Sunair Services Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended December 31, 2006 |
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OR |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number I-4334
SUNAIR SERVICES CORPORATION
(Exact name of Registrant as specified in its charter)
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Florida
(State or other jurisdiction of incorporation or
organization) |
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59-0780772
(I.R.S. Employer Identification No.) |
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595 South Federal Highway, Suite 500
Boca Raton, Florida
(Address of principal executive offices) |
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33432
(Zip Code) |
(Registrants telephone number, including area code)
None
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
o Accelerated
filer
o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange Act).
Yes
o No
þ
As of February 7, 2007, the Registrant had outstanding
13,091,088 shares of common stock.
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
INDEX
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND SEPTEMBER 30, 2006
(UNAUDITED)
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December 31, | |
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September 30, | |
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2006 | |
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2006 | |
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$ |
1,580,897 |
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$ |
1,601,110 |
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Accounts receivable, net
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6,077,875 |
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4,919,595 |
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Income tax receivable
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352,393 |
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352,393 |
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Interest receivable
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21,539 |
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11,084 |
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Inventories, net
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2,318,454 |
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2,328,205 |
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Deferred tax asset
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137,387 |
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137,387 |
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Prepaid and other current assets
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932,430 |
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1,163,508 |
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Note receivable current
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334,986 |
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334,986 |
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Total Current Assets
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11,755,961 |
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10,848,268 |
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PROPERTY, PLANT, AND EQUIPMENT, net
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2,370,940 |
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2,538,434 |
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OTHER ASSETS:
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Note receivable
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2,000,000 |
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2,000,000 |
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Software costs, net
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3,897,164 |
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3,938,465 |
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Customer list, net
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11,944,754 |
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11,247,099 |
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Goodwill
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55,517,787 |
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52,818,269 |
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Other assets
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655,190 |
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522,427 |
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Total Other Assets
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74,014,895 |
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70,526,260 |
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TOTAL ASSETS
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$ |
88,141,796 |
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$ |
83,912,962 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITIES:
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Accounts payable
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$ |
3,654,634 |
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$ |
2,743,523 |
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Accrued expenses
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2,493,780 |
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2,831,162 |
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Unearned revenues
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1,266,222 |
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589,365 |
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Customer deposits
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2,348,345 |
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2,677,364 |
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Capitalized leases, current portion
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26,742 |
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8,796 |
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Notes payable, current portion
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135,006 |
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138,374 |
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Total Current Liabilities
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9,924,729 |
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8,988,584 |
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LONG TERM LIABILITIES:
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Capitalized leases, net of current portion
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20,027 |
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Notes payable, net of current portion
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3,182,233 |
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1,723,642 |
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Note payable -related party
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5,000,000 |
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5,000,000 |
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Revolving line of credit
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8,456,477 |
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8,000,000 |
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Deferred tax liability
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564,628 |
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112,226 |
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Total Long Term Liabilities
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17,203,338 |
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14,855,895 |
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Total Liabilities
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27,128,067 |
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23,844,479 |
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STOCKHOLDERS EQUITY:
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Preferred stock, no par value, 8,000,000 shares authorized, none
issued and outstanding
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Common stock, $.10 par value, 100,000,000 shares authorized,
13,017,559 and 13,007,559 shares issued and outstanding at
December 31, 2006 and September 30, 2006, respectively
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1,301,757 |
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1,300,757 |
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Additional paid-in capital
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51,809,752 |
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51,548,768 |
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Retained earnings
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7,799,888 |
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7,200,197 |
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Accumulated other comprehensive gain cumulative
translation adjustment
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102,332 |
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18,761 |
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Total Stockholders Equity
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61,013,729 |
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60,068,483 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$ |
88,141,796 |
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$ |
83,912,962 |
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The accompanying notes are an integral part of these financial
statements.
3
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
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For the Three | |
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For the Three | |
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Months Ended | |
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Months Ended | |
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December 31, 2006 | |
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December 31, 2005 | |
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SALES
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$ |
15,886,255 |
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$ |
11,225,575 |
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COST OF SALES
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6,892,013 |
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4,614,085 |
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GROSS PROFIT
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8,994,242 |
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6,611,490 |
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SELLING AND ADMINISTRATIVE EXPENSES
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9,881,703 |
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7,176,680 |
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LOSS FROM OPERATIONS
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(887,461 |
) |
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(565,190 |
) |
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OTHER INCOME (EXPENSES):
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Interest income
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67,774 |
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1,469 |
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Interest expense
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(288,323 |
) |
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(411,175 |
) |
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Other
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(22,801 |
) |
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(4,789 |
) |
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Total Other Income (Expenses)
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(243,350 |
) |
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(414,495 |
) |
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LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
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(1,130,811 |
) |
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(979,685 |
) |
INCOME TAX BENEFIT
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369,026 |
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420,495 |
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LOSS FROM CONTINUING OPERATIONS
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(761,785 |
) |
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(559,190 |
) |
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX
PROVISION OF $821,426 AND $100,272 FOR DECEMBER 31, 2006 AND
2005, RESPECTIVELY
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1,361,476 |
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194,647 |
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NET INCOME (LOSS)
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$ |
599,691 |
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$ |
(364,543 |
) |
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BASIC AND DILUTED INCOME (LOSS) PER SHARE:
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CONTINUING OPERATIONS
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$ |
(0.06 |
) |
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$ |
(0.05 |
) |
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DISCONTINUED OPERATIONS
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$ |
0.11 |
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$ |
0.02 |
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NET INCOME (LOSS)
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$ |
0.05 |
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$ |
(0.03 |
) |
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WEIGHTED AVERAGE SHARES OUTSTANDING:
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BASIC
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13,017,233 |
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10,512,464 |
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DILUTED
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13,017,233 |
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10,512,464 |
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The accompanying notes are an integral part of these financial
statements.
4
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
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For the Three | |
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For the Three | |
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Months Ended | |
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Months Ended | |
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December 31, 2006 | |
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December 31, 2005 | |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss)
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$ |
599,691 |
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$ |
(364,543 |
) |
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Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
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Depreciation
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235,918 |
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202,734 |
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Amortization
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561,406 |
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466,172 |
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Deferred taxes
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452,400 |
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(320,223 |
) |
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Bad debt reserve
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5,747 |
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1,936 |
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Inventories reserve
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77,962 |
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(2,774 |
) |
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(Gain) loss on sale of assets
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(2,346,367 |
) |
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9,789 |
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Equity based compensation
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216,984 |
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Stock based compensation
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45,000 |
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(Increase) decrease in Assets:
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Accounts receivable
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(1,130,709 |
) |
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56,680 |
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Interest receivable
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(10,453 |
) |
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8,479 |
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Inventories
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(64,710 |
) |
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|
93,889 |
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Prepaid and other current assets
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|
410,289 |
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(12,367 |
) |
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Other assets
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(108,785 |
) |
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(19,544 |
) |
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Increase (decrease) in Liabilities:
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Accounts payable and accrued expenses
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84,429 |
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296,519 |
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Unearned revenue
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(682 |
) |
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81,480 |
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Customer deposits
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(369,825 |
) |
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(125,884 |
) |
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Net Cash Provided By (Used In) Operating Activities
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(1,341,705 |
) |
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372,343 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of property, plant, and equipment
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(98,204 |
) |
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(161,289 |
) |
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Software development costs
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(95,768 |
) |
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(91,316 |
) |
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Cash paid for business acquisitions
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(1,500,000 |
) |
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(5,733,419 |
) |
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Net proceeds from sale of property
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2,522,274 |
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Net Cash Provided by (Used In) Investing Activities
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$ |
828,302 |
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$ |
(5,986,024 |
) |
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The accompanying notes are an integral part of these financial
statements.
5
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
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For the Three | |
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For the Three | |
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Months Ended | |
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Months Ended | |
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December 31, 2006 | |
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December 31, 2005 | |
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| |
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from (repayment of) line of credit
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$ |
456,477 |
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$ |
(3,500,000 |
) |
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Repayment of notes payable
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(44,777 |
) |
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(12,204 |
) |
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Payment on capital leases
|
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(2,081 |
) |
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|
(23,351 |
) |
|
Net proceeds from sale of common stock, net
|
|
|
|
|
|
|
9,457,515 |
|
|
|
|
|
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Net Cash Provided By Financing Activities
|
|
|
409,619 |
|
|
|
5,921,960 |
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash
|
|
|
83,571 |
|
|
|
(50,495 |
) |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(20,213 |
) |
|
|
257,784 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
1,601,110 |
|
|
|
3,220,699 |
|
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CASH AND CASH EQUIVALENTS, END OF PERIOD
|
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$ |
1,580,897 |
|
|
$ |
3,478,483 |
|
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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|
Cash paid during the period for income taxes
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|
$ |
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|
|
$ |
|
|
|
|
|
|
|
|
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|
Cash paid during the period for interest
|
|
$ |
257,463 |
|
|
$ |
406,497 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
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|
Debt incurred in acquisition of Archer Exterminators, Inc.
|
|
$ |
1,500,000 |
|
|
$ |
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these financial
statements.
6
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended December 31, 2006 and
December 31, 2005
(UNAUDITED)
1. Basis of Consolidated Financial Statement
Presentation
The accompanying unaudited consolidated condensed financial
statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission
and in accordance with the instructions to
Form 10-Q and do
not include all the information and footnote disclosures
normally included in consolidated financial statements prepared
in accordance with accounting principles generally accepted in
the United States of America. The information furnished in the
interim financial statements includes normal recurring
adjustments and reflects all adjustments, which, in the opinion
of management, are necessary for a fair presentation of such
financial statements. For further information refer to the
consolidated financial statements and footnotes thereto included
in the Companys most recent audited consolidated financial
statements and notes thereto included in its September 30,
2006 annual report on
Form 10-KSB.
Operating results for the three months ended December 31,
2006 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2007.
2. Significant Accounting Policies
The preparation of 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 reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
Accounts receivable consist of balances due from sales. The
Company performs periodic credit evaluations of its customers
and maintains an allowance for potential credit losses based on
historical experience and other information available to
management. As of December 31, 2006 and September 30,
2006, the Company established an allowance of $351,640 and
$365,730 respectively.
Inventories, which consist of raw materials, work-in-process,
and finished goods, are stated at the lower of cost or market
value, cost being determined using the first in, first out
method. The Company records reserves for inventory shrinkage and
obsolescence when considered necessary.
|
|
|
Property, Plant, and Equipment |
Property, plant and equipment are carried at cost. Depreciation
is provided over the estimated useful lives of the assets using
both the straight-line and accelerated methods. The estimated
useful lives used to compute depreciation are as follows:
|
|
|
Buildings and improvements
|
|
10 to 30 years |
Machinery and equipment
|
|
4 to 10 years |
Automobiles
|
|
4 to 10 years |
The cost of maintenance and repairs is charged to expense as
incurred; renewals and betterments are capitalized. When
properties are retired or otherwise disposed of, the cost of
such properties and the related accumulated depreciation are
removed from the accounts. Any profit or loss is credited, or
charged to income.
7
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended December 31, 2006 and
December 31, 2005 (Continued)
(UNAUDITED)
The Company capitalizes certain costs associated with software
development in accordance with Statement of Financial Accounting
Standard No. 86 (FASB No. 86) Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed. The Company amortizes software costs for periods
of 5 to 10 years, the estimated useful life of the asset.
|
|
|
Goodwill and other intangible assets |
Goodwill represents the excess of costs over fair value of
assets of businesses acquired. Pursuant to FASB Statement
No. 142 (FASB 142), goodwill acquired in a
purchase business combination and determined to have an
indefinite useful life are not amortized, but instead tested for
impairment at least annually in accordance with the provisions
of FASB 142. The Company tests goodwill for impairment as of
September 30 of each year.
FASB 142 also requires that customer lists and intangible assets
with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FASB Statement
No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets.
Customer lists are stated at fair value based on the discounted
cash flows over the estimated life of the customer contracts and
relationships. The Company used an independent appraisal firm to
perform a valuation study at the time of acquisition of
Middleton Pest Control, Inc. to determine the value and
estimated life of customer lists purchased in order to assist
management in determining an appropriate method in which to
amortize the asset. The amortization life is based on historic
analysis of customer relationships combined with estimates of
expected future revenues from customer accounts. The Company
amortizes customer lists on a straight-line basis over the
expected life of the customer of 8 years.
|
|
|
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of |
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset 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 future undiscounted cash flows
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the assets exceed the fair
value. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. There were no
assets impaired during the three months ended December 31, 2006
and 2005.
Service revenues are recorded and recognized at the date of
service completion. Sales revenues are recorded when products
are shipped and title has passed to unaffiliated customers, and
when collectibility is reasonably assured. Installation revenues
are considered earned at the time the project is completed.
Maintenance contracts are recorded as unearned revenues at the
time of collection and are recognized as income monthly over the
term of the contract. Interest and dividends earned on
investments are recorded when earned.
8
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended December 31, 2006 and
December 31, 2005 (Continued)
(UNAUDITED)
The Company expenses advertising costs as incurred.
Expenditures for research and development are charged to
operations as incurred.
|
|
|
Foreign Currency Translation |
Telecom FM Ltd. (Telecom), a United Kingdom
corporation, is a wholly owned subsidiary of the Company that
distributes and installs telecommunication devices providing
fixed wireless access to network and data service providers.
Telecoms functional currency is the British pound
sterling, its local currency. Accordingly, balance sheet
accounts are translated at exchange rates in effect at the end
of the period and income statement accounts are translated at
average exchange rates for the period. Translation gains and
losses are included as a separate component of
stockholders equity as cumulative translation adjustments.
Foreign currency transaction gains and losses are included in
other income and expenses.
Comprehensive income is comprised of net income and other
comprehensive income. Other comprehensive income includes
certain changes in equity that are excluded from net income. At
December 31, 2006 and September 30, 2006, accumulated
other comprehensive income was comprised of cumulative foreign
currency translation adjustments.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board
(FASB) issued statement No. 123
(SFAS No. 123) (revised 2004), Share-Based
Payment. SFAS No. 123(R) will require the Company to
recognize compensation expense for all stock-based compensation
in its consolidated statements of operations. Pro forma
disclosure will no longer be an alternative.
SFAS No. 123(R) will also require the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow, as required under current guidance. The new
requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption.
SFAS No. 123(R) is effective for fiscal year beginning
after June 15, 2005, with early adoption permitted. The
Company implemented the new standard beginning with the first
quarter of fiscal 2006.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement
No. 3. This Statement provides guidance on accounting for
reporting of accounting changes and error corrections. This
statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15,
2005. The Company does not expect the statement to have a
material effect on its financial statements.
In June 2006, the FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes, (FIN 48) a
clarification of FASB Statement No. 109, Accounting
for Income Taxes. This interpretation clarifies
recognition threshold and measurement attributes for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company has not yet determined the
impact of this interpretation on its financial statements.
9
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended December 31, 2006 and
December 31, 2005 (Continued)
(UNAUDITED)
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
(SAB 108), to address diversity in practice in
quantifying financial statement misstatements. SAB 108
requires that the Company quantify misstatements based on their
impact on each of its financial statements and related
disclosures. SAB 108 is effective as of the end of the
Companys 2007 fiscal year, allowing a one-time
transitional cumulative effect adjustment to retained earnings
as of October 1, 2006 for errors that were not previously
deemed material, but are material under the guidance in
SAB 108. The Company is currently evaluating the impact of
adopting SAB 108 on its financial statements.
In September 2006, the FASB issued SFAS 157, Fair Value
Measurements, which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair
value measurements. The provisions of SFAS 157 are
effective as of the beginning of the Companys 2008 fiscal
year. The Company is currently evaluating the impact of adopting
SFAS 157 on its financial statements.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, which requires employers to recognize the
over funded or under funded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity.
The Company has determined that this standard will not have a
material effect on its financial statements.
3. Acquisitions
On December 16, 2005 the Company, through its wholly-owned
subsidiary, Middleton entered into an Asset Purchase Agreement
to acquire substantially all the assets of Spa Creek for
$5,500,000.
In addition, the Company incurred $233,419 of transaction costs
consisting of legal and accounting fees.
The following table sets forth the allocation of the purchase
price to Spa Creek tangible and intangible assets acquired and
liabilities assumed as of December 16, 2005:
|
|
|
|
|
Goodwill
|
|
$ |
5,732,933 |
|
Customer list
|
|
|
262,000 |
|
Accounts Receivable
|
|
|
132,929 |
|
Inventory
|
|
|
66,475 |
|
Fixed assets
|
|
|
30,000 |
|
Customer deposits
|
|
|
(279,917 |
) |
Accrued expenses
|
|
|
(211,001 |
) |
|
|
|
|
Total
|
|
$ |
5,733,419 |
|
|
|
|
|
On January 9, 2006, Middleton entered into an Asset
Purchase Agreement to acquire substantially all of the assets of
Paragon for approximately $1,050,000 consisting of $800,000
cash, $100,000 in the form of a subordinated promissory note,
$50,000 in transaction costs and 17,036 shares of common stock
valued at $100,000.
10
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended December 31, 2006 and
December 31, 2005 (Continued)
(UNAUDITED)
On February 28, 2006, Middleton entered into an Asset
Purchase Agreement to acquire substantially all of the assets of
Pestec for approximately $800,000 consisting of $600,000 cash,
$175,000 in the form of a subordinated promissory note, and
$25,000 in transaction costs.
On March 31, 2006 Middleton entered into an Asset Purchase
Agreement to acquire substantially all of the assets of Ron Fee,
for $5,200,000 consisting of $4,000,000 cash and $1,200,000 in
the form of a subordinated promissory note.
In addition, the Company incurred approximately $325,000 of
transaction costs consisting of legal and accounting fees.
The following table sets forth the allocation of the purchase
price to Ron Fee tangible and intangible assets acquired and
liabilities assumed as of March 31, 2006:
|
|
|
|
|
Goodwill
|
|
$ |
3,348,432 |
|
Customer list
|
|
|
1,554,000 |
|
Accounts receivable
|
|
|
235,000 |
|
Inventory
|
|
|
91,000 |
|
Fixed assets
|
|
|
440,000 |
|
Accounts payable
|
|
|
(92,432 |
) |
Customer deposits
|
|
|
(22,000 |
) |
Notes payable autos
|
|
|
(29,000 |
) |
|
|
|
|
Total
|
|
$ |
5,525,000 |
|
|
|
|
|
Subsequent to the acquisition, the former controller of Ron Fee
received 10,000 shares of common stock for services rendered
valued at $4.50 per share.
On November 30, 2006 Middleton entered into an Asset
Purchase Agreement to acquire substantially all of the assets of
Archer for $3,300,000 consisting of $1,500,000 cash, $1,500,000
in the form of a subordinated promissory note and shares of the
Companys common stock valued at $300,000. In addition, the
company incurred approximately $150,400 in transaction costs.
The shares were issued in January, 2007.
11
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended December 31, 2006 and
December 31, 2005 (Continued)
(UNAUDITED)
The following table sets forth the preliminary allocation of the
purchase price to Archer tangible and intangible assets acquired
and liabilities assumed as of November 30, 2006:
|
|
|
|
|
Goodwill
|
|
$ |
2,660,622 |
|
Customer list
|
|
|
1,110,000 |
|
Accounts receivable
|
|
|
33,318 |
|
Inventory
|
|
|
3,500 |
|
Fixed assets
|
|
|
146,127 |
|
Prepaid Expenses
|
|
|
215,178 |
|
Deferred Revenue
|
|
|
(677,539 |
) |
Customer deposits
|
|
|
(40,806 |
) |
|
|
|
|
Total
|
|
$ |
3,450,400 |
|
|
|
|
|
|
|
|
Pro-Forma Results of Operations |
The following sets forth the Companys results of
operations for the three months ended December 31, 2006 and
2005 as if the acquisitions and dispositions had taken place on
October 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Revenues
|
|
$ |
16,244,129 |
|
|
|
13,275,449 |
|
Net income (loss)
|
|
|
557,640 |
|
|
|
(358,463 |
) |
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
.04 |
|
|
|
(.03 |
) |
|
Diluted
|
|
|
.04 |
|
|
|
(.03 |
) |
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
September 30, | |
|
|
2006 | |
|
2006 | |
|
|
| |
|
| |
Materials
|
|
$ |
1,336,729 |
|
|
$ |
1,430,453 |
|
Work-in-process
|
|
|
100,285 |
|
|
|
170,491 |
|
Finished goods
|
|
|
881,440 |
|
|
|
727,261 |
|
|
|
|
|
|
|
|
|
|
$ |
2,318,454 |
|
|
$ |
2,328,205 |
|
|
|
|
|
|
|
|
As of December 31, 2006 and September 30, 2006 the
Company established inventory shrinkage and obsolescence
reserves of $510,375 and $473,736 respectively.
5. Earnings per Common Share
Basic earnings per share amounts are computed by dividing the
net income by the weighted average number of common shares
outstanding. Diluted earnings per share amounts are computed by
dividing net income by the weighted average number of shares of
common stock, common stock equivalents, and stock options
outstanding during the period. Potential shares of common stock
and their effects on income were excluded from the diluted
calculations if the effect was anti-dilutive.
12
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended December 31, 2006 and
December 31, 2005 (Continued)
(UNAUDITED)
6. Preferred Stock
At December 31, 2006 and 2005, the Company had 8,000,000
authorized shares of preferred stock, no par value that may be
issued at such terms and provisions as determined by the board
of directors. None are outstanding.
7. Revolving Line of Credit
The Company has a line of credit with a financial institution
collateralized by the assets of the Company. The maximum credit
limit is $20,000,000. Interest is compounded daily based upon
the London Interbank Offering Rate (LIBOR) plus a variable
percentage based on the leverage ratio. The interest rate at
December 31, 2006 was 8.32%. The revolving line of credit
has a commitment fee in the amount of .375% per annum on the
average daily unused amount of the aggregate revolving committed
amount. The revolver line has an extended maturity date of
January 7, 2008. The balance due on the line was $8,456,477
at December 31, 2006.
The Company, as a term of the revolving credit line, is required
to maintain financial covenants. As of December 31, 2006,
certain of these financial covenants had not been met, and the
lender has waived such noncompliance.
8. Notes Payable
Note payable with a financial institution for equipment
purchases. The note bears interest at 5.60% per annum, payable
in monthly installments of principal and interest in the amount
of $5,794 through September 29, 2008. Balances at
December 31, 2006 and September 30, 2006, totaled
$115,926 and $131,589, respectively.
Note payable with a financial institution for leased office
build out costs. The note bears interest at 5.60% per annum,
payable in monthly installments of principal and interest in the
amount of $3,285 through March 29, 2011. Balances at
December 31, 2006 and September 30, 2006, totaled
$148,568 and $156,212, respectively.
Notes payable with financial institutions for automobile loans.
Interest rates range from 0% to 9% per annum, payable in monthly
installments of principal and interest ranging in the amounts of
$220 to $687, expiring in various years through 2010. Balances
at December 31, 2006 and September 30, 2006, totaled
$77,745 and $99,215, respectively.
The Company has notes payable relating to the acquisitions of
Pestec, Paragon, Ron Fee, and Archer. The notes bear interest at
6% per annum for Pestec, Paragon and Ron Fee and LIBOR plus 2%
(7.2% at December 31, 2006) for Archer, with interest
payable in semi-annual installments ranging in the amounts of
$3,000 to $36,000 and principal due at maturity. The notes
expire in various years through 2009. The balances at
December 31, 2006 and September 30, 2006, totaled
$2,975,000 and $1,475,000 respectively.
9. Stock Options
At the annual meeting of shareholders held on February 4,
2005, the shareholders approved the cancellation of the stock
option plan, previously adopted by the shareholders at the
January 24, 2000 shareholders meeting, and, in its place,
approved the 2004 Stock Incentive Plan with an aggregate of
800,000 shares of the Companys unissued common stock to be
reserved for issuance to key employees as non-qualified stock
options. The option price, numbers of shares and grant date are
determined at the discretion of the Companys Board of
Directors.
13
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended December 31, 2006 and
December 31, 2005 (Continued)
(UNAUDITED)
Stock options activity for the three months ended
December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Average | |
|
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
Balances, beginning of period
|
|
|
683,336 |
|
|
$ |
8.44 |
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(43,282 |
) |
|
$ |
12.11 |
|
|
|
|
|
|
|
|
Balances, end of period
|
|
|
640,054 |
|
|
$ |
8.23 |
|
|
|
|
|
|
|
|
Stock options outstanding and exercisable at December 31,
2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
Exercise | |
|
|
|
Weighted Average | |
|
Weighted Average | |
|
|
Price | |
|
Number Outstanding | |
|
Remaining Life | |
|
Exercise Price | |
|
Number Exercisable | |
| |
|
| |
|
| |
|
| |
|
| |
$ |
4.79 |
|
|
|
60,000 |
|
|
|
3 |
|
|
$ |
4.79 |
|
|
|
60,000 |
|
$ |
5.00 |
|
|
|
166,667 |
|
|
|
6 |
|
|
$ |
5.00 |
|
|
|
83,334 |
|
$ |
5.35 |
|
|
|
20,000 |
|
|
|
7.5 |
|
|
$ |
5.35 |
|
|
|
15,000 |
|
$ |
5.60 |
|
|
|
100,000 |
|
|
|
6.5 |
|
|
$ |
5.60 |
|
|
|
58,750 |
|
$ |
6.09 |
|
|
|
17,500 |
|
|
|
7.5 |
|
|
$ |
6.09 |
|
|
|
|
|
$ |
13.78 |
|
|
|
94,962 |
|
|
|
1 |
|
|
$ |
13.78 |
|
|
|
94,962 |
|
$ |
11.40 |
|
|
|
180,925 |
|
|
|
7 |
|
|
$ |
11.40 |
|
|
|
45,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
640,054 |
|
|
|
|
|
|
|
|
|
|
|
357,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2006, the Company adopted the provisions of
SFAS No. 123(R) which requires the Company to recognize
expense related to the fair value of stock-based compensation
awards. The Company elected the modified prospective transition
method as permitted by SFAS No. 123(R) and therefore
has not restated the financial results for prior periods. Under
the modified prospective method, stock-based compensation for
the three months ended December 31, 2006 is based on grant
date fair value estimated in accordance with the provisions of
SFAS No. 123(R) and compensation expense for all
stock-based compensation awards granted subsequent to
January 1, 2006, as well as for existing awards for which
the requisite service has not been rendered as of the date of
adoption based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123(R). In
addition, options granted to certain members of the Board of
Directors as payment for Board Services recorded in accordance
with SFAS No. 123(R) and the issuance of restricted
stock awards and stock units are also included in stock-based
compensation for the three months ended December 31, 2006.
For the three months ended December 31, 2006, the Company
recognized $216,984 compensation expense and is being reflected
as selling, general and administrative expenses.
Prior to January 1, 2006, the Company accounted for its
stock-based compensation plan as permitted by
SFAS No. 123(R), using the intrinsic value method
prescribed in APB No. 25, and made the pro forma
disclosures required by SFAS No. 148 for the three
months ended December 31, 2005. All options granted under
the Companys 2004 Stock Incentive Plan and the
Companys prior stock option plan had exercise prices equal
to the fair market value of the underlying Common Stock on the
date of grant. Accordingly, for the three months ended
December 31, 2005, stock-based compensation was recorded in
accordance with APB No. 25.
14
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended December 31, 2006 and
December 31, 2005 (Continued)
(UNAUDITED)
The following table illustrates the effect on net loss and net
loss per share of Common Stock as if the Company had applied the
fair value recognition provisions of SFAS No. 123(R)
to stock-based compensation for the three months ended
December 31, 2005:
|
|
|
|
|
|
Net loss:
|
|
|
|
|
|
As reported
|
|
$ |
(364,543 |
) |
|
Add: Stock-based compensation expense, as reported
|
|
|
|
|
|
Deduct: Stock-based compensation expense, pro forma
|
|
|
(94,931 |
) |
|
|
|
|
Net loss, pro forma
|
|
|
(459,747 |
) |
Net loss per share, basic:
|
|
|
|
|
|
Basic, as reported
|
|
$ |
(0.03 |
) |
|
Stock-based compensation expense, pro forma
|
|
$ |
(0.01 |
) |
|
|
|
|
Net loss per share, basic, pro forma
|
|
$ |
(0.04 |
) |
Net loss per share, diluted:
|
|
|
|
|
|
Diluted, as reported
|
|
$ |
(0.03 |
) |
|
Stock-based compensation expense, pro forma
|
|
$ |
(0.01 |
) |
|
|
|
|
Net loss per share, diluted, pro forma
|
|
$ |
(0.04 |
) |
As of December 31, 2006, approximately $991,690 of total
unrecognized compensation costs related to non-vested stock
options is expected to be recognized over a weighted average
period of 2 years.
10. Segment Information
The Company manages its business and has segregated its
activities into two business segments: Installation and
maintenance of telephone communication systems, and pest
control, lawn and shrub care, subterranean and drywood termite
control and mosquito reduction services.
Certain financial information for each segment is provided below
for the three months ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Net revenues:
|
|
|
|
|
|
|
|
|
|
Lawn and pest control services
|
|
$ |
12,388,515 |
|
|
$ |
9,456,794 |
|
|
Telephone communications
|
|
|
3,497,740 |
|
|
|
1,768,781 |
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
15,886,255 |
|
|
$ |
11,225,575 |
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Lawn and pest control services
|
|
$ |
979,824 |
|
|
$ |
1,066,330 |
|
|
Telephone communications
|
|
|
(128,890 |
) |
|
|
(355,022 |
) |
|
Unallocated Company expenses
|
|
|
(1,981,745 |
) |
|
|
(1,690,391 |
) |
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
$ |
(1,130,811 |
) |
|
$ |
(979,083 |
) |
|
|
|
|
|
|
|
11. Discontinued Operations
On September 8, 2006, Sunair Communications, a wholly-owned
subsidiary through which the Company operated its high frequency
single sideband communication business, sold substantially all
of its assets to a
15
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended December 31, 2006 and
December 31, 2005 (Continued)
(UNAUDITED)
related party, Sunair Holdings, LLC for $5.7 million. Of
the $5.7 million, the Company received cash proceeds of
$3.7 million and $2.0 million in the form of a three
year subordinated promissory note issued by Sunair Holdings and
made payable to Sunair Communications. The Companys former
Chief Financial Officer, who also was the former Chief Financial
Officer of Sunair Communications, and the Companys former
President, who also was the former President of Sunair
Communications, are also affiliates of Sunair Holdings.
On November 20, 2006, the Company closed a transaction to
sell the real estate property associated with the previously
sold high frequency radio business for $2.7 million in cash
and a recognized gain in the amount of $2,369,168.
The accompanying consolidated condensed statements of operations
for the three months presented have been adjusted to classify
the high frequency communication business as discontinued
operations. Selected statements of operations data for the
Companys discontinued operations as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Total net revenue
|
|
$ |
0 |
|
|
$ |
1,740,098 |
|
|
|
|
|
|
|
|
Pre-tax income (loss) from discontinued operations
|
|
$ |
(186,266 |
) |
|
$ |
294,919 |
|
Gain on sale of property
|
|
|
2,369,168 |
|
|
|
|
|
Income tax effect
|
|
|
(821,426 |
) |
|
|
(100,272 |
) |
|
|
|
|
|
|
|
Income on discontinued operations
|
|
$ |
1,361,476 |
|
|
$ |
194,647 |
|
|
|
|
|
|
|
|
16
|
|
Item 2. |
Managements Discussion And Analysis of Financial
Condition and Results of Operations |
Cautionary Statement Regarding Forward Looking
Information:
Some of the statements in this quarterly report, including those
that contain the words anticipate,
believe, plan, estimate,
expect, should, intend and
other similar expressions, are forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Those forward-looking statements
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements
or those of our industry to be materially different from any
future results, performance or achievements expressed or implied
by those forward-looking statements. Among the factors that
could cause actual results, performance or achievement to differ
materially from those described or implied in the
forward-looking statements are general economic conditions,
competition, potential technology changes, changes in or the
lack of anticipated changes in the regulatory environment in
various countries, the risks inherent in new product and service
introductions and the entry into new geographic markets and
other factors included in our filings with the Securities and
Exchange Commission (the SEC). Copies of our SEC
filings are available from the SEC or may be obtained upon
request from us. We do not undertake any obligation to update
the information contained herein, which speaks only as of this
date.
General:
Sunair Services Corporation (Sunair, the
Company, us, we or
our) is a Florida corporation organized in 1956. We
changed our corporate name from Sunair Electronics, Inc. to
Sunair Services Corporation in November of 2005. Previously, we
operated through three business segments: Lawn and Pest Control
Services, Telephone Communications and High Frequency Radio. As
a result of our previously announced sale on September 8,
2006 of substantially all of the assets of our High Frequency
Radio business, we now operate through two business segments:
Lawn and Pest Control Services and Telephone Communications. The
Lawn and Pest Control Services segment has become our dominant
operation. Accordingly, this has resulted in a fundamental shift
in the nature of our business.
The Lawn and Pest Control Services Segment:
Our Lawn and Pest Control Services segment provides lawn and
pest control services to both residential and commercial
customers.
On December 16, 2005, our wholly owned subsidiary,
Middleton Pest Control, Inc. (Middleton), acquired
substantially all of the assets of Spa Creek Services, LLC D/ B/
A Pest Environmental Services, a pest control and termite
services company located in Central Florida, for approximately
$5.5 million in cash. We also incurred closing costs of
$233,419 for a total purchase price of $5,733,419.
On January 9, 2006, Middleton acquired substantially all of
the assets of Par Pest Control, Inc. D/ B/ A Paragon Termite
& Pest Control, a pest control and termite services company
located in Port St. Lucie, Florida, for approximately
$1,050,000, consisting of $800,000 cash, $100,000 in the form of
a subordinated promissory note, approximately $50,000 in
transaction costs and 17,036 shares of our common stock valued
at $100,000.
On February 28, 2006, Middleton acquired substantially all
of the assets of Pestec Pest Control, Inc., a pest control and
lawn care services company located in Sarasota, Florida, for
approximately $800,000, consisting of $600,000 cash, $175,000 in
the form of a subordinated promissory note and $25,000 in
transaction costs.
On March 31, 2006, Middleton acquired Ron Fee, Inc., a pest
control and termite services company located in Central Florida,
for approximately $5.2 million, consisting of
$4.0 million in cash and $1.2 million in the form of a
subordinated promissory note. We also incurred closing costs of
approximately $325,000 for a total purchase price of $5,525,000.
17
On November 30, 2006 Middleton acquired substantially all
of the assets of Archer Exterminators, Inc., a pest control
services company located in Orlando, Florida, for
$3.3 million, consisting of $1.5 million in cash,
$1.5 million in the form of a subordinated promissory note
and 73,529 shares of the Companys common stock valued at
$300,000. We also incurred approximately $150,400 of
transactions costs related to this acquisition.
On January 27, 2006, we completed the sale of our
securities to investors in a private placement pursuant to
purchase agreements, dated December 15, 2005, by and among
us and the investors of the common stock named therein (the
Purchase Agreements). Pursuant to the Purchase
Agreements, we agreed to sell up to an aggregate of 2,857,146
shares of our common stock at a price per share of $5.25 (the
Private Placement), with total gross proceeds
(before fees and expenses) to us of approximately
$15 million and net proceeds to us of approximately
$13.5 million. In conjunction with the Private Placement,
warrants to purchase 1,000,000 shares of common stock were
issued, at an exercise price of $6.30 (subject to adjustment).
The shares and warrants have anti-dilution features. As of
December 31, 2006, no warrants issued as part of the
Private Placement had been exercised.
We plan to fund additional acquisitions in the Lawn and Pest
Control Services segment with the proceeds from the divestiture
of our High Frequency Radio segment, internally generated funds,
amounts available under our revolving line of credit and funds
from the expected eventual divestiture of our Telephone
Communications businesses. However, we cannot assure you of the
timing of such dispositions, or the amount that we will receive
upon such dispositions. Further, we cannot assure you that the
funds available from these sources will be sufficient to finance
our acquisition strategy. We plan to continue to focus on
acquisitions in the southeastern United States including
Alabama, Georgia, Louisiana, Mississippi and Florida, but will
consider additional super regional acquisitions in
other geographic areas.
Telephone Communications Segment:
Our Telephone Communications segment installs and maintains
telephony and fixed wireless systems.
As previously announced, the Telephone Communications segment
was targeted for divestiture at the time we entered into the
Lawn and Pest Control Services segment. Accordingly, we intend
to divest ourselves of the non-core assets acquired in
connection with our purchases of Percipia, Inc. and its wholly
owned subsidiary Percipia Networks, Inc. (collectively,
Percipia) and Telecom FM Ltd. (Telecom)
as soon as practicable.
Liquidity:
For the three months ended December 31, 2006, we had cash
flow used by operations of $(1,341,705). This cash was used
primarily to fund an increase in accounts receivable of
approximately $1.1 million and a decrease in customer
deposits of approximately $400,000.
Cash flow from investing activities for the three months ended
December 31 2006 was $828,302 which consisted primarily of cash
proceeds from the sale of building and property in the amount of
$2.5 million net of cash paid for the acquisition of Archer
Exterminators, Inc. of $1.5 million. Costs were also
incurred in the purchase of property, plant and equipment as
well as software development costs.
Cash flow provided by financing activities for the three months
ended December 31, 2006 was $409,619 provided by net
proceeds from the Companys revolving line of credit.
During the three months ended December 31, 2006, we had
cash or cash equivalents more than adequate to cover known
requirements. Our known requirements consist of normal operating
expenses. It is anticipated that we will remain as liquid during
the remainder of fiscal 2007 through cash generated from
operations and our revolving line of credit.
18
Capital Resources:
During the three months ended December 31, 2006,
approximately $190,000 was spent for Capital Assets. These funds
were primarily used for software development relating to our
Telephone Communications business segment and purchases of
equipment. No expenditures are contemplated for extensive
maintenance in fiscal 2007.
We have a line of credit with a financial institution
collateralized by substantially all of our assets. The maximum
credit limit is $20,000,000. Interest is compounded daily based
upon the London Interbank Offering Rate (LIBOR) plus a
variable percentage based on the leverage ratio. The interest
rate at December 31, 2006 was approximately 8.3%. The
revolving line of credit has a commitment fee in the amount of
..375% per annum on the average daily unused amount of the
aggregate revolving committed amount. The revolver line has an
extended maturity date of January 7, 2008. The balance due
on the line was $8,456,477 at December 31, 2006. As a term
of the revolving credit line, we are required to maintain
financial covenants. As of December 31, 2006, certain of
these financial covenants had not been met, and the lender has
waived such noncompliance.
Results of Operations:
During the three months ended December 31, 2006, sales from
continuing operations were $15,886,255 up $4.6 million or
41.5% compared to $11,225,575 for the three months ended
December 31, 2005. Of the $15,886,255 of sales $12,388,515
or 78% were attributable to the Lawn and Pest Control Services
segment and $3,497,740 or 22% were attributable to the
Companys wholly owned subsidiaries Percipia and Telecom,
in the Telephone Communications segment.
Middletons revenue increased approximately
$2.9 million or 30% to $12.4 million for the three
months ended December 31, 2006 compared to
$9.5 million for the three months ended December 31,
2005. This significant revenue increase in our core business is
the result of completed acquisitions and internally generated
growth.
The Lawn and Pest Control Services segment expanded its gross
margin to $7,826,749 or 63.2% for the three months ended
December 31, 2006 compared to $5,951,179 or 62.9% for the
three months ended December 31, 2005.
Sales in the Telephone Communications segment increased to
$3,497,740 in the three months ended December 31, 2006
compared to $1,768,792 for the three months ended
December 31, 2005 due primarily to significantly increased
sales activity from Telecom.
Backlog for the Telephone Communications segment of $2,016,149
was approximately $400,000 higher at December 31, 2006
compared to $1,616,902 at December 31, 2005, primarily due
to increased sales staff and related levels of sales activity.
Gross margins for the Telephone Communications segment were
approximately $1.2 million or 33.4% for the three months
ended December 31, 2006 compared to $660,000 or 37.3% for
the three months ended December 31, 2005.
Company wide selling, general and administrative expenses
relating to continuing operations decreased as a percentage of
revenue to 62.2% for the three months ended December 31,
2006 compared to 63.9% for the three months ended
December 31, 2005.
Company wide other income and expenses relating to continuing
operations decreased approximately $170,000 to $243,350 for the
three months ended December 31, 2006 compared to $414,495
for the three months ended December 31, 2005. This decrease
was mainly due to the decrease in net interest expense of
approximately $190,000 to $220,549 for the three months ended
December 31, 2006 compared to $414,495 for the three months
ended December 31, 2005. The decrease in interest expense
was mainly due to a decrease of the average outstanding related
to the revolving credit line.
19
Discontinued Operations:
On November 20, 2006, Sunair Communications, a wholly owned
subsidiary, closed a transaction to sell real estate associated
with the previously sold and discontinued High Frequency Radio
business for $2.7 million in cash resulting in a realized
tax effected gain of approximately $1.36 million.
For the first three months of fiscal 2007, we had net income of
$599,691 as compared to a net loss of $(364,543) for the first
three months of fiscal 2006 an increase in net income of
$964,234. This increase is culmination of the changes in the
items discussed above.
|
|
Item 3. |
Quantitative and Qualitative Disclosures About Market
Risk |
Market risk is the potential loss arising from adverse changes
in market rates and prices, such as interest rates, a decline in
the stock market and foreign currency exchange rates.
We are exposed to certain market risks that are inherent in our
financial instruments, including the impact of interest rate
movements and our ability to meet financial covenants. These
financial instruments arise from transactions entered into in
the normal course of business. We are also subject to interest
rate risk on our senior credit facility and may be subject to
interest rate risk on any future financing requirements. We
attempt to limit our exposure to interest rate risk in our
financial instruments by managing long-term debt and our
borrowings under our revolving line of credit. While we cannot
predict or manage our ability to refinance existing debt or the
impact interest rate movements or our ability to meet financial
covenants will have on our existing debt, we continue to
evaluate our financial position on an ongoing basis.
We generally conduct business in U.S. dollars, and as a result,
we have limited foreign currency exchange rate risk. However, we
are exposed to foreign currency risk through our operations in
the Telephone Communications business. Foreign currency risk
arises from transactions denominated in a currency other than
our functional currency and from foreign denominated revenue and
profit translated into U.S. dollars. The primary foreign
currency to which we are exposed is the British pound sterling,
Telecoms functional local currency. We do not currently
use forward exchange contracts to limit potential losses in
earnings or cash flows from foreign currency exchange rate
movements. Our consolidated balance sheets are translated at
exchange rates in effect as of the balance sheet date and income
statement accounts are translated at average exchange rates for
the period of the income statement. Translation gains and losses
are included as a separate component of stockholders
equity as cumulative translation adjustments. Foreign currency
transaction gains and losses are included in other income and
expenses. The effect of an immediate change in foreign exchange
rates would not have a material impact on our financial
condition or results of operations.
|
|
Item 4. |
Controls and Procedures |
Evaluation of disclosure controls
and procedures.
The term disclosure controls and procedures refers
to the controls and procedures of a company that are designed to
ensure that information required to be disclosed by a company in
the reports that it files under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within
required time periods. Our Chief Executive Officer and our
Interim Chief Financial Officer have concluded, based on their
evaluation as of December 31, 2006, that our disclosure
controls and procedures are effective.
Changes in internal control over
financial reporting.
There have been no changes in our internal control over
financial reporting during the three months ended
December 31, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
20
PART II
OTHER INFORMATION
|
|
Item 1. |
Legal Proceedings |
On November 21, 2005, a lawsuit was filed in Franklin
County, Ohio, against Percipia and its Chief Technology Officer,
Hari Kesavan, claiming that Percipia interfered with employment
relationships with two individuals who were employed by the
plaintiff, Halcyon Solutions, Inc. The plaintiff seeks
compensatory damages and punitive damages, each in excess of the
presumptive jurisdictional amount of $25,000, and
attorneys fees and costs. Percipia and Mr. Kesavan
deny any improper conduct and contend that the claims asserted
by the plaintiff are without merit and intend to vigorously
defend against such claims. As of December 31, 2006, the
lawsuit was in the early stages and its outcome could not be
determined. Trial is set for commencement on or after
April 30, 2007.
There have been no material changes from the risk factors
previously disclosed in Item 1, Risk Factors, in the
Companys
Form 10-KSB for
the fiscal year ended September 30, 2006.
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
On November 30, 2006, Middleton acquired substantially all
of the assets of Archer Exterminators, Inc. for a purchase price
of: (i) $1.5 million in cash; (ii) $1.5 million in the
form of a subordinated promissory note, issued jointly by the
Company and Middleton; and (iii) 73,529 shares of the
Companys common stock valued at approximately $300,000
(Acquisition Shares). The Acquisition Shares were
issued pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended.
Archer represented to us that it was acquiring the Acquisition
Shares for its account and not with a view toward the sale or
distribution thereof, and that Archer has the ability to bear
the economic risk of acquiring the Acquisition Shares. The
Acquisition Shares were stamped with a restrictive legend, and
no rights were given to Archer to have any of the Acquisition
Shares registered.
|
|
Item 3. |
Defaults Upon Senior Securities |
None.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
|
|
Item 5. |
Other Information |
None.
|
|
|
|
|
|
31.1 |
|
|
Certification by Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
|
Certification by Interim Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
|
Certification by Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
|
Certification by Interim Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
SUNAIR SERVICES CORPORATION |
|
Date: February 14, 2007 |
|
/s/ John J. Hayes
John
J. Hayes
President and Chief Executive Officer |
|
Date: February 14, 2007 |
|
/s/ Edward M. Carriero,
Jr.
Edward
M. Carriero, Jr.
Interim Chief Financial Officer |
22