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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003.
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Rollins, Inc. had 45,080,317 shares of its $1 Par Value Common Stock outstanding
as of April 30, 2003.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
--------------
Item 1. Financial Statements.
Consolidated Statements of Financial Position as of March 31, 2003
and December 31, 2002 2
Consolidated Statements of Income for the Three Months Ended March
31, 2003 and 2002 3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 12
Item 4. Controls and Procedures. 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 13
Item 6. Exhibits and Reports on Form 8-K. 13
SIGNATURES 14
CERTIFICATIONS 15 - 16
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share and per share data)
(Unaudited)
March 31, December 31,
2003 2002
-------------------- ------------------
ASSETS
Cash and Short-Term Investments $ 54,351 $ 38,315
Trade Receivables, Net of Allowance for
Doubtful Accounts of $4,645 and $6,040,
respectively 48,204 47,740
Materials and Supplies 11,188 10,662
Deferred Income Taxes 20,088 20,035
Other Current Assets 11,533 9,470
-------------------- ------------------
Current Assets 145,364 126,222
Equipment and Property, Net 36,338 38,880
Goodwill 72,392 72,392
Customer Contracts and Other Intangible Assets 34,289 35,507
Deferred Income Taxes 43,345 44,406
-------------------- ------------------
Total Assets $ 331,728 $ 317,407
==================== ==================
LIABILITIES
Accounts Payable $ 13,960 $ 12,138
Accrued Insurance 11,075 11,740
Accrued Payroll 23,956 28,623
Unearned Revenue 46,038 43,049
Accrual for Termite Contracts 19,000 19,000
Other Current Liabilities 19,858 15,312
-------------------- ------------------
Current Liabilities 133,887 129,862
Accrued Insurance, Less Current Portion 30,896 30,222
Accrual for Termite Contracts, Less Current Portion 28,443 27,446
Accrued Pension 10,769 10,769
Long-Term Accrued Liabilities 28,366 28,418
-------------------- ------------------
Total Liabilities 232,361 226,717
-------------------- ------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 45,133,845 and 44,799,368
shares issued and outstanding, respectively 45,134 44,799
Accumulated Other Comprehensive Income (Loss) (17,003) (16,947)
Retained Earnings 71,236 62,838
-------------------- ------------------
Total Stockholders' Equity 99,367 90,690
-------------------- ------------------
Total Liabilities and Stockholders' Equity $ 331,728 $ 317,407
==================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except share and per share data)
(Unaudited)
Three Months Ended
March 31,
----------------------------------
2003 2002
---------------- ----------------
REVENUES
Customer Services $ 155,122 $ 153,302
---------------- ----------------
COSTS AND EXPENSES
Cost of Services Provided 84,078 84,022
Depreciation and Amortization 5,156 5,427
Sales, General & Administrative 54,222 55,837
Interest (Income) Expense (66) 49
---------------- ----------------
143,390 145,335
---------------- ----------------
INCOME BEFORE INCOME TAXES 11,732 7,967
---------------- ----------------
PROVISION FOR INCOME TAXES
Current 3,463 1,804
Deferred 995 1,223
---------------- ----------------
4,458 3,027
---------------- ----------------
NET INCOME $ 7,274 $ 4,940
================ ================
EARNINGS PER SHARE - BASIC AND DILUTED
Net Income $ 0.16 $ 0.11
================ ================
Average Shares Outstanding---Basic 44,912,015 45,195,273
Average Shares Outstanding---Diluted 46,110,466 45,488,982
DIVIDENDS PAID PER SHARE $ 0.0500 $ 0.0333
The accompanying notes are an integral part of these
consolidated financial statements.
3
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
2003 2002
--------------- --------------
OPERATING ACTIVITIES
Net Income $ 7,274 $ 4,940
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 5,156 5,427
Provision for Deferred Income Taxes 1,009 1,256
Other, Net 35 167
(Increase) Decrease in Assets:
Trade Receivables (436) 693
Materials and Supplies (526) 284
Other Current Assets (2,063) 127
Other Non-Current Assets 44 83
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 3,718 210
Unearned Revenue 2,989 2,386
Accrued Insurance 9 191
Accrual for Termite Contracts 997 537
Long-Term Accrued Liabilities (52) 1,978
------------------ -----------------
Net Cash Provided by Operating Activities 18,154 18,279
------------------ -----------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (961) (2,725)
Net Cash Used for Acquisition of Companies (385) (545)
------------------ -----------------
Net Cash Used in Investing Activities (1,346) (3,270)
------------------ -----------------
FINANCING ACTIVITIES
Dividends Paid (2,247) (1,507)
Payments on Capital Leases --- (256)
Other 1,475 4
------------------ -----------------
Net Cash Used in Financing Activities (772) (1,759)
------------------ -----------------
Net Increase in Cash and Short-Term Investments 16,036 13,250
Cash and Short-Term Investments At Beginning of Period 38,315 8,650
------------------ -----------------
Cash and Short-Term Investments At End of Period $ 54,351 $ 21,900
================== =================
The accompanying notes are an integral part of these
consolidated financial statements.
4
ROLLINS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION
The consolidated financial statements included herein have been
prepared by Rollins, Inc. (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
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 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,
2002.
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 consolidated financial statements
included herein contain all normal recurring adjustments necessary to
present fairly the financial position of the Company as of March 31,
2003 and December 31, 2002, and the results of operations for the
three months ended March 31, 2003 and 2002 and cash flows for the
three months ended March 31, 2003 and 2002. Operating results for the
three months ended March 31, 2003 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2003.
Comprehensive income includes amounts subject to foreign currency
translation (See Note 5). For the three months ended March 31, 2003
and 2002, comprehensive income is not materially different from net
income.
The Board of Directors, at its quarterly meeting on January 28, 2003,
authorized a three-for-two stock split by the issuance on March 10,
2003 of one additional common share for each two common shares held of
record on February 10, 2003. Accordingly, the par value for additional
shares issued was adjusted to common stock, and fractional shares
resulting from the stock split were settled in cash. All share and per
share data appearing throughout this Form 10-Q have been retroactively
adjusted for this stock split.
In November 2002, the Emerging Issues Task Force issued EITF 00-21,
Revenue Arrangements with Multiple Deliverables, which is effective
for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. This EITF addresses how to account for
arrangements that may involve the delivery or performance of multiple
products, services, and/or rights to use assets. The Company's termite
baiting business involves multiple deliverables, consisting of an
initial installation and subsequent monitoring inspections. Since the
inception of its termite baiting program in 1999, the Company has
consistently deferred a portion of the selling price to be recognized
over the first year of the contracts based on a fair value assessment
of the service provided. Management is currently analyzing the impact
of adopting this EITF.
Certain amounts for prior periods have been reclassified to conform
with current period consolidated financial statement presentation.
Such reclassifications had no effect on previously reported net
income.
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
------------------------------------------
2003 2002 2001
------------ ------------ ------------
First Quarter $ 155,122 $ 153,302 $ 150,280
Second Quarter N/A 184,189 180,731
Third Quarter N/A 174,063 169,223
Fourth Quarter N/A 153,871 149,691
NOTE 2. EARNINGS PER SHARE
5
In accordance with SFAS No. 128, Earnings Per Share ("EPS"), the
Company computes basic Earnings Per Share ("EPS") on the basis of
weighted-average shares outstanding. Diluted EPS is computed on the
basis of weighted-average shares outstanding plus common stock options
outstanding during the year, which, if exercised, would have a
dilutive effect on EPS. Basic and diluted EPS are the same for all
periods reported. Basic and diluted EPS have been restated for the
three-for-two stock split for all periods presented (See Note 1). A
reconciliation of the number of weighted-average shares used in
computing basic and diluted EPS is as follows:
Three Months Ended
March 31,
-----------------------
(In thousands except per share data and per share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------
Basic and diluted earnings available to stockholders (numerator): $7,274 $4,940
Shares (denominator):
Weighted-average shares outstanding 44,912 45,195
Effect of Dilutive securities:
Employee Stock Options 1,198 294
---------- ------------
Adjusted Weighted-Average Shares and Assumed
Exercises 46,110 45,489
Per share amounts:
Basic earnings per common share $0.16 $0.11
Diluted earnings per common share $0.16 $0.11
- --------------------------------------------------------------------------------------------------
NOTE 3. 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. Orkin
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.
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. Orkin has appealed this ruling to the Florida Second District
Court of Appeals. Moreover, Orkin believes this case to be without
merit and intends to defend itself vigorously through trial, if
necessary. At this time, the final outcome of the litigation cannot be
determined. However, 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.
Orkin is involved in certain environmental matters primarily arising
in the normal course of business. In the opinion of Management, the
Company's liability under any of these matters would not materially
affect its financial condition or results of operations.
Additionally, in the normal course of business, Orkin is a defendant
in a number of lawsuits, which allege that plaintiffs have been
damaged as a result of the rendering of services by Orkin personnel
and equipment. Orkin 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.
NOTE 4. STOCKHOLDERS' EQUITY
6
For the first quarter ended March 31, 2003, approximately 132,500
shares of common stock were issued upon exercise of stock options by
employees. The Company accounts for its employee stock options under
the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
Three Months Ended
March 31,
--------------------------
(In thousands, except per share data) 2003 2002
--------------------------
Net income, as reported $7,274 $4,940
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (483) (463)
--------------------------
Pro forma net income $6,791 $4,477
--------------------------
Earnings per share:
Basic-as reported $0.16 $0.11
Basic-pro forma $0.15 $0.10
Diluted-as reported $0.16 $0.11
Diluted-pro forma $0.15 $0.10
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) consists of the following (in
thousands):
Minimum Foreign
Pension Currency
Liability Translation Total
--------------- --------------- --------------
Balance at December 31, 2001 $ (4,047) $ (775) $ (4,822)
Change during first three months of 2002:
Before-tax amount --- (6) (6)
Tax benefit --- 2 2
--------------- --------------- --------------
--- (4) (4)
--------------- --------------- --------------
Balance at March 31, 2002 $ (4,047) $ (779) $ (4,826)
--------------- --------------- --------------
Balance at December 31, 2002 $ (16,182) $ (765) $ (16,947)
Change during 2003:
Before-tax amount --- (86) (86)
Tax benefit --- 30 30
--------------- --------------- --------------
--- (56) (56)
--------------- --------------- --------------
Balance at March 31, 2003 $ (16,182) $ (821) $ (17,003)
--------------- --------------- --------------
NOTE 6. RELATED PARTY TRANSACTIONS
The following related party transactions have been described in
greater detail in the Company's Form 10-K for the year ended December
31, 2002.
At the Company's January 28, 2003 Board of Directors' meeting, the
independent directors of the Board of Directors and the Audit
Committee approved four 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 and will not have a material effect on the Company's
financial position, results of operations or liquidity. The first
approval was the ratification of the current arrangement between
Rollins, Inc. and LOR, Inc., a company controlled by R. Randall
Rollins, Chairman of the Board of Rollins, Inc., and Gary W. Rollins,
Chief Executive Officer, President and Chief Operating Officer of
Rollins, Inc., related to sharing the aviation hangar located at the
Dekalb-Peachtree Airport, as well as the usage of the Jetstar II,
owned by Rollins, Inc., and Gulfstream III, owned by LOR, Inc. The
second approval was the ratification of the arrangement concerning the
rental
7
of office space to LOR, Inc. located at 2170 Piedmont Road N.E.,
Atlanta, Georgia 30324. The third approval was the ratification of the
arrangement concerning the rental of office space to LOR, Inc. located
at 710 Lakeshore Circle, Atlanta, Georgia 30324. The fourth approval
was the ratification of the current arrangement related to the payment
of fees for the services of a programmer/analyst that was employed by
LOR, Inc. but has become employed by Rollins, Inc. in the first
quarter of 2003. It is the opinion of Management that these related
party transactions were reasonable and fair to the Company and will
not have a material effect on the Company's financial position,
results of operations or liquidity.
Employees of Rollins, Inc. confer with employees of LOR, Inc. and RRR
Associates, a company controlled by R. Randall Rollins, and vice
versa. No fees are charged for these services because, in the opinion
of Management, the activity is mutually beneficial and offsetting.
NOTE 7. ACCRUAL FOR TERMITE CONTRACTS
During the first quarter of 2003, the Company adopted the accounting
provisions of FASB Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Direct Guarantees of Indebtedness of Others, which requires that the
fair value of guarantees issued after December 31, 2002 be recorded as
a liability, with the offsetting entry being recorded based on the
circumstances in which the guarantee was issued. FIN 45 further states
that the liability is typically reduced over the term of the
guarantee. The adoption had no impact on the Company's financial
position, results of operations or liquidity.
The Company maintains an accrual for termite contracts representing
the estimated costs of reapplications, repair claims and associated
labor, chemicals, and other costs relative to termite control services
performed prior to the balance sheet date as discussed in further
detail in Item 2. under Critical Accounting Policies. A reconciliation
of the beginning and ending balances of the accrual for termite
contracts is as follows:
(In thousands)
--------------------------------------------------------------
Beginning Balance as of December 31, 2002 $46,446
Current Year Provision 5,525
Settlements, Claims and Expenditures Made
During the Period (4,528)
--------
Ending Balance as of March 31, 2003 $47,443
-------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company's continued emphasis on customer retention, along with building
recurring revenues, resulted in revenue growth of 1.2% in the first quarter of
2003 despite a sluggish economy and harsh winter in parts of the U.S. The
financial results for the first quarter 2003 were positively impacted by the
continued benefit of our recent service initiatives, which included
every-other-month residential pest control service, AcuridSM premium commercial
pest control services, and termite directed liquid and baiting treatment.
For the first quarter of 2003, the Company had net income of $7.3 million
compared to net income of $4.9 million in the first quarter of 2002, which
represents a 47.2% increase. The overall improvement for the year in profit
margins is largely a result of improved Cost of Services Provided and Sales,
General & Administrative as a percentage of revenues.
For the first quarter of 2003, the Company generated a net increase in cash of
$16.0 million compared to $13.3 million in the first quarter of 2002. The
Company had Cash and Short-Term Investments of $54.4 million at March 31, 2003,
compared to $38.3 million at December 31, 2002 and $21.9 million at March 31,
2002.
Results of Operations
Revenues for the quarter ended March 31, 2003 increased to $155.1 million, an
increase of $1.8 million or 1.2% from last year's first quarter revenues of
$153.3 million. The revenue increase was mainly attributable to a modest
increase in revenues from residential pest control service. The growth in pest
control revenues reflects a net gain in the pest control customer base, a
successful 2002 price increase campaign, as well as higher average selling
prices for new customers. Every-other-month service, our primary residential
pest control service offering, continues to grow in importance, comprising over
50% of our residential pest control customer base at March 31, 2003. Our
commercial revenues were flat, mainly as a result of a slight decrease in
customer base and sales, offset by a successful price increase campaign for
existing customers in 2002. Termite revenues decreased in the first quarter of
2003 reflecting a harsher winter and spring than previous years in parts of the
U.S. The Company experienced an improvement in recurring termite revenues mainly
from enhanced renewal retention and higher bait monitoring services. Despite the
decrease in termite sales dollars, the Company managed to achieve a slight
improvement
8
in average selling prices. The Company's foreign operations made up less than
6.0% of the Company's total revenues in the first quarter 2003 and 2002.
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
------------------------------------------
2003 2002 2001
------------ ------------ ------------
First Quarter $ 155,122 $ 153,302 $ 150,280
Second Quarter N/A 184,189 180,731
Third Quarter N/A 174,063 169,223
Fourth Quarter N/A 153,871 149,691
Cost of Services Provided for the quarter ended March 31, 2003 increased $56,000
or 0.1%, while margins improved by 0.6 percentage points, representing 54.2% of
revenues for the first quarter 2003 compared to 54.8% of revenues in the prior
year first quarter. The slight increase for the quarter ended March 31, 2003 can
be mainly attributed to higher fleet charges partially offset by reductions in
materials and supplies and administrative salaries. Pest control and termite
technician productivity and employee retention continued to improve. It is
management's opinion that better employee retention helps to drive better
customer retention.
Sales, General and Administrative for the quarter ended March 31, 2003 decreased
$1.6 million or 2.9% and, as a percentage of revenues, improved by 1.4 margin
points for the first quarter, averaging 35.0% of total revenues compared to
36.4% for the prior year quarter. Improvement for the year was mainly attributed
to reduced sales salaries due to reduction of the sales costs.
Depreciation and Amortization expenses for the quarter ended March 31, 2003 were
approximately $271,000 or 5.0% lower than the prior year quarter. The decrease
was mainly due to lower capital spending and certain technology assets becoming
fully depreciated in the last twelve months.
The Company's tax provision of $4.5 million for the first quarter ended March
31, 2003 reflects increased pre-tax income over the prior year period. The
effective tax rate of 38% was consistent between periods presented.
Related Party Transactions
The following related party transactions have been described in greater detail
in the Company's Form 10-K for the year ended December 31, 2002.
At the Company's January 28, 2003 Board of Directors' meeting, the independent
directors of the Board of Directors and the Audit Committee approved four
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 and will not have a material effect on the Company's
financial position, results of operations or liquidity. The first approval was
the ratification of the current arrangement between Rollins, Inc. and LOR, Inc.,
a company controlled by R. Randall Rollins, Chairman of the Board of Rollins,
Inc., and Gary W. Rollins, Chief Executive Officer, President and Chief
Operating Officer of Rollins, Inc., related to sharing the aviation hangar
located at the Dekalb-Peachtree Airport, as well as the usage of the Jetstar II,
owned by Rollins, Inc., and Gulfstream III, owned by LOR, Inc. The second
approval was the ratification of the arrangement concerning the rental of office
space to LOR, Inc. located at 2170 Piedmont Road N.E., Atlanta, Georgia 30324.
The third approval was the ratification of the arrangement concerning the rental
of office space to LOR, Inc. located at 710 Lakeshore Circle, Atlanta, Georgia
30324. The fourth approval was the ratification of the current arrangement
related to the payment of fees for the services of a programmer/analyst that was
employed by LOR, Inc. but has become employed by Rollins, Inc. in the first
quarter of 2003. It is the opinion of Management that these related party
transactions were reasonable and fair to the Company and will not have a
material effect on the Company's financial position, results of operations or
liquidity.
Employees of Rollins, Inc. confer with employees of LOR, Inc. and RRR
Associates, a company controlled by R. Randall Rollins, and vice versa. No fees
are charged for these services because, in the opinion of Management, the
activity is mutually beneficial and offsetting.
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
9
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 relative to
termite control services performed prior to the balance sheet date. The
Company contracts an independent third party actuary on an annual basis to
provide the Company a range of estimated liability based upon historical
claims information. The actuarial study is a major consideration in
determining the accrual balance, along with Management's knowledge of
changes in business practices, contract changes, ongoing claims and termite
remediation trends. The reserve is established based on all these factors.
Management makes judgments utilizing these operational factors but
recognizes that they are inherently subjective due to the difficulty in
predicting 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 accurately predict future significant claims. Positive changes
to our business practices include revisions made to our contracts, more
effective treatment methods that include a directed-liquid 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 on an annual basis 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 accurately predict future
significant claims. Initiatives that have been implemented include
pre-employment screening and an annual Motor Vehicle report required on all
its drivers, utilization of a Global Positioning System that has been fully
deployed to our Company vehicles, post-offer physicals for new employees,
and pre-hire, random and post-accident drug testing. The Company has
improved the time required to report a claim by utilizing a "Red Alert"
program that provides serious accident assessment twenty four hours a day
and seven days a week and has instituted a modified duty program that
enables employees to go back to work on a limited-duty basis.
Revenue Recognition - The Company's revenue recognition policies are
designed to recognize revenues at the time services are performed. For
certain revenue types, because of the timing of billing and the receipt of
cash versus the timing of performing services, certain accounting estimates
are utilized. Residential and commercial pest control services are
primarily recurring in nature, while certain types of commercial customers
may receive multiple treatments within a given month. In general, pest
control customers sign an initial one year contract, and revenues are
recognized at the time services are performed. For pest control customers,
the Company offers a discount for those customers who prepay for a full
year of services. The Company defers recognition of these advance payments
and recognizes the revenue as the services are rendered. The Company
classifies the discounts related to the advance payments as a reduction in
revenues. Termite baiting revenues are recognized when the initial services
are performed at the inception of a new contract, although a portion of
every termite baiting sale is deferred. The amount deferred is an estimate
of the value of monitoring services to be rendered after the initial
service. The amount deferred is then recognized as income on a
straight-line basis over the remaining contract term, which results in
recognition of revenue in a pattern that approximates the timing of
performing monitoring visits. Baiting renewals are deferred and recognized
over the annual contract period on a straight-line basis that approximates
the timing of performing the required monitoring visits. Traditional
termite treatments are recognized as revenue at the time services are
performed. Traditional termite contract renewals are recognized as revenues
at the renewal date in order to match the revenue with the approximate
timing of the corresponding service provided.
Liquidity and Capital Resources
The Company believes its current cash balances, future cash flows from operating
activities and available borrowings under its $40.0 million credit facility 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 $18.2 million for the quarter ended March 31, 2003, compared
with cash provided by operating activities of $18.3 million for the same period
in 2002. The 2003 results were achieved primarily from favorable changes in
working capital related primarily to higher income from operations, the timing
of advanced payments from customers which produced an increase in unearned
revenue, and the Company's ability to reduce its investment in accounts
receivable and inventories despite higher revenues.
10
The Company invested approximately $961,000 in capital expenditures during the
quarter ended March 31, 2003, and expects to invest between $7.0 million and
$9.0 million for the remainder of 2003. Capital expenditures for the quarter
consisted primarily of the purchase of equipment replacements and upgrades and
improvements to the Company's management information systems. During the
quarter, the Company made acquisitions totaling $385,000 compared to $545,000
during 2002. The Company currently does not have plans to aggressively seek new
acquisitions but will give consideration to any unusually attractive acquisition
opportunities presented. A total of $2.2 million was paid in cash dividends
($0.05 per share) during the quarter. At the January 28, 2003 Board of
Directors' Meeting, the Board approved a 50% increase in the dividend, from
$0.033 to $0.05 per share on the split number of shares, as well as a
three-for-two stock split to holders of record on February 10, 2003 payable
March 10, 2003. The capital expenditures, acquisitions and cash dividends were
funded entirely through existing cash balances and operating activities. The
Company maintains a $40.0 million credit facility with a commercial bank, of
which no borrowings were outstanding as of March 31, 2003 or May 2, 2003.
However, the Company does maintain approximately $25.0 million in Letters of
Credit.
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 3 to the accompanying financial statements.
In late April of 2002, the Company initiated a restructuring and re-engineering
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 processes and support to the field. In 2002, the
Company incurred $824,000 in costs related to the restructuring and does not
anticipate additional costs in 2003. 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 flows of the Company.
The Company made contributions of $20.0 million to the defined benefit
retirement plan (the "Plan") during 2002 as a result of the Plan being
underfunded. The Company believes that it will make contributions in the amount
of approximately $5.0 to $10.0 million in 2003. 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.
Impact of Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force issued EITF 00-21, Revenue
Arrangements with Multiple Deliverables, which is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. This
EITF addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services, and/or rights to use assets. The
Company's termite baiting business involves multiple deliverables, consisting of
an initial installation and subsequent monitoring inspections. Since the
inception of its termite baiting program in 1999, the Company has consistently
deferred a portion of the selling price to be recognized over the first year of
the contracts based on a fair value assessment of the service provided.
Management is currently analyzing the impact of adopting this EITF.
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 2003 capital
expenditures. The actual results of the Company could differ materially from
those indicated by the forward-looking statements because of various risks,
timing and uncertainties including, without limitation, the possibility of an
adverse ruling against the Company in the 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; that 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
and additional risks discussed in the Company's Form 10-K for 2002. 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.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of March 31, 2003, the Company maintained an investment portfolio subject to
short-term interest rate risk exposure. The Company has been affected by the
impact of lower interest rates on interest income from its short-term
investments. The Company is also subject to interest rate risk exposure through
borrowings on its $40.0 million credit facility. Due to the absence of such
borrowings as of March 31, 2003 and as currently anticipated for 2003, this risk
is not expected to have a material effect upon the Company's results of
operations or financial position going forward. The Company is also exposed to
market risks arising from changes in foreign exchange rates. The Company
believes that this foreign exchange rate risk will not have a material effect
upon the Company's results of operations or financial position going forward.
Item 4. Controls and Procedures.
Under the supervision and with the participation of our Management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operations of our disclosure
controls and procedures, as defined in rules 13a-14(c) and 15d -14(c) under the
Securities Exchange Act of 1934, within 90 days of the filing date of this
report (the "Evaluation Date"). Based on this evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective such that the
material information required to be included in our Securities and Exchange
Commission ("SEC") reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to Rollins,
Inc., including our consolidated subsidiaries, and was made known to them by
others within those entities, particularly during the period when this report
was being prepared.
In addition, there were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
Evaluation Date. We have not identified any significant deficiency or material
weaknesses in our internal controls, and therefore there were no corrective
actions taken.
12
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 (ii) 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.
(iv) Amendment to the By-laws of Rollins, Inc. is incorporated
herein by reference to Exhibit (3) (iv) as filed with its Form
10-K for the year ended December 31, 2002.
(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.
(99.1) Certification of Periodic Financial Reports.
(b) Reports on Form 8-K.
On January 31, 2003, the Company furnished a report on Form 8-K,
which reported under Item 9 that on January 28, 2003, the Company
reported earnings for the fourth quarter and year ended December
31, 2002.
On January 31, 2003, the Company furnished a report on Form 8-K,
which reported under Item 9 that on January 28, 2003, the Company
announced that the Board of Directors has approved a
three-for-two stock split of the Company's common shares and a
50% increase in the cash dividend.
On February 28, 2003, the Company furnished a report on Form 8-K,
which reported under Item 9 that Atlanta-based Orkin Pest Control
was recognized by Training magazine as part of its prestigious
Top 100 list.
13
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: May 2, 2003 By: /s/ Gary W. Rollins
------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
Date: May 2, 2003 By: /s/ Harry J. Cynkus
------------------------
Harry J. Cynkus
Chief Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)
14
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: May 2, 2003 By: /s/ Gary W. Rollins
----------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
15
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: May 2, 2003 By: /s/ Harry J. Cynkus
-----------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)