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 March 31, 2007 |
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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
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59-0780772 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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595 South Federal Highway, Suite 500
Boca Raton, Florida
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33432 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(561) 208-7400
(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 May 10, 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 MARCH 31, 2007 AND SEPTEMBER 30, 2006
(UNAUDITED)
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MARCH 31, 2007 |
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SEPTEMBER 30, 2006 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
2,199,441 |
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$ |
1,601,110 |
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Accounts receivable, net |
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6,591,988 |
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4,919,595 |
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Income tax receivable |
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328,551 |
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352,393 |
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Interest receivable |
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29,074 |
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11,084 |
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Inventories, net |
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2,604,822 |
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2,328,205 |
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Deferred tax asset |
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31,379 |
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137,387 |
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Prepaid and other current assets |
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1,648,290 |
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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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13,768,531 |
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10,848,268 |
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PROPERTY, PLANT, AND EQUIPMENT, net |
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2,240,024 |
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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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3,825,102 |
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3,938,465 |
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Customer list, net |
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11,524,936 |
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11,247,099 |
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Goodwill |
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55,548,004 |
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52,818,269 |
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Other assets |
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229,100 |
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522,427 |
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Total Other Assets |
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73,127,142 |
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70,526,260 |
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TOTAL ASSETS |
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$ |
89,135,697 |
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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 BALANCE SHEETS
AS OF MARCH 31, 2007 AND SEPTEMBER 30, 2006
(UNAUDITED)
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MARCH 31, 2007 |
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SEPTEMBER 30, 2006 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
4,156,480 |
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$ |
2,743,523 |
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Accrued expenses |
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3,948,411 |
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2,831,162 |
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Unearned revenues |
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1,334,224 |
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589,365 |
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Customer deposits |
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2,852,261 |
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2,677,364 |
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Capitalized leases, current portion |
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9,632 |
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8,796 |
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Notes payable, current portion |
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132,000 |
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138,374 |
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Total Current Liabilities |
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12,433,008 |
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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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14,947 |
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20,027 |
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Notes payable, net of current portion |
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3,177,553 |
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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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7,100,000 |
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8,000,000 |
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Deferred tax liability |
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275,318 |
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112,226 |
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Total Long Term Liabilities |
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15,567,818 |
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14,855,895 |
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TOTAL LIABILITIES |
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28,000,826 |
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23,844,479 |
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COMMITMENTS & CONTINGENCIES |
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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, $.10 par value, 100,000,000 shares
authorized, 13,091,088 and 13,007,559 shares issued and outstanding
at March 31, 2007 and September 30, 2006, respectively |
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1,309,109 |
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1,300,757 |
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Additional paid-in capital |
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52,126,224 |
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51,548,768 |
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Retained earnings |
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7,580,910 |
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7,200,197 |
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Accumulated other comprehensive gain cumulative translation adjustment |
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118,628 |
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18,761 |
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Total Stockholders Equity |
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61,134,871 |
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60,068,483 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
89,135,697 |
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$ |
83,912,962 |
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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 OPERATIONS
(UNAUDITED)
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FOR THE SIX |
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FOR THE SIX |
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MONTHS ENDED |
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MONTHS ENDED |
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MARCH 31, 2007 |
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MARCH 31, 2006 |
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SALES |
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$ |
34,161,310 |
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$ |
24,279,110 |
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COST OF SALES |
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14,199,809 |
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10,005,519 |
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GROSS PROFIT |
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19,961,501 |
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14,273,591 |
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SELLING AND ADMINISTRATIVE EXPENSES |
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20,923,876 |
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15,977,846 |
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LOSS FROM OPERATIONS |
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962,375 |
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1,704,255 |
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OTHER INCOME (EXPENSES): |
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Interest income |
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119,418 |
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2,495 |
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Interest expense |
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(675,713 |
) |
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(668,445 |
) |
Gain on sale of assets |
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9,423 |
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Other income |
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5,000 |
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Total Other Income (Expenses) |
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(546,872 |
) |
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(660,950 |
) |
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LOSS FROM CONTINUING OPERATIONS |
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BEFORE INCOME TAXES |
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1,509,247 |
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2,365,205 |
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INCOME TAX BENEFIT |
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528,484 |
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687,072 |
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LOSS FROM CONTINUING OPERATIONS |
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980,763 |
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1,678,133 |
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INCOME FROM DISCONTINUED OPERATIONS, NET
OF INCOME TAX PROVISION OF $821,426 AND $221,015
IN 2007 AND 2006, RESPECTIVELY |
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1,361,476 |
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515,701 |
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NET INCOME (LOSS) |
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$ |
380,713 |
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$ |
(1,162,432 |
) |
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BASIC AND DILUTED INCOME (LOSS) PER SHARE: |
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CONTINUING OPERATIONS |
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$ |
(0.07 |
) |
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$ |
(0.14 |
) |
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DISCONTINUED OPERATIONS |
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$ |
0.10 |
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$ |
0.04 |
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NET INCOME (LOSS) |
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$ |
0.03 |
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$ |
(0.10 |
) |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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BASIC |
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13,041,634 |
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11,646,412 |
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DILUTED |
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13,041,634 |
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11,646,412 |
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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 OPERATIONS
(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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MARCH 31, 2007 |
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MARCH 31, 2006 |
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SALES |
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$ |
18,275,055 |
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$ |
13,053,535 |
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COST OF SALES |
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7,307,796 |
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5,391,434 |
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GROSS PROFIT |
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10,967,259 |
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7,662,101 |
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SELLING AND ADMINISTRATIVE EXPENSES |
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11,042,173 |
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8,801,166 |
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LOSS FROM OPERATIONS |
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|
74,914 |
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|
1,139,065 |
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OTHER INCOME (EXPENSES): |
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Interest income |
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51,644 |
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|
1,026 |
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Interest expense |
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(387,390 |
) |
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(257,270 |
) |
Loss on sale of assets |
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32,224 |
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Other income |
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9,789 |
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Total Other Income (Expenses) |
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(303,522 |
) |
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(246,455 |
) |
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LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |
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|
378,436 |
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1,385,520 |
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INCOME TAX BENEFIT |
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|
159,458 |
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266,577 |
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LOSS FROM CONTINUING OPERATIONS |
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218,978 |
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1,118,943 |
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INCOME FROM DISCONTINUED OPERATIONS, NET
OF INCOME TAX PROVISION OF $0 AND $100,272
IN 2007 AND 2006, RESPECTIVELY |
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|
321,054 |
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NET LOSS |
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$ |
218,978 |
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$ |
797,889 |
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BASIC AND DILUTED INCOME (LOSS) PER SHARE: |
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CONTINUING OPERATIONS |
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$ |
(0.02 |
) |
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$ |
(0.09 |
) |
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DISCONTINUED OPERATIONS |
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$ |
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|
$ |
0.03 |
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NET LOSS |
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$ |
(0.02 |
) |
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$ |
(0.06 |
) |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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BASIC |
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13,066,578 |
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12,805,558 |
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DILUTED |
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13,066,578 |
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12,805,558 |
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The accompanying notes are an integral part of these financial statements.
6
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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FOR THE SIX |
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FOR THE SIX |
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MONTHS ENDED |
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MONTHS ENDED |
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MARCH 31, 2007 |
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MARCH 31, 2006 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
380,713 |
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$ |
(1,162,432 |
) |
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities: |
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Depreciation |
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470,443 |
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|
435,919 |
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Amortization |
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1,159,023 |
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|
944,946 |
|
Deferred taxes |
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|
269,100 |
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|
|
(466,057 |
) |
Bad debt reserve |
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|
5,747 |
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|
303,026 |
|
Inventories reserve |
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|
77,962 |
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|
29,698 |
|
Gain on sale of assets |
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(2,380,398 |
) |
|
|
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|
Equity based compensation |
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|
240,808 |
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|
|
123,409 |
|
Stock based compensation |
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|
45,000 |
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|
|
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|
(Increase) decrease in Assets: |
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|
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|
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|
Accounts receivable |
|
|
(1,644,822 |
) |
|
|
(164,628 |
) |
Income tax receivable |
|
|
23,842 |
|
|
|
1,781 |
|
Interest receivable |
|
|
(17,990 |
) |
|
|
|
|
Inventories |
|
|
(351,078 |
) |
|
|
120,822 |
|
Prepaid and other current assets |
|
|
(393,630 |
) |
|
|
(599,275 |
) |
Other assets |
|
|
393,372 |
|
|
|
(130,839 |
) |
Increase (decrease) in Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
2,327,681 |
|
|
|
175,458 |
|
Unearned revenue |
|
|
67,321 |
|
|
|
234,631 |
|
Income taxes payable |
|
|
(1,057 |
) |
|
|
|
|
Customer deposits |
|
|
134,091 |
|
|
|
419,995 |
|
|
|
|
|
|
|
|
Net Cash Provided By Operating Activities |
|
|
806,128 |
|
|
|
266,454 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property, plant, and equipment |
|
|
(202,470 |
) |
|
|
(250,177 |
) |
Software development costs |
|
|
(162,018 |
) |
|
|
(229,692 |
) |
Cash paid for business acquisitions |
|
|
(1,518,432 |
) |
|
|
(11,578,687 |
) |
Net Proceeds from disposition of property |
|
|
2,531,963 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By (Used In) Investing Activities |
|
$ |
649,043 |
|
|
$ |
(12,058,556 |
) |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
7
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
FOR THE SIX |
|
|
FOR THE SIX |
|
|
|
MONTHS ENDED |
|
|
MONTHS ENDED |
|
|
|
MARCH 31, 2007 |
|
|
MARCH 31, 2006 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Repayment of line of credit (net) |
|
|
(900,000 |
) |
|
|
(1,500,000 |
) |
Repayment of notes payable |
|
|
(34,516 |
) |
|
|
(35,384 |
) |
Payment on capital leases |
|
|
(22,191 |
) |
|
|
(36,340 |
) |
Proceeds from sale of common stock, net |
|
|
|
|
|
|
13,656,472 |
|
|
|
|
|
|
|
|
Net Cash Provided By (Used in) Financing Activities |
|
|
(956,707 |
) |
|
|
12,084,748 |
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash |
|
|
99,867 |
|
|
|
(37,025 |
) |
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
598,331 |
|
|
|
255,621 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
1,601,110 |
|
|
|
3,220,699 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
2,199,441 |
|
|
$ |
3,476,320 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
549,113 |
|
|
$ |
555,389 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES: |
|
|
|
|
|
|
|
|
Common stock issued in acquisition of Archer Exterminators, Inc. |
|
$ |
300,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Debt incurred in acquisition of Archer Exterminatiors, Inc. |
|
$ |
1,500,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
8
SUNAIR
SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the Six Months Ended March 31, 2007 and March 31, 2006
(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 six months ended March 31, 2007 are
not necessarily indicative of the results that may be expected for the fiscal year ending September
30, 2007.
2. Significant Accounting Policies
Use of Estimates
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
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 March 31, 2007 and
September 30, 2006, the Company established an allowance of $360,040 and $365,730 respectively.
Inventories
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.
9
Software Costs
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. (Middleton) 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 six months ended March 31,
2007 and 2006.
Revenue Recognition
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.
Advertising Costs
The Company expenses advertising costs as incurred.
Research and Development
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.
10
Comprehensive Income
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 March
31, 2007 and September 30, 2006, accumulated other comprehensive income was comprised of cumulative
foreign currency translation adjustments.
Recent Accounting Pronouncements
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.
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 (SFAS 157), 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.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to choose to measure eligible financial
instruments at fair value. The unrealized gains and losses on items for which the fair value option
has been elected should be reported in earnings. The decision to elect the fair value options is
determined on an instrument by instrument basis, it should be applied to an entire instrument, and
it is irrevocable. Assets and liabilities measured at fair value pursuant to the fair value option
should be reported separately in the balance sheet from those instruments measured using another
measurement attribute. SFAS No. 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. The Company is currently analyzing the potential impact of adoption
of SFAS No. 159 to its financial statements.
3. Acquisitions
Acquisition of Spa Creek Services, LLC D/B/A Pest Environmental Services (Spa Creek)
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:
11
|
|
|
|
|
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 |
|
|
|
|
|
Acquisition of Par Pest Control, Inc. D/B/A Paragon Termite & Pest Control (Paragon)
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.
Acquisition of Pestec Pest Control, Inc. (Pestec)
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.
Acquisition of Ron Fee, Inc. (Ron Fee)
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.
Acquisition of Archer Exterminators, Inc. (Archer)
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.
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 |
|
|
|
|
|
12
Pro-Forma Results of Operations
The following sets forth the Companys results of operations for the six months ended March
31, 2007 and 2006 as if the acquisitions and dispositions had taken place on October 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Revenues |
|
$ |
34,519,184 |
|
|
$ |
29,116,011 |
|
Net income (loss) |
|
|
338,663 |
|
|
|
(958,023 |
) |
Income (Loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
|
.03 |
|
|
|
(.09 |
) |
Diluted |
|
|
.03 |
|
|
|
(.09 |
) |
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Materials |
|
$ |
1,892,000 |
|
|
$ |
1,430,453 |
|
Work-in-process |
|
|
213,463 |
|
|
|
170,491 |
|
Finished goods |
|
|
499,359 |
|
|
|
727,261 |
|
|
|
|
|
|
|
|
|
|
$ |
2,604,822 |
|
|
$ |
2,328,205 |
|
|
|
|
|
|
|
|
As of March 31, 2007 and September 30, 2006 the Company established inventory shrinkage and
obsolescence reserves of $494,692 and $473,736 respectively.
5. Income 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. The Company uses the treasury stock method in calculating dilutive shares.
6. Preferred Stock
At March 31, 2007 and 2006, 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 credit agreement with a financial institution, which provides for a
revolving line of credit collateralized by the assets of the Company. 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 March 31, 2007 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 balance due on the line was $7,100,000 at March 31, 2007. The
Company, as a term of the revolving credit line, is required to maintain certain financial
covenants.
On May 14, 2007, the Company amended the terms of its credit agreement to extend the maturity
date to April 1, 2008 and to reduce the capacity under the revolving line of credit from
$20,000,000 to $16,000,000. The amendment also modified certain financial covenants. The leverage
ratio was increased and the consolidated EBITDA requirement was reduced.
13
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 March 31, 2007 and September 30, 2006, totaled $100,035 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 March 31, 2007 and September 30, 2006, totaled
$140,721 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 $209 to $528, expiring in various years through 2010. Balances at March 31, 2007 and September
30, 2006, totaled $68,797 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 March 31, 2007) 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 March 31, 2007 and September 30, 2006, totaled $3,000,000 and
$1,475,000 respectively.
The company has a $5,000,000 subordinated note payable to related parties, in connection with
the acquisition of Middleton. These parties include the CEO of Middleton and a Director of the
Company. Interest is paid semi-annually at prime (8.25% as of March 31, 2007). The note payable is
due in full on June 7, 2010.
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.
During the quarter ended March 31, 2007, 35,000 stock options were granted with an exercise
price of $3.23 per share.
Stock options activity for the six months ended March 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Balances, beginning of period |
|
|
640,054 |
|
|
$ |
8.23 |
|
Granted |
|
|
35,000 |
|
|
$ |
3.32 |
|
Exercised |
|
|
|
|
|
|
|
|
Cancelled |
|
|
(10,000 |
) |
|
$ |
5.60 |
|
|
|
|
|
|
|
|
|
Balances, end of period |
|
|
665,054 |
|
|
$ |
8.00 |
|
|
|
|
|
|
|
|
|
Stock options outstanding and exercisable at March 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
Exercise |
|
|
|
|
|
Weighted Average |
|
Weighted Average |
|
|
Price |
|
Number Outstanding |
|
Remaining Life |
|
Exercise Price |
|
Number Exercisable |
$3.23
|
|
|
35,000 |
|
|
|
8 |
|
|
$ |
3.23 |
|
|
|
$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 |
|
|
|
20,000 |
|
$5.60
|
|
|
90,000 |
|
|
|
6.5 |
|
|
$ |
5.60 |
|
|
|
56,250 |
|
$6.09
|
|
|
17,500 |
|
|
|
7.5 |
|
|
$ |
6.09 |
|
|
|
4,375 |
|
$13.78
|
|
|
94,962 |
|
|
|
1 |
|
|
$ |
13.78 |
|
|
|
94,962 |
|
$11.40
|
|
|
180,925 |
|
|
|
7 |
|
|
$ |
11.40 |
|
|
|
45,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
665,054 |
|
|
|
|
|
|
|
|
|
|
|
364,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Fair Value
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, equity-based compensation for the six months ended March 31, 2007 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 equity-based compensation for the six months ended March 31,
2007.
For the six months ended March 31, 2007, the Company recognized $240,808 of equity-based
compensation expense which has been reported as selling, general and administrative expenses.
As of March 31, 2007, approximately $1,045,439 of total unrecognized equity-based 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 six months ended
March 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Net revenues: |
|
|
|
|
|
|
|
|
Lawn and pest control services |
|
$ |
25,990,134 |
|
|
$ |
20,375,094 |
|
Telephone communications |
|
|
8,171,176 |
|
|
|
3,904,016 |
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
34,161,310 |
|
|
$ |
24,279,110 |
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Lawn and pest control services |
|
$ |
2,555,707 |
|
|
$ |
1,523,151 |
|
Telephone communications |
|
|
(78,407 |
) |
|
|
(539,789 |
) |
Unallocated Company expenses |
|
|
(3,439,675 |
) |
|
|
(2,698,092 |
) |
|
|
|
|
|
|
|
Total operating loss |
|
$ |
(962,375 |
) |
|
$ |
(1,704,255 |
) |
|
|
|
|
|
|
|
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 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.
15
The accompanying consolidated condensed statements of operations for the six 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:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Total net revenue |
|
$ |
0 |
|
|
$ |
3,372,202 |
|
|
|
|
|
|
|
|
Pre-tax income (loss) from discontinued operations |
|
$ |
(186,266 |
) |
|
$ |
736,716 |
|
Gain on sale of property |
|
|
2,369,168 |
|
|
|
|
|
Income tax effect |
|
|
(821,426 |
) |
|
|
(221,015 |
) |
|
|
|
|
|
|
|
Income on discontinued operations |
|
$ |
1,361,476 |
|
|
$ |
515,701 |
|
|
|
|
|
|
|
|
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.
16
On March 31, 2006, Middleton acquired substantially all of the assets of 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. Subsequent to the acquisition, the
former controller of Ron Fee received 10,000 shares of our common
stock for services rendered valued at $4.50 per share.
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 closing costs of
approximately $150,400 for a total purchase price of $3,450,400.
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 March 31, 2007, 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
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 six months ended March 31, 2007, we had cash flow provided by operations of $806,128.
This cash was provided primarily by an increase in accounts payable and accrued expenses of
approximately $2.4 million which was partially offset by an increase in accounts receivable of
approximately $1.6 million.
Cash
flow from investing activities for the six months ended March 31, 2007 was $649,043, 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. Cash
of approximately $360,000 was utilized to purchase of property, plant and equipment and fund
software development costs.
Cash used by financing activities for the six months ended March 31, 2007 was $956,707 which
was primarily utilized to repay the Companys revolving line of credit.
During the six months ended March 31, 2007, 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.
17
Capital Resources:
During the six months ended March 31, 2007, approximately $360,000 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.
The Company has a credit agreement with a financial institution, which provides for a
revolving line of credit collateralized by the assets of the Company. 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 March 31, 2007 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 balance due on the line was $7,100,000 at March 31, 2007. The
Company, as a term of the revolving credit line, is required to maintain certain financial
covenants.
On May 14, 2007, the Company amended the terms of its credit agreement to extend the maturity
date to April 1, 2008 and to reduce the capacity under the revolving line of credit from
$20,000,000 to $16,000,000. The amendment also modified certain financial covenants. The leverage
ratio was increased and the consolidated EBITDA requirement was reduced.
Results of Operations:
During the six months ended March 31, 2007, sales from continuing operations were $34.2
million up approximately $9.9 million or 41% compared to $24.3 million for the six months ended
March 31, 2006. Of the $34.2 million of sales, $26.0 million or 76% were attributable to the Lawn
and Pest Control Services segment and $8.2 million or 24% were attributable to the Companys wholly
owned subsidiaries Percipia and Telecom FM, in the Telephone Communications segment.
Middletons revenue increased approximately $5.6 million or 28% to $26 million for the six
months ended March 31, 2007 compared to approximately $20.4 million for the six months ended March
31, 2006. 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 $9.3 million or 65%
of revenue for the six months ended March 31, 2007 compared to $7.6 million or 62.5% of revenue for
the six months ended March 31, 2006.
Sales in the Telephone Communications segment increased to $8.2 million in the six months
ended March 31, 2007 compared to $3.9 million for the six months ended March 31, 2006 due primarily
to significantly increased sales activity from Telecom.
The order backlog for the Telephone Communications segment of $1.39 million at March 31, 2007
was virtually the same as the $1.36 million at March 31, 2006.
Gross margins for the Telephone Communications segment were approximately $2.9 million or 35%
for the six months ended March 31, 2007 compared to $1.5 million or 38% for the six months ended
March 31, 2006.
Company wide selling, general and administrative expenses relating to continuing operations
decreased as a percentage of revenue to approximately 61% for the six months ended March 31, 2007
compared to 66% for the six months ended March 31, 2006.
Company wide other income and expenses relating to continuing operations decreased
approximately $110,000 to $550,000 for the six months ended March 31, 2007 compared to
approximately $660,000 for the six months ended March 31, 2006. This decrease was mainly due to the
decrease in net interest expense of approximately $110,000 to $555,000 for the six months ended
March 31, 2007 compared to $665,000 for the six months ended March 31, 2006. The decrease in net
interest expense was mainly due to an increase in interest income on the $2 million note receivable
related to the sale of the high frequency business in September 2006.
Discontinued Operations:
On November 20, 2006, Sunair Communications, a wholly owned subsidiary, closed a transaction
to sell the 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.
18
Net Income (Loss):
For the first six months of fiscal 2007, we had net income of $380,713 as compared to a net
loss of $(1,162,432) for the first six months of fiscal 2006 an increase in net income of
approximately $1.5 million. This increase is the culmination of the items discussed above in the
Results of Operations and Discontinued Operations sections.
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 March 31, 2007, 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 six
months ended March 31, 2007 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
19
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 sought compensatory damages and punitive damages, each in excess of the presumptive
jurisdictional amount of $25,000, and attorneys fees and costs.
In April 2007, the parties resolved their pending litigation on mutually acceptable terms.
While details of the settlement agreement, full waiver and mutual general release are confidential,
there was no admission of any liability or wrongdoing by Percipia or Mr. Kesavan. Percipia agreed
to make a one-time payment to the plaintiff in an amount that is not material to the Company.
Item 1A. Risk Factors
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
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on February 7, 2007. At the meeting, the
following persons were elected to serve as directors, with the votes indicated:
|
|
|
|
|
|
|
|
|
Director |
|
Affirmative Votes |
|
|
Withheld Votes |
|
Joseph Burke |
|
|
8,997,375 |
|
|
|
3,024,333 |
|
Joseph S. DiMartino |
|
|
8,948,275 |
|
|
|
3,073,433 |
|
Mario B. Ferrari |
|
|
8,936,375 |
|
|
|
3,085,333 |
|
Arnold Heggestad, Ph.D. |
|
|
8,997,375 |
|
|
|
3,024,333 |
|
Steven P. Oppenheim |
|
|
8,997,375 |
|
|
|
3,024,333 |
|
Richard C. Rochon |
|
|
8,936,375 |
|
|
|
3,085,333 |
|
Charles P. Steinmetz |
|
|
8,997,375 |
|
|
|
3,024,333 |
|
Item 5. Other Information
On May 14, 2007, the Company amended the terms of its credit agreement to extend the maturity
date to April 1, 2008 and to reduce the capacity under the revolving line of credit from
$20,000,000 to $16,000,000. The amendment also modified certain financial covenants. The leverage
ratio was increased and the consolidated EBITDA requirement was reduced.
Item 6. Exhibits
|
|
|
10.22
|
|
First Amendment to Credit Agreement, dated May 14, 2007, by and among Sunair Services
Corporation, its domestic subsidiaries from time to time parties thereto, the lenders parties
thereto, and Wachovia Bank, National Association, as administrative agent for the lenders. |
|
|
|
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 |
20
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: May 15, 2007 |
/s/ JOHN J. HAYES
|
|
|
John J. Hayes |
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
Date: May 15, 2007 |
/s/ EDWARD M. CARRIERO, JR.
|
|
|
Edward M. Carriero, Jr. |
|
|
Interim Chief Financial Officer |
|
|
21