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 September 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-4422
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ROLLINS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0068479
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2170 Piedmont Road, N.E., Atlanta, Georgia
(Address of principal executive offices)
30324
(Zip Code)
(404) 888-2000
(Registrant's telephone number, including area code)
------------------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Rollins, Inc. had 30,035,881 shares of its $1 Par Value Common Stock outstanding
as of October 31, 2000.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
--------------
Item 1. Financial Statements.
Condensed Consolidated Statements of Financial Position as of
September 30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Income and Earnings Retained
for the Three and Nine Months Ended September 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 10
Item 6. Exhibits and Reports on Form 8-K. 10
SIGNATURES 11
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share data)
(Unaudited)
September 30, December 31,
2000 1999
-------------------- ------------------
ASSETS
Cash and Short-Term Investments $ 263 $ 5,689
Marketable Securities - 12,967
Trade Receivables, Net 56,652 44,878
Materials and Supplies 13,036 13,429
Deferred Income Taxes 18,209 19,644
Other Current Assets 13,249 11,142
-------------------- ------------------
Current Assets 101,409 107,749
Equipment and Property, Net 50,229 46,245
Goodwill and Other Intangible Assets 117,377 112,024
Deferred Income Taxes 44,747 45,015
Other Assets 1,950 1,907
-------------------- ------------------
Total Assets $ 315,712 $ 312,940
==================== ==================
LIABILITIES
Capital Lease Obligations $ 2,302 $ 3,638
Accounts Payable 14,565 15,275
Accrued Insurance 10,871 11,165
Accrued Payroll 21,798 23,100
Unearned Revenue 29,819 20,441
Other Expenses 39,801 37,822
-------------------- ------------------
Current Liabilities 119,156 111,441
Capital Lease Obligations 638 2,450
Accrued Insurance 47,704 43,745
Accrual for Termite Contracts 40,162 54,352
Long-Term Accrued Liabilities 26,764 29,162
-------------------- ------------------
Total Liabilities 234,424 241,150
-------------------- ------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 30,035,881 and 29,881,402
shares issued at September 30, 2000 and December
31, 1999, respectively 30,036 29,881
Earnings Retained 51,252 41,909
-------------------- ------------------
Total Stockholders' Equity 81,288 71,790
-------------------- ------------------
Total Liabilities and Stockholders' Equity $ 315,712 $ 312,940
==================== ==================
[FN]
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EARNINGS RETAINED
(In thousands except share and per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
REVENUES
Customer Services $ 172,373 $ 154,102 $ 502,451 $ 446,330
------------- ------------- ------------- -------------
COSTS AND EXPENSES
Cost of Services Provided 99,949 89,107 285,714 255,643
Depreciation and Amortization 4,677 3,384 13,548 9,562
Sales, General and Administrative 63,950 60,223 185,268 168,865
Interest Income (14) (923) (238) (3,098)
------------- ------------- ------------- -------------
168,562 151,791 484,292 430,972
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 3,811 2,311 18,159 15,358
------------- ------------- ------------- -------------
PROVISION FOR INCOME TAXES
Current 898 (801) 5,250 799
Deferred 550 1,680 1,650 5,037
------------- ------------- ------------- -------------
1,448 879 6,900 5,836
------------- ------------- ------------- -------------
NET INCOME $ 2,363 $ 1,432 $ 11,259 $ 9,522
============= ============= ============= =============
EARNINGS RETAINED
Balance at Beginning of Period 50,345 52,588 41,909 49,746
Cash Dividends (1,504) (1,518) (4,528) (4,572)
Common Stock Purchased and Retired - (4,485) (144) (6,696)
Other 48 1,395 2,756 1,412
------------- ------------- ------------- -------------
BALANCE AT END OF PERIOD $ 51,252 $ 49,412 $ 51,252 $ 49,412
============= ============= ============= =============
EARNINGS PER SHARE - BASIC AND
DILUTED $ 0.08 $ 0.05 $ 0.38 $ 0.31
============= ============= ============= =============
WEIGHTED SHARES OUTSTANDING - BASIC 30,036,184 30,287,947 30,000,334 30,429,842
WEIGHTED SHARES OUTSTANDING - DILUTED 30,039,628 30,295,492 30,002,770 30,437,641
[FN]
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------------------
2000 1999
--------------- ---------------
OPERATING ACTIVITIES
Net Income $ 11,259 $ 9,522
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 13,548 9,562
Provision for Deferred Income Taxes 1,651 5,037
Other, Net 13 1,297
(Increase) Decrease in Assets, Net of
Acquisitions:
Trade Receivables (9,763) (126)
Materials and Supplies 558 1,173
Other Current Assets (3,012) 1,709
Other Non-Current Assets 134 (299)
Increase (Decrease) in Liabilities, Net of
Acquisitions:
Accounts Payable and Accrued Expenses (7,899) (1,767)
Unearned Revenue 9,378 4,517
Accrued Insurance (3,877) (2,788)
Accrual for Termite Contracts (6,423) (16,587)
Long-Term Accrued Liabilities (2,671) 2,982
------------------ ------------------
Net Cash Provided by Operating Activities 2,896 14,232
------------------ ------------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (11,781) (12,483)
Net Cash Used for Acquisition of Companies (7,080) (28,527)
Marketable Securities, Net 13,084 43,519
------------------ ------------------
Net Cash Provided by (Used in) Investing
Activities (5,777) 2,509
------------------ ------------------
FINANCING ACTIVITIES
Dividends Paid (4,528) (4,572)
Common Stock Purchased and Retired (154) (7,587)
Payments on Capital Leases (2,542) (2,224)
Net Borrowings Under Line of Credit Agreement 4,475 -
Other 204 348
------------------ ------------------
Net Cash Used in Financing Activities (2,545) (14,035)
------------------ ------------------
Net Increase (Decrease) in Cash and
Short-Term Investments (5,426) 2,706
Cash and Short-Term Investments
at Beginning of Period 5,689 1,244
------------------ ------------------
Cash and Short-Term Investments
at End of Period $ 263 $ 3,950
================== ==================
[FN]
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ROLLINS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION
The condensed consolidated financial statements included
herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission. Footnote disclosures normally included
in the financial statements prepared in accordance with
accounting principles generally accepted in the United
States have been condensed or omitted pursuant to such rules
and regulations.
These condensed consolidated financial statements should be
read in conjunction with the financial statements and
related notes contained in the Company's annual report on
Form 10-K for the year ended December 31, 1999 as amended by
the Form 10-K/A Amendment No. 1 filed on November 3, 2000.
In the opinion of management, the condensed consolidated
financial statements included herein contain all normal
recurring adjustments necessary to present fairly the
financial position of the Company as of September 30, 2000
and December 31, 1999, and the results of operations for the
three and nine months ended September 30, 2000 and 1999 and
cash flows for the nine months ended September 30, 2000 and
1999. Operating results for the three months and nine months
ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ended December
31, 2000.
Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income," establishes
standards for reporting comprehensive income and its
components. For the nine months ended September 30, 2000 and
1999, comprehensive income is not materially different from
net income and, as a result, the impact of SFAS 130 is not
reflected in the Company's condensed consolidated financial
statements included herein.
Certain amounts for prior periods have been reclassified to
conform with the current period condensed consolidated
financial statement presentation. Such reclassifications had
no effect on previously reported net income.
NOTE 2. PROVISION FOR INCOME TAXES
The book provision for income taxes includes the liability
for state income taxes, net of the federal income tax
benefit. The deferred provision for income taxes arises from
the changes during the year in the Company's net deferred
tax asset or liability.
5
NOTE 3. EARNINGS PER SHARE
Pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," the
number of weighted average shares used in computing basic
and diluted earnings per share (EPS) are as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
Basic EPS 30,036 30,288 30,000 30,430
Effect of Dilutive Stock Options 4 7 3 8
---------------- --------------- ---------------- ----------------
Diluted EPS 30,040 30,295 30,003 30,438
================ =============== ================ ================
NOTE 4. LEGAL PROCEEDINGS
One of the Company's subsidiaries, Orkin Exterminating
Company, Inc. ("Orkin"), is a named defendant in Helen
Cutler and Mary Lewin v. Orkin Exterminating Company., Inc.
et al. pending in the District Court of Houston County,
Alabama. The plaintiffs in the above mentioned case filed
suit in March of 1996 and are seeking monetary damages and
injunctive relief for alleged breach of contract arising out
of alleged missed or inadequate reinspections. The attorneys
for the plaintiffs contend that the case is suitable for a
class action and the court has ruled that the plaintiffs
would be permitted to pursue a class action lawsuit against
Orkin. The Company believes this case to be without merit
and intends to defend itself vigorously at trial. At this
time, the final outcome of the litigation cannot be
determined. However, it is the opinion of Management that
the ultimate resolution of this action will not have a
material adverse effect on the Company's financial position,
results of operations or liquidity.
On May 14, 1999, a lawsuit was filed in the Circuit Court of
Macon County, Alabama against Orkin, alleging breach of
contract and fraud. The suit asserts a failure to treat and
inspect the residence of the plaintiff and to repair the
termite damage and alleges that Orkin concealed alleged
misconduct by suppressing material facts. On August 18,
2000, the jury in the matter of The Estate of Artie Mae
Jeter v. Orkin Exterminating Company, Inc. and Bill Maxwell,
returned a verdict of $80.8 million against Orkin. The award
consisted of $800,000 in compensatory damages (including
property damage and mental anguish) and $80.0 million in
punitive damages. The jury found simply that the contract
had been breached and Orkin had committed fraud.
It is Orkin's position that it complied with its contractual
obligations and that it did not attempt to conceal alleged
misconduct or suppress material facts. Orkin will vigorously
pursue post-trial relief and its right to appeal. However,
if the verdict is permitted to stand, it would have a
material adverse impact on the Company and Orkin. Although
it is the opinion of management and their attorneys that
this verdict will be substantially reduced and that the
ultimate resolution of this litigation will not have a
material impact on the Company and Orkin, there is no
assurance that the verdict will be reduced or reversed on
appeal.
Additionally, in the normal course of business, the Company
is a defendant in a number of lawsuits which allege that
plaintiffs have been damaged as a result of the rendering of
services by Company personnel and equipment. The Company is
actively contesting these actions. It is the opinion of
Management that the outcome of these actions will not have a
material adverse effect on the Company's financial position,
results of operations or liquidity.
6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The Company reported net income of $2.4 million or $0.08 per share for the
quarter compared to net income of $1.4 million or $0.05 per share for the
comparable quarter in 1999. Net income for the first nine months of 2000
increased 18.2% to $11.3 million or $0.38 per share compared to $9.5 million or
$0.31 per share for the same period in 1999. Revenues for the third quarter and
nine months ended September 30, 2000, increased 11.9% and 12.6%, respectively.
The improvement in earnings for the quarter and first nine months resulted
primarily from quarter-over-quarter increases in both pest and termite control
revenue and Selling, General and Administrative margin improvements. Cost of
Services Provided also improved as a percentage of revenue on a year to date
basis. The improvements in Cost of Services Provided and Selling, General and
Administrative margins were partially offset by a decrease in Interest Income
and an increase in Provision for Income Taxes and Depreciation and Amortization.
The Company's revenue improvement for the tenth consecutive quarter continued
the positive momentum initiated in 1998. The Company believes the improvements
in revenue and net income resulted from the strategic programs initiated in 1997
and 1998 to build recurring revenue, expand the Company's commercial pest
control business and contain termite claims costs as well as the successful
integration of last year's strategic acquisitions.
Results of Operations
Revenues increased to $172.4 million for the third quarter 2000 from $154.1
million for the same quarterly period of 1999. For the first nine months of
2000, the Company has generated revenues of $502.4 million, up 12.6% from last
year's amount of $446.3 million. Factors contributing to the increase in
revenues are increases in the pest control commercial customer base and in
average termite completion and annual renewal prices. The increase in pest
control commercial customer base resulted from last year's acquisitions and the
success of its selling and service programs.
Cost of Services Provided was approximately $10.8 million higher than the prior
year quarter and remained relatively stable as a percentage of revenues,
increasing to represent 58.0% of revenues compared with 57.8% for the same
quarter of the prior year. For the first nine months of 2000, Cost of Services
Provided improved to represent 56.9% of revenues compared to 57.3% for the prior
year period. The improvement was primarily attributable to reductions, as a
percentage of revenues, in service salaries, termite claims experience,
operating insurance costs and improved inventory management.
Depreciation and Amortization expense increased approximately $1.3 million for
the quarter and $4.0 million for the first nine months of the year when compared
to the same periods for the prior year. The increases reflect increased
amortization of goodwill and other intangibles as a result of the Company's
acquisitions.
Selling, General and Administrative increased $3.7 million but decreased as a
percentage of revenues to 37.1% compared to 39.1% for the same quarter of the
prior year. For the first nine months of 2000, Selling, General and
Administrative decreased as a percentage of revenues to 36.9% compared with
37.8% for the prior year period. The improvements as a percentage of revenues
resulted primarily from better leveraging of fixed costs due to higher revenues.
Interest Income decreased $909,000 compared to the same quarter of the prior
year, and decreased $2.9 million for the nine months ended September 30, 2000
compared to the same period of the prior year. The decreases were primarily due
to lower invested funds over the prior year periods. The decrease in invested
funds resulted primarily from the use of cash to fund acquisitions.
The Company's net tax provisions of $1.4 million for the quarter and $6.9
million for the first nine months reflect increased taxable income over the
prior year periods.
7
Financial Condition
Except for the uncertainty of the outcome of the appeals process regarding the
Jeter litigation, (for further information, see Note 4 to the accompanying
condensed consolidated financial statements) the Company believes its current
cash balances, future cash flows from operating activities and line of credit
will be sufficient to finance its current operations and obligations, and fund
expansion of the business for the foreseeable future. The Company's operations
generated cash of $2.9 million for the first nine months of 2000 compared with
cash provided by operating activities of $14.2 million in the same period of
1999. This decrease resulted primarily from unfavorable changes in working
capital related primarily to differences in the timing of accounts receivable,
accounts payable and other accrued expenses, partially offset by favorable
changes in the accrual for termite contracts and unearned revenue and higher net
income from operations, adjusted for non-cash items. The favorable changes in
unearned revenue resulted primarily from our new service offering, Directed
Liquid-Termite Baiting Program, which has the benefit of generating additional
recurring revenue by deferring a portion of termite baiting sales to the balance
sheet in the form of unearned revenue. This unearned revenue will be recognized
as revenue over the life of the related contracts.
The Company invested approximately $18.9 million in capital expenditures and
acquisitions during the first nine months of 2000, and expects to invest between
$2.0 and $3.0 million during the remainder of 2000, inclusive of improvements to
its management information systems. Capital expenditures during the first nine
months of 2000 consisted primarily of equipment replacements and upgrades and
improvements to the Company's management information systems. During the first
nine months, cash used in financing activities was approximately $2.5 million
compared with cash used of $14.0 million for the same period of the prior year.
The primary reason for the improvement in cash used is attributable to a
decrease in the amount of the Company's common stock repurchases and
retirements, partially offset by the cash provided by our credit facilities. Of
total cash used in financing activities, approximately $4.5 million was paid in
cash dividends and $154,000 was paid for the repurchase and retirement of 10,177
shares of the Company's Common Stock as part of an odd-lot buy-back program. The
capital expenditures, acquisitions, cash dividends and stock repurchases were
primarily funded through existing cash balances, marketable securities,
operating activities and borrowings on the Company's $40.0 million line of
credit, of which the full amount was available for borrowing as of October 31,
2000.
In 1997 and 1998, Orkin and other pest control industry companies received
letters from the Federal Trade Commission (FTC) advising of its investigation of
the pest control industry - more specifically, the termite and moisture control
practices of the industry - and requesting certain information voluntarily from
the Company. Orkin has voluntarily provided the information requested and has
advised the FTC of the Company's intention to continue to cooperate fully with
this investigation. At this point in time, management does not believe this
investigation will have a material effect upon its results of operations or
financial condition. In addition, the Company is aggressively defending a class
action lawsuit filed in Dothan, Alabama. The Company is also appealing a
judgment that was rendered against it during the third quarter in Macon County,
Alabama. For further discussion, see Note 4 to the accompanying condensed
consolidated financial statements.
8
Impact of Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In second quarter 1999, the Financial Accounting Standards Board
voted to delay the effective date of this standard to fiscal years beginning
after June 15, 2000. The adoption of this standard, effective for the Company as
of January 1, 2001, is not expected to materially impact the results of
operations or financial condition of the Company.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements regarding the expected impact of the outcome of
litigation arising in the ordinary course of business, the outcome of the Helen
Cutler and Mary Lewin v. Orkin Exterminating Company., Inc., et al. ("Cutler")
litigation and the outcome of the The Estate of Artie Mae Jeter v. Orkin
Exterminating Company, Inc. and Bill Maxwell ("Jeter") appeals process on the
Company's financial condition and management's expectations regarding the
potential reduction in the amount of the judgment, and the Company's ability to
fund current operations and obligations and proposed expansion. The actual
results of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties including,
without limitation, the possibility of a court ruling against the Company in
litigation or in the Cutler litigation or the possibility of an appellate court
ruling against the Company in the Jeter litigation; the potential inability of
the Company to obtain a bond, letter of credit or other type of surety and the
possibility that the cost of any bond, letter of credit or other surety, if
required as part of the appeals process could exceed the Company's expectations;
general economic conditions; market risk; changes in industry practices or
technologies; the degree of success of the Company's termite process reforms and
pest control selling and treatment methods; the Company's ability to identify
potential acquisitions; climate and weather trends; competitive factors and
pricing practices; potential increases in labor costs; and changes in various
government laws and regulations, including environmental regulations. All of the
foregoing risks and uncertainties are beyond the ability of the Company to
control, and in many cases the Company cannot predict the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of October 31, 2000, the Company no longer maintains a material investment
portfolio subject to interest rate risk exposure. The Company is, however,
subject to interest rate risk exposure through its line of credit as discussed
in the liquidity section of Management's Discussion & Analysis. Due to the
absence of such borrowings as of October 31, 2000 and as currently anticipated
at December 31, 2000, this risk is not expected to have a material effect upon
the Company's results of operations or financial position going forward.
9
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 to Part I, Item 1 for discussion of certain
litigation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(3)(i) Restated Certificate of Incorporation of
Rollins, Inc. is incorporated herein by
reference to Exhibit (3) (i) as filed with its
Form 10-K for the year ended December 31, 1997.
(ii) By-laws of Rollins, Inc. is incorporated herein
by reference to Exhibit (3) (ii) as filed with
its Form 10-Q for the quarterly period ended
March 31, 1999.
(4) Form of Common Stock Certificate of Rollins,
Inc. is incorporated herein by reference to
Exhibit(4) as filed with its Form 10-K for the
year ended December 31, 1998.
(27)(a) Financial Data Schedule (For Commission Use
Only).
(27)(b) Restated Financial Data Schedule (For Commission
Use Only).
(b) Reports on Form 8-K.
One report on Form 8-K, dated August 18, 2000
(filed September 14, 2000) was filed during
the third quarter ended September 30, 2000
reporting matters under Item 5, Other Events.
10
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: November 13, 2000 By: /s/ Gary W. Rollins
- ------------------------ ----------------------------------------
Gary W. Rollins
President and Chief Operating Officer
(Member of the Board of Directors)
Date: November 13, 2000 By: /s/ Harry J. Cynkus
- ------------------------ -----------------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
11