Sunair Services Corporation
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2005
OR
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o |
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TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission file number I-4334
SUNAIR
SERVICES CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
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FLORIDA
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59-0780772 |
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(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
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(I.R.S. EMPLOYER
IDENTIFICATION NO.) |
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3005 SW THIRD AVE., FT. LAUDERDALE, FL
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33315 |
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(ADDRESS OR PRINCIPAL EXECUTIVE OFFICE)
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(ZIP CODE) |
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ISSUERS
TELEPHONE NUMBER (INCLUDING AREA CODE) (954) 525-1505 |
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NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
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
Registrants common stock par value 10 cents, outstanding as of February 14, 2006 13,060,559
shares.
Transitional Small Business Disclosure format. Yes o No þ
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
INDEX
*****
PAGE NO.
********
- 2 -
PART I. FINANCIAL INFORMATION
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
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12/31/05 |
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9/30/05 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
3,478,483 |
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$ |
3,220,699 |
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Accounts receivable, net |
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5,058,027 |
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4,983,714 |
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Interest receivable |
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6,009 |
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14,488 |
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Inventories |
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7,585,087 |
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7,609,727 |
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Deferred tax asset |
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431,781 |
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315,837 |
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Prepaid and other current assets |
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1,447,513 |
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1,435,146 |
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Total Current Assets |
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18,006,900 |
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17,579,611 |
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NOTE RECEIVABLE |
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334,986 |
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334,986 |
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PROPERTY, PLANT, AND EQUIPMENT, net |
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2,299,774 |
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2,321,008 |
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DEFERRED TAX ASSET |
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15,879 |
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OTHER ASSETS |
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Software
Costs, net |
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3,898,046 |
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3,938,402 |
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Customer List |
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10,189,750 |
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10,262,250 |
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Goodwill |
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49,121,311 |
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43,599,379 |
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Other Assets |
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99,937 |
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80,393 |
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Total Other Asset |
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63,309,044 |
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57,880,424 |
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TOTAL ASSETS |
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$ |
83,966,583 |
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$ |
78,116,029 |
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See accompanying notes.
- 3 -
PART I. FINANCIAL INFORMATION
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
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12/31/05 |
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9/30/05 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
5,297,688 |
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$ |
4,630,304 |
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Accrued expenses |
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1,903,447 |
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2,274,312 |
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Unearned revenues |
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262,696 |
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181,216 |
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Customer deposits |
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1,644,710 |
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1,490,677 |
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Capital leases, current portion |
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24,922 |
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41,561 |
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Notes payable, current portion |
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91,866 |
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90,645 |
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Total Current Liabilities |
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9,225,329 |
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8,708,715 |
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LONG TERM LIABILITY |
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Capitalized leases, net of current
position |
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6,712 |
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Notes payable, net of current position |
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274,124 |
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287,549 |
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Notes
payable related party |
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5,000,000 |
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5,000,000 |
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Revolving line of credit |
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8,500,000 |
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12,000,000 |
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Deferred tax liability |
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188,400 |
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Total Long Term Liabilities |
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13,774,124 |
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17,482,661 |
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Total Liabilities |
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22,999,453 |
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26,191,376 |
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STOCKHOLDERS EQUITY: |
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Preferred stock, no par value, 2,000,000
shares authorized, none issued and
outstanding |
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Common stock, $.10 par value, 25,000,000
shares authorized, 12,186,380, and
10,186,380 shares issued and outstanding at
December 31, 2005 and September 30, 2005
respectively |
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1,218,638 |
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1,018,638 |
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Additional paid-in-capital |
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47,017,185 |
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37,759,670 |
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Retained earnings |
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12,806,231 |
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13,170,774 |
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Translation adjustment |
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( 74,924 |
) |
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( 24,429 |
) |
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Total Stockholders Equity |
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60,967,130 |
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51,924,653 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
83,966,583 |
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$ |
78,116,029 |
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See accompanying notes.
- 4 -
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
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THREE MONTHS ENDED |
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12/31/05 |
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12/31/04 |
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SALES |
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$ |
12,965,990 |
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$ |
5,093,988 |
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COST OF SALES |
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5,272,295 |
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2,800,799 |
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GROSS PROFIT |
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7,693,695 |
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2,293,189 |
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SELLING GENERAL AND ADMINISTRATIVE EXPENSES |
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7,979,165 |
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1,790,515 |
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INCOME (LOSS) FROM OPERATIONS |
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(285,470 |
) |
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502,674 |
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OTHER INCOME (LOSS): |
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Interest income |
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16,668 |
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|
35,776 |
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Interest expense |
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(411,175 |
) |
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|
(19,882 |
) |
Other expense |
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(4,789 |
) |
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(6,846 |
) |
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Total Other
Income (Loss) |
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(399,296 |
) |
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9,048 |
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INCOME (LOSS) BEFORE BENEFIT (PROVISION)
FOR INCOME TAXES |
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(684,766 |
) |
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511,722 |
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BENEFIT (PROVISION) FOR INCOME TAXES |
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320,223 |
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(139,317 |
) |
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NET INCOME (LOSS) |
|
$ |
(364,543 |
) |
|
$ |
372,405 |
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NET INCOME (LOSS) PER COMMON SHARE: |
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BASIC |
|
$ |
(0.03 |
) |
|
$ |
0.09 |
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DILUTED |
|
$ |
(0.03 |
) |
|
$ |
0.09 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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BASIC |
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10,512,464 |
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|
4,008,055 |
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DILUTED |
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10,654,566 |
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4,105,592 |
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See accompanying notes.
- 5 -
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED |
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|
12/31/05 |
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12/31/04 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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|
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Net income
(loss) |
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$ |
(364,543 |
) |
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$ |
372,405 |
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Adjustments to reconcile net income
(loss) to |
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net cash provided by operating activities: |
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|
|
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Depreciation |
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202,734 |
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52,850 |
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Amortization |
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466,172 |
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|
79,719 |
|
Deferred taxes |
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(320,223 |
) |
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|
143,349 |
|
Translation adjustment |
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(50,495 |
) |
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|
67,236 |
|
Bad debt reserve |
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1,936 |
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Inventories reserve |
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(2,774 |
) |
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|
25,493 |
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Gain (loss) on disposal of assets |
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9,789 |
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(Increase) decrease in assets: |
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Accounts receivable |
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56,680 |
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|
990,930 |
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Interest receivable |
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|
8,479 |
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|
103,836 |
|
Inventories |
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|
93,889 |
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|
332,262 |
|
Prepaid and other current assets |
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|
(12,367 |
) |
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|
(587,708 |
) |
Other assets |
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(19,544 |
) |
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Increase (decrease) in Liabilities: |
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Accounts payable and accrued expenses |
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296,519 |
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(408,857 |
) |
Unearned revenue |
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|
81,480 |
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|
108,340 |
|
Income taxes payable |
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|
30,518 |
|
Customer deposits |
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(125,884 |
) |
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|
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Net Cash Provided By Operating Activities |
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|
321,848 |
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|
1,310,373 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of property, plant, and equipment |
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(161,289 |
) |
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|
(32,619 |
) |
Software development costs |
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(91,316 |
) |
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|
(124,273 |
) |
Cash paid for acquisition of Telecom FM |
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(1,500,000 |
) |
Cash paid for acquisition of Pest Environmental |
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(5,733,419 |
) |
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Proceeds from redemption of held-to-maturity investments |
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|
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|
2,913,601 |
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|
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Net Cash (Used In) Provided By Investing Activities |
|
$ |
(5,986,024 |
) |
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$ |
1,256,709 |
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|
See accompanying notes.
- 6 -
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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CASH FLOWS FROM FINANCING ACTIVITIES: |
|
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|
|
|
|
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|
|
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|
Repayment of line of credit |
|
$ |
(3,500,000 |
) |
|
$ |
(2,000,000 |
) |
Proceeds from exercise of stock options |
|
|
|
|
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|
18,563 |
|
Proceeds from the sale of common stock |
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|
10,500,000 |
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|
|
|
|
Costs associated with the sale of common stock |
|
|
(1,042,485 |
) |
|
|
|
|
Payment on capital leases |
|
|
(23,351 |
) |
|
|
|
|
Repayment of notes payable |
|
|
(12,204 |
) |
|
|
(5,505 |
) |
|
|
|
|
|
|
|
Net Cash Provided By (Used In) Financing Activities |
|
|
5,921,960 |
|
|
|
(1,986,942 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
AND CASH EQUIVALENTS |
|
|
257,784 |
|
|
|
580,140 |
|
|
|
|
|
|
|
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|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
3,220,699 |
|
|
|
3,872,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
3,478,483 |
|
|
$ |
4,452,364 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
|
$ |
|
|
|
$ |
125,000 |
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
406,497 |
|
|
$ |
18,930 |
|
|
|
|
|
|
|
|
See accompanying notes.
- 7 -
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. |
|
Basis of Consolidated Financial Statement Presentation |
|
|
|
The accompanying unaudited consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange Commission
and in accordance with the instructions to Form 10-QSB and do not include all the
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with accounting principles generally accepted in the
United States of America. The information furnished in the interim financial statements
includes normal recurring adjustments and reflects all adjustments, which, in the
opinion of management, are necessary for a fair presentation of such financial
statements. For further information refer to the consolidated financial statements and
footnotes thereto included in the Companys most recent audited consolidated financial
statements and notes thereto included in its September 30, 2005 annual report on Form
10-KSB. Operating results for the three months ended December 31, 2005 are not
necessarily indicative of the results that may be expected for the
fiscal year ending September
30, 2006. |
|
2. |
|
Significant Accounting Policies |
|
|
|
Use of Estimates |
|
|
|
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those estimates. |
|
|
|
Accounts Receivable |
|
|
|
Accounts receivable consist of balances due from sales. The Company monitors accounts
receivable and provides allowances when considered necessary. As of December 31, 2005
and September 30, 2005, the Company established an allowance of $298,200 and $144,194
respectively. |
|
|
|
Investments |
|
|
|
Certain investments that management has the intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion of discounts that
are recognized in interest income using the interest method over the period to maturity. |
|
|
|
Marketable and debt securities which management has classified as trading are carried at
fair value with net unrealized gains and losses reported in operations. Realized gains
and losses on marketable equity and debt securities are recognized upon sale using the
specific identification method. |
|
|
|
Inventories |
|
|
|
Inventories, which consist of raw materials, work-in-process, and finished goods, are
stated at the lower of cost or market value, cost being determined using the first in,
first out method. Fixed and variable manufacturing costs and overhead are included in
the carrying values of finished goods and work-in-process. The Company records reserves
for inventory shrinkage and obsolescence, when considered necessary. For the three
months ended December 31, 2005 inventory shrinkage and obsolescence reserves decreased
$2,774. |
- 8 -
|
|
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 SFAS No. 86 (FASB No. 86) Accounting for the
costs of computer software to be sold, leased, or otherwise marketed. The Company
amortizes costs over 10 years, the estimated useful life of the asset.
Customer List
Pursuant to the acquisition of Middleton Pest Control, Inc., the Company recorded
Customer List as an intangible asset in the amount of $10,500,000, which amount was
determined pursuant to an independent third-party appraisal. The Company is amortizing
the Customer List over its estimated economic life of eight years.
Pursuant
to the acquisition of Four Seasons Lawn and Pest Control, Inc. by the
Companys subsidiary (Middleton), the Company recorded
Customer List as an intangible asset in the amount of $204,000. The
Company is amortizing
Customer List over its estimated economic life of 8 years.
Pursuant
to the acquisition of Spa Creek Services, LLC D/B/A Pest
Environmental by the Companys subsidiary (Middleton), the
Company
recorded Customer List as an intangible asset in the amount of
$262,000. The Company is
amortizing 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 exceeds the fair value. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less costs to
sell. There were no assets impaired during the first three months ended December 31,
2005.
- 9 -
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
In
the High Frequency Radio and Telephone Communications segments, 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.
In the Lawn and Pest Control Services segment, sales revenues are
recorded when services are rendered. Interest and dividends earned on investments are recorded when earned.
Advertising Costs
The Company expenses advertising costs as incurred.
Research and Development
Expenditures for research and development are charged to operations as incurred.
Foreign Currency Translation
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 December 31, 2005 and September 30, 2005, accumulated other comprehensive
income was comprised of cumulative foreign currency translation adjustments.
- 10 -
3. |
|
Acquisitions |
|
|
|
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 preliminary allocation of the purchase price to
Middletons tangible and intangible assets acquired and liabilities assumed as of May
31, 2005: |
|
|
|
|
|
Cash |
|
$ |
1,377,035 |
|
Accounts receivable |
|
|
1,504,821 |
|
Inventory |
|
|
546,129 |
|
Prepaid assets |
|
|
662,565 |
|
Fixed assets |
|
|
1,587,781 |
|
Other assets |
|
|
63,762 |
|
Customer list |
|
|
10,500,000 |
|
Goodwill |
|
|
40,297,345 |
|
Accounts payable |
|
|
(590,377 |
) |
Accrued liabilities |
|
|
(930,739 |
) |
Customer deposits |
|
|
(1,550,611 |
) |
Notes payable |
|
|
(457,170 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
53,010,541 |
|
|
|
|
|
Acquisition of Four Seasons Lawn and Pest Control, Inc.
On July 29, 2005 the Company, through Middleton, entered into an Asset Purchase
Agreement to acquire substantially all of the assets of Four Seasons Lawn and Pest
Control, Inc. for $1,423,760.
Acquisition
of Spa Creek Services, LLC.
On December 16, 2005, Middleton entered into a definitive Asset Purchase Agreement by
and among Middleton and Spa Creek Services, LLC, D/B/A Pest Environmental, a Delaware limited liability company (Spa Creek), to acquire substantially all
the assets and assumed certain liabilities of Spa Creek for $5,500,000.
In addition, the Company incurred $233,419 of transaction costs consisting of legal and
accounting fees.
- 11 -
The following table sets forth the preliminary allocation of the purchase price to Spa
Creek tangible and intangible assets acquired and liabilities assumed as of December 16,
2005:
|
|
|
|
|
Goodwill |
|
$ |
5,521,932 |
|
Customer list |
|
|
262,000 |
|
AR |
|
|
132,929 |
|
Inventory |
|
|
66,475 |
|
PPE |
|
|
30,000 |
|
Customer deposits |
|
|
(279,917 |
) |
|
|
|
|
Total |
|
$ |
5,733,419 |
|
|
|
|
|
Pro-Forma Results Of Operations
The following sets forth the Companys results of operations for the three months ended
December 31, 2005 as if the acquisitions had taken place on October 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Revenues |
|
$ |
13,721,294 |
|
|
$ |
14,076,797 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
(393,493 |
) |
|
$ |
277,624 |
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(.04 |
) |
|
$ |
.07 |
|
Diluted |
|
$ |
(.04 |
) |
|
$ |
.07 |
|
- 12 -
4. |
|
Inventories |
|
|
|
Inventories consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
12/31/05 |
|
|
9/30/05 |
|
Materials |
|
$ |
1,699,149 |
|
|
$ |
2,942,827 |
|
Work In Progress |
|
|
4,446,674 |
|
|
|
3,533,734 |
|
Finished Goods |
|
|
1,439,264 |
|
|
|
1,133,166 |
|
|
|
|
|
|
|
|
|
|
$ |
7,585,087 |
|
|
$ |
7,609,727 |
|
|
|
|
|
|
|
|
5. |
|
Earnings Per Common Share |
|
|
|
Basic earnings per share amounts are computed by dividing the net income by the weighted
average number of common shares outstanding. Diluted earnings per share amounts are
computed by dividing net income by the weighted average number of shares of common
stock, common stock equivalents, and stock options outstanding during the period. |
|
6. |
|
Preferred Stock |
|
|
|
At December 31, 2005, the Company had 8,000,000 authorized shares of preferred
stock, no par value, that may be issued at such terms and provisions as determined by
the board of directors. None are outstanding. |
|
7. |
|
Stock Options |
|
|
|
During the fiscal year ended September 30, 2005, the shareholders approved the
cancellation of the Stock Option Plan, previously adopted by the shareholders at the
January 24, 2004 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 employees and non-employee
directors. The
option price, numbers of shares and grant date are determined at the discretion of the
Companys board of directors. |
|
|
|
During the quarter ended December 31, 2005, 105,000 stock options were granted at
a price of $5.60 per share. |
|
|
|
On January 27, 2006, the Company completed the sale of its securities to investors in
a private placement pursuant to purchase agreements, dated December 15, 2005, by and
among the Company and the investors of our common stock named therein (the Purchase
Agreements). Pursuant to the Purchase Agreements, the Company agreed to sell up to
an aggregate of 2,857,146 shares of its common stock at a price per share of $5.25 and
warrants to purchase 1,000,000 shares of its common stock (the Private Placement) at
an exercise price of $6.30 (subject to adjustment). The sale and issuance of the
securities closed in two tranches. The first closing was completed on December 16,
2005, pursuant to which the Company issued and sold an aggregate of 2,000,003 shares
of its common stock and warrants to purchase 700,000 shares of its common stock. The
second closing was completed on January 27, 2006, pursuant to which the Company sold
an additional 857,143 shares of its common stock and warrants to purchase 300,000
shares of its common stock. |
|
8. |
|
Segment Information |
|
|
|
Certain financial information for each segment is provided below as of December
31: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net revenues: |
|
|
|
|
|
|
|
|
Lawn and Pest Control Services |
|
$ |
9,456,794 |
|
|
$ |
|
|
High Frequency Radio |
|
|
1,740,404 |
|
|
|
2,534,507 |
|
Telephone Communications |
|
|
1,768,792 |
|
|
|
2,559,481 |
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
12,965,990 |
|
|
$ |
5,093,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Lawn and Pest Control Services |
|
$ |
1,066,330 |
|
|
$ |
|
|
High Frequency Radio |
|
|
294,919 |
|
|
|
281,845 |
|
Telephone Communications |
|
|
(355,022 |
) |
|
|
229,877 |
|
Unallocated home office expenses |
|
|
(1,690,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
$ |
(684,766 |
) |
|
$ |
511,722 |
|
|
|
|
|
|
|
|
- 13 -
9. |
|
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 FASB issued SFAS 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 FASB issued SAFS 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 the Company to recognize compensation expense for all stock-based
compensation in its 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 beginning with the first
quarterly or annual reporting period of the fiscal year beginning on or after December
15, 2005. |
|
|
|
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. The Company is still evaluating the impact of
adopting SFAS No 151, but it does not
expect it to have a material impact on its consolidated results of operations or
financial position. |
|
|
|
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement
of APB Opinion No. 20 and FASB Statement No. 3. This Statement provides guidance on
accounting for reporting of accounting changes and error corrections. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company does not expect the statement to have a
material effect on its financial statements. |
- 14 -
Item 2. Managements Discussion And Analysis Or Plan Of Operation
Cautionary Statement Regarding Forward Looking Information:
Some of the statements in this quarterly report, including those that contain the words
anticipate, believe, plan, estimate, expect, should, intend and other similar
expressions, are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Those forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance or achievements or
those of our industry to be materially different from any future results, performance or
achievements expressed or implied by those forward-looking statements. Among the factors that could
cause actual results, performance or achievement to differ materially from those described or
implied in the forward-looking statements are general economic conditions, competition, potential
technology changes, changes in or the lack of anticipated changes in the regulatory environment in
various countries, the risks inherent in new product and service introductions and the entry into
new geographic markets and other factors included in our filings with the Securities and Exchange
Commission (the SEC). Copies of our SEC filings are available from the SEC or may be obtained
upon request from us. We do not undertake any obligation to update the information contained
herein, which speaks only as of this date.
General:
Sunair 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.
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
Season Lawn and Pest Control, Inc. for approximately $1.4 million in cash. In addition, on
December 20,
- 15 -
2005,
Middleton acquired Spa Creek Services, LLC D/B/A Pest Environmental
(Spa Creek), a pest control and termite services
company located in Central Florida for a purchase price of approximately $5.5 million
in cash.
On January 27, 2006, we completed the sale of our securities to investors in a private placement
pursuant to purchase agreements, dated December 15, 2005, by and among us and the investors of 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 securities closed in two tranches. The first closing was completed
on December 16, 2005, pursuant to which 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. The second closing was
completed on January 27, 2006, pursuant to which we sold 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.
Liquidity:
For the quarter ended December 31, 2005, we had positive cash flow from operations of $321,848 due
to increases in depreciation and amortization and decreases due to
deferred taxes, 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. Cash flow from operations
was negatively impacted by our net loss of $(364,543).
Cash flows used by investing activities for the quarter ended December 31 2005 were $5,986,024
which consisted primarily of costs incurred in the acquisition of Spa Creek. Costs were also
incurred in the purchase of property, plant and equipment as well as software development costs.
Cash flows provided by financing activities for the quarter ended December 31, 2005 were $5,921,960
provided by proceeds from the sale of common stock, less the repayment of a portion of the line of
credit and costs associated with the sale of common stock.
During the quarter ended December 31, 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 three month
period, cash and cash equivalents had an average balance of $3,350,000 as opposed to an average
balance of $4,162,000 for the three months ending December 31, 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 December 31,
2005 was 2.0 compared to 2.0 as of September 30, 2005.
We record reserves for inventory shrinkage and obsolescence, when considered necessary. For the
quarter just ended inventory shrinkage and obsolescence reserves decreased $2,774 as compared to an
increase of $25,493 for the same period one year ago due to a decrease in the 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 December 31,
2005, we established an allowance of $298,200. As of December 31, 2004 we established an allowance
of $48,485.
- 16 -
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 first quarter of fiscal 2006, $161,289 was spent for Capital Assets. These funds were
primarily used for leasehold improvements and equipment. No expenditures are contemplated for
extensive 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 December 31, 2005 was
approximately 7.25%. 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 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 revolver
line expires on June 7, 2007. The balance due on the line was
$8,500,000 at December 30, 2005.
Results of Operations:
First Quarter of Fiscal 2006 Compared to First Quarter of Fiscal 2005
During the first quarter ended December 31, 2005, sales of $12,965,990 were up 154.5% or $7,872,002
from the same quarter one year ago. Of those, sales of $9,456,794 or 72.9% was attributed to the
new Lawn and Pest Control Services segment. $1,740,404 or 13.4% was attributed to the High
Frequency Radio segment, and $1,768,792 or 13.6% was attributed to the wholly owned subsidiaries of
Percipia and Telecom, in the Telephone Communications segment.
Sales in the High Frequency Radio segment are non-recurring, and because we completed fewer
contracts in the first quarter of fiscal 2006 than in the first quarter of fiscal 2005, sales in
this segment decreased to $1,740,404 in the first quarter of fiscal 2006 from $2,534,507 in the
first quarter of fiscal 2005.
Sales in the Telephone Communications segment decreased to $1,768,792 in the first quarter of
fiscal 2006 from $2,559,481 in the first quarter of fiscal 2005 due to customer returns to Telecom
of defective equipment. Telecom returned the defective equipment to the manufacturer for
replacement. The defect has been corrected and normal shipments by Telecom are expected to
commence at the beginning of the third quarter of fiscal 2006.
Backlog for the High Frequency Radio and Telephone Communications segments of $3,222,000 was lower
at December 31, 2005 compared to $6,537,000 at December 31, 2004, due in part to the decrease in
sales in the High Frequency Radio segment, which temporarily depleted backlog, offset by increases
in backlog at Percipia.
Cost of sales was lower at 40.7% of sales in the first quarter of fiscal 2006 as compared to 55.0%
of sales in the first quarter of fiscal 2005. This decrease is primarily due to the addition of
the Lawn and Pest Control Services segment which has lower costs than the High Frequency Radio and
Telephone Communications segments. Cost of sales for the Lawn and Pest Control Services segment
was $3,091,756 or 32.7%. Cost of sales for the High Frequency Radio segment was
$1,072,069 or 61.6% and cost of sales for the Telephone Communications segment was $1,108,470 or
62.7%. Inventories increased 9.9% or $683,887 from the same period one year ago primarily due to
increases in inventories received from the acquisitions in the Lawn and Pest Control Services
segment 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 345.6% or $6,188,650 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 Lawn and Pest Control, Inc. in June and July of
fiscal 2005 and Spa Creek in the first quarter of fiscal 2006, and the amortization of customer
lists associated with our acquisition of Middleton, Four Seasons Lawn and Pest Control, Inc. and
Spa Creek. Expenses continue to be incurred for expanded market exposure and increased product
applications.
Interest income decreased $19,108 due to funds used for investments in the Lawn and Pest Control
Services segment. Interest expense was incurred on obligations incurred on the purchase of
Middleton and for the establishment and use of the line of credit.. Other income decreased slightly
as there was reduced activity in this area for fiscal 2006.
For the first quarter of fiscal 2006, we incurred net loss of $(364,543) as compared to net income
of $372,405 for the first quarter of fiscal 2005 for the reasons described above.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The term disclosure controls and procedures
is defined in Rule 13a 15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This
term refers to the controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files under the Exchange
Act is recorded, processed, summarized and reported within required time periods. Our Chief
Executive Officer and our Chief Financial Officer have concluded, based on their evaluation as of
December 31, 2005, that our disclosure controls and procedures are effective.
(b) Changes in internal control over financial reporting. There have been no changes in our
internal control over financial reporting during the quarter ended December 31, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
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 December 31, 2005, the lawsuit
was in the early stages and its outcome could not be determined.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Effective November 30, 2005, shareholders of the Company approved an amendment to the
Companys Articles of Incorporation to change the name of the Company from Sunair
Electronics, Inc. to Sunair Services Corporation. The action was taken by written
consent in lieu of a meeting. Shareholders holding 69.2% of the outstanding shares of
common stock executed the written consent.
Item 5. Other Information
None.
Item 6. Exhibits
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31.1 |
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Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
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31.2 |
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Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
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32.1 |
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Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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32.2 |
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Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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SIGNATURES
Pursuant to the requirements of the securities and exchange act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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SUNAIR SERVICES CORPORATION |
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Date February 14, 2006
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/S/ John J. Hayes |
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John J. Hayes, President |
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and Chief Executive Officer |
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Date February 14, 2006
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/S/ Synnott B. Durham |
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Synnott B. Durham, |
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Chief Financial Officer |
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