Sunair Services Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from to
Commission file number I-4334
SUNAIR SERVICES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Florida
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59-0780772 |
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(State or Other Jurisdiction of
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(I.R.S. Employer Identification No.) |
Incorporation or Organization) |
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595 South Federal Highway, Suite 500 |
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Boca Raton, Florida
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33432 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(561) 208-7400
(Registrants Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of August 8, 2007, the Registrant had outstanding 13,091,088 shares of common stock.
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
INDEX
2
PART
I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JUNE 30, 2007 AND SEPTEMBER 30, 2006
(UNAUDITED)
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JUNE 30, 2007 |
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SEPTEMBER 30, 2006 |
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ASSETS
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
2,589,970 |
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$ |
1,601,110 |
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Accounts receivable, net |
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5,170,364 |
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4,919,595 |
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Income tax receivable |
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352,393 |
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Interest receivable |
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55,000 |
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11,084 |
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Inventories, net |
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2,703,862 |
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2,328,205 |
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Deferred tax asset |
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137,387 |
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Prepaid and other current assets |
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1,539,252 |
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1,163,508 |
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Note receivable current |
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334,986 |
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Total Current Assets |
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12,058,448 |
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10,848,268 |
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PROPERTY, PLANT, AND EQUIPMENT, net |
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2,205,401 |
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2,538,434 |
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OTHER ASSETS: |
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Deferred tax asset |
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45,541 |
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Note receivable |
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2,000,000 |
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2,000,000 |
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Software costs, net |
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3,805,149 |
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3,938,465 |
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Customer list, net |
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11,532,919 |
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11,247,099 |
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Goodwill |
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56,894,723 |
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52,818,269 |
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Other assets |
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276,499 |
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522,427 |
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Total Other Assets |
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74,554,831 |
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70,526,260 |
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TOTAL ASSETS |
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$ |
88,818,680 |
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$ |
83,912,962 |
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The accompanying notes are an integral part of these financial statements
3
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JUNE 30, 2007 AND SEPTEMBER 30, 2006
(UNAUDITED)
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JUNE 30, 2007 |
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SEPTEMBER 30, 2006 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
3,876,440 |
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$ |
2,743,523 |
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Accrued expenses |
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3,574,984 |
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2,831,162 |
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Unearned revenues |
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1,317,896 |
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589,365 |
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Customer deposits |
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3,209,260 |
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2,677,364 |
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Capitalized leases, current portion |
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8,336 |
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8,796 |
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Notes payable, current portion |
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422,648 |
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138,374 |
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Total Current Liabilities |
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12,409,564 |
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8,988,584 |
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LONG TERM LIABILITIES: |
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Capitalized leases, net of current portion |
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13,999 |
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20,027 |
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Notes payable, net of current portion |
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3,629,957 |
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1,723,642 |
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Note payable -related party |
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5,000,000 |
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5,000,000 |
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Revolving line of credit |
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7,000,000 |
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8,000,000 |
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Deferred tax liability |
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112,226 |
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Total Long Term Liabilities |
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15,643,956 |
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14,855,895 |
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TOTAL LIABILITIES |
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28,053,520 |
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23,844,479 |
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COMMITMENTS & CONTINGENCIES |
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STOCKHOLDERS EQUITY: |
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Preferred stock, no par value, 8,000,000 shares
authorized, none issued and outstanding |
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Common stock, $.10 par value, 100,000,000 shares
authorized, 13,091,088 and 13,007,559 shares issued
and outstanding
at June 30, 2007 and September 30, 2006, respectively |
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1,309,109 |
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1,300,757 |
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Additional paid-in capital |
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52,371,800 |
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51,548,768 |
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Retained earnings |
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6,915,152 |
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7,200,197 |
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Accumulated other comprehensive gain cumulative translation adjustment |
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169,099 |
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18,761 |
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Total Stockholders Equity |
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60,765,160 |
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60,068,483 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
88,818,680 |
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$ |
83,912,962 |
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The accompanying notes are an integral part of these financial statements
4
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
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FOR THE NINE |
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FOR THE NINE |
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MONTHS ENDED |
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MONTHS ENDED |
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JUNE 30, 2007 |
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JUNE 30, 2006 |
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SALES |
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$ |
49,306,413 |
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$ |
36,074,674 |
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COST OF SALES |
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19,594,822 |
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13,853,832 |
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GROSS PROFIT |
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29,711,591 |
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22,220,842 |
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SELLING AND ADMINISTRATIVE EXPENSES |
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30,390,898 |
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24,825,017 |
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LOSS FROM OPERATIONS |
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(679,307 |
) |
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(2,604,175 |
) |
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OTHER INCOME (EXPENSES): |
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Interest income |
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166,583 |
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4,086 |
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Interest expense |
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(949,391 |
) |
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(978,948 |
) |
Gain on disposal of assets |
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10,513 |
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Other income |
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47,946 |
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Total Other Income (Expenses) |
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(772,295 |
) |
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(926,916 |
) |
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LOSS FROM OPERATIONS BEFORE INCOME TAXES |
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(1,451,602 |
) |
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(3,531,091 |
) |
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INCOME TAX BENEFIT |
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445,205 |
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1,580,456 |
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LOSS FROM CONTINUING OPERATIONS |
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(1,006,397 |
) |
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(1,950,635 |
) |
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX (PROVISION) FOR OR BENEFIT OF $372,759 AND $(174,244)
IN 2007 AND 2006, RESPECTIVELY |
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(640,133 |
) |
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304,627 |
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GAIN ON
THE DISPOSAL OF ASSETS FROM DISCONTINUED OPERATIONS, NET OF |
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INCOME
TAX PROVISION OF $821,426 |
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1,361,476 |
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NET LOSS |
|
$ |
(285,054 |
) |
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$ |
(1,646,008 |
) |
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BASIC AND DILUTED INCOME (LOSS) PER SHARE: |
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CONTINUING OPERATIONS |
|
$ |
(0.08 |
) |
|
$ |
(0.16 |
) |
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DISCONTINUED OPERATIONS |
|
$ |
0.06 |
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|
$ |
0.02 |
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|
|
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NET LOSS |
|
$ |
(0.02 |
) |
|
$ |
(0.14 |
) |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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BASIC |
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13,058,119 |
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|
12,117,794 |
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DILUTED |
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13,058,119 |
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12,117,794 |
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The accompanying notes are an integral part of these financial statements
5
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
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FOR THE THREE |
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FOR THE THREE |
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MONTHS ENDED |
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MONTHS ENDED |
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JUNE 30, 2007 |
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JUNE 30, 2006 |
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SALES |
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$ |
17,440,730 |
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$ |
13,810,527 |
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COST OF SALES |
|
|
7,055,732 |
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5,378,652 |
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GROSS PROFIT |
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10,384,998 |
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8,431,875 |
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SELLING AND ADMINISTRATIVE EXPENSES |
|
|
10,408,742 |
|
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|
9,298,279 |
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|
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LOSS FROM OPERATIONS |
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(23,744 |
) |
|
|
(866,404 |
) |
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|
|
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OTHER INCOME (EXPENSES): |
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Interest income |
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|
47,165 |
|
|
|
1,762 |
|
Interest expense |
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|
(273,683 |
) |
|
|
(310,503 |
) |
Other income |
|
|
|
|
|
|
47,946 |
|
|
|
|
|
|
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|
Total Other Income (Expenses) |
|
|
(226,518 |
) |
|
|
(260,795 |
) |
|
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|
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LOSS FROM OPERATIONS BEFORE INCOME TAXES |
|
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(250,262 |
) |
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(1,127,199 |
) |
|
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|
|
|
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INCOME TAX (PROVISION) BENEFIT |
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(83,279 |
) |
|
|
828,857 |
|
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|
|
|
|
|
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|
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|
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LOSS FROM CONTINUING OPERATIONS |
|
|
(333,541 |
) |
|
|
(298,342 |
) |
|
|
|
|
|
|
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|
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME
TAX BENEFIT OF $372,579 AND $111,298 IN 2007 AND 2006, RESPECTIVELY |
|
|
(332,226 |
) |
|
|
(185,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
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NET LOSS |
|
$ |
(665,767 |
) |
|
$ |
(483,576 |
) |
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
BASIC AND
DILUTED LOSS PER SHARE: |
|
|
|
|
|
|
|
|
CONTINUING OPERATIONS |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
BASIC |
|
|
13,091,088 |
|
|
|
13,060,559 |
|
|
|
|
|
|
|
|
DILUTED |
|
|
13,091,088 |
|
|
|
13,060,559 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
6
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
|
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|
|
|
|
|
|
|
|
|
FOR THE NINE |
|
|
FOR THE NINE |
|
|
|
MONTHS ENDED |
|
|
MONTHS ENDED |
|
|
|
JUNE 30, 2007 |
|
|
JUNE 30, 2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(285,054 |
) |
|
$ |
(1,646,008 |
) |
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
691,590 |
|
|
|
659,483 |
|
Amortization |
|
|
1,754,442 |
|
|
|
1,509,594 |
|
Deferred taxes |
|
|
(20,380 |
) |
|
|
(1,127,702 |
) |
Bad debt reserve |
|
|
(80,753 |
) |
|
|
137,992 |
|
Inventories reserve |
|
|
137,962 |
|
|
|
29,698 |
|
Gain on disposal of assets |
|
|
(2,193,415 |
) |
|
|
|
|
Equity based compensation |
|
|
486,385 |
|
|
|
486,217 |
|
Stock based compensation |
|
|
45,000 |
|
|
|
|
|
(Increase) decrease in Assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(16,097 |
) |
|
|
292,550 |
|
Income tax receivable |
|
|
352,393 |
|
|
|
|
|
Interest receivable |
|
|
(43,916 |
) |
|
|
10,250 |
|
Inventories |
|
|
(499,982 |
) |
|
|
(625,800 |
) |
Prepaid and other current assets |
|
|
(297,219 |
) |
|
|
(1,245,231 |
) |
Other assets |
|
|
358,601 |
|
|
|
(41,954 |
) |
Increase (decrease) in Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
1,472,791 |
|
|
|
(839,627 |
) |
Unearned revenue |
|
|
76,505 |
|
|
|
367,775 |
|
Leases payable |
|
|
(1,462 |
) |
|
|
|
|
Income taxes payable |
|
|
(1,195 |
) |
|
|
|
|
Customer deposits |
|
|
491,090 |
|
|
|
648,214 |
|
|
|
|
|
|
|
|
Net Cash Provided By (Used In) Operating Activities |
|
|
2,427,286 |
|
|
|
(1,384,549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property, plant, and equipment |
|
|
(296,563 |
) |
|
|
(441,929 |
) |
Software development costs |
|
|
(281,388 |
) |
|
|
(436,892 |
) |
Cash paid for business acquisitions |
|
|
(2,598,432 |
) |
|
|
(11,695,506 |
) |
Net Proceeds from disposition of property |
|
|
2,344,980 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used In Investing Activities |
|
$ |
(831,403 |
) |
|
$ |
(12,574,327 |
) |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
7
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
FOR THE NINE |
|
|
FOR THE NINE |
|
|
|
MONTHS |
|
|
MONTHS |
|
|
|
ENDED |
|
|
ENDED |
|
|
|
JUNE 30, 2007 |
|
|
JUNE 30, 2006 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Repayment of line of credit (net) |
|
|
(1,000,000 |
) |
|
|
(1,500,000 |
) |
Repayment of notes payable |
|
|
(70,156 |
) |
|
|
(96,930 |
) |
Payment on capital leases |
|
|
(22,191 |
) |
|
|
(37,589 |
) |
Proceeds from note receivable |
|
|
334,986 |
|
|
|
|
|
Proceeds from sale of common stock, net |
|
|
|
|
|
|
13,655,672 |
|
|
|
|
|
|
|
|
Net Cash Provided By (Used In) Financing Activities |
|
|
(757,361 |
) |
|
|
12,021,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash |
|
|
150,338 |
|
|
|
39,303 |
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
988,860 |
|
|
|
(1,898,420 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
1,601,110 |
|
|
|
3,220,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
2,589,970 |
|
|
$ |
1,322,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
1,071,750 |
|
|
$ |
978,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES: |
|
|
|
|
|
|
|
|
Common stock issued in acquisitions |
|
$ |
300,000 |
|
|
$ |
100,000 |
|
|
|
|
|
|
|
|
Debt incurred in acquisitions |
|
$ |
2,235,000 |
|
|
$ |
1,475,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
8
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the Nine Months Ended June 30, 2007 and June 30, 2006
(UNAUDITED)
1. Basis of Consolidated Financial Statement Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange Commission and in
accordance with the instructions to Form 10-Q and do not include all the information and footnote
disclosures normally included in consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America. The information furnished
in the interim financial statements includes normal recurring adjustments and reflects all
adjustments, which, in the opinion of management, are necessary for a fair presentation of such
financial statements. For further information refer to the consolidated financial statements and
footnotes thereto included in the Companys most recent audited consolidated financial statements
and notes thereto included in its September 30, 2006 annual report on Form 10-KSB. Operating
results for the nine months ended June 30, 2007 are not necessarily indicative of the results that
may be expected for the fiscal year ending September 30, 2007.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Accounts Receivable
Accounts receivable consist of balances due from sales. The Company performs periodic credit
evaluations of its customers and maintains an allowance for potential credit losses based on
historical experience and other information available to management. As of June 30, 2007 and
September 30, 2006, the Company established an allowance of $278,714 and $365,730, respectively.
Inventories
Inventories, which consist of raw materials, work-in-process, and finished goods, are stated
at the lower of cost or market value, cost being determined using the first in, first out method.
The Company records reserves for inventory shrinkage and obsolescence when considered necessary.
Property, Plant, and Equipment
Property, plant and equipment are carried at cost. Depreciation is provided over the estimated
useful lives of the assets using both the straight-line and accelerated methods. The estimated
useful lives used to compute depreciation are as follows:
|
|
|
|
|
Buildings and improvements |
|
10 to 30 years |
Machinery and equipment |
|
4 to 10 years |
Automobiles |
|
4 to 10 years |
The cost of maintenance and repairs is charged to expense as incurred; renewals and
betterments are capitalized. When properties are retired or otherwise disposed of, the cost of such
properties and the related accumulated depreciation are removed from the accounts. Any profit or
loss is credited, or charged to income.
Software Costs
The Company capitalizes certain costs associated with software development in accordance with
Statement of Financial Accounting Standard No. 86 (FASB No. 86) Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. The Company amortizes software costs
for periods of 5 to 10 years, the estimated useful life of the asset.
9
Goodwill and other intangible assets
Goodwill represents the excess of costs over fair value of assets of businesses acquired.
Pursuant to FASB Statement No. 142 (FASB 142), goodwill acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized, but instead tested
for impairment at least annually in accordance with the provisions of FASB 142. The Company tests
goodwill for impairment as of September 30 of each year.
FASB 142 also requires that customer lists and intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets.
Customer lists are stated at fair value based on the discounted cash flows over the estimated
life of the customer contracts and relationships. The Company used an independent appraisal firm to
perform a valuation study at the time of acquisition of Middleton
Pest Control, Inc. (Middleton) to determine
the value and estimated life of customer lists purchased in order to assist management in
determining an appropriate method in which to amortize the asset. The amortization life is based on
historic analysis of customer relationships combined with estimates of expected future revenues
from customer accounts. The Company amortizes customer lists on a straight-line basis over the
expected life of the customer of 8 years.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the assets
exceed the fair value. Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. There were no assets impaired during the nine months ended June 30,
2007 and 2006.
Reclassifications
Certain reclassifications of amounts previously reported have been made to the accompanying
consolidated condensed financial statements in order to maintain consistency and comparability between
periods presented.
In September 2006 the Company sold substantially all the assets of its high frequency radio
business. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the results of these operations have been
reclassified from continuing to discontinued operations for all periods presented in the
accompanying Consolidated Condensed Statements of Operations as well as Note 11 of the Notes to the
Consolidated Condensed Financial Statements.
In August 2007 the company sold all the outstanding stock of Percipia, Inc., a wholly
owned subsidiary in the Telephone Communications business segment. In accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the results of these operations have been reclassified from continuing to discontinued
operations for all periods presented in the accompanying Consolidated
Condensed Statements of Operations as
well as Note 11 of the Notes to the Consolidated Condensed Financial Statements.
In November 2006 the Company sold real estate property associated with the previously sold
high frequency radio business. In accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, the sale of this real estate
property has been reclassified from continuing operations to gain on
disposal of assets from discontinued
operations in the accompanying Consolidated Condensed Statement of Operations for the nine months ended June 30,
2007 as well as Note 11 of the Notes to the Consolidated Condensed Financial Statements.
Revenue Recognition
Service revenues are recorded and recognized at the date of service completion. Sales revenues
are recorded when products are shipped and title has passed to unaffiliated customers, and when
collectibility is reasonably assured. Installation revenues are considered earned at the time the
project is completed. Maintenance contracts are recorded as unearned revenues at the time of
collection and are recognized as income monthly over the term of the contract. Interest and
dividends earned on investments are recorded when earned.
10
Advertising Costs
The Company expenses advertising costs as incurred.
Research and Development
Expenditures for research and development are charged to operations as incurred.
Foreign Currency Translation
Telecom
FM Ltd. (Telecom FM), a United Kingdom corporation, is a wholly owned subsidiary of
the Company that distributes and installs telecommunication devices providing fixed wireless access
to network and data service providers. Telecom FMs functional currency is the British pound sterling,
its local currency. Accordingly, balance sheet accounts are translated at exchange rates in effect
at the end of the period and income statement accounts are translated at average exchange rates for
the period. Translation gains and losses are included as a separate component of stockholders
equity as cumulative translation adjustments. Foreign currency transaction gains and losses are
included in other income and expenses.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income. Other
comprehensive income includes certain changes in equity that are excluded from net income. At June
30, 2007 and September 30, 2006, accumulated other comprehensive income was comprised of cumulative
foreign currency translation adjustments.
Recent Accounting Pronouncements
In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, (FIN 48)
a clarification of FASB Statement No. 109, Accounting for Income Taxes. This interpretation
clarifies recognition threshold and measurement attributes for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company has not yet determined
the impact of this interpretation on its financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108), to address diversity in practice in quantifying financial
statement misstatements. SAB 108 requires that the Company quantify misstatements based on their
impact on each of its financial statements and related disclosures. SAB 108 is effective as of the
end of the Companys 2007 fiscal year, allowing a one-time transitional cumulative effect
adjustment to retained earnings as of October 1, 2006 for errors that were not previously deemed
material, but are material under the guidance in SAB 108. The Company is currently evaluating the
impact of adopting SAB 108 on its financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. The provisions of SFAS 157 are effective as of the beginning of the Companys 2008
fiscal year. The Company is currently evaluating the impact of adopting SFAS 157 on its financial
statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, which requires employers to recognize the over funded or
under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as
an asset or liability in its statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through comprehensive income of a business
entity. The Company has determined that this standard will not have a material effect on its
financial statements.
3. Acquisitions
Acquisition of Spa Creek Services, LLC D/B/A Pest Environmental Services (Spa Creek)
On December 16, 2005 the Company, through its wholly-owned subsidiary, Middleton entered into
an Asset Purchase Agreement to acquire substantially all the assets of Spa Creek for $5,500,000.
11
In addition, the Company incurred $233,419 of transaction costs consisting of legal and
accounting fees.
The following table sets forth the allocation of the purchase price to Spa Creek tangible and
intangible assets acquired and liabilities assumed as of December 16, 2005:
|
|
|
|
|
Good will |
|
$ |
5,732,933 |
|
Customer list |
|
|
262,000 |
|
Accounts Receivable |
|
|
132,929 |
|
Inventory |
|
|
66,475 |
|
Fixed assets |
|
|
30,000 |
|
Customer deposits |
|
|
(279,917 |
) |
Accrued expenses |
|
|
(211,001 |
) |
|
|
|
|
Total |
|
$ |
5,733,419 |
|
|
|
|
|
Acquisition of Par Pest Control, Inc. D/B/A Paragon Termite & Pest Control (Paragon)
On January 9, 2006, Middleton entered into an Asset Purchase Agreement to acquire
substantially all of the assets of Paragon for approximately $1,050,000 consisting of $800,000
cash, $100,000 in the form of a subordinated promissory note, $50,000 in transaction costs and
17,036 shares of common stock valued at $100,000.
Acquisition of Pestec Pest Control, Inc. (Pestec)
On February 28, 2006, Middleton entered into an Asset Purchase Agreement to acquire
substantially all of the assets of Pestec for approximately $800,000 consisting of $600,000 cash,
$175,000 in the form of a subordinated promissory note, and $25,000 in transaction costs.
Acquisition of Ron Fee, Inc. (Ron Fee)
On March 31, 2006 Middleton entered into an Asset Purchase Agreement to acquire substantially
all of the assets of Ron Fee, for $5,200,000 consisting of $4,000,000 cash and $1,200,000 in the
form of a subordinated promissory note.
In addition, the Company incurred approximately $325,000 of transaction costs consisting of
legal and accounting fees.
The following table sets forth the allocation of the purchase price to Ron Fee tangible and
intangible assets acquired and liabilities assumed as of March 31, 2006:
|
|
|
|
|
Good will |
|
$ |
3,348,432 |
|
Customer list |
|
|
1,554,000 |
|
Accounts receivable |
|
|
235,000 |
|
Inventory |
|
|
91,000 |
|
Fixed assets |
|
|
440,000 |
|
Accounts payable |
|
|
(92,432 |
) |
Customer deposits |
|
|
(22,000 |
) |
Notes payableautos |
|
|
(29,000 |
) |
|
|
|
|
Total |
|
$ |
5,525,000 |
|
|
|
|
|
Subsequent to the acquisition, the former controller of Ron Fee received 10,000 shares of
common stock for services rendered valued at $4.50 per share.
Acquisition of Archer Exterminators, Inc. (Archer)
On November 30, 2006 Middleton entered into an Asset Purchase Agreement to acquire
substantially all of the assets of Archer for $3,300,000 consisting of $1,500,000 cash, $1,500,000
in the form of a subordinated promissory note and shares of the Companys common stock valued at
$300,000. In addition, the company incurred approximately $150,400 in transaction costs. The shares
were issued in January, 2007.
12
The following table sets forth the allocation of the purchase price to Archer tangible and
intangible assets acquired and liabilities assumed as of November 30, 2006:
|
|
|
|
|
Good will |
|
$ |
2,660,622 |
|
Customer list |
|
|
1,110,000 |
|
Accounts receivable |
|
|
33,318 |
|
Inventory |
|
|
3,500 |
|
Fixed assets |
|
|
146,127 |
|
Prepaid Expenses |
|
|
215,178 |
|
Deferred Revenue |
|
|
(677,539 |
) |
Customer deposits |
|
|
(40,806 |
) |
|
|
|
|
Total |
|
$ |
3,450,400 |
|
|
|
|
|
Pro-Forma Results of Operations
The following sets forth the Companys results of operations for the nine months ended June
30, 2007 and 2006 as if the acquisitions and dispositions had taken place on October 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, |
|
|
2007 |
|
2006 |
Revenues |
|
$ |
50,795,203 |
|
|
$ |
44,721,631 |
|
Net income (loss) |
|
|
(201,393 |
) |
|
|
(771,450 |
) |
Net income (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
|
(.02 |
) |
|
|
(.06 |
) |
Diluted |
|
|
(.02 |
) |
|
|
(.06 |
) |
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Materials |
|
$ |
1,875,846 |
|
|
$ |
1,430,453 |
|
Work-in-process |
|
|
188,364 |
|
|
|
170,491 |
|
Finished goods |
|
|
639,652 |
|
|
|
727,261 |
|
|
|
|
|
|
|
|
|
|
$ |
2,703,862 |
|
|
$ |
2,328,205 |
|
|
|
|
|
|
|
|
As of June 30, 2007 and September 30, 2006 the Company established inventory shrinkage and
obsolescence reserves of $591,421 and $473,736, respectively.
5. Income per Common Share
Basic earnings per share amounts are computed by dividing the net income by the weighted
average number of common shares outstanding. Diluted earnings per share amounts are computed by
dividing net income by the weighted average number of shares of common stock, common stock
equivalents, and stock options outstanding during the period. Potential shares of common stock and
their effects on income were excluded from the diluted calculations if the effect was
anti-dilutive.
6. Preferred Stock
At June 30, 2007 and 2006, the Company had 8,000,000 authorized shares of preferred stock, no
par value that may be issued at such terms and provisions as determined by the board of directors.
None are outstanding.
7. Revolving Line of Credit
The Company has a line of credit with a financial institution collateralized by the assets of
the Company. The maximum credit limit is $16,000,000. Interest is compounded daily based upon the
London Interbank Offering Rate (LIBOR) plus a variable
13
percentage based on the leverage ratio. The interest rate at June 30, 2007 was 8.07%. 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. As a term of the revolving credit line,
the Company is required to maintain certain financial covenants. The
revolver line has a maturity date of October 1, 2008. The balance due on the line was $7,000,000 at June 30, 2007.
8. Notes Payable
Note payable with a financial institution for equipment purchases. The note bears interest at
5.60% per annum, payable in monthly installments of principal and interest in the amount of $5,794
through September 29, 2008. Balances at June 30, 2007 and September 30, 2006, totaled $83,846 and
$131,589, respectively.
Note payable with a financial institution for leased office build out costs. The note bears
interest at 5.60% per annum, payable in monthly installments of principal and interest in the
amount of $3,285 through March 29, 2011. Balances at June 30, 2007 and September 30, 2006, totaled
$132,843 and $156,212, respectively.
Notes payable with financial institutions for automobile loans. Interest rates range from 0%
to 9% per annum, payable in monthly installments of principal and interest ranging in the amounts
of $209 to $528, expiring in various years through 2010. Balances at June 30, 2007 and September
30, 2006, totaled $100,916 and $99,215, respectively.
The Company has notes payable relating to the acquisitions of Pestec, Paragon, Ron Fee,
Archer, Florida Exterminating, and Summer Rain. The notes bear interest at 6% per annum for Pestec,
Paragon and Ron Fee, LIBOR plus 2% (7.32% at June 31, 2007) for Archer, 7% for Florida
Exterminating and 7% for Summer Rain, with interest payable in semi-annual installments ranging in
the amounts of $3,000 to $36,000 and principal due at maturity. The notes expire in various years
through 2009. The balances at June 30, 2007 and September 30, 2006, totaled $3,735,000 and
$1,475,000 respectively.
The Company has a $5,000,000 subordinated note payable to related parties, in connection with
the acquisition of Middleton. These parties include the CEO of Middleton and a Director of the
Company. Interest is paid semi-annually at prime (8.25% as of June 30, 2007). The note payable is
due in full on June 7, 2010.
9. Stock Options
At the annual meeting of shareholders held on February 4, 2005, the shareholders approved the
cancellation of the stock option plan, previously adopted by the shareholders at the January 24,
2000 shareholders meeting, and, in its place, approved the 2004 Stock Incentive Plan with an
aggregate of 800,000 shares of the Companys unissued common stock to be reserved for issuance to
key employees as non-qualified stock options. The option price, numbers of shares and grant date
are determined at the discretion of the Companys Board of Directors.
During the quarter ended June 30, 2007, no stock options were granted.
Stock options activity for the nine months ended June 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Balances, beginning of period |
|
|
665,054 |
|
|
$ |
8.00 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Cancelled |
|
|
(20,000 |
) |
|
$ |
4.79 |
|
|
|
|
|
|
|
|
Balances, end of period |
|
|
645,054 |
|
|
$ |
8.10 |
|
|
|
|
|
|
|
|
14
Stock options outstanding and exercisable at June 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
Exercise |
|
|
|
|
|
Weighted Average |
|
Weighted Average |
|
|
Price |
|
Number Outstanding |
|
Remaining Life |
|
Exercise Price |
|
Number Exercisable |
$
3.23
|
|
|
35,000 |
|
|
|
8 |
|
|
$ |
3.23 |
|
|
|
8,750 |
|
$4.79
|
|
|
40,000 |
|
|
|
3 |
|
|
$ |
4.79 |
|
|
|
40,000 |
|
$5.00
|
|
|
166,667 |
|
|
|
6 |
|
|
$ |
5.00 |
|
|
|
83,334 |
|
$5.35
|
|
|
20,000 |
|
|
|
7.5 |
|
|
$ |
5.35 |
|
|
|
20,000 |
|
$5.60
|
|
|
90,000 |
|
|
|
6.5 |
|
|
$ |
5.60 |
|
|
|
56,250 |
|
$6.09
|
|
|
17,500 |
|
|
|
7.5 |
|
|
$ |
6.09 |
|
|
|
4,375 |
|
$13.78
|
|
|
94,962 |
|
|
|
1 |
|
|
$ |
13.78 |
|
|
|
94,962 |
|
$11.40
|
|
|
180,925 |
|
|
|
7 |
|
|
$ |
11.40 |
|
|
|
90,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
645,054 |
|
|
|
|
|
|
|
|
|
|
|
398,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) which requires the
Company to recognize expense related to the fair value of stock-based compensation awards. The
Company elected the modified prospective transition method as permitted by SFAS No. 123(R) and
therefore has not restated the financial results for prior periods. Under the modified prospective
method, equity-based compensation for the nine months ended June 30, 2007 is based on grant date
fair value estimated in accordance with the provisions of SFAS No. 123(R) and compensation expense
for all stock-based compensation awards granted subsequent to January 1, 2006, as well as for
existing awards for which the requisite service has not been rendered as of the date of adoption
based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).
In addition, options granted to certain members of the Board of Directors as payment for board
services recorded in accordance with SFAS No. 123(R) are also included in equity-based compensation for the nine months ended June 30,
2007.
For the nine months ended June 30, 2007, the Company recognized $486,385 equity-based
compensation expense and is being reflected as selling, general and administrative expenses.
As of June 30, 2007, approximately $799,862 of total unrecognized equity-based compensation
costs related to non-vested stock options is expected to be recognized over a weighted average
period of approximately 2 years.
10. Segment Information
The Company manages its business and has segregated its activities into two business segments:
Installation and maintenance of telephone communication systems, and pest control, lawn and shrub
care, subterranean and drywood termite control and mosquito reduction services.
Certain financial information for each segment is provided below for the nine months ended
June 30:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Net revenues: |
|
|
|
|
|
|
|
|
Lawn and pest control services |
|
$ |
39,186,678 |
|
|
$ |
33,157,360 |
|
Telephone communications |
|
|
10,119,735 |
|
|
|
2,917,314 |
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
49,306,413 |
|
|
$ |
36,074,674 |
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Lawn and pest control services |
|
$ |
3,469,340 |
|
|
$ |
2,427,224 |
|
Telephone communications |
|
|
658,758 |
|
|
|
(813,489 |
) |
Unallocated Company expenses |
|
|
(4,807,405 |
) |
|
|
(4,217,910 |
) |
|
|
|
|
|
|
|
Total operating loss |
|
$ |
(679,307 |
) |
|
$ |
(2,604,175 |
) |
|
|
|
|
|
|
|
15
11. Discontinued Operations
On
September 8, 2006, Sunair Communications, Inc., a wholly-owned subsidiary through which the
Company operated its high frequency single sideband communication business, sold substantially all
of its assets to a related party, Sunair Holdings, LLC for $5.7 million. Of the $5.7 million, the
Company received cash proceeds of $3.7 million and $2.0 million in the form of a three year
subordinated promissory note issued by Sunair Holdings and made payable to Sunair Communications.
The Companys former Chief Financial Officer, who also was the former Chief Financial Officer of
Sunair Communications, and the Companys former President, who also was the former President of
Sunair Communications, are also affiliates of Sunair Holdings.
On November 20, 2006, the Company closed a transaction to sell the real estate property
associated with the previously sold high frequency radio business for $2.7 million in cash and a
recognized gain in the amount of $2,182,902.
On August 1, 2007, the Company sold all the outstanding shares of Percipia, Inc., a
wholly-owned subsidiary, in the Companys Telephone Communications segment for approximately $4.0
million in cash, subject to a post-closing adjustment.
The
accompanying consolidated condensed statements of operations for the
nine month periods presented
have been adjusted to reclassify: 1) the high frequency communication business and the part of the
telephone communications business related to Percipia, Inc. from continuing operations to
discontinued operations and 2) the gain on the sale of real estate property associated with the
previously sold high frequency radio business from continuing operations to gain on sale of
assets from discontinued operations.
Selected statements of operations data for the Companys discontinued operations as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
High Frequency Radio |
|
$ |
|
|
|
$ |
463,047 |
|
Percipia, Inc. |
|
|
(1,012,892 |
) |
|
|
15,824 |
|
|
|
|
|
|
|
|
Pre-tax income (loss) from discontinued operations |
|
|
(1,012,892 |
) |
|
|
478,871 |
|
|
|
|
|
|
|
|
Income tax (Provision) Benefit |
|
|
372,759 |
|
|
|
(174,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations, net of income tax effect |
|
|
(640,133 |
) |
|
|
304,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale
of assets from discontinued operations |
|
|
2,182,902 |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax Provision |
|
|
(821,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets from discontinued operations net of income tax effect |
|
|
1,361,476 |
|
|
|
|
|
|
|
|
|
|
|
|
12. Subsequent Event
On August 1, 2007 the Company completed the sale of its wholly owned telephone communications
subsidiary, Percipia, Inc. in accordance with a Share Purchase Agreement dated as of July 12, 2007.
Pursuant to the Share Purchase Agreement the Company sold all of the issued and outstanding shares
of Percipia, Inc. for approximately $4.0 million in cash subject to a post closing adjustment.
16
Item 2. Managements Discussion And Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Information:
Some of the statements in this quarterly report, including those that contain the words
anticipate, believe, plan, estimate, expect, should, intend and other similar
expressions, are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Those forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance or achievements or
those of our industry to be materially different from any future results, performance or
achievements expressed or implied by those forward-looking statements. Among the factors that could
cause actual results, performance or achievement to differ materially from those described or
implied in the forward-looking statements are general economic conditions, competition, potential
technology changes, changes in or the lack of anticipated changes in the regulatory environment in
various countries, the risks inherent in new product and service introductions and the entry into
new geographic markets and other factors included in our filings with the Securities and Exchange
Commission (the SEC). Copies of our SEC filings are available from the SEC or may be obtained
upon request from us. We do not undertake any obligation to update the information contained
herein, which speaks only as of this date.
Overview:
Sunair Services Corporation (Sunair, the Company, us, we or our) is a Florida
corporation organized in 1956. We changed our corporate name from Sunair Electronics, Inc. to
Sunair Services Corporation in November of 2005. Previously, we operated through two business
segments: Telephone Communications and High Frequency Radio. In June 2005 with the acquisition of
Middleton Pest Control, Inc. (Middleton) we embarked on a new strategy to become a leading
regional provider of lawn and pest control services focusing mainly on residential customers.
In order to execute our strategy we shifted our focus to the Lawn and Pest Control
Services business segment, which resulted in a series of acquisitions and divestitures planned to enable us
to shed our legacy businesses (Telephone Communications and High
Frequency Radio) and grow our core
business, lawn and pest control.
To date the acquisitions and divestitures have been as follows:
Acquisitions:
|
|
|
June 2005 we acquired the issued and outstanding stock of Middleton Pest Control,
Inc., our platform company, a leading provider of lawn and pest control services in
Florida. |
|
|
|
|
July 2005 we acquired substantially all the assets of Four Seasons Lawn and Pest
Control, Inc. |
|
|
|
|
December 2005 we acquired substantially all the assets of Spa Creek Services, LLC,
D/B/A Pest Environmental Services, Inc. |
|
|
|
|
January 2006 we acquired substantially all the assets of Par Pest Control, Inc. |
|
|
|
|
February 2006 we acquired substantially all the assets of Pestec Pest Control, Inc. |
|
|
|
|
March 2006 we acquired substantially all the assets of Ron Fee, Inc. |
|
|
|
|
December 2006 we acquired substantially all the assets of Archer Exterminators, Inc. |
|
|
|
|
April 2007 we acquired substantially all the assets of David Burke, Inc., D/B/A
Florida Exterminating |
|
|
|
|
May 2007 we acquired substantially all the assets of Summer Rain Fertilization
Company |
Dispositions:
|
|
|
September 2006 we sold substantially all the assets of Sunair Electronics, Inc. our
high frequency radio business |
|
|
|
|
November 2006 we sold real estate associated with the previously sold high
frequency radio business |
|
|
|
|
August 1, 2007 we sold all the issued and outstanding stock of Percipia, Inc., a
wholly owned subsidiary operating in our Telephone Communications business segment |
17
The divestiture of Percipia represents a key transaction for us. With the sale of this
subsidiary, we continue to execute our strategy of divesting our non-core assets while
growing our core Lawn and Pest Control Services business via
acquisitions and internally
generated growth. The proceeds from this divestiture will be redeployed for future targeted
acquisitions related to the growth of our core Lawn and Pest Control
Services business.
We plan to fund additional acquisitions in the Lawn and Pest Control Services segment with
internally generated funds, amounts available under our revolving line of credit and funds from the
expected eventual divestiture of the remaining portion of our Telephone Communications business.
However, we cannot assure you of the timing of such disposition, or the amount that we will receive
upon such disposition. Further, we cannot assure you that the funds available from these sources
will be sufficient to finance our acquisition strategy. We plan to continue to focus on
acquisitions in the southeastern United States including Alabama, Georgia, Louisiana, Mississippi
and Florida, but will consider additional acquisitions in other geographic regions.
Results of Operations:
Continuing Operations:
Revenues:
Our
company wide revenues for the three months ended June 30, 2007
of $17.4 million was up $3.6
million or 26.3% from revenues of $13.8 million for the three months ended June 30, 2006. Our
company wide revenues for the nine months ended June 30, 2007 of $49.3 million was up $13.3 million
or 36.7% from revenues of $36.0 million for the nine months ended June 30, 2006. Of the $49.3
million of sales, $39.2 million or 79.5% were attributable to the Lawn and Pest Control Services
segment and $10.1 million or 20.5% were attributable to the Companys wholly owned subsidiary
Telecom FM, operating in the Telephone Communications business segment.
Middletons revenues for the three months ended June 30, 2007 were up $400,000 or 3.2% to
$13.2 million compared to $12.8 million for the three months ended June 30, 2006. Revenues for the
nine months ended June 30, 2007 were up $6.0 million or 18.1% to $39.2 million compared to $33.2
million for the nine months ended June 30, 2006.
The increase in revenues at Middleton for the three months ended June 30, 2007 fell below our
expectations primarily due to a decrease in new business lead flow. We have addressed this issue
by making significant investments in both our sales management team and additions to our sales
force. Additionally, we are in the process of a developing and launching a new marketing campaign.
Telecom FMs revenues for the three months ended June 30, 2007 were up $3.2 million to $4.2
million compared to $1.0 million for the three months ended June 30, 2006. Revenues for the nine
months ended June 30, 2007 were up $7.2 million to $10.1 million compared to $2.9 million for the
nine months ended June 30, 2006.
The significant increase in revenues at Telecom FM for both the three months and nine months
ended June 30, 2007 were due to a series of large orders received and fulfilled during the last two
quarters. It is expected that this pace will slow significantly in the next quarter due to the
normal business downturn experienced during summer vacation season in Europe.
Gross Margins:
Our
company wide gross margin for the three months ended June 30,
2007 of $10.4 million or 59.5%
of revenue was up $1.9 million from $8.4 million or 61.0% for the three months ended June 30, 2006.
Our company wide gross margin for the nine months ended June 30,
2007 of $29.7 million or 60.3% of
revenues was up $7.5 million from $22.2 million for the nine months ended June 30, 2006.
Middletons contribution to gross margin for the three months ended June 30, 2007 was $8.2
million up $300,000 from $7.9 million for the three months ended June 30, 2006. Middletons gross
margin for the three months ended June 30, 2007 as a percentage of revenue increased to 62.0% from
61.6% for the three months ended June 30, 2006. Middletons contribution to gross margin for
18
the nine months ended June 30, 2007 was $24.8 million up $4.2 million from $20.6 million for the nine
months ended June 30, 2006. Middletons gross margin for the nine months ended June 30, 2007 as a
percentage of revenue increased to 63.4% from 62.2% for the three months ended June 30, 2006. The
gross margin growth for the three months ended June 30, 2007 fell short of our expectations due to
shortfall in projected revenue which is addressed in the revenue section above.
Telecom FMs contribution to gross margin for the three months ended June 30, 2007 was $2.2
million up $1.6 million from $600,000 for the three months ended June 30, 2006. Telecom FMs
gross margin for the three months ended June 30, 2007 as a percentage of revenue decreased to 52.0%
from 54.6% for the three months ended June 30, 2006. The significant increase in the gross margin
for both the three months ended and nine months ended June 30, 2007 were a result of the
significant increases in the related revenue growth.
Selling, General and Administrative Expenses (SG&A):
Our company wide SG&A expenses for the three months ended June 30, 2007 were $10.4 million or
59.6% of revenue compared to $9.3 million or 67.3% of revenues for the three months ended June 30,
2006. Our company wide SG&A expenses for the nine months ended June 30, 2007 were $30.4 million or
61.6% of revenue compared to $24.8 million or 68.8% of revenues for the nine months ended June 30,
2006.
Middletons SG&A expenses for the three months ended June 30, 2007 were $7.3 million or 55.0%
of revenue compared to $7.0 million or 54.6% of revenues for the three months ended June 30, 2006.
Middletons SG&A expenses for the nine months ended June 30, 2007 were $21.4 million or 54.6% of
revenue compared to $18.2 million or 54.8% of revenues for the nine months ended June 30, 2006.
During the three months ended and nine months ended June 30,
2007 there were significant expenditures made with regard to our Sarbanes Oxley implementation efforts. Additionally, as previously
mentioned during the three months ended June 30, 2007 we have made significant
expenditures related to the
expansion of our sales force including recruiting and training. In
the future we expect these expenditures to decrease and be ongoing.
Telecom FMs SG&A expenses for the three months ended June 30, 2007 were $1.8 million or
41.8% of revenue compared to $800,000 or 78.0% of revenues for the three months ended June 30,
2006. Telecom FMs SG&A expenses for the nine months ended June 30, 2007 were $4.2 million or
41.6% of revenue compared to $2.4 million or 54.8% of revenues for the nine months ended June 30,
2006. The SG&A expenses were leveraged significantly due to the significant increase in sales
volume despite having to significantly ramp up the operation in order to fulfill the large volume
of orders received.
Unallocated holding company expenses incurred by Sunair Services Corporation which are
included in company wide SG&A were $1.4 million for the three months ended June 30, 2007 compared
to $1.5 million for the three months ended June 30, 2006. Unallocated holding company expenses
for the nine months ended June 30, 2007 were $4.8 million
for the nine months ended June 30, 2007
compared to $4.2 million for the nine months ended June 30, 2006. The increase is primarily due
to an increase in amortization of intangible assets of $200,000 together with increases in
insurance costs and non-cash stock option expense totaling $100,000.
Interest Expense (net):
Our
net interest expense for the three months ended June 30, 2007
was $227,000 compared to
$308,000 for the nine months ended June 30, 2006. Our net interest expense for the nine months
ended June 30, 2007 was $785,000 compared to $975,000 for the nine months ended June 30, 2006. The decrease in net interest expense for both the three
months ended and nine months ended June 30, 2007 was primarily due to an increase in interest
income earned from the $2.0 million note receivable related to
the sale of the high frequency radio business in September 2006 and the decrease in the outstanding balance on our revolving line of
credit.
Discontinued Operations:
On September 8, 2006, we sold substantially all the assets of Sunair Electronics, Inc. which
operated our high frequency radio business to a related party, Sunair Holdings, LLC for $5.7
million. Of the $5.7 million, we received cash proceeds of $3.7 million and $2.0 million
in the form of a three year subordinated promissory note. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the results of operations for Sunair Electronics,
Inc. have been reclassified from continuing to discontinued operations in the accompanying
Consolidated Condensed Statements of Operations for the nine months ended June 30, 2006.
On November 20, 2006, we closed a transaction to sell the real estate property associated with
the previously sold high frequency radio business for $2.7 million in cash and a recognized gain in
the amount of $2,182,902. In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the sale of this real estate
property has been reclassified from continuing operations to gain on
disposal of assets from discontinued operations in the accompanying Consolidated Condensed Statement of Operations for the nine months ended June 30,
2007.
19
On August 1, 2007, we sold all the outstanding shares of Percipia, Inc., a wholly-owned
subsidiary, in our Telephone Communications segment for approximately $4.0 million in
cash, subject to a post-closing adjustment. In accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the results of operations for
Percipia have been reclassified from continuing to discontinued operations for all periods presented in the
accompanying Consolidated Condensed Statements of Operations.
Selected
statements of operations data for our discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
High Frequency Radio |
|
$ |
|
|
|
$ |
463,047 |
|
Percipia, Inc. |
|
|
(1,012,892 |
) |
|
|
15,824 |
|
|
|
|
|
|
|
|
Pre-tax income (loss) from discontinued operations |
|
|
(1,012,892 |
) |
|
|
478,871 |
|
|
|
|
|
|
|
|
Income tax (Provision)
Benefit |
|
|
372,759 |
|
|
|
(174,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations, net
of income tax effect |
|
|
(640,133 |
) |
|
|
304,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale
of assets from discontinued operations |
|
|
2,182,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax Provision |
|
|
(821,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets from discontinued operations net of income tax effect |
|
$ |
1,361,476 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Net Income:
Our company wide net loss for the three months ended June 30, 2007 was $665,767 compared to
$483,576 for the three months ended June 30, 2006. Our company wide net loss for the nine months
ended June 30, 2007 was $285,054 compared to $1.6 million for the nine months ended June 30, 2006.
The decrease in the company wide net loss for the nine months ended June 30, 2007 of $1.3
million was due to the following: 1) a decrease in the loss from continuing operations of $900,000
to $1.0 million for the nine months ended June 30, 2007 compared to $1.9 million for the nine
months ended June 30, 2006, 2) a change in the results of discontinued operations of $900,000 to a
loss from discontinued operations of $(600,000) for the nine months ended June 30, 2007 as compared
to income from discontinued operations of $300,000 for the nine months ended June 30, 2006, and 3)
a gain on the sale of assets from discontinued operations of $1.3 million for the nine months ended
June 30, 2007.
Liquidity:
For the nine months ended June 30, 2007, we had cash flow provided by operating activities of
approximately $2.2 million. This cash was provided primarily by an increase in accounts payable and
accrued expenses of approximately $1.5 million and an increase in customer deposits of
approximately $500,000.
Cash flow utilized by investing activities for the nine months ended June 30, 2007 was
approximately $700,000, which consisted of $2.6 million paid for the acquisitions of lawn and pest
control businesses, $2.3 million of net proceeds received for the disposition of property and
approximately $600,000 utilized to purchase property, plant and equipment and fund software
development costs.
Cash used by financing activities for the nine months ended June 30, 2007 was approximately
$800,000 of which $1.0 million was utilized to repay our revolving line of credit,
approximately $100,000 utilized to repay other debt and approximately $300,000 proceeds received
for repayment of a note receivable.
On
August 1, 2007, we sold all the outstanding shares of Percipia, Inc., a wholly-owned
subsidiary, in our Telephone Communications segment for approximately $4.0 million in
cash, subject to a post-closing adjustment. Approximately $3.25 million of these proceeds were
utilized to pay down the revolving line of credit thereby providing additional availability of
funds for future targeted acquisitions.
20
During the nine months ended June 30, 2007, we had cash or cash equivalents more than adequate
to cover known requirements. Our known requirements consist of normal operating expenses. It is
anticipated that we will remain as liquid during the remainder of fiscal 2007 through cash
generated from operations and our revolving line of credit.
Capital Resources:
On January 27, 2006, we completed the sale of our securities to investors in a private
placement pursuant to purchase agreements, dated December 15, 2005, by and among us and the
investors of the common stock named therein (the Purchase Agreements). Pursuant to the Purchase
Agreements, we agreed to sell up to an aggregate of 2,857,146 shares of our common stock at a price
per share of $5.25 (the Private Placement), with total gross proceeds (before fees and expenses)
to us of approximately $15 million and net proceeds to us of approximately $13.5 million. In
conjunction with the Private Placement, warrants to purchase 1,000,000 shares of common stock were
issued, at an exercise price of $6.30 (subject to adjustment). The shares and warrants have
anti-dilution features. As of June 30, 2007, no warrants issued as part of the Private Placement
had been exercised.
We
have a credit agreement with a financial institution, which provides for a
revolving line of credit collateralized by our assets. 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 June 30, 2007 was 8.07%. The revolving line of credit has a
commitment fee in the amount of .375% per annum on the average daily unused amount of the aggregate
revolving committed amount. The balance due on the line was $7.0 million at June 30, 2007. As a term
of the revolving credit line, we are required to maintain certain financial covenants.
On
May 14, 2007, we amended the terms of our credit agreement to extend the maturity
date to April 1, 2008 and to reduce the capacity under the revolving line of credit from
$20,000,000 to $16,000,000. The amendment also modified certain financial covenants. The leverage
ratio was increased and the consolidated EBITDA requirement was reduced.
On
August 13, 2007, the maturity date of our credit agreement was
extended to October 1, 2008.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices,
such as interest rates, a decline in the stock market and foreign currency exchange rates.
We are exposed to certain market risks that are inherent in our financial instruments,
including the impact of interest rate movements and our ability to meet financial covenants. These
financial instruments arise from transactions entered into in the normal course of business. We are
also subject to interest rate risk on our senior credit facility and may be subject to interest
rate risk on any future financing requirements. We attempt to limit our exposure to interest rate
risk in our financial instruments by managing long-term debt and our borrowings under our revolving
line of credit. While we cannot predict or manage our ability to refinance existing debt or the
impact interest rate movements or our ability to meet financial covenants will have on our existing
debt, we continue to evaluate our financial position on an ongoing basis.
We generally conduct business in U.S. dollars, and as a result, we have limited foreign
currency exchange rate risk. However, we are exposed to foreign currency risk through our
operations in the Telephone Communications business. Foreign currency risk arises from transactions
denominated in a currency other than our functional currency and from foreign denominated revenue
and profit translated into U.S. dollars. The primary foreign currency to which we are exposed is
the British pound sterling, Telecom FMs functional local currency. We do not currently use forward
exchange contracts to limit potential losses in earnings or cash flows from foreign currency
exchange rate movements. Our consolidated balance sheets are translated at exchange rates in effect
as of the balance sheet date and income statement accounts are translated at average exchange rates
for the period of the income statement. Translation gains and losses are included as a separate
component of stockholders equity as cumulative translation adjustments. Foreign currency
transaction gains and losses are included in other income and expenses. The effect of an immediate
change in foreign exchange rates would not have a material impact on our financial condition or
results of operations.
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Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
The term disclosure controls and procedures refers to the controls and procedures of a
company that are designed to ensure that information required to be disclosed by a company in the
reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within required time periods. Our Chief Executive Officer and our Interim Chief
Financial Officer have concluded, based on their evaluation as of June 30, 2007, that our
disclosure controls and procedures are effective.
Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting during the nine
months ended June 30, 2007 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in the Companys Quarterly Report on Form 10-Q for the period ended March 31,
2007, Percipia resolved its pending litigation with Halcyon Solutions, Inc. on mutually acceptable
terms, and made a one-time payment to the plaintiff in an amount that is not material to the
Company.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Item 1, Risk
Factors, in the Companys Form 10-KSB for the fiscal year ended September 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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 Interim 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 Interim 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 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: August 14, 2007
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/s/ JOHN J. HAYES |
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John J. Hayes |
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President and Chief Executive Officer |
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Date: August 14, 2007
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/s/ EDWARD M. CARRIERO, JR. |
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Edward M. Carriero, Jr. |
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Interim Chief Financial Officer |
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