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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 No. 1-4422
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ROLLINS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0068479
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2170 Piedmont Road, N.E., Atlanta, Georgia 30324
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 888-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class Exchange on which registered
- --------------------------------------- -----------------------------------
Common Stock, $1 Par Value The New York Stock Exchange
The Pacific Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes /X/ No / /
The aggregate market value of Rollins, Inc. Common Stock held by non-affiliates
on February 24, 2003, was $392,315,753 based on the closing price on the New
York Stock Exchange on such date of $20.67 per share.
Rollins, Inc. had 44,859,646 shares of Common Stock outstanding as of February
24, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Rollins, Inc.'s Annual Report to Stockholders for the calendar year
ended December 31, 2002 are incorporated by reference into Part II, Item 6.
Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders of
Rollins, Inc. are incorporated by reference into Part III, Items 10-14.
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PART I
Item 1. Business.
General
Rollins, Inc. ("the Company") is a national service company with
headquarters located in Atlanta, Georgia, providing pest and termite control
services to both residential and commercial customers in North America. Services
are performed through a contract that specifies the pricing arrangement with the
customer.
Orkin Exterminating Company, Inc. ("Orkin"), a wholly owned subsidiary of
the Company founded in 1901, is one of the world's largest pest and termite
control companies. It provides customized services from over 400 locations to
approximately 1.6 million customers. Orkin serves customers in the United
States, Canada and Mexico, providing essential pest control services and
protection against termite damage, rodents and insects to homes and businesses,
including hotels, food service establishments, dairy farms and transportation
companies. Orkin operates under the Orkin(R) and PCO Services, Inc.(R)
trademarks and the AcuridSM service mark. The Orkin(R) brand name makes Orkin
the most recognized pest and termite company in the country. The PCO Services
brand name provides similar brand recognition in Canada. The Company is the
largest pest control provider in Canada.
The Company has only one reportable segment, its pest and termite control
business. Revenue, operating profit and identifiable assets for this segment,
which includes the United States, Canada and Mexico, are included in Item 8 of
this document under financial statements and supplementary data on pages 17 and
18. 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.
A bimonthly pest control service initiative was implemented in 1999 to
better service our residential customers, and has grown to represent just under
50% of our residential customer base at the end of 2002. This program provides
greater convenience to our customers and enables the Company to achieve
technician productivity improvements and other service efficiencies, including
lower fleet costs. In addition, AcuridSM commercial pest elimination service was
introduced company-wide in 2001. This premium service includes insect control,
fly control, rodent control and odor control for commercial customers and is now
available through any Orkin branch.
The dollar amount of service contracts and backlog orders as of the end of
the Company's 2002 and 2001 calendar years was approximately $28.4 million and
$16.2 million, respectively. Backlog services and orders are usually provided
within the month following the month of receipt, except in the area of prepaid
pest control and bait monitoring services, which are usually provided within
twelve months of receipt. The Company does not have a material portion of its
business that may be subject to renegotiation of profits or termination of
contracts at the election of a governmental entity.
The Rollins Customer Care Center achieved its ISO 9002 quality
certification in 2001. It is joined by forty-seven dedicated commercial branches
that have also completed the ISO 9002 quality certification process.
The Company continues to expand its growth through the Orkin franchise
program. This program is primarily used in smaller markets where it is currently
not economically feasible to locate a conventional Orkin branch. There is a
built-in exit strategy at the end of the franchise term that motivates the
franchisee to sell the business to Orkin. There were 36 Company franchises at
the end of 2002 compared to 30 at the end of 2001.
Seasonality
The business of the Company is affected by the seasonal nature of the
Company's pest and termite control services. The increase in pest pressure and
activity as well as the metamorphosis of termites in the spring and summer (the
occurrence of which is determined by the timing of the change in seasons) has
historically resulted in an increase in the revenue and income of the Company's
pest and termite control operations during such periods as evidenced by the
following chart.
Total Net Revenues
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2002 2001 2000
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First Quarter $153,302 $150,280 $148,926
Second Quarter 184,189 180,731 179,736
Third Quarter 174,063 169,223 171,690
Fourth Quarter 153,871 149,691 146,526
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6
Inventories
The Company has relationships with multiple vendors for pest and termite
control treatment products and maintains a sufficient level of chemicals,
materials and other supplies to fulfill its immediate servicing needs and to
alleviate any potential short-term shortage in availability from its national
network of suppliers.
Competition
The Company believes that Orkin competes favorably with competitors as one
of the world's largest pest and termite control companies. The Company competes
with a number of pest and termite control companies including Terminix and
Ecolab.
The principal methods of competition in the Company's pest and termite
control business are quality of service and guarantees, including the money-back
guarantee on pest and termite control, and the termite retreatment and damage
repair guarantee to qualified homeowners.
Research and Development
Expenditures by the Company on research activities relating to the
development of new products or services are not significant. Some of the new and
improved service methods and products are researched, developed and produced by
unaffiliated universities and companies. Also, a portion of these methods and
products are produced to the specifications provided by the Company. Some of the
more recent studies that have been conducted on behalf of the Company include
one on fly pathogens by the University of Florida and an integrated pest
management study currently being performed by the Virginia Polytechnic
Institute. Additional research at the University of Florida involves the impact
of soil type and soil compaction on termites tunneling behavior. Also, Texas A&M
has performed studies on both termites and fire ants, using biological control
agents for population reduction and predicting the time termites swarm each
year.
Governmental Regulation
State and local governmental licenses and permits are required in order for
the Company to conduct its pest and termite control services in certain
localities. In view of the widespread operations of the Company's service
operations, the failure of any local governments to license a facility would not
have a material adverse effect on the results of operations or financial
position of the Company.
Other than the impact on the Company of governmental regulation of the use
of pesticides, the Company is not materially affected by compliance with
federal, state and local provisions, that have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment.
Employees
The number of persons employed by the Company as of February 24, 2003 was
approximately 7,600.
Recent Developments
The Board of Directors, at their 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-K have been retroactively adjusted for this stock split.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to reports filed pursuant to Section 13(a)
and 15(d) of the Securities and Exchange Act of 1934, as amended, are available
free of charge on our web site at www.rollinscorp.com as soon as reasonably
practicable after those reports are electronically filed with or furnished to
the Securities and Exchange Commission.
7
Item 2. Properties.
The Company's administrative headquarters and central warehouse, both of
which are owned by the Company, are located at 2170 Piedmont Road, N.E.,
Atlanta, Georgia 30324. The Company owns or leases several hundred branch
offices and operating facilities used in its business as well as the Rollins
Training Center located in Atlanta, Georgia. None of the branch offices,
individually considered, represents a materially important physical property of
the Company. The facilities are suitable and adequate to meet the current and
reasonably anticipated future needs of the Company.
Item 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. 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.
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.
The Company 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, 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.
8
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2002.
Item 4.A. Executive Officers of the Registrant.
Each of the executive officers of the Company was elected by the Board of
Directors to serve until the Board of Directors' meeting immediately following
the next Annual Meeting of Stockholders or until his earlier removal by the
Board of Directors or his resignation. The following table lists the executive
officers of the Company and their ages, offices with the Company, and the dates
from which they have continually served in their present offices with the
Company.
Date First Elected
Name Age Office with Registrant to Present Office
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R. Randall Rollins(1) 71 Chairman of the Board 10/22/91
Gary W. Rollins(2) 58 Chief Executive Officer, 7/24/01
President and Chief
Operating Officer
Michael W. Knottek(3) 58 Senior Vice President 4/23/02
and Secretary
Harry J. Cynkus(4) 53 Chief Financial Officer 5/28/98
and Treasurer
Glen W. Rollins(5) 36 Vice President 4/23/02
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(1) R. Randall Rollins and Gary W. Rollins are brothers.
(2) Gary W. Rollins was elected to the office of President and Chief
Operating Officer in January 1984. He was elected to the additional
office of Chief Executive Officer in July 2001.
(3) Michael W. Knottek joined the Company in June 1997 as Vice President
and, in addition, was elected Secretary in May 1998. He became Senior
Vice President in April of 2002. From 1992 to 1997, Mr. Knottek held a
variety of executive management positions with National Linen Service,
including Senior Vice President of Finance and Administration and Chief
Financial Officer. Prior to 1992, he held a variety of senior positions
with Initial USA, finally serving as President from 1991 to 1992.
(4) Harry J. Cynkus joined the Company in April 1998 and, in May 1998, was
elected Chief Financial Officer and Treasurer. From 1996 to 1998, Mr.
Cynkus served as Chief Financial Officer of Mayer Electric Company, a
wholesaler of electrical supplies. From 1994 to 1996, he served as Vice
President - Information Systems for Brach & Brock Confections, the
acquirer of Brock Candy Company, where Mr. Cynkus served as Vice
President - Finance and Chief Financial Officer from 1992 to 1994. From
1989 to 1992, he served as Vice President - Finance of Initial USA, a
division of an international support services company. Mr. Cynkus is a
Certified Public Accountant.
(5) Glen W. Rollins is the son of Gary W. Rollins. He joined the Company in
1989 and has held a variety of positions within the organization
including Executive Vice President of Orkin Exterminating Company,
Inc., to which he was elected in June 2001. In April 2002, he was named
Vice President of Rollins, Inc.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock of the Company is listed on the New York and Pacific Stock
Exchanges and is traded on the Philadelphia, Chicago and Boston Exchanges under
the symbol ROL. The high and low prices of the Company's common stock and
dividends paid for each quarter in the years ended December 31, 2002 and 2001
were as follows:
STOCK PRICES AND DIVIDENDS
Rounded to the nearest $.01
Stock Price Dividends Stock Price Dividends
------------------------ Paid ------------------------- Paid
2002 High Low Per Share 2001 High Low Per Share
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First Quarter $14.50 $12.53 $.03 First Quarter $14.20 $11.23 $.03
Second Quarter 14.47 12.13 .03 Second Quarter 13.79 11.55 .03
Third Quarter 14.32 12.20 .03 Third Quarter 13.99 9.98 .03
Fourth Quarter 19.00 12.41 .03 Fourth Quarter 14.23 9.99 .03
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The number of stockholders of record as of February 24, 2003 was 1,538.
Item 6. Selected Financial Data.
The information contained under the heading, "5-Year Financial Summary", on
the inside front cover of the 2002 Annual Report to Stockholders, is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
% Increase From
Prior Year
--------------------------
(In thousands) 2002 2001 2000 2002 2001
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Revenues $665,425 $649,925 $646,878 2.4% 0.5%
Net Income 27,110 16,942 9,550 60.0 77.4
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General Operating Comments
The Company's continued emphasis on customer retention along with building
recurring revenues resulted in revenue growth of 2.4% in 2002 despite a sluggish
economy. The financial results for the fourth quarter 2002 and the year 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 fourth quarter of 2002, the Company had net income of $3.7 million
compared to net income of $1.6 million in the fourth quarter of 2001. For the
year ended December 31, 2002, the Company had net income of $27.1 million
compared to the prior year amount of $16.9 million, which represents a 60.0%
increase. The overall improvement for the year in profit margins is largely a
result of improved Cost of Services Provided and Sales, General & Administrative
a percentage of revenues, partially offset by higher depreciation.
Results of Operations - 2002 Versus 2001
Revenues for the year ended December 31, 2002 increased to $665.4 million,
an increase of $15.5 million or 2.4% from last year's revenues of $649.9
million. The Company's foreign operations made up less than 6.0% of the
Company's total revenues in 2002 and 2001. The revenue increase was mainly
attributable to a modest increase in revenues from pest control services, as
termite revenues were flat with the prior year. The growth in pest control
revenues reflects the beneficial impact of better customer retention and a
successful residential summer sales program, factors that combined to produce a
net gain in the customer base as well as higher average selling prices. Within
the
10
U.S., the Company had an improvement in customer retention, a modest increase in
new sales units and an overall improvement in average selling prices, resulting
in a higher ending customer base at the end of the year. Every-other-month
service, our primary residential pest control service offering, continues to
grow in importance, comprising almost 50% of our residential pest control
customer base at year end. Our commercial revenues grew, mainly as a result of
better pricing on new sales, a successful price increase campaign for existing
customers in 2002, and the introduction of new products and services during the
year. Although termite revenues were flat in 2002 as a result of a decrease in
sales to new customers, the Company experienced an improvement in recurring
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 in average selling prices.
Orkin's directed liquid termite baiting program generates recurring
monitoring revenues that are deferred to the balance sheet each month in the
form of unearned revenue. This is then being recognized in future periods when
the service is rendered.
Cost of Services Provided for the year ended December 31, 2002 decreased
$284,000 or 0.1% and margins improved by 1.4 points, representing 54.3% of
revenues in 2002 compared to 55.7% of revenues in the prior year. Improvement
for the year ended December 31, 2002 can be mainly attributed to the Company's
recent service initiatives that have increased productivity, reduced headcount,
and created other efficiencies and better asset utilization. The Company
achieved reductions in service salaries, personnel related expenses, materials
and supplies, travel and fleet expense, which were partially offset by slightly
higher insurance and claims charges. Pest control and termite technician
productivity improved as did employee retention. The Company believes that
better employee retention has a direct impact on customer retention. Better
fleet management led to a decrease in the average number of vehicles and an
improvement in revenues per vehicle.
Sales, General and Administrative for the year ended December 31, 2002
decreased $2.0 million or 0.8%, and improved by 1.2 margin points in 2002,
averaging 35.8% of total revenues compared to 37.0% for the prior year.
Improvement for the year was mainly attributed to reduced personnel related
expenses, fleet expense, telephone expense, travel expense, bad debt expense and
sales promotions partially offset by higher summer selling program expense and
advertising expense.
Depreciation and Amortization expenses for the year ended December 31, 2002
were approximately $1.3 million or 6.6% higher than the prior year. 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 $2.2
million partially offset by an increase in amortization expense of $2.0 million
due to a change in the expected life of customer contracts.
Net income for the year ended December 31, 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 year ended December 31, 2001, it would not have had a material impact to net
income previously reported for the year ended December 31, 2001.
The Company's net tax provision of $16.6 million for the year ended
December 31, 2002 reflects increased taxable income over the prior year. The
effective tax rate of 38% was consistent between periods presented.
The decline in the Accrual for Termite Contracts of $4.4 million or 8.7%
reflects improvement in the experience rate, as well as the payment of several
large termite claims and the cost of remediation. Accrued Insurance decreased
$0.7 million or 1.6% during the year as a result of improved experience rate,
attributable to the Company's proactive management of issues associated with
self insured risks.
Results of Operations - 2001 Versus 2000
The 0.5% increase in revenues for the year ended December 31, 2001 was
primarily due to increased recurring revenues in both pest and termite control.
Pest control benefited from improvement in customer retention and a solid
increase in commercial revenues. The increased recurring revenues from termite
control can be mainly attributed to the impact of the termite baiting program.
11
Orkin's directed liquid termite baiting program generates recurring
monitoring revenues that are deferred to the balance sheet each month in the
form of unearned revenue. This is then being recognized in future periods when
the service is rendered.
Over the past couple of years, the Company has successfully integrated
several pest control companies acquired in the United States and Canada. Cost of
Services Provided decreased $7.0 million compared to 2000, and improved to
represent 55.7% of revenues compared to 57.0% in 2000. This margin improvement
was primarily attributable to productivity improvements and other increased
efficiencies, including a reduced workforce in service, and reductions in
personnel related expenses and fleet expense that were partially offset by an
increase in insurance expense. Depreciation and Amortization increased
approximately $1.9 million or 10.2% over 2000, due primarily to the
implementation of our new proprietary branch computer system, FOCUS, in the
fourth quarter of 2001.
Sales, General and Administrative decreased $4.0 million over 2000, and
improved to represent 37.0% of revenues compared to 37.8% in 2000. This
improvement as a percentage of revenues resulted primarily from improved
efficiencies and a reduced workforce in sales, decreased other personnel related
costs, and decreased bad debt expense.
Net interest income declined $252,000 or 56.0% in 2001 primarily due to
lower interest rates on invested cash balances and higher interest expense for
notes payable associated with acquisitions.
The Company's tax provision of $10.4 million as compared to $5.9 million in
2000, reflects increased income in 2001.
The decline in the Accrual for Termite Contracts of $6.8 million or 11.8%
reflects improvement in the experience rate, as well as the payment of termite
claims and the cost of remediation. Accrued Insurance decreased $6.3 million or
12.9% during the year as a result of improved experience rate, attributable to
the Company's proactive management of issues associated with self insured risks.
Related Party Transactions
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 was 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 reasonable and
fair to the Company and will not have a material effect on the Company's
financial position, results of operations or liquidity.
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 and Gary
W. Rollins, related to sharing the aviation hangar located at the
Dekalb-Peachtree Airport as well the usage of the Jetstar II, owned by Rollins,
Inc., and Gulfstream III, owned by LOR, Inc. LOR, Inc. leases half of the hangar
from Rollins, Inc. for a total annual lease amount of $13,655. This lease
expires on January 24, 2008. The hangar currently houses three airplanes, two of
which are not owned by Rollins, Inc. and reside on the portion of the hangar
leased by LOR, Inc. All other expenses related to the hangar are also shared
equally by Rollins, Inc. and LOR, Inc. Total expenses for 2002 were
approximately $114,000, which includes rental, utilities, maintenance and
repairs, depreciation, property tax and miscellaneous expense. The Jetstar II
and Gulfstream III are used by both Rollins, Inc. and LOR, Inc. and are billed
on a monthly basis. The Gulfstream III is charged at a rate of $12,750 per month
while the Jetstar II is charged at a rate of $5,250 per month. All expenses
related to each respective aircraft are paid for by the owner of each aircraft,
except for fuel. Fuel is paid for by Rollins, Inc. and billed monthly to the
company using the aircraft. Additionally, Mr. R. Randall Rollins and Mr. Gary W.
Rollins use the Jetstar II for personal use and are billed for its use at the
rate of
12
$1,000 per hour, which approximates the fuel cost. The total hourly usage for
2002 was approximately 6 hours or $6,000. The Company on occasion uses the
Gulfstream III and is also billed for its use at a rate of $1,000 per hour,
which approximates the fuel cost. 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 property located at 2170
Piedmont Road is owned by Rollins Continental, Inc. a wholly owned subsidiary of
Rollins, Inc. Currently LOR, Inc. occupies approximately 3,580 square feet of
office space in the building located at 2170 Piedmont Road. The annual rental
rate is $39,029. 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 property located at 710 Lakeshore Circle is
also owned by Rollins Continental, Inc. Currently LOR, Inc. occupies
approximately 3,344 square feet of office space in the building located at 710
Lakeshore Circle. The annual rental rate is $40,800. 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. The programmer/analyst
is being used to further develop the PowerTrak Version 1.0 hand-held computer
software purchased in the fourth quarter of 2002 (as discussed in the above
paragraph). The hourly wage paid to LOR, Inc. was $32 per hour, which equated to
$66,560 per year, including overhead. 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 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 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 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.
13
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 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 $53.7 million for the year ended December 31, 2002,
compared with cash provided by operating activities of $29.6 million in 2001 and
$11.4 million in 2000. The 2002 increase resulted primarily from favorable
changes in working capital related primarily to higher net 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. A customer of
the Company, Kmart, declared bankruptcy in January 2002, which did not have a
material impact on the Company's results of operations or its liquidity.
The Company invested approximately $10.4 million in capital expenditures
during the year ended December 31, 2002. Capital expenditures for the year
consisted primarily of the purchase of the Rollins Training Center for $3.1
million, as well as equipment replacements and upgrades and improvements to the
Company's management information systems. The Company expects to invest between
$8.5 million and $10.5 million in 2003 in capital expenditures. During the year,
the Company made several acquisitions totaling $1.8 million compared to $0.7
million during 2001. 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 $6.0 million was paid in cash
dividends ($0.033 a quarter) during the year and approximately $6.2 million was
paid for repurchases of 496,200 shares of the Company's Common Stock.
Approximately 108,000 of these repurchased shares were used for the 401(k) match
in February 2003. At the January 28, 2003 Board of Directors' Meeting the Board
approved a 50% increase in the dividend, from $0.033 to $0.05 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, stock repurchases 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 December 31, 2002 or February 24, 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 7 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.
14
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.
At December 31, 2002, the Company had the following contractual
commitments:
Year ending December 31,
--------------------------------------------------------------------
(In thousands) 2003 2004 2005 2006-2011
- --------------------------------------------------------------------------------------------------------------
Non-cancelable operating leases $22,047 $15,556 $11,416 $31,515
Acquisition notes payable 1,685 1,467 1,134 1,783
--------------------------------------------------------------------
Total $23,732 $17,023 $12,550 $33,298
- --------------------------------------------------------------------------------------------------------------
Impact of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations, which is effective for fiscal years beginning after June
15, 2002. The Statement requires legal obligations associated with the
retirement of long-lived assets to be recognized at their fair value at the time
that the obligations are incurred. Upon initial recognition of a liability, that
cost should be capitalized as part of the related long-lived asset and allocated
to expense over the useful life of the asset. The Company will adopt Statement
143 on January 1, 2003, and, based on current circumstances, does not believe
that the impact of adoption of Statement 143 will have a material impact on the
Company's financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, 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 will adopt the provisions of Statement 145
related to the rescission of Statement 4 on January 1, 2003. The Company adopted
the provisions of this Statement related to Statement 13, as well as all other
provisions of this Statement, which were effective May 15, 2002. The adoption of
these provisions did not have a material impact on the Company's financial
position, results of operations or liquidity for the year ended December 31,
2002. Management believes that the adoption of the provisions of Statement 145
related to the rescission of Statement 4 will not have a material effect on the
Company's financial position, results of operations or liquidity.
In June 2002, the FASB issued Statement 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
Statement 146 on January 1, 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.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure. Statement 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for employee stock-based compensation and requires expanded
disclosure regarding stock-based compensation in the "Summary of Significant
Accounting Policies", or its equivalent, in the notes to the consolidated
financial statements about the method of accounting and the effect of the method
used on reported results. The disclosure provisions of this Statement are
effective for financial statements issued for fiscal years ending after December
15, 2002. The Company does not expect to transition to the fair value based
method of accounting for stock-based compensation. Management believes that the
adoption of Statement 148 will not have a material effect on the financial
position, results of operations or liquidity of the Company.
15
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Direct Guarantees of Indebtedness of Others, which requires expanded disclosure
for existing guarantees and product warranties for the year ended December 31,
2002 in addition to stipulating that at the inception of guarantees issued after
December 31, 2002, a company needs to record the fair value of the guarantee 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 Company will apply the
initial recognition and measurement provisions on a prospective basis for all
guarantees issued after December 31, 2002. Adoption of FIN 45 will have no
impact on the Company's historical financial statements as existing guarantees
are not subject to the measurement provisions of FIN 45.
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 is currently analyzing the impact of adopting this EITF.
Forward-Looking Statements
This Annual 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.
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 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market Risk
As of December 31, 2002, 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 December 31, 2002 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.
16
Item 8. Financial Statements and Supplementary Data.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Rollins, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------
At December 31, (In thousands except share and per share data) 2002 2001
--------------------------------------------
ASSETS
Cash and Short-Term Investments $ 38,315 $ 8,650
Trade Receivables, Net of Allowance for Doubtful Accounts
of $5,441 and $6,973, respectively 47,740 48,479
Materials and Supplies 10,662 11,895
Deferred Income Taxes 20,035 21,044
Other Current Assets 9,470 10,415
--------------------------------------------
Current Assets 126,222 100,483
Equipment and Property, Net 38,880 44,273
Goodwill 72,392 72,383
Customer Contracts and Other Intangible Assets 35,507 40,067
Deferred Income Taxes 44,406 39,309
Other Assets --- 44
--------------------------------------------
Total Assets $317,407 $296,559
--------------------------------------------
LIABILITIES
Accounts Payable $ 12,138 $ 12,920
Accrued Insurance 11,740 9,912
Accrued Payroll 28,623 30,921
Unearned Revenue 43,049 27,470
Accrual for Termite Contracts 19,000 15,000
Other Current Liabilities 15,312 12,313
-------------------- -----------------------
Current Liabilities 129,862 108,536
Accrued Insurance, Less Current Portion 30,222 32,713
Accrual for Termite Contracts, Less Current Portion 27,446 35,875
Accrued Pension 10,769 2,885
Long-Term Accrued Liabilities 28,418 31,052
--------------------------------------------
Total Liabilities 226,717 211,061
--------------------------------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 44,799,368 and 45,104,985
shares issued and outstanding, respectively 44,799 45,105
Accumulated Other Comprehensive Income (Loss) (16,947) (4,822)
Retained Earnings 62,838 45,215
--------------------------------------------
Total Stockholders' Equity 90,690 85,498
--------------------------------------------
Total Liabilities and Stockholders' Equity $317,407 $296,559
--------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
17
CONSOLIDATED STATEMENTS OF INCOME
Rollins, Inc. and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands except per share data) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
REVENUES
Customer Services $665,425 $649,925 $646,878
----------------------------------------------------
COSTS AND EXPENSES
Cost of Services Provided 361,677 361,961 368,974
Depreciation and Amortization 21,635 20,292 18,421
Sales, General and Administrative 238,583 240,544 244,530
Interest Income (196) (198) (450)
----------------------------------------------------
621,699 622,599 631,475
INCOME BEFORE INCOME TAXES 43,726 27,326 15,403
----------------------------------------------------
PROVISION FOR INCOME TAXES
Current 13,680 6,771 3,182
Deferred 2,936 3,613 2,671
----------------------------------------------------
16,616 10,384 5,853
----------------------------------------------------
NET INCOME $ 27,110 $ 16,942 $ 9,550
----------------------------------------------------
EARNINGS PER SHARE - BASIC AND DILUTED
Net Income $ 0.60 $ 0.37 $ 0.21
----------------------------------------------------
Average Shares Outstanding - Basic 45,021 45,200 45,014
Average Shares Outstanding - Diluted 45,409 45,398 45,070
DIVIDENDS PAID PER SHARE $ 0.13 $ 0.13 $ 0.13
The accompanying notes are an integral part of these consolidated financial
statements.
18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Rollins, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) Accumulated
Other
Common Stock Retained Comprehensive Comprehensive Treasury
-------------------
Shares Amount Earnings Income (Loss) Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 29,881 $29,881 $41,909 $ --- $ --- $ --- $71,790
Net Income 9,550 9,550
Common Stock Purchased (10) (10) (144) (154)
Common Stock Issued for Acquisitions of Companies 165 165 2,307 2,472
Cash Dividends (6,031) (6,031)
Three-for-Two Stock Split 15,018 15,018 (15,018) ---
Other 972 972
---------------------------------------------------------------------------------
Balance at December 31, 2000 45,054 $45,054 $33,545 $ --- $ --- $ --- $78,599
---------
Net Income 16,942 16,942 16,942
Other Comprehensive Income, Net of Tax
Minimum Pension Liability Adjustment (4,047) (4,047)
Foreign Currency Translation Adjustments (775) (775)
--------
Other Comprehensive Income (Loss) (4,822) (4,822)
--------
Comprehensive Income $12,120
--------
Cash Dividends (6,028) (6,028)
Common Stock Purchased (1,503) (107) (1,610)
Common Stock Issued for Acquisitions of Companies 31 31 469 --- 500
Issuance of 401(k) Company Match 108 108 1,712 --- 1,820
Three-for-Two Stock Split 71 71 (17) (54) ---
Other 2 2 95 --- 97
---------------------------------------------------------------------------------
Balance at December 31, 2001 45,266 $45,266 $45,215 $ --- $ (4,822) $ (161) $85,498
---------
Net Income 27,110 27,110 27,110
Other Comprehensive Income, Net of Tax
Minimum Pension Liability Adjustment (12,135) (12,135)
Foreign Currency Translation Adjustments 10 10
--------
Other Comprehensive Income (Loss) (12,125) (12,125)
--------
Comprehensive Income $14,985
--------
Cash Dividends (6,004) (6,004)
Common Stock Purchased (90) (90) (5,835) (241) (6,166)
Issuance of 401(k) Company Match --- --- 1,634 90 1,724
Three-for-Two Stock Split (27) (27) 102 (75) ---
Other 37 37 616 --- 653
---------------------------------------------------------------------------------
Balance at December 31, 2002 45,186 $45,186 $62,838 $ --- $(16,947) $ (387) $90,690
---------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Rollins, Inc. and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, (In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 27,110 $ 16,942 $ 9,550
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 21,635 20,292 18,421
Provision for Deferred Income Taxes 3,643 3,360 2,671
Other, Net 955 250 (42)
(Increase) Decrease in Assets:
Trade Receivables 816 1,620 (1,266)
Materials and Supplies 1,244 1,085 614
Other Current Assets 945 (3,396) 607
Other Non-Current Assets (44) (2,476) 1,858
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (7,576) 5,413 (8,271)
Unearned Revenue 15,579 1,088 6,690
Accrued Insurance (663) (6,322) (6,270)
Accrual for Termite Contracts (4,429) (6,776) (11,702)
Long-Term Accrued Liabilities (5,521) (1,522) (1,413)
---------------------------------------
Net Cash Provided by Operating Activities 53,694 29,558 11,447
---------------------------------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (10,367) (8,474) (14,411)
Net Cash Used for Acquisitions of Companies (1,788) (704) (7,437)
Marketable Securities, Net --- --- 13,084
---------------------------------------
Net Cash Used in Investing Activities (12,155) (9,178) (8,764)
---------------------------------------
FINANCING ACTIVITIES
Dividends Paid (6,004) (6,028) (6,031)
Common Stock Purchased (6,166) (1,610) (154)
Payments on Capital Leases (256) (1,829) (3,397)
(Payments)/Borrowings, under the Credit Facility --- (1,400) 1,400
Other 552 (1,262) 209
---------------------------------------
Net Cash Used in Financing Activities (11,874) (12,129) (7,973)
---------------------------------------
Net Increase (Decrease) in Cash and Short-Term Investments 29,665 8,251 (5,290)
Cash and Short-Term Investments at Beginning of Year 8,650 399 5,689
---------------------------------------
Cash and Short-Term Investments at End of Year $ 38,315 $ 8,650 $ 399
---------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest $ 436 $ 581 $ 854
Cash Paid for Income Taxes $ 10,893 $ 5,954 $ (2,754)
The accompanying notes are an integral part of these consolidated financial
statements.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000, Rollins, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description - Rollins, Inc. ("the Company") is a national service
company with headquarters located in Atlanta, Georgia, providing pest and
termite control services to both residential and commercial customers.
Orkin Exterminating Company, Inc. ("Orkin"), a wholly owned subsidiary of
the Company founded in 1901, is one of the world's largest pest and termite
control companies. It provides customized services from over 400 locations to
approximately 1.6 million customers. Orkin serves customers in the United
States, Canada, and Mexico, providing essential pest control services and
protection against termite damage, rodents and insects to homes and businesses,
including hotels, food service establishments, discount and grocery retail
stores, dairy farms and transportation companies. Orkin operates under the
Orkin(R) and PCO Services, Inc.(R) trademarks and the AcuridSM service mark.
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.
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of Rollins, Inc. and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Estimates Used in the Preparation of Consolidated Financial Statements - The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
Management to make estimates and assumptions that affect the amounts reported in
the accompanying notes and financial statements. Such estimates include the
amount of valuation reserves for bad debt, Accrued Insurance and Accrual for
Termite Contracts balances. Actual results could differ from those estimates.
Revenues - 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. Interest income on installment receivables is accrued monthly based on
actual loan balances and stated interest rates. Franchise fee income is treated
as unearned revenue in the Statement of Financial Position for the duration of
the initial contract period. Royalty fees from Orkin franchises are accrued and
recognized as revenues on a monthly basis.
Cash and Short-Term Investments - The Company considers all investments with a
maturity of three months or less to be cash equivalents. Short-term investments
are stated at cost, which approximates fair market value.
Materials and Supplies - Materials and supplies are recorded at the lower of
cost (first-in, first-out basis) or market. The Company's centralized warehouse
is located in Atlanta, Georgia.
21
Equipment and Property - Depreciation and amortization, which includes the
amortization of assets recorded under capital leases, are provided principally
on a straight-line basis over the estimated useful lives of the related assets.
Annual provisions for depreciation of $15.0 million in 2002, $13.6 million and
$11.4 million for each of the years 2001 and 2000, respectively have been
reflected in the Consolidated Statements of Income in the line item entitled
Depreciation and Amortization. These annual provisions for depreciation are
computed using the following asset lives: buildings, ten to forty years; and
furniture, fixtures, and operating equipment, three to ten years. Expenditures
for additions, major renewals and betterments are capitalized and expenditures
for maintenance and repairs are expensed as incurred. The cost of assets retired
or otherwise disposed of and the related accumulated depreciation and
amortization are eliminated from the accounts in the year of disposal with the
resulting gain or loss credited or charged to income.
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.
Advertising - Advertising expenses are charged to income during the year in
which they are incurred. The total advertising costs were approximately $30.0
million, $30.2 million and $30.8 million in 2002, 2001 and 2000, respectively.
Income Taxes - The Company provides for income taxes based on Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns.
Earnings Per Share - In accordance with SFAS No. 128, Earnings Per Share
("EPS"), the Company presents basic EPS and diluted EPS. Basic EPS is computed
on the basis of weighted-average shares outstanding. Diluted EPS is computed on
the basis of weighted-average shares outstanding plus common stock options
outstanding during the year, which, if exercised, would have a dilutive effect
on EPS. Basic and diluted EPS are the same for all years reported. Basic and
diluted EPS have been restated for the three-for-two stock split. A
reconciliation of the number of weighted-average shares used in computing basic
and diluted EPS is as follows:
(In thousands except per share data and per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Basic and diluted earnings available to stockholders (numerator): $27,110 $16,942 $ 9,550
Shares (denominator):
Weighted-average shares outstanding 45,021 45,200 45,014
Effect of Dilutive securities: ---------------------------------
Employee Stock Options 388 198 56
---------------------------------
Adjusted Weighted-Average Shares and Assumed
Conversions 45,409 45,398 45,070
Per share amounts:
Basic earnings per common share $0.60 $0.37 $0.21
Diluted earnings per common share $0.60 $0.37 $0.21
- ------------------------------------------------------------------------------------------------------------
Stock-Based Compensation - As permitted by SFAS No. 123, Accounting for
Stock-Based Compensation, the Company accounts for employee stock compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees.
22
Comprehensive Income -For the year ended December 31, 2000, comprehensive income
was not materially different from net income and, as a result, the impact of
SFAS No. 130, Reporting Comprehensive Income, was not reflected in those
consolidated financial statements. For the years ended 2002 and 2001, the
Company is reporting comprehensive income due to additional minimum liabilities
recorded in association with the pension plan and foreign currency translations
in the accompanying Consolidated Statements of Stockholders' Equity.
New Accounting Standards - In June 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations, which is effective for fiscal years
beginning after June 15, 2002. The Statement requires legal obligations
associated with the retirement of long-lived assets to be recognized at their
fair value at the time that the obligations are incurred. Upon initial
recognition of a liability, that cost should be capitalized as part of the
related long-lived asset and allocated to expense over the useful life of the
asset. The Company will adopt Statement 143 on January 1, 2003, and, based on
current circumstances, does not believe that the impact of adoption of Statement
143 will have a material impact on the Company's financial position or results
of operations.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, 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 will adopt the provisions of Statement 145
related to the rescission of Statement 4 on January 1, 2003. The Company adopted
the provisions of this Statement related to Statement 13, as well as all other
provisions of this Statement, which were effective May 15, 2002. The adoption of
these provisions did not have a material impact on the Company's financial
position, results of operations or liquidity for the year ended December 31,
2002. Management believes that the adoption of the provisions of Statement 145
related to the rescission of Statement 4 will not have a material effect on the
Company's financial position, results of operations or liquidity.
In June 2002, the FASB issued Statement 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
Statement 146 on January 1, 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.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure. Statement 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for employee stock-based compensation and requires expanded
disclosure regarding stock-based compensation in the "Summary of Significant
Accounting Policies", or its equivalent, in the notes to the consolidated
financial statements about the method of accounting and the effect of the method
used on reported results. The disclosure provisions of this Statement are
effective for financial statements issued for fiscal years ending after December
15, 2002. The Company does not expect to transition to the fair value based
method of accounting for stock-based compensation. Management believes that the
adoption of Statement 148 will not have a material effect on the financial
position, results of operations or liquidity of the Company.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Direct Guarantees of Indebtedness of Others, which requires expanded disclosure
for existing guarantees and product warranties for the year ended December 31,
2002 in addition to stipulating that at the inception of guarantees issued after
December 31, 2002, a company needs to record the fair value of the guarantee 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 Company will apply the
initial recognition and measurement provisions on a prospective basis for all
guarantees issued after December 31, 2002. Adoption of FIN 45 will have no
impact on the Company's historical financial statements as existing guarantees
are not subject to the measurement provisions of FIN 45.
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 is currently analyzing the impact of adopting this EITF.
23
Fair Value of Financial Instruments - The Company's financial instruments
consist of cash and short-term investments, trade receivables, accounts payable
and other short-term liabilities. The carrying amounts of these financial
instruments approximate their fair values.
Reclassifications - Certain amounts for previous years have been reclassified to
conform with the 2002 consolidated financial statement presentation.
Three-for-Two Stock Split - The Board of Directors, at their 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 on
record at 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 in the
consolidated financial statements and related notes have been retroactively
adjusted for this stock split.
2. TRADE RECEIVABLES
Trade receivables, net, at December 31, 2002, totaling $47.7 million and at
December 31, 2001, totaling $48.5 million are net of allowances for doubtful
accounts of $5.4 million and $7.0 million, respectively. Trade receivables
include installment receivable amounts, which are due subsequent to one year
from the balance sheet dates. These amounts were approximately $6.4 million and
$7.4 million at the end of 2002 and 2001, respectively. The carrying amount of
installment receivables approximates fair value as the interest rates
approximate market rates. The Allowance For Doubtful Accounts is calculated and
recorded on a monthly basis, and is based on the application of percentages to
delinquency aging totals for the various categories of receivables, specific
consideration and current economic conditions. Bad debt write-offs occur at
certain aging dates. At any given time, the Company may have immaterial amounts
due from related parties, which are invoiced and settled on a regular basis.
Receivables due from related parties were $64,000 as of December 31, 2002, as
compared to $53,000 as of December 31, 2001.
3. EQUIPMENT AND PROPERTY
Equipment and property are presented at cost less accumulated depreciation
and are detailed as follows:
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
Buildings $13,118 $10,408
Operating Equipment 34,522 35,072
Furniture and Fixtures 6,601 7,703
Computer Equipment and Systems 32,544 30,723
Computer Equipment Under Capital Leases --- 2,721
-------------------------
86,785 86,627
Less - Accumulated Depreciation 52,381 46,229
-------------------------
34,404 40,398
Land 4,476 3,875
-------------------------
$38,880 $44,273
- --------------------------------------------------------------------------------
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangibles consist primarily of goodwill and customer contracts and also
includes trademarks and non-compete agreements, all related to businesses
acquired. Goodwill represents the excess of the purchase price over the fair
value of net assets of businesses acquired. The carrying amount of goodwill was
$72.4 million as of December 31, 2002 and 2001. Goodwill arising from
acquisitions prior to November 1970 has never been amortized for financial
statement purposes, since, in the opinion of Management, there has been no
decrease in the value of the acquired businesses. During the years ended
December 31, 2000 and 2001, the values assigned to all intangible assets,
including goodwill for acquisitions completed subsequent to November 1970 and
prior to June 30, 2001, were amortized on a straight-line basis over the
estimated useful lives of the assets, not exceeding 40 years.
On January 1, 2002, the Company adopted FASB Statement No. 142, Goodwill
and Other Intangible Assets. As of January 1, 2002, amortization of goodwill and
trademarks was terminated, and instead the assets are subject to periodic
testing for impairment. The Company completed an initial impairment analysis
upon adoption of Statement 142 and a subsequent analysis as of September 30,
2002. Based upon the results of these analyses, the Company has concluded that
no impairment of its goodwill or trademarks has occurred.
24
Customer contracts and non-compete agreements are amortized on a
straight-line basis over the period of the agreements, as straight-line best
approximates the ratio that current revenues bear to the total of current and
anticipated revenues, based on the estimated lives of the assets. In accordance
with Statement 142, the expected lives of customer contracts and non-compete
agreements were reviewed, and it was determined that customer contracts should
be amortized over a life of 8 to 12 1/2 years dependent upon customer type. The
impact of this review in 2002 was an increase in amortization expense on
customer contracts of $2.0 million. The carrying amount and accumulated
amortization for customer contracts are as follows:
December 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
Customer contracts $44,963 $43,177
Less: accumulated amortization (13,036) (8,008)
--------------------------
$31,927 $35,169
- --------------------------------------------------------------------------------
Had the Company adopted the provisions of Statement 142 as of January 1,
2000, the effects on net income would have been as follows:
Year ended December 31,
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Net income (as reported) $27,110 $16,942 $ 9,550
Effect of ceasing goodwill amortization --- 2,219 2,094
Effect of change in customer contract lives --- (2,005) (2,126)
-------------------------------------------------
Pro forma net income $27,110 $17,156 $ 9,518
Pro forma basic net income per share $0.60 $0.38 $0.21
Pro forma diluted net income per share $0.60 $0.38 $0.21
- ------------------------------------------------------------------------------------------------------
Total intangible amortization expense was approximately $6.7 million in
2002, $6.6 million in 2001 and $6.8 million in 2000. Amortization of customer
contracts and non-competes was approximately $6.7 million in 2002, $4.4 million
in 2001 and $4.7 million in 2000 and goodwill amortization was $2.2 million in
2001 and $2.1 million in 2000. Estimated amortization expense for each of the
five succeeding fiscal years is as follows:
December 31,
-------------------------------------------------
2003 $5,045
2004 4,917
2005 4,826
2006 4,634
2007 4,071
-------------------------------------------------
5. INCOME TAXES
The primary factors causing income tax expense to be different than the
federal statutory rate for 2002 and 2001 are as follows:
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------
Income taxes at statutory rate $15,304 $ 9,564 $ 5,391
State income tax expense (net of Federal benefit) 1,719 712 885
Foreign tax expense 1,064 360 ---
Other (1,471) (252) (423)
------------------------------------
$16,616 $10,384 $ 5,853
- ---------------------------------------------------------------------------------------------
The Provision for Income Taxes was based on a 38.0% estimated effective
income tax rate on Income Before Income Taxes for the years ended December 31,
2002, 2001 and 2000. The effective income tax rate differs from the annual
federal statutory tax rate primarily because of state and foreign income taxes.
For the year ended December 31, 2002, the Company paid income taxes of $10.9
million, net of refunds received. During 2001, the Company paid income taxes of
$5.9 million, net of refunds. For 2000, the Company received a refund of income
taxes paid of $2.8 million, net of current payments.
25
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities at December 31,
2002 and 2001 are as follows:
(In thousands) 2002 2001
- ------------------------------------------------------------------------------
Deferred tax assets:
Termite Accrual $17,649 $19,333
Insurance Reserves 15,945 16,198
Accrued Expenses 12,562 13,310
Compensation and Benefits 9,587 4,457
Depreciation and Amortization 4,067 5,180
Other 8,806 11,509
-------------------------
68,616 69,987
Deferred tax liabilities:
Safe Harbor Lease (707) (2,946)
Other (3,468) (6,688)
-------------------------
(4,175) (9,634)
-------------------------
Net deferred tax asset $64,441 $60,353
- ------------------------------------------------------------------------------
6. ACCRUAL FOR TERMITE CONTRACTS
The Company maintains an accrual for termite contracts representing the
estimated costs of reapplications, repair claims and associated labor,
chemicals, and other costs relative to termite control services performed prior
to the balance sheet date. 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.
A reconciliation of the beginning and ending balances is as follows:
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------
Beginning Balance $50,875 $57,651 $69,352
Current Year Provision 21,050 17,800 13,800
Settlements, Claims and Expenditures
Made During the Year (25,479) (24,576) (25,501)
-------------------------------------
Ending Balance $46,446 $50,875 $57,651
- -------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES
The Company has several operating leases expiring at various dates through
2017. The Company also had a capital lease for certain computer equipment that
expired in February 2001. The minimum lease payments under non-cancelable
operating leases with terms in excess of one year, in effect at December 31,
2002, are summarized as follows:
(In thousands)
- ----------------------------------------------------------
2003 $22,047
2004 15,556
2005 11,416
2006 7,027
2007 5,148
Thereafter 19,340
---------
$80,534
- ----------------------------------------------------------
Total rental expense under operating leases charged to operations was $27.4
million, $28.7 million and $29.4 million for the years ended December 31, 2002,
2001 and 2000, respectively.
26
The Company maintains a credit facility with a bank that allows it to
borrow up to $40.0 million on an unsecured basis at the bank's prime rate of
interest or the indexed London Interbank Offered Rate (LIBOR). No amount was
outstanding under this credit facility as of December 31, 2002 or December 31,
2001.
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.
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.
The Company 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, 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.
8. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory tax-qualified defined benefit
retirement plan (the "Plan") covering all employees meeting certain age and
service requirements. The Plan provides benefits based on the average
compensation for the highest five years during the last ten years of credited
service (as defined) in which compensation was received, and the average
anticipated Social Security covered earnings. The Company funds the Plan with at
least the minimum amount required by ERISA. The Company made contributions of
$20.0 million to the Plan in 2002. Effective January 1, 2002 the Company adopted
amendments to the Plan including a change to the benefit calculation and
limiting plan participation to current participants. These amendments are
reflected below in the projected benefit obligation.
27
The funded status of the Plan and the resulting accrued pension expense are
summarized as follows as of December 31:
(In thousands) 2002 2001
- -------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year $94,006 $85,646
Service Cost 3,825 4,794
Interest Cost 7,246 7,207
Amendments --- (8,419)
Actuarial Loss 8,081 8,414
Benefits Paid (3,864) (3,636)
------------------------
Benefit Obligation at End of Year 109,294 94,006
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets at Beginning of Year 76,942 74,066
Actual Return on Plan Assets (4,365) (638)
Employer Contribution 20,000 7,150
Benefits Paid (3,864) (3,636)
------------------------
Fair Value of Plan Assets at End of Year 88,713 76,942
------------------------
Funded Status (20,581) (17,064)
Unrecognized Net Actuarial Loss 42,236 23,076
Unrecognized Prior Service Benefit (6,346) (7,214)
------------------------
Net Prepaid / (Accrued) Pension Expense $15,309 $ (1,202)
- -------------------------------------------------------------------------------
In accordance with pension accounting requirements, the Company recorded a
minimum liability totaling $10.8 million and $7.4 million as of December 31,
2002 and 2001, respectively. These amounts represent the differences between the
actuarially calculated accumulated benefit obligation and the fair value of the
plan assets.
The weighted-average assumptions as of December 31 were as follows:
2002 2001
- -------------------------------------------------------------------------------
Discount Rate 6.875% 7.375%
Expected Return on Plan Assets 8.000% 8.500%
Rate of Compensation Increase 3.875% 4.375%
- -------------------------------------------------------------------------------
The components of net periodic benefit cost for the past three years are
summarized as follows:
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------
Service Cost $3,825 $4,794 $4,097
Interest Cost 7,246 7,207 6,307
Expected Return on Plan Assets (7,553) (7,458) (6,494)
Net Amortizations:
Amortization of Net Loss 838 62 ---
Amortization of Net Prior Service Benefit (868) (75) (82)
--------------------------------
Net Periodic Benefit Cost $3,488 $4,530 $3,828
- -------------------------------------------------------------------------------
At December 31, 2002 and 2001, the Plan's assets were comprised of listed
common stocks and U.S. government and corporate securities. Included in the
assets of the Plan were shares of Rollins, Inc. Common Stock with a market value
of $7.7 million and $6.1 million at December 31, 2002 and 2001, respectively.
28
The Company sponsors a deferred compensation 401(k) plan that is available
to substantially all employees with six months of service. The plan provides for
a matching contribution (made in the form of Common Stock of the Company) of
thirty cents ($.30) for each one dollar ($1.00) of a participant's contributions
to the plan that do not exceed 6 percent of his or her annual compensation
(which includes commissions, overtime and bonuses). The Company match percentage
increased by 20% in 2002. The charges to expense for the Company match were
approximately $2.3 million in 2002, $2.0 million in 2001 and $2.1 million in
2000. At December 31, 2002 and 2001 approximately 22.9% and 17%, respectively of
the plan assets consisted of Rollins, Inc. Common Stock. Total administrative
fees for the plan were approximately $278,500 in 2002, $308,000 in 2001 and
$228,000 in 2000.
The Company has two Employee Incentive Stock Option Plans, the first
adopted in January 1994 (the "1994 Plan") and the second adopted in April 1998
(the "1998 Plan") as a supplement to the 1994 Plan. An aggregate of 4.5 million
shares of Common Stock may be granted under various stock incentive programs
sponsored by these plans, at a price not less than the market value of the
underlying stock on the date of grant. Options may be issued under the 1994 Plan
and the 1998 Plan through January 2004 and April 2008, respectively. The
majority of options expire ten years from the date of grant, if not exercised,
and vest 20% each year over 5 years.
Options are also outstanding under a prior Employee Incentive Stock Option
Plan (the "1984 Plan"). Under this plan, 1.8 million shares of Common Stock were
subject to options granted during the ten-year period ended October 1994. The
options were granted at the fair market value of the shares on the date of grant
and expire ten years from the date of grant, if not exercised. No additional
options will be granted under the 1984 Plan.
Option transactions during the last three years for the 1984, 1994 and 1998
plans are summarized as follows:
2002 2001 2000
- --------------------------------------------------------------------------------
Number of Shares Under Stock Options:
Outstanding at Beginning of Year 2,465,250 2,753,160 2,649,261
Granted 1,168,500 258,750 296,250
Exercised (67,666) (6,075) (2,676)
Cancelled (245,700) (540,585) (189,675)
---------------------------------------
Outstanding at End of Year 3,320,384 2,465,250 2,753,160
Exercisable at End of Year 1,478,252 1,082,070 821,220
Weighted-Average Exercise Price:
Granted $ 12.85 $ 12.17 $ 9.83
Exercised 10.45 8.83 8.83
Cancelled 12.15 13.05 11.22
Outstanding at End of Year 12.43 12.16 12.05
Exercisable at End of Year 12.47 12.60 12.73
- --------------------------------------------------------------------------------
Information with respect to options outstanding and options exercisable at
December 31, 2002 is as follows:
Average Remaining
Contractual Life
Exercise Price Number Outstanding (In Years) Number Exercisable
- ------------------------------------------------------------------------------------------------
$17.00 2,100 0.08 2,100
18.92 83,100 1.08 61,650
16.17 6,000 2.08 3,600
13.92 25,500 3.08 15,300
12.83 129,600 4.08 104,100
13.13 798,750 5.33 627,000
10.88 775,094 6.08 465,056
9.83 166,740 7.08 66,696
12.17 213,750 8.08 42,750
12.77 669,750 9.08 ---
12.77 372,000 4.08 74,400
14.04 78,000 4.08 15,600
- ------------------------------------------------------------------------------------------------
3,320,384 1,478,252
- ------------------------------------------------------------------------------------------------
29
The Company accounts for its 1984, 1994 and 1998 plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
Year Ended December 31,
-------------------------------------------
(In thousands, except per share data) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Net income, as reported $27,110 $16,942 $9,550
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1,853) (1,508) (1,392)
------------------------------------------
Pro forma net income $25,257 $15,434 $8,158
------------------------------------------
Earnings per share:
Basic-as reported $0.60 $0.37 $0.21
Basic-pro forma $0.56 $0.34 $0.18
Diluted-as reported $0.60 $0.37 $0.21
Diluted-pro forma $0.56 $0.34 $0.18
- ------------------------------------------------------------------------------------------------------
The per share weighted-average fair value of stock options granted during
2002, 2001, and 2000 was $2.53, $3.57, and $3.67, respectively, on the date of
grant, using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2002 2001 2000
- -------------------------------------------------------------------------------
Risk-Free Interest Rate 3.98% 5.10% 6.90%
Expected Life, in Years Range from 4 to 8 8 8
Expected Volatility 12.50% 15.76% 20.66%
Expected Dividend Yield 1.04% 1.10% 1.25%
- -------------------------------------------------------------------------------
9. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
Accumulated other comprehensive income/(loss) consists of the following (in
thousands):
Minimum Foreign
Pension Translation
Liability Currency Total
- -----------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ --- $ --- $ ---
Change during 2001:
Before-tax amount (6,212) (1,192) (7,404)
Tax benefit 2,165 417 2,582
--------------------------------------------------------
(4,047) $ (775) (4,822)
--------------------------------------------------------
Balance at December 31, 2001 $ (4,047) $ (775) $ (4,822)
Change during 2002:
Before-tax amount (19,867) 14 (19,881)
Tax benefit (expense) 7,732 (4) 7,736
--------------------------------------------------------
(12,135) 10 (12,125)
--------------------------------------------------------
Balance at December 31, 2002 $(16,182) $ (765) $(16,947)
- -----------------------------------------------------------------------------------------------
30
10. RELATED PARTY TRANSACTIONS 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 was 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 reasonable and
fair to the Company and will not have a material effect on the Company's
financial position, results of operations or liquidity.
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 and Gary
W. Rollins, related to sharing the aviation hangar located at the
Dekalb-Peachtree Airport as well the usage of the Jetstar II, owned by Rollins,
Inc., and Gulfstream III, owned by LOR, Inc. LOR, Inc. leases half of the hangar
from Rollins, Inc. for a total annual lease amount of $13,655. This lease
expires on January 24, 2008. The hangar currently houses three airplanes, two of
which are not owned by Rollins, Inc. and reside on the portion of the hangar
leased by LOR, Inc. All other expenses related to the hangar are also shared
equally by Rollins, Inc. and LOR, Inc. Total expenses for 2002 were
approximately $114,000, which includes rental, utilities, maintenance and
repairs, depreciation, property tax and miscellaneous expense. The Jetstar II
and Gulfstream III are used by both Rollins, Inc. and LOR, Inc. and are billed
on a monthly basis. The Gulfstream III is charged at a rate of $12,750 per month
while the Jetstar II is charged at a rate of $5,250 per month. All expenses
related to each respective aircraft are paid for by the owner of each aircraft,
except for fuel. Fuel is paid for by Rollins, Inc. and billed monthly to the
company using the aircraft. Additionally, Mr. R. Randall Rollins and Mr. Gary W.
Rollins use the Jetstar II for personal use and are billed for its use at the
rate of $1,000 per hour, which approximates the fuel cost. The total hourly
usage for 2002 was approximately 6 hours or $6,000. The Company on occasion uses
the Gulfstream III and is also billed for its use at a rate of $1,000 per hour,
which approximates the fuel cost. 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 property located at 2170
Piedmont Road is owned by Rollins Continental, Inc. a wholly owned subsidiary of
Rollins, Inc. Currently LOR, Inc. occupies approximately 3,580 square feet of
office space in the building located at 2170 Piedmont Road. The annual rental
rate is $39,029. 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 property located at 710 Lakeshore Circle is
also owned by Rollins Continental, Inc. Currently LOR, Inc. occupies
approximately 3,344 square feet of office space in the building located at 710
Lakeshore Circle. The annual rental rate is $40,800. 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. The programmer/analyst
is being used to further develop the PowerTrak Version 1.0 hand-held computer
software purchased in the fourth quarter of 2002 (as discussed in the above
paragraph). The hourly wage paid to LOR, Inc. was $32 per hour, which equated to
$66,560 per year, including overhead. 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 and vice versa. No fees are charged for these services because in the
opinion of management the activity is mutually beneficial and offsetting.
31
11. UNAUDITED QUARTERLY DATA
All earnings per share data have been restated for the three-for-two stock
split.
PROFIT AND LOSS INFORMATION
(In thousands except per share data) First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------------------
2002
Revenues $153,302 $184,189 $174,063 $153,871
Net Income 4,940 11,691 6,754 3,725
Earnings per Share - Basic and Diluted 0.11 0.26 0.15 0.08
- ----------------------------------------------------------------------------------------------------------------------
2001
Revenues $150,280 $180,731 $169,223 $149,691
Net Income 2,021 9,038 4,268 1,615
Earnings per Share - Basic and Diluted 0.04 0.20 0.09 0.04
- ----------------------------------------------------------------------------------------------------------------------
2000
Revenues $148,926 $179,736 $171,690 $146,526
Net Income (Loss) 794 8,102 2,363 (1,709)
Earnings (Loss) per Share - Basic and Diluted 0.02 0.18 0.05 (0.04)
- ----------------------------------------------------------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On July 23, 2002 Rollins, Inc. ("Rollins") voted to dismiss its independent
accountants, Arthur Andersen LLP ("Andersen"), and to engage the services of
Ernst & Young LLP ("Ernst & Young") to serve as its new independent accountants,
effective immediately. This determination followed Rollins' decision to seek
proposals from independent accountants to audit Rollins' financial statements
for the fiscal year ending December 31, 2002. The decision to dismiss Andersen
and to engage the services of Ernst & Young was approved by Rollins' Board of
Directors upon the recommendation of its Audit Committee.
During Rollins' two most recent fiscal years ended December 31, 2001 and
2000, and through the date of the Form 8-K filed on July 23, 2002, there were no
disagreements between Rollins and Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to Andersen's satisfaction would
have caused them to make reference to the subject matter of the disagreement in
connection with their reports.
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within Rollins' two most recent fiscal years ended
December 31, 2001 and 2000, or through the date of the Form 8-K filed on July
23, 2002.
The audit reports of Andersen on the consolidated financial statements of
Rollins and subsidiaries as of and for the two fiscal years ended December 31,
2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope, or accounting
principles.
As required under Securities and Exchange Commission regulations, Rollins
provided Andersen with a copy of the foregoing disclosures and requested that
Andersen furnish Rollins with a letter addressed to the Commission stating
whether it agrees with the statements by Rollins in this disclosure and, if not,
stating the respects in which it does not agree. Although reasonable efforts
have been made by Rollins, it has been unable to obtain such a letter from
Andersen. Rollins therefore relied on temporary Item 304T(2) of Regulation S-K
in filing its report on Form 8-K.
During Rollins' two most recent fiscal years ended December 31, 2001 and
2000, and through the date of the Form 8-K filed on July 23, 2002, Rollins did
not consult with Ernst & Young with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on Rollins' consolidated financial
statements, or regarding any other matters or reportable events set forth in
Item 304(a)(2)(i) and (ii) of Regulation S-K.
32
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information under the captions "Election of Directors" in "Section
16(a) Beneficial Ownership Reporting Compliance" included in the Proxy Statement
for the Annual Meeting of Stockholders to be held April 22, 2003 is incorporated
herein by reference. Additional information concerning executive officers is
included in Part I, Item 4.A. of this Form 10-K.
Item 11. Executive Compensation.
The information under the caption "Executive Compensation" included in the
Proxy Statement for the Annual Meeting of Stockholders to be held April 22, 2003
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information under the captions "Capital Stock", "Election of Directors"
and "Equity Compensation Plan Information" included in the Proxy Statement for
the Annual Meeting of Stockholders to be held April 22, 2003 is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information under the caption "Compensation Committee Interlocks and
Insider Participation" included in the Proxy Statement for the Annual Meeting of
Stockholders to be held April 22, 2003 is incorporated herein by reference.
Item 14. 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.
33
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Consolidated Financial Statements, Financial Statement Schedule and
Exhibits.
1. Consolidated financial statements listed in the accompanying
Index to Consolidated Financial Statements and Schedule are filed
as part of this report.
2. The financial statement schedule listed in the accompanying
Index to Consolidated Financial Statements and Schedule is filed
as part of this report.
3. Exhibits listed in the accompanying Index to Exhibits are
filed as part of this report. The following such exhibits are
management contracts or compensatory plans or arrangements:
(10)(a) Rollins, Inc. 1984 Employee Incentive Stock Option
Plan is incorporated herein by reference to Exhibit 10 as
filed with its Form 10-K for the year ended December 31,
1996.
(10) (b) Rollins, Inc. 1994 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit (10)(b) as filed
with its Form 10-K for the year ended December 31, 1999.
(10) (c) Rollins, Inc. 1998 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit A of the March
24, 1998 Proxy Statement for the Annual Meeting of
Stockholders held on April 28, 1998.
(10) (d) Lease Agreement dated July 1, 2002 between Rollins
Continental, Inc. and Rollins Ranch, a division of LOR, Inc.
incorporated herein by reference as filed with its Form 10-Q
for the quarter ended September 30, 2002 filed on November
14, 2002.
(10) (e) Stock Option Agreement dated January 22, 2002 for
Gary W. Rollins, Chief Executive Officer, President and
Chief Operating Officer.
(10) (f) Closing Statement dated October 31, 2002 between
Rollins Continental, Inc. and RTC, LLC, a company controlled
by R. Randall Rollins, Chairman of the Board of Rollins,
Inc.
(b) Reports on Form 8-K.
1. No reports on Form 8-K were required to be filed during the
fourth quarter of calendar year 2002.
(c) Exhibits (inclusive of item 3 above):
(2)(a) Asset Purchase Agreement by and between Orkin
Exterminating Company, Inc. and PRISM Integrated Sanitation
Management, Inc. is incorporated herein by reference to
Exhibit (2) as filed with its Form 10-Q filed on August 16,
1999.
(b) Stock Purchase Agreement as of September 30, 1999, by
and among Orkin Canada, Inc., Orkin Expansion, Inc., S.C.
Johnson Commercial Markets, Inc., and S.C. Johnson
Professional, Inc. is incorporated herein by reference to
Exhibit (2)(b) as filed with its Form 10-K for the year
ended December 31, 1999.
(c) Asset Purchase Agreement as of October 19, 1999 by and
between Orkin Exterminating Company, Inc., Redd Pest Control
Company, Inc., and Richard L. Redd is incorporated herein by
reference to Exhibit (2)(c) as filed with its Form 10-K for
the year ended December 31, 1999.
34
(d) First Amendment to Asset Purchase Agreement dated as of
December 1, 1999, by and among Orkin Exterminating Company,
Inc., Redd Pest Control Company, Inc. and Richard L. Redd is
incorporated herein by reference to Exhibit (2)(d) as filed
with its Form 10-K for the year ended December 31, 1999.
(e) Asset Purchase Agreement, dated as of October 1, 1997,
by and among Rollins, Ameritech Monitoring Services, Inc.
and Ameritech Corporation is incorporated herein by
reference to Exhibit 2.1 as filed with its Form 8-K Current
Report filed October 16, 1997.
(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. are 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.
(iv) Amendment to the By-laws of Rollins, Inc.
(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) (a) Rollins, Inc. 1984 Employee Incentive Stock Option
Plan is incorporated herein by reference to Exhibit (10) as
filed with its Form 10-K for the year ended December 31,
1996.
(10) (b) Rollins, Inc. 1994 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit (10)(b) as filed
with its Form 10-K for the year ended December 31, 1999.
(10) (c) Rollins, Inc. 1998 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit A of the March
24, 1998 Proxy Statement for the Annual Meeting of
Stockholders held on April 28, 1998.
(10) (d) Lease Agreement dated July 1, 2002 between Rollins
Continental, Inc. and Rollins Ranch, a division of LOR, Inc.
incorporated herein by reference as filed with its Form 10-Q
for the quarter ended September 30, 2002 filed on November
14, 2002.
(10) (e) Stock Option Agreement dated January 22, 2002 for
Gary W. Rollins, Chief Executive Officer, President and
Chief Operating Officer.
(10) (f) Closing Statement dated October 31, 2002 between
Rollins Continental, Inc. and RTC, LLC, a company controlled
by R. Randall Rollins, Chairman of the Board of Rollins,
Inc.
(13) Portions of the Annual Report to Stockholders for the
year ended December 31, 2002, which are specifically
incorporated herein by reference.
(21) Subsidiaries of Registrant.
(23) Consent of Ernst & Young LLP, Independent Auditors.
(24) Powers of Attorney for Directors.
(99.1) Certification of Periodic Financial Reports.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ GARY W. ROLLINS
-------------------------
Gary W. Rollins
Chief Executive Officer, President and
Chief Operating Officer
(Principal Executive Officer)
Date: March 17, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ GARY W. ROLLINS By: /s/ HARRY J. CYNKUS
--------------------- ----------------------
Gary W. Rollins Harry J. Cynkus
Chief Executive Officer, President Chief Financial Officer
and Chief Operating Officer and Treasurer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Date: March 17, 2003 Date: March 17, 2003
The Directors of Rollins, Inc. (listed below) executed a power of attorney
appointing Gary W. Rollins their attorney-in-fact, empowering him to sign this
report on their behalf.
R. Randall Rollins, Director
Wilton Looney, Director
Henry B. Tippie, Director
James B. Williams, Director
Bill J. Dismuke, Director
- -------------------------------------------------------------------------------
/s/ GARY W. ROLLINS
- --------------------
Gary W. Rollins
As Attorney-in-Fact & Director
March 17, 2003
36
Certifications
I, Gary W. Rollins, Chief Executive Officer, President and Chief Operating
Officer of Rollins, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Rollins, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 17, 2003 By: /s/ GARY W. ROLLINS
--------------------
Gary W. Rollins
Chief Executive Officer,
President and Chief
Operating Officer
(Member of the Board of
Directors)
37
I, Harry J. Cynkus, Chief Financial Officer and Treasurer of Rollins, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Rollins, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 17, 2003 By: /s/ HARRY J. CYNKUS
--------------------
Harry J. Cynkus
Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
38
ROLLINS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
(Item 15)
Page Number From
This Form 10-K
----------------
(1) Consolidated Financial Statements
Consolidated Statements of Financial Position
as of December 31, 2002 and 2001 17
Consolidated Statements of Income for each of
the three years in the period ended December 31, 2002 18
Consolidated Statements of Stockholders' Equity
for each of the three years in the period
ended December 31, 2002 19
Consolidated Statements of Cash Flows for each
of the three years in the period ended
December 31, 2002 20
Notes to Consolidated Financial Statements 21-32
Report of Ernst & Young LLP, Independent Auditors 44
Report of Arthur Andersen LLP, Independent Public
Auditors 46
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts 40
Schedules not listed above have been omitted as either not applicable,
immaterial or disclosed in the Consolidated Financial Statements or notes
thereto.
39
ROLLINS, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(In thousands of dollars)
Additions
----------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts(1) Deductions (2) Period
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
Allowance for doubtful accounts $ 6,973 $ 5,705 $ --- $ 7,237 $ 5,441
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Allowance for doubtful accounts $ 8,729 $ 5,950 $ --- $ 7,706 $ 6,973
- -------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
Allowance for doubtful accounts $ 4,929 $ 8,056 $ 1,850 $ 6,106 $ 8,729
- -------------------------------------------------------------------------------------------------------------------------------
NOTE: (1) Charged to Other Accounts represents beginning balances
of allowances for doubtful accounts of acquired
companies.
(2) Deductions represent the write-off of uncollectible
receivables, net of recoveries.
40
ROLLINS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Number
(2)(a) Asset Purchase Agreement by and between Orkin
Exterminating Company, Inc. and PRISM Integrated Sanitation
Management, Inc. is incorporated herein by reference to
Exhibit (2) as filed with its Form 10-Q filed on August 16,
1999.
(b) Stock Purchase Agreement as of September 30, 1999, by
and among Orkin Canada, Inc., Orkin Expansion, Inc., S.C.
Johnson Commercial Markets, Inc., and S.C. Johnson
Professional, Inc. is incorporated herein by reference to
Exhibit (2)(b) as filed with its Form 10-K for the year
ended December 31, 1999.
(c) Asset Purchase Agreement as of October 19, 1999 by and
between Orkin Exterminating Company, Inc., Redd Pest Control
Company, Inc., and Richard L. Redd is incorporated herein by
reference to Exhibit (2)(c) as filed with its Form 10-K for
the year ended December 31, 1999.
(d) First Amendment to Asset Purchase Agreement dated as of
December 1, 1999, by and among Orkin Exterminating Company,
Inc., Redd Pest Control Company, Inc. and Richard L. Redd is
incorporated herein by reference to Exhibit (2)(d) as filed
with its Form 10-K for the year ended December 31, 1999.
(e) Asset Purchase Agreement, dated as of October 1, 1997,
by and among Rollins, Ameritech Monitoring Services, Inc.
and Ameritech Corporation is incorporated herein by
reference to Exhibit 2.1 as filed with its Form 8-K Current
Report filed October 16, 1997.
(f) Lease Agreement dated July 1,2002 between Rollins
Continental, Inc. and Rollins Ranch, a division of LOR, Inc.
is incorporated herein by reference to Exhibit (2)(f) as
filed with its Form 10-Q filed on November 14, 2002.
(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. are 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.
(iv) Amendment to the By-laws of Rollins, Inc.
(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) (a) Rollins, Inc. 1984 Employee Incentive Stock Option
Plan is incorporated herein by reference to Exhibit (10) as
filed with its Form 10-K for the year ended December 31,
1996.
(10) (b) Rollins, Inc. 1994 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit (10)(b) as filed
with its Form 10-K for the year ended December 31, 1999.
(10) (c) Rollins, Inc. 1998 Employee Stock Incentive Plan is
incorporated herein by reference to Exhibit A of the March
24, 1998 Proxy Statement for the Annual Meeting of
Stockholders held on April 28, 1998.
(10) (d) Lease Agreement dated July 1, 2002 between Rollins
Continental, Inc. and Rollins Ranch, a division of LOR, Inc.
incorporated herein by reference as filed with its Form 10-Q
for the quarter ended September 30, 2002 filed on November
14, 2002.
(10) (e) Stock Option Agreement dated January 22, 2002 for
Gary W. Rollins, Chief Executive Officer, President and
Chief Operating Officer.
41
(10) (f) Closing Statement dated October 31, 2002 between
Rollins Continental, Inc. and RTC, LLC, a company controlled
by R. Randall Rollins, Chairman of the Board of Rollins,
Inc.
(13) Portions of the Annual Report to Stockholders for the
year ended December 31, 2002, which are specifically
incorporated herein by reference.
(21) Subsidiaries of Registrant.
(23) Consent of Ernst & Young LLP, Independent Auditors.
(24) Powers of Attorney for Directors.
(99.1) Certification of Periodic Financial Reports.
42
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
To the Stockholders of Rollins, Inc.:
The management of Rollins, Inc. is responsible for the integrity and
objectivity of the consolidated financial statements and other financial
information presented in this report. These statements have been prepared in
conformity with accounting principles generally accepted in the United States
consistently applied and include amounts based on the best estimates and
judgments of management.
Rollins maintains a system of internal accounting controls designed to
provide reasonable assurance, at a reasonable cost, that assets are safeguarded
against loss or unauthorized use and that the financial records are adequate and
can be relied upon to produce financial statements in accordance with accounting
principles generally accepted in the United States. The internal control system
is augmented by written policies and procedures, an internal audit program and
the selection and training of qualified personnel. This system includes policies
that require adherence to ethical business standards and compliance with all
applicable laws and regulations.
The consolidated financial statements for the year ended December 31, 2002,
have been audited by Ernst & Young LLP, independent auditors, and the financial
statements for the years ended December 31, 2001 and 2000 have been audited by
other auditors. In connection with its audit, Ernst & Young develops and
maintains an understanding of Rollins' accounting and financial controls and
conducts tests of Rollin's accounting systems and other related procedures as it
considers necessary to render an opinion on the financial statements.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with Rollins' management, internal auditors and
independent auditors to review matters relating to the quality of financial
reporting and internal accounting controls, and the independent nature, extent
and results of the audit effort. The Committee recommends to the Board
appointment of the independent auditors. Both the internal auditors and the
independent auditors have access to the Audit Committee, with or without the
presence of management.
/s/ GARY W. ROLLINS /s/ HARRY J. CYNKUS
- ------------------- -------------------
Gary W. Rollins Harry J. Cynkus
Chief Executive Officer, President and Chief Financial Officer
Chief Operating Officer and Treasurer
Atlanta, Georgia
February 15, 2003
43
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Rollins, Inc.
We have audited the accompanying consolidated statement of financial
position of Rollins, Inc. and Subsidiaries as of December 31, 2002, and the
related consolidated statements of income, stockholders' equity and cash flows
for the year then ended. Our audit also included the financial statement
schedule for the year ended December 31, 2002, listed in the Index at Item
15(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit. The consolidated financial
statements and schedule of Rollins, Inc. and Subsidiaries as of December 31,
2001, and for the two years then ended, were audited by other auditors who have
ceased operations and whose report dated February 15, 2002 expressed an
unqualified opinion on those statements and schedule before the restatement
adjustments described in Notes 1, 4, 5 and 6.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2002 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Rollins, Inc. and Subsidiaries at December 31, 2002, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule for the year
ended December 31, 2002, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed above, the consolidated financial statements and schedule of
Rollins, Inc. and Subsidiaries as of December 31, 2001 and for the two years
then ended were audited by other auditors who have ceased operations. As
described in Note 1, on January 28, 2003 the Company's board of directors
approved a 3-for-2 stock split, and all references to number of shares and per
share information in the consolidated financial statements have been adjusted to
reflect the stock split on a retroactive basis. We audited the adjustments that
were applied to restate the number of shares and per share information reflected
in the 2001 and 2000 consolidated financial statements. Our procedures included
(a) agreeing the authorization for the 3-for-2 stock split to the Company's
underlying records obtained from management, and (b) testing the mathematical
accuracy of the restated number of shares, earnings per share, common stock
stated at par value and other applicable disclosures such as stock options. Also
as discussed in Note 4, the consolidated financial statements of Rollins, Inc.
and Subsidiaries as of December 31, 2001 and for the two years then ended have
been revised to include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangibles, which
was adopted by the Company as of January 1, 2002. Our audit procedures with
respect to the disclosures in Note 4 with respect to 2001 and 2000 included (a)
agreeing the previously reported net income to the previously issued financial
statements, (b) agreeing the adjustments to reported net income representing
amortization expense (including any related tax effects) recognized in those
periods related to goodwill that is no longer being amortized as a result of
initially applying Statement No. 142 (including any related tax effects) to the
Company's underlying records obtained from management, (c) agreeing all 2001
separate asset and accumulated amortization balances as disclosed for individual
intangibles to the Company's underlying accounting records obtained from
management, (d) agreeing all 2001 and 2000 amortization expense disclosures to
the Company's underlying accounting records obtained from management and (e)
testing the mathematical accuracy of the reconciliation of pro forma net income
to reported net income. Also as discussed in Note 6, the consolidated financial
statements of Rollins, Inc. and Subsidiaries as of December 31, 2001 and for the
two years then ended have been revised to include the transitional
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disclosures required by FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Direct Guarantees of
Indebtedness of Others, which were adopted by the Company as of December 31,
2002. Our audit procedures with respect to the disclosures in Note 6 with
respect to 2001 and 2000 included (a) agreeing the previously reported beginning
and ending balances of the accrual for termite contracts to the previously
issued financial statements and (b) agreeing the provisions and settlements,
claims and expenditures made during the year to the Company's underlying records
obtained from management. The disclosures in Note 5 of the consolidated
financial statements of Rollins, Inc. and Subsidiaries as of December 31, 2001
and for the two years then ended have been revised to disclose additional detail
with respect to certain components of deferred income tax amounts. Our audit
procedures with respect to the disclosures in Note 5 with respect to 2001
included agreeing the components of deferred tax amounts to the Company's
underlying records obtained from management. In our opinion, such adjustments
and disclosures are appropriate and have been properly applied. However, we were
not engaged to audit, review, or apply any procedures to the 2001 and 2000
consolidated financial statements of the Company other than with respect to such
adjustments and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 and 2000 consolidated financial statements taken as a
whole.
/s/ Ernst & Young LLP
- ----------------------
Ernst & Young LLP
Atlanta, Georgia
February 24, 2003
45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rollins, Inc.:
We have audited the accompanying statements of financial position of
Rollins, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 2001
and 2000 and the related statements of income, changes in stockholder equity and
cash flows for each of the three years in the period ended December 31, 2001.
These financial statements and the schedule referred to below are the
responsibility of the Company's Management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by Management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rollins, Inc. and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule listed in Item 14 is the
responsibility of the Company's Management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Atlanta, Georgia
February 15, 2002
NOTE: THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP, OUR
FORMER INDEPENDENT ACCOUNTANTS. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP IN CONNECTION WITH THE FILING OF THE FORM 10-K.
46