8-K/A 1 we7168k.txt 8-K/A PRO FORMA UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): April 30, 2004 ROLLINS, INC. (Exact name of registrant as specified in its charter) 1-4422 (Commission File Number.) Delaware 51-0068479 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 2170 Piedmont Road, N.E., Atlanta, Georgia (Address of principal executive offices) 30324 (Zip Code) (404) 888-2000 (Registrant's telephone number, including area code) ------------------------------------------ On May 17, 2004, Rollins, Inc. filed with the Securities and Exchange Commission (the "Commission") a Report on Form 8-K (the "Initial 8-K Report") with respect to its acquisition on April 30, 2004, of substantially all of the assets of Western Pest Services (the "Seller"). In accordance with Item 7(a)(4) of Form 8-K, the Initial 8-K Report did not include the historical Seller financial statements or the unaudited pro forma combined financial information of Rollins (collectively, the "Financial Information") and instead contained an undertaking to file the Financial Information with the Commission in an amendment to the Initial 8-K Report as soon as practicable, but not later than July 16, 2004. This amendment is being filed for the purpose of satisfying the Registrant's undertaking to file the Financial Information, and this amendment should be read in conjunction with the Initial 8-K Report. ITEM 7. Financial Statements and Exhibits. The following financial statements, pro forma financial information and exhibits were filed as part of this report: (a) Financial Statements of Western Indutries, Inc. pursuant to Rule 3-05 of Regulation S-X: 2 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Western Industries, Inc. We have audited the accompanying consolidated balance sheet of Western Industries, Inc. and subsidiaries as of December 31, 2003 and the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western Industries, Inc. and subsidiaries at December 31, 2003 and the results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ WISS & COMPANY, LLP ----------------------- WISS & COMPANY, LLP Livingston, New Jersey May 10, 2004 3
WESTERN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (in Thousands) December 31, 2003 ----------------------- ASSETS CURRENT ASSETS: Cash and equivalents $ 5,476 Securities available-for-sale 2,542 Accounts receivable, less allowance for doubtful accounts of $510 6,843 Inventories 2,886 Materials and supplies 1,618 Prepaid expenses and other current assets 1,768 Advances to affiliates 379 Refundable income taxes 3 Deferred income taxes 494 ----------------------- Total Current Assets 22,009 ----------------------- PROPERTY, PLANT AND EQUIPMENT 5,130 ----------------------- OTHER ASSETS: Cash surrender value of life insurance, less related loans of $266 4,692 Intangible assets 2,284 Deferred compensation plan 3,723 Other assets 310 ----------------------- Total Other Assets 11,009 ----------------------- Total Assets $ 38,148 ======================= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 12,799 Income taxes payable 508 Current portion of long-term debt 205 Current portion of deferred compensation 101 Deferred revenues 8,797 ----------------------- Total Current Liabilities 22,410 ----------------------- OTHER LIABILITIES: Deferred compensation plan, less current portion 5,687 Long-term debt, less current portion 1,837 Deferred income taxes 23 Deferred revenues 532 ----------------------- Total Liabilities 8,079 ----------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock 885 Retained earnings 5,089 Accumulated other comprehensive income 1,685 ----------------------- Total Stockholders' Equity 7,659 ----------------------- Total Liabilities and Stockholders' Equity $ 38,148 ======================= The accompanying notes to the financial statements are an integral part of this statement.
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WESTERN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (in Thousands) Year Ended December 31, 2003 -------------------------------- REVENUES: Net sales $ 96,906 Agency fees 1,468 -------------------------------- 98,374 -------------------------------- COSTS AND EXPENSES: Cost of services rendered and products sold 53,722 Depreciation and amortization 1,686 Selling, general and administrative 42,021 Interest and other income, net (198) -------------------------------- 97,231 -------------------------------- INCOME BEFORE INCOME TAXES 1,143 -------------------------------- INCOME TAXES: Current 518 Deferred (205) -------------------------------- 313 -------------------------------- NET INCOME 830 ================================ OTHER COMPREHENSIVE INCOME - Unrealized gain on securities available-for-sale 633 -------------------------------- COMPREHENSIVE INCOME $ 1,463 ================================ The accompanying notes to the financial statements are an integral part of this statement.
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WESTERN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in Thousands) Year Ended December 31, 2003 ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 830 Adjustments to reconcile net income to net cash flows from operating activities: cash flows from operating activities: Depreciation and amortization 1,687 Deferred income taxes (205) Interest credited to long-term debt 94 Gain on sale of property (153) Provision for losses on accounts receivable 398 Provision for insurance reserve 1,546 Changes in operating assets and liabilities: Accounts receivable (954) Inventories 775 Materials and supplies (191) Prepaid expenses and other current assets 211 Refundable income taxes 27 Other assets 54 Accounts payable and accrued expenses 331 Deferred revenue 1,358 Income taxes payable 166 ------------------ Net cash flows from operating activities 5,974 ================== CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (716) Payments received on notes receivable 12 Proceeds from sale of property, plant and equipment 546 Purchase of available-for-sale securities (65) Cash surrender value of life insurance (614) Advances to affiliates (29) Cost of customer lists and computer software (375) ------------------ Net cash flows from investing activities (1,241) ================== CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 47 Payments of long-term debt (522) Payment of dividends (3,628) ------------------ Net cash flows from financing activities (4,103) ================== NET CHANGE IN CASH AND EQUIVALENTS 630 CASH AND EQUIVALENTS, BEGINNING OF YEAR 4,846 ------------------ CASH AND EQUIVALENTS, END OF YEAR $ 5,476 ================== SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid $ 328 Interest paid $ 206 Non-cash investing activity: Unrealized gain on securities available-for-sale $ 633 ================== The accompanying notes to the financial statements are an integral part of this statement.
6 WESTERN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2003 Dollars in Thousands Note 1 - Nature of the Business and Summary of Significant Accounting Policies: Principles of Consolidation - The consolidated financial statements include the accounts of Western Industries, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany transactions have been eliminated upon consolidation. Nature of the Business - The Company is engaged in pest control and the distribution of pesticides and chemicals. The Company primarily operates in the Mid-Atlantic states and Florida and is headquartered in Parsippany, New Jersey. 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 on a monthly or tri-monthly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, residential pest control customers sign an initial one-year contract, and revenues are recognized at the time services are performed. For commercial 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 on the delivery of units method. At the inception of a new baiting services contract upon quality control review of the installation, the Company recognizes revenue for the delivery of the monitoring stations, initial directed liquid termiticide treatment and installation of the monitoring services. The amount deferred for the undelivered monitoring element 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 renewal revenue is 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 when corresponding service is provided. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Equivalents - The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Securities Available-for-Sale - Securities available for sale are reported at their fair values and consist of equity securities not classified as trading securities or as securities to be held to maturity. Unrealized holding gains and losses are included in other comprehensive income. Inventories - Inventories consist principally of pesticides and are stated at the lower of cost (last-in, first-out method [LIFO]) or market. If the first-in, first-out [FIFO] method of inventory accounting had been used, inventories would have been approximately $850 higher than reported at December 31, 2003, and net income for 2003 would have increased by approximately $10. Materials and Supplies - Materials and supplies are stated at cost and are to be used in pest control applications. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets which range from three to forty years. Repairs and maintenance costs are expensed as incurred; major renewals and betterments are capitalized. When assets are disposed of, the assets and related allowances for depreciation are eliminated from the accounts and any resulting gain or loss is reflected in operations. 7 Insurance - The Company self-insures, up to specified limits, certain risks related to general liability, workers' compensation and vehicle liability. The estimated costs of existing and future claims under the self-insurance program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The Company contracts an independent third party actuary to provide the Company a range of estimated liability based upon historical claims information. The actuarial study is a major consideration, along with Management's knowledge of changes in business practice and existing claims compared to current balances. The reserve is established based on all these factors. Management's judgment is inherently subjective and a number of factors are outside Management's knowledge and control. Additionally, historical information is not always an accurate indication of future events. Accrual for Termite Contract Damages - Accrual for termite contract damages represents the estimated costs of reapplications, repair claims, associated labor, chemicals and other costs. The Company contracts an independent third party actuary to provide the Company a range of estimated liability based upon historical claims information. The actuarial study is a major consideration 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. Intangible Assets - Intangible assets at December 31, 2003, are stated at cost and consist principally of customer lists, computer software and non-compete agreements which are being amortized over fifteen, five and ten years, respectively, and goodwill which is tested for impairment annually for possible reduction in fair value below its carrying amount. The Company conducted the required impairment review in 2003, and determined that no impairment existed. Concentrations of Credit Risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. In management's opinion, cash and cash equivalents are with high credit quality financial institutions and concentration of credit risk is limited. At times, cash balances may exceed insured limits. The Company periodically reviews its trade receivables and establishes an allowance for uncollectible accounts. Management feels the credit risk beyond the established allowance is limited. Vendor Concentration - Purchases from one unaffiliated supplier comprised approximately 13% of the Company's net purchases in 2003. Retirement Plan - The Company has a 401(k) retirement savings plan (the "Plan") for all of its employees who meet certain eligibility criteria whereby it contributes 3% of employee annual compensation. The Plan also requires the Company to contribute 50% of employee contributions limited to 1.5% on the first 3% of employee compensation. The Plan also contains a feature allowing additional contributions from Company profits which may be awarded each year at the discretion of management. These amounts are allocated to participants based on the ratio of the participant's compensation to the total compensation of all participants. Company 401(k) and profit sharing contributions totaled $1,920 in 2003. Deferred Compensation Plan - The Company has a Deferred Compensation Plan providing certain employees with the opportunity to participate in the program. Under the program, participants may defer up to 20% of their base compensation and up to 100% of bonuses earned. Amounts deferred are invested by the Company. The assets of the plan are segregated and consists of various marketable securities and other liquid assets as determined by the participants, and remain the sole property of the Company until such time when the amounts are distributed to the participants. The program is not qualified under Section 401 of the Internal Revenue Code. In addition, the Company has certain agreements with four of its current or retired executives whereby the Company will make or continue payments upon retirement of the respective individual for a ten year period (Note 8). Deferred Revenues - Deferred termite reinspection revenue of $3,504 at December 31, 2003 relate to contracts which expire beginning after December 31, 2003. The related property is inspected annually; if infestation or reinfestation is determined to have occurred, the Company will treat or re-treat the property. In the opinion of management, the deferred revenues are sufficient to cover prospective costs. Deferred service contract revenue of $5,825 as of December 31, 2003, resulted from the sale of service contracts payable in advance. Revenue is recognized when contractual requirements are performed, while any portion of the sales price applicable to succeeding years is deferred. Income Taxes - Deferred income taxes are recognized for the tax consequences of "temporary 8 differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company (except for two of its subsidiaries) has elected under Section 1361 of the Internal Revenue Code and under certain state statutes to be taxed as an S Corporation. Under these provisions, all earnings and losses of the Company for federal and state income tax reporting purposes are reported on the income tax returns of the shareholders. Other than the two subsidiaries referred to above, no provision has been made for federal income taxes. The Company is subject to state income taxes at a reduced rate. Advertising Costs - Advertising costs are charged to operations as incurred and totaled approximately $2,900 in 2003. New Accounting Standard - In January 2003, as revised in December 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). Under that interpretation, certain entities known as "Variable Interest Entities" (VIE) must be consolidated by the "primary beneficiary" of the entity. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. For VIE's in which a significant (but not majority) variable interest is held, certain disclosures are required. The measurement principles of this interpretation will be effective for the Company's December 31, 2004 financial statements. At December 31, 2003, the Company is a beneficiary in three entities that were formed in connection with its operations. Due to the sale of the Company's principal operations (Note 8) in 2004, the Company currently is evaluating the classification of these entities under FIN 46. At December 31, 2003, the maximum exposure to loss was approximately $9,000. Note 2 - Securities Available-for-Sale: Securities available-for-sale at December 31, 2003, consist of equity securities having a cost basis of $858 and unrealized gains of $1,685. Note 3 - Property, Plant and Equipment: Property, plant and equipment consist of the following: December 31, 2003 ------------ Land $ 530 Buildings and improvements 4,633 Office furniture and equipment 4,080 Service equipment 3,102 ------------ 12,345 Less: Accumulated depreciation 7,215 ------------ $ 5,130 ============ Depreciation expense for 2003 totaled $1,099. 9 Note 4 - Intangible Assets: Intangible assets consist of the following: December 31, 2003 ------------ Customer lists $ 2,348 Computer software 1,067 Non-compete agreements 819 Goodwill 120 Other 94 ------------ 4,448 Less: Accumulated amortization 2,164 ------------ $ 2,284 ============ Note 5 - Accounts Payable and Accrued Expenses: Accounts payable and accrued expenses consist of the following: December 31, 2003 ------------ Accounts payable $ 2,001 Accrued payroll and bonuses 5,357 Accrued insurance costs 2,221 Accrued profit sharing and 401(k) contributions 1,659 Accrual for termite contract damages 293 Other accrued expenses 1,268 ------------ $ 12,799 ============ 10 Note 6 - Long-term Debt: Long-term debt at December 31, 2003, consists of the following: First mortgage payable in monthly installments plus interest, collateralized by land and buildings:
Monthly Interest Due December 31, Property Installment Rate Date 2003 ------------------------------------------------------------------------------- Richmond, VA $ 2 8.20% January 2009 $ 119 Wilmington, DE 1 7.6 December 2012 60 Fairfax, VA 3 8.0 March 2013 281 Paramus, NJ 2 7.75 November 2009 190 Note bearing interest at 8.5% per annum, payable interest only to 2005, when principal is due 1,198 Other notes payable, due through 2005 194 ---------- 2,042 Less: Current maturities 205 ---------- $ 1,837 ==========
Long-term debt at December 31, 2003, matures as follows: Year Ending December 31, ------------------------- 2004 $ 205 2005 1,332 2006 74 2007 75 2008 76 2009 and thereafter 280 ------------ $ 2,042 ============ Note 7 - Commitments, Contingencies and Related Party Transactions: Leases - The Company leases office space and motor vehicles under various operating leases, expiring through 2007, and seven offices leased on a month-to-month basis, from companies owned by its officers and stockholders. The leases provide for payment of real estate taxes, insurance, maintenance and repairs. Future minimum lease payments under all noncancelable operating leases with an initial or remaining lease term in excess of one year are as follows: Year Ending December 31, ------------------------ 2004 $ 3,442 2005 2,240 2006 1,419 2007 359 ------------- $ 7,460 ============= Rent expense totaled $4,363 in 2003, including $313 to affiliates. Advances due from the above affiliates at December 31, 2003, totaled $379, and bear interest at prime (4% at December 31, 2003). Litigation - The Company is a defendant in a legal action pending in the Supreme Court of New York, County of Bronx, under which the plaintiff is seeking monetary damages of $1,000. The Company has filed a motion to dismiss and intends to defend itself vigorously. The motion to dismiss and a scheduled date for hearing are pending. The final outcome of the litigation cannot presently be determined. 11 The Company has been served a summons and complaint in connection with a wrongful death claim against a facility located in Florida serviced by the Company. The plaintiff is pursuing this claim against the facility in which the Company is presently not a named party. The final outcome of this matter and possible loss, if any, cannot presently be determined. The Company is subject to various other legal proceedings arising in the ordinary course of business. It is not possible at this time to predict the outcome of the unsettled legal actions; however, in the opinion of management, the disposition of such matters will not have a material adverse effect on the consolidated financial statements. Environmental Costs - The Company expenses environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liabilities on a site-by-site basis and records a liability at the time when it is probable and can be reasonably estimated. The estimated liability is not discounted or reduced for possible recoveries from insurance carriers. The Company has accrued $450 for estimated environmental remediation costs at December 31, 2003. Note 8 - Subsequent Event: On April 30, 2004, the Company sold its pest-control operations and certain other assets for approximately $110.0 million receiving cash and marketable securities. In conjunction with the sale of the pest-control operations, the Company agreed to pay three of the four employees under its deferred compensation agreement, the present value of their future retirement benefits totaling approximately $950. The fourth employee, who retired in 2001, will be paid $101 per annum through 2022. 12
WESTERN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (in Thousands) March 31, 2004 (Unaudited) ASSETS ------------------------ CURRENT ASSETS: Cash and equivalents $ 6,376 Securities available-for-sale 2,627 Accounts receivable, less allowance for doubtful accounts of $555 8,021 Inventories 3,213 Materials and supplies 1,755 Prepaid expenses and other current assets 1,998 Advances to affiliates 393 Refundable income taxes 126 Deferred income taxes 501 ------------------------ Total Current Assets 25,010 ------------------------ PROPERTY, PLANT AND EQUIPMENT 5,228 ------------------------ OTHER ASSETS: Cash surrender value of life insurance, less related loans of $266 3,954 Intangible assets 2,259 Deferred compensation plan 4,170 Other assets 309 ------------------------ Total Other Assets 10,692 ------------------------ Total Assets $ 40,930 ======================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 15,536 Income taxes payable 380 Current portion of long-term debt 169 Current portion of deferred compensation 101 Deferred revenues 7,816 ------------------------ Total Current Liabilities 24,002 ------------------------ OTHER LIABILITIES: Deferred compensation plan, less current portion 6,109 Long-term debt, less current portion 569 Deferred income taxes 23 Deferred revenues 576 ------------------------ Total Liabilities 7,277 ------------------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock 885 Retained earnings 7,004 Accumulated other comprehensive income 1,762 ------------------------ Total Stockholders' Equity 9,651 ------------------------ Total Liabilities and Stockholders' Equity $ 40,930 ======================== The accompanying notes to the financial statements are an integral part of this statement.
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WESTERN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Unaudited) (in Thousands) Three Months Ended March 31, 2004 -------------------------------- REVENUES: Net sales $ 24,330 Agency fees 312 -------------------------------- 24,642 -------------------------------- COSTS AND EXPENSES: Cost of services rendered and products sold 13,239 Depreciation and amortization 401 Selling, general and administrative 8,803 Interest and other income, net 23 -------------------------------- 22,466 -------------------------------- INCOME BEFORE INCOME TAXES 2,176 -------------------------------- INCOME TAXES: Current 40 Deferred (8) -------------------------------- 32 -------------------------------- NET INCOME 2,144 ================================ OTHER COMPREHENSIVE INCOME - Unrealized gain on securities available-for-sale 77 -------------------------------- COMPREHENSIVE INCOME $ 2,221 ================================ The accompanying notes to the financial statements are an integral part of this statement.
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WESTERN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (in Thousands) Three Months Ended March 31, 2004 ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,144 Adjustments to reconcile net income to net cash flows from operating activities: cash flows from operating activities: Depreciation and amortization 401 Deferred income taxes (8) Provision for losses on accounts receivable 44 Changes in operating assets and liabilities: Accounts receivable (1,222) Inventories (327) Materials and supplies (137) Prepaid expenses and other current assets (232) Refundable income taxes (123) Deferrred compensation plan assets (447) Deferrred compensation plan payable 442 Accounts payable and accrued expenses 2,736 Deferred revenue (935) Income taxes payable (128) ------------------ Net cash flows from operating activities 2,188 ================== CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (462) Payments received on notes receivable 2 Purchase of available-for-sale securities (8) Cash surrender value of life insurance 738 Advances to affiliates (14) Cost of customer lists and computer software (10) ------------------ Net cash flows from investing activities 246 ================== CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt (1,304) Payment of dividends (230) ------------------ Net cash flows from financing activities (1,534) ================== NET CHANGE IN CASH AND EQUIVALENTS 900 CASH AND EQUIVALENTS, BEGINNING OF YEAR 5,476 ------------------ CASH AND EQUIVALENTS, END OF YEAR $ 6,376 ================== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 291 Non-cash investing activity: Unrealized gain on securities available-for-sale $ 77 ================== The accompanying notes to the financial statements are an integral part of this statement.
15 WESTERN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 Dollars in Thousands Note 1 - Nature of the Business and Summary of Significant Accounting Policies: Principles of Consolidation - The consolidated financial statements include the accounts of Western Industries, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany transactions have been eliminated upon consolidation. Nature of the Business - The Company is engaged in pest control and the distribution of pesticides and chemicals. The Company primarily operates in the Mid-Atlantic states and Florida and is headquartered in Parsippany, New Jersey. Interim Reporting - The interim financial statements included herein reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. Such adjustments consist solely of normal recurring accruals. Results for interim periods are not necessarily indicated of results for a full year. 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 on a monthly or tri-monthly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, residential pest control customers sign an initial one-year contract, and revenues are recognized at the time services are performed. For commercial 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 on the delivery of units method. At the inception of a new baiting services contract upon quality control review of the installation, the Company recognizes revenue for the delivery of the monitoring stations, initial directed liquid termiticide treatment and installation of the monitoring services. The amount deferred for the undelivered monitoring element 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 renewal revenue is 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 when corresponding service is provided. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Equivalents - The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Securities Available-for-Sale - Securities available for sale are reported at their fair values and consist of equity securities not classified as trading securities or as securities to be held to maturity. Unrealized holding gains and losses are included in other comprehensive income. Inventories - Inventories consist principally of pesticides and are stated at the lower of cost (last-in, first-out method [LIFO]) or market. Materials and Supplies - Materials and supplies are stated at cost and are to be used in pest control applications. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets which range from three to forty years. Repairs and maintenance costs are expensed as incurred; major renewals and betterments are capitalized. When assets are disposed of, the assets and related allowances for depreciation are eliminated from the accounts and any resulting gain or loss is reflected in operations. Insurance - The Company self-insures, up to specified limits, certain risks related to general liability, 16 workers' compensation and vehicle liability. The estimated costs of existing and future claims under the self-insurance program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The Company contracts an independent third party actuary to provide the Company a range of estimated liability based upon historical claims information. The actuarial study is a major consideration, along with Management's knowledge of changes in business practice and existing claims compared to current balances. The reserve is established based on all these factors. Management's judgment is inherently subjective and a number of factors are outside Management's knowledge and control. Additionally, historical information is not always an accurate indication of future events. Accrual for Termite Contract Damages - Accrual for termite contract damages represents the estimated costs of reapplications, repair claims, associated labor, chemicals and other costs. The Company contracts an independent third party actuary to provide the Company a range of estimated liability based upon historical claims information. The actuarial study is a major consideration 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. Concentrations of Credit Risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. In management's opinion, cash and cash equivalents are with high credit quality financial institutions and concentration of credit risk is limited. At times, cash balances may exceed insured limits. The Company periodically reviews its trade receivables and establishes an allowance for uncollectible accounts. Management feels the credit risk beyond the established allowance is limited. Retirement Plan - The Company has a 401(k) retirement savings plan (the "Plan") for all of its employees who meet certain eligibility criteria whereby it contributes 3% of employee annual compensation. The Plan also requires the Company to contribute 50% of employee contributions limited to 1.5% on the first 3% of employee compensation. The Plan also contains a feature allowing additional contributions from Company profits which may be awarded each year at the discretion of management. These amounts are allocated to participants based on the ratio of the participant's compensation to the total compensation of all participants. Deferred Compensation Plan - The Company has a Deferred Compensation Plan providing certain employees with the opportunity to participate in the program. Under the program, participants may defer up to 20% of their base compensation and up to 100% of bonuses earned. Amounts deferred are invested by the Company. The assets of the plan are segregated and consist of various marketable securities and other liquid assets as determined by the participants, and remain the sole property of the Company until such time when the amounts are distributed to the participants. The program is not qualified under Section 401 of the Internal Revenue Code. In addition, the Company has certain agreements with four of its current or retired executives whereby the Company will make or continue payments upon retirement of the respective individual for a ten year period (Note 8). Income Taxes - Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company (except for two of its subsidiaries) has elected under Section 1361 of the Internal Revenue Code and under certain state statutes to be taxed as an S Corporation. Under these provisions, all earnings and losses of the Company for federal and state income tax reporting purposes are reported on the income tax returns of the shareholders. Other than the two subsidiaries referred to above, no provision has been made for federal income taxes. The Company is subject to state income taxes at a reduced rate. New Accounting Standard - In December 2002, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). The interpretation requires that a variable interest entity be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 are effective for all variable interest entities created or acquired after January 31, 2003. In December 2003, the Financial Accounting Standards Board issued a revision to FIN 46 referred to as Interpretation No. 46(R). Among other provisions, the revision extends the adoption date of FIN 46 (R) to the first quarter of 2004 for variable interest entities created prior to February 1, 2003. The believes the adoption of the Interpretation, with respect to variable interest entities created prior to February 1, 2003, will not have a material impact on the financial position, results of operations or liquidity of the Company. During 2003, the Company adopted FIN 46 with 17 respect to franchise entities created after January 31, 2003. The adoption did not have a significant effect on the Company's financial position or results of operations. Note 2 - Property, Plant and Equipment: Property, plant and equipment consist of the following: March 31, 2004 (unaudited) ----------- Land $ 530 Buildings and improvements 4,659 Office furniture and equipment 4,141 Service equipment 3,145 ----------- 12,475 Less: Accumulated depreciation 7,247 ----------- $ 5,228 =========== Note 3 - Intangible Assets: Intangible assets consist of the following: March 31, 2004 (Unaudited) ----------- Customer lists $ 2,294 Computer software 1,111 Non-compete agreements 819 Goodwill 121 Other 131 ----------- 4,476 Less: Accumulated amortization 2,217 ----------- $ 2,259 =========== Note 4 - Accounts Payable and Accrued Expenses: Accounts payable and accrued expenses consist of the following: March 31, 2004 (Unaudited) ----------- Accounts payable $ 3,712 Accrued payroll and bonuses 5,115 Accrued insurance costs 2,447 Accrued profit sharing and 401(k) contributions 2,098 Accrual for termite contract damages 372 Other accrued expenses 1,792 ----------- $ 15,536 =========== 18 Note 5 - Long-term Debt: Long-term debt at March 31, 2004, consists of the following: First mortgage payable in monthly installments plus interest, collateralized by land and buildings: March 31, Monthly Interest Due 2004 Property Installment Rate Date (Unaudited) ------------------------------------------------------------------------------- Richmond, VA $ 2 8.20% January 2009 $ 113 Wilmington, DE 1 7.6 December 2012 59 Fairfax, VA 3 8.0 March 2013 273 Paramus, NJ 2 7.75 November 2009 188 Other notes payable, due through 2005 105 --------- 738 Less: Current maturities 169 --------- $ 569 ========= Note 6 - Subsequent Event: On April 30, 2004, the Company sold its pest-control operations and certain other assets for approximately $110.0 million, receiving cash and marketable securities. In conjunction with the sale of the pest-control operations, the Company agreed to pay three of the four employees under its deferred compensation agreement, the present value of their future retirement benefits totaling approximately $950. The fourth employee, who retired in 2001, will be paid $101 per annum through 2022. (b) Pro Forma financial information required pursuant to Article 11 of Regulation S-X: The pro forma financial statements give pro forma effect to the acquisition by the Company of Western Pest Services for approximately $110.0 million (the "Acquisition"). The Purchase Price was funded with cash on hand, the sale of property located in Okeechobee County, Florida and a $15.0 million dollar senior unsecured revolving credit facility with Wachovia Bank NA. The unaudited pro forma consolidated balance sheet was prepared as if the Acquisition occurred as of March 31, 2004. The unaudited pro forma consolidated statement of income for the year ended December 31, 2003 was prepared as if the Acquisition occurred as of January 1, 2003. The unaudited pro forma consolidated statement of income for the three months ended March 31, 2004 was prepared as if the Acquisition occurred as of January 1, 2004. The pro forma adjustments are based upon available information and assumptions that the Company believes are reasonable. The pro forma adjustment to reflect the allocation of the purchase price is based upon the preliminary information currently available, which may be revised, as additional information becomes available. The notes to the unaudited pro forma financial statements provide a more detailed discussion of how such adjustments were derived and presented in the pro forma financial statements. Such financial statements have been compiled from historical financial statements and other information, but do not purport to represent what the Company's financial position or results of operations actually would have been had the transactions occurred on the dates indicated, or to project the Company's financial performance for any future period. The pro forma statements of income do not reflect any synergies or other operating benefits that may be realized as the Company integrates Western Pest Services with the Company's existing operations. 19
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 2004 (in thousands) Pro Forma Pro Forma Rollins, Inc. Western Adjustments for for the ASSETS Historical Pest (a) the Acquisition Acquisition --------------------------------------------------------------------- CURRENT ASSETS: Cash and equivalents $ 97,888 $ 6,376 $ (93,836) (b,c,d,m) $ 10,428 Securities available-for-sale --- 2,627 (2,627) (m) --- Trade receivables, net 45,549 8,021 (3,653) (k) 49,917 Note receivable --- 10 5,368 (d) 5,378 Materials and supplies 10,147 1,755 11,902 Deferred Income Taxes 20,580 3,213 (3,213) (j) 20,580 Prepaid expenses and other current assets 10,092 3,008 (1,165) (k,m) 11,935 --------------------------------------------------------------------- Total Current Assets 184,256 25,010 (99,126) 110,140 --------------------------------------------------------------------- Equipment and Property, net 34,618 5,228 10,653 (b,k) 50,499 Cash surrender value of officers' life insurance 3,954 (3,518) (m) 436 Goodwill 72,521 34,865 (b) 107,386 Customer Contracts and Other Intangible Assets 28,924 2,259 57,148 (b,m) 88,331 Deferred income taxes 17,287 17,287 Other Assets 25,350 309 (179) (m) 25,480 Other-Deferred Compensation Plan --- 4,170 4,170 --------------------------------------------------------------------- Total Assets $ 362,956 $ 40,930 $ (157) $ 403,729 ===================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 15,325 3,712 (3,117) (k) 15,920 Accrued Insurance 13,050 2,447 15,497 Accrued Compensation and Related Liabilities 26,913 7,213 34,126 Unearned Revenue 50,702 7,816 58,518 Accrual for Termite Contracts 21,500 372 21,872 Other Current Liabilities 23,983 2,442 (845) (d,j,m) 25,580 Line-of-Credit Borrowing --- --- 15,000 (c) 15,000 --------------------------------------------------------------------- Total Current Liabilities 151,473 24,002 11,039 186,513 Accrued Insurance, Less Current Portion 24,764 24,764 Accrual for Termite Contracts, Less Current Portion 22,135 22,135 Long-Term Accrued Liabilities 16,741 592 (592) (m) 16,741 Deferred Compensation Plan 6,109 (952) (m) 5,157 Unearned Revenue --- 576 576 --------------------------------------------------------------------- Total Liabilities 215,113 31,279 9.494 255,886 --------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock 45,399 45,399 Additional Paid-In Capital 7,025 7,025 Western Pest Shareholders' Equity 9,651 (9,651) Accumulated Other Comprehensive Loss (300) (300) Retained earnings 95,719 --- 95,719 --------------------------------------------------------------------- Total Stockholders' Equity 147,843 9,651 (9,651) 147,843 --------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 362,956 $40,930 $ (157) $ 403,729 =====================================================================
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2003 (in thousands, except per share data) Pro Forma Pro Forma Rollins, Inc. Western Adjustments for for the Historical Pest (a) the Acquisition Acquisition --------------------------------------------------------------------- REVENUES $ 677,013 $ 98,374 $ (25,832) (k,l) $ 749,555 COSTS AND EXPENSES: Cost of Services Provided 362,422 53,722 (18,590) (k,l) 397,554 Depreciation and Amortization 20,179 1,686 5,469 (e,k) 27,334 Sales, General and Administrative 236,514 42,021 (5,896) (e,k) 272,639 (Gain)/Loss on Sale of Assets (1,700) (1,700) Interest Income/expense (432) (198) 1,640 (f) 1,010 --------------------------------------------------------------------- 616,983 97,231 (17,377) 696,837 --------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 60,030 1,143 (8,455) 52,718 PROVISION FOR INCOME TAXES 24,269 313 (3,219) (g) 21,363 --------------------------------------------------------------------- NET INCOME $ 35,761 $ 830 $ (5,236) $ 31,355 ===================================================================== EARNINGS PER SHARE - BASIC Net Income $ 0.79 $ 0.70 EARNINGS PER SHARE - DILUTED Net Income $ 0.77 $ 0.68 Average Shares Outstanding - Basic 45,069 45,069 Average Shares Outstanding - Diluted 46,206 46,206
21
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME THREE MONTHS ENDED MARCH 31, 2004 (in thousands, except per share data) Pro Forma Pro Forma Rollins, Inc. Western Adjustments for for the Historical Pest (a) the Acquisition Acquisition --------------------------------------------------------------------- REVENUES $ 158,692 $ 24,642 $ (5,506) (k,l) $ 177,828 COSTS AND EXPENSES: Cost of Services Provided 85,357 13,239 (4,225) (k,l) 94,371 Depreciation and Amortization 4,657 401 1,390 (h) 6,448 Sales, General and Administrative 54,175 8,803 (1,242) (h) 61,736 Loss on Sale of Assets 1 1 Interest Income/expense (150) 23 333 (i) 206 --------------------------------------------------------------------- 144,040 22,466 (3,744) 162,762 --------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 14,652 2,176 (1,762) 15,066 PROVISION FOR INCOME TAXES 5,934 32 (136) (j) 6,102 --------------------------------------------------------------------- NET INCOME $ 8,718 $ 2,144 $ (1,898) $ 8,964 ===================================================================== EARNINGS PER SHARE - BASIC Net Income $ 0.19 $ 0.22 EARNINGS PER SHARE - DILUTED Net Income $ 0.19 $ 0.21 Average Shares Outstanding - Basic 45,298 45,298 Average Shares Outstanding - Diluted 46,643 46,643
22 WESTERN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS a) Represents the unaudited historical financial statements of Western Industries, Inc. for the twelve months ended December 31, 2003 and as of March 31, 2004 and for the three months then ended. b) To reflect the Company's acquisition of Western Pest Service for a total purchase cost of approximately $110.0 million. The purchase price was funded with cash on hand, the sale of property located in Okeechobee County, Florida and a $15.0 million senior unsecured revolving credit facility with Wachovia Bank NA. The credit facility was repaid in full by the end of May 2004. The excess of purchase cost over the carrying amount of the net assets acquired has been allocated as follows: Real Estate $ 11,170 Customer Contracts 50,500 Trade Name 3,900 Patents 130 Non compete agreement 400 Goodwill 34,865 ---------- $ 100,965 ========== c) To record the additional borrowing of $15.0 million senior unsecured revolving credit facility with Wachovia Bank NA used to finance the purchase of Western Pest Services. The credit facility was repaid in full by the end of May 2004. d) To record the purchase and subsequent sale of Residex Corporation to an industry distribution group. No gain or loss was recognized on the transaction. Cash paid $ (5,226) Note receivable assumed 5,368 Note payable assumed (457) Cash received 315 ----------- Net Gain/(Loss) on Purchase and Subsequent Sale $ --- e) To reflect additional annual depreciation and amortization on the step up basis related to the tangible and intangible assets acquired, based upon the following depreciation/amortization periods. Asset Annual Value Years Expense --------- ----- ----------- Goodwill $ 34,865 n/a $ 0 Customer Contracts-Residential 13,200 8 1,650 Customer Contracts-Commercial 30,900 10 3,090 Customer Contracts-Termite 5,400 10 540 Customer Contracts-Fumigation 1,000 2.5 400 Trade Name 3,900 n/a 0 Patents 130 2.5 52 Non Compete Agreements 400 5 80 ----------- Total $ 5,812 In accordance with Statement of Financial Accounting Standard No. 142, goodwill resulting from the acquisition is not amortized. Additional annual depreciation expense based on the increase in cost for buildings purchased is calculated as follows: Historical carrying value, net $ 2,744 Fair market value 3,850 Increase in cost 1,106 Over 20 years 20 ----------- Additional annual depreciation expense $ 55 23 Annual rent savings on real estate acquired totals $313. f) To reflect additional interest expense (at 4.5% for 12 months) resulting from the acquisition related borrowings. g) To reflect the income tax effect resulting from the Western income and pro forma adjustments as if taxed as a C-Corporation using an applicable tax rate of 40.5%. h) To reflect additional depreciation and amortization for the three months on the step up basis related to the tangible and intangible assets acquired, based upon the following depreciation/amortization periods.
Asset Annual 3 Months Value Years Expense Expense -------------------------------------------------------- Goodwill $34,865 n/a $ 0 $ 0 Customer Contracts-Residential 13,200 8 1,650 413 Customer Contracts-Commercial 30,900 10 3,090 773 Customer Contracts-Termite 5,400 10 540 135 Customer Contracts-Fumigation 1,000 3 400 100 Trade Name 3,900 n/a 0 0 Patents 130 3 52 13 Non Compete Agreements 400 5 80 20 -------------------------------------------------------- Total $5,812 $1,454
In accordance with Statement of Financial Accounting Standard No. 142, goodwill resulting from the acquisition is not amortized. Additional depreciation expense for the 3 months is based on the increase in basis for buildings purchased, calculated as follows: Historical basis on Western, net $2,744 Fair market value per valuation report 3,850 Increase in basis 1,106 Over 20 years 20 ------- Additional depreciation expense $ 14 for 3 months Rent savings on real estate acquired totals $80 for 3 months i) To record additional interest expense of $169 (at 4.5% for 3 months) resulting from the acquisition related borrowings and a reduction of interest income on previously invested cash used to fund the acquisition. j) To reflect the income tax effect resulting from the Western income and pro forma adjustments as if taxed as a C-Corporation using an applicable tax rate of 40.5%. k) Assets, liabilities, revenues and expenses have been adjusted to exclude the operations of Residex Corporation, which was purchased on April 30, 2004 and subsequently sold to an industry distribution group on April 30, 2004, with no gain or loss recognized on the transaction. l) Revenues and Costs of Services Provided were adjusted to reflect the discontinuation of providing services on behalf of Copesan, the nationwide consortium of regional pest control companies that service national accounts. m) Certain assets and liabilities that were not purchased and assumed by the Company as part of the purchase agreement were adjusted accordingly. 24 (c) Exhibits. (2)(i) Asset Purchase Agreement by and among Orkin, Inc. (as assigned to Rollins, Inc.) and Western Industries, Inc., Western Exterminating Company, Inc. et al. dated March 8, 2004 incorporated herein by reference to Exhibit (2) (i) as filed with its Form 10-Q for the quarter ended March 31, 2004, as amended. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ROLLINS, INC. Date: July 16, 2004 By: /s/ Gary W. Rollins ------------------------------- Gary W. Rollins Chief Executive Officer, President and Chief Operating Officer Date: July 16, 2004 By: /s/ Harry J. Cynkus ------------------------------ Harry J. Cynkus Chief Financial Officer and Treasurer 26