Sunair Electronics Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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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 |
For the quarterly period ended June 30, 2005
OR
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o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission
file number I-4334
SUNAIR ELECTRONICS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER 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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3005 SW THIRD AVE., FT. LAUDERDALE, FL.
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33315 |
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(ADDRESS OR PRINCIPAL EXECUTIVE OFFICE)
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(ZIP CODE) |
ISSUERS TELEPHONE NUMBER (INCLUDING AREA CODE) (954) 525-1505
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period 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
Registrants
common stock par value 10 cents, outstanding as of August 12, 2005 10,056,377
shares.
Transitional Small Business Disclosure format. Yes o No þ
SUNAIR ELECTRONICS, INC. AND SUBSIDIARY
INDEX
**********
- 2 -
PART I. FINANCIAL INFORMATION
SUNAIR ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
06/30/05 |
|
09/30/04 |
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,443,300 |
|
|
$ |
3,872,224 |
|
Accounts receivable, net |
|
|
4,699,349 |
|
|
|
3,080,875 |
|
Interest receivable |
|
|
|
|
|
|
108,013 |
|
Inventories |
|
|
7,441,523 |
|
|
|
7,258,955 |
|
Investments |
|
|
|
|
|
|
2,913,601 |
|
Deferred tax asset |
|
|
61,200 |
|
|
|
180,725 |
|
Prepaid and other current assets |
|
|
1,510,050 |
|
|
|
315,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
17,155,422 |
|
|
|
17,729,862 |
|
|
|
|
|
|
|
|
|
|
NOTES RECEIVABLE |
|
|
405,590 |
|
|
|
405,590 |
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT, AND EQUIPMENT, NET |
|
|
2,242,711 |
|
|
|
703,381 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer List net |
|
|
10,390,625 |
|
|
|
|
|
Software costs, net |
|
|
4,126,626 |
|
|
|
3,955,513 |
|
Goodwill |
|
|
41,150,028 |
|
|
|
852,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets |
|
|
55,667,279 |
|
|
|
4,808,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
75,471,002 |
|
|
$ |
23,647,029 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
- 3 -
PART I. FINANCIAL INFORMATION
SUNAIR ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
06/30/05 |
|
09/30/04 |
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3,225,698 |
|
|
$ |
1,501,864 |
|
Accrued expenses |
|
|
1,640,184 |
|
|
|
1,186,250 |
|
Bank lines of credit |
|
|
|
|
|
|
2,047,000 |
|
Unearned revenues |
|
|
1,754,550 |
|
|
|
115,857 |
|
Loan from shareholder |
|
|
|
|
|
|
22,800 |
|
Notes payable |
|
|
104,089 |
|
|
|
33,585 |
|
Income taxes payable |
|
|
177,450 |
|
|
|
212,688 |
|
Payable in connection with
acquisition of Telecom FM |
|
|
|
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
6,901,971 |
|
|
|
6,620,044 |
|
|
|
|
|
|
|
|
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|
LONG TERM DEBT |
|
|
16,358,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED TAX LIABILITY |
|
|
199,200 |
|
|
|
199,000 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value,
8,000,000 shares authorized, none
issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, $.10 par value,
100,000,000 shares authorized,
10,056,377, and 4,006,620 shares
issued and outstanding at June 30,
2005 and September 30, 2004
respectively |
|
|
1,005,638 |
|
|
|
400,662 |
|
Additional paid-in-capital |
|
|
37,467,470 |
|
|
|
3,852,106 |
|
Retained earnings |
|
|
13,540,229 |
|
|
|
12,575,217 |
|
Translation adjustment |
|
|
(2,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Stockholders Equity |
|
|
52,011,130 |
|
|
|
16,827,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
75,471,002 |
|
|
$ |
23,647,029 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
- 4 -
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
|
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|
|
|
|
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NINE MONTHS ENDED |
|
|
06/30/05 |
|
06/30/04 |
SALES |
|
$ |
17,737,834 |
|
|
$ |
5,951,143 |
|
|
|
|
|
|
|
|
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|
COST OF SALES |
|
|
10,137,798 |
|
|
|
3,284,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
7,600,036 |
|
|
|
2,666,374 |
|
|
|
|
|
|
|
|
|
|
SELLING GENERAL AND ADMINISTRATIVE EXPENSES |
|
|
6,494,653 |
|
|
|
1,557,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
1,105,383 |
|
|
|
1,108,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
255,722 |
|
|
|
189,488 |
|
Interest expense |
|
|
(51,357 |
) |
|
|
|
|
Other |
|
|
(24,416 |
) |
|
|
(19,021 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) |
|
|
179,949 |
|
|
|
170,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE (PROVISION) FOR INCOME TAXES |
|
|
1,285,332 |
|
|
|
1,279,413 |
|
|
|
|
|
|
|
|
|
|
(PROVISION) FOR INCOME TAXES |
|
|
(320,674 |
) |
|
|
(372,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
964,658 |
|
|
$ |
907,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC |
|
$ |
0.14 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
$ |
0.11 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC |
|
|
6,704,827 |
|
|
|
3,797,004 |
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
|
8,917,332 |
|
|
|
3,885,942 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
- 5 -
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
06/30/05 |
|
06/30/04 |
SALES |
|
$ |
7,797,514 |
|
|
$ |
1,420,687 |
|
|
|
|
|
|
|
|
|
|
COST OF SALES |
|
|
4,600,272 |
|
|
|
765,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
3,197,242 |
|
|
|
654,937 |
|
|
|
|
|
|
|
|
|
|
SELLING GENERAL AND ADMINISTRATIVE EXPENSES |
|
|
3,075,186 |
|
|
|
527,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
122,056 |
|
|
|
127,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
105,296 |
|
|
|
65,005 |
|
Interest expense |
|
|
(19,217 |
) |
|
|
|
|
Other |
|
|
(6,110 |
) |
|
|
(14,976 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) |
|
|
79,969 |
|
|
|
50,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE (PROVISION) BENEFIT FOR INCOME TAXES |
|
|
202,025 |
|
|
|
177,712 |
|
|
|
|
|
|
|
|
|
|
(PROVISION) BENEFIT FOR INCOME TAXES |
|
|
27,126 |
|
|
|
(63,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
229,151 |
|
|
$ |
114,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC |
|
|
9,289,434 |
|
|
|
3,816,620 |
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
|
13,468,887 |
|
|
|
3,905,854 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
- 6 -
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED |
|
|
06/30/05 |
|
06/30/04 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
964,658 |
|
|
$ |
907,313 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
201,102 |
|
|
|
118,396 |
|
Amortization |
|
|
327,024 |
|
|
|
21,505 |
|
Deferred taxes |
|
|
119,725 |
|
|
|
|
|
Translation adjustment |
|
|
(2,207 |
) |
|
|
|
|
Inventories reserve |
|
|
79,300 |
|
|
|
|
|
(Increase) decrease in Assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(113,653 |
) |
|
|
471,479 |
|
Interest receivable |
|
|
108,013 |
|
|
|
(47,274 |
) |
Inventories |
|
|
284,261 |
|
|
|
146,497 |
|
Prepaid and other current assets |
|
|
(468,254 |
) |
|
|
(11,569 |
) |
Increase (decrease) in Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
656,652 |
|
|
|
(254,177 |
) |
Unearned revenue |
|
|
88,082 |
|
|
|
|
|
Income taxes payable |
|
|
(35,238 |
) |
|
|
(341,959 |
) |
|
|
|
|
|
|
|
|
|
Net Cash Provided By Operating Activities |
|
|
2,209,465 |
|
|
|
1,010,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant, and equipment |
|
|
(152,298 |
) |
|
|
(23,182 |
) |
Proceeds from sale of held-to-maturity investment |
|
|
2,913,601 |
|
|
|
|
|
Software development costs |
|
|
(388,762 |
) |
|
|
|
|
Cash paid for acquisition of Telecom FM |
|
|
(1,500,000 |
) |
|
|
|
|
Costs incurred for acquisition of Middleton Pest
Control, Inc. |
|
|
(38,010,541 |
) |
|
|
|
|
Purchases of investments |
|
|
|
|
|
|
(501,190 |
) |
Cash acquired in acquisition of Middleton Pest
Control, Inc. |
|
|
1,377,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used In) Investing Activities |
|
|
(35,760,965 |
) |
|
|
(524,372 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from line of credit |
|
|
16,000,000 |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
47,138 |
|
|
|
176,512 |
|
Repayment of line of credit |
|
|
(7,047,000 |
) |
|
|
|
|
Repayment of notes payable |
|
|
(27,965 |
) |
|
|
|
|
Repayment of loan from shareholder |
|
|
(22,800 |
) |
|
|
|
|
Proceeds from sale of common stock, net |
|
|
24,173,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By Financing Activities |
|
|
33,122,576 |
|
|
|
176,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(428,924 |
) |
|
|
662,351 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
3,872,224 |
|
|
|
1,022,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
3,443,300 |
|
|
$ |
1,684,526 |
|
|
|
|
|
|
|
|
|
|
- 7 -
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED |
|
|
06/30/05 |
|
06/30/04 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
|
$ |
400,000 |
|
|
$ |
718,000 |
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
131,679 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in acquisition of
Middleton Pest Control, Inc. |
|
$ |
10,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable issued in acquisition of
Middleton Pest Control, Inc. |
|
$ |
5,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
- 8 -
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. |
|
Basis of Consolidated Financial Statement Presentation: |
|
|
|
The accompanying unaudited consolidated 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-QSB 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, 2004 annual report on Form
10-KSB. Operating results for the nine months ended June 30, 2005 are not necessarily
indicative of the results that may be expected for the year ending September 30, 2005. |
|
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 monitors accounts
receivable and provides allowances when considered necessary. As of June 30, 2005 and
September 30, 2004, the Company established an allowance of $60,238 and $48,485
respectively. |
|
|
|
Investments |
|
|
|
Certain investments that management has the intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion of discounts that
are recognized in interest income using the interest method over the period to maturity. |
|
|
|
Marketable and debt securities which management has classified as trading are carried at
fair value with net unrealized gains and losses reported in operations. Realized gains
and losses on marketable equity and debt securities are recognized upon sale using the
specific identification method. |
|
|
|
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. Fixed and variable manufacturing costs and overhead are included in
the carrying values of finished goods and work-in-process. The Company records reserves
for inventory shrinkage and obsolescence, when considered necessary. For the nine months
ended June 30, 2005, inventory shrinkage and obsolescence reserves increased $79,300. |
- 9 -
|
|
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 |
|
|
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. |
|
|
|
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
costs over 10 years, the estimated useful life of the asset. |
|
|
|
Customer List |
|
|
|
Pursuant to the acquisition of Middleton Pest Control, Inc., the Company recorded
Customer List as an intangible asset in the amount of $10,500,000, which amount was
determined pursuant to an independent third-party appraisal. The Company is amortizing
the Customer List over its estimated economic life of eight 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 exceeds 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 first nine months ended June 30, 2005. |
|
|
|
Income (Loss) Per 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. |
|
|
|
Revenue Recognition |
|
|
|
Sales revenues are recorded when products are shipped and title has passed to
unaffiliated customers. 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. |
- 10 -
|
|
Foreign Currency Translation |
|
|
|
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 year and income statement accounts are translated at average exchange rates
for the year. Translation gains and losses are included as a separate component of
stockholders equity as cumulative translation adjustments. |
|
|
|
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 June 30, 2005 and September 30, 2004, accumulated other comprehensive income
was comprised of cumulative foreign currency translation adjustments. |
|
3. |
|
Acquisitions: |
|
A) |
|
Acquisition of Percipia, Inc. and Subsidiary |
|
|
|
|
For purposes of expanding into the telecommunication market, the Company completed
its acquisition of all the issued and outstanding common stock of Percipia, Inc.
(Percipia), and its wholly owned subsidiary, Percipia Networks, Inc. on August 6,
2004. The consideration paid by the Company consisted of cash of $841,510 (including
$53,550 paid to retire all outstanding stock options of Percipia and $127,960 paid
for acquisition costs) and 190,000 shares of its common stock valued at $997,500
based on an average price of $5.25 over the thirty days prior to the acquisition for
a total purchase price of $1,839,010. As a result, Percipia became a wholly owned
subsidiary of the Company. For accounting purposes, the effective date of the
acquisition was June 30, 2004. |
|
|
|
|
The following table sets forth the preliminary allocation of the purchase price to
Percipias tangible and intangible assets acquired and liabilities assumed as of
July 1, 2004: |
|
|
|
|
|
Cash |
|
$ |
17,690 |
|
Accounts receivable |
|
|
425,417 |
|
Inventory |
|
|
380,750 |
|
Deferred tax assets |
|
|
653,000 |
|
Fixed assets |
|
|
95,453 |
|
Software |
|
|
2,700,000 |
|
Note receivable and other assets |
|
|
80,362 |
|
Goodwill |
|
|
852,683 |
|
Accounts payable |
|
|
(239,098 |
) |
Accrued liabilities |
|
|
(555,877 |
) |
Deferred tax liability |
|
|
(860,000 |
) |
Unearned revenues |
|
|
(145,106 |
) |
Line of Credit |
|
|
(99,300 |
) |
Notes Payable |
|
|
(1,428,089 |
) |
Capital leases |
|
|
(38,875 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,839,010 |
|
|
|
|
|
|
|
|
|
The goodwill resulting from this acquisition is expected to be amortized over
fifteen years for tax purposes. |
- 11 -
|
B) |
|
Acquisition of CPM FM Limited (formerly known as Telecom FM Limited) |
|
|
|
|
On October 5, 2004, the Company, through a wholly owned subsidiary, Sunair
Communications, Limited, a private limited company incorporated in England (SCL),
entered into a definitive asset purchase agreement by and among SCL, CPM FM Limited
(formerly known as Telecom FM Limited) (Telecom), a private limited company
incorporated in England, and TFM Group Limited, a private limited company
incorporated in England and the sole shareholder of Telecom, pursuant to which the
Company acquired substantially all of the assets and assumed certain liabilities of
Telecom for $1,500,000 cash. The purpose of this acquisition was to expand into the
telecommunication market. |
|
|
|
|
In addition, the Company incurred $340,913 of transaction costs consisting
principally of legal and accounting fees. |
|
|
|
|
The transaction was closed on October 11, 2004 and, as stated in the asset purchase
agreement, became effective on September 1, 2004. SCL changed
its name to Telecom FM Limited shortly after the closing. |
|
|
|
|
The following table sets forth the allocation of the purchase price to Telecoms
tangible assets acquired and liabilities assumed as of September 1, 2004: |
|
|
|
|
|
Inventories |
|
$ |
910,282 |
|
Accounts receivable |
|
|
1,303,570 |
|
Prepaid expenses and other current assets |
|
|
171,103 |
|
Fixed assets |
|
|
22,763 |
|
Software costs |
|
|
1,164,699 |
|
Accounts payable |
|
|
(991,475 |
) |
Bank overdraft |
|
|
(411,773 |
) |
Accrued expenses |
|
|
(238,136 |
) |
Loan payable |
|
|
(90,120 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,840,913 |
|
|
|
|
|
|
|
|
|
The $1,500,000 due to the principles of Telecom were accrued as payable as of
September 30, 2004. Of this amount, $1,250,000 was paid in October of 2004. Costs
accrued in connection with the acquisition of $249,312 are included in accrued
expenses as of September 30, 2004. |
|
|
C) |
|
Acquisition of Middleton Pest Control, Inc. |
|
|
|
|
On June 7, 2005, the Company, Sunair Southeast Pest Holdings, Inc., a wholly owned
subsidiary of the Company (Pest Holdings), and the selling shareholders (collectively,
the Sellers) of Middleton Pest Control, Inc., a Florida corporation (Middleton),
entered into a stock purchase agreement (the Stock Purchase Agreement) pursuant to
which, on the same date, Pest Holdings acquired from the Sellers 100% of the issued and
outstanding shares of capital stock of Middleton. The aggregate purchase price for
the outstanding capital stock of Middleton was $50,000,000, which was comprised of:
(i) $35,000,000 in cash; (ii) $5,000,000 in the form of a subordinated
promissory note; and (iii)1,028,807 shares of the Companys common stock. The Company also incurred closing costs of $1,610,541 and a charge of $1,400,000 for Middletons built-in capital gains tax for a total purchase price of
$53,010,541. |
- 12 -
The following table sets forth the preliminary allocation of the purchase price to
Middletons tangible and intangible assets acquired and liabilities assumed as of
May 31, 2005:
|
|
|
|
|
Cash |
|
$ |
1,377,035 |
|
Accounts receivable |
|
|
1,504,821 |
|
Inventory |
|
|
546,129 |
|
Prepaid assets |
|
|
662,565 |
|
Fixed assets |
|
|
1,587,781 |
|
Other assets |
|
|
63,762 |
|
Customer list |
|
|
10,500,000 |
|
Goodwill |
|
|
40,297,345 |
|
Accounts payable |
|
|
(590,377 |
) |
Accrued liabilities |
|
|
(930,739 |
) |
Customer deposits |
|
|
(1,550,611 |
) |
Notes payable |
|
|
(457,170 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
53,010,541 |
|
|
|
|
|
|
Pro-forma results of operations
The following sets forth the Companys results of operations for the nine months and
three months ended June 30, 2005 as if the acquisitions had taken place on October 1,
2003.
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED JUNE 30, |
|
|
2005 |
|
2004 |
Revenues |
|
$ |
39,000,428 |
|
|
$ |
32,639,335 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,454,559 |
|
|
$ |
1,636,694 |
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
0.34 |
|
Diluted |
|
$ |
0.15 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
2005 |
|
2004 |
Revenues |
|
$ |
13,486,948 |
|
|
$ |
10,998,234 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
261,058 |
|
|
$ |
401,838 |
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.03 |
|
|
$ |
0.08 |
|
Diluted |
|
$ |
0.02 |
|
|
$ |
0.08 |
|
- 13 -
4. Inventories:
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
06/30/05 |
|
09/30/04 |
Materials |
|
$ |
1,750,947 |
|
|
$ |
1,565,463 |
|
Work in progress |
|
|
4,806,480 |
|
|
|
4,117,503 |
|
Finished goods |
|
|
884,096 |
|
|
|
1,575,989 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,441,523 |
|
|
$ |
7,258,955 |
|
|
|
|
|
|
|
|
|
|
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.
At June 30, 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. |
|
Stock Options and Warrants: |
At the fiscal year ended September 30, 2004, options to purchase 270,000 shares of the
Companys common stock at $2.25 per share had been issued to key employees of the
Company. 45,600 stock options were exercised in fiscal 2003 and 78,450 stock options
were exercised in fiscal 2004. Due to a majority change in ownership in November 2003,
all of the Companys outstanding stock options became fully vested and exercisable. At
the beginning of the current fiscal year, there were options outstanding to purchase
145,950 shares of common stock at $2.25 per share of which 8,250 stock options were
exercised in the first fiscal quarter and 12,700 stock options were exercised in the
third fiscal quarter. These options are fully vested and are exercisable until November
21, 2005.
On February 4, 2005, the shareholders of the Company approved the issuance of options
outside of the existing option plan to three directors. The options are for the purchase
of 60,000 shares of common stock at $4.79 per share and are fully vested and exercisable
at March 31, 2005.
Pursuant to employment agreements entered into in February, 2005 between the Company and
Mr. Laurent, Mr. Durham and Mr. Budde, officers of the Company, an aggregate of 60,000
options were granted for the purchase of the Companys common stock at $13.78 per share.
The options will vest equally over a period of 24 months at a rate of 1,666 per month so
long as the option holder is currently employed by the Company.
- 14 -
On February 8, 2005, the Company completed its sale of 5,000,000 units to Coconut Palm
Capital Investors II, Ltd., a Florida limited partnership (Coconut Palm) pursuant to a
Purchase Agreement dated as of November 17, 2004, by and between the Company and Coconut
Palm (the Purchase Agreement). The aggregate purchase price paid by Coconut Palm for
the units was $25 million. The units consist of five million shares of the Companys
common stock, warrants to purchase an additional five million shares of the Companys
common stock at an exercise price of $6.00 per share, which are immediately exercisable
and will expire after three years; and warrants to purchase an additional five million shares of the Companys common stock at an exercise price of $7.00 per share, which are
immediately exercisable and will expire after five years.
In addition, on February 8, 2005 a grant for 166,667 stock options to purchase 166,667
shares of common stock at $5.00 per share became effective for options granted to John J. Hayes. The options will vest equally over a period of four years
beginning in November, 2005.
In connection with the acquisition of Middleton, the Company agreed to make available a
pool of 300,000 options to purchase shares of the Companys common stock for Gregory
Clendenin, the Chief Executive Officer of Pest Holdings and Middleton, and certain members of
his management team, who will also be employed by Pest Holdings. On June 7, 2005, the Board of
Directors of the Company approved the grant of options to purchase 194,169 shares of Common Stock at $11.40 per share, of which
Mr. Clendenin received 47,625.
There are 333,333 options outstanding which were granted to two individuals contingent
upon their employment with the Company. At June 30, 2005, these individuals were not
employed by Sunair.
8. |
|
Equipment and Service Information: |
|
|
|
The following table sets forth sales and cost of sales information for equipment and
services in the Company. |
|
|
|
|
|
|
|
|
|
|
|
NINE |
|
|
THREE |
|
|
|
MONTHS |
|
|
MONTHS |
|
|
|
ENDED |
|
|
ENDED |
|
|
|
06/30/05 |
|
|
06/30/05 |
|
Sales |
|
|
|
|
|
|
|
|
Equipment |
|
$ |
12,498,240 |
|
|
$ |
3,716,779 |
|
Service |
|
|
5,239,594 |
|
|
|
4,080,735 |
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
17,737,834 |
|
|
$ |
7,797,514 |
|
|
|
|
|
|
|
|
Cost of Sales |
|
|
|
|
|
|
|
|
Equipment |
|
$ |
7,502,943 |
|
|
$ |
2,422,082 |
|
Service |
|
|
2,634,855 |
|
|
|
2,178,190 |
|
|
|
|
|
|
|
|
|
Total Cost of Sales |
|
$ |
10,137,798 |
|
|
$ |
4,600,272 |
|
|
|
|
|
|
|
|
- 15 -
9. |
|
Recent Accounting Pronouncements: |
In January 2003, the FASB issued interpretations No. 46, Consolidation of Variable
Interest Entities. FIN No. 46 addresses consolidation by business enterprises of
variable interest entities (formerly Special Purpose Entities or SPES). The Company
does not have any variable interest entities as defined by FIN No. 46 and therefore the
interpretation did not affect the Companys financial position, results of operations or
cash flows.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. This statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities under
Statement No. 133, Accounting for Derivatives Instruments and Hedging Activities. The
provisions of this statement are effective for all derivatives and hedging activities
entered into after June 30, 2003. The Company did not have any derivatives or hedging
activities and therefore the standard did not affect the Companys financial position,
results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards
on the classification and measurement of certain instruments with characteristics of
both liabilities and equity. The provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2002 and to all other instruments
that exist as of the beginning of the first interim financial reporting period beginning
after June 15, 2003. SFAS No. 150 did not have a material effect on the Companys
financial Statements.
In December 2004, the FASB issued FASB No. 123 Accounting for Stock-Based Compensation
Revised
In December 2004, the FASB issued SFAS No. 123R, Accounting for Stock-Based
Compensation. This statement is a revision to SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for stock issued to
employees. This statement requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service, the requisite service
period (usually the vesting period). The grant-date fair value of employee share options
and similar instruments will be estimated using option-pricing models.
In addition, a public entity is required to measure the cost of employee services
received in exchange for an award of liability instruments based on its current fair
value. The fair value of that award will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation cost over that period.
For public entities that do not file as small business issuers, this statement is
effective as of the beginning of the first annual reporting period that begins after
June 15, 2005.
- 16 -
For public entities that file as small business issuers, this statement is effective as
of the beginning of the first annual reporting period that begins after December 15,
2005.
At the required effective date, all public entities that used the fair value based
method for either recognition or disclosure under Statement 123 are required to apply
this statement using a modified version of prospective application. Under that
transition method, compensation cost is recognized on or after the required effective
date for the portion of outstanding awards for which the requisite service has not yet
been rendered, based on the grant-date fair value of those awards calculated under
Statement 123 for either recognition or pro-forma disclosures. For periods before the
required effective date, those entities may elect to apply the modified version of
retrospective application under which financial statements for prior periods are
adjusted on a basis consistent with the pro forma disclosures required for those periods
by Statement 123. The Company has not yet determined which methodology it will adopt but
believes that the impact that the adoption of SFAS No. 123R will have on its financial
position or results of operations will approximate the magnitude of the stock-based
employee compensation cost pursuant to the disclosure requirements of SFAS No. 148.
EITF 03-11, Reporting Gains and Losses on Derivative Instruments that are Subject to
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
and Not Held for Trading Purposes.
In July 2003, the EITF reached a consensus that all gains and losses (realized and
unrealized) on derivative instruments within the scope of SFAS 133 should be shown net
in the income statement, whether or not settled physically, if the derivative
instruments are held for trading purposes. However, the EITF recognized that there may
be contracts within the scope of SFAS 133 considered not held for trading purposes that
warrant further consideration as to the appropriate income statement classification of
the gains and losses. In EITF 03 11, the EITF clarified certain criteria to use in
determining whether gains and losses related to non-trading derivative instruments
should be shown net in the income statement. The adoption of EITF 03-11 did not have a
material effect on the Companys financial position, results of operations or cash
flows.
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Item 2. Managements Discussion and Analysis or Plan of Operation
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 Electronics, Inc. (Sunair, the Company, us, we or our) is a Florida corporation
organized in 1956. Through Sunair Communications, Inc., a wholly owned subsidiary of the Company, the Company is engaged in the design, manufacture and sale of high frequency
single sideband communications equipment and the software development, design, integration testing
and documentation of C4ISR systems utilized for long range voice and data communications
in fixed station, mobile and marine military and governmental applications.
Middleton Pest Control, Inc. (Middleton), a Florida corporation, is a wholly owned subsidiary
which provides lawn and pest control services to both residential and commercial customers.
Percipia, Inc. (Percipia), an Ohio corporation, is a wholly owned subsidiary which provides
installation and maintenance of telephony systems, and develops and customizes software for
telephony systems to various industries, most notably hospitality.
Telecom FM Limited (Telecom), a United Kingdom corporation, is a wholly owned subsidiary which
distributes and installs telecommunication devices providing fixed wireless access to network and
data service providers.
Sunair products and engineering capabilities are marketed both domestically and internationally and
are primarily intended for strategic military and other governmental applications. Sales are
executed direct through systems engineering companies, worldwide commercial and foreign
governmental agencies or direct to the U.S. Government.
Sunairs line of equipment is composed of proprietary HF/SSB radio equipment and ancillary items
sold as operating units or combined into sophisticated systems that may interface with
workstations, antennae, power sources, modems, message switching devices, cryptographic equipment
software and the like provided by others. Sunair products employ advanced solid state designs with
computer controlled networking capabilities. In addition, the Company custom designs systems
incorporating various combinations of equipment into racks and control consoles that may interface
with value added products and systems of other manufacturers. With the acquisitions of Percipia and
Telecom, the Company now installs and maintains telephony and fixed wireless systems.
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Pursuant to the previously announced purchase agreement, dated as of November 17, 2004 (the Purchase
Agreement), by and between the Company and Coconut Palm Capital Investors II, Ltd., a Florida
limited partnership (Coconut Palm), on February 8, 2005, Coconut Palm completed its purchase of 5
million units. The units consist of 5 million newly issued shares of common stock of the Company
and warrants to purchase an additional 10 million shares of common stock at exercise prices ranging
from $6.00 per share to $7.00 per share. The warrants are immediately exercisable and will expire
at times of three and five years from closing. The aggregate purchase price for the units was $25
million. As of the closing of the transaction, Coconut Palm beneficially owned 15 million
shares, or 78.9%, of the common stock of the Company (assuming exercise of the warrants).
The Company used the proceeds from the sale of the units to partially fund the acquisition, by our
subsidiary Sunair Southeast Pest Holdings, Inc., of all of the outstanding capital stock of
Middleton, which has operations in the lawn and pest control services sector and to form a new lawn
and pest control services division. The aggregate purchase price for the outstanding capital stock
of Middleton was $50 million, which was comprised of: (i) $35.0 million in cash; (ii) $5.0 million
in the form of a subordinated promissory note; and (iii)1,028,807 shares of our common stock.
Middleton, with headquarters located in Orlando, Florida, provides pest control and lawn care
services to both residential and commercial customers. Middleton provides essential pest control
services and protection against termite damage, rodents and insects to homes and businesses. In
addition, Middleton supplies essential lawn care services to homes and businesses, which includes
fertilization treatments and protection against disease, weeds and insects for lawns and shrubs.
Ultimately, the Company anticipates that with the sale of the units and the formation of its new
lawn and pest control services division, it will no longer operate solely through its traditional
business segments. Furthermore, as the Company is able to grow its new lawn and pest control
services division through acquisitions and, eventually through internal organic growth, it is
contemplated that this new segment will become the Companys dominant operation. Accordingly, if
the Company is successful in implementing this strategy, it will represent a fundamental shift in
the nature of the Companys business.
In connection with the investment by Coconut Palm, the Company entered into an employment agreement
with John J. Hayes under which he became the Companys President and Chief Executive Officer
beginning February 15, 2005. The Company anticipates that as it acquires lawn and pest control
companies, it will enter into employment agreements with additional persons for the new lawn and
pest control services division. In connection with the acquisition of Middleton, on June 7, 2005
the Company entered into an employment agreement with Gregory Clendenin to serve as the Chief
Executive Officer of Middleton and Sunair Southeast Pest Holdings, Inc.
Mr. Laurent serves as the
President of the high frequency single sideband communications business. Mr. Durham will remain the
Chief Financial Officer of the Company and now serves as the Vice President of Finance of the high
frequency single sideband communications business. Mr. Budde serves as the Vice President of
Operations of the high frequency single sideband communications business. In February 2005, James E.
Laurent, the Companys then current President and Chief Executive Officer, Synnott B. Durham, the
Companys then current corporate Secretary and Chief Financial Officer, and Henry A. Budde, the
Companys then current Vice President of Operations, have entered into employment agreements with
the Company, which became effective upon the closing of the transaction.
In connection with this change in business strategy, and in accordance with the Purchase Agreement,
the Company also agreed to use its best efforts to enter
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into a definitive agreement as soon as practicable to divest itself of certain non-core assets
acquired in connection with the Companys purchase of: (i) Percipia; and (ii) the assets of
Telecom, at a purchase price equal to the amount the Company paid for such assets plus the amount
of any intercompany debt incurred and advances made in connection with such purchases.
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Liquidity:
For the nine months ended June 30, 2005, the Company had positive cash flow from operations of
$2,209,465 due primarily to net income of $964,658 and increases in accounts payable and accrued
expenses.
Cash flows used in investing activities for the nine months ended June 30, 2005 were $35,760,965
due to costs incurred in the acquisition of Middleton, amounts paid for the purchase of property,
plant, and equipment, software development and cash paid for the acquisition of the assets of
Telecom, less proceeds from the sale of held to maturity investments.
Cash flows provided by financing activities for the nine months ended June 30, 2005 were
$33,122,576 which consisted of proceeds from the sale of stock pursuant to the closing of the
Purchase Agreement with Coconut Palm and the exercise of stock options, and the proceeds from the
Companys line of credit, less the repayment portion.
During the nine months ended June 30, 2005, the Company had short term investments and cash or cash
equivalents more than adequate to cover known requirements, unforeseen events or uncertainties that
might occur. The Companys known requirements consist of normal operating expenses. During this
nine month period, cash and cash equivalents had an average balance of $12,884,672 as opposed to an
average balance of $1,738,000 for the twelve months ended September 30, 2004. Cash equivalents are
money market funds that are readily available for immediate use should the occasion arise. The
current ratio of the Company as of June 30, 2005 was 2.5 compared to 2.6 as of September 30, 2004.
The Company records reserves for inventory shrinkage and obsolescence, when considered necessary.
For the nine months ended June 30, 2005, inventory shrinkage and obsolescence reserves increased
$79,300 due to expected inventory shrinkage. Accounts receivable consist of balances due from
sales. The Company monitors accounts receivables and provides allowances when considered necessary.
As of June 30, 2005, the Company had an allowance of $60,238.
Non cash interim reserves are maintained to cover items such as warranty repairs in process and
other charges that may be in dispute.
Capital Resources:
During the nine months ended June 30, 2005, $152,298 was spent for capital assets. These funds were
primarily used for new plant equipment. $388,762 was spent for software development costs. No
expenditures are contemplated for plant expansion or extensive maintenance in fiscal 2005. The
Company may incur additional debt or use cash to finance acquisitions in the lawn and pest control
division, although there are currently no definitive agreements in connection with any
acquisitions.
In connection with the acquisition of Middleton, on June 7, 2005, the Company and its domestic
subsidiaries entered into a credit agreement relating to a secured 2-year revolving credit
facility (the Credit Facility) with the lenders named therein and Wachovia Bank, National Association, as facility
agent (Wachovia). The Credit Facility provides for borrowings up to an aggregate principal amount
of $20.0 million, including a $3.0 million letter of credit subfacility, and expires on June 7,
2007. Interest rates on borrowings under the Credit Facility will be based on LIBOR plus the
applicable percentage, which is based on the Companys leverage ratio, as further described in the
Credit Facility.
The Credit Facility requires the Company to maintain specified financial ratios regarding leverage,
interest coverage and EBITDA. The Credit Facility also places certain restrictions on, among other
things, the Companys ability to create or incur indebtedness, pay or make dividends or other
distributions, create or permit certain liens, enter into transactions with affiliates and merge or
consolidate with other entities. As of June 30, 2005, $11,000,000 was outstanding under the Credit
Facility.
In addition, in connection with the acquisition of Middleton, on June 7, 2005, the Companys
subsidiary, Sunair Southeast Pest Holdings, Inc., issued a subordinated promissory note to the
sellers of the capital stock of Middleton (the Pest Holdings Note). The principal amount of the
Middleton Note is $5.0 million, which is due and payable in full on the fifth anniversary from the
date of issuance. The Pest Holdings Note bears interest at an annual rate equal to the prime rate
as reported from time to time in the Wall Street Journal.
Liabilities also consist of current accounts payable, accrued expenses related to the current
accounting period, the current and long term portion of income taxes payable, amounts due under the
management services agreement described below and compensation to management.
Effective upon the closing of the Purchase Agreement with Coconut Palm, the Company entered into a
five-year management services agreement with RPC Financial Advisors, LLC (RPC), pursuant to which
RPC agreed to provide management services for the Companys newly created pest and termite control
services division. The Company has agreed to pay a management fee during the first year of the
management services agreement in the amount of $1,562,500. Following the first year and thereafter,
the management fee will be equal to 1% of the gross revenues from operations of the pest and
termite control services division. Richard Rochon and Mario Ferrari, both of whom are affiliates of
Coconut Palm and each of whom are members of the Companys board of directors, are also affiliates
of RPC.
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Results of Operations:
Nine months ended June 30, 2005 compared to nine months ended June 30, 2004.
During the nine months ended June 30, 2005, sales of $17,737,834 were up 198.1% or $11,786,691 from
the same period one year ago due to increased shipments on orders received in fiscal 2004, the nine
months ended June 30, 2005, the added revenues produced by the subsidiaries acquired in the fourth
quarter of fiscal year ended September 30, 2004 ($1,890,201) and the acquisition of Middleton in
June of this year
($3,349,393). Backlog of equipment orders of $3,769,000 was higher at June 30, 2005 compared to
$2,732,000 at June 30, 2004.
Cost of sales was slightly higher at 57.2% of sales in the nine months ended June 30, 2005 as
compared to 55.2% of sales for the same period one year ago due to a change in the product mix.
Even though inventory of equipment decreased in the nine months ended June 30, 2005, overall
inventory increased slightly due to the acquisition of Middleton. The Company continues its
efforts to reduce inventories to lower levels.
Selling, general and administrative expenses increased 310.0% or $4,827,850 due to increased
overhead expenses associated with the operation of Percipia, Inc. Telecom FM LTD, and Middleton.
Expenses continue to be incurred for expanded market exposure.
Interest income increased $66,234 due to the investment of proceeds received on the sale of stock
in February of 2005 less the redemption of the PEFCO notes in the first quarter of fiscal 2005.
Interest expense was incurred on a bank line of credit. Other expenses incurred were due to a loss
on the redemption of the PEFCO note.
The high frequency single sideband communications division continues to focus on the Asia and Middle East areas where strong
opportunities are found for both standard manufactured products and systems integration work. The
sales staff is being expanded in the coming fourth quarter to address more of these potentials
relating to our high frequency radio capabilities. Order input has grown in the new telecom segment
of the division which will support sales totals for early fiscal year 2006. Deliveries under
Department of Homeland Security (USCG) orders will continue through the first three month of fiscal
year 2006.
The lawn and pest control division produced strong results for the one month following the
acquisition of Middleton by the Company. Middletons revenues of $3,349,393 for the month ended
June 30, 2005, were up 25% over the same period one year ago. Pre-tax income for the month ended
June 30, 2005 was approximately $330,000. Middleton anticipates that it will increase revenues by
focusing on a new integrated marketing strategy utilizing radio, television, direct mail, print
billboard and public relations. Since recruiting in the tight labor market continues to be one of
Middletons biggest challenges, it is also focusing on a new recruiting campaign.
Item 3. Controls and procedures
(a) Evaluation of disclosure controls and procedures. The term disclosure controls and procedures
is defined in Rule 13a 15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This
term 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 Exchange
Act is recorded, processed, summarized and reported within required time periods. Our chief
executive officer and our chief financial officer have concluded, based on their evaluation as of
June 30, 2005, that our disclosure controls and procedures are effective.
(b) Changes in internal control over financial reporting. There have been no changes in our
internal control over financial reporting during the quarter ended June 30, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Part II Other Information
Item 1. Legal Proceedings
None
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
None
Item 5. Other Information
None
Item 6. Exhibits
31.1 |
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Certification by Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification by Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification by Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification by Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the securities and exchange act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SUNAIR ELECTRONICS, INC. |
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DATE: August 15, 2005
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/S/ JOHN J. HAYES |
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JOHN J. HAYES, PRESIDENT
AND CHIEF EXECUTIVE OFFICER |
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DATE: August 15, 2005
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/S/ SYNNOTT B. DURHAM |
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SYNNOTT B. DURHAM,
CHIEF FINANCIAL OFFICER |
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