Sunair Services Corporation
 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 16, 2005
SUNAIR SERVICES CORPORATION
 
(Exact name of registrant as specified in its charter)
         
Florida   1-04334   59-0780772
         
(State or Other Jurisdiction
of Incorporation)
  (Commission
File Number)
  (I.R.S. Employer
Identification No.)
3005 Southwest Third Avenue
Fort Lauderdale, Florida 33315
(Address of Principal Executive Office) (Zip Code)
(954) 525-1505
(Registrant’s telephone number, including area code)
Not Applicable
(Former Name or Former Address, If Changed Since Last Report.)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2 (b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4 (c))
 
 

 


 

Section 9 — Financial Statements and Exhibits
Item 9.01 Financial Statements and Exhibits.
On December 16, 2005, Middleton Pest Control, Inc., an indirect wholly-owned subsidiary of the Registrant, acquired substantially all of the assets of Spa Creek Services, LLC, a Delaware limited liability company d/b/a Pest Environmental (“Spa Creek”).
This Current Report on Form 8-K/A contains the information required by Item 9.01 of Form 8-K relating to the acquisition of Spa Creek.
(a)   Financial Statements of Business Acquired.
 
    The financial statements of Spa Creek are attached as Exhibit A to this Current Report on Form 8-K/A.
 
(b)   Pro Forma Financial Information.
 
    The pro forma financial information relating to the Spa Creek acquisition are attached as Exhibit B to this Current Report on Form 8-K/A.
 
(c)   Shell company Transactions.
 
    Not applicable.
 
(d)   Exhibits.
 
    Not applicable.

2


 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
         
  SUNAIR SERVICES CORPORATION
 
 
Date: February 28, 2006  By:   /s/ SYNNOTT B. DURHAM    
    Synnott B. Durham   
    Chief Financial Officer   
 

3


 

EXHIBIT A
SPA CREEK SERVICES, LLC
AUDITED FINANCIAL STATEMENTS

CONTENTS
         
    Page  
INDEPENDENT AUDITORS’ REPORT
    1  
 
       
BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003
    2  
 
       
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31 2004 AND 2003
    4  
 
       
STATEMENTS OF MEMBERS’ DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
    5  
 
       
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
    6  
 
       
NOTES TO FINANCIAL STATEMENTS
    7  


 

INDEPENDENT AUDITORS’ REPORT
To the Board of Directors
Spa Creek Services, LLC
Brooksville, Florida
We have audited the accompanying balance sheets of Spa Creek Services, LLC (a Delaware Limited Liability Company) as of December 31, 2004 and 2003 and the related statements of operations, members’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in all material respects, the financial position of Spa Creek Services, LLC as of December 31, 2004 and 2003, 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.
/s/ Berenfeld Spritzer Shechter & Sheer
January 30, 2006
Sunrise, Florida

-1-


 

SPA CREEK SERVICES, LLC
BALANCE SHEETS
AS OF DECEMBER 31,
ASSETS
                 
  2004     2003  
CURRENT ASSETS:
       
 
Cash and cash equivalents
  $ 666,991     $ 32,109  
Accounts receivable, net
    112,339       62,860  
Inventories
    36,642       34,792  
Prepaid and other current assets
    33,758       35,441  
 
           
 
               
Total Current Assets
    849,730       165,202  
 
           
 
               
Property, plant and equipment, net
    242,235       364,950  
 
           
 
               
OTHER ASSETS
               
 
               
Note receivable
    123,660        
 
               
Non-compete agreements, net
    1,436,906       1,080,220  
 
               
Goodwill
    2,769,534       1,955,503  
 
           
 
               
Total Other Assets
    4,330,100       3,035,723  
 
           
 
               
TOTAL ASSETS
  $ 5,422,065     $ 3,565,875  
 
           
The accompanying notes are an integral part of these financial statements.

-2-


 

SPA CREEK SERVICES, LLC
BALANCE SHEETS
AS OF DECEMBER 31,
LIABILITIES AND MEMBERS’ DEFICIT
                 
  2004     2003  
CURRENT LIABILITIES:
         
 
Accounts payable
  $ 31,062       17,764  
Accrued expenses
    331,126       186,019  
Customer deposits
    264,925       378,859  
Notes payable, current portion
    107,685       1,000  
Notes payable — related party
    6,183,755       4,127,105  
 
           
 
               
Total Current Liabilities
    6,918,553       4,710,747  
 
           
 
               
Notes payable, net of current portion
    349,501       30,000  
 
           
 
               
Total Liabilities
    7,268,054       4,740,747  
 
           
 
               
MEMBERS’ DEFICIT:
               
 
               
Contributed capital
    500,000       391,650  
Accumulated deficit
    (2,345,989 )     (1,566,522 )
 
           
 
               
Total Members’ Deficit
    (1,845,989 )     (1,174,872 )
 
           
 
               
TOTAL LIABILITIES AND MEMBERS’ DEFICIT
  $ 5,422,065     $ 3,565,875  
 
           
The accompanying notes are an integral part of these financial statements.

-3-


 

SPA CREEK SERVICES, LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
                 
    2004     2003  
SALES
  $ 4,657,186     $ 3,011,281  
 
               
COST OF SALES
    1,450,557       870,523  
 
           
 
               
GROSS PROFIT
    3,206,629       2,140,758  
 
               
SELLING AND ADMINISTRATIVE EXPENSES
    3,919,481       2,746,593  
 
           
 
               
LOSS FROM OPERATIONS
    (712,852 )     (605,835 )
 
           
 
               
OTHER INCOME (EXPENSES):
               
Interest income
    2,242       883  
Interest expense
    (83,027 )     (65,925 )
Gain (loss) on disposal of asset
    7,670       (1,705 )
Other income
    6,500       773  
 
           
Total Other Expenses
    (66,615 )     (65,974 )
 
           
 
               
NET LOSS
  $ (779,467 )   $ (671,809 )
 
           
The accompanying notes are an integral part of these financial statements.

-4-


 

SPA CREEK SERVICES, LLC
STATEMENTS OF MEMBERS’ DEFICIT
YEARS ENDED DECEMBER 31, 2004 AND 2003
                         
 
  CONTRIBUTED   ACCUMULATED   MEMBERS’
 
  CAPITAL   DEFICIT   DEFICIT
 
                 
BALANCE, DECEMBER 31, 2002
  $ 358,500     $ (894,713 )   $ (536,213 )
 
                       
CASH CONTRIBUTIONS
  33,150       33,150
 
                       
NET LOSS — DECEMBER 31, 2003
          (671,809 )     (671,809 )
 
                 
 
                       
BALANCE, DECEMBER 31, 2003
    391,650       (1,566,522 )     (1,174,872 )
 
                       
CASH CONTRIBUTIONS
    108,350             108,350  
 
                       
NET LOSS — DECEMBER 31, 2004
          (779,467 )     (779,467 )
 
                 
 
                       
BALANCE, DECEMBER 31, 2004
  $ 500,000     $ (2,345,989 )   $ (1,845,989 )
 
                 
The accompanying notes are an integral part of these financial statements.

-5-


 

SPA CREEK SERVICES, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
                 
    2004     2003  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net loss
  $ (779,467 )     (671,809 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation
    109,252       104,224  
Amortization
    506,238       311,644  
Bad debt reserve
    29,000        
(Gain)/Loss on disposals
    (7,670 )     1,705  
(Increase) Decrease in Assets:
               
Accounts receivable
    135,957       8,077  
Inventories
    9,023       (4,782 )
Prepaid and other current assets
    1,684       2,862  
Increase (Decrease) in Liabilities:
               
Accounts payable and accrued expenses
    158,405       101,870  
Customer deposits
    (132,776 )     3,769  
 
           
Net Cash Provided By (Used In)Operating Activities
    29,646       (142,440 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property, plant, and equipment
    (31,974 )     (67,549 )
Cash paid for acquisition of pest control companies
    (1,507,062 )     (144,947 )
Proceeds from sale of property
    106,009       51,657  
 
           
Net Cash Used In Investing Activities
    (1,433,027 )     (160,839 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of note payable
    (126,737 )      
Repayment of line of credit
          (215,000 )
Proceeds from notes payable
    2,056,650       516,850  
Proceeds from contributed capital
    108,350       33,150  
 
           
Net Cash Provided By Financing Activities
    2,038,263       335,000  
 
           
 
               
NET INCREASE IN CASH AND CASH EQUIVALENTS
    634,882       31,721  
 
               
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    32,109       388  
 
           
 
               
CASH AND CASH EQUIVALENTS, END OF YEAR
  $ 666,991     $ 32,109  
 
           
 
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during the year for interest
  $ 3,927     $ 1,590  
 
           
 
               
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
The Company acquired assets in various acquisitions as follows:
               
Fair value of assets acquired
  $ 1,964,248     $ 175,947  
Cash paid for the assets
    (1,507,062 )     (144,947 )
 
           
Liabilities incurred
  $ 457,186     $ 31,000  
 
           
The accompanying notes are an integral part of these financial statements.

-6-


 

SPA CREEK SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business activity
Spa Creek Services, LLC, a Delaware limited liability company d/b/a Pest Environmental (the “Company”), provides pest control, lawn and shrub care, subterranean and drywood termite control and mosquito reduction services to both residential and commercial customers in Central Florida.
Basis of Presentation
The Company has prepared the financial statements in accordance with accounting principles generally accepted in the United States of America.
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 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 consists of balances due from sales. The Company monitors accounts receivable and provides allowances when considered necessary. As of December 31, 2004 and 2003, the Company established an allowance of $79,000 and $50,000, respectively.
Inventories
Inventories are stated at the lower of cost or market value, cost being determined using the first in, first out method.
Property, plant, and equipment
Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. The estimated useful lives used to compute depreciation are as follows:
     
Furniture, fixtures and equipment
  5 to 7 years
Leasehold improvements and vehicles
  5 years
The cost of maintenance and repairs is charged to expense as incurred; renewals and betterments are capitalized. When properties are retired or otherwise disposed of, the cost of such properties and the related accumulated depreciation are removed from the accounts. Any profit or loss is credited, or charged to income.

-7-


 

SPA CREEK SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 December 31, 2004 and 2003.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash.
The Company maintains cash balances at one financial institution. The accounts at this financial institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. From time to time, the Company had cash in financial institutions in excess of federally insured limits. As of December 31, 2004 and 2003, the company had cash in excess of FDIC limits of $562,437 and $0, respectively.
Income Taxes
The Company exists as a Limited Liability Company and is taxed as a partnership. In lieu of partnership income taxes, under the Internal Revenue Code the partners are taxed on their proportionate shares of the Company’s taxable income. Therefore, the accompanying financial statements do not contain provisions or liabilities for federal and state income taxes.
Revenue recognition
Sales revenues are recorded at the time services are performed. Generally, pest control customers sign an initial one year contract, and the Company defers recognition of these payments and recognizes the revenue as services are performed.
Advertising costs
The Company expenses advertising costs as incurred. Advertising expenses totaled approximately $348,770 and $218,664 for the years ended December 31, 2004 and 2003, respectively.
Fair value of financial instruments
The Company’s financial instruments consist primarily of cash, accounts receivable, accounts payable, accrued liabilities and loans and notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair values due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.

-8-


 

SPA CREEK SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 — ACQUISITIONS
During the years ended December 31, 2004 and 2003, the Company entered into Asset Purchase Agreements to acquire substantially all of the assets of various pest control businesses in order to expand their market area.
The following table sets forth the allocation of the net purchase price of tangible and intangible assets acquired and sold and liabilities assumed as of December 31, 2004 and 2003:
                 
    2004     2003  
Goodwill
  $ 814,031     $ 73,223  
Non-compete agreements
    862,926       102,724  
Accounts Receivable
    259,095        
Inventory
    10,874        
Property, plant and equipment
    36,164        
Customer deposits
    (18,842 )      
 
           
 
               
Total
  $ 1,964,248     $ 175,947  
 
           
NOTE 3 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31:
                 
    2004     2003  
Furniture, fixtures and equipment
  $ 201,728     $ 194,391  
Leasehold improvements
    52,525       44,266  
Vehicles
    182,900       283,891  
 
           
 
    437,153       522,548  
 
Accumulated Depreciation
    194,918       157,598  
 
           
 
  $ 242,235     $ 364,950  
 
           
Depreciation expense consists of $109,252 and $104,224 during the years ended December 31, 2004 and 2003, respectively.
NOTE 4 — GOODWILL AND OTHER ASSETS
Intangibles consist primarily of goodwill and non-compete agreements, which are related to businesses acquired. Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. As of December 31, 2004 and 2003, the carrying amount of goodwill was $2,769,534 and $1,955,503, respectively.

-9-


 

SPA CREEK SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 4 — GOODWILL AND OTHER ASSETS (CONTINUED)
Pursuant to the acquisition of various pest control businesses, the Company recorded the Non-Compete Agreements as intangible assets. The Company is amortizing Non-Compete Agreements over their estimated economic life of 5 years. The carrying amount and accumulated amortization for the Non-Compete Agreements are as follows:
                 
    2004     2003  
Non-Compete Agreements
  $ 2,512,820     $ 1,649,894  
Accumulated Amortization
    1,075,914       569,674  
 
           
 
  $ 1,436,906     $ 1,080,220  
 
           
NOTE 5 — NOTES PAYABLE
As part of the acquisitions, the Company incurred various promissory notes. The balance outstanding due to these acquisitions for the years ended December 31, 2004 and 2003 totaled $457,186 and $31,000, respectively. Interest rates on promissory notes vary from non-interest bearing to 7.5% per annum. To reflect the time value of money on the non-interest bearing notes, the liability recorded in the financial statements reflects future payments discounted at an imputed rate of 4%. The promissory notes mature at various years through 2009.
The Company also entered into promissory notes with related parties to fund the operations of the company. The notes bear interest at 2% per annum and are due on demand and therefore classified as current liabilities on the accompanying balance sheets. The balance outstanding on the promissory notes for the years ended December 31, 2004 and 2003 was $6,183,755 and $4,127,105, respectively.
Maturities of notes payable as of December 31, 2004 were as follows:
         
Year ended December 31, 2005
  $ 6,291,440  
2006
    102,966  
2007
    107,077  
2008
    80,584  
2009
    58,874  
 
     
Total notes payable
  $ 6,640,941  
 
     

-10-


 

SPA CREEK SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 6 — SUBSEQUENT EVENT
On December 16, 2005, Spa Creek Services, LLC entered into a definitive Asset Purchase Agreement to sell substantially all of their assets and certain liabilities to Middleton Pest Control, Inc. for $5,500,000 cash.

-11-


 

EXHIBIT B
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
CONTENTS
         
    Page
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
    1  
 
       
COMBINING BALANCE SHEET AS OF SEPTEMBER 30, 2005
    2  
 
       
COMBINING STATEMENTS OF OPERATIONS FOR THE
YEAR ENDED SEPTEMBER 30, 2005
    3  
 
       
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
    4  

 


 

SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information gives effect to the acquisition of Spa Creek Services, LLC d/b/a Pest Environmental (“Spa Creek”).
On December 16, 2005 (“Effective Date”), the Registrant, Sunair Services Corporation (“Sunair”) completed an acquisition (the “Acquisition”), through its indirect wholly owned-subsidiary Middleton Pest Control, Inc. (“Middleton”), of substantially all the assets and assumption of certain liabilities of Spa Creek. The Acquisition was consummated pursuant to the terms and provisions of an Asset Purchase Agreement dated as of December 16, 2005. The consideration paid by Middleton consisted of cash of $5,500,000 at the day of closing.
The unaudited pro forma condensed combined balance sheet gives effect to the Acquisition as if it had occurred on October 1, 2004. The unaudited pro forma combined statements of operations for the year ended September 30, 2005 gives effect to the Acquisition as if it had occurred at the beginning of the earliest period presented.
The pro forma condensed combined financial information should be read in conjunction with the Company’s Form 10-KSB for the year ended September 30, 2005, as well as the Company’s unaudited Form 10-QSB for the quarter ended December 31, 2005 and the related notes included in this Current Report on Form 8-K/A.
We are providing the pro forma financial information for illustrative purposes only. The results may have been different had these transactions actually occurred during the periods presented. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have been achieved had the transactions actually occurred during the periods presented or the future results that Sunair will experience. The unaudited pro forma condensed combining statements of operations do not give effect to any cost savings or operating synergies expected to result from the acquisition and divestiture or the costs to achieve such cost savings or operating synergies.

-1-


 

SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
COMBINING BALANCE SHEET
September 30, 2005
                                                 
    Sunair and                             See Note 3        
    Subsidiaries     Spa Creek     Combined     Pro-forma     Pro-forma     Pro-forma  
    Historical     Services, LLC     Total     Adjustments     Adjustments     Combined  
ASSETS
                                               
 
                                               
Cash and cash equivalents
  $ 3,220,699     $ 649,669     $ 3,870,368     $ 9,457,515       1          
 
                            (5,733,419 )     2          
 
                            (649,669 )     3     $ 6,944,795  
Accounts receivables, net
    4,983,714       108,572       5,092,286       (108,572 )     3          
 
                            132,929       2       5,116,643  
Interest receivable
    14,488             14,488                     14,488  
Inventories
    7,609,727       54,246       7,663,973       (54,246 )     3          
 
                            66,475       2       7,676,202  
Deferred tax asset
    315,837             315,837                     315,837  
Prepaid and other current assets
    1,435,146       21,580       1,456,726       (21,580 )     3       1,435,146  
Property, plant and equipment, net
    2,321,008       124,846       2,445,854       (124,846 )     3          
 
                            30,000       2       2,351,008  
Notes receivables
    334,986       32,976       367,962       (32,976 )     3       334,986  
Other assets
    80,393       14,766       95,159       (14,766 )     3       80,393  
Non-compete, net
          996,227       996,227       (996,227 )     3        
Software costs, net
    3,938,402             3,938,402                     3,938,402  
Customer lists, net
    10,262,250             10,262,250       262,000       2       10,524,250  
Goodwill
    43,599,379       2,769,534       46,368,913       (2,769,534 )     3          
 
                      5,521,932       2       49,121,311  
 
                                     
Total Assets
  $ 78,116,029     $ 4,772,416     $ 82,888,445     $ 4,965,016             $ 87,853,461  
 
                                     
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
 
                                               
Accounts payable
  $ 4,630,304     $ 13,649     $ 4,643,953     $ (13,649 )     3     $ 4,630,304  
Accrued expenses and other liabilities
    2,274,312       343,306       2,617,618       (298,306 )     3       2,319,312  
Deferred tax liability
    188,400             188,400       (122,638 )     3       65,762  
Unearned revenues
    181,216             181,216                     181,216  
Customer deposits
    1,490,677       257,427       1,748,104       (257,427 )     3          
 
                            279,917       2       1,770,594  
Bank line of credit
    12,000,000             12,000,000                     12,000,000  
Due to shareholder
                                     
Loan from parent
                                     
Notes payable and capital leases
    5,426,467       6,292,270       11,718,737       (6,292,270 )     3       5,426,467  
 
                                     
 
                                               
Total Liabilities
    26,191,376       6,906,652       33,098,028       (6,704,373 )             26,393,655  
 
                                               
Common Stock
    1,018,638             1,018,638       200,000       1       1,218,638  
Additional Paid in Capital
    37,759,670             37,759,670       9,257,515       1       47,017,185  
Member’s Capital
          500,000       500,000       (500,000 )     3        
Retained earnings (deficit)
    13,170,774       (2,634,236 )     10,536,538       2,711,874       3       13,248,412  
 
                                               
Translation adjustment
    (24,429 )           (24,429 )                   (24,429 )
 
                                     
Total Stockholders’ Equity
    51,924,653       (2,134,236 )     49,790,417       11,669,389               61,459,806  
 
                                     
Total Liabilities and Stockholders’ Equity
  $ 78,116,029     $ 4,772,416     $ 82,888,445     $ 4,965,016             $ 87,853,461  
 
                                     
The accompanying notes are an integral part of these financial statements.

-2-


 

SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
COMBINING STATEMENTS OF OPERATIONS
September 30, 2005
                                                 
    Sunair and                             See Note 3        
    Subsidiaries     Spa Creek     Combined     Pro-forma     Pro-forma     Pro-forma  
    Historical     Services, LLC     Total     Adjustments     Adjustments     Combined  
Revenues
  $ 31,451,770     $ 3,583,615     $ 35,035,385     $             $ 35,035,385  
 
                                               
Cost of revenues
    21,244,761       413,053       21,657,814                     21,657,814  
 
                                     
 
                                               
Gross Profit
    10,207,009       3,170,562       13,377,571                     13,377,571  
 
                                               
Selling, general and administrative expenses
    10,020,901       3,658,012       13,678,913       45,000       3       13,723,913  
 
                                     
 
                                               
Income (loss) from operations
    186,108       (487,450 )     (301,342 )     (45,000 )             (346,342 )
Other income (expenses)
    (6,109 )     20,998       14,889                     14,889  
 
                                     
 
                                               
Income (loss) before provision for income taxes
    179,999       (466,452 )     (286,453 )     (45,000 )             (331,453 )
 
                                               
Benefit for income taxes
    415,558             415,558       122,638       3       538,196  
 
                                     
 
                                               
NET INCOME (LOSS)
  $ 595,557     $ (466,452 )   $ 129,105     $ 77,638             $ 206,743  
 
                                     
 
                                               
Pro-forma net income per common share:
                                               
Basic
  $ 0.08                                     $ 0.03  
 
                                           
Diluted
  $ 0.05                                     $ 0.02  
 
                                           
 
                                               
Weighted average of pro-forma shares outstanding:
                                               
Basic
    7,556,857                                       7,556,857  
 
                                           
Diluted
    11,478,074                                       11,478,074  
 
                                           
The accompanying notes are an integral part of these financial statements.

-3-


 

SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
NOTE 1 — BASIS OF PRESENTATION
     The accompanying unaudited pro forma condensed combined financial information has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading.
NOTE 2 — ASSET PURCHASE AGREEMENT
     On December 16, 2005, Middleton Pest Control, Inc. (“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 assume certain liabilities of Spa Creek for $5,500,000. In addition, Sunair Services Corporation (“Sunair”) incurred $233,419 of transaction costs consisting of legal, accounting and brokerage fees.
     The following table sets forth the preliminary allocation of the purchase price of Spa Creek’s tangible and intangible assets acquired and liabilities assumed as of December 16, 2005:
         
Goodwill
  $ 5,521,932  
Customer list
    262,000  
Accounts receivable
    132,929  
Inventory
    66,475  
Property, plant and equipment
    30,000  
Customer deposits
    (279,917 )
 
     
Total
  $ 5,733,419  
 
     
NOTE 3 — PRO FORMA ADJUSTMENTS
  1.   To reflect the issuance and sale of 2,000,003 shares of common stock in the first tranche of a private placement for a total of $10,500,016 less $1,042,501 in closing costs to complete the acquisition of the assets of Spa Creek.

-4-


 

SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
NOTE 3 — PRO FORMA ADJUSTMENTS (CONTINUED)
  2.   To reflect the allocation of the purchase price of $5,733,419 to specific assets acquired and adjustments from book value to market value of assets acquired. The excess of the purchase price over the book value was allocated first to customer lists at the fair market value on the date of the purchase. The remainder was allocated to goodwill.
 
  3.   Reflects elimination of assets and liabilities included in historical financials of Spa Creek not purchased by Middleton. Also to record 3 month consulting agreement to prior owners at $15,000 per month and adjust for the tax benefit of the pro forma loss of Spa Creek.

-5-