Item 8. Financial Statements and Supplementary Data.

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Item 8. Financial Statements and Supplementary Data.

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**CONSOLIDATED STATEMENTS OF FINANCIAL POSITION **Rollins, Inc. and Subsidiaries

At December 31, (in thousands except share information)20122011
ASSETS
Cash and cash equivalents$65,082$46,275
Trade receivables, net of allowance for doubtful accounts of $8,211 and $6,738, respectively68,92061,687
Financed receivables, short-term, net of allowance for doubtful accounts of $1,842 and $1,691, respectively11,82311,659
Materials and supplies11,84711,125
Deferred income taxes33,33831,272
Other current assets14,98213,804
Total Current Assets205,992175,822
Equipment and property, net82,26376,858
Goodwill212,477211,019
Customer contracts, net113,400108,348
Other intangible assets, net28,38929,178
Deferred income taxes26,84122,604
Financed receivables, long-term, net of allowance for doubtful accounts of $1,408 and $1,309, respectively11,68111,298
Other assets11,46310,523
Total Assets$692,506$645,650
LIABILITIES
Accounts payable24,85422,584
Accrued insurance24,16421,844
Accrued compensation and related liabilities60,04261,137
Unearned revenue87,75385,636
Other current liabilities31,60334,650
Total current liabilities228,416225,851
Accrued insurance, less current portion31,28327,516
Accrued pension43,27131,867
Long-term accrued liabilities34,58036,419
Total Liabilities337,550321,653
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock, without par value; 500,000 authorized, zero shares issued——
Common stock, par value $1 per share; 250,000,000 shares authorized, respectively, 146,015,082 and 146,250,934 shares issued, respectively146,015146,251
Paid-in-capital45,15636,554
Accumulated other comprehensive loss(56,967)(48,090)
Retained earnings220,752189,282
Total Stockholders' Equity354,956323,997
Total Liabilities and Stockholders' Equity$692,506$645,650

The accompanying notes are an integral part of these consolidated financial statements.

**CONSOLIDATED STATEMENTS OF INCOME **Rollins, Inc. and Subsidiaries

Years ended December 31, (in thousands except per share data)201220112010
REVENUES
Customer services$1,270,909$1,205,064$1,136,890
COSTS AND EXPENSES
Cost of services provided647,578616,842583,089
Depreciation and amortization38,65537,50336,408
Sales, general and administrative407,488388,710373,288
(Gain)/loss on sales/impairment of assets, net(468)405123
Pension settlement loss1,000——
Interest expense14508437
1,094,2671,043,968993,345
INCOME BEFORE INCOME TAXES176,642161,096143,545
PROVISION FOR INCOME TAXES
Current67,18059,60151,468
Deferred(1,870)7842,075
65,31060,38553,543
NET INCOME$111,332$100,711$90,002
INCOME PER SHARE – BASIC$0.76$0.69$0.61
INCOME PER SHARE – DILUTED$0.76$0.69$0.61
Weighted average shares outstanding – basic146,299146,882148,030
Weighted average shares outstanding – diluted146,306146,946148,231
DIVIDENDS PAID PER SHARE$0.44$0.28$0.24

The accompanying notes are an integral part of these consolidated financial statements

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS **Rollins, Inc. and Subsidiaries

Years ended December 31, (in thousands)201220112010
NET INCOME$111,332$100,711$90,002
Other comprehensive earnings (loss), net of tax
Foreign currency translation adjustments656(708)826
Pension and other postretirement benefit plans(9,533)(14,892)(1,189)
Other comprehensive loss(8,877)(15,600)(363)
Comprehensive earnings$102,455$85,111$89,639

The accompanying notes are an integral part of these consolidated financial statements

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY **Rollins, Inc. and Subsidiaries

Common StockAccumulated Other Comprehensive Income (Loss)
Paid- In-CapitalRetained Earnings
(In thousands)SharesAmountTotal
Balance at December 31, 2009148,357$148,357$22,655$(32,127)$125,681$264,566
Net Income90,00290,002
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment(1,189)(1,189)
Foreign Currency Translation Adjustments826826
Cash Dividends(35,521)(35,521)
Common Stock Purchased (1)(1,889)(1,889)(24,463)(26,352)
Stock Compensation5945947,153(209)7,538
Employee Stock Buybacks and Common Stock Options Exercised119119(3,177)(27)(3,085)
Excess Tax Benefit on Restricted Stock, Dividend Compensation and Non-Qualified Stock Options1,1851,185
Balance at December 31, 2010147,181$147,181$27,816$(32,490)$155,463$297,970
Net Income100,711100,711
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment(14,892)(14,892)
Foreign Currency Translation Adjustments(708)(708)
Cash Dividends(41,110)(41,110)
Common Stock Purchased (1)(1,458)(1,458)(25,782)(27,240)
Stock Compensation5955956,9607,555
Employee Stock Buybacks and Common Stock Options Exercised(67)(67)(2,838)(2,905)
Excess Tax Benefit on Restricted Stock, Dividend Compensation and Non-Qualified Stock Options4,6164,616
Balance at December 31, 2011146,251$146,251$36,554$(48,090)$189,282$323,997
Net Income111,332111,332
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment(9,533)(9,533)
Foreign Currency Translation Adjustments656656
Cash Dividends(64,282)(64,282)
Common Stock Purchased (1)(782)(782)(15,580)(16,362)
Stock Compensation6846848,8109,494
Employee Stock Buybacks and Common Stock Options Exercised(138)(138)(3,439)(3,577)
Excess Tax Benefit on Restricted Stock, Dividend Compensation and Non-Qualified Stock Options3,2313,231
Balance at December 31, 2012146,015$146,015$45,156$(56,967)$220,752$354,956

(1)

Charges to Retained Earnings are from purchases of the Company's Common Stock and its three-for-two stock split effective 12/10/2010.

The accompanying notes are an integral part of these consolidated financial statements.

**CONSOLIDATED STATEMENTS OF CASH FLOWS **Rollins, Inc. and Subsidiaries

Years ended December 31, (in thousands)201220112010
OPERATING ACTIVITIES
Net Income$111,332$100,711$90,002
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization38,65537,50336,408
Pension Settlement1,000——
Provision for deferred income taxes(1,870)7842,075
Stock based compensation expense9,4947,5557,538
(Gain)/loss on sales/impairments of assets, net(468)405123
Excess tax benefits from share-based payments(3,231)(2,367)(1,185)
Provision for bad debts11,0958,8798,641
Other, net(113)(762)(844)
Changes in assets and liabilities:
Trade accounts receivables and other accounts receivables(16,438)(10,663)(13,977)
Financed receivables(1,453)(1,855)(1,097)
Materials and supplies(655)837(1,391)
Other current assets(1,469)5,457(8,197)
Other non-current assets2861,894(1,473)
Accounts payable and accrued expenses(2,175)5,69511,273
Unearned revenue1,935(59)(2,516)
Accrued insurance6,0873,4874,398
Accrued pension(5,203)(4,900)(5,176)
Long-term accrued liabilities(4,890)2,046(549)
Net cash provided by operating activities141,919154,647124,053
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired(25,030)(11,410)(34,764)
Purchase of equipment and property(19,040)(18,652)(13,036)
Cash from sales of franchises322149148
Proceeds from sales of assets1,0557597
Net cash used in investing activities(42,693)(29,154)(47,645)
FINANCING ACTIVITIES
Payments on line of credit borrowings—(26,000)(4,000)
Cash paid for common stock purchased(19,938)(30,215)(29,692)
Dividends paid(64,282)(41,110)(35,521)
Book overdrafts in bank accounts—(4,500)2,500
Proceeds received upon exercise of stock options—69255
Principal payments on capital lease obligations—(38)(224)
Excess tax benefits from share-based payments3,2312,3671,185
Net cash used in financing activities(80,989)(99,427)(65,497)
Effect of exchange rate changes on cash570(704)498
Net increase in cash and cash equivalents18,80725,36211,409
Cash and cash equivalents at beginning of year46,27520,9139,504
Cash and cash equivalents at end of year$65,082$46,275$20,913
Supplemental disclosure of cash flow information
Cash paid for interest$—$123$248
Cash paid for income taxes, net$62,998$51,983$60,101

The accompanying notes are an integral part of these consolidated financial statements

Supplemental Disclosures of Non-Cash Items

Pension—Non-cash (increases) decreases in the minimum pension liability which were (charged) credited to other comprehensive income/(loss) were $(15.4) million, $(24.5) million, and $(1.9) million in 2012, 2011, and 2010, respectively.

Business Combinations—There were $3.0 million in non-cash acquisitions of assets in business combinations for the year ended December 31, 2012, 2011 $0.8 and $10.7 million for 2010.

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS **Years ended December 31, 2012, 2011, and 2010, Rollins, Inc. and Subsidiaries

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description—Rollins, Inc. (the "Company") was originally incorporated in 1948 under the laws of the state of Delaware as Rollins Broadcasting, Inc.

The Company is an international service company with headquarters located in Atlanta, Georgia, providing pest and termite control services through its wholly-owned subsidiaries to both residential and commercial customers in North America with domestic franchises and international franchises in Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa and Mexico.

Orkin, LLC ("Orkin"), a wholly-owned subsidiary of the Company founded in 1901, is the world's largest pest and termite control company. It provides customized services from over 400 locations. Orkin serves customers in the United States, Canada, Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa and Mexico providing essential pest control services and protection against termite damage, rodents and insects to homes and businesses, including hotels, food service establishments, food manufacturers, retailers and transportation companies. Orkin operates under the Orkin®, and Orkin Canada® trademarks and the AcuridSM service mark. The Orkin® brand name makes Orkin the most recognized pest and termite company throughout the United States.

Orkin Canada, a wholly-owned subsidiary of Orkin founded in 1952, was acquired by Orkin in 1999. Orkin Canada is Canada's largest pest control provider and a leader in the development of fast, effective and environmentally responsible pest control solutions.

Western Pest Services ("Western"), a wholly-owned subsidiary of the Company founded in 1928, was acquired by Rollins, Inc. in 2004. Western is primarily a commercial pest control service company and its business complements most of the services Orkin offers focusing on the northeastern United States.

The Industrial Fumigant Company ("IFC"), a wholly-owned subsidiary of the Company founded in 1937, was acquired by Rollins, Inc. in 2005. IFC is a leading provider of pest management and sanitation services and products to the food and commodity industries.

HomeTeam Pest Defense ("HomeTeam"), a wholly-owned subsidiary of the Company established in 1996, was acquired by Rollins, Inc. in April 2008. At the time of the acquisition, HomeTeam, with its unique Taexx tubes in the wall pest control system, was recognized as a premier pest control business and ranked as the 4th largest company in the industry. HomeTeam services home builders nationally.

The Company has several smaller wholly-owned subsidiaries that in total make up less than 5% of total revenues.

The Company has only one reportable segment, its pest and termite control business. Revenue, operating profit and identifiable assets for this segment, includes the United States, Canada, Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa and Mexico. The Company's results of operations and its financial condition are not reliant upon any single customer, few customers or foreign operations.

Principles of Consolidation—The Company's Consolidated Financial Statements include the accounts of Rollins, Inc. and our wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The Company does not consolidate the financial statements of any company in which it has an ownership interest of 50% or less. The Company is not the primary beneficiary of, nor does it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any variable interest entity. The Company reclassified certain prior period amounts, none of which were material, to conform to the current period presentation. All material intercompany accounts and transactions have been eliminated.

Subsequent Events—The Company evaluates its financial statements through the date the financial statements are issued. As of the filing date, February 27, 2013, there were no subsequent events that would affect the Company's financial statements.

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 of America requires management to make estimates and assumptions that affect the amounts reported in the accompanying notes and financial statements. Actual results could differ from those estimates.

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 on a monthly, bi-monthly or quarterly basis, 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 based on the delivery of the individual units of accounting. At the inception of a new baiting services contract upon quality control review of the installation, the Company recognizes revenue for the installation of the monitoring stations, initial directed liquid termiticide treatment and servicing of the monitoring stations. A portion of the contract amount is deferred for the undelivered monitoring element. This portion is 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. The allocation of the purchase price to the two deliverables is based on the relative selling price. There are no contingencies related to the delivery of additional items or meeting other specified performance conditions. 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.

At inception revenue received for conventional termite renewals is deferred and recognized on a straight-line basis over the remaining contract term; and, the cost of reinspections, reapplications and repairs and associated labor and chemicals are expensed as incurred. For outstanding claims, an estimate is made of the costs to be incurred (including legal costs) based upon current factors and historical information. The performance of reinspections tends to be close to the contract renewal date and while reapplications and repairs involve an insubstantial number of the contracts, these costs are incurred over the contract term. As the revenue is being deferred, the future cost of reinspections, reapplications and repairs and associated labor and chemicals applicable to the deferred revenue are expensed as incurred. The Company accrues for noticed claims. The costs of providing termite services upon renewal are compared to the expected revenue to be received and a provision is made for any expected losses.

All revenues are reported net of sales taxes.

The Company's foreign operations accounted for approximately 8% of revenues for each of the years ended December 31, 2012, 2011 and 2010.

Interest income on installment receivables is accrued monthly based on actual loan balances and stated interest rates. Recognition of initial franchise fee revenues occurs when all material services or conditions relating to a new agreement have been substantially performed or satisfied by the Company. Initial franchise fees are treated as unearned revenue in the Statement of Financial Position until such time. Royalties from Orkin franchises are accrued and recognized as revenues as earned on a monthly basis. Gains on sales of pest control customer accounts to franchises are recognized at the time of sale and when collection is reasonably assured.

Allowance for Doubtful Accounts—The Company maintains an allowance for doubtful accounts based on the expected collectability of accounts receivable. Management uses historical collection results as well as accounts receivable aging in order to determine the expected collectability of accounts receivable. Substantially all of the Company's receivables are due from pest control and termite services in the United States and selected international locations. The Company's allowance for doubtful accounts is determined using a combination of factors to ensure that our receivables are not overstated due to uncollectability. The Company's established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Provisions for doubtful accounts are recorded in selling, general and administrative expenses. Accounts are written-off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the required provision in the period of recovery. Therefore, the provision for doubtful accounts can fluctuate significantly from period to period. There were no large recoveries in 2012, 2011 and 2010. We record specific provisions when we become aware of a customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to customers change, our estimates of the realizability of receivables would be further adjusted, either upward or downward.

Advertising—Advertising costs are charged to sales, general and administrative expense during the year in which they are incurred.

Years ended December 31,
(in thousands)201220112010
Advertising$48,909$46,081$43,119

Cash and Cash Equivalents—The Company considers all investments with an original maturity of three months or less to be cash equivalents. Short-term investments, included in cash and cash equivalents, are stated at cost, which approximates fair market value. At times, cash and cash equivalents may exceed federally insured amounts.

The Company's $65.1 million of total cash at December 31, 2012, is primarily cash held at various banking institutions. Approximately $40.9 million is held in cash accounts at international bank institutions and the remaining $24.2 million is primarily held in non-interest-bearing accounts at various domestic banks. In July 2010, President Obama signed into law the Dodd-Frank Act, which again led to changes in FDIC deposit guarantees. Beginning January 1, 2011 and lasting through December 31, 2012, all funds held in noninterest-bearing transaction accounts at insured depository institutions were automatically fully

insured, without limit. This temporary unlimited insurance expired at the end of 2012 and has reverted to a $250,000 limit per bank.

At December 31,
(in thousands)20122011
Cash held in foreign bank accounts$40,933$24,089

Marketable Securities—From time to time, the Company maintains investments held by several large, well-capitalized financial institutions. The Company's investment policy does not allow investment in any securities rated less than "investment grade" by national rating services.

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Debt securities are classified as available-for-sale because the Company does not have the intent to hold the securities to maturity. Available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included as a component of interest income.

The Company had no marketable securities other than those held in the defined pension benefit plan and the nonqualified deferred compensation plan at December 31, 2012 and 2011. See note 13 for further details.

Materials and Supplies—Materials and supplies are recorded at the lower of cost (first-in, first-out basis) or market.

Income Taxes—The Company provides for income taxes based on FASB ASC topic 740 "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. The Company provides an allowance for deferred tax assets when it is determined that it is more likely than not that the deferred tax assets will not be utilized. The Company establishes additional provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain some positions that do not meet the minimum probability threshold. The Company's policy is to record interest and penalties related to income tax matters in income tax expense.

Equipment and Property—Equipment and Property are stated at cost, net of accumulated depreciation, which includes the amortization of assets recorded under capital leases and are provided principally on a straight-line basis over the estimated useful lives of the related assets. Annual provisions for depreciation are computed using the following asset lives: buildings, ten to forty years; and furniture, fixtures, and operating equipment, two 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. The annual provisions for depreciation, below, have been reflected in the Consolidated Statements of Income in the line item entitled Depreciation and Amortization:

Years ended December 31,
(in thousands)201220112010
Depreciation$15,212$15,112$15,975

Goodwill and Other Intangible Assets—In accordance with FASB ASC Topic 350, "Intangibles—Goodwill and other", the Company classifies intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and

(3) goodwill. The Company does not amortize intangible assets with indefinite lives and goodwill. Goodwill and other intangible assets with indefinite useful lives are tested for impairment annually or more frequently if events or circumstances indicate the assets might be impaired. Such conditions may include an economic downturn or a change in the assessment of future operations. The Company performs impairment tests of goodwill at the Company level. Such impairment tests for goodwill include comparing the fair value of the appropriate reporting unit (the Company) with its carrying value. If the fair value of the reporting unit is lower than its carrying value, then the Company will compare the implied fair value of goodwill to its carrying value. Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value. The Company performs impairment tests for indefinite-lived intangible assets by comparing the fair value of each indefinite-lived intangible asset unit to its carrying value. The Company recognizes an impairment charge if the asset's carrying value exceeds its estimated fair value. The Company completed its most recent annual impairment analyses as of September 30, 2012. Based upon the results of these analyses, the Company has concluded that no impairment of its goodwill or other intangible assets was indicated.

Impairment of Long-Lived Assets—In accordance with FASB ASC Topic 360, "Property, Plant and Equipment", the Company's long-lived assets, such as property and equipment and intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. We periodically evaluate the appropriateness of remaining depreciable lives assigned to long-lived assets, including assets that may be subject to a management plan for disposition.

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 a semi-annual basis to provide the Company an 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 Contracts—The Company maintains an accrual for termite claims representing the estimated costs of reapplications, repairs and associated labor and chemicals, settlements, awards and other costs relative to termite control services. Factors that may impact future cost include termiticide life expectancy and government 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 precisely predict future significant claims. An accrual for termite contracts is included in other current liabilities and long-term accrued liabilities on the Company's consolidated statements of financial position.

Contingency Accruals—The Company is a party to legal proceedings with respect to matters in the ordinary course of business. In accordance with FASB ASC Topic 450 "Contingencies," Management estimates and accrues for its liability and costs associated with the litigation. Estimates and accruals are determined in consultation with outside counsel. Because it is not possible to accurately predict the ultimate result of the litigation, judgments concerning accruals for liabilities and costs associated with litigation are inherently uncertain and actual liability may vary from amounts estimated or accrued. However, in the opinion of

management, the outcome of the litigation will not have a material adverse impact on the Company's financial condition or results of operations. Contingency accruals are included in other current liabilities and long-term accrued liabilities on the Company's consolidated statements of financial position.

Earnings Per Share—FASB ASC Topic 260-10 "Earnings Per Share-Overall," requires a basic earnings per share and diluted earnings per share presentation. Further, all outstanding unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities and an entity is required to include participating securities in its calculation of basic earnings per share.

The Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and therefore are considered participating securities. See note 13 for further information on restricted stock granted to employees.

The basic and diluted calculations differ as a result of the dilutive effect of stock options included in diluted earnings per share, but excluded from basic earnings per share. Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods.

A reconciliation of weighted average shares outstanding along with the earnings per share attributable to restricted shares of common stock (participating securities) is as follows:

Twelve Months End December 31,
201220112010
Net income$111,332$100,711$90,002
Less: Dividends paid
Common Stock(63,120)(40,383)(34,871)
Restricted shares of common stock(1,162)(727)(650)
Undistributed earnings for the period$47,050$59,601$54,481
Allocation of undistributed earnings:
Common stock$46,150$58,497$53,419
Restricted shares of common stock9001,1041,062
Diluted allocation of undistributed earnings:
Common stock$46,150$58,498$53,421
Restricted shares of common stock9001,1031,060
Basic shares outstanding:
Common stock143,499144,162145,145
Restricted shares of common stock2,8002,7202,885
146,299146,882148,030
Diluted shares outstanding:
Common stock143,499144,162145,145
Dilutive effect of stock options764201
143,506144,226145,346
Restricted shares of common stock2,8002,7202,885
146,306146,946148,231
Basic earnings per share
Common stock:
Distributed earnings$0.44$0.28$0.24
Undistributed earnings0.320.410.37
$0.76$0.69$0.61
Restricted shares of common stock
Distributed earnings$0.42$0.27$0.23
Undistributed earnings0.320.410.37
$0.74$0.68$0.60
Total shares of common stock
Distributed earnings$0.44$0.28$0.24
Undistributed earnings0.320.410.37
$0.76$0.69$0.61
Diluted earning per share:
Common stock:
Distributed earnings$0.44$0.28$0.24
Undistributed earnings0.320.410.37
$0.76$0.69$0.61
Restricted shares of common stock
Distributed earnings$0.42$0.27$0.23
Undistributed earnings0.320.410.37
$0.74$0.68$0.60
Total shares of common stock
Distributed earnings$0.44$0.28$0.24
Undistributed earnings0.320.410.37
$0.76$0.69$0.61

Translation of Foreign Currencies—Assets and liabilities reported in functional currencies other than U.S. dollars are translated into U.S. dollars at the year-end rate of exchange. Revenues and expenses are translated at the weighted-average exchange rates for the year. The resulting translation adjustments are charged or credited to other comprehensive income. Gains or losses from foreign currency transactions, such as those resulting from the settlement of receivables or payables, denominated in foreign currency are included in the earnings of the current period.

Stock-Based Compensation—The Company accounts for its stock-based compensation in accordance with FASB ASC Topic 713 "Compensation—Stock Compensation." Stock options and time lapse restricted shares (TLRSs) have been issued to officers and other management employees under the Company's Employee Stock Incentive Plan. The Company's stock options generally vest over a five-year period and expire ten years from the issuance date.

TLRSs provide for the issuance of a share of the Company's Common Stock at no cost to the holder and generally vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. Outstanding TLRSs vest in 20 percent increments starting with the second anniversary of the grant, over six years from the date of grant. During these years, grantees receive all dividends declared and retain voting rights for the granted shares. The agreements under which the restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed. These awards are amortized, net of forfeitures, on a straight-line basis over six years.

The Company has not granted stock options since 2003.

Comprehensive Income (Loss)—Other Comprehensive Income (Loss) results from foreign currency translations and minimum pension liability adjustments.

Franchising Program—Rollins' wholly-owned subsidiary, Orkin, had 57, 58 and 56 domestic franchises as of December 31, 2012, 2011 and 2010, respectively. Transactions with domestic franchises involve sales of customer contracts to establish new franchises, initial franchise fees and royalties. The customer contracts and initial franchise fees are typically sold for a combination of cash and notes due over periods ranging up to five years. Notes receivable from franchises were $5.1 million at December 31, 2012 and $4.7 million at December 31, 2011. These amounts are included as financing receivables in the accompanying Consolidated Statements of Financial Position.

The Company recognizes gains from the sale of customer contracts at the time they are sold to franchises and collection on the notes is reasonably assured. The Company recognized net gains of $0.5 million, $0.8 million and $1.1 million and for the years ended December 31, 2012, 2011 and 2010, respectively for the sale of customer contracts. These amounts are included as revenues in the accompanying Consolidated Statements of Income.

All domestic franchises have a guaranteed repurchase clause that the franchise may be repurchased by Orkin at a later date once it has been established; therefore, initial domestic franchise fees are deferred in accordance with FASB ASC Topic 952-605 "Franchisor Revenue Recognition," for the duration of the initial contract period and are included as unearned revenue in the Consolidated Statements of Financial Position. Deferred franchise fees were $3.0 million, $2.9 million and $2.5 million at December 31, 2012, 2011 and 2010, respectively.

Royalties from franchises are accrued and recognized in accordance with FASB ASC Topic 952-605 "Franchisor Revenue Recognition," as revenues are earned on a monthly basis. Revenue from franchises was $3.7 million for the year ended December 31, 2012 and $3.4 million for each of the years ended December 31, 2011 and 2010, respectively.

As of December 31, 2012, 2011 and 2010, Orkin had 22, 18 and 16 international franchises, respectively. Orkin's international franchise program began with its first international franchise in 2000 and since has

expanded to Central America, South America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa and Mexico.

The Company's maximum exposure to loss (notes receivable from franchises less deferred franchise fees) relating to the franchises was $2.1 million, $1.8 million and $1.2 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Three-for-Two Stock Split—The Board of Directors, at its quarterly meeting on October 26, 2010, authorized a three-for-two stock split by the issuance on December 10, 2010 of one additional common share for each two common shares held of record at November 10, 2010. 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.

New Accounting Standards

Recently issued accounting standards to be adopted in 2013

In December 2011, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") Disclosures about Offsetting Assets and Liabilities ("ASU 2011-11") to Topic 210, Balance Sheet. The update requires new disclosures about balance sheet offsetting and related arrangements. For derivatives and financial assets and liabilities, the amendments require disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. The guidance is effective December 1, 2013 and is to be applied retrospectively. This guidance does not amend the existing guidance on when it is appropriate to offset; as a result, we do not expect this guidance to have a material effect on our financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02). This standard provides new accounting guidance that permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. An entity would continue to calculate the fair value of an indefinite-lived intangible asset if the asset fails the qualitative assessment, while no further analysis would be required if it passes. The provisions of the new guidance are effective as of the beginning of our 2013 fiscal year; we do not expect the new guidance to have an impact on the 2013 impairment test results.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts of Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02) to topic 220, Comprehensive Income. The guidance which requires disclosure of significant amounts reclassified out of accumulated other comprehensive income by component and their corresponding effect on the respective line items of net income. This guidance is effective for the Company beginning in the first quarter of 2013; we do not expect the new guidance to have a material effect on our financial statements.

2. ACQUISITIONS

The Company has made several acquisitions that are not material individually or in total to the Company's consolidated financial statements during the years ended December 31, 2012, 2011 and 2010.

3. DEBT

On October 31, 2012, the Company entered into a Revolving Credit Agreement with SunTrust Bank and Bank of America, N.A. for an unsecured line of credit of up to $175.0 million, which includes a $75.0 million letter of credit subfacility, and a $25.0 million swingline subfacility. As of December 31, 2012, no borrowings were outstanding under the line of credit or under the swingline subfacility. The Company maintains approximately $33.2 million in letters of credit. These letters of credit are required by the Company's fronting insurance companies and/or certain states, due to the Company's self-insured status,

to secure various workers' compensation and casualty insurance contracts coverage. The Company believes that it has adequate liquid assets, funding sources and insurance accruals to accommodate such claims.

The Revolving Credit Agreement is guaranteed by certain of Rollins' domestic-subsidiaries. The maturity date of the Credit Agreement is October 31, 2016, subject to optional annual extensions on the first three anniversaries of the Credit Agreement for one year each. Revolving loans under the Revolving Credit Agreement bear interest at one of the following two rates, at the Company's election:

the Base Rate, which shall mean the highest of (i) the per annum rate which the Administrative Agent publicly announces from time to time as its prime lending rate, (ii) the Federal Funds rate, plus 0.50% per annum, and (iii) the Adjusted LIBOR Rate (which equals LIBOR as increased to account for the maximum reserve percentages established by the U.S. Federal Reserve) determined on a daily basis for an Interest Period of one (1), plus 1.0% per annum.

with respect to any Eurodollar borrowings, Adjusted LIBOR plus an additional amount, which varies between .75% and 1.00%, based upon Rollins' then-current debt-to-EBITDA ratio. As of December 31, 2012, the additional rate allocated was .75%.

The Revolving Credit Agreement contains customary terms and conditions, including, without limitation, certain financial covenants including covenants restricting the Company's ability to incur certain indebtedness or liens, or to merge or consolidate with or sell substantially all of its assets to another entity. Further, the Revolving Credit Agreement contains financial covenants restricting the Company's ability to permit the ratio of the Company's consolidated debt to EBITDA to exceed certain limits.

The Company remained in compliance with applicable debt covenants at December 31, 2012 and expects to maintain compliance throughout 2013.

4. TRADE RECEIVABLES

The Allowance for Doubtful Accounts is principally calculated based on the application of estimated loss percentages to delinquency aging totals, based on contractual terms, for the various categories of receivables. Bad debt write-offs occur according to Company policies that are specific to pest control, commercial and termite accounts.

Years ended December 31,
(in thousands)20122011
Gross Trade Receivables, short-term$77,131$68,425
Allowance for Doubtful Accounts(8,211)(6,738)
Net Trade Receivables$68,920$61,687

At any given time, the Company may have immaterial amounts due from related parties, which are invoiced and settled on a regular basis.

5. FINANCING RECEIVABLES

Rollins manages its financing receivables on an aggregate basis when assessing and monitoring credit risks. The Company's credit risk is generally low with a large number of entities comprising Rollins' customer base and dispersion across many different geographical regions. The credit quality of a potential obligor is evaluated at the loan origination based on an assessment of the individual's beacon/credit bureau score. Rollins requires potential obligor to have good credit worthiness with low risk before entering into a contract. Depending upon the individual's credit score the Company may accept with 100% financing, require a significant down payment or turn down the contract. Delinquencies of accounts are monitored

each month. Financing receivables include installment receivable amounts which are due subsequent to one year from the balance sheet dates.

Years ended December 31,
(in thousands)20122011
Gross Financing Receivables, short-term$13,665$13,350
Gross Financing Receivables, long-term13,08912,607
Allowance for Doubtful Accounts(3,250)(3,000)
Net Financing Receivables$23,504$22,957

Total financing receivables, net were $23.5 million and $23.0 million at December 31, 2012 and December 31, 2011, respectively. Financing receivables are charged-off when deemed uncollectable or when 180 days have elapsed since the date of the last full contractual payment. The Company's charge-off policy has been consistently applied and no significant changes have been made to the policy during the periods reported. Management considers the charge-off policy when evaluating the appropriateness of the allowance for doubtful accounts. Charge-offs as a percentage of average financing receivables were 2.6%, 3.0% and 4.0% for the twelve months ended December 31, 2012, 2011 and 2010, respectively. Due to the low percentage of charge-off receivables and the high credit worthiness of the potential obligor, the entire Rollins, Inc. financing receivables portfolio has a low credit risk.

The Company offers 90 days same-as-cash financing to some customers based on their credit worthiness. Interest is not recognized until the 91st day at which time it is recognized retrospectively back to the first day if the contract has not been paid in full. In certain circumstances, such as when delinquency is deemed to be of an administrative nature, accounts may still accrue interest when they reach 180 days past due. As of December 31, 2012, there were no accounts on a non-accrual status, and no financing receivables greater than 180 days past due.

Included in financing receivables are notes receivable from franchise owners. These notes are low risk as the repurchase of these franchises is guaranteed by the Company's wholly-owned subsidiary, Orkin, LLC, and the repurchase price of the franchise is currently estimated and have historically been well above the receivable due from the franchise owner.

The carrying amount of notes receivable approximates fair value as the interest rates approximate market rates for these types of contracts. Long-Term Installment receivables, net were $11.7 million and $11.3 million at December 31, 2012 and 2011, respectively.

Rollins establishes an allowance for doubtful accounts to insure financing receivables are not overstated due to uncollectability. The allowance balance is comprised of a general reserve, which is determined based on a percentage of the financing receivables balance, and a specific reserve, which is established for certain accounts with identified exposures, such as customer default, bankruptcy or other events, that make it unlikely that Rollins will recover its investment. The general reserve percentages are based on several factors, which include consideration of historical credit losses and portfolio delinquencies, trends in overall weighted-average risk rating of the portfolio and information derived from competitive benchmarking.

The allowance for doubtful accounts related to financing receivables was as follows:

(in thousands)Twelve months ended December 31, 2012Twelve months ended December 31, 2011
Balance, beginning of period$3,000$2,700
Additions to allowance906977
Deductions, net of recoveries(656)(677)
Balance, end of period$3,250$3,000

The following is a summary of the past due financing receivables as of:

(in thousands)December 31, 2012December 31, 2011
30 - 59 days past due$563$590
60 - 89 days past due190183
90 days or more past due331450
Total$1,084$1,223

Percentage of period-end gross financing receivables

December 31, 2012December 31, 2011
Current95.9%95.3%
30 - 59 days past due2.1%2.3%
60 - 89 days past due0.7%0.7%
90 days or more past due1.3%1.7%
Total100.0%100.0%

6. EQUIPMENT AND PROPERTY

Equipment and property are presented at cost less accumulated depreciation and are detailed as follows:

December 31,
(in thousands)20122011
Buildings$45,527$43,842
Operating Equipment79,41170,932
Furniture and Fixtures12,47911,809
Computer Equipment and Systems54,50152,275
191,918178,858
Less—Accumulated Depreciation(134,368)(125,667)
57,55053,191
Land24,71323,667
Net equipment and property$82,263$76,858

Included in equipment and property, net at December 31, 2012 and 2011, are fixed assets held in foreign countries of $2.3 million, and $2.6 million, respectively.

Total depreciation expense was approximately $15.2 million in 2012, $15.1 million in 2011 and $16.0 million in 2010.

7. FAIR VALUE MEASUREMENT

The Company's financial instruments consist of cash and cash equivalents, short-term investments, trade and notes receivables, accounts payable and other short-term liabilities. The carrying amounts of these financial instruments approximate their fair values. The Company has financial instruments related to its defined benefit pension plan and deferred compensation plan detailed in note 13.

The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs.

The following table presents our nonqualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2012.

TotalLevel 1Level 2Level 3
Cash and cash equivalents$50$50$—$—
Total$50$50$—$—

The following table presents our nonqualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2011.

TotalLevel 1Level 2Level 3
Cash and cash equivalents$37$37$—$—
Available for sale securities287287——
Total$324$324$—$—

Cash and cash equivalents, which are used to pay benefits and deferred compensation plan administrative expenses, are held in Money Market Funds.

The marketable securities classified as available-for-sale and the securities held in the deferred compensation plan are carried at fair value, based on quoted market prices, in the accompanying consolidated balance sheets.

At December 31, 2012 the Deferred Compensation Plan had 41 life insurance policies with a net face value of $36.6 million. The cash surrender value of these life insurance policies had a net realizable value of $11.2 million and $9.8 million at December 31, 2012 and 2011, respectively. The total deferred compensation plan assets, recorded in other assets on the Company's consolidated statements of financial position, were $11.3 million and $10.1 million at December 31, 2012 and 2011, respectively.

8. GOODWILL

Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was $212.5 million as of December 31, 2012 and $211.0 million as of December 31, 2011. Goodwill increased for the year ended December 31, 2012 due primarily to acquisitions. The carrying amount of goodwill in foreign countries was $9.8 million as of December 31,

2012 $9.6 million as of December 31, 2011. The changes in the carrying amount of goodwill for the twelve months ended December 30, 2012 and 2011 are as follows:

(in thousands)
Goodwill as of December 31, 2010$210,779
Goodwill acquired429
Goodwill adjustments due to currency translation(189)
Goodwill as of December 31, 2011$211,019
Goodwill acquired1,237
Goodwill adjustments due to currency translation221
Goodwill as of December 31, 2012$212,477

9. CUSTOMER CONTRACTS AND OTHER INTANGIBLE ASSETS

Customer contracts 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 FASB ASC Topic 350 "Intangibles—Goodwill and other", the expected lives of customer contracts were reviewed, and it was determined that customer contracts should be amortized over a life of 8 to 20 years dependent upon customer type. The carrying amount and accumulated amortization for customer contracts were as follows:

December 31,
(in thousands)20122011
Customer contracts$217,384$227,281
Less: Accumulated amortization(103,984)(118,933)
Customer contracts, net$113,400$108,348

The carrying amount of customer contracts in foreign countries was $5.4 million as of December 31, 2012 and $6.3 million as of December 31, 2011.

Other intangible assets include non-compete agreements, patents and finite lived and indefinite lived trade names. Non-compete agreements are amortized on a straight-line basis over periods ranging from 3 to 20 years and patents are amortized on a straight-line basis over 15 years. The carrying amount and accumulated amortization for other intangible assets were as follows:

December 31,
(in thousands)20122011
Other intangible assets$35,515$41,702
Less: Accumulated amortization(7,126)(12,524)
Other intangible assets, net$28,389$29,178

Included in the table above are trademarks and tradenames of $15.3 million and $15.7 million at December 31, 2012 and 2011, respectively. Also included in the table above are non-amortizable, indefinite lived intangible assets $12.6 million and $14.4 million at December 31, 2012 and 2011, respectively.

December 31,
(in thousands)20122011
Customer contracts, net$113,400$108,348
Other intangible assets, net28,38929,178
Customer Contracts and other intangible assets, net$141,789$137,526

Total amortization expense was approximately $23.4 million in 2012, $22.4 million in 2011 and $20.4 million in 2010.

Estimated amortization expense for the existing carrying amount of customer contracts and other intangible assets for each of the five succeeding fiscal years are as follows:

(in thousands)
2013$24,478
2014$21,497
2015$18,846
2016$16,080
2017$14,444

10. INCOME TAXES

The Company's income tax provision consisted of the following:

December 31,
(in thousands)201220112010
Current:
Federal$54,815$48,505$40,250
State8,7177,7238,494
Foreign3,6483,3732,724
Deferred:
Federal(2,326)1912,355
State484528625
Foreign(28)65(905)
Total income tax provision$65,310$60,385$53,543

The primary factors causing income tax expense to be different than the federal statutory rate for 2012, 2011 and 2010 are as follows:

December 31,
(in thousands)201220112010
Income tax at statutory rate$61,825$56,384$50,241
State income tax expense (net of federal benefit)5,8355,4774,688
Foreign tax benefit(2,560)(2,109)(1,804)
Other210633418
Total income tax provision$65,310$60,385$53,543

The provision for income taxes resulted in an effective tax rate of 37.0% on income before income taxes for the year ended December 31, 2012. The effective rate differs from the annual federal statutory rate primarily because of state and foreign income taxes.

For 2011 and 2010 the effective tax rate was 37.5% and 37.3%, respectively. The effective income tax rate differs from the annual federal statutory tax rate primarily because of state and foreign income taxes.

During 2012, 2011 and 2010, the Company paid income taxes of $63.0 million, $52.0 million and $60.1 million, respectively, net of refunds.

The Company had state and federal income taxes receivable totaling $5.2 million and $6.3 million at December 31, 2012 and 2011, respectively, included in other current assets.

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 income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31, 2012 and 2011 are as follows:

December 31,
(in thousands)20122011
Deferred tax assets:
Termite Accrual$2,288$3,068
Insurance and Contingencies25,84123,752
Unearned Revenues14,41313,988
Compensation and Benefits11,98411,484
Net Pension Liability16,70312,333
State and Foreign Operating Loss Carryforwards9,8388,981
Bad Debt Reserve3,7033,135
Other1,3841,605
Valuation allowance(2,096)(1,646)
Total Deferred Tax Assets84,05876,700
Deferred tax liabilities:
Depreciation and Amortization(6,554)(7,097)
Foreign Currency Translation(3,606)(3,200)
Intangibles and Other(13,719)(12,527)
Total Deferred tax Liabilities(23,879)(22,824)
Net Deferred Tax Assets$60,179$53,876

Analysis of the valuation allowance:

December 31,
(in thousands)20122011
Valuation allowance at beginning of year$1,646$810
Increase/(decrease) in valuation allowance450836
Valuation allowance at end of year$2,096$1,646

As of December 31, 2012, the Company has net operating loss carryforwards for foreign and state income tax purposes of approximately $207.0 million, which will be available to offset future taxable income. If not used, these carryforwards will expire between 2013 and 2028. Management believes that it is unlikely to be able to utilize approximately $10.0 million of foreign net operating losses before they expire and has included a valuation allowance for the effect of these unrealizable operating loss carryforwards. The valuation allowance increased by $0.5 million due to the foreign net operating losses.

Earnings from continuing operations before income tax includes foreign income of $13.0 million in 2012, $11.0 million in 2011 and $7.8 million in 2010. During December 2009, the international subsidiaries remitted their earnings to the Company in the form of a one-time dividend. In the future the Company intends to reinvest indefinitely the undistributed earnings of non-U.S. subsidiaries. Computation of the potential deferred tax liability associated with these undistributed earnings is not practicable.

The total amount of unrecognized tax benefits at December 31, 2012 that, if recognized, would affect the effective tax rate is $1.6 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

December 31,
(in thousands)20122011
Balance at Beginning of Year$2,009$2,566
Additions based on tax positions related to current year4543
Additions for tax positions of prior years332511
Reductions for tax positions of prior years(344)(988)
Settlements(322)(123)
Expiration of statute of limitation(139)—
Balance at End of Year$1,581$2,009

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. In many cases these uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. The federal tax audit for 2002 and 2003 was completed in 2011. In addition, the Company has subsidiaries in various state jurisdictions that are currently under audit for years ranging from 1996 through 2008. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S., income tax examinations for years prior to 2006.

It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next 12 months. These changes may be the result of settlement of ongoing state audits. It is expected that certain state audits will be completed in the next 12 months resulting in a reduction of the liability for unrecognized tax benefits of $0.9 million. None of the reductions in the liability for unrecognized tax benefits due to settlements discussed above will affect the effective tax rate.

The Company's policy is to record interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties were $0.9 million and $1.0 million as of December 31, 2012 and 2011, respectively. During 2012, 2011 and 2010 the Company recognized interest and penalties of $0.1 million, $0.3 million and $0.9 million, respectively.

11. ACCRUAL FOR TERMITE CONTRACTS

In accordance with FASB ASC Topic 450 "Contingencies," the Company maintains an accrual for termite claims representing the estimated costs of reapplications, repairs and associated labor and chemicals, settlements, awards and other costs relative to termite control services. Factors that may impact future cost include termiticide life expectancy and government regulation.

A reconciliation of changes in the accrual for termite contracts for the years ended December 31, 2012 and 2011 as follows:

December 31,
(in thousands)20122011
Beginning balance$10,300$8,925
Current year provision2,8565,619
Settlements, claims, and expenditures(4,856)(4,244)
Ending balance$8,300$10,300

The accrual for termite contracts is included in other current liabilities, $3.3 million and $3.7 million at December 31, 2012 and 2011, respectively and long-term accrued liabilities, $5.0 million and $6.6 million at December 31, 2012 and 2011, respectively on the Company's consolidated statements of financial position.

12. COMMITMENTS AND CONTINGENCIES

The Company leases buildings, vehicles and equipment under operating and capital leases, some of which contain escalation clauses. The capital leases contractually expired at various dates through 2011. The assets and liabilities acquired under capital leases are recorded at the lower of fair market value or the present value of future lease payments, and are depreciated over the actual contract term. Depreciation of assets under capital leases is included in depreciation expense for 2012 and 2011. Following is a summary of property held under capital leases:

(in thousands)20122011
Vehicles$—$862
Expirations & Disposals—(19)
Accumulated Depreciation—(843)
Total property held under capital leases$—$—

The remainder of the leases are accounted for as operating leases expiring at various dates through 2028:

Years ended December 31,
(in thousands)201220112010
Rental Expense$48,511$45,958$43,135

Future commitments under operating leases are as summarized:

(in thousands)Operating leases
2013$31,265
201421,352
201513,569
20168,260
20175,160
Thereafter5,895
Total minimum obligation$85,501

In the normal course of business, certain of the Company's subsidiaries are defendants in a number of lawsuits or arbitrations, which allege that plaintiffs have been damaged as a result of the rendering of services by the defendant subsidiary. The subsidiaries are actively contesting these actions. Some lawsuits have been filed (John Maciel v. Orkin, Inc., et al.; Douglas F. Bracho, Jr. v. Orkin, Inc.; Jennifer M. Welsh et al. v. Orkin, LLC, et al.: and Jennifer Thompson and Janet Flood v. Philadelphia Management Company, Parkway Associated, Parkway House Apartments, Barbara Williams, and Western Pest Services) in which the plaintiffs are seeking certification of a class. These cases originate in California (Maciel and Bracho), South Carolina (Welsh), and Pennsylvania (Flood), respectively. The Maciel lawsuit, a wage and hour related matter, was filed in the Superior Court of Los Angeles County, California. The Bracho lawsuit, a matter related to payroll deductions for use of Company vehicles, was filed in the Superior Court of Orange County, California. In Bracho, the Court in early October approved a final resolution of this matter, and on October 15, 2012, it was dismissed. The Welsh lawsuit, a termite service related matter, was filed in the Court of Common Pleas Fourteenth Judicial Circuit, County of Beaufort, South Carolina. The Flood lawsuit, a bed bug service related matter filed by residents of an apartment complex, was filed in the Court of Common Pleas of Philadelphia County, Pennsylvania. On October 26, 2012, the Court approved a settlement of the Flood case, and it was dismissed with prejudice. None of the remaining matters have been scheduled for a class certification hearing. Additionally, the Company and a subsidiary, The Industrial Fumigant Company, LLC, are named defendants in Severn Peanut Co. and Meherrin Agriculture & Chemical Co. v. Industrial Fumigant Co., et al. The Severn lawsuit, a matter related to a fumigation service,

has been filed in the Northern Division of the United States District Court for the Eastern District of North Carolina. The plaintiffs are seeking damages for breach of contract and negligence. The Industrial Fumigant Company, LLC is also a named defendant in Insurance Company of the State of Pennsylvania as Subrogee of Archer-Daniels-Midland Company, Agrinational Insurance Company, Inc. as Subrogee of Archer-Daniels-Midland Company, and Archer-Daniels-Midland Company v. The Industrial Fumigant Co., The Industrial Fumigant Company, LLC, and James Miller. The ADM lawsuit, a matter related to a fumigation service, has been filed in the State Court in Lucas County, Ohio. The plaintiffs are seeking damages for breach of contract and negligence. The Company believes these matters are without merit and intends to vigorously contest certification and defend itself through trial or arbitration, if necessary. The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or liquidity; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual quarter or year.

Orkin, LLC 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 and did not materially affect its financial condition, results of operations or liquidity. Environmental remediation is reported on a non-discounted basis.

13. EMPLOYEE BENEFIT PLANS

Employee Benefit Plans

Defined Benefit Pension Plans

Rollins, Inc. Retirement Income Plan

The Company maintains several noncontributory tax-qualified defined benefit pension plans (the "Plans") covering employees meeting certain age and service requirements. The Plans 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 Plans with at least the minimum amount required by ERISA. The Company made contributions of $5.2 million, $4.9 million and $5.2 million to the Plans during the years ended December 31, 2012, 2011 and 2010, respectively.

In 2005, the Company ceased all future benefit accruals under the Rollins, Inc. Retirement Income Plan, although the Company remains obligated to provide employees benefits earned through June 2005. In 2012 the Plan was amended to allow certain vested terminated participants the ability to elect for a limited time the commencement of their benefit in the form of a single-sum payment, not to exceed $13,500, or an annuity starting date of December 1, 2012. In total $4.7 million was paid by the Plan during the year ended December 31, 2012 under this program.

The Company terminated the Waltham Services, LLC Salaried Pension Plan and all benefits have been settled via an annuity purchase or lump sum in December 2012. The total payout by the plan was either in the form of lump sum payments (including rollovers) or annuities. Active employees were eligible to roll their balances into the Rollins 401(k) Plan. The Annuities were purchased through Principle. The total amount disbursed to terminate the plan totaled $4.0 million.

The Company also includes the Waltham Services, LLC Hourly Employee Pension Plan in the Company's financial statements. The Company accounts for these defined benefit plans in accordance with FASB ASC Topic 715 "Compensation- Retirement Benefits", and engages an outside actuary to calculate its obligations and costs. With the assistance of the actuary, the Company evaluates the significant assumptions used on a periodic basis including the estimated future return on plan assets, the discount rate, and other factors, and makes adjustments to these liabilities as necessary.

In June 2005, the Company froze the Rollins, Inc. defined benefit pension plan. The Company currently uses December 31 as the measurement date for its defined benefit post-retirement plans. The funded status of the Plans and the net amount recognized in the statement of financial position are summarized as follows as of:

December 31,
(in thousands)20122011
CHANGE IN ACCUMULATED BENEFIT OBLIGATION
Accumulated Benefit obligation at beginning of year$196,911$183,972
Pension plans acquired upon acquisitions of companies——
Service cost100158
Interest cost9,6229,879
Actuarial (gain) loss21,54112,205
Benefits paid(17,359)(8,793)
Liability gain due to curtailment—(510)
Accumulated Benefit obligation at end of year210,815196,911
CHANGE IN PLAN ASSETS
Market value of plan assets at beginning of year165,044171,457
Actual return on plan assets14,656(2,520)
Employer contribution5,2034,900
Benefits paid(17,359)(8,793)
Fair value of plan assets at end of year167,544165,044
Funded status$(43,271)$(31,867)

Amounts Recognized in the Statement of Financial Position consist of:

December 31,
(in thousands)20122011
Noncurrent liabilities$(43,271)$(31,867)

Amounts Recognized in Accumulated Other Comprehensive Income consists of:

December 31,
(in thousands)20122011
Net actuarial loss$102,419$87,035

The accumulated benefit obligation for the defined benefit pension plans were $210.8 million and $196.9 million at December 31, 2012 and 2011, respectively. Accumulated benefit obligation and projected benefit obligation are materially the same for the Plans. Pre-tax increases in the pension liability which were (charged, net of tax) credited to other comprehensive income/(loss) were $(15.4) million, $(24.5) million and $(1.9) million in 2012, 2011 and 2010, respectively.

The following weighted-average assumptions were used to determine the accumulated benefit obligation and net benefit cost:

December 31,
201220112010
ACCUMULATED BENEFIT OBLIGATION
Discount rate4.17%5.01%5.51%
Rate of compensation increaseN/AN/AN/A
NET BENEFIT COST
Discount rate5.01%5.51%6.01%
Expected return on plan assets7.00%7.00%7.00%
Rate of compensation increaseN/AN/AN/A

The return on plan assets reflects the weighted-average of the expected long-term rates of return for the broad categories of investments held in the plan. The expected long-term rate of return is adjusted when there are fundamental changes in the expected returns on the plan investments.

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, for fiscal year's 2012, 2011 and 2010 the Company utilized a yield curve analysis.

Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income

Pension Benefits
(in thousands)201220112010
Net Periodic Benefit Cost
Service cost$100$158$86
Interest cost9,6229,8799,514
Expected return on plan assets(12,106)(12,080)(11,437)
Amortization of net loss3,6061,8001,115
Net periodic loss/(benefit)$1,222$(243)$(722)
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
Pretax loss$18,991$26,297$3,048
Amortization of net loss(3,606)(1,800)(1,115)
Total recognized in other comprehensive income15,38524,4971,933
Total recognized in net periodic benefit cost and other comprehensive income$16,607$24,254$1,211

The Company does not expect to amortize a net gain or loss in 2013. At December 31, 2012 and 2011, the Plan's assets were comprised of listed common stocks and U.S. government and corporate securities, real estate and other. Included in the assets of the Plan were shares of Rollins, Inc. Common Stock with a market value of $26.6 million and $34.1 million at December 31, 2012 and 2011, respectively.

The Plans' weighted average asset allocation at December 31, 2012 and 2011 by asset category, along with the target allocation for 2013, are as follows:

Target allocations forPercentage of plan assets as of December 31,
Asset category201320122011
Cash and cash equivalents0% – 5%0.2%0.6%
Equity securities—Rollins stock10% – 20%15.9%20.6%
Domestic equity—all other20% – 30%13.0%12.7%
Global equity10% – 20%12.5%11.4%
International equity10% – 20%13.6%11.6%
Debt securities—core fixed income15% – 50%17.1%18.9%
Tactical composite10% – 20%12.5%12.5%
Real estate0% – 10%7.7%4.3%
Real return0% – 10%7.5%7.4%
Other0% – 5%0.0%0.0%
Total100.0%100.0%100.0%

For each of the asset categories in the pension plan, the investment strategy is identical—maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plans utilize a number of investment approaches, including individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation. The Company and management are considering making contributions to the pension plans of approximately $5.0 million during fiscal 2013.

Included among the asset categories for the Plans' investments are real estate and other comprised of real estate and hedge funds. These investments are categorized as level 3 investments and are valued using significant non-observable inputs which do not have a readily determinable fair value. In accordance with ASU No. 2009-12 "Investments In Certain Entities That Calculate Net Asset Value per Share (Or Its Equivalent)," these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate against these risks by evaluating the appropriateness of the funds' judgments and assumptions by reviewing the financial data included in the funds' financial statements for reasonableness.

Fair Value Measurements

The Company's overall investment strategy is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit payments, with a wide diversification of asset types, fund strategies and fund managers. Equity securities primarily include investments in large-cap and mid-cap companies. Fixed-income securities include corporate bonds of companies in diversified securities, mortgage-backed securities, and U.S. Treasuries. Other types of investments include hedge funds and private equity funds that follow several different investment strategies.

Some of our assets, primarily our private equity, real estate and hedge funds, do not have readily determinable market values given the specific investment structures involved and the nature of the underlying investments. For the December 31, 2011 plan asset reporting, publicly traded asset pricing was used where possible. For assets without readily determinable values, estimates were derived from investment manager discussions focusing on underlying fundamentals and significant events.

The following table presents our plan assets using the fair value hierarchy as of December 31, 2012. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See note 7 for a brief description of the three levels under the fair value hierarchy.

TotalLevel 1Level 2Level 3
(1)Cash and Cash Equivalents$289$289$—$—
(2)Fixed Income Securities28,624—28,624—
Domestic Equity Securities———
Rollins, Inc. Stock26,64426,644——
Other Securities21,77921,779——
Global Equity Securities20,99020,990——
(3)International Equity Securities22,75810,80511,953—
(4)Tactical Composite21,026—21,026—
(5)Real Estate12,890——12,890
(6)Real Return12,544—12,544—
Total$167,544$80,507$74,147$12,890

The following table presents our plan assets using the fair value hierarchy as of December 31, 2011. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

TotalLevel 1Level 2Level 3
(1)Cash and Cash Equivalents$918$918$—$—
(2)Fixed Income Securities31,167—31,167—
Domestic Equity Securities———
Rollins, Inc. Stock34,05034,050——
Other Securities21,03221,032——
Global Equity Securities18,75118,751——
(3)International Equity Securities19,1209,3169,804—
(4)Tactical Composite20,680—20,680—
(5)Real Estate7,092——7,092
(6)Real Return12,234—12,234—
Total$165,044$84,067$73,885$7,092

(1)

Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market funds.

(2)

Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.

(3)

Some International equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets.

(4)

Tactical Composite funds invest in stocks, bonds and cash, both domestic and international. These assets are valued primarily using a market approach based on the quoted market prices of identical instruments in their respective markets.

(5)

Real estate fund values are primarily reported by the fund manager and are based on valuation of the underlying investments, which include inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data.

(6)

Real Return funds invest in global equities, commodities and inflation protected core bonds that are valued primarily using a market approach based on the quoted market prices of identical instruments in their respective markets.

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2012.

Balance at December 31, 2011Net Realized and Unrealized Gains/(Losses)Net Purchases, Issuances and SettlementsNet Transfers In to/ (Out of) Level 3Balance at December 31, 2012
Real Estate$7,092$997$4,801$—$12,890
Total$7,092$997$4,801$—$12,890

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2011.

Balance at December 31, 2010Net Realized and Unrealized Gains/(Losses)Net Purchases, Issuances and SettlementsNet Transfers In to/ (Out of) Level 3Balance at December 31, 2011
Real Estate$6,248$844$—$—$7,092
Alternative Investments1,423(11)(1,412)——
Total$7,671$833$(1,412)$—$7,092

The estimated future benefit payments over the next ten years are as follows:

(in thousands)
2013$8,922
20149,578
201510,230
201610,705
201711,176
Thereafter61,743
Total$112,354

Defined Contribution 401(k) Plan

The Company sponsors a defined contribution 401(k) Plan that is available to a majority of the Company's full-time employees the first of the calendar quarter following completion of three months of service. The Plan is available to non full-time employees the first day of the calendar quarter following one year of service upon completion of 1,000 hours in that year. The Plan provides for a matching contribution of fifty cents ($.50) for each one dollar ($1.00) of a participant's contributions to the Plan that do not exceed 6 percent of his or her eligible compensation (which includes commissions, overtime and bonuses). The charge to expense for the Company match was approximately $7.7 million for the year ended December 31, 2012 and $7.0 million for each of the years ended December 31, 2011 and 2010. At December 31, 2012, 2011 and 2010 approximately, 32.5%, 35.5% and 35.1%, respectively of the plan assets consisted of Rollins, Inc. Common Stock. Total administrative fees paid by the Company for the Plan were approximately $53 thousand in 2012, $42 thousand in 2011 and $52 thousand in 2010.

Nonqualified Deferred Compensation Plan

The Deferred Compensation Plan provides that participants may defer up to 50% of their base salary and up to 85% of their annual bonus with respect to any given plan year, subject to a $2,000 per plan year minimum. The Company may make discretionary contributions to participant accounts. The Company currently plans to credit accounts of participants of long service to the Company with certain discretionary amounts ("Pension Plan Benefit Restoration Contributions") in lieu of benefits that previously accrued under the Company's Retirement Income Plan up to a maximum of $245,000. The Company intends to make Pension Plan Benefit Restoration Contributions under the Deferred Compensation Plan for five years. The first contribution was made in January 2007 for those participants who were employed for all of the 2006 plan year. Only employees with five full years of vested service on June 30, 2005 qualify for Pension Plan Benefit Restoration Contributions. Under the Deferred Compensation Plan, salary and bonus deferrals and Pension Plan Benefit Restoration Contributions are fully vested. Any discretionary contributions are subject to vesting in accordance with the matching contribution vesting schedule set forth in the Rollins 401(k) Plan in which a participant participates. The Company made its last contributions associated with this plan during the first quarter of 2011.

Accounts will be credited with hypothetical earnings, and/or debited with hypothetical losses, based on the performance of certain "Measurement Funds." Account values are calculated as if the funds from deferrals and Company credits had been converted into shares or other ownership units of selected Measurement Funds by purchasing (or selling, where relevant) such shares or units at the current purchase price of the relevant Measurement Fund at the time of the participant's selection. Deferred Compensation Plan benefits are unsecured general obligations of the Company to the participants, and these obligations rank in parity with the Company's other unsecured and unsubordinated indebtedness. The Company has established a "rabbi trust," which it uses to voluntarily set aside amounts to indirectly fund any obligations under the Deferred Compensation Plan. To the extent that the Company's obligations under the Deferred Compensation Plan exceed assets available under the trust, the Company would be required to seek additional funding sources to fund its liability under the Deferred Compensation Plan.

Generally, the Deferred Compensation Plan provides for distributions of any deferred amounts upon the earliest to occur of a participant's death, disability, retirement or other termination of employment (a "Termination Event"). However, for any deferrals of salary and bonus (but not Company contributions), participants would be entitled to designate a distribution date which is prior to a Termination Event. Generally, the Deferred Compensation Plan allows a participant to elect to receive distributions under the Deferred Compensation Plan in installments or lump-sum payments.

At December 31, 2012 the Deferred Compensation Plan had 41 life insurance policies with a net face value of $36.6 million. The cash surrender value of these life insurance policies were worth $11.2 million and $9.8 million at December 31, 2012 and 2011, respectively.

The estimated life insurance premium payments over the next five years are as follows:

(in thousands)
2013$840
20141,306
20151,348
20161,588
20171,517
Total$6,599

Total expense/(income) related to deferred compensation was $338 thousand, $218 thousand and $130 thousand in 2012, 2011, and 2010, respectively. The Company had $11.3 million and $10.1 million in deferred compensation assets as of December 31, 2012 and 2011, respectively, included within other assets

on the Company's consolidated statements of financial position and $11.1 million and $9.8 million in deferred compensation liability as of December 31, 2012 and 2011, respectively, located within long-term accrued liabilities on the Company's consolidated statements of financial position. The amounts of assets were marked to fair value.

14. STOCK-BASED COMPENSATION

Stock Compensation Plans

Stock options and time lapse restricted shares (TLRSs) have been issued to officers and other management employees under the Company's Employee Stock Incentive Plan.

Stock Options

The Company's stock options generally vest over a five-year period and expire ten years from the issuance date. For the year ended December 31, 2012, the Company issued approximately 32 thousand shares of common stock upon exercise of stock options by employees and issued 0.1 million shares in 2011.

In order to estimate the fair value of stock options, the Company used the Black-Scholes option valuation model, which was developed for use in estimating the fair value of publicly traded options, which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions and these assumptions can vary over time.

Option activity under the Company's stock option plan as of December 31, 2012, 2011 and 2010 and changes during the year ended December 31, 2012 were as follows:

SharesWeighted Average Exercise PriceWeighted Average Remaining Contractual Term (in years)Aggregate Intrinsic Value
Outstanding at December 31, 2009653$4.672.44$5,348
Exercised(517)4.67
Outstanding at December 31, 20101364.661.592,056
Exercised(103)4.48
Outstanding at December 31, 201133$5.260.93$553
Exercised(32)5.25
Outstanding at December 31, 20121$5.520.08$17
Exercisable at December 31, 20121$5.520.08$17

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company's closing stock price on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that day. The amount of aggregate intrinsic value will change based on the fair market value of the Company's stock.

The aggregate intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $0.5 million, $1.7 million and $5.2 million, respectively. Exercise of options during the years ended December 31, 2012, 2011 and 2010 resulted in cash receipts of less than $1 thousand, $0.1 million and $0.3 million, respectively.

Time Lapse Restricted Shares and Restricted Stock Units

TLRSs provide for the issuance of a share of the Company's Common Stock at no cost to the holder and generally vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. The Company issued TLRSs that vest over ten years prior to 2004. TLRSs issued 2004 and later vest in 20 percent increments starting with the second anniversary of the grant, over six years from the date of grant. During these years, grantees receive all dividends declared and retain voting rights for the granted shares. The agreements under which the restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed.

The Company issued time lapse restricted shares of 0.8 million, 0.7 million and 0.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.

The Company issues new shares from its authorized but unissued share pool. At December 31, 2012, approximately 4.5 million shares of the Company's common stock were reserved for issuance. In accordance with FASB ASC Topic 718, "Compensation—Stock Compensation," the Company uses the modified prospective application method of adoption, which requires the Company to record compensation cost, related to unvested stock awards as of December 31, 2005 by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards with no change in historical reported earnings. Awards granted after December 31, 2005 are valued at fair value and recognized on a straight line basis over the service periods of each award. The Company estimates restricted share forfeiture rates based on its historical experience.

The following table summarizes the components of the Company's stock-based compensation programs recorded as expense ($ in thousands):

Twelve months ended December 31,
201220112010
Time Lapse Restricted Stock:
Pre-tax compensation expense$9,494$7,555$7,538
Tax benefit(3,655)(2,909)(2,902)
Restricted stock expense, net of tax$5,839$4,646$4,636

As of December 31, 2012 and 2011, $30.9 million and $24.4 million, respectively, of total unrecognized compensation cost related to time-lapse restricted shares is expected to be recognized over a weighted average period of approximately 4.1 years at December 31, 2012, 2011 and 2010, respectively.

The following table summarizes information on unvested restricted stock units outstanding as of December 31, 2012, 2011 and 2010:

Number of Shares (in thousands)Weighted-Average Grant-Date Fair Value
Unvested Restricted Stock Grants
Unvested as of December 31, 20092,736$10.31
Forfeited(277)10.99
Vested(666)9.51
Granted87112.32
Unvested as of December 31, 20102,66411.09
Forfeited(74)12.90
Vested(574)10.08
Granted67019.30
Unvested as of December 31, 20112,68613.30
Forfeited(92)16.41
Vested(627)10.87
Granted77622.69
Unvested as of December 31, 20122,743$16.41

15. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

Accumulated other comprehensive income/(loss) consist of the following (in thousands):

Pension Liability AdjustmentForeign Currency TranslationTotal
Balance at December 31, 2010$(38,077)$5,587$(32,490)
Change during 2011:
Before-tax amount(24,497)(1,125)(25,622)
Tax benefit9,60541710,022
(14,892)(708)(15,600)
Balance at December 31, 2011(52,969)4,879(48,090)
Change during 2012
Before-tax amount(15,385)1,062(14,323)
Tax benefit5,852(406)5,446
(9,533)656(8,877)
Balance at December 31, 2012$(62,502)$5,535$(56,967)

16. RELATED PARTY TRANSACTIONS

The Company provides certain administrative services to RPC, Inc. ("RPC") (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated with the Company). The service agreements between RPC and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months notice. The services covered by these agreements include administration of certain employee benefit programs, and other administrative services. Charges to RPC (or to corporations which are subsidiaries of RPC) for such services and rent totaled less than $0.1 million for the years ended December 31, 2012, 2011 and 2010.

The Company rents office, hanger and storage space to LOR, Inc. ("LOR") (a company controlled by R. Randall Rollins and Gary W. Rollins). Charges to LOR (or corporations which are subsidiaries of LOR) for rent totaled $1.1 million, $1.0 and $0.9 for the years ended December 31, 2012, 2011 and 2010, respectively.

All transactions were approved by the Company's Nominating and Governance Committee of the Board of Directors.

17. UNAUDITED QUARTERLY DATA

(in thousands except per share data)FirstSecondThirdFourth
2012
Revenues$289,465$334,872$340,179$306,393
Gross profit (Revenues less cost of services provided)$141,383$168,879$169,701$143,368
Net income$23,080$33,127$32,211$22,914
Income per share:
Income per share – Basic$0.16$0.23$0.22$0.16
Income per share – Diluted$0.16$0.23$0.22$0.16
2011
Revenues$271,643$320,436$323,929$289,056
Gross profit (Revenues less cost of services provided)$130,745$160,791$158,832$137,854
Net income$18,640$31,061$29,415$21,595
Income per share:
Income per share – Basic$0.13$0.21$0.20$0.15
Income per share – Diluted$0.13$0.21$0.20$0.15

18. CASH DIVIDEND

On October 23, 2012, the Board of Directors declared a special year-end dividend of $0.12 per share payable December 10, 2012 to stockholders of record at the close of business November 09, 2012. The Board of Directors, at its quarterly meeting on January 22, 2013, approved a 12.5% increase in the Company's quarterly dividend. The increased regular quarterly dividend of $0.09 per share will be payable March 8, 2013 to stockholders of record at the close of business February 8, 2013. 2013 marked the eleventh consecutive year Rollins, Inc.'s board of directors has increased the Company's dividend a minimum of 12% or greater.

Previous: Item 7A. Quantitative and Qualitative Disclosures about Market Risk. · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.