Operating Officer of Rollins, Inc. for $16.6 million in cash. The sale resulted
in a net gain after tax of $8.1 million or $0.11 per share since the real estate
had appreciated over approximately 30 years it had been owned by the Company.
The real estate was under a lease agreement with annual rentals of $131,939 that
would have expired June 30, 2007. On May 28, 2004, the Company sold real estate
in Sussex County, Delaware to LOR, Inc. for $111,000 in cash. The sale resulted
in an immaterial net gain after tax. The Board of Directors, at its quarterly
meeting on January 27, 2004, approved the formation of a committee (the
"Committee") made up of Messrs. Bill J. Dismuke and James B. Williams, who are
independent directors, to evaluate the transactions. In addition, the Company on
October 22, 2004 purchased real estate located at 2158 Piedmont Road, N.E.,
Atlanta, Georgia 30324, adjacent to the Company's headquarters, from LOR, Inc.
for $4.6 million. The Committee was furnished with full disclosure of the
transactions, including independent appraisals, and determined that the terms of
the transactions were reasonable and fair to the Company. The Company sold an
additional piece of real estate in Sussex County, Delaware to LOR, Inc. or an
entity wholly owned by LOR, Inc. for $10.6 million in cash. The transaction took
place on December 29, 2004 and resulted in a $6.3 million gain, net of costs and
after taxes.
On April 30, 2004, the Company acquired substantially all of the assets and
assumed certain liabilities of Western Pest Services ("Western"), and the
Company's consolidated financial statements include the operating results of
Western from the date of the acquisition. Neither Western nor its principals had
any prior relationship with the Company or its affiliates. Western was engaged
in the business of providing pest control services and the Company has continued
this business. The acquisition was made pursuant to an Asset Purchase Agreement
(the "Western Agreement") dated March 8, 2004, between Rollins, Inc. and Western
Industries, Inc. and affiliates. The consideration for the assets and certain
noncompetition agreements (the "Purchase Price") was for approximately $106.6
million, including approximately $7.0 million of assumed liabilities. The
Purchase Price was funded with cash on hand, the sale of property located in
Okeechobee County, Florida and a $15.0 million senior unsecured revolving credit
facility.
Pursuant to the Western Agreement, the Company acquired substantially all of
Western's property and assets, including accounts receivable, real property
leases, seller contracts, governmental authorizations, data and records,
intangible rights and property and insurance benefits. As described in the
Western Agreement, the Company assumed only specified liabilities of Western and
obligations under disclosed assigned contracts.
The Company engaged an independent valuation firm to determine the allocation of
the purchase price to Goodwill and identifiable Intangible assets. Such
valuation resulted in the allocation of $41.3 million to Goodwill and $55.2
million to other intangible assets, principally customer contracts. The
finite-lived intangible assets, principally customer contracts, are being
amortized over periods principally ranging from 8 to 12.5 years on a
straight-lined basis.
On April 30, 2004, in a transaction ancillary to the Western acquisition, the
Company acquired Residex Corporation ("Residex"), a company that distributes
chemicals and other products to pest management professionals, pursuant to an
Asset Purchase Agreement (the "Residex Agreement") dated March 8, 2004, between
Rollins, Inc. and Western Industries, Inc., JBD Incorporated and Residex
Corporation. Subsequently on April 30, 2004, the Company sold Residex to an
industry distribution group. The amounts involved were not material and no gain
or loss was recognized on the transaction.
Prior to the acquisition, Western Pest Services was recognized as a premier pest
control business and ranked as the 8th largest company in the industry. Based in
Parsippany, NJ, the Company provides pest elimination and prevention to homes
and businesses to over 130,000 customers from New York to Virginia with
additional operations in Georgia and Florida. Western is primarily a commercial
pest control service company and its existing businesses complement most of the
services that Orkin offers, in an area of the country in which Orkin has not
been particularly strong, the Northeast. The Company's consolidated statements
of income include the results of operations of Western for the period beginning
after May 1, 2004 through March 31, 2005.
Orkin, one of the Company's subsidiaries, is aggressively defending a class
action lawsuit filed in Hillsborough County, Tampa, Florida. In early April
2002, the Circuit Court of Hillsborough County certified the class action status
of Butland et al. v. Orkin Exterminating Company, Inc. et al. Other lawsuits
against Orkin, and in some instances the Company, are also being vigorously
defended, including the Warren and Petsch cases and the Garrett arbitration. For
further discussion, see Note 7 to the accompanying financial statements.
21
Impact of Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values beginning with the first interim
or annual period after December 15, 2005, with early adoption encouraged. The
pro forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Rollins is required to adopt
SFAS 123R in the first quarter of fiscal 2006, beginning January 1, 2006. Under
SFAS 123R, Rollins must determine the appropriate fair value model to be used
for valuing share-based payments, the amortization method for compensation cost
and the transition method to be used at date of adoption. The transition methods
include prospective and retrospective adoption options. Under the retrospective
option, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options and restricted
stock at the beginning of the first quarter of adoption of SFAS 123R, while the
retrospective methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period restated. Rollins
is evaluating the requirements of SFAS 123R and expects that the adoption of
SFAS 123R will not have a material impact on Rollins' consolidated results of
operations and earnings per share. Rollins has not yet determined the method of
adoption or the effect of adopting SFAS 123R, and it has not determined whether
the adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS 123.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements regarding the expected impact of potential future
pension plan contributions, future contributions of Western, expected
contributions of the commercial business segment, and the outcome of litigation
arising in the ordinary course of business and the outcome of the Butland et al.
v. Orkin Exterminating Company, Inc. et al. ("Butland") litigation on the
Company's financial position, results of operations and liquidity; the adequacy
of the Company's resources to fund operations and obligations; the Company's
projected 2005 capital expenditures; the impact of recent accounting
pronouncements; the expected outcome of the growth of national account revenue.
The actual results of the Company could differ materially from those indicated
by the forward-looking statements because of various risks, timing and
uncertainties including, without limitation, the possibility of an adverse
ruling against the Company in the Butland or other 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. A more detailed discussion of potential risks facing
the Company can be found in the Company's Report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of March 31, 2005, the Company maintained an investment portfolio (included
in Cash and Cash Equivalents) subject to short-term interest rate risk exposure.
The Company has been affected by the impact of lower interest rates on interest
income from its short-term investments. The Company is also subject to interest
rate risk exposure through borrowings on its $70.0 million credit facilities.
Due to the absence of such borrowings as of March 31, 2005, this risk was not
significant in the first three months of 2005 and is not expected to have a
material effect upon the Company's results of operations or financial position
going forward. The Company is also exposed to market risks arising from changes
in foreign exchange rates. The Company believes that this foreign exchange rate
risk will not have a material effect upon the Company's results of operations
going forward.
22
Item 4. Controls and Procedures.
Under the supervision and with the participation of our Management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of March 31, 2005. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective at the reasonable
assurance level such that the material information relating to Rollins, Inc.,
including our consolidated subsidiaries, and required to be included in our
Securities and Exchange Commission ("SEC") reports is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms
and was made known to them by others within those entities, particularly during
the period when this report was being prepared.
In addition, Management's quarterly evaluation identified no changes in our
internal control over financial reporting during the first quarter that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. As of March 31, 2005, we did not identify any
material weaknesses in our internal controls, and therefore no corrective
actions were taken.
We have identified several internal control deficiencies at Western Pest
Control, which was acquired on April 30, 2004, and the Company has initiated a
project to identify internal control deficiencies and implement changes. Most of
these identified deficiencies center around IT controls and organizational
issues that affect smaller companies, such as separation of duties, management
reviews, and documentation of policies and procedures.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 to Part I, Item 1 for discussion of certain litigation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases Of Equity Securities
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Total Number Part of Publicly Be Purchased Under
of Shares Average Price Announced the Repurchase
Month Purchased (1) Paid per Share Repurchase Plan(2) Plan(2)
------------------ --------------- ---------------- --------------------- ----------------------
January 1 to 31, 2005 215,292 $16.82 196,050 721,476
February 1 to 28, 2005 515,146 $16.49 445,260 276,216
March 1 to 31, 2005 73,362 $17.61 --- 276,216
=============== ================ ===================== ======================
Total 803,800 $17.12 641,310 276,216
(1) Includes repurchases in connection with exercise of
employee stock options in the following amounts: January
2005: 19,242; February 2005: 69,886; March 2005: 73,362.
(2.) These shares were repurchased under the plan to
repurchase up to 4.5 million shares (post all stock splits)
announced October 28, 1997. At the April 26, 2005 Board of
Directors meeting, the Board of Directors of Rollins, Inc.
authorized the purchase of up to 4 million shares of the
Company's common stock. These plans have no expiration
dates.
--------------------------------------------------------------------------------------------------------------
23
Item 6. Exhibits.
(a) Exhibits
(3)(i) (A) Restated Certificate of Incorporation of Rollins, Inc.
dated July 28, 1981, and Certificate of change of Location
of Registered Office and of Registered Agent dated March 22,
1994, both of which are incorporated herein by reference to
Exhibit (3) (i) as filed with the registrant's Form 10-K for
the year ended December 31, 1997.
(B) Certificate of Amendment of Certificate of Incorporation
of Rollins, Inc. dated August 20, 1987, incorporated herein
by reference to Exhibit (3)(i)(B) to the registrant's Form
10-K for the year ended December 31, 2004.
(ii) Amended and Restated By-laws of Rollins, Inc., incorporated
herein by reference to Exhibit (3) (iii) as filed with the
registrant's Form 10-Q for the quarterly period ended March
31, 2004.
(4) Form of Common Stock Certificate of Rollins, Inc.,
incorporated herein by reference to Exhibit (4) as filed
with its Form 10-K for the year ended December 31, 1998.
(10)(c) Rollins, Inc. Form of Restricted Stock Agreement
incorporated herein by reference to Exhibit 10 (c) as filed
with its Form 10-K for the year ended December 31, 2004.
(10)(d) Rollins, Inc. Form of Option Agreement incorporated
herein by reference to Exhibit 10 (d) as filed with its Form
10-K for the year ended December 31, 2004.
(10)(e) Rollins, Inc. Executive Compensation Summary
(10)(f) Written Description of Rollins, Inc. Performance-Based
Incentive Cash Compensation Plan for Fiscal Year 2005
incorporated herein by reference to Exhibit 10 (f) as filed
with its Form 10-K for the year ended December 31, 2004..
(10)(g) Form A of Executive Bonus Plan incorporated herein by
reference to Exhibit 10 (g) as filed with its Form 10-K for
the year ended December 31, 2004.
(10)(h) Form B of Executive Bonus Plan
(10)(i) Rollins, Inc. Non-Employee Directors Compensation
incorporated herein by reference to Exhibit 10 (i) as filed
with its Form 10-K for the year ended December 31, 2004.
(31.1) Certification of Chief Executive Officer Pursuant to Item
601(b)(31) of Regulation S-K, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Financial Officer Pursuant to Item
601(b)(31) of Regulation S-K, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
24
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: April 29, 2005 By: /s/ Gary W. Rollins
---------------------------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
(Principal Executive Officer)
Date: April 29, 2005 By: /s/ Harry J. Cynkus
--------------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
25