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, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-4422
------------------------------------------
ROLLINS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0068479
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2170 Piedmont Road, N.E., Atlanta, Georgia
(Address of principal executive offices)
30324
(Zip Code)
(404) 888-2000
(Registrant's telephone number, including area code)
------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Rollins, Inc. had 29,845,550 shares of its $1 Par Value Common Stock outstanding
as of October 31, 2002.
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, 2002 and December 31, 2001 2
Condensed Consolidated Statements of Income and Retained Earnings
for the Three and Nine Months Ended September 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2002 and 2001 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. 11
Item 4. Controls and Procedures. 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 12
Item 5. Other Information. 12
Item 6. Exhibits and Reports on Form 8-K. 12
SIGNATURES 13
CERTIFICATIONS 14 - 15
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,
2002 2001
-------------------- ------------------
ASSETS
Cash and Short-Term Investments $ 44,494 $ 8,650
Trade Receivables, Net 52,503 48,479
Materials and Supplies 11,075 11,895
Deferred Income Taxes 20,019 21,044
Other Current Assets 10,992 10,415
-------------------- ------------------
Current Assets 139,083 100,483
Equipment and Property, Net 38,252 44,273
Goodwill and Other Intangible Assets, Net 109,439 112,450
Deferred Income Taxes 38,248 39,309
Other Assets 0 44
-------------------- ------------------
Total Assets $ 325,022 $ 296,559
==================== ==================
LIABILITIES
Accounts Payable $ 11,734 $ 12,920
Accrued Insurance 13,230 9,912
Accrued Payroll 27,906 30,921
Unearned Revenue 43,072 27,470
Accrual for Termite Contracts 17,000 15,000
Other Current Liabilities 17,738 12,313
-------------------- ------------------
Current Liabilities 130,680 108,536
Accrued Insurance 28,946 32,713
Accrual for Termite Contracts 34,696 35,875
Long-Term Accrued Liabilities 29,579 33,937
-------------------- ------------------
Total Liabilities 223,901 211,061
-------------------- ------------------
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 29,889,885 and 30,069,990
shares issued and outstanding at September 30,
2002 and December 31, 2001, respectively 29,890 30,070
Accumulated Other Comprehensive Income (4,808) (4,822)
Retained Earnings 76,039 60,250
-------------------- ------------------
Total Stockholders' Equity 101,121 85,498
-------------------- ------------------
Total Liabilities and Stockholders' Equity $ 325,022 $ 296,559
==================== ==================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In thousands except share and per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- -----------------
REVENUES
Customer Services $ 174,873 $ 169,806 $ 513,715 $ 502,128
---------------- ---------------- ---------------- -----------------
COSTS AND EXPENSES
Cost of Services Provided 95,174 95,118 277,750 280,111
Depreciation and Amortization 5,425 5,140 16,298 15,033
Sales, General & Administrative 63,516 62,780 182,075 182,528
Interest (Income) / Expense (135) (116) (125) (265)
---------------- ---------------- ---------------- -----------------
163,980 162,922 475,998 477,407
---------------- ---------------- ---------------- -----------------
INCOME BEFORE INCOME TAXES 10,893 6,884 37,717 24,721
---------------- ---------------- ---------------- -----------------
PROVISION FOR INCOME TAXES
Current 4,600 1,370 12,346 5,499
Deferred (461) 1,246 1,986 3,895
---------------- ---------------- ---------------- -----------------
4,139 2,616 14,332 9,394
---------------- ---------------- ---------------- -----------------
NET INCOME $ 6,754 $ 4,268 $ 23,385 $ 15,327
================ ================ ================ =================
RETAINED EARNINGS
Balance at Beginning of Period 74,466 57,538 60,250 48,563
Cash Dividends (1,495) (1,509) (4,511) (4,527)
Common Stock Purchased (3,781) (56) (5,004) (56)
Other 95 (218) 1,919 716
---------------- ---------------- ---------------- -----------------
BALANCE AT END OF PERIOD $ 76,039 $ 60,023 $ 76,039 $ 60,023
================ ================ ================ =================
EARNINGS PER SHARE - BASIC $ 0.23 $ 0.14 $ 0.78 $ 0.51
================ ================ ================ =================
EARNINGS PER SHARE - DILUTED $ 0.22 $ 0.14 $ 0.77 $ 0.51
================ ================ ================ =================
WEIGHTED SHARES OUTSTANDING - BASIC 29,923,467 30,176,364 30,067,661 30,155,118
WEIGHTED SHARES OUTSTANDING - DILUTED 30,078,571 30,313,600 30,254,715 30,300,810
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,
----------------------------------------
2002 2001
------------------ -----------------
OPERATING ACTIVITIES
Net Income $ 23,385 $ 15,327
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 16,298 15,033
Provision for Deferred Income Taxes 2,085 4,628
Other, Net 776 135
(Increase) Decrease in Assets:
Trade Receivables (3,947) (3,610)
Materials and Supplies 831 1,432
Other Current Assets (577) (7,801)
Other Non-Current Assets 96 (871)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 2,773 4,102
Unearned Revenue 15,602 6,764
Accrued Insurance (449) (4,195)
Accrual for Termite Contracts 822 (1,380)
Long-Term Accrued Liabilities (4,359) (3,547)
------------------ -----------------
Net Cash Provided by Operating Activities 53,336 26,017
------------------ -----------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (5,900) (6,184)
Net Cash Used for Acquisition of Companies (1,768) (704)
Marketable Securities, Net 0 0
------------------ -----------------
Net Cash Used in Investing Activities (7,668) (6,888)
------------------ -----------------
FINANCING ACTIVITIES
Dividends Paid (4,511) (4,527)
Common Stock Purchased (5,288) (60)
Payments on Capital Leases (256) (1,447)
Payments, Net of Borrowings,
Under Line of Credit Agreement 0 (1,400)
Other 231 (1,632)
------------------ -----------------
Net Cash Used in Financing Activities (9,824) (9,066)
------------------ -----------------
Net Increase in Cash and Short-Term
Investments 35,844 10,063
Cash and Short-Term Investments
At Beginning of Period 8,650 399
------------------ -----------------
Cash and Short-Term Investments
At End of Period $ 44,494 $ 10,462
================== =================
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, 2001.
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.
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, 2002 and December 31, 2001, and
the results of operations for the three and nine months ended
September 30, 2002 and 2001 and cash flows for the nine months
ended September 30, 2002 and 2001. Operating results for the
three and nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 2002.
Comprehensive income includes amounts subject to foreign currency
translation. For the three and nine months ended September 30,
2002 and 2001, comprehensive income is not materially different
from net income.
In June 2001 the Financial Accounting Standards Board (FASB)
approved Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 prospectively prohibits
the pooling of interests method of accounting for business
combinations initiated after June 30, 2001. The amortization of
existing goodwill ceased on January 1, 2002. Any goodwill
resulting from acquisitions completed after June 30, 2001 is not
being amortized. SFAS No. 142 also establishes a new method of
testing goodwill for impairment at least on an annual basis or on
an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its
carrying value. The adoption of SFAS No. 142 has resulted in the
Company's discontinuation of amortization of its goodwill. The
adoption of SFAS 142 required the Company to perform an initial
impairment assessment on all goodwill during fiscal year 2002.
The Company chose September 30th as the measurement date to
assess the carrying value of goodwill on an annual basis. In this
assessment, the Company compared its fair value to its carrying
value. The fair value of the Company was determined by a
comparison of its closing stock price as of September 30, 2002
and the reported book value of the Company. At the September 30th
measurement date and upon adoption of SFAS 142, the Company had
no impairment of its goodwill, which totaled $72.4 million at
September 30, 2002. The expected impact in 2002 from the
application is a decrease in amortization expense of
approximately $2.3 million. Also, per SFAS No. 142, the expected
life of customer contracts was reviewed and they will be
amortized over a life between 8 to 12.5 years dependent upon
customer type. The expected impact in 2002 of this review is an
increase in amortization expense of $2.1 million. The Company
does not believe that the net result of the decrease in
amortization of goodwill and increase in amortization of customer
contracts will have a material impact on its annual financial
statements. The impact of SFAS No. 142 was not material to the
Company's financial position, results of operations or liquidity
for the three and nine months ended September 30, 2002.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective June 15, 2002 that addresses obligations
associated with the retirement of tangible long-lived assets and
associated retirement costs. The FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
effective for fiscal years beginning after December 15, 2001 that
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," effective for
fiscal years beginning May 15, 2002 or later that rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt", FASB Statement No. 64, "Extinguishments of Debt Made to
Satisfy
5
Sinking-Fund Requirements", and FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers". This
Statement Amends FASB Statement No. 4 and FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The
Company adopted SFAS No. 144 effective January 1, 2002. The
adoption of SFAS No. 144 did not have a material impact on the
Company's financial position, results of operations or liquidity
for the three and nine months ended September 30, 2002. The
Company does not believe the impact of adopting SFAS No. 143 or
SFAS No. 145 will have a material impact on its financial
position, results of operations or liquidity.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that
a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and
nullifies EITF 94-3. The Company plans to adopt SFAS No. 146 in
January 2003. Management believes that the adoption of this
statement will not have a material effect on the Company's
financial position, results of operations or liquidity.
Certain amounts for prior periods have been reclassified to
conform with 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
federal, foreign and state income taxes. The deferred provision
for income taxes arises from the changes during the year in the
Company's net deferred tax asset or liability.
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,
------------------------------------ ------------------------------------
2002 2001 2002 2001
---------------- --------------- ---------------- ----------------
Basic EPS 29,923 30,176 30,068 30,155
Effect of Dilutive Stock Options 156 138 187 146
---------------- --------------- ---------------- ----------------
Diluted EPS 30,079 30,314 30,255 30,301
================ =============== ================ ================
NOTE 4. LEGAL PROCEEDINGS
Orkin, one of the Company's subsidiaries, 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.
6
Orkin is also 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 in excess of
$15,000 for each named plaintiff and injunctive relief for
alleged breach of contract, fraud and various violations of
Florida state law. The Court ruled in early April 2002,
certifying the class action lawsuit against Orkin. The Company
has appealed this ruling to the Florida Second District Court of
Appeals. Moreover, the Company 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, it is the opinion of Management
that the ultimate resolution of this action will not have a
material adverse effect on the Company's financial position,
results of operations or liquidity.
Additionally, in the normal course of business, the Company is a
defendant in a number of lawsuits, which allege that plaintiffs
have been damaged as a result of the rendering of services by
Company personnel and equipment. The Company is actively
contesting these actions. It is the opinion of Management,
however, that the outcome of these actions will not have a
material adverse effect on the Company's financial position,
results of operations or liquidity.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company reported net income of $6.8 million or $0.23 per share for the third
quarter of 2002, compared to net income of $4.3 million or $0.14 per share for
the comparable quarter in 2001, a 58.2% increase. Net income for the first nine
months of 2002 increased 52.6% to $23.4 million or $0.78 per share compared to
$15.3 million or $0.51 per share for the same period in 2001. Revenues for the
third quarter of 2002 showed an increase of 3.0% as compared to the third
quarter 2001. Revenues for the nine months ended September 30, 2002 showed an
increase of 2.3% as compared to the nine months ended September 30, 2001.
The improvement in earnings for the quarter and first nine months resulted
primarily from an increase in revenue and pest and termite initiatives that have
decreased costs, increased productivity, and improved customer retention.
Results of Operations
Revenues increased to $174.9 million for the third quarter of 2002, a 3.0%
increase or $5.1 million from $169.8 million for the same quarterly period of
2001. For the nine months the Company generated revenues of $513.7 million, a
2.3% increase or $11.6 million from last year's amount of $502.1 million. The
revenue increase was mainly attributable to pest control services, as termite
revenue was flat. The growth in pest control reflects a successful Eclipse
summer sales program that contributed to a positive net gain in customers. Our
commercial revenue grew, reflecting last quarter's price increase and a one-time
sale to a national account customer. Every-other-month service, our primary
residential pest control service offering, continues to grow in importance, now
approaching 50% of our residential pest control customer base. In addition, a
selection of older residential pest control customer accounts received a price
increase in the third quarter.
The business of the Company is affected by the seasonal nature of the Company's
pest and termite control services as evidenced by the following chart.
Total Net Revenues
---------------------------------------------------
2002 2001 2000
-------------- --------------- --------------
First Quarter $ 153,815 $ 150,973 $ 149,550
Second Quarter 185,027 181,349 180,528
Third Quarter 174,873 169,806 172,373
Fourth Quarter N/A 150,158 147,107
Cost of Services Provided in the third quarter of 2002 was approximately $56,000
more than in the prior year quarter while margins improved to represent 54.4% of
revenues compared with 56.0% of revenues for the same quarter of the prior year.
The increase in third quarter expenses was primarily due to increases in
insurance and claims expense, cash discounts, and other expenses. The margin
improvement was mainly attributed to the 3.0% increase in third quarter revenues
and the beneficial impact of higher every-other-month revenues on service
payroll, fleet, and materials and supplies margins. For the first nine months of
2002, Cost of Services Provided decreased $2.4 million and margins improved to
represent 54.1% of revenues compared to 55.8% of revenues for the prior year
period. Improvement for the nine months ended September 30, 2002 can be mainly
attributed to programs that have increased productivity while reducing
headcount, and reductions in service salaries, personnel related expenses,
materials and supplies, and fleet expense which were partially offset by higher
insurance and claims expense.
7
Sales, General and Administrative in the third quarter of 2002 increased
$736,000 but margins improved to represent 36.3% of revenues compared to 37.0%
of revenues for the same quarter of the prior year. The increase in third
quarter expenses was primarily due to higher sales commissions for the
successful Eclipse summer selling program, bad debt expense, sales salaries, and
administrative salaries. The margin improvement was mainly attributed to the
3.0% increase in third quarter revenues compared to a 1.5% decline in revenues
in the third quarter of 2001 as compared to third quarter 2000. For the first
nine months of 2002, Sales, General and Administrative expenses decreased
$453,000, and as a percentage of revenues was 35.4% compared to 36.4% for the
prior year period. Improvement for the first nine months was mainly attributed
to reduced personnel related expenses, fleet expense, telephone expense, travel
expense, and sales promotions.
Depreciation and Amortization expenses for the third quarter of 2002 were
approximately $285,000 higher than the prior year quarter. For the first nine
months of 2002, Depreciation and Amortization expenses were approximately $1.3
million higher than the prior year period. The increase was primarily due to the
depreciation associated with FOCUS, the Company's new proprietary branch
computer system. The rollout of FOCUS to the branches was completed in the
fourth quarter of 2001. As a result of the adoption of SFAS No. 142, the
amortization of goodwill has been discontinued as of January 1, 2002, causing a
decrease in goodwill amortization expense of approximately $2.3 million offset
by an increase in amortization expense of $2.1 million due to a change in the
expected life of customer contracts. For further discussion, see Note 1 to the
accompanying financial statements.
Net income for the quarter ended September 30, 2002 includes the effects of
adopting SFAS No. 142, which did not have a material impact to the Company's
overall results of operations. In addition, if SFAS No. 142 had been adopted in
the quarter ended September 30, 2001, it would not have had a material impact to
net income previously reported for the quarter ended September 30, 2001.
The Company's net tax provision of $4.1 million for the quarter and $14.3
million for the nine month period reflects increased taxable income over the
prior year period. The effective tax rate of 38% was consistent between periods
presented.
Impact of Recent Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board (FASB) approved Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interests method of accounting for business
combinations initiated after June 30, 2001. The amortization of existing
goodwill ceased on January 1, 2002. Any goodwill resulting from acquisitions
completed after June 30, 2001 is not being amortized. SFAS No. 142 also
establishes a new method of testing goodwill for impairment at least on an
annual basis or on an interim basis if an event occurs or circumstances change
that would reduce the fair value of a reporting unit below its carrying value.
The adoption of SFAS No. 142 has resulted in the Company's discontinuation of
amortization of its goodwill. The adoption of SFAS 142 required the Company to
perform an initial impairment assessment on all goodwill during fiscal year
2002. The Company chose September 30th as the measurement date to assess the
carrying value of goodwill on an annual basis. In this assessment, the Company
compared its fair value to its carrying value. The fair value of the Company was
determined by a comparison of its closing stock price as of September 30, 2002
and the reported book value of the Company. At the September 30th measurement
date and upon adoption of SFAS 142, the Company had no impairment of its
goodwill, which totaled $72.4 million at September 30, 2002. The expected impact
in 2002 from the application is a decrease in amortization expense of
approximately $2.3 million. Also, per SFAS No. 142, the expected life of
customer contracts was reviewed and they will be amortized over a life between 8
to 12.5 years dependent upon customer type. The expected impact in 2002 of this
review is an increase in amortization expense of $2.1 million. The Company does
not believe that the net result of the decrease in amortization of goodwill and
increase in amortization of customer contracts will have a material impact on
its annual financial statements. The impact of SFAS No. 142 was not material to
the Company's financial position, results of operations or liquidity for the
three and nine months ended September 30, 2002.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective June 15, 2002 that addresses obligations associated with the
retirement of tangible long-lived assets and associated retirement costs. The
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective for fiscal years beginning after December 15, 2001
that addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. The FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," effective for fiscal years beginning May 15, 2002 or later that
rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt", FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements", and FASB Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers". This Statement Amends FASB Statement No. 4
and FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions. This Statement
also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The Company adopted SFAS No. 144 effective January 1, 2002.
The adoption of SFAS No. 144 did not have a material impact on the Company's
financial position, results of operations or liquidity for the three and nine
months ended
8
September 30, 2002. The Company does not believe the impact of adopting SFAS No.
143 or SFAS No. 145 will have a material impact on its financial position,
results of operations or liquidity.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies EITF 94-3. The Company plans to adopt SFAS No. 146 in
January 2003. Management believes that the adoption of this statement will not
have a material effect on the Company's financial position, results of
operations or liquidity.
Liquidity and Capital Resources
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 $53.3 million for
the first nine months of 2002, compared with cash provided by operating
activities of $26.0 million in the same period of 2001. This increase resulted
primarily from favorable changes in working capital related primarily to higher
net income from operations that has been adjusted for non-cash items as well as
differences in the timing of unearned revenue and other accrued expenses. A
significant customer of the Company, Kmart, recently declared bankruptcy, which
did not have a significant impact on the Company or its liquidity.
The Company invested approximately $5.9 million in capital expenditures during
the first nine months of 2002, and expects to invest between $4.0 and $6.0
million for the remainder of 2002, inclusive of improvements to its management
information systems. Capital expenditures in the first nine months of 2002
consisted primarily of equipment replacements and upgrades and improvements to
the Company's management information systems. A total of $4.5 million was paid
in cash dividends ($0.05 a quarter) during the first nine months of 2002. The
capital expenditures, acquisitions and cash dividends were primarily funded
through existing cash balances and operating activities. In the first nine
months of 2002, the Company made seven acquisitions totaling $1.8 million
compared to three acquisitions and two payments from previous acquisitions
totaling $0.7 million in the first nine months of 2001. The Company maintains a
$40 million credit facility with a commercial bank, of which we have no
borrowings outstanding as of September 30, 2002.
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. Orkin is also a
defendant in Helen Cutler and Mary Lewin v. Orkin Exterminating Company, Inc. et
al pending in the District Court of Houston County, Alabama. For further
discussion, see Note 4 to the accompanying financial statements.
In late April of 2002, the Company initiated a restructuring of the Home Office
at its corporate headquarters in Atlanta. As part of this reorganization,
positions were eliminated and a new organization was implemented to provide more
effective support to the field. In a continuing effort to improve the efficiency
and quality of the support the Home Office provides the field, the Company is
currently reengineering its Home Office processes. In the first nine months of
2002, the Company incurred $670,000 in costs related to the restructuring and
anticipates additional costs of $200,000 in the fourth quarter. It is the
opinion of Management that the reorganization will not have a material effect on
the Company's financial position, results of operations or liquidity in the near
term, though ultimately improving the profitability and cash flow of the
Company.
At the Company's October 22, 2002 Board of Directors meeting, the independent
directors of the Board of Directors and the Audit Committee approved three
related party transactions. The Audit Committee and the independent directors
were furnished with full disclosure of the transactions, including independent
appraisals, and determined that the terms of each transaction were reasonable
and fair to the Company. The first approval was the purchase of the Rollins
Training Center on October 31, 2002 for $3.1 million from RTC, LLC, a company
controlled by R. Randall Rollins, Chairman of the Board of Rollins, Inc. The
second approval was the purchase of hand-held computer software development
known as PowerTrak Version 1.0 from RRR Associates, a company controlled by R.
Randall Rollins. The purchase will be made during the fourth quarter at an
approved purchase price of $250,000. The third approval was a lease agreement
effective July 1, 2002 that expires June 30, 2007 for company real estate in
Okeechobee County, Florida to be leased to Rollins Ranch, a division of LOR,
Inc., a company controlled by R. Randall Rollins and Gary W. Rollins, Chief
Executive Officer, President and Chief Operating Officer of Rollins. Inc. The
annual lease rate on this real estate is $131,939. It is the opinion of
Management that these related party transactions were fair and reasonable and
will not have a material effect on the Company's financial position, results of
operations or liquidity.
The Company has made contributions to the defined benefit retirement plan (the
Plan) during 2002 as a result of the Plan being underfunded. Total 2002
contributions to date amount to approximately $10.0 million. The Company will
further analyze the funded status of the Plan prior to December 31, 2002 and may
choose to make additional contributions to the Plan. It is the opinion of
Management that additional Plan contributions will not have a material effect on
the Company's financial position, results of operations or liquidity.
9
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 contracts representing the estimated costs of reapplications,
repair claims and associated labor, chemicals, and other costs
incurred relative to termite services performed prior to the balance
sheet date. The Company contracts an independent third party actuary
to provide the Company a range of estimated liability based upon
historical claims information. The actuarial study is a major
consideration; however, along with Management's knowledge of changes
in business practices, contract changes, ongoing claims and termite
remediation trends are used in the determination of the accrual.
Management makes judgments utilizing these operational factors but
recognizes that they are inherently subjective due to the litigious
nature of settlements and awards. Other factors that may impact future
cost include chemical life expectancy and governmental 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 predict future catastrophic claims.
These positive changes to our business practices include revisions
made to our contracts, more effective treatment methods that include a
directed-liquid baiting program, more effective termiticides, and
expanded training methods and techniques.
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 to
provide the Company a range of estimated liability based upon
historical claims information. The actuarial study is a major
consideration, along with Management's knowledge of changes in
business practice and existing claims compared to current balances.
The reserve is established based on all these factors. 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. However, it is not possible to predict future
catastrophic claims. Initiatives that have been implemented, include
an annual Motor Vehicle Registration program, utilization of a Global
Positioning System in the majority of our company vehicles, post-offer
physicals for new employees, 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, while certain
types of commercial customers may receive multiple treatments within a
given month. Commercial business also offers greater prospects for
revenues from additional special services and product sales, which are
recognized as income when performed. In general, pest control
customers sign an initial one year contract. A small portion of new
customer prepayments is recorded as revenue, using accounting
estimates, in recognition of the fact that first time services
generally involve greater costs for service payroll and materials.
Termite revenues are recognized when the services are performed,
although a portion of every termite baiting sale is deferred and
recognized as income during the term of the contract using accounting
estimates to match the timing of performing monitoring visits.
Traditional termite contract renewals are recognized as revenues when
collected in order to match the revenue with the corresponding service
provided on or about the renewal date. Baiting renewals are deferred
and recognized over the annual guarantee period in relation to the
cost of the required monitoring visits.
10
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, related party transactions, the outcome of
litigation arising in the ordinary course of business and the outcome of the
Helen Cutler and Mary Lewin v. Orkin Exterminating Company, Inc. et al.
("Cutler") and the Butland et al. v. Orkin Exterminating Company, Inc. et al.
("Butland") litigation on the Company's financial condition, results of
operations and liquidity; the adequacy of the company's resources to fund
operations and obligations; the impact of the corporate restructuring on
liquidity and results of operations; and the Company's projected 2002 capital
expenditures. 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 an adverse
ruling against the Company in the Cutler, 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; the cost reduction benefits of the corporate restructuring may not be
as great as expected or eliminated positions may have to be reinstated in the
future; 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 September 30, 2002, the Company no longer maintains a material investment
portfolio subject to interest rate risk exposure. The Company is subject to
interest rate risk exposure through borrowings on its $40 million credit
facility. Due to the absence of such borrowings as of October 31, 2002 and since
no borrowings are currently anticipated through December 31, 2002, this risk is
not expected to have a material effect upon the Company's results of operations
or financial position going forward. The Company has been affected; however, by
the impact of lower interest rates on interest income from its short-term
investments.
Item 4. Controls and Procedures.
Based on the evaluation of the Company's disclosure controls and procedures as
of a date within 90 days of the filing date of this quarterly report, each of
Gary W. Rollins, the Chief Executive Officer, President and Chief Operating
Officer of the Company, and Harry J. Cynkus, the Chief Financial Officer and
Treasurer of the Company, have concluded that the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities and Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported, within the time period specified by the Securities and
Exchange Commission's rules and forms.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
11
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 to Part I, Item 1 for discussion of certain
litigation.
Item 5. Other Information.
At the Company's October 22, 2002 Board of Directors meeting,
the Audit Committee approved Ernst & Young LLP, the Company's
independent auditors, to review the federal tax return for the
upcoming year.
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.
(iii) Amendment to the By-laws of Rollins, Inc. is
incorporated herein by reference to Exhibit
(3) (iii) as filed with its Form 10-Q for the
quarterly period ended March 31, 2001.
(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.
(10) (i) Lease Agreement dated July 1, 2002 between
Rollins Continental, Inc. and Rollins Ranch,
a division of LOR, Inc.
(99.1) Certification of Periodic Financial Reports.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or were
required to be filed during the third quarter
of 2002.
12
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 14, 2002 By: /s/ Gary W. Rollins
--------------------------------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
Date: November 14, 2002 By: /s/ Harry J. Cynkus
--------------------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
13
Certifications
I, Gary W. Rollins, President and Chief Executive Officer of Rollins, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rollins, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ Gary W. Rollins
--------------------------------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
14
I, Harry J. Cynkus, Chief Financial Officer of Rollins, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rollins, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ Harry J. Cynkus
--------------------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
15