TEN-YEAR FINANCIAL SUMMARY
ROLLINS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------------------
OPERATIONS SUMMARY
(In thousands except per share data)
Revenues $ 627,431 $ 620,435 $ 605,327
Cost of Services Provided 358,783 325,889 311,315
Depreciation and Amortization 8,612 7,950 8,130
Special Charge -- 12,000 --
Sales, General and Administrative 229,237 216,234 208,289
Interest Expense (Income), Net (5,967) (4,988) (2,994)
---------------------------------------
Income Before Income Taxes 36,766 63,350(1) 80,587
Income Taxes 13,971 24,073 31,026
---------------------------------------
Net Income $ 22,795 $ 39,277(1) $ 49,561
---------------------------------------
---------------------------------------
Earnings per Share $ .64 $ 1.10(1) $ 1.39
Dividends per Share $ .58 $ .56 $ .50
Cash Provided by Operations $ 58,067 $ 46,910 $ 39,340
Capital Expenditures $ 12,115 $ 18,026 $ 8,368
Total Assets $ 308,783 $ 314,925 $ 295,265
Long-Term Debt -- -- --
Stockholders' Equity $ 190,290 $ 214,318 $ 193,633
--------------------------------------------------------------------------------------------------
SELECTED RATIO ANALYSIS
(As a % of revenues except return on average equity)
Cost of Services Provided 57.2% 52.5% 51.5%
Sales, General and Administrative 36.5 34.9 34.4
Net Income 3.6 6.3(1) 8.2
Net Income without Special Charge 3.6 7.5 8.2
Return on Average Equity 11.3 19.3 28.0
--------------------------------------------------------------------------------------------------
SHARES OUTSTANDING
(In thousands)
Average 35,478 35,849 35,770
At Year End 34,594 35,858 35,826
--------------------------------------------------------------------------------------------------
(1) INCLUDES A SPECIAL CHARGE OF $12,000,000 ($7,440,000 AFTER TAX
BENEFIT OR $.21 PER SHARE) AT SEPTEMBER 30, 1995.
10
- -----------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------
$575,802 $527,666 $475,555 $436,398 $402,324 $380,834 $354,303
293,499 271,518 247,994 230,107 211,604 193,829 180,513
8,310 7,966 7,806 7,482 7,509 7,013 6,935
-- -- -- -- -- -- --
203,483 187,238 169,825 155,904 146,658 140,158 126,355
(2,390) (1,870) (2,134) (2,460) (2,215) (1,693) (781)
- -----------------------------------------------------------------------------------------------------------
72,900 62,814 52,064 45,365 38,768 41,527 41,281
28,431 24,812 20,565 17,919 15,236 16,819 19,177
- -----------------------------------------------------------------------------------------------------------
$ 44,469 $ 38,002 $ 31,499 $ 27,446 $ 23,532 $ 24,708 $ 22,104
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
$ 1.25 $ 1.07 $ .89 $ .77 $ .67 $ .70 $ .63
$ .44 $ .40 $ .39 $ .37 $ .36 $ .34 $ .33
$ 40,034 $ 33,319 $ 31,987 $ 36,350 $ 31,955 $ 24,323 $ 29,852
$ 7,727 $ 7,042 $ 8,536 $ 8,929 $ 9,747 $ 7,825 $ 8,864
$267,194 $236,291 $204,577 $177,961 $160,121 $146,526 $130,953
-- -- -- -- -- -- --
$160,508 $129,899 $105,137 $ 86,718 $ 72,228 $ 61,082 $ 48,455
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
51.0% 51.5% 52.1% 52.7% 52.6% 50.9% 50.9%
35.3 35.5 35.7 35.7 36.5 36.8 35.7
7.7 7.2 6.6 6.3 5.8 6.5 6.2
7.7 7.2 6.6 6.3 5.8 6.5 6.2
30.6 32.3 32.8 34.5 35.3 45.1 50.5
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
35,638 35,569 35,510 35,465 35,438 35,418 35,232
35,673 35,592 35,532 35,478 35,453 35,426 35,412
- -----------------------------------------------------------------------------------------------------------
11
QUARTERLY INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK PRICES Stock Prices Dividends Stock Prices Dividends
AND DIVIDENDS 1996 High Low Paid 1995 High Low Paid
(Rounded to the nearest 1/8) ------------------------------------------------------------------------------------------------------
First Quarter $ 24 7/8 $ 20 3/4 $ .14 1/2 First Quarter $ 27 1/2 $ 22 $ .14
Second Quarter 23 7/8 21 3/4 .14 1/2 Second Quarter 28 5/8 22 1/8 .14
Third Quarter 23 1/2 20 .14 1/2 Third Quarter 25 1/4 23 .14
Fourth Quarter 20 7/8 18 1/4 .14 1/2 Fourth Quarter 25 18 7/8 .14
THE NUMBER OF STOCKHOLDERS OF RECORD AS OF DECEMBER 31, 1996 WAS 3,405.
- ----------------------------------------------------------------------------------------------------------------------
PROFIT AND LOSS
INFORMATION (In thousands except per share data) First Second Third Fourth
--------------------------------------------------------------------------------------------------
1996
Revenues $ 142,502 $ 177,847 $ 162,514 $ 144,568
Operating Income 12,515 21,673 6,320 861
Net Income 6,387 12,841 3,306 261
Earnings per Share .18 .36 .09 .01
--------------------------------------------------------------------------------------------------
1995
Revenues $ 142,654 $ 175,350 $ 162,333 $ 140,098
Operating Income 14,901 35,217 6,842(1) 13,233
Net Income 7,807 21,102 3,454(1) 6,914
Earnings per Share .22 .59 .09(1) .20
--------------------------------------------------------------------------------------------------
1994
Revenues $ 136,443 $ 171,874 $ 158,002 $ 139,008
Operating Income 13,755 36,285 22,906 15,984
Net Income 6,888 21,066 13,011 8,596
Earnings per Share .19 .59 .36 .25
--------------------------------------------------------------------------------------------------
(1) INCLUDES A SPECIAL CHARGE OF $12,000,000 ($7,440,000 AFTER TAX BENEFIT
OR $.21 PER SHARE) AT SEPTEMBER 30, 1995.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ----------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Selected Industry Segment Data % Change From Prior Year
Increase/(Decrease)
(In thousands) 1996 1995 1994 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
REVENUES
Orkin $ 553,522 $ 547,797 $ 530,099 1.0% 3.3%
Rollins Protective 63,662 59,233 61,692 7.5 (4.0)
Other 10,247 13,405 13,536 (23.6) (1.0)
--------------------------------------------
$ 627,431 $ 620,435 $ 605,327 1.1 2.5
--------------------------------------------
--------------------------------------------
OPERATING INCOME
Orkin $ 38,844 $ 76,754 $ 78,711 (49.4) (2.5)
Rollins Protective 3,994 4,476 6,579 (10.8) (32.0)
Other (1,469) (11,037) 3,640 N/M N/M
--------------------------------------------
$ 41,369 $ 70,193 $ 88,930 (41.1) (21.1)
--------------------------------------------
--------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
GENERAL OPERATING COMMENTS
The Company's investments in its core businesses contributed to lower than
anticipated operating income and profit margin for 1996. Expenditures for
growth related programs and market expansion initiatives as well as a
substandard termite season negatively impacted 1996 operating income and
margins. Higher insurance costs and termite claims also had an adverse impact
on operating income.
Rollins, Inc.'s consolidated revenues of $627.4 million were 1.1% higher
than in 1995. Operating income decreased $28.8 million or 41.1% over the prior
year. Profit margins declined 41.6% from 1995 as compared to a decline of 23.1%
(9.8% without the Special Charge) from 1994 to 1995.
Orkin revenues increased 1.0% to $553.5 million while operating income and
profit margins decreased 49.4% and 50.0%, respectively, over the prior year.
This compares to a 5.4% margin decrease from 1994 to 1995. Rollins Protective
Services' (RPS) revenues increased 7.5% while operating income and margins
declined 10.8% and 17.1%, respectively, from 1995. This compares to a 29.0%
margin decline from 1994 to 1995. RPS' 1996 margin deterioration is primarily
due to investments in new dedicated commercial branches, related market
development, and acquisition costs.
ORKIN 1996 VERSUS 1995
Orkin's 1.0% increase in revenues over 1995 was due to increases in recurring
pest control and termite renewal revenues offset by a decrease in termite sales
revenue resulting from a substandard termite season. Orkin's customer base
increased over 1995 as a result of the Company's market expansion efforts.
Orkin Pest Control opened twenty-four new branches and added seven franchises in
1996. In addition, eight business acquisitions were completed including
locations in Canada and Mexico.
Orkin's pest control business strategies in 1996 were focused primarily on
commercial growth opportunities, new technology and employee training and
development. A separate Orkin Commercial Division was formed in 1996 to
increase market share and better meet the specific needs of commercial pest
control customers. As a direct result, commercial sales and margins for 1996
increased, as well as customer retention. Orkin plans to continue to
aggressively seek growth opportunities in the commercial market as part of their
future expansion plans. In order to capitalize on future opportunities, Orkin
increased their investment in data processing and communication technology. New
computers that directly interface with the Atlanta Rollins Customer Satisfaction
Department were installed in all pest control branches. This interface enables
13
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
management to react quickly to daily operational issues while providing timely
and accurate information for superior customer service. Improvements in
specialized sales and service training for all service, sales and management
employees were also initiated. The Orkin University education program was
instituted in 1996 to develop employees' industry knowledge through required
and elective training. Orkin will continue to enhance its employee training
and compensation programs since this investment directly translates into
better service, more satisfied customers and lower turnover. Through the
investments made in 1996, Orkin is positioning itself for long-term growth
in revenues, profits and customer base.
In 1996, Orkin Plantscaping completed a major training initiative for all
sales and service personnel in order to improve sales and customer retention.
Lawn Care concentrated on improving sales generation activity in a more
focused geographic market that included new customer leads developed by the
Rollins Customer Satisfaction Department.
ORKIN 1995 VERSUS 1994
For 1995, Orkin's pest control and termite sales and customer base increased,
despite a second consecutive year of an unusually cold and wet spring. This
weather situation negatively impacted the seasonal termite business. A renewed
emphasis was placed on the monthly recurring pest control business with
resulting gains. Orkin intensified its focus on the commercial market segment
through the creation of a Director of Commercial Pest Control. A record year of
pest control customer growth was achieved that included the opening of nine
new branch facilities and one region. In addition, Orkin completed its first
acquisition in Canada and successfully initiated a national franchise program.
Strategic investments were made in 1995 to increase employee sales and
service staffing, enhance training, target marketing efforts and improve
customer satisfaction. The million-dollar Rollins Customer Satisfaction
Department began operations in the first quarter 1995 to initiate customer
satisfaction feedback and to provide cross-marketing opportunities for all the
Rollins, Inc. divisions. Orkin employee training efforts were consolidated
under one department, Orkin Quality and Training, in order to improve the
training's content, accountability and efficiency.
Orkin Plantscaping initiated a Company-wide training program targeted to
improve sales and retain current customers. Also, a veteran senior Orkin
executive took over the Division in the fourth quarter of 1995. Orkin Lawn Care
restructured its business, with adjustments to management's span of control and
sales and service staffing, to fit a smaller, more tightly focused geographic
market.
ROLLINS PROTECTIVE SERVICES (RPS)
1996 VERSUS 1995
RPS' revenues and customer base increased in 1996 while operating income
decreased compared to last year primarily due to market expansion and
acquisition costs. RPS' customer retention rate reached the highest level in
their history as a result of a very successful customer service program. Three
acquisitions in New England and the Mid-Atlantic areas augment RPS' internal
growth.
RPS focused its resources in 1996 on business development and new product
technology. Several strategic partnerships were formed with various cable and
new home construction businesses. These successful ventures have positioned RPS
for unique growth opportunities in existing and new markets. For example, RPS'
joint marketing program with a major U.S. cable company provides them with a
vast marketing potential for recurring revenue within existing branch locations
and new expansion markets. RPS also partnered with upscale home builders
through the Builders Program to provide security and fire protection for new
home owners. RPS will continue to seek new partnerships that allow them to
increase their market share in a rapidly growing, changing industry. RPS also
met the challenges of a changing industry through new product technology. Safe
Start, a value-priced advanced wireless security system, was introduced in 1996.
RPS is anticipating tomorrow's challenges and consumer interest with research
and development and new product testing with leading security equipment
manufacturers.
ROLLINS PROTECTIVE SERVICES (RPS)
1995 VERSUS 1994
RPS focused its efforts in 1995 on customer service, product development and
business expansion. Three separate central alarm monitoring stations and their
national customer service department were consolidated into a single,
state-of-the art, integrated National
14
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- ------------------------------------------------------------------------------
Customer Support Center. A new premium residential alarm system, the System
VII, was introduced to the market in the fourth quarter 1995. Also, RPS
completed seven modest acquisitions and consequently restructured their field
organization to better meet the needs of the new customers as well as existing
customers.
OTHER 1996 VERSUS 1995
Revenue and operating income were negatively impacted by more stringent credit
standard policies within the consumer finance area, Rollins Acceptance Company
(RAC), and a disappointing termite season. The lower volume of Company financed
sales for the year in conjunction with the decline in termite sales revenue
contributed to RAC's results.
OTHER 1995 VERSUS 1994
Revenue decreased due to revisions of the Company's credit and internal
operating policies within the consumer finance area, Rollins Acceptance Company
(RAC). These revisions were a result of the changing customer demographics, in
conjunction with lower than expected termite demand. A one-time special charge
in 1995 of $12.0 million, which related to the write-off of doubtful accounts
receivable, negatively impacted other businesses' operating income.
- ----------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION % Change From Prior Year
Increase/(Decrease)
(Dollars in thousands) 1996 1995 1994 1996 1995
- ----------------------------------------------------------------------------------------------------------
Cash and Short-Term Investments $ 12,150 $ 33,623 $ 31,917
Marketable Securities 84,785 65,743 51,820
----------------------------------------
$ 96,935 $ 99,366 $ 83,737 (2.4)% 18.7%
Working Capital $126,217 $ 151,756 $ 148,010 (16.8) 2.5
Current Ratio 2.6 3.1 3.2 (16.1) (3.1)
Cash Provided by Operations $ 58,067 $ 46,910 $ 39,340 23.8 19.2
Rollins, Inc. maintains a strong financial position. The Company's operations
have historically provided a strong positive cash flow which represents the
Company's principal source of funds. Interest income increased 19.6% due to the
increase in average funds invested in short-term investments and marketable
securities.
Net trade receivables decreased $9.7 million or 10.9% compared with
December 31, 1995. Trade receivables include installment receivables which are
due subsequent to one year from the balance sheet date. These amounts were
approximately $19.0 million and $26.2 million at the end of 1996 and 1995,
respectively. The decrease in receivables is primarily the result of decreased
financed sales, the effect of the revisions to the Company's credit standard
policies, and improved collections.
During 1996, the Company invested $19.7 million in capital expenditures,
capital leases, and acquisitions compared to $22.2 million in 1995. Also, $20.7
million was paid out in cash dividends and approximately 1.3 million shares of
the Company's common stock were purchased and retired in 1996. The Company
maintains a $40.0 million unused line of credit. This source of funds has not
been used, but is available for future acquisitions and growth, if needed.
15
STATEMENTS OF FINANCIAL POSITION
ROLLINS, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------
At December 31, (In thousands except share data) 1996 1995
- ----------------------------------------------------------------------------------------------------------
ASSETS Cash and Short-Term Investments $ 12,150 $ 33,623
Marketable Securities 84,785 65,743
Trade Receivables, Net 78,856 88,542
Materials and Supplies 15,006 13,924
Deferred Income Taxes 4,379 7,447
Other Current Assets 10,560 13,486
------------------------------
Current Assets 205,736 222,765
Equipment and Property, Net 41,042 37,799
Intangible Assets 41,931 42,013
Other Assets 20,074 12,348
-----------------------------
Total Assets $ 308,783 $ 314,925
-----------------------------
-----------------------------
- ----------------------------------------------------------------------------------------------------
LIABILITIES Capital Lease Obligations $ 2,735 $ 1,314
Accounts Payable 15,897 13,334
Accrued Insurance Expenses 15,053 14,314
Accrued Payroll 12,957 12,028
Unearned Revenue 15,614 14,695
Other Expenses 17,263 15,324
------------------------------
Current Liabilities 79,519 71,009
Capital Lease Obligations 12,163 7,422
Long-Term Accrued Liabilities 20,591 15,936
Deferred Income Taxes 6,220 6,240
------------------------------
Total Liabilities 118,493 100,607
------------------------------
Commitments and Contingencies
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' Common Stock, par value $1 per share; 99,500,000 shares
EQUITY
authorized; 34,594,481 and 41,431,814 shares issued 34,594 41,432
Earnings Retained 155,696 224,009
------------------------------
190,290 265,441
Less - Common Stock in Treasury, at Cost,
5,573,589 shares in 1995 -- 51,123
------------------------------
Total Stockholders' Equity 190,290 214,318
------------------------------
Total Liabilities and Stockholders' Equity $ 308,783 $ 314,925
------------------------------
------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
16
STATEMENTS OF INCOME
ROLLINS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands except per share data) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
REVENUES
Customer Services $ 627,431 $ 620,435 $ 605,327
---------------------------------------
COSTS AND EXPENSES
Cost of Services Provided 358,783 325,889 311,315
Depreciation and Amortization 8,612 7,950 8,130
Special Charge -- 12,000 --
Sales, General and Administrative 229,237 216,234 208,289
Interest Income (5,967) (4,988) (2,994)
---------------------------------------
590,665 557,085 524,740
---------------------------------------
INCOME BEFORE INCOME TAXES 36,766 63,350 80,587
---------------------------------------
PROVISION (CREDIT) FOR INCOME TAXES
Current 15,522 31,919 30,201
Deferred (1,551) (7,846) 825
---------------------------------------
13,971 24,073 31,026
---------------------------------------
NET INCOME $ 22,795 $ 39,277 $ 49,561
---------------------------------------
---------------------------------------
EARNINGS PER SHARE $ .64 $ 1.10 $ 1.39
---------------------------------------
---------------------------------------
AVERAGE SHARES OUTSTANDING 35,478 35,849 35,770
---------------------------------------
---------------------------------------
STATEMENTS OF EARNINGS RETAINED
ROLLINS, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands except per share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Year $ 224,009 $ 203,582 $ 171,862
Net Income 22,795 39,277 49,561
Cash Dividends (20,669) (20,076) (17,887)
Common Stock Purchased and Retired (24,916) -- --
Common Stock in Treasury Retired (45,371) -- --
Other (152) 1,226 46
-----------------------------------------
Balance at End of Year $ 155,696 $ 224,009 $ 203,582
-----------------------------------------
-----------------------------------------
DIVIDENDS PER SHARE $ .58 $ .56 $ .50
-----------------------------------------
-----------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
17
STATEMENTS OF CASH FLOWS
ROLLINS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
OPERATING Net Income $ 22,795 $ 39,277 $ 49,561
ACTIVITIES
Noncash Charges (Credits) to Earnings:
Special Charge -- 12,000 --
Depreciation and Amortization 8,612 7,950 8,130
Deferred Income Taxes (1,551) (7,846) 825
Other, Net 4,394 4,461 2,382
(Increase) Decrease in Assets:
Trade Receivables 9,996 1,476 (14,257)
Materials and Supplies (995) 2,422 (421)
Other Current Assets 4,108 (622) (3,183)
Other Non-Current Assets (2,934) (1,167) (533)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 6,833 3,681 (2,676)
Unearned Revenue 542 (1,040) 2,713
Long-Term Accrued Liabilities 3,655 (6,602) (4,277)
Non-Current Deferred Income Taxes 2,612 (7,080) 1,076
-------------------------------------
Net Cash Provided by Operating Activities 58,067 46,910 39,340
-------------------------------------
-------------------------------------
- -------------------------------------------------------------------------------------------------------------------
INVESTING Purchases of Equipment and Property (9,982) (9,080) (8,256)
ACTIVITIES
Net Cash Used for Acquisition of Companies (7,950) (4,373) (740)
Marketable Securities, Net (19,661) (12,463) (1,910)
Proceeds from Sale of Equipment and Property 316 215 1,152
---------------------------------------
Net Cash Used in Investing Activities (37,277) (25,701) (9,754)
---------------------------------------
---------------------------------------
- -------------------------------------------------------------------------------------------------------------------
FINANCING Dividends Paid (20,669) (20,076) (17,887)
ACTIVITIES
Common Stock Purchased and Retired (26,200) -- --
Proceeds from Capital Lease 5,500 -- --
Payments on Capital Lease (1,314) -- --
Other 420 573 2,116
---------------------------------------
Net Cash Used in Financing Activities (42,263) (19,503) (15,771)
---------------------------------------
---------------------------------------
Net Increase (Decrease) in Cash and
Short-Term Investments (21,473) 1,706 13,815
Cash and Short-Term Investments
at Beginning of Year 33,623 31,917 18,102
---------------------------------------
Cash and Short-Term Investments
at End of Year $ 12,150 $ 33,623 $ 31,917
-----------------------------------------
-----------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
18
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994, ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION - Rollins, Inc. Is a national company with
headquarters located in Atlanta, Georgia, providing services to both residential
and commercial customers. The four primary services provided are termite and
pest control, protective services, lawn care, and plantscaping.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Rollins, Inc. (the Company) and its subsidiaries. All
significant intercompany transactions and balances have been eliminated.
ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation
of the financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
REVENUES - Revenue is recognized at the time services are performed.
CASH AND SHORT-TERM INVESTMENTS - The Company considers all investments
with a maturity of three months or less to be cash equivalents. Short-term
investments are stated at cost which approximates fair value.
MARKETABLE SECURITIES - Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under this statement, the Company's
marketable securities are classified as "available for sale" and have been
recorded at current market value with an offsetting adjustment to stockholders'
equity. The adoption of this statement did not have a material effect on the
Company's financial position.
MATERIALS AND SUPPLIES - Materials and supplies are recorded at the lower
of cost (first-in, first-out basis) or market.
EQUIPMENT AND PROPERTY - Depreciation and amortization which includes the
amortization of assets recorded under capital leases are provided principally on
a straight-line basis over the estimated useful lives of the related assets.
Annual provisions for depreciation are computed using the following asset lives:
buildings, 10 to 40 years; and furniture, fixtures, and operating equipment, 3
to 10 years. The cost of assets retired or otherwise disposed of and the
related accumulated depreciation and amortization are eliminated from the
accounts in the year of disposal with the resulting gain or loss credited or
charged to income. Expenditures for additions, major renewals and betterments
are capitalized and expenditures for maintenance and repairs are expensed as
incurred.
INSURANCE - The Company self-insures, up to specified limits, certain risks
related to general liability, workers' compensation and vehicle liability.
The estimated costs of existing and future claims under the self-insurance
program are accrued based upon historical trends as incidents occur, whether
reported or unreported (although actual settlement of the claims may not be made
until future periods) and may be subsequently revised based on developments
relating to such claims. The non-current portion of these estimated outstanding
claims comprises most of the long-term accrued liabilities balance shown on the
Statements of Financial Position.
ADVERTISING - Advertising expenses are charged to income during the year in
which they are incurred. The total advertising costs were approximately
$28,332,000, $27,292,000, and $25,834,000 in 1996, 1995, and 1994, respectively.
INCOME TAXES - The Company follows the practice of providing for income
taxes based on Statement of Financial Accounting Standards No. 109 (SFAS No.
109), "Accounting for Income Taxes." SFAS No. 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns.
COMMON STOCK - Earnings per share is computed on the basis of
weighted-average shares outstanding. Stock options outstanding do not have a
significant dilutive effect.
STOCK-BASED COMPENSATION - During October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation." This Statement establishes a
fair value based method of accounting for employee stock-based compensation.
However, the Statement allows companies to continue following the accounting
prescribed by Accounting Principles Bulletin (APB) Opinion No. 25. The Company
has adopted the disclosure-only option of SFAS No. 123 and will continue to use
the accounting treatment outlined in APB Opinion No. 25. If the accounting
provisions of the new Statement had been adopted as of the beginning of 1996,
the effect on 1996 net earnings would have been immaterial. Further, based on
current and anticipated use of stock-based compensation, it is not envisioned
that the impact of the Statement's accounting provisions would be material in
any future period.
19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994, ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
2. SPECIAL CHARGE
A special charge of $12,000,000 ($7,440,000 after tax benefit or $.21 per
share) was recorded in the third quarter 1995 to write off doubtful accounts
receivable in the consumer finance operation, Rollins Acceptance Company, (RAC),
as a result of management's actions and assessment of the estimated realizable
value of the financed receivables portfolio at September 30, 1995.
3. TRADE RECEIVABLES
Trade receivables, net, at December 31, 1996, totalling $78,856,000 and at
December 31, 1995, totalling $88,542,000 are net of allowances for doubtful
accounts of $5,961,000 and $9,991,000, respectively. Trade receivables include
installment receivable amounts which are due subsequent to one year from the
balance sheet dates. These amounts were approximately $19,030,000 and
$26,209,000 at the end of 1996 and 1995, respectively. The carrying amount of
installment receivables approximates fair value because the interest rates
approximate market rates.
4. EQUIPMENT AND PROPERTY
Equipment and property are presented at cost less accumulated depreciation
and are detailed as follows:
(In Thousands) 1996 1995
- -------------------------------------------------------------------------------
Buildings $ 9,461 $ 9,238
Operating equipment 55,056 55,339
Furniture and fixtures 12,539 12,018
Computer equipment under
capital leases 10,482 8,736
-----------------------
87,538 85,331
Less - accumulated depreciation 49,758 50,715
-----------------------
37,780 34,616
Land 3,262 3,183
-----------------------
$ 41,042 $ 37,799
-----------------------
-----------------------
5. INTANGIBLE ASSETS
Intangible assets represent goodwill arising from acquisitions and are
stated at cost less accumulated amortization. Intangibles which arose from
acquisitions prior to November, 1970 are not being amortized for financial
statement purposes, since, in the opinion of management, there has been no
decrease in the value of the acquired businesses. Intangibles arising from
acquisitions since November, 1970 are being amortized over forty years.
6. INCOME TAXES
A reconciliation between taxes computed at the statutory rate on the income
before income taxes and the provision for income taxes is as follows:
(In Thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Federal income taxes
at statutory rate $ 12,868 $ 22,172 $ 28,205
State income taxes
(net of federal benefit) 1,539 3,015 3,286
Other (436) (1,114) (465)
--------------------------------------
$ 13,971 $ 24,073 $ 31,026
--------------------------------------
--------------------------------------
The provision for income taxes was based on a 38.0% estimated effective
income tax rate on income before income taxes for the years ended December 31,
1996 and 1995, and a 38.5% estimated effective income tax rate for the year
ended December 31, 1994. The effective income tax rate differs from the annual
federal statutory tax rate primarily because of state income taxes.
Income taxes remitted were $9,354,000, $37,708,000, and $33,915,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
The tax effect of the temporary differences which comprise the current and
non-current deferred income tax debits (credits) amounts is as follows:
(In Thousands) 1996 1995
- ------------------------------------------------------------------------------
Deferred Tax Assets (Liabilities)
Insurance reserves $ 13,466 $ 11,925
Safe harbor lease (15,460) (16,374)
Other 153 5,656
------------------------
$ (1,841) $ 1,207
------------------------
------------------------
20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994, ROLLINS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES
The Company has capitalized lease obligations and several operating leases.
The minimum lease payments under the capital leases and non-cancelable operating
leases with terms in excess of one year, in effect at December 31, 1996, are
summarized as follows:
Capitalized Operating
(In thousands) Leases Leases
- -------------------------------------------------------------------------------
1997 $3,470 $ 19,255
1998 3,760 14,823
1999 3,760 9,944
2000 3,760 7,184
2001 2,073 6,082
Thereafter 288 42,747
-----------------------
$ 17,111 $ 100,035
---------
---------
Amount representing interest (2,213)
--------
Present value of obligations 14,898
Portion due within one year (2,735)
--------
Long-term obligations $ 12,163
--------
--------
Effective December 1996, the Company entered into a five year contract for
the acquisition of information systems equipment and services. This contract
was classified as a capital lease. As part of the lease agreement, the Company
received cash for the financing of future purchases of various third party
software and services as well as actual equipment. Therefore, as of
December 31, 1996, only the delivered computer equipment and services were
recorded as assets.
Total rental expense under operating leases charged to operations was
$26,751,000, $25,701,000, and $24,867,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
In the normal course of business, the Company is a defendant in a number of
lawsuits which allege that plaintiffs have been damaged as a result of the
rendering of services by Company personnel and equipment. The Company is
actively contesting these actions. It is the opinion of Management that the
outcome of these actions will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity.
8. BUSINESS SEGMENT INFORMATION
The Company operates two major business segments. Certain information with
respect to the Company's business segments is as follows:
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
REVENUES
Orkin $ 553,522 $ 547,797 $ 530,099
Rollins Protective 63,662 59,233 61,692
Other 10,247 13,405 13,536
-----------------------------------------
$ 627,431 $ 620,435 $ 605,327
---------------------------------------
---------------------------------------
OPERATING INCOME
Orkin $ 38,844 $ 76,754 $ 78,711
Rollins Protective 3,994 4,476 6,579
Other (1,469) (11,037)(1) 3,640
----------------------------------------
41,369 70,193 88,930
OTHER
Corporate expenses, net (10,570) (11,831) (11,337)
Interest income 5,967 4,988 2,994
----------------------------------------
Income before
income taxes $ 36,766 $ 63,350(1) $ 80,587
----------------------------------------
----------------------------------------
IDENTIFIABLE ASSETS
Orkin $ 158,086 $ 167,037 $ 169,750
Rollins Protective 26,468 22,618 21,236
Other 124,229 125,270 104,279
----------------------------------------
$ 308,783 $ 314,925 $ 295,265
----------------------------------------
----------------------------------------
DEPRECIATION AND
AMORTIZATION EXPENSE
Orkin $ 6,486 $ 6,154 $ 6,654
Rollins Protective 755 634 448
Other 1,371 1,162 1,028
----------------------------------------
$ 8,612 $ 7,950 $ 8,130
----------------------------------------
----------------------------------------
CAPITAL EXPENDITURES
Orkin $ 7,284 $ 14,413 $ 6,530
Rollins Protective 912 1,923 466
Other 3,919 1,690 1,372
----------------------------------------
$ 12,115 $ 18,026 $ 8,368
----------------------------------------
----------------------------------------
(1) INCLUDES A SPECIAL CHARGE OF $12,000,000 ($7,440,000 AFTER TAX BENEFIT OR
$.21 PER SHARE) AT SEPTEMBER 30, 1995.
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994, ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory tax-qualified defined benefit
retirement plan covering all employees meeting certain age and service
requirements. The qualified plan provides benefits based on the average
compensation for the highest five years during the last ten years of credited
service (as defined) in which compensation was received, and the average
anticipated Social Security covered earnings. The Company funds the Plan with
at least the minimum amount required by ERISA.
The Company's net pension expense for the past three years is summarized as
follows:
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Service cost-benefits
earned during the period $ 3,141 $ 2,844 $ 2,749
Interest cost on projected
benefit obligation 4,081 3,958 3,524
Actual return on plan assets (5,185) (9,236) 1,445
Net amortization
of transition asset (1,181) (1,181) (1,181)
Deferral of net
investment gain (loss) 570 4,778 (5,718)
-------------------------------------
Net pension expense $ 1,426 $ 1,163 $ 819
-------------------------------------
-------------------------------------
The funded status of the Plan is summarized as follows at December 31:
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation
including vested benefits of
$44,420 in 1996 and
$41,850 in 1995 $ (48,011) $ (45,553)
Effect of projected future
compensation levels (9,298) (9,131)
------------------------
Projected benefit obligation (57,309) (54,684)
Plan assets at fair value 54,876 52,056
------------------------
Plan assets less than
projected obligation (2,433) (2,628)
Unrecognized net loss 3,401 6,204
Unrecognized net asset at transition
being amortized over 10 years (575) (1,725)
Unrecognized prior service cost (293) (325)
------------------------
Prepaid pension expense
included in other assets $ 100 $ 1,526
------------------------
------------------------
At December 31, 1996, the Plan's assets were comprised of listed common
stocks and U.S. Government and corporate securities. Included in the assets of
the Plan were shares of Rollins common stock with a market value of $6,054,000.
The expected long-term rate of return on plan assets was 9.5% in 1996, 1995, and
1994. The weighted-average discount rate used in determining the projected
benefit obligation decreased from 8.5% in 1994 to 7.5% in 1995 and 1996 to more
closely approximate rates on high-quality, long-term obligations. The assumed
growth rate of compensation was 5.5% in 1994 and 4.5% in 1995 and 1996.
The Company sponsors a deferred compensation 401(k) plan that is available
to substantially all employees with six months of service. The charges to
expense for the Company match were $1,592,000 in 1996, $1,627,000 in 1995, and
$1,465,000 in 1994.
The Company has an Employee Incentive Stock Option Plan (1984 Plan), adopted
in October, 1984, under which 1,200,000 shares of common stock were subject to
options to be granted during the ten-year period ended October, 1994. The
options were granted at the fair market value of the shares on the date of the
grant and expire ten years from the date of the grant, if not exercised. No
additional options will be granted under this Plan.
Option transactions during the last three years for the 1984 Plan are
summarized as follows:
(Number of shares) 1996 1995 1994
- --------------------------------------------------------------------------------
Outstanding at
January 1, 62,611 73,857 114,206
Granted -- -- --
Exercised (5,037) (6,696) (36,009)
Cancelled (5,542) (4,550) (4,340)
--------------------------------------------
Outstanding at
December 31, 52,032 62,611 73,857
Exercisable at
December 31, 48,418 50,501 46,857
--------------------------------------------
Option price ranges per share:
Granted $ -- $ -- $ --
Exercised 11.25-19.08 7.00-19.08 5.92-25.50
Cancelled 11.25-25.50 11.25-25.50 5.92-25.50
Outstanding 11.25-25.50 8.50-25.50 7.00-25.50
--------------------------------------------
--------------------------------------------
22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994, ROLLINS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
On January 25, 1994, the Company adopted a new Employee Stock Incentive Plan
(1994 Plan) under which 1,200,000 shares of common stock are subject to grants
through January 25, 2004 under various stock incentive programs. The options
were granted at the fair market value of the shares on the date of the grant and
expire ten years from the date of the grant, if not exercised.
Grant and option transactions during the last three years for the 1994
Plan are summarized as follows:
(Number of shares) 1996 1995 1994
- --------------------------------------------------------------------------------
Outstanding at
January 1, 195,000 193,100 --
Granted 75,000 17,000 200,900
Exercised -- -- --
Cancelled (21,900) (15,100) (7,800)
------------------------------------------
Outstanding at
December 31, 248,100 195,000 193,100
Exercisable at
December 31, 44,040 21,140 --
------------------------------------------
Option price ranges per share:
Granted $20.88-28.38 $ 24.25 $ 28.38
Exercised -- -- --
Cancelled 20.88-28.38 24.25-28.38 28.38
Outstanding 20.88-28.38 24.25-28.38 28.38
------------------------------------------
------------------------------------------
23
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------
To the Stockholders of Rollins, Inc.:
We have prepared the accompanying financial statements and related
information included herein for the years ended December 31, 1996, 1995 and
1994. The opinion of Arthur Andersen LLP, the Company's independent auditors,
on those financial statements is included herein. The primary responsibility
for the integrity of the financial information included in this annual report
rests with management. Such information was prepared in accordance with
generally accepted accounting principles, appropriate in the circumstances,
based on our best estimates and judgements and giving due consideration to
materiality.
Rollins, Inc. maintains internal accounting control systems which
are adequate to provide reasonable assurance that assets are safeguarded from
loss or unauthorized use and which produce records adequate for preparation of
financial information. The system and controls and compliance therewith are
reviewed by an extensive program of internal audits and by our independent
auditors. There are limits inherent in all systems of internal accounting
control based on the recognition that the cost of such a system should not
exceed the benefits to be derived. We believe the Company's system provides
this appropriate balance.
The Board of Directors pursues its review and oversight role for these
financial statements through an Audit Committee composed of three outside
directors. The Audit Committee's duties include recommending to the Board of
Directors the appointment of an independent accounting firm to audit the
financial statements of Rollins, Inc. The Audit Committee meets periodically
with management and the Board of Directors. It also meets with representatives
of the internal and independent auditors and reviews the work of each to insure
that their respective responsibilities are being carried out and to discuss
related matters. Both the internal and independent auditors have direct access
to the Audit Committee.
/s/ R. Randall Rollins /s/ Gene L. Smith
R. Randall Rollins Gene L. Smith
CHAIRMAN OF THE BOARD AND CHIEF FINANCIAL OFFICER
CHIEF EXECUTIVE OFFICER SECRETARY, AND TREASURER
Atlanta, Georgia
February 17, 1997
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Directors and Stockholders of Rollins, Inc.:
We have audited the accompanying statements of financial position of
Rollins, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995 and the related statements of income, earnings retained and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rollins, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
February 17, 1997
24
DIRECTORS, OFFICERS, AND STOCKHOLDERS' INFORMATION
- --------------------------------------------------------------------------------
DIRECTORS
JOHN W. ROLLINS
Chairman of the Board and Chief Executive Officer of
Rollins Truck Leasing Corp. (vehicle leasing and transportation),
Chairman of the Board and Chief Executive Officer of Rollins
Environmental Services, Inc. (hazardous waste treatment and
disposal)
HENRY B. TIPPIE+
Chairman of the Board and Chief Executive Officer of Tippie Services,
Inc. (management services)
R. RANDALL ROLLINS*
Chairman of the Board and Chief Executive Officer of Rollins, Inc., Chairman
of the Board and Chief Executive Officer of RPC, Inc. (oil and gas field
services, and boat manufacturing)
WILTON LOONEY+
Honorary Chairman of the Board of Genuine Parts Company (automotive parts
distributor)
JAMES B. WILLIAMS+
Chairman of the Board and Chief Executive Officer of Sun Trust Banks, Inc.
(bank holding company)
GARY W. ROLLINS*
President and Chief Operating Officer of Rollins, Inc.
BILL J. DISMUKE
Retired President of Edwards Baking Company
* Member of the Executive Committee
+ Member of the Audit and Compensation Committees
OFFICERS
R. RANDALL ROLLINS
Chairman of the Board and Chief Executive Officer
GARY W. ROLLINS
President and Chief Operating Officer
GENE L. SMITH
Chief Financial Officer, Secretary, and Treasurer
STOCKHOLDERS' INFORMATION
ANNUAL MEETING
The Annual Meeting of the Stockholders will be held at 9:30 a.m. Tuesday,
April 22, 1997, at the Company's corporate offices in Atlanta, Georgia.
TRANSFER AGENT AND REGISTRAR
For inquiries related to stock certificates, including changes of address,
lost certificates, dividends, and tax forms, please contact:
SunTrust Bank
Stock Transfer Department
P.O. Box 4625
Atlanta, Georgia 30302
Telephone: 1-800-568-3476
STOCK EXCHANGE INFORMATION
The Common Stock of the Company is listed on the New York and Pacific Stock
Exchanges and traded on the Philadelphia, Chicago and Boston Exchanges under
the symbol ROL.
DIVIDEND REINVESTMENT PLAN
This Plan provides a simple, convenient, and inexpensive way for stockholders
to invest cash dividends in additional Rollins, Inc. shares. For further
information, contact SunTrust Bank, Atlanta, at the above address or write to
the Secretary at the Company's mailing address.
FORM 10-K
The Company's annual report on Form 10-K to the Securities and Exchange
Commission provides certain additional information. Stockholders may obtain a
copy by contacting the Secretary at the Company's mailing address.
CORPORATE OFFICES
Rollins, Inc.
2170 Piedmont Road, N.E.
Atlanta, Georgia 30324
MAILING ADDRESS
Rollins, Inc.
P.O. Box 647
Atlanta, Georgia 30301
TELEPHONE
(404) 888-2000