Sunair Services Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2005
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the transition period from to
Commission file number: 1-4334
SUNAIR SERVICES CORPORATION
(Name of Small business Issuer in Its Charter)
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Florida
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59-0780772 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
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3005 S.W. Third Avenue
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33315 |
Fort Lauderdale, FL |
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(Address of Principal Executive Offices)
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(Zip Code) |
Issuers Telephone Number, Including Area Code:
(954) 525-1505
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
Common stock $.10 par value
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American Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act. o
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 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
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. o
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
Issuers revenues for the most recent fiscal year ended
September 30, 2005 was $31,451,770.
The aggregate market value of the voting stock held by non-affiliates of the registrant was
approximately $26,287,391 as of December 27, 2005 based on the closing price of stock on the
American Stock Exchange on said date.
The number of shares outstanding of the registrants common stock as of December 27, 2005:
12,186,380 shares
Documents Incorporated By Reference
Portions of the Registrants definitive proxy statement for its
2005 annual meeting of
shareholders, which proxy statement will be filed no later than 120 days after the close of the
Registrants fiscal year ended September 30, 2005, are hereby incorporated by reference in Part III
of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format: Yes o No þ
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
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, 2005. We operate through three business segments: Lawn
and Pest Control Services; High Frequency Radio and Telephone Communications. For financial
information regarding these segments, see Note 18 to the consolidated financial statements included
in Item 7 herein.
Our Lawn and Pest Control Services segment provides lawn care and pest control services to
both residential and commercial customers.
Our High Frequency Radio segment designs, manufactures and sells high frequency single
sideband communications equipment and develops software and performs the design, integration
testing and documentation of Communications, Command, Control, Computers, Intelligence,
Surveillance and Reconnaissance, or C4ISR,
systems utilized for long range voice and
data communications in fixed station, mobile and marine for military and governmental applications.
Our Telephone Communications segment installs and maintains telephony and fixed wireless
systems.
The Lawn and Pest Control Services Segment
On February 8, 2005, we closed a transaction with Coconut Palm Capital Investors II, Ltd.
(Coconut Palm), which we entered into on November 17, 2004. Coconut Palm purchased from us
5,000,000 Units for an aggregate purchase price of $25 million. Each Unit consisted of (i) one
share of our common stock, (ii) one warrant to purchase one share of our common stock at an
exercise price of $6.00 per share with a term of three years and (iii) one warrant to purchase one
share of our common stock at an exercise price of $7.00 per share with a term of five years. In
connection with the investment by Coconut Palm, we formed a new Lawn and Pest Control Services
segment for future acquisitions.
The Lawn and Pest Control Services segment acquired its first company on June 7, 2005, through
the acquisition by our subsidiary, Sunair Southeast Pest Holdings, Inc., of all of the outstanding
capital stock of Middleton Pest Control, Inc. (Middleton). 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. On July 29, 2005, Middleton acquired substantially all of the assets of Four
Seasons Lawn and Pest Control, Inc. (Four Seasons) for approximately $1.4 million in cash. In addition, on
December 16, 2005, Middleton acquired Spa Creek Services, LLC
d/b/a Pest Environmental, a pest control and termite services
company located in Central Florida for a preliminary purchase price of approximately $5.5 million
in cash.
On December 16, 2005, we completed the first-tranche of a two-tranche 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 our 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 and warrants to purchase 1,000,000 shares of our
common stock (the Private Placement) at an exercise price of $6.30 (subject to adjustment) with
total gross proceeds (before fees and expenses) to us of approximately $15 million and net proceeds
to us of approximately $13.8 million.
The sale and issuance of our common stock in the Private Placement has been structured to close in two tranches. The
first closing was completed on December 16, 2005, when we issued and sold an aggregate
of 2,000,003 shares of our common stock and warrants to purchase 700,000 shares of our common
stock. In the second closing, which is expected to occur on the twentieth day after we mail an
information statement to our shareholders, we expect to sell an additional 857,143 shares of our
common stock and warrants to purchase 300,000 shares of our common stock.
We plan to use the proceeds from the sale of our common stock in the Private Placement to fund
acquisitions that have operations in the lawn and pest control services sector. We plan initially
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. Ultimately, we anticipate that with the formation of our new Lawn and Pest
Control Services segment, we no longer will operate solely through our traditional High Frequency
Radio segment. Furthermore, as we are able to grow our Lawn and Pest Control Services segment
through acquisitions and, eventually through internal organic growth, we contemplate that this new
division will become our dominant operation. Accordingly, if we are successful in implementing
this strategy, it will represent a fundamental shift in the nature of our business.
Business of Middleton
Overview
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.
Middleton operates under the Middleton Lawn and Pest ControlR and Middleton Pest
Control, Inc.
Middleton was founded in 1952 as a single location in Orlando, Florida. Middleton has since
grown to a network of 22 branches throughout central Florida and Floridas northeast coast, from
which it serves more than 71,000 accounts.
Seasonality
The lawn and pest control business is seasonal in nature. The termite swarm season, which
generally occurs in early spring but varies by region depending on climate, leads to the highest
demand for termite control services and therefore the highest level of revenues. Weather
conditions, such as hurricanes, affect the demand for lawn care services and may result in a
decrease in revenues or an increase in costs.
Customers
As of September 30, 2005, approximately 97% of Middletons revenues were derived from
residential accounts and 3% of Middletons revenues were derived from commercial accounts.
Middleton is not dependent on a single customer or a few customers, the loss of which would have a
material adverse effect on the Lawn and Pest Control Services segment.
The following table provides information regarding the services utilized by Middletons
customers:
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Service |
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% of Customers |
Lawn Care |
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52 |
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General Pest Control |
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23 |
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Termite |
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24 |
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Mosquito |
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1 |
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Total |
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100 |
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As of September 30, 2005, 41% of Middletons customers use more than one service.
Inventories
Middleton has relationships with multiple vendors for lawn and pest control treatment products
and maintains a sufficient level of chemicals, materials and other supplies to fulfill its
immediate servicing needs and to alleviate any potential short-term shortage in availability from
its national network of suppliers.
Competition
The lawn and pest control services industry, a highly fragmented industry which is actively
consolidating, is made up of approximately 20,000 pest control firms nationally and approximately
2,300 in Florida. The top five firms account for approximately 30% of revenues in the market and
the top 100 firms account for approximately 50% of the revenues. The principal methods of
competition include quality of service, name recognition, pricing, assurance of customer
satisfaction and reputation.
Lawn Care Services. Competition in the market for lawn care services is strong, coming mainly
from large national companies including TruGreen Chemlawn and, to a lesser extent, from local,
independently owned firms and from homeowners who care for their own lawns.
Pest Control Services. Competition in the market for pest control services is strong, coming
mainly from thousands of regional and local, independently owned firms, from homeowners who treat
their own pest control problems and from Orkin, Inc. and Terminix, which operate on a national
basis.
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Marketing and Distribution
Middleton markets its services primarily through an integrated marketing strategy which
includes yellow pages advertisements, marketing to existing customers, television and radio
advertising, print advertisements, direct mail and door-to-door solicitation.
Middleton also uses the Internet to market its services. On the Middleton website
(www.middletonpest.com), customers are able to schedule their services online, pay online, or ask a
technical question any time of the day or night. In 2004, Middleton received over 22,000 hits on
its website.
Environmental and Regulatory Considerations
Middleton is subject to various legislative and regulatory enactments that are designed to
protect the environment, public health and consumer protection. Middleton believes that it is in
substantial compliance with all such legislative and regulatory requirements. Compliance with
these requirements has not had a material negative effect on its financial position, results of
operations or liquidity.
The Federal Insecticide Fungicide and Rodentcide Act (as amended) is a federal law that grants
the responsibility of the states to be the primary agent in enforcement and conditions under which
pest control companies operate. Each state must meet certain guidelines of the Environmental
Protection Agency in regulating the following: licensing, record keeping, contracts, standards of
application, training and registration of products. This allows each state to institute certain
features that set their regulatory programs in keeping with special interests of the citizens and
the pest control companies wishes in each state. Florida has enacted such guidelines which
regulate and license the pest control industry in Florida. The pest control industry is impacted
by these federal and state regulations.
Employees
The number of persons employed by Middleton as of September 30, 2005 was 349, which includes
108 salespersons, 153 technicians, 30 branch and district managers, 41 office associates, and 17
persons in Middletons corporate office.
The High Frequency Radio Segment
Overview
Our 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. Our products employ advanced solid state designs with
computer controlled networking capabilities. In addition, we custom design systems incorporating
various combinations of equipment into racks and control consoles that may interface with value
added products and systems of other manufacturers.
Seasonality
The High Frequency Radio segments business is subject to limited seasonal variation.
Customers
We currently derive, and expect to continue to derive, a significant portion of our revenues
from our larger customers. Historically, these customers have placed orders with us on a
project-by-project basis, which orders have accounted for a significant portion of our revenues
during any fiscal year. We expect to continue to depend upon project orders from these customers,
and a relatively small group of other customers, for a significant percentage of our revenues. The
loss of, or a significant decrease in, project orders from these customers would have a material
adverse effect on our revenues.
Further, 14% of our sales in fiscal 2005 were to the U.S. Government. Any significant
disruption or deterioration of our relationship with the U.S. Government could significantly reduce
our revenues.
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Inventories
Raw materials, purchased parts and related items are available from various suppliers located
throughout the country. Management believes that the items required in the manufacture of its
electronic equipment are available in sufficient quantities to meet manufacturing requirements with
some extended deliveries.
Competition
We operate in a competitive business that is sensitive to changing technology. Although
successful product and systems development is not dependent necessarily on substantial financial
resources, most of our competitors are larger and can maintain higher levels of expenditures for
research and development than we can. Our competitors include large multinational communications
companies, as well as smaller companies with developing technology expertise. Our competitors for
U.S. Government contracts typically are large, technically competent firms with substantial assets.
Principal competitive factors in these businesses are cost-effectiveness, product quality and
reliability, technological capabilities, service and the ability to meet delivery schedules.
Marketing and Distribution
Our 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.
We sell
through a network of dealers and representatives located throughout the United States
and over 100 other nations. In addition, sales are made on a direct basis to segments of the U.S.
Government. A substantial amount of our sales are made to customers outside the United States and
are handled through our wholly owned subsidiary, Sunair International Sales Corp. We maintain a
sales and service organization geared to train and assist not only its dealers, but larger
governmental users throughout the world. Training programs are conducted at our facilities and in
the field.
Employees
The
number of persons employed in the High Frequency Radio segment was 62, which includes
35 assemblers and test technicians, 8 engineering staff and 19 in
various office and administrative positions.
Engineering
We maintain an engineering department which included six full-time engineers, one tech
writer and a full-time technician in 2005. We also utilized the services of temporary
technicians at various times throughout the year.
Essentially all export sales are covered by irrevocable letters of credit or sight drafts. It
is believed that over 80% of the non-U.S. Government sales ultimately enter the export market
either directly or via resale by domestic customers. For amounts of export sales by geographic
area, sales to governmental agencies of the U.S. and to foreign governments for the years ended
September 30, 2005 and 2004, see Note 18 to the consolidated
financial statements included in Item 7 herein.
The Telephone Communications Segment
Overview
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For
the purpose of
expanding into the telecommunication market, we acquired all of the issued and
outstanding common stock of Percipia, Inc. (Percipia) and its wholly-owned subsidiary, Percipia
Networks, Inc, on August 6, 2004. The aggregate purchase price 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 our 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
ours. Percipia provides installation and maintenance of telephone
systems to various industries, most notably, hospitality. The number
of persons employed by Percipia is 20.
In addition,
to further expand into the telecommunication market, on October 5, 2004, we
acquired substantially all of the assets and assumed certain liabilities of Telecom FM Limited
(Telecom) for $1,500,000 cash. Telecom is a private
limited company incorporated in the U.K. Telecom distributes and
installs telecommunications devices providing fixed wireless access
to network and data service providers. The number of persons employed
by Telecom is 20.
Research and Development
During the fiscal years ended September 30, 2005 and 2004, we expended approximately $176,000
and $425,000 respectively, on product development and engineering.
Backlog
The backlog
of our unfilled orders in the High Frequency Radio and Telephone
Communications segments as of September 30 is as follows:
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2005 |
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2004 |
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$ |
4,542,000 |
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$ |
7,208,000 |
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All orders at September 30, 2005 are expected to be shipped within the current fiscal year.
We attempt to fill most orders from our finished goods stock and thus do not look to backlog as a
major indication of activity.
Risks Factors
General
Risk Factors
The nature of the stock ownership of our company consolidates influence over our company in the
hands of a few shareholders.
Our officers and directors beneficially own, directly or indirectly and, in the aggregate, a
significant percentage of the outstanding shares of our common stock and have the ability to
significantly influence the outcome of any matters submitted to a vote of our shareholders.
We do not anticipate paying any dividends on our common stock.
Over the last five years, we have not paid any dividends on our common stock. We anticipate
that for the foreseeable future we will continue to retain any earnings for use in the operation of
our business. Any future determination to pay cash dividends will be at the discretion of our
board of directors and will depend on our earnings, capital requirements, financial condition and
other factors deemed relevant by our board of directors.
An increased number of shares of our common stock in the market may adversely impact the market
price of our common stock.
Sales of large amounts of our common stock in the public market, exercise of the warrants sold
to Coconut Palm and the investors in the Private Placement, completion of future purchases of
companies in the lawn and pest control services sector in which shares of our common stock
constitutes a part or all of the purchase price or completion of other sales of our common stock to
raise funds to complete purchases of lawn and pest control services companies could adversely
affect the prevailing market price of our common stock, even if our business is doing well. These
potential sales could also impair our ability to raise additional capital through the sale of
equity securities.
Our stock is thinly traded.
While
our stock trades on the American Stock Exchange, our stock is thinly
traded and an investor may
have difficulty in reselling his or her shares quickly. The low trading volume of our common stock is
outside of our control, and we cannot guarantee that the trading volume will increase in the near
future or that, even if it does increase in the future, it will be maintained. Without a large
float, our common stock is less liquid than the stock of companies with broader public ownership
and, as a result, the trading prices of our common stock may be more volatile. In addition, in the
absence of an active public trading market, an investor may be unable to liquidate his or her
investment in us. Trading of a relatively small volume of our common stock may have a greater
impact on the trading price for our stock than would be the case if our public float were larger.
We cannot predict the prices at which our common stock will trade in the future.
Risk Factors Related to the Lawn and Pest Control Services Segment
We may not be able to compete in the competitive and technical pest control industry in the future.
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We operate in a highly competitive business that is sensitive to changing technology. Our
revenues and earnings may be adversely affected by changes in competitive prices. Competition in
the market for lawn care services is strong, coming mainly from large national companies including
TruGreen Chemlawn and, to a lesser extent, from local, independently owned firms and from
homeowners who care for their own lawns. Competition in the market for pest control services is
strong, coming mainly from thousands of regional and local, independently owned firms, from
homeowners who treat their own pest control problems and from Orkin, Inc. and Terminix which
operate on a national basis.
We believe that the principal competitive factors in the market areas that we serve are
quality of service, pricing, assurance of customer satisfaction and reputation. No assurance can be
given that we will be able to compete successfully against current or future competitors or that
the competitive pressures that we face will not result in reduced revenues and market share.
Our operations are affected by adverse weather conditions.
Our operations are directly affected by the weather conditions in Florida. Middletons
business is affected by the seasonal nature of its termite control services. The termite swarm
season, which generally occurs in early spring but varies by region depending on climate, leads to
the highest demand for termite control services and therefore the highest level of revenues.
Weather conditions affect the demand for lawn care services and may result in a decrease in
revenues or an increase in costs. In addition, because Middletons operations are conducted in
Florida, its business may be adversely affected by interruptions in business and property damage
caused by severe weather conditions such as hurricanes, tropical storms and flooding.
Our inability to attract and retain skilled workers may impair growth potential and profitability.
Our ability to remain productive and profitable will depend substantially on our ability to
attract and retain skilled workers. Our ability to expand our operations is in part impacted by our
ability to increase our labor force. The demand for skilled employees is high, and the supply is
very limited. A significant increase in the wages paid by competing employers could result in a
reduction in our skilled labor force, increases in the wage rates paid by us, or both. If either of
these events occurred, our capacity and profitability could be diminished, and our growth potential
could be impaired.
Our operations may be adversely affected if we are unable to comply with regulatory and environmental laws.
Our business is significantly affected by environmental laws and other regulations relating to
the pest control industry and by changes in such laws and the level of enforcement of such laws. We
are unable to predict the level of enforcement of existing laws and regulations, how such laws and
regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws
and regulations will be adopted. We believe our present operations substantially comply with
applicable federal and state environmental laws and regulations. We also believe that compliance
with such laws has had no material adverse effect on our operations to date. However, such
environmental laws are changed frequently. We are unable to predict whether environmental laws
will, in the future, materially affect our operations and financial condition. Penalties for
noncompliance with these laws may include cancellation of licenses, fines, and other corrective
actions, which would negatively affect our future financial results.
We expect to acquire other businesses, which may adversely affect our operating results, financial condition and existing business.
In addition to Middleton, we plan to continue to acquire additional lawn and pest control
services companies. The success of our acquisition program will depend on, among other things:
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the availability of suitable candidates; |
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competition from other companies for the purchase of available candidates; |
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our ability to value those candidates accurately and negotiate favorable terms for those acquisitions; |
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the availability of funds to finance acquisitions; and |
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the availability of management resources to oversee the integration and operation of the acquired businesses. |
Financing for the acquisitions may come from several sources, including our existing cash on
hand as well as the proceeds from the exercise of outstanding warrants, the incurrence of
indebtedness or the issuance of additional common stock, preferred stock or other securities. The
issuance of a material amount of additional securities could, among other things:
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result in substantial dilution of the percentage ownership of our shareholders at the time of issuance; |
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result in the substantial dilution of our earnings per share; |
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adversely affect the prevailing market price for our common stock; and |
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result in increased indebtedness, which could negatively affect our liquidity and operating flexibility. |
Our inability to successfully integrate businesses we acquire could have adverse consequences on
our business.
We intend to experience significant growth through acquisitions. Acquisitions result in
greater administrative burdens and operating costs and, to the extent financed with debt,
additional interest costs. We cannot assure you that we will be able to manage or integrate
acquired companies or businesses successfully. The process of integrating our acquired businesses
may be disruptive to our business and may cause an interruption of, or a loss of momentum in, our
business as a result of the following factors, among others:
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loss of key employees or customers; |
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possible inconsistencies in standards, controls, procedures and policies among the
combined companies and the need to implement company-wide financial, accounting,
information and other systems; |
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failure to maintain the quality of services that the companies have historically provided; |
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the need to coordinate geographically diverse organizations; and |
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the diversion of managements attention from our day-to-day business as a result of the
need to deal with any disruptions and difficulties and the need to add management
resources to do so. |
These disruptions and difficulties, if they occur, may cause us to fail to realize the cost
savings, revenue enhancements and other benefits that we currently expect to result from that
integration and may cause material adverse short- and long-term effects on our operating results
and financial condition.
We may not realize the anticipated cost savings and other benefits from our acquisitions.
Even if we are able to integrate the operations of acquired businesses into our operations, we
may not realize the full benefits of the cost savings, revenue enhancements or other benefits that
we anticipate. The potential cost savings associated with an acquisition are based on analyses
completed by our employees. These analyses necessarily involve assumptions as to future events,
including general business and industry conditions, costs to operate our business and competitive
factors, many of which are beyond our control and may not materialize. While we believe these
analyses and their underlying assumptions to be reasonable, they are estimates which are difficult
to predict and necessarily speculative in nature. If we achieve the expected benefits, they may not
be achieved within the anticipated time frame. Also, the cost savings and other synergies from
these acquisitions may be offset by costs incurred in integrating the companies, increases in other
expenses, operating losses or problems in the business unrelated to these acquisitions.
Our Lawn and Pest Control Services segment is dependent upon the services of John J. Hayes and
Gregory Clendenin and our ability to hire additional executive officers to manage that division.
We are dependent upon the services of John J. Hayes, our President and Chief Executive
Officer, and Gregory Clendenin, the Chief Executive Officer of Sunair Southeast Pest Holdings and
Middleton, who are knowledgeable in the lawn and pest control services industry and are important
to our change in business strategy. The loss of the services of Mr. Hayes or Mr. Clendenin would
have a significant adverse effect on us as we would no longer be able to benefit from their
knowledge, experience and guidance. In addition, our inability to attract additional executive
officers to manage the Lawn and Pest Control Services segment could seriously harm the business,
results of operations and financial condition of that division.
We may encounter difficulties with our new management team and new operating focus.
We expect that we will encounter challenges and difficulties similar to those frequently
experienced by companies operating under a new or revised business plan with a new management team.
These challenges and difficulties relate to our ability to:
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attract new customers and retain existing customers; |
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generate sufficient cash flow from operations or through additional debt or equity financings to support our growth
strategy; |
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hire, train and retain sufficient additional financial reporting management, operational and technical employees; and |
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install and implement new financial and other systems, procedures and controls to support our growth strategy with
minimal delays. |
If the actions taken to integrate our Lawn and Pest Control Services segment into our general
corporate structure encounter greater difficulties than anticipated, we may be required to use
additional resources to complete the integration which could divert managements attention and
strain operational and financial resources. We may not successfully address any or all of these
challenges, and our failure to do so would adversely affect our business plan and results of
operations, our ability to raise additional capital and our ability to achieve enhanced
profitability.
Product liability claims or inadequate product liability insurance coverage may have a material
adverse effect on our business, financial condition and future prospects.
We face an inherent risk of product liability exposure related to our use of pesticides and
chemicals in our lawn and pest control business. An individual may bring a product liability claim
against us if one of the products that we use causes, or appears to have caused, an injury. Product
liability claims may result in:
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substantial monetary awards to plaintiffs; |
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costs of related litigation; |
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injury to our reputation; and |
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decreased demand for our products. |
We currently maintain product liability coverage against risks associated with our services.
Insurance coverage may not be available in the future at an acceptable cost, if at all, or in
sufficient amounts to protect us against such liability. The obligation to pay any product
liability claim in excess of whatever insurance we are able to acquire could have a material
adverse effect on our business, financial condition and future prospects.
Risk
Factors Related to the Communications Segment.
We are dependent upon key members of our management team.
We are dependent upon the services of James E. Laurent, Synnott B. Durham and Henry A. Budde,
the President, Vice President of Finance, and Vice President of Operations, respectively, of our
communications segment. The loss of the services of any of these executive officers could have a
material adverse effect on us as we would no longer be able to benefit from their knowledge,
experience and guidance.
Our business could be materially impacted by the loss of orders from any one of our larger
customers.
We currently derive, and expect to continue to derive, a significant portion of our revenues
from our larger customers. Historically, these customers have placed orders with us on a
project-by-project basis, which orders have accounted for a significant portion of our revenues
during any fiscal year. We expect to continue to depend upon project orders from these customers,
and a relatively small group of other customers, for a significant percentage of our revenues. The
loss of, or a significant decrease in, project orders from these customers would have a material
adverse effect on our revenues.
We depend on the U.S. Government for a material portion of our sales, and the loss of this
relationship or a shift in government funding could have adverse consequences on our business.
14% of our sales in fiscal 2005 were to the U.S. Government. Any significant disruption or
deterioration of our relationship with the U.S. Government could significantly reduce our revenues.
Our U.S. Government sales must compete with sales efforts
managed by other defense contractors for a limited number of programs and for uncertain levels of
funding. Our competitors continuously engage in efforts to expand their business relationships
with the U.S. Government and likely will continue these efforts in the future. The U.S. Government
may choose to use other defense contractors for its limited number of defense programs. In
addition, the funding of defense programs also competes with nondefense spending of the U.S.
Government. Budget decisions made by the U.S. Government are outside of our control and have
long-term consequences for our business. A shift in government defense
8
spending to other programs in which we are not involved, or a reduction in U.S. Government defense
spending generally, could have adverse consequences on our business.
We depend significantly on U.S. and foreign government contracts, which are only partially funded,
subject to immediate termination, and heavily regulated and audited.
The termination or failure to fund one or more U.S. or foreign government contracts could have
an adverse impact on our business. Over its lifetime, a government program may be implemented by
the award of many different individual contracts and subcontracts. The funding of government
programs in the U.S. is subject to Congressional appropriations. Although multi-year contracts may
be authorized in connection with major procurements, Congress generally appropriates funds on a
fiscal year basis even though a program may continue for several years. Consequently, programs
often receive only partial funding initially, and additional funds are committed only as Congress
makes further appropriations. The funding of government programs in foreign countries is similarly
subject to appropriations by the foreign countrys government. The termination of funding for a
government program would result in a loss of anticipated future revenues attributable to that
program. That could have an adverse impact on our operations. In addition, the termination of a
program or the failure to commit additional funds to a program that already has been started could
result in lost revenue. Under certain conditions, government contracts are subject to oversight
audits by government representatives. In addition, the contracts generally contain provisions
permitting termination, in whole or in part, without prior notice at the governments convenience
upon the payment of compensation only for work done and commitments made at the time of
termination. No assurance can be given that one or more of our government contracts will not be
terminated under these circumstances. Also, no assurance can be given that we would be able to
procure new government contracts to offset the revenues lost as a result of any termination of our
government contracts. Because a significant portion of our revenues are dependent on our
procurement, performance and payment under our government contracts, the loss of one or more large
contracts could have an adverse impact on our financial condition.
Our government business also is subject to specific procurement regulations and a variety of
socioeconomic and other requirements. These requirements, although customary in government
contracts, increase our performance and compliance costs. These costs might increase in the
future, thereby reducing our margins, which could have an adverse effect on our financial
condition. Failure to comply with these regulations and requirements could lead to suspension or
debarment, from government contracting or subcontracting for a period of time. Among the causes
for debarment are violations of various statutes, including those related to procurement integrity,
export control, government security regulations, employment practices, protection of the
environment, accuracy of records and recording of costs. The termination of a government contract
or relationship as a result of any of these acts would have an adverse impact on our operations and
could have an adverse effect on our reputation and ability to procure other government contracts in
the future.
Our future success will depend on our ability to develop new products that achieve market
acceptance.
Both our commercial and defense businesses are characterized by rapidly changing technologies
and evolving industry standards. Accordingly, our future performance depends on a number of
factors, including our ability to:
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identify emerging technological trends in our target markets; |
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develop and maintain competitive products; |
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enhance our products by adding innovative features that differentiate our products from those of our competitors; and |
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manufacture and bring cost-effective products to market quickly. |
We believe that, in order to remain competitive in the future, we will need to continue to
develop new products, which will require the investment of significant financial resources in new
product development. The need to make these expenditures could divert our attention and resources
from other projects, and our management cannot be sure that these expenditures ultimately will lead
to the timely development of new products. Due to the design complexity of some of our products,
we may experience delays in completing development and introducing new products in the future. Any
delays could result in increased costs of development or redirect resources from other projects.
In addition, we cannot provide assurances that the markets for our products will develop as we
currently anticipate. The failure of our products to gain market acceptance could reduce
significantly our revenues and harm our business. Furthermore, we cannot be sure that our
competitors will not develop competing products that gain market acceptance in
advance of our products or that our competitors will not develop new products that cause our
existing products to become obsolete. If we fail in our new product development efforts or our
products fail to achieve market acceptance more rapidly than those of our competitors, our revenues
will decline and our business, financial condition and results of operations will be adversely
affected.
Our international sales are subject to risks related to doing business in foreign countries.
9
39% of our revenues for fiscal 2005 were from international operations, under U.S. dollar
denominated contracts. Our international business may be subject to a variety of risks, including
equipment seizure, political instability, expropriation, nationalization, modification or
renegotiation of contracts, war and civil disturbances or other risks that may limit or disrupt
markets, 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, increased costs associated with
maintaining international marketing efforts, the introduction of non-tariff barriers and higher
duty rates and difficulties in enforcement of contractual obligations and intellectual property
rights. There can be no assurance that such factors will not have a material adverse effect on our
future international sales and, consequently, on our business, financial condition or results of
operations.
We operate in a competitive business.
We operate in a competitive business that is sensitive to changing technology. Although
successful product and systems development is not dependent necessarily on substantial financial
resources, most of our competitors are larger and can maintain higher levels of expenditures for
research and development than we can. Our competitors include large multinational communications
companies, as well as smaller companies with developing technology expertise. Our competitors for
U.S. Government contracts typically are large, technically competent firms with substantial assets.
Principal competitive factors in these businesses are cost-effectiveness, product quality and
reliability, technological capabilities, service and the ability to meet delivery schedules. No
assurance can be given that we will be able to compete successfully against our current or future
competitors or that the competitive pressures that we face will not result in reduced revenues and
market share.
10
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995, the Reform Act, provides a safe harbor
for forward-looking statements made by or on our behalf. We and our representatives may, from time
to time, make written or verbal forward-looking statements, including statements contained in our
filings with the Securities and Exchange Commission, including this
Annual Report on Form 10K-SB, and in our reports
to shareholders. Generally, the inclusion of the words believe, expect, intend, estimate,
anticipate, will, and similar expressions identify statements that constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and that are intended to come
within the safe harbor protection provided by those sections. All statements addressing operating
performance, events, or developments that we expect or anticipate will occur in the future,
including statements relating to sales growth, earnings or earnings per share growth, and market
share, as well as statements expressing optimism or pessimism about future operating results, are
forward-looking statements within the meaning of the Reform Act.
The forward-looking statements are and will be based upon our managements then-current views
and assumptions regarding future events and operating performance, and are applicable only as of
the dates of such statements. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise. By their nature,
all forward-looking statements involve risks and uncertainties. Actual results, including our
revenues, expenses, gross margins, cash flows, financial condition, and net income, as well as
factors such as our competitive position, the demand for our products and services and our customer
base, may differ materially from those contemplated by the forward-looking statements or those
currently being experienced by us for a number of reasons, including but not limited to risk
factors set forth above under Risk Factors.
The risk factors described beginning on page 5 are not exhaustive. We cannot assure you
that we have correctly identified and appropriately assessed all factors affecting our business or
that the publicly available and other information with respect to these matters is complete and
correct. Additional risks and uncertainties not presently known to us or that we currently believe
to be immaterial also may adversely impact us. Should any risks and uncertainties develop into
actual events, these developments could have material adverse effects on our business, financial
condition, and results of operations. For these reasons, we caution you not to place undue
reliance on our forward-looking statements.
ITEM 2. DESCRIPTION OF PROPERTIES
Lawn and Pest Control Services Segment
Middletons corporate headquarters, which are leased by Middleton, are located at 1900 33rd
Street, Orlando, FL 32839. Middleton is currently building a new corporate headquarters building
in Orlando, Florida, which should be complete by late 2005. Middleton leases all of its
22 branch offices used in its business. The following is a list of the district and branch
locations:
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Orlando District Office
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Daytona District Office
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Tampa District Office |
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Orlando, Florida
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Daytona Beach, Florida
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Tampa, Florida |
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Kissimmee, Florida
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Cocoa, Florida
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Lakeland, Florida |
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Longwood, Florida
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Orange City, Florida
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Winter Haven, Florida |
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Leesburg, Florida
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Palm Coast, Florida
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Clearwater, Florida |
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Clermont, Florida
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New Smyrna, Florida
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Sarasota, Florida |
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Gainesville, Florida
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Melbourne, Florida |
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Ocala, Florida
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Vero Beach, Florida |
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St. Augustine, Florida |
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Stuart, Florida |
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Jacksonville, Florida |
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11
High Frequency Radio Segment
Manufacturing, Sales and Administrative operations are conducted at 3005 S.W. Third Avenue,
Fort Lauderdale, Florida, 33315, within one concrete block building containing approximately 32,000
sq. ft. of floor space on approximately 1.6 acres of land, all of which is owned in fee simple by
us.
Telephone Communications Segment
Percipia
and Telecom each reside in leased office and warehouse space.
Percipia is located at 858 Morrison Road, Gahanna, OH, 43230 and
Telecom is located in the U.K. at 895 Plymouth Road, Scough,
Berkshire, SL1 4LP, U.K.
ITEM 3. LEGAL PROCEEDINGS
On November 21, 2005, a lawsuit was filed in Franklin County, Ohio, against Percipia and its
Chief Technology Officer, Hari Kesavan, claiming that Percipia interfered with employment
relationships with two individuals who were employed by the plaintiff, Halcyon Solutions, Inc. The
plaintiff seeks compensatory damages and punitive damages, each in excess of the presumptive
jurisdictional amount of $25,000, and attorneys fees and costs. Percipia and Mr. Kesavan deny any
improper conduct and contend that the claims asserted by the plaintiff are without merit and intend
to vigorously defend against such claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to the vote of security holders during the fourth quarter of fiscal
2005.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(a) The following table sets forth the high and low sale price of the Companys common stock as
traded on the American Stock Exchange under the symbol SNR.
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High |
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Low |
Year ended September 30, 2004 |
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First quarter |
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$ |
7.18 |
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$ |
3.80 |
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Second quarter |
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7.80 |
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5.60 |
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Third quarter |
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6.75 |
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5.10 |
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Fourth quarter |
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5.75 |
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4.40 |
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Year ended September 30, 2005 |
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First quarter |
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$ |
17.50 |
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$ |
4.51 |
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Second quarter |
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17.15 |
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11.60 |
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Third quarter |
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13.20 |
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8.90 |
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Fourth quarter |
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13.70 |
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6.79 |
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As of December 27, 2005, there were approximately 1,200 shareholders of record.
We have not paid a dividend on our common stock and anticipate that we will retain future
earnings, if any, to fund the development and growth of our business. Consequently, we do not
anticipate paying cash dividends on our common stock in the foreseeable future.
(b) The following table sets forth information, as of the end of fiscal year 2005, with respect to
the Companys compensation plan under which the Companys common stock is authorized for issuance:
12
Equity Compensation Plan Information
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Number of |
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securities |
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remaining available |
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for |
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Number of |
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future issuance |
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securities to |
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Weighted- |
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under |
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be issued upon |
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average |
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equity |
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exercise |
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exercise price of |
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compensation |
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of outstanding |
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outstanding |
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plans (excluding |
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options, |
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options, |
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securities reflected |
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warrants and |
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warrants and |
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in |
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rights |
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rights |
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column (a)) |
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Plan Category |
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(a) |
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(b) |
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(c) |
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Equity compensation plans approved by stockholders |
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10,475,836 |
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6.59 |
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545,831 |
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Equity compensation plans not approved by stockholders |
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0 |
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0 |
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0 |
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Total |
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10,475,836 |
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6.59 |
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545,831 |
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(c) Not Applicable
(d) Not Applicable
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
As discussed in Item 1. Business, with the recent acquisition of Middleton and the formation
of the Lawn and Pest Control Services segment, we no longer operate solely through our traditional
business segments. Furthermore, as we are able to grow the new Lawn and Pest Control Services
segment through acquisitions and, eventually through internal organic growth, it is contemplated
that this new segment will become our dominant operation. We plan to use funds from the sale of
common stock in the Private Placement to fund acquisitions that have operations in the lawn and
pest control services sector. Accordingly, if we are successful in implementing this strategy, it
will represent a fundamental shift in the nature of our business. In connection with this change
in business strategy, we intend to divest ourselves of certain non-core assets acquired in connection with
our purchase of: (i) Percipia; and (ii) the assets of Telecom.
Liquidity
For the fiscal year ended September 30, 2005, we had positive cash flow from operations of
$2,372,971 due to increases in reserves, accounts payable and accrued expenses. The primary reason
for these increases was due to the acquisitions made in the Lawn and
Pest Control Services segment. Accounts
receivable and prepaid and other current assets increased for the same reason.
Cash flows used by investing activities for the fiscal year ended September 30, 2005 were
$37,438,748 which consisted of costs incurred in the acquisition of Middleton and Four Seasons, less cash received in the acquisition of Middleton as well as the payment of the amount due
on the acquisition of Telecom in 2004 and the proceeds from the redemption of held-to-maturity
investments.
Cash flows provided by financing activities for the fiscal year ended September 30, 2005 were
$34,414,252 provided by proceeds from the sale of common stock to Coconut Palm, borrowing under a
line of credit for the asset purchase of Middleton, less the repayment of a portion of the line of
credit, and proceeds from the exercise of stock options.
During the fiscal year ended September 30, 2005, we had short term investments and cash or cash
equivalents more than adequate to cover known requirements, unforeseen events or uncertainties that
might occur. Our known requirements consist of normal operating expenses. During this twelve month
period, cash and cash equivalents had an average balance of $10,655,000 as opposed to an average
balance of $1,788,000 for the twelve months ending September 30, 2004. Cash equivalents are money
market funds that are readily available for immediate use should the occasion arise. It is
anticipated that we will remain as liquid during fiscal 2006. Our current ratio as of September
30, 2005 was 2.0 compared to 3.9 as of September 30, 2004.
We record reserves for inventory shrinkage and obsolescence, when considered necessary. For the
year just ended inventory shrinkage and obsolescence reserves increased $99,360 as compared to an
increase of $310,760 in 2004 due to a write down of obsolete and discontinued products. Accounts
receivable consist of balances due from sales. We monitor accounts receivable and provide
allowances when considered necessary. As of September 30, 2005, we established an allowance of
$144,194. As of September 30, 2004 we established an allowance of $48,485.
Non-cash interim reserves are maintained to cover items such as warranty repairs in process and
other charges that may be in dispute. No letters of credit involve foreign exchange.
Capital Resources
During the twelve months of fiscal 2005, $337,772 was spent for Capital Assets. These funds were
primarily used for leasehold improvements and equipment. No expenditures are contemplated for
extensive
13
maintenance in fiscal 2006. Liabilities consist of current accounts payable, accrued expenses
related to the current accounting period, customer deposits, and the current and long-term portion
of notes payable.
We have a revolving line of credit with a financial institution. The maximum credit limit is
$20,000,000. Interest is compounded daily based upon the London Interbank Offering Rate (LIBOR)
plus a variable percentage based on the leverage ratio. The interest rate at September 30, 2005 was
approximately 6%. 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 revolving line expires on June 7, 2007. The revolving line of credit requires us to maintain specified financial ratios regarding leverage, interest
coverage and EBITDA. The revolving line of credit also places certain restrictions on, among other things,
our 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.
The balance due on the line was $12,000,000 at September 30, 2005.
As of September 30, 2005, the amount available under the line of credit was $656,462.
Results of Operations
Fiscal Year Ended 2005 Compared to Fiscal Year Ended 2004
During fiscal 2005, sales of $31,451,770 were up 218.2% or $21,566,395 from fiscal 2004. Of those,
sales of $12,822,000 or 40.8% was attributed to the Lawn and Pest Control Services segment, all of
which occurred in the last 4 months of this fiscal year. $9,921,318 or 31.5% was attributed to the
High Frequency Radio segment, and $8,708,452 or 27.7% was attributed to the wholly owned
subsidiaries of Percipia and Telecom, in the Telephone Communications segment, which were acquired
in the fourth quarter of fiscal 2004. Sales in the High Frequency Radio segment are not recurring
businesses, and accordingly, are not expected to continue to grow at this rate in fiscal 2006. We
expect that sales in the High Frequency Radio segment will move back toward a more historical
revenue range in 2006.
Backlog of $4,542,000 was lower at September 30, 2005 compared to $7,208,000 at September 30, 2004.
due in part to the increase in sales in the High Frequency Radio segment, which temporarily
depleted backlog, offset by increases in backlog at Percipia.
Cost of sales was slightly higher at 67.5% of sales in fiscal 2005 as compared to 57.5% of sales in
fiscal 2004. This increase is primarily due to a change in product mix with decreased percentages
of system engineering and integration which carry lower overheads than manufacturing processes and
higher costs incurred by the Telephone Communications segment. Cost
of Sales for the Lawn and Pest Control Services segment
was $7,890,172 or 61.5%. The High Frequency Radio segment had cost of sales of $6,574,119 or 66.3%
and the Telephone Communications was $6,780,470 or 77.9%. Inventories increased 4.8% or $350,772 primarily
due to increases in inventories received from the acquisition of Middleton which
were greater than the reductions realized by the other segments. We continue our efforts to reduce
inventories to lower levels.
Selling, general and administrative expenses increased 264.7% or $7,273,322 due to the expenses
incurred by the newly created home office and overhead associated with increased legal expenses,
the acquisition of Middleton and Four Seasons in June and July of the current fiscal year
and Percipia and Telecom in the fourth quarter of fiscal 2004, and the amortization of customer
lists associated with our acquisition of Middleton and Four Seasons. Expenses continue to be
incurred for expanded market exposure and increased product applications.
Interest income increased $68,975 due to the short term investment of proceeds received from the
sale of stock. Interest expense was incurred on obligations incurred on the purchase of Middleton and for the establishment and use of the bank line of credit as discussed
below. Other income increased slightly as there was some activity in this area for fiscal 2005.
During 1995, it was determined that continued operations of its Interest Charge-Domestic
International Sales Corporation (IC-DISC) subsidiarys election was no longer advantageous to us.
Accordingly, the election of the subsidiary was discontinued and its retained earnings of
approximately $3,200,000 were distributed to us. Federal tax regulations provide for the taxation
of such distribution over a ten year period in equal annual increments. Utilizing the maximum tax
rates, the income tax consequences of such distribution will approximate $122,000 per year. No
interest is payable on this unpaid portion.
14
Concentration Risk
We at various times during the year maintain cash balances in excess of federally insured (FDIC)
limits. The uninsured balances were approximately $2,044,785 and $3,866,000 at September 30, 2005
and 2004, respectively.
Business Risk
We derive a portion of our revenue from international operations, under U.S. dollar denominated
contracts. Risks associated with operating in international markets include equipment seizure,
political instability, expropriation, nationalization, modification or renegotiation of contracts,
war and civil disturbances or other risks that may limit or disrupt markets.
Critical 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. We monitor accounts receivable and provide
allowances when considered necessary. As of September 30, 2005 and 2004, we established an
allowance of $144,194 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. We record reserves for inventory shrinkage and obsolescence, when considered
necessary. For the year just ended, inventory shrinkage and obsolescence reserves increased
$99,360.
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:
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Buildings and improvements
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10 to 30 years |
Machinery and equipment
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4 to 10 years |
15
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
We capitalize certain costs associated with software development in accordance with Statement of
Financial Accounting Standard #86 (FASB #86) Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed. We amortize costs for periods of 5 to 10 years, the estimated
economic life of the asset.
Customer Lists
Pursuant to the acquisition of Middleton, we recorded Customer lists as an intangible asset in the
amount of $10,500,000, which amount was determined pursuant to an independent third-party
appraisal. We are amortizing the Customer list over its estimated economic life of 8 years.
Pursuant
to the acquisition of Four Seasons by our subsidiary (Middleton), we recorded Customer lists as an intangible asset in the amount of $204,000.
We are amortizing the Customer list over its estimated economic life of 8 years.
Impairment of long-lived assets and long-lived assets to be disposed of
We review 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 years ended September 30, 2005 and 2004.
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
We expense advertising costs as incurred. Advertising expenses totaled approximately $1,230,226 and
$25,382 for the years ended September 30, 2005 and 2004, respectively.
Research and development
Expenditures for research and development are charged to operations as incurred. Total research and
development expenses amounted to approximately $176,000 and $425,000 for the years ended September
30, 2005 and 2004, respectively.
16
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. Foreign currency transaction gains and losses are included in other income and
expenses.
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 September 30, 2005,
accumulated other comprehensive income was comprised of cumulative foreign currency translation
adjustments.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, approximate fair value due to the short-term maturities of these assets and
liabilities. The fair market value of other financial instruments is provided by the use of quoted
market prices and other appropriate valuation techniques, based on information available at
year-end.
Income taxes
We account for income taxes using SFAS No. 109, Accounting for Income Taxes, which requires
recognition of deferred tax liabilities and assets for expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded for deferred tax assets if
it is more likely than not that some portion or all of the deferred tax assets will not be
realized.
Recent Accounting Pronouncements
In January 2003, the FASB issued Financial Interpretations (FIN) No. 46, Consolidation of Variable
Interest Entities, which requires the consolidation of, and disclosures about, variable interest
entities (VIEs). VIEs are entities for which control is achieved through means other than voting
rights. In December 2003, the FASB revised FIN No 46 to incorporate all decisions, including those
in previously issued FASB Staff Positions (FSP), into one Interpretation. The revised
Interpretation superseded the original Interpretation. We do not have any variable interest
entities as defined by FIN No. 46 and therefore the interpretation did not affect our financial
position, results of operations or cash flows.
In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 149 Amendment of Statement No. 133 on Derivative Instruments and Hedging
Activities, which is effective for all derivative and hedging activities initiated after June 30,
2003. We have no derivative or hedging activities. Therefore, the adoption of Statement No. 149 is
not expected to materially affect our financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 150 Accounting For Certain Financial Instruments with Characteristics of both
Liabilities and Equity, which is effective for all financial instruments after June 15, 2003.
Since we have no such financial instruments, the adoption of Statement No. 150 is not expected to
materially affect our financial statements.
In December 2004, the FASB issued SFAS No 123 (revised 2004), Share-Based Payment. SFAS No. 123 (R)
will require us to recognize compensation expense for all stock-based compensation in our
consolidated
17
statements of earnings. Pro forma disclosure will no longer be an alternative. SFAS No. 123 (R)
will also require the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow, as required under current
guidance. The new requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. This statement is effective for fiscal years beginning after June
15, 2005, with early adoption permitted. We expect to implement the new standard beginning with the
first quarter of fiscal 2006.
In November 2004 the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 amends the guidance in
Accounting Research Bulletin 43, Inventory Pricing, to clarify the accounting for abnormal amounts
of idle facility expenses, freight, handling costs and wasted material (spoilage) cost. SFAS No.
151 requires those items to be excluded from the cost of inventory and expensed when incurred. It
also requires that the allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years
beginning after June 15, 2005. We are still evaluating the impact of adopting SFAS No 151, but we
do not expect it to have a material impact on our consolidated results of operations or financial
position.
In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20
and FASB Statement No. 3. This Statement provides guidance on accounting for reporting of
accounting changes and error corrections. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the
statement to have a material effect on its financial statements.
18
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BERENFELD SPRITZER SHECHTER & SHEER
CERTIFIED PUBLIC ACCOUNTANTS
1551 SAWGRASS CORPORATE PARKWAY, SUITE 130
SUNRISE, FLORIDA 33323
TELEPHONE (954) 370-2727 FAX (954) 370-2776
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Audit Committee, Board of Directors
and Stockholders of Sunair Services Corporation
and Subsidiaries
Ft. Lauderdale, Florida
We have audited the accompanying consolidated balance sheets of Sunair Services
Corporation (a
Florida Corporation) and Subsidiaries as of September 30, 2005 and 2004 and the related
consolidated statements of income, stockholders equity and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards required that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Sunair Services Corporation and Subsidiaries as of
September 30, 2005 and 2004 and the results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United States of America.
Berenfeld Spritzer Shechter & Sheer
Certified Public Accountants
Sunrise, Florida
December 23, 2005
19
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30,
ASSETS
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,220,699 |
|
|
$ |
3,872,224 |
|
Accounts receivable, net |
|
|
4,983,714 |
|
|
|
3,080,875 |
|
Interest receivable |
|
|
14,488 |
|
|
|
108,013 |
|
Inventories |
|
|
7,609,727 |
|
|
|
7,258,955 |
|
Investments |
|
|
|
|
|
|
2,913,601 |
|
Deferred tax asset |
|
|
315,837 |
|
|
|
180,725 |
|
Prepaid and other current assets |
|
|
1,435,146 |
|
|
|
315,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
17,579,611 |
|
|
|
17,729,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT, AND EQUIPMENT, net |
|
|
2,321,008 |
|
|
|
703,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable |
|
|
334,986 |
|
|
|
405,590 |
|
Other assets |
|
|
80,393 |
|
|
|
|
|
Software costs, net |
|
|
3,938,402 |
|
|
|
3,955,513 |
|
Customer lists, net |
|
|
10,262,250 |
|
|
|
|
|
Goodwill |
|
|
43,599,379 |
|
|
|
852,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets |
|
|
58,215,410 |
|
|
|
5,213,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
78,116,029 |
|
|
$ |
23,647,029 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
20
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
4,630,304 |
|
|
$ |
1,501,864 |
|
Accrued expenses |
|
|
2,274,312 |
|
|
|
1,186,250 |
|
Customers deposits |
|
|
1,490,677 |
|
|
|
|
|
Unearned revenues |
|
|
181,216 |
|
|
|
115,857 |
|
Due to stockholder |
|
|
|
|
|
|
22,800 |
|
Capitalized leases, current portion |
|
|
41,561 |
|
|
|
33,585 |
|
Notes payable, current portion |
|
|
90,645 |
|
|
|
|
|
Income taxes payable |
|
|
|
|
|
|
212,688 |
|
Payable in connection with acquisition of Telecom FM |
|
|
|
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
8,708,715 |
|
|
|
4,573,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized leases, net of current portion |
|
|
6,712 |
|
|
|
|
|
Notes payable, net of current portion |
|
|
287,549 |
|
|
|
|
|
Note payable related party |
|
|
5,000,000 |
|
|
|
|
|
Revolving line of credit |
|
|
12,000,000 |
|
|
|
2,047,000 |
|
Deferred tax liability |
|
|
188,400 |
|
|
|
199,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long Term Liabilities |
|
|
17,482,661 |
|
|
|
2,246,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
26,191,376 |
|
|
|
6,819,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 10,186,377 and 4,006,620 shares
issued and outstanding at September 30, 2005
and 2004, respectively |
|
|
1,018,638 |
|
|
|
400,662 |
|
Additional paid-in-capital |
|
|
37,759,670 |
|
|
|
3,852,106 |
|
Retained earnings |
|
|
13,170,774 |
|
|
|
12,575,217 |
|
Translation adjustment |
|
|
(24,429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
51,924,653 |
|
|
|
16,827,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
78,116,029 |
|
|
$ |
23,647,029 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
21
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30,
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
SALES |
|
$ |
31,451,770 |
|
|
$ |
9,885,375 |
|
|
|
|
|
|
|
|
|
|
COST OF SALES |
|
|
21,244,761 |
|
|
|
5,685,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
10,207,009 |
|
|
|
4,200,153 |
|
|
|
|
|
|
|
|
|
|
SELLING AND ADMINISTRATIVE EXPENSES |
|
|
10,020,901 |
|
|
|
2,747,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
186,108 |
|
|
|
1,452,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
277,276 |
|
|
|
208,301 |
|
Interest expense |
|
|
(296,729 |
) |
|
|
(30,300 |
) |
Gain on disposal of assets |
|
|
11,362 |
|
|
|
|
|
Other income |
|
|
1,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses) |
|
|
(6,109 |
) |
|
|
178,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE BENEFIT (PROVISION)
FOR INCOME TAXES |
|
|
179,999 |
|
|
|
1,630,575 |
|
|
|
|
|
|
|
|
|
|
BENEFIT (PROVISION) FOR INCOME TAXES |
|
|
415,558 |
|
|
|
(500,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
595,557 |
|
|
$ |
1,130,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC |
|
$ |
0.08 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
DILUTED |
|
$ |
0.05 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC |
|
|
7,556,857 |
|
|
|
3,830,487 |
|
|
|
|
|
|
|
|
DILUTED |
|
|
11,478,074 |
|
|
|
3,919,127 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Accumulated |
|
|
Total |
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Other |
|
|
Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income |
|
|
Equity |
|
Balance at September 30, 2003 |
|
|
|
|
|
$ |
|
|
|
|
3,738,170 |
|
|
$ |
373,817 |
|
|
$ |
2,704,939 |
|
|
$ |
11,444,997 |
|
|
$ |
|
|
|
$ |
14,523,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in acquisition of
Percipia and Subsidiary |
|
|
|
|
|
|
|
|
|
|
190,000 |
|
|
|
19,000 |
|
|
|
978,500 |
|
|
|
|
|
|
|
|
|
|
|
997,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
78,450 |
|
|
|
7,845 |
|
|
|
168,667 |
|
|
|
|
|
|
|
|
|
|
|
176,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004 net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,130,220 |
|
|
|
|
|
|
|
1,130,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
4,006,620 |
|
|
|
400,662 |
|
|
|
3,852,106 |
|
|
|
12,575,217 |
|
|
|
|
|
|
|
16,827,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in acquisition of
Middleton |
|
|
|
|
|
|
|
|
|
|
1,028,807 |
|
|
|
102,881 |
|
|
|
9,897,119 |
|
|
|
|
|
|
|
|
|
|
|
10,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private placement |
|
|
|
|
|
|
|
|
|
|
5,000,000 |
|
|
|
500,000 |
|
|
|
24,500,000 |
|
|
|
|
|
|
|
|
|
|
|
25,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost associated with private
placement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(826,797 |
) |
|
|
|
|
|
|
|
|
|
|
(826,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
150,950 |
|
|
|
15,095 |
|
|
|
337,242 |
|
|
|
|
|
|
|
|
|
|
|
352,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,429 |
) |
|
|
(24,429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595,557 |
|
|
|
|
|
|
|
595,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 |
|
|
|
|
|
$ |
|
|
|
|
10,186,377 |
|
|
$ |
1,018,638 |
|
|
$ |
37,759,670 |
|
|
$ |
13,170,774 |
|
|
$ |
(24,429 |
) |
|
$ |
51,924,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
595,557 |
|
|
$ |
1,130,220 |
|
Adjustments to reconcile net income to
Net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
435,497 |
|
|
|
171,789 |
|
Amortization |
|
|
976,521 |
|
|
|
68,867 |
|
Deferred tax |
|
|
(145,712 |
) |
|
|
(188,725 |
) |
Translation adjustment |
|
|
(24,429 |
) |
|
|
|
|
Bad debt reserve |
|
|
160,381 |
|
|
|
48,485 |
|
Inventories reserve |
|
|
99,360 |
|
|
|
310,760 |
|
Gain on disposal of assets |
|
|
(11,362 |
) |
|
|
(2,041 |
) |
Unrealized losses on investments |
|
|
|
|
|
|
74,782 |
|
(Increase) decrease in Assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(499,412 |
) |
|
|
368,399 |
|
Interest receivable |
|
|
93,525 |
|
|
|
497 |
|
Inventories |
|
|
82,891 |
|
|
|
774,558 |
|
Prepaid and other current assets |
|
|
(767,203 |
) |
|
|
(123,006 |
) |
Note receivable |
|
|
|
|
|
|
8,406 |
|
Other assets |
|
|
(15,279 |
) |
|
|
|
|
Increase (decrease) in Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
1,626,886 |
|
|
|
(288,843 |
) |
Unearned revenue |
|
|
65,359 |
|
|
|
(29,249 |
) |
Income taxes payable |
|
|
(212,688 |
) |
|
|
(129,271 |
) |
Customer deposits |
|
|
(86,921 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By Operating Activities |
|
|
2,372,971 |
|
|
|
2,195,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant, and equipment |
|
|
(337,772 |
) |
|
|
(75,859 |
) |
Software development costs |
|
|
(517,660 |
) |
|
|
(159,681 |
) |
Costs incurred in acquisition of Percipia |
|
|
|
|
|
|
(841,510 |
) |
Cash acquired in acquisition of Percipia |
|
|
|
|
|
|
17,690 |
|
Cash paid for acquisition of Telecom FM |
|
|
(1,500,000 |
) |
|
|
|
|
Costs incurred in acquisition of Middleton Pest Control, Inc. |
|
|
(38,010,541 |
) |
|
|
|
|
Cash acquired in acquisition of Middleton Pest Control, Inc. |
|
|
1,377,035 |
|
|
|
|
|
Costs incurred in acquisition of Four Seasons, Inc. |
|
|
(1,423,760 |
) |
|
|
|
|
Notes and loans stockholder |
|
|
47,804 |
|
|
|
22,800 |
|
Proceeds from sale of trading securities |
|
|
|
|
|
|
1,502,041 |
|
Proceeds from redemption of held-to-maturity investments |
|
|
2,913,601 |
|
|
|
|
|
Proceeds from sale of property |
|
|
12,545 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By (Used In) Investing Activities |
|
|
(37,438,748 |
) |
|
|
465,481 |
|
|
|
|
|
|
|
|
24
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from line of credit |
|
|
17,000,000 |
|
|
|
1,947,700 |
|
Repayment of line of credit |
|
|
(7,047,000 |
) |
|
|
|
|
Repayment of notes payable |
|
|
(33,585 |
) |
|
|
(1,523,499 |
) |
Payment on capital leases |
|
|
(30,703 |
) |
|
|
|
|
Repayment of bank overdraft |
|
|
|
|
|
|
(411,773 |
) |
Proceeds from exercise of stock options |
|
|
352,337 |
|
|
|
176,512 |
|
Proceeds from sale of common stock, net |
|
|
24,173,203 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By Financing Activities |
|
|
34,414,252 |
|
|
|
188,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS |
|
|
(651,525 |
) |
|
|
2,850,049 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
|
3,872,224 |
|
|
|
1,022,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR |
|
$ |
3,220,699 |
|
|
$ |
3,872,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
|
$ |
400,000 |
|
|
$ |
510,000 |
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
296,728 |
|
|
$ |
30,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in acquisition of Middleton |
|
$ |
10,000,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Debt incurred in acquisition of Middleton |
|
$ |
5,000,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Common stock issued in acquisition of Percipia and Subsidiary |
|
$ |
|
|
|
$ |
997,500 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business activity
Sunair Services Corporation, formerly known as Sunair Electronics, Inc. (the Company) is a
Florida corporation organized in 1956. The Company is engaged in the design, manufacture, and sale
of high frequency single sideband communication systems utilized for long-range voice and data
transmissions in fixed station, airborne, mobile, and marine para-military applications. Sunair
International Sales Corp., a wholly owned subsidiary, accounts for all foreign sales.
Middleton
Pest Control, Inc. (Middleton), a Florida corporation, is
an indirect wholly owned subsidiary
which provides pest control, lawn and shrub care, subterranean and drywood termite control and
mosquito reduction services to both residential and commercial customers.
Percipia, Inc. and Subsidiary (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.
Capitalization
The Companys authorized capital
stock consists of 100,000,000 shares of common stock, $.10 par
value per share, and 8,000,000 shares of preferred stock, with no par value.
The Board of Directors has the authority, without action by the Companys stockholders, to provide
for the issuance of preferred stock in one or more classes or series and to designate the rights,
preferences and privileges of each class or series, which may be greater than the rights of the
common stock. There was no preferred stock outstanding as of September 30, 2005 and 2004.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of Sunair Services
Corporation and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of three months or
less to be cash equivalents.
Accounts receivable
Accounts receivable consist of balances due from sales. The Company monitors accounts receivable
and provides allowances when considered necessary. As of September 30, 2005 and 2004, the Company
established an allowance of $144,194 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.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of Significant Accounting Policies
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.
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 #86 (FASB #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 economic life of the asset.
Customer Lists
Pursuant to the acquisition of Middleton Pest Control, Inc. the Company recorded Customer lists 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 8 years.
Pursuant to the acquisition of Four Season Lawn and Pest Control Inc. by the companys subsidiary
(Middleton Pest Control, Inc.), the Company recorded Customer lists as an intangible asset in the
amount of $204,000. The Company is amortizing the Customer list over its estimated economic life 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 years ended September 30, 2005 and
2004.
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.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of Significant Accounting Policies (continued)
Revenue recognition
Service revenues are recorded when the services are performed. 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. Advertising expenses totaled approximately
$1,230,226 and $25,382 for the years ended September 30, 2005 and 2004, respectively.
Research and development
Expenditures for research and development are charged to operations as incurred. Total research and
development expenses amounted to approximately $176,000 and $425,000 for the years ended September
30, 2005 and 2004, respectively.
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. Foreign currency transaction gains and losses are included in other income and
expenses.
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 September 30, 2005,
accumulated other comprehensive income was comprised of cumulative foreign currency translation
adjustments.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, approximate fair value due to the short-term maturities of these assets and
liabilities. The fair market value of other financial instruments is provided by the use of quoted
market prices and other appropriate valuation techniques, based on information available at
year-end.
Concentration risk
The Company at various times during the year maintains cash balances in excess of federally insured
(FDIC) limits. The uninsured balances were approximately $2,044,785 and $3,866,000 at September 30,
2005 and 2004, respectively.
During the year ended September 30, 2004, the Company had sales to two customers which approximated
51 % of total sales. There was no material concentration for the year ended September 30, 2005.
Business Risk
The Company derives a portion of its revenue from international operations, under U.S. dollar
denominated contracts. Risks associated with operating in international markets include equipment
seizure, political instability, expropriation, nationalization, modification or renegotiation of
contracts, war and civil disturbances or other risks that may limit or disrupt markets.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of Significant Accounting Policies (continued)
Income taxes
The Company accounts for income taxes using SFAS No. 109, Accounting for Income Taxes, which
requires recognition of deferred tax liabilities and assets for expected future tax consequences of
events that have been included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. A valuation allowance is recorded for deferred tax
assets if it is more likely than not that some portion or all of the deferred tax assets will not
be realized.
Reclassification
Certain amounts in the prior period have been reclassified to conform to the 2005 presentation.
Recent Accounting Pronouncements
In January 2003, the FASB
issued Financial Interpretations (FIN) No. 46, Consolidation of Variable
Interest Entities, which requires the consolidation of, and disclosures about, variable interest
entities (VIEs). VIEs are entities for which control is achieved through means other than voting
rights. In December 2003, the FASB revised FIN No 46 to incorporate all decisions, including those
in previously issued FASB Staff Positions (FSP), into one Interpretation. The revised
Interpretation superseded the original Interpretation. 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 Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 149 Amendment of Statement No. 133 on Derivative Instruments and Hedging
Activities, which is effective for all derivative and hedging activities initiated after June 30,
2003. The Company has no derivative or hedging activities. Therefore, the adoption of Statement No.
149 is not expected to materially affect the Companys financial statements.
In May 2003,
the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 Accounting For Certain
Financial Instruments
with Characteristics of both Liabilities and Equity, which is effective for all financial
instruments after June 15, 2003. Since the Company has no such financial instruments, the adoption
of Statement No. 150 is not expected to materially affect the Companys financial statements.
In December 2004, the FASB issued SFAS No 123 (revised 2004), Share-Based Payment. SFAS No. 123 (R)
will require us to recognize compensation expense for all stock-based compensation in our
consolidated statements of earnings. Pro forma disclosure will no longer be an alternative. SFAS
No. 123 (R) will also require the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash flow, as required
under current guidance. The new requirement will reduce net operating cash flows and increase net
financing cash flows in periods after adoption. This statement is effective for fiscal years
beginning after June 15, 2005, with early adoption permitted. We expect to implement the new
standard beginning with the first quarter of fiscal 2006.
In November 2004 the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 amends the guidance in
Accounting Research Bulletin 43, Inventory Pricing, to clarify the accounting for abnormal amounts
of idle facility expenses, freight, handling costs and wasted material (spoilage) cost. SFAS No.
151 requires those items to be excluded from the cost of inventory and expensed when incurred. It
also requires that the allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years
beginning after June 15, 2005. We are still evaluating the impact of adopting SFAS No 151, but we
do not expect it to have a material impact on our consolidated results of operations or financial
position.
In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20
and FASB Statement No. 3. This Statement provides guidance on accounting for reporting of
accounting changes and error corrections. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not
expect the statement to have a material effect on its financial statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Acquisitions
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 July 1, 2004.
The following table sets forth the allocation of the purchase price to Percipias tangible and
intangible assets acquired and liabilities assumed as of July 1, 2004:
|
|
|
|
|
Cash |
|
$ |
17,690 |
|
A/R |
|
|
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 |
|
|
|
|
|
Acquisition of 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 telecommunications 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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Acquisitions (continued)
The following table set 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 principals of Telecom was accrued as a liability as of September 30, 2004
and subsequently paid off. Costs accrued in connection with the acquisition of $249,312 are
included in accrued expenses as of September 30, 2004.
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.
The following table sets forth the 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 |
|
|
1,439,821 |
|
Inventory |
|
|
516,129 |
|
Prepaid assets |
|
|
334,761 |
|
Fixed assets |
|
|
1,587,781 |
|
Other assets |
|
|
63,762 |
|
Customer list |
|
|
10,500,000 |
|
Goodwill |
|
|
41,788,649 |
|
Accounts payable |
|
|
(921,982 |
) |
Accrued liabilities |
|
|
(1,667,634 |
) |
Customer deposits |
|
|
(1,550,611 |
) |
Notes payable |
|
|
(457,170 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
53,010,541 |
|
|
|
|
|
On July 29, 2005 the Company, through Middleton,
entered into an Asset Purchase Agreement to acquire substantially all of the assets of Four Season
Lawn and Pest Control, Inc. for $1,423,760.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Acquisitions (continued)
Reporting Period
The accompanying consolidated financial statements for the year ended September 30, 2005 depict the
results of operations and cash flows of Sunair Services Corporation, Sunair International Sales
Corp., Percipia and Telecom for the twelve months ended September 30, 2005 and the results of
operations and cash flows of Middleton from June 1, 2005 (effective date of acquisition) to
September 30, 2005. The accompanying consolidated financial statements for the year ended September
30, 2004 depict the results of operations and cash flows of Sunair Services Corporation and Sunair
International Sales Corp. for the twelve months ended September 30, 2004 and the results of
operations and cash flows of Percipia from July 1, 2004 (effective date of acquisition) to
September 30, 2004 and of Telecom from September 1, 2004 (effective date of acquisition) to
September 30, 2004.
Pro-Forma Results of Operations
The following sets forth the Companys results of operations for the years ended September 30, 2005
and 2004 as if the acquisitions had taken place on October 1, 2004 and 2003, respectively.
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, |
|
|
2005 |
|
2004 |
Revenues |
|
$ |
52,714,365 |
|
|
$ |
45,266,148 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,578,102 |
|
|
$ |
3,796,832 |
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
0.74 |
|
Diluted |
|
$ |
0.13 |
|
|
$ |
0.73 |
|
3. Investments
Investments held-to-maturity included Private Export Funding Corporation (PEFCO) note at September
30, 2004 at its expected realizable value in the amount of $2,913,601. During 2005, the investment
was called at a price below its carrying value.
4. Inventories
Inventories consist of the following at September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Materials |
|
$ |
2,942,827 |
|
|
$ |
1,565,463 |
|
Work in progress |
|
|
3,533,734 |
|
|
|
4,117,503 |
|
Finished goods |
|
|
1,133,166 |
|
|
|
1,575,989 |
|
|
|
|
|
|
|
|
|
|
$ |
7,609,727 |
|
|
$ |
7,258,955 |
|
|
|
|
|
|
|
|
The Company records reserves for inventory shrinkage and obsolescence. Reserves for inventory
shrinkage and obsolescence amounted to $1,804,393 and $1,025,374 as of September 30, 2005 and 2004,
respectively.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Note receivable
As partial payment for goods and services delivered, a foreign government agency has issued a note
to one of the Companys customers. The note matures on April 15, 2007. The customer has assigned an
interest therein to the Company, valued at approximately $335,000 at September 30, 2005 and 2004,
respectively. Interest thereon is paid semi-annually at the rate of 9%. Interest receivable of $
$14,488 and $12,633, is included in interest receivable at September 30, 2005 and 2004,
respectively.
The Company at September 30, 2004 had a note receivable of $70,604 from an entity from which the
Companys wholly owned subsidiary, Percipia, Inc. was previously spun off. The note was collected
during the current year.
6. Property, plant and equipment
Property, plant and equipment consist of the following at September 30:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Land |
|
$ |
38,185 |
|
|
$ |
38,185 |
|
Building and improvements |
|
|
1,625,040 |
|
|
|
1,114,684 |
|
Machinery and equipment |
|
|
3,845,162 |
|
|
|
2,657,764 |
|
|
|
|
|
|
|
|
|
|
|
5,508,387 |
|
|
|
3,810,633 |
|
Accumulated Depreciation |
|
|
3,187,379 |
|
|
|
3,107,252 |
|
|
|
|
|
|
|
|
|
|
$ |
2,321,008 |
|
|
$ |
703,381 |
|
|
|
|
|
|
|
|
Depreciation expense consists of $435,497 and $171,789 during the years ended September 30,2005 and
2004, respectively.
7. Capital Leases
The Company is the lessee of equipment under capital leases expiring in various dates through 2008.
In conjunction therewith, the Company has capitalized the present value of the minimum lease
payments in the amount of $212,848. The net book value of assets under capital leases for the years
ended September 30, 2005 and 2004 was $92,905 and $13,137, respectively. Interest expense on the
capital leases amounted to $6,329 and $2,333 for the years end September 30, 2005 and 2004,
respectively.
Minimum future lease payments under capital leases as of September 30, 2005, are:
|
|
|
|
|
Year Ended September 30, |
|
Amount |
|
2006 |
|
$ |
43,963 |
|
2007 |
|
|
6,406 |
|
2008 |
|
|
1,008 |
|
|
|
|
|
Total minimum lease payments |
|
|
51,377 |
|
Less: Amount representing interest |
|
|
3,104 |
|
|
|
|
|
Present value of net minimum lease payment |
|
|
48,273 |
|
Less: Current portion |
|
|
41,561 |
|
|
|
|
|
Long-term portion |
|
$ |
6,712 |
|
|
|
|
|
8. Revolving Line of Credit
The Company has a revolving line of credit with a financial institution. The maximum credit limit
is $20,000,000. Interest is compounded daily based upon the London Interbank Offering Rate (LIBOR)
plus a variable percentage based on the leverage ratio. The interest rate at September 30, 2005 was
approximately 6%. The revolving line of credit has a commitment fee in the amount of .375% per
annum on the average daily unused amount of the aggregate revolving committed amount. The revolver
line expires on June 7, 2007. The balance due on the line was $12,000,000 at September 30, 2005
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Due to Stockholder
At September 30, 2004, the Company had a loan payable of $22,800 to a stockholder. The loan had no
stated interest rate and no maturity date. The loan was repaid during the current year.
10. Notes payable
Note payable with a financial institution for equipment purchases. The note bears interest at 5.25%
per annum, payable in monthly installments of principal and interest in the amount of $5,794
through September 29, 2008. Balances at September 30, 2005 and 2004, totaled $192,348 and $0,
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 September 30, 2005 and 2004, totaled $185,846
and $0, respectively.
Minimum future payments required under the above notes as of September 30, 2005, for each of the
next five years and in the aggregate are:
|
|
|
|
|
Year Ended September 30, |
|
Amount |
|
2006 |
|
$ |
90,645 |
|
2007 |
|
|
95,630 |
|
2008 |
|
|
100,609 |
|
2009 |
|
|
35,200 |
|
2010 |
|
|
37,223 |
|
Thereafter |
|
|
18,887 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
378,194 |
|
|
|
|
|
11. Notes payable related party
The company has a $5,000,000 subordinated note payable to a related party relating to the
acquisition of Middleton Pest Control, Inc. (See note 2). Interest is paid semi-annually at prime.
The note payable is due in full on June 7, 2010.
12. Income taxes
The components of the Companys income tax provision (benefit) for the years ended September 30 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
618,172 |
|
State |
|
|
|
|
|
|
70,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
689,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
|
(373,658 |
) |
|
|
(164,526 |
) |
State |
|
|
(41,900 |
) |
|
|
(24,199 |
) |
|
|
|
|
|
|
|
|
|
|
(415,558 |
) |
|
|
(188,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) |
|
$ |
(415,558 |
) |
|
$ |
500,355 |
|
|
|
|
|
|
|
|
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Income taxes (continued)
During 1995, it was determined that continued operations of the Companys Interest Charge-Domestic
International Sales Corporation (IC-DISC) subsidiarys tax election was no longer advantageous to
the Company. Accordingly, the election of the subsidiary was discontinued and its retained
earnings, of approximately $3,200,000, were distributed to the Company. Federal tax regulations
provide for the taxation of such distribution over a ten year period in equal annual increments.
Utilizing the maximum tax rates, the income tax consequence of such distribution will approximate
$122,000 per year. No interest is payable on this unpaid portion.
The total provisions for 2005 and 2004 vary from the amounts computed by applying the 34% statutory
rates to income before income taxes for the following reasons:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Income tax at the statutory
rates |
|
$ |
61,200 |
|
|
$ |
554,395 |
|
State income tax, net of
federal tax |
|
|
9,900 |
|
|
|
43,000 |
|
Intangibles |
|
|
(278,397 |
) |
|
|
|
|
Other book/tax differences |
|
|
(208,261 |
) |
|
|
(97,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(415,558 |
) |
|
$ |
500,355 |
|
|
|
|
|
|
|
|
As of September 30, 2005, the components of the deferred tax assets and liabilities consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Deferred |
|
|
|
|
|
|
Tax Liability |
|
|
Tax Asset |
|
|
Total |
|
|
|
Current
|
|
|
|
Net Operating loss carryover |
|
$ |
|
|
|
$ |
190,200 |
|
|
$ |
190,200 |
|
Allowance for doubtful accounts |
|
|
|
|
|
|
68,084 |
|
|
|
68,084 |
|
Tax/book basis of software costs |
|
$ |
|
|
|
|
42,500 |
|
|
$ |
42,500 |
|
Inventory reserve |
|
|
|
|
|
|
15,053 |
|
|
|
15,053 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
$ |
|
|
|
$ |
315,837 |
|
|
$ |
315,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current
|
|
|
|
Net Operating loss carryover |
|
|
|
|
|
$ |
943,000 |
|
|
$ |
943,000 |
|
Tax/book basis of software costs |
|
$ |
(1,131,400 |
) |
|
|
|
|
|
$ |
(1,131,400 |
) |
|
|
|
|
|
|
|
|
|
|
Total non-current |
|
$ |
(1,131,400 |
) |
|
$ |
943,000 |
|
|
$ |
(188,400 |
) |
|
|
|
|
|
|
|
|
|
|
The Companys wholly-owned subsidiary, Percipia has approximately $2,393,000 in net operating loss
carryforwards which expire beginning in 2021. The Tax Reform Act of 1986 imposed substantial
restrictions on the utilization of net operating losses and tax credits in the event of an
ownership change, as defined by the Internal Revenue Code. Federal and state net operating losses
are subject to limitations as a result of these restrictions.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. 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 fiscal year ended September 30, 2004, 78,450 stock options were exercised for $2.25 per
share. No options were granted during 2004.
During the fiscal year ended September 30, 2005, 150,950 stock options were exercised at an average
price of $2.33 per share. Options of 480,836 were granted at an average price of $8.65 per share.
Included in the 480,836 options granted was 226,667 options that were granted outside of the plan.
Stock option activity for the years ended September 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
Average |
|
|
Number |
|
|
Average |
|
|
|
of Shares |
|
|
Exercise Price |
|
|
of Shares |
|
|
Exercise Price |
|
Balances, beginning of year |
|
|
145,950 |
|
|
$ |
2.25 |
|
|
|
224,400 |
|
|
$ |
2.25 |
|
Granted |
|
|
480,836 |
|
|
$ |
8.65 |
|
|
|
|
|
|
$ |
|
|
Exercised |
|
|
(150,950 |
) |
|
$ |
2.33 |
|
|
|
(78,450 |
) |
|
$ |
(2.25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, end of year |
|
|
475,836 |
|
|
$ |
8.65 |
|
|
|
145,950 |
|
|
$ |
2.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding and exercisable at September 30, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
Exercise |
|
|
Number |
|
|
Average |
|
|
Average |
|
|
Number |
|
Price |
|
|
Outstanding |
|
|
Remaining Life |
|
|
Exercise Price |
|
|
Exercisable |
|
|
|
$ |
4.79 |
|
|
|
55,000 |
|
|
|
3 |
|
|
$ |
4.79 |
|
|
|
55,000 |
|
|
|
$ |
5.00 |
|
|
|
166,667 |
|
|
|
10 |
|
|
$ |
5.00 |
|
|
|
0 |
|
|
|
$ |
13.78 |
|
|
|
60,000 |
|
|
|
8 |
|
|
$ |
13.78 |
|
|
|
34,986 |
|
|
|
$ |
11.40 |
|
|
|
194,169 |
|
|
|
8 |
|
|
$ |
11.40 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8.65 |
|
|
|
475,836 |
|
|
|
7 |
|
|
$ |
8.65 |
|
|
|
89,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has elected to follow APB No. 25, Accounting for Stock Issued to Employees, and
related interpretations, in accounting for its employee stock options because, as discussed below,
the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based
Compensation, requires use of highly subjective assumptions in option valuation models. Under APB
No. 25, the exercise price of the Companys employee stock options are not materially less than
fair market price of the shares at the date of grant, therefore no compensation expense is
recognized in the financial statements. Pro forma information regarding net income and earnings per
share, determined as if the Company had accounted for its employee stock options under the fair
value method of SFAS No. 123, is required by that statement.
Options granted during 2005 and 2004 were valued at the date of grant using the Black-Scholes
option pricing model.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Stock options (continued)
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. The Companys employee
stock options have characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair value estimate. It is
managements opinion that the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
The amounts below represent the pro forma information calculated through use of the Black-Scholes
model. For purposes of pro forma disclosures, the estimated fair value of the options is amortized
to expense over the options vesting period. The per share weighted average fair value of stock
options granted during 2005 ranged from $2.87 to $9.51 on the date of grant with the following
weighted average assumptions: Volatility range from 57% 62%; expected dividend yield of 0%; risk
free interest rate ranging from 3.44% to 3.86%; and expected life ranging from 5 years to 8.25
years.
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Pro forma net income |
|
$ |
394,144 |
|
|
$ |
993,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.05 |
|
|
$ |
0.26 |
|
Diluted |
|
$ |
0.03 |
|
|
$ |
0.25 |
|
14. Private placement
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.
15. Employee benefits
The Company has a profit sharing and 401 (k) Plan. Under the Plan, eligible employees may
contribute up to 15% of their annual compensation. The Company may contribute to the Plan at the
discretion of the Board of Directors. During the years ended September 30, 2005 and 2004, the
Company contributed $82,453 and $32,000 respectively.
16. Operating leases
The Company leases office space under operating leases expiring in various years through 2012.
Certain leases provide for renewal options for periods from one to five years at their fair rental
value at the time of renewal. In the normal course of business, operating leases are generally
renewed or replaced by other leases.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Operating leases (continued)
Minimum future rental payments under non-cancelable operating leases as of September 30, 2005, for
each of the next 5 years and in the aggregate are:
|
|
|
|
|
Year Ended September 30, |
|
Amount |
|
2006 |
|
$ |
2,095,197 |
|
2007 |
|
|
1,630,580 |
|
2008 |
|
|
1,150,417 |
|
2009 |
|
|
802,142 |
|
2010 |
|
|
537,183 |
|
Thereafter |
|
|
652,567 |
|
|
|
|
|
Total minimum future rental payments |
|
$ |
6,868,086 |
|
|
|
|
|
Rent expense was $979,641 and $21,599 for the years ended September 30, 2005 and 2004,
respectively.
17. Earnings per share
Basic net income per share is computed using the weighted average number of shares outstanding
during the period. Diluted net income per share uses the weighted average of shares outstanding
during the period plus the additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. The Companys dilutive potential common shares
are for the stock options and warrants described in Notes 13 and 14.
Outstanding share information is as follows for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Weighted average common
shares outstanding (basic) |
|
|
7,556,857 |
|
|
|
3,830,487 |
|
|
|
|
|
|
|
|
|
|
Effect of options and warrants |
|
|
3,921,217 |
|
|
|
88,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding (diluted) |
|
|
11,478,074 |
|
|
|
3,919,127 |
|
|
|
|
|
|
|
|
18. Segment and geographic information
The Company manages its business and has segregated its activities into three business
segments, the design, manufacture, and sale of high frequency voice and data transmission
equipment, the sale, installation and maintenance of telephone communication systems, and pest
control, lawn and shrub care, subterranean and drywood termite control and mosquito reduction
services.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Segment and geographic information (continued)
Certain financial information for each segment is provided below as of September 30:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net revenues: |
|
|
|
|
|
|
|
|
Pest control |
|
$ |
12,822,000 |
|
|
$ |
|
|
Transmission equipment |
|
|
9,921,318 |
|
|
|
8,227,359 |
|
Telephone systems |
|
|
8,708,452 |
|
|
|
1,658,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
31,451,770 |
|
|
$ |
9,885,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Pest control |
|
$ |
910,146 |
|
|
$ |
|
|
Transmission equipment |
|
|
1,475,475 |
|
|
|
1,215,996 |
|
Telephone systems |
|
|
(644,054 |
) |
|
|
236,578 |
|
Unallocated home office expenses |
|
|
(1,555,459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
$ |
186,108 |
|
|
$ |
1,452,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable property plant and equipment: |
|
|
|
|
|
|
|
|
Pest control |
|
$ |
1,679,073 |
|
|
$ |
|
|
Transmission equipment |
|
|
472,849 |
|
|
|
563,827 |
|
Telephone systems |
|
|
169,086 |
|
|
|
139,554 |
|
|
|
|
|
|
|
|
Total identifiable property plant and
equipment |
|
$ |
2,321,008 |
|
|
$ |
703,381 |
|
|
|
|
|
|
|
|
Included in sales and cost of sales for the year ended September 30, 2005 are service and related
income and cost of sales-service in the amounts of $15,550,055 and $8,796,041 respectively. During
2004, these amounts were deemed immaterial.
Sales by geographic area, and to U.S. and foreign governmental agencies for the years ended
September 30 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Geographic area: |
|
|
|
|
|
|
|
|
United States |
|
$ |
18,544,519 |
|
|
$ |
6,058,549 |
|
Egypt |
|
|
28,404 |
|
|
|
1,700,000 |
|
Spain |
|
|
1,022,210 |
|
|
|
776,944 |
|
South Africa |
|
|
1,132,830 |
|
|
|
111,051 |
|
United Kingdom |
|
|
826,941 |
|
|
|
127,955 |
|
Canada |
|
|
60,528 |
|
|
|
259,237 |
|
Malaysia |
|
|
137,329 |
|
|
|
230,782 |
|
Germany |
|
|
268,655 |
|
|
|
83,463 |
|
Other |
|
|
9,430,354 |
|
|
|
537,394 |
|
|
|
|
|
|
|
|
|
|
$ |
31,451,770 |
|
|
$ |
9,885,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to U.S. governmental agencies |
|
$ |
6,429,171 |
|
|
$ |
1,428,897 |
|
|
|
|
|
|
|
|
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Litigation
On November 21, 2005, a lawsuit was filed against Percipia, Inc. (a Subsidiary of Sunair), claiming
that Percipia interfered with employment relationships with two individuals who were employed by
the plaintiff. As of November 21, 2005, the lawsuit was in the early stages and its outcome could
not be determined.
20. Subsequent event
The Company has entered into purchase agreements with
institutional and other accredited investors
for the private placement of its securities. Under the purchase agreements, investors have agreed
to purchase 2,857,146 shares of common stock and warrants to purchase
up to 1 million additional
shares of common stock at an exercise price of $6.30 per share. The
warrants are exercisable after 180 days from the date of issuance and will expire five years from
date of issuance. On December 16, 2005 the company completed the initial closing of $10.5 million
for 2,000,003 shares. The balance of 857,143 shares will be issued in a second
closing. The funds will be used to fund acquisitions, retire debt and for general purposes.
The Company through Middleton acquired
Pest Environmental, a pest control and termite services company located in Central Florida for a
preliminary purchase price of approximately $5,500,000.
Effective November 30, 2005, the majority shareholders approved the change in the Company name from
Sunair Electronics, Inc. to Sunair Services Corporation.
|
|
|
ITEM 8. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE |
None.
ITEM 8A. 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 Chief Financial Officer have concluded, based on their evaluation as of
September 30, 2005, that our disclosure controls and procedures are effective as of such date.
(b) Changes in Internal Control Over Financial Reporting. There have been no changes in our
internal control over financial reporting during the fiscal year ended September 30, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
40
PART III
|
|
|
ITEM 9. |
|
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT |
The items required by Part III, Item 9 are incorporated herein by reference from the
Registrants Proxy Statement for its 2005 Annual Meeting of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The items required by Part III, Item 10 are incorporated herein by reference from the
Registrants Proxy Statement for its 2005 Annual Meeting of Shareholders.
|
|
|
ITEM 11. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The items required by Part III, Item 11 are incorporated herein by reference from the
Registrants Proxy Statement for its 2005 Annual Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The items required by Part III, Item 12 are incorporated herein by reference from the
Registrants Proxy Statement for its 2005 Annual Meeting of Shareholders.
ITEM 13.EXHIBITS
|
|
|
|
|
(a)1.
|
|
Financial Statements filed as a
part of the Form 10-KSB Consolidated Balance Sheets as of
September 30, 2005 and 2004
|
|
Page 20 |
|
|
|
|
|
|
|
Statements of Consolidated Income for each of the two years in the period ended September 30, 2005
|
|
Page 22 |
|
|
|
|
|
|
|
Statements of stockholders equity for each of the two years in the period ended September 30, 2005
|
|
Page 23 |
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for each of the two years in the period ended September 30, 2005
|
|
Page 24 |
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Page 26 |
|
|
|
|
|
(a)2.
|
|
Financial Statement Schedules filed as part of the Form 10-KSB: |
|
|
|
|
|
|
|
|
|
Report on Financial Statements Schedules of Independent Public Accountants
|
|
Page 19 |
|
|
|
|
|
|
|
Other schedules are omitted because of the absence of conditions under which they are required
or because the required information is given in the financial statements or notes thereto. |
|
|
|
|
|
|
|
|
|
Separate financial statements of the Company are omitted because of the absence of the
conditions under which they are required. |
|
|
|
|
|
|
|
(a)3.
|
|
Exhibits |
|
|
|
|
|
Exhibit No. |
|
Exhibit Description |
2.1
|
|
Stock Purchase Agreement, dated as of August 6, 2004, by and among Sunair Electronics,
Inc, Michael Herman and Kesavan Haridas (incorporated by reference to the Current Report on
Form 8-K filed with the SEC on August 23, 2004) |
|
|
|
2.2
|
|
Asset Purchase Agreement by and among Sunair Communications, Limited, a private limited
company incorporated in England; Telecom FM, Limited, a private limited company incorporated
in England; and TFM Group Limited, a private limited company incorporated in England and the
sole shareholder of Telecom FM, Limited (incorporated by reference to the Current Report on
Form 8-K filed with the SEC on October 12, 2004) |
41
|
|
|
Exhibit No. |
|
Exhibit Description |
3.2
|
|
Articles of Amendment to the Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Form 10-Q filed with the SEC on May 16, 2005) |
|
|
|
3.3
|
|
Bylaws (incorporated by reference to Exhibit 3.2 to the Form 10-Q filed with the SEC on
May 16, 2005) |
|
|
|
4.1
|
|
First Tranche Warrant, dated February 8, 2005, issued by Sunair Electronics, Inc. to
Coconut Palm Capital Investors II, Ltd. (incorporated by reference to the Form 10-Q filed
with the SEC on May 16, 2005) |
|
|
|
4.2
|
|
Second Tranche Warrant, dated February 8, 2005, issued by Sunair Electronics, Inc. to
Coconut Palm Capital Investors II, Ltd. (incorporated by reference to the Form 10-Q filed
with the SEC on May 16, 2005) |
|
|
|
10.1
|
|
Purchase Agreement, dated November 17, 2004, by and between Sunair Electronics, Inc., a
Florida corporation, and Coconut Palm Capital Investors II, Ltd., a Florida limited
partnership (Incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on
November 17, 2005) |
|
|
|
10.2
|
|
Sunair Electronics, Inc. 2004 Stock Incentive Plan (Incorporated by reference to Annex D
to the Companys Proxy Statement filed with the SEC on January 18, 2005)* |
|
|
|
10.3
|
|
Management Services Agreement (Incorporated by reference to the Form 8-K filed with the
SEC on March 29, 2005) |
|
|
|
10.4 |
|
Form of Stock Option Agreement Executed by Each of the Persons Set Forth on Schedule I
Thereto (Incorporated by reference to the Form 8-K filed with
the SEC on March 29,
2005)* |
|
|
|
10.5
|
|
Form of Stock Option Agreement for the Companys 2004 Stock Incentive Plan (Incorporated
by reference to the Form 8-K filed with the SEC on March 29, 2005)* |
|
|
|
10.6
|
|
Stock Option Agreement with John J. Hayes (Incorporated by reference to Exhibit 10.3 to
the Form S-8 filed with the SEC on May 26, 2005)* |
|
|
|
10.7
|
|
Employment Agreement between Sunair Electronics, Inc. and John Hayes (incorporated by
reference to the Form 10-Q filed with the SEC on May 16, 2005)* |
|
|
|
10.8
|
|
Employment Agreement between Sunair Electronics, Inc. and James E. Laurent (incorporated
by reference to the Form 10-Q filed with the SEC on May 16, 2005)* |
|
|
|
10.9
|
|
Employment Agreement between Sunair Electronics, Inc. and Synnott B. Durham (incorporated
by reference to the Form 10-Q filed with the SEC on May 16, 2005)* |
|
|
|
10.10
|
|
Employment Agreement between Sunair Electronics, Inc. and Henry A. Budde (incorporated
by reference to the Form 10- Q filed with the SEC on May 16, 2005)* |
|
|
|
10.11
|
|
Stock Purchase Agreement by and Among the Sellers Named Therein and Sunair Southeast
Pest Holdings, Inc., dated as of June 7, 2005 (incorporated by reference to the Form 8-K
filed with the SEC on June 10, 2005) |
|
|
|
10.12
|
|
Employment Agreement between Sunair Southeast Pest Holdings, Inc. and Gregory Clendenin,
dated as of June 7, 2005 (incorporated by reference to the Form 8-K filed with the SEC on
June 10, 2005) |
|
|
|
10.13
|
|
Subordinated Promissory Note, dated as of June 7, 2005 (incorporated by reference to the
Form 8-K filed with the SEC on June 10, 2005) |
|
|
|
10.14
|
|
Credit Agreement among Sunair Electronics, Inc., its Domestic Subsidiaries from time to
time parties thereto, the Lenders parties thereto, and Wachovia Bank, National Association,
dated as of June 7, 2005 (incorporated by reference to the Form 8-K filed with the SEC on
June 10, 2005) |
|
|
|
23
|
|
Consent of Berenfeld Spritzer Shechter & Sheer |
|
|
|
31.1
|
|
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
42
|
|
|
Exhibit No. |
|
Exhibit Description |
32.1
|
|
Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Management Compensatory Plan |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The items required by Part III, Item 14 are incorporated herein by reference from the Registrants
Proxy Statement for its 2005 Annual Meeting of Shareholders.
43
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
SUNAIR SERVICES CORPORATION |
|
|
|
|
|
|
|
By:
|
|
/s/ John J. Hayes |
|
|
|
|
|
|
|
|
|
JOHN J. HAYES |
|
|
|
|
Chief Executive Officer and President |
|
|
|
|
|
|
|
Date
|
|
December 29, 2005 |
In accordance with the Exchange Act, this report has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
|
|
|
|
|
SIGNATURE |
|
TITLE |
|
DATE |
/s/ John J. Hayes
John J. Hayes
|
|
President and Chief
Executive Officer
(principal executive officer)
|
|
December 29, 2005 |
|
|
|
|
|
/s/ Synnott B. Durham
Synnott B. Durham
|
|
Chief Financial Officer and
Treasurer
(principal financial officer
and principal accounting
officer)
|
|
December 29, 2005 |
|
|
|
|
|
/s/ Joseph S. DiMartino
Joseph S. DiMartino
|
|
Director
|
|
December 29, 2005 |
|
|
|
|
|
/s/ Mario B. Ferrari
Mario B. Ferrari
|
|
Director
|
|
December 29, 2005 |
|
|
|
|
|
/s/ Arnold Heggestad, Ph.D.
Arnold Heggestad, Ph. D.
|
|
Director
|
|
December 29, 2005 |
|
|
|
|
|
/s/ Michael D. Herman
Michael D. Herman
|
|
Director
|
|
December 29, 2005 |
|
|
|
|
|
/s/ Steven P. Oppenheim
Steven P. Oppenheim
|
|
Director
|
|
December 29, 2005 |
|
|
|
|
|
/s/ Richard C. Rochon
Richard C. Rochon
|
|
Director
|
|
December 29, 2005 |
|
|
|
|
|
/s/ Charles P. Steinmetz
Charles P. Steinmetz
|
|
Director
|
|
December 29, 2005 |