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 |
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For the quarterly period ended December 31, 2007 |
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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 |
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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 incorporation or organization)
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(I.R.S. Employer Identification No.) |
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595 South Federal Highway, Suite 500
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 Noo
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 January 31, 2008, 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
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 AND SEPTEMBER 30, 2007
(UNAUDITED)
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December 31, 2007 |
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September 30, 2007 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
1,366,757 |
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$ |
2,781,838 |
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Accounts receivable, net |
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5,439,666 |
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3,481,064 |
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Inventories, net |
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1,601,180 |
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1,826,636 |
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Prepaid and other current assets |
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1,679,786 |
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2,185,909 |
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Total Current Assets |
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10,087,389 |
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10,275,447 |
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PROPERTY, PLANT, AND EQUIPMENT, net |
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2,193,662 |
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2,118,552 |
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OTHER ASSETS: |
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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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306,714 |
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359,375 |
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Customer list, net |
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10,250,006 |
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10,958,234 |
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Goodwill |
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62,112,528 |
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60,675,353 |
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Other assets |
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446,774 |
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390,294 |
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Total Other Assets |
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75,116,022 |
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74,383,256 |
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TOTAL ASSETS |
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$ |
87,397,073 |
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$ |
86,777,255 |
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The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 AND SEPTEMBER 30, 2007
(UNAUDITED)
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December 31, 2007 |
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September 30, 2007 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
2,827,660 |
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$ |
2,346,395 |
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Accrued expenses |
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3,202,532 |
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4,263,674 |
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Unearned revenues |
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789,734 |
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952,417 |
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Customer deposits |
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2,896,919 |
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3,166,264 |
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Notes payable and capital leases, current portion |
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392,540 |
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409,029 |
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Total Current Liabilities |
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10,109,385 |
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11,137,779 |
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LONG TERM LIABILITIES: |
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Notes payable and capital leases, net of current portion |
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6,129,630 |
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5,545,456 |
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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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9,832,796 |
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6,732,796 |
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Total Long Term Liabilities |
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20,962,426 |
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17,278,252 |
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TOTAL LIABILITIES |
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31,071,811 |
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28,416,031 |
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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, $.10 par value, 100,000,000 shares
authorized, 13,091,088 shares issued and outstanding
at December 31, 2007 and September 30, 2007, respectively |
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1,309,110 |
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1,309,110 |
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Additional paid-in capital |
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52,520,449 |
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52,378,437 |
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Retained earnings |
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2,471,194 |
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4,585,007 |
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Accumulated other comprehensive gain cumulative
translation adjustment |
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24,509 |
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88,670 |
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Total Stockholders Equity |
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56,325,262 |
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58,361,224 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
87,397,073 |
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$ |
86,777,255 |
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The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
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2007 |
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2006 |
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SALES |
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Lawn and pest control services sales |
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$ |
13,448,897 |
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$ |
12,388,515 |
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Telephone communications sales |
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2,471,204 |
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2,559,088 |
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Total sales |
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15,920,101 |
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14,947,603 |
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COST OF SALES |
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Lawn and pest control services cost of sales |
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4,966,956 |
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4,561,766 |
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Telephone communications cost of sales |
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1,152,144 |
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1,486,264 |
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Total cost of sales |
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6,119,100 |
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6,048,030 |
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GROSS PROFIT |
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9,801,001 |
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8,899,573 |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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11,593,761 |
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9,637,073 |
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LOSS FROM OPERATIONS |
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(1,792,760 |
) |
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(737,500 |
) |
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OTHER INCOME (EXPENSES): |
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Interest income |
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53,904 |
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67,774 |
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Interest expense |
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(379,627 |
) |
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(288,323 |
) |
Gain (Loss) on disposal of assets |
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4,670 |
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(21,706 |
) |
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Total Other Income (Expenses) |
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(321,053 |
) |
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(242,255 |
) |
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LOSS FROM OPERATIONS BEFORE INCOME TAXES |
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(2,113,813 |
) |
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(979,755 |
) |
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INCOME TAX (EXPENSE) BENEFIT |
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317,303 |
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LOSS FROM CONTINUING OPERATIONS |
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(2,113,813 |
) |
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(662,452 |
) |
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX PROVISION OF $0 and $769,703
IN 2007 and 2006, RESPECTIVELY |
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1,262,143 |
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NET (LOSS) INCOME |
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$ |
(2,113,813 |
) |
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$ |
599,691 |
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BASIC AND DILUTED INCOME (LOSS) PER SHARE: |
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CONTINUING OPERATIONS |
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$ |
(0.16 |
) |
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$ |
(0.05 |
) |
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DISCONTINUED OPERATIONS |
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$ |
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$ |
0.10 |
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NET (LOSS) INCOME |
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$ |
(0.16 |
) |
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$ |
0.05 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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BASIC and DILUTED |
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13,091,088 |
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13,017,233 |
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The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007
(UNAUDITED)
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Stockholders' |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income (Loss) |
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Equity |
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Balance at September 30, 2007 |
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13,091,088 |
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$ |
1,309,110 |
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$ |
52,378,437 |
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$ |
4,585,007 |
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$ |
88,670 |
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$ |
58,361,224 |
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Comprehensive income: |
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Net (loss) |
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(2,113,813 |
) |
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(2,113,813 |
) |
Currency translation adjustment |
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(64,161 |
) |
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(64,161 |
) |
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Comprehensive (loss) |
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(2,113,813 |
) |
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(64,161 |
) |
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(2,177,974 |
) |
Share-based compensation |
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142,012 |
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142,012 |
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Balance at December 31. 2007 |
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13,091,088 |
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$ |
1,309,110 |
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$ |
52,520,449 |
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$ |
2,471,194 |
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$ |
24,509 |
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$ |
56,325,262 |
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The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
6
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
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2007 |
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2006 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net (loss) income |
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$ |
(2,113,813 |
) |
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$ |
599,691 |
|
Adjustments to reconcile net (loss) income to
net cash (used in) operating activities: |
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Depreciation |
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227,383 |
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|
235,918 |
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Amortization |
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|
978,299 |
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|
561,406 |
|
Deferred taxes |
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|
452,400 |
|
Bad debt reserve |
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|
5,747 |
|
Inventories reserve |
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|
374 |
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|
77,962 |
|
Gain on sale of assets |
|
|
(4,670 |
) |
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|
(2,346,367 |
) |
Stock issued for services rendered |
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|
|
|
|
|
45,000 |
|
Stock-based compensation expense |
|
|
142,012 |
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|
216,984 |
|
(Increase) decrease in assets: |
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Accounts receivable |
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(1,885,817 |
) |
|
|
(1,130,709 |
) |
Interest receivable |
|
|
|
|
|
|
(10,453 |
) |
Inventories |
|
|
238,282 |
|
|
|
(64,710 |
) |
Prepaid and other current assets |
|
|
478,493 |
|
|
|
410,289 |
|
Other assets |
|
|
(28,852 |
) |
|
|
(108,785 |
) |
Increase (decrease) in liabilities: |
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|
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Accounts payable and accrued expenses |
|
|
(837,518 |
) |
|
|
84,429 |
|
Unearned revenue |
|
|
(162,683 |
) |
|
|
(682 |
) |
Customer deposits |
|
|
(273,142 |
) |
|
|
(369,825 |
) |
|
|
|
|
|
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|
Net Cash (Used In) Operating Activities |
|
|
(3,241,652 |
) |
|
|
(1,341,705 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of property, plant, and equipment |
|
|
(193,991 |
) |
|
|
(98,204 |
) |
Software development costs |
|
|
|
|
|
|
(95,768 |
) |
Cash paid for business acquisitions |
|
|
(1,000,000 |
) |
|
|
(1,500,000 |
) |
Net proceeds from sale of assets |
|
|
8,047 |
|
|
|
2,522,274 |
|
|
|
|
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Net Cash (Used In) Provided by Investing Activities |
|
|
(1,185,944 |
) |
|
|
828,302 |
|
|
|
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|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
7
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
|
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|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
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|
|
|
|
|
|
Proceeds from line of credit |
|
|
3,100,000 |
|
|
|
456,477 |
|
Repayment of notes payable and capital leases |
|
|
(32,316 |
) |
|
|
(46,858 |
) |
|
|
|
|
|
|
|
Net Cash Provided By Financing Activities |
|
|
3,067,684 |
|
|
|
409,619 |
|
|
|
|
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|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash |
|
|
(55,169 |
) |
|
|
83,571 |
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(1,415,081 |
) |
|
|
(20,213 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
2,781,838 |
|
|
|
1,601,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
1,366,757 |
|
|
$ |
1,580,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
397,159 |
|
|
$ |
257,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES: |
|
|
|
|
|
|
|
|
Common stock issued in acquisition |
|
$ |
|
|
|
$ |
300,000 |
|
|
|
|
|
|
|
|
Debt incurred in acquisitions |
|
$ |
600,000 |
|
|
$ |
1,500,000 |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
8
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Consolidated Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange Commission and in
accordance with the instructions to Form 10-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, 2007 Annual Report on Form 10-K. Operating results
for the three months ended December 31, 2007 are not necessarily indicative of the results that may
be expected for the fiscal year ending September 30, 2008.
2. Summary of Significant Accounting Policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of Sunair Services
Corporation and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of three months or
less to be cash equivalents.
Accounts Receivable
Accounts receivable consist of balances due from sales. The Company 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 December 31, 2007 and
September 30, 2007, the Company established an allowance of $346,559 and $334,419 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. As of
December 31, 2007 and September 30, 2007, the Company established a reserve of $692,330 and
$691,954, respectively.
9
Property, Plant, and Equipment
Property, plant and equipment are carried at cost. Depreciation is provided over the estimated
useful lives
of the assets using both the straight-line and accelerated methods. Leasehold improvements are
amortized over the shorter of the life of the lease or the estimated useful life of the leasehold
improvement. The estimated useful lives used to compute depreciation are as follows:
|
|
|
Leasehold improvements
|
|
3 to 10 years |
Machinery and equipment
|
|
4 to 10 years |
The cost of maintenance and repairs is charged to expense as incurred; renewals and
betterments are capitalized. When properties are retired or otherwise disposed of, the cost of such
properties and the related accumulated depreciation are removed from the accounts.
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. As of December 31, 2007 and
September 30, 2007, the remaining unamortized software costs amounted to $306,714 and $359,375,
respectively. During 2007, the Company sold the outstanding shares of Percipia where most of the
software costs were incurred.
Customer Lists
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 obtained 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. Middleton
has applied the same valuation method on all of the subsequent acquisitions. Customer lists and
intangible assets with estimable useful lives are 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, (FASB No. 144).
The Company previously amortized customer lists on a straight-line basis over the weighted average
expected life of the customer of 8 years. In the fourth quarter of 2007, the Company performed an
extensive analysis to reassess the expected life of the customer lists and concluded that the
expected life of the customer list should be adjusted from 8 years to 5 years. The change in the
estimated useful life used to account for customer lists resulted from our ongoing analysis of all
pertinent factors, including actual customer attrition data, demand, and competition. The pertinent
factors have been influenced by managements ongoing customer retention programs, as well as
tactical and strategic initiatives to improve service delivery, customer satisfaction, and the
credit worthiness of the subscriber customer base. In accordance with FASB Statement No. 154,
Accounting Changes and Error Corrections, (FASB No. 154), the change in estimated useful life of
customer lists is accounted for prospectively. Amortization expense for the three months ended
December 31, 2007 and 2006 amounted to $933,432, and $412,344 respectively.
Goodwill
Goodwill represents the excess of costs over fair value of net assets of businesses acquired.
Pursuant to FASB Statement No. 142 (FASB No. 142), Goodwill and Other Intangible Assets, 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 No. 142. The Company tests goodwill for impairment as of September 30 of each
year and, more frequently, if a triggering event occurs utilizing a valuation study. Recoverability
of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair
value of the reporting unit with its carrying
amount. If a reporting units carrying amount exceeds its fair value, the second step is performed.
The second step involves a comparison of the implied fair value and carrying value of that
reporting units goodwill. To the extent that a reporting units carrying amount exceeds the
implied fair value of its goodwill, an impairment loss is recognized.
10
In performing this assessment, management uses the income approach and the similar transactions
method of the market approach to develop the fair value of the Reporting Unit in order to assess
its potential impairment of goodwill. The income approach is based on a discounted cash flow model
which relies on a number of factors, including operating results, business plans, economic
projections and anticipated future cash flows. Rates used to discount future cash flows are
dependent upon interest rates and the cost of capital at a point in time. The similar transactions
method is a market approach methodology in which the fair value of a business is estimated by
analyzing the prices at which companies similar to the subject, which are used as guidelines, have
sold in controlling interest transactions (mergers and acquisitions). Target companies are compared
to the subject company, and multiples paid in transactions are analyzed and applied to subject
company data, resulting in value indications. Comparability can be affected by, among other things,
the product or service produced or sold, geographic markets served, competitive position,
profitability, growth expectations, size, risk perception, and capital structure. There are
inherent uncertainties related to these factors and managements judgment in applying them to the
analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis
will change in such a manner that impairment in value may occur in the future.
Based upon the most recent assessment as of September 30, 2007, the estimated fair value of the
reporting unit exceeded its carrying amount by approximately $4.3 million. As of December 31,
2007, the Company was not aware of any items or events that would cause an adjustment to the
recorded value of goodwill for impairment.
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. No asset impairment occurred during the three months ended December 31, 2007
and 2006.
Income (loss) per share
Basic earnings per share amounts are computed by dividing the net income by the weighted average
number of common shares outstanding. Diluted earnings per share amounts are computed by dividing
net income by the weighted average number of shares of common stock, common stock equivalents, and
stock options outstanding during the period. Potential shares of common stock and their effects on
income were excluded from the diluted calculations if the effect was anti-dilutive.
Revenue Recognition
Service revenues are recorded and recognized when the service is completed. Sales revenues are
recorded when products are shipped and title has passed to unaffiliated customers, and when
collectability 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.
11
Leases
In accordance with FASB Statement No. 13, Accounting for Leases, (FASB No. 13), the Company
performs a review of newly acquired leases to determine whether a lease should be treated as a
capital or operating lease. Capital lease assets are capitalized and depreciated over the term of
the initial lease. A
liability equal to the present value of the aggregated lease payments is recorded utilizing the
stated lease interest rate. If an interest rate is not stated the Company will determine an
estimated cost of capital and utilize that rate to calculate the present value. If the lease has an
increasing rate over time and/or is an operating lease, all leasehold incentives, rent holidays, or
other incentives will be considered in determining if a deferred rent liability is required.
Leasehold incentives are capitalized and depreciated over the initial term of the lease. At
December 31, 2007 and September 30, 2007, the outstanding capital lease payable amounted to $15,513
and $16,353 respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses totaled $565,812, and
$607,680 for the three months ended December 31, 2007 and 2006, respectively. The advertising
expenditures for the three months ended December 31, 2006 related to Percipia, Inc. (Percipia)
are included in loss from discontinued operations.
Foreign Currency Translation
Telecoms functional currency is the British pound sterling, its local currency. Accordingly,
balance sheet accounts are translated at exchange rates in effect at the end of the period and
income statement accounts are translated at an average exchange rate 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 December 31, 2007
and September 30, 2007, accumulated other comprehensive income was comprised of cumulative foreign
currency translation adjustments.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, approximate fair value due to the short-term maturities of these assets and
liabilities. The fair market value of other financial instruments is provided by the use of quoted
market prices and other appropriate valuation techniques, based on information available at
year-end.
Concentration of credit risk
The Company at various times during the year maintains cash balances in excess of federally insured
(FDIC) limits. The uninsured balances were $1,094,234 and $2,462,838 at December 31, 2007 and
September 30, 2007, respectively.
Stock-based Compensation
Effective January 1, 2006, the Company adopted FASB Statement No.123 (revised 2004), Share-Based
Payments (FASB No. 123R). The Company adopted FASB No. 123R using the modified prospective
basis. Under this method, compensation costs recognized beginning January 1, 2006 included costs
related to 1) all share-based payments granted prior to but not yet vested as of January 1, 2006,
based on previously estimated grant-date fair values and 2) all share-based payments granted
subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the
provisions of FASB No. 123R. The Company uses the Black-Scholes option pricing model to estimate
the fair value of stock options granted subsequent to the date of adoption of FASB No. 123R. See
Note 11 Stock Options.
12
Income taxes
The Company accounts for income taxes using FASB Statement No. 109, Accounting for Income Taxes
(FASB No. 109), which requires recognition of deferred tax liabilities and assets for expected
future tax consequences of events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to reverse. A valuation
allowance is recorded for deferred tax assets if it is more likely than not that some portion or
all of the deferred tax assets will not be realized. In July 2006, the FASB issued Interpretation
No. (FIN) 48, Accounting for Uncertainty in Income Taxes and FSP FIN 48-1, which amended certain
provisions of FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with FASB No. 109. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 requires that the Company determine whether
the benefits of the Companys tax positions are more likely than not of being sustained upon audit
based on the technical merits of the tax position. The provisions of FIN 48 also provide guidance
on de-recognition, classification, interest and penalties, accounting in interim periods and
disclosure. The provisions of FIN 48 are effective as of the beginning of the 2008 calendar year,
with the cumulative effect of a change in accounting principle recorded as an adjustment to opening
retained earnings. The Company is currently evaluating the impact that the adoption of FIN 48 will
have on its future results of operations and financial position.
Reclassification
Certain reclassifications of amounts previously reported have been made to the accompanying
consolidated financial statements in order to maintain consistency and comparability between
periods presented.
In August 2007, the Company sold Percipia. For purposes of comparability, the results of these
operations have been reclassified from continuing operations to discontinued operations for the
three months ended December 31, 2006 presented in the accompanying condensed consolidated
statements of operations. See Note 12- Discontinued Operations.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007) Business Combinations (FASB No.
141(R)). FASB No. 141(R) retains the fundamental requirements of the original pronouncement
requiring that the purchase method be used for all business combinations. FASB No. 141(R) defines
the acquirer as the entity that obtains control of one or more businesses in the business
combination, establishes the acquisition date as the date that the acquirer achieves control and
requires the acquirer to recognize the assets acquired, liabilities assumed and any non-controlling
interest at their fair values as of the acquisition date. FASB No. 141(R) also requires that
acquisition-related costs be recognized separately from the acquisition. FASB No. 141(R) is
effective for the Company for fiscal 2010. The Company is currently assessing the impact of FASB
No. 141(R) on its consolidated financial position and results of operations.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (FASB No. 160). The objective of FASB No. 160
is to improve the relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements by establishing accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. This Statement applies to all entities that prepare consolidated financial
statements, except not-for-profit organizations. FASB No. 160 amends ARB 51 to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. It also amends certain of ARB 51s consolidation procedures for consistency with
the requirements of FASB No. 141 (R). This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1,
2009, for entities with calendar year-ends). Earlier adoption is prohibited. The effective date of
this Statement is the same as that of the related Statement 141(R). FASB No. 160 will be effective
for the Companys fiscal 2010. This Statement shall be applied prospectively as of the beginning
of the fiscal year in which this Statement is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be applied
retrospectively for all periods presented. The Company is currently assessing the impact of FASB
No. 160 as its consolidated financial statements.
13
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB Statement No. 115 (FASB No. 159). FASB
No. 159 gives the Company the irrevocable option to carry most financial assets and liabilities at
fair value, with changes in fair value recognized in earnings. FASB No. 159 is effective for the
Companys 2009 fiscal year, although early adoption is permitted. The Company is currently
assessing the impact of FASB No. 159 on its consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FASB No. 157).
FASB No. 157 provides a common definition of fair value and establishes a framework to make the
measurement of fair value in generally accepted accounting principles more consistent and
comparable. FASB No. 157 also requires expanded disclosures to provide information about the extent
to which fair value is used to measure assets and liabilities, the methods and assumptions used to
measure fair value, and the effect of fair value measures on earnings. On December 14, 2007, the
FASB issued proposed FASB Staff Position No. FAS 157-b, Effective Date of FASB No. 157 (Proposed
FSP). The Proposed FSP would amend FASB No. 157, to delay the effective date of FASB No. 157 for
all nonfinanical assets and nonfinancial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (that is, at least annually). The
Proposed FSP defers the effective date of FASB No. 157 to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years for items within the scope of the Proposed FSP.
FASB No. 157 will be effective for the Companys 2010 fiscal year, although early adoption is
permitted. The Company is currently assessing the potential effect of FASB No. 157 on its
consolidated financial statements.
3. Acquisitions
Acquisition of Marshall Pest Control of SW FL, Inc.
On October 2, 2007, Middleton acquired substantially all the assets of Marshall Pest Control of SW
FL, Inc. (Marshall) , a lawn and pest control services company located in Naples, Florida for
$1.6 million, consisting of $1.0 million in cash and $600,000 in the form of a promissory note. In
addition, the Company incurred working capital adjustments and transaction costs of approximately $0.3 million.
The following table sets forth the allocation of the purchase price to Marshall tangible and
intangible assets acquired and liabilities assumed as of October 2, 2007:
|
|
|
|
|
Goodwill |
|
$ |
1,487,775 |
|
Customer list |
|
|
225,204 |
|
Accounts receivable |
|
|
68,989 |
|
Inventory |
|
|
13,199 |
|
Fixed assets |
|
|
62,475 |
|
|
|
|
|
Total |
|
$ |
1,857,642 |
|
|
|
|
|
14
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 73,529 shares of the Companys common stock valued at $300,000.
In addition, the Company incurred working capital adjustments and
transaction costs totaling $0.1 million. The shares were
issued in January, 2007.
Acquisition of Valentines Indoor Pest Management, Inc. (Valentine)
On February 8, 2007, Middleton acquired substantially all the assets of Valentine, headquartered in
St. Cloud, Florida for approximately $43,400, consisting of $18,432 in cash and $25,000 in the form
of a promissory note.
Acquisition of David Burke, Inc. D/B/A Florida Exterminating (Florida Exterminating)
On April 30, 2007, Middleton acquired substantially all the assets of Florida Exterminating, a pest
control company headquartered in Tampa, Florida for approximately $815,000 consisting of $580,000
in cash and $235,000 in the form of a promissory note.
Acquisition of Summer Rain Fertilization Company (Summer Rain)
On May 31, 2007, Middleton acquired substantially all the assets of Summer Rain, a lawn care
services company headquartered in Margate, Florida for approximately $1.0 million, consisting of
$500,000 in cash and $500,000 in the form of a promissory note.
Acquisition of Howell Environmental, Inc. (Howell)
On August 21, 2007, Middleton acquired substantially all the assets of Howell, a lawn care and pest
control services company located in West Palm Beach, Florida, for approximately $2.3 million,
consisting of $925,000 in cash and $1.4 million in the form of a promissory note with $1.0 million
secured by a letter of credit.
Acquisition of Longboat Key Pest Control, Inc. (Longboat Key)
On September 20, 2007, Middleton acquired substantially all of the assets of Longboat Key, a lawn
care and pest control services company located in Longboat, Florida for $1.7 million, consisting of
$1.0 million in cash, $542,000 in the form of a promissory note and $158,000 to be paid over a two
year period at 50% of the collections related to a large commercial customer. The $158,000 is
considered contingent purchase price and will be recorded as part of the purchase price allocation
at the time it becomes probable that the contingency will be resolved and payment will be received.
The following table sets forth the allocation of the purchase price for tangible and intangible
assets associated with the above 2007 and 2008 acquisitions and their related acquired assets and
liabilities assumed as of December 31, 2007:
|
|
|
|
|
Goodwill |
|
$ |
9,344,859 |
|
Customer list |
|
|
2,159,885 |
|
Accounts receivable |
|
|
641,666 |
|
Inventory |
|
|
62,418 |
|
Fixed assets |
|
|
576,424 |
|
Prepaid expenses |
|
|
210,644 |
|
Customer deposits |
|
|
(79,281 |
) |
Deferred revenue |
|
|
(677,539 |
) |
|
|
|
|
Total |
|
$ |
12,239,076 |
|
|
|
|
|
15
Pro-Forma Results of Operations
The following sets forth the Companys results of operations for the three months ended December
31, 2006 as if the acquisitions had taken place on October 1, 2006.
|
|
|
|
|
|
|
For the Three |
|
|
|
Months Ended |
|
|
|
December 31, |
|
|
|
2006 |
|
Revenues |
|
$ |
16,656,825 |
|
Net (loss) |
|
$ |
(428,899 |
) |
Net (loss) per share
Basic and diluted |
|
$ |
(0.03 |
) |
The
pro-forma results of operations for the three months ended
December 31, 2007 are not presented since there was an
insignificant difference between pro-forma and actual results for the
period as Marshall was acquired on October 2, 2007.
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2007 |
|
Materials |
|
$ |
1,188,726 |
|
|
$ |
1,146,261 |
|
Finished goods |
|
|
412,454 |
|
|
|
680,375 |
|
|
|
|
|
|
|
|
|
|
$ |
1,601,180 |
|
|
$ |
1,826,636 |
|
|
|
|
|
|
|
|
The Company establishes reserves for inventory shrinkage and obsolescence. Reserves for inventory
shrinkage and obsolescence amounted to $692,330 and $691,954 at December 31, 2007 and September 30,
2007, respectively.
5. Note Receivable
Pursuant to the Asset Purchase Agreement on September 8, 2006 between the Company and Sunair
Holdings, LLC (Sunair Holdings), the Company received a three year subordinated promissory note
as partial payment for the sale of substantially all of the assets of Sunair Communications, Inc.
(Sunair Communications). The $2.0 million note issued by Sunair Holdings is guaranteed by the
members of Sunair Holdings, matures on September 8, 2009 and bears interest at one year LIBOR plus
3% (7.43% at December 31, 2007) which is payable monthly starting on October 1, 2006. At
September 30, 2007 interest receivable included in the accompanying consolidated balance sheets
amounted to $55,560, which was paid together with interest due through
December 2007. 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.
16
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2007 |
|
Leasehold improvements |
|
$ |
1,050,561 |
|
|
$ |
1,146,561 |
|
Automobiles |
|
|
3,402,452 |
|
|
|
3,288,057 |
|
Machinery and equipment |
|
|
3,799,200 |
|
|
|
3,545,880 |
|
|
|
|
|
|
|
|
|
|
|
8,252,213 |
|
|
|
7,980,498 |
|
Accumulated Depreciation |
|
|
6,058,551 |
|
|
|
5,861,946 |
|
|
|
|
|
|
|
|
|
|
$ |
2,193,662 |
|
|
$ |
2,118,552 |
|
|
|
|
|
|
|
|
Depreciation expense consists of $227,383 and $235,918 during the three months ended December
31, 2007 and 2006, respectively.
7. Revolving Line of Credit
The Company has a line of credit with a financial institution collateralized by substantially all
of the assets of the Company. The maximum credit limit was
$16,000,000 as of December 31, 2007. Interest is compounded daily
based upon the London Interbank Offering Rate (LIBOR) plus a variable percentage based on the
leverage ratio. The interest rate at December 31, 2007 was approximately 7.10%. 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 outstanding balance on the revolving line of
credit at December 31, 2007 and September 30, 2007, respectively, amounted to $9,832,796 and
$6,732,796. At December 31, 2007, the availability under the revolving line of credit amounted to
$1.4 million.
On May 14, 2007, the Company amended the terms of its credit agreement to extend the maturity date
to April 1, 2008 and to reduce the capacity under the revolving line of credit from $20.0 million
to $16.0 million. This amendment also modifies certain financial covenants. The leverage ratio was
increased and the consolidated EBITDA requirement was reduced. On August 14, 2007, the Company
obtained a subsequent extension of the maturity date on the credit agreement to October 1, 2008.
On
February 12, 2008, the Company amended certain terms and conditions of the credit agreement.
Among the amended terms and conditions were an extension of the
maturity date to January 7, 2009 as well as amendments to the financial covenants relating to consolidated EBITDA, the leverage ratio
and the fixed charge coverage ratio, which amendments are effective as of December 31, 2007. As of
December 31, 2007, the Company was in compliance with its
financial covenants. See Note 19- Subsequent Events
for additional information.
8. Notes Payable
The Company has a capital lease for certain office equipment. The balance of the capital lease at
December 31, 2007 and September 30, 2007, totaled $15,513 and $16,353, respectively.
Notes payable with a financial institution for leased office build out costs and computer
equipment. The notes bear interest at 5.60% and 5.25% per annum, respectively, payable in monthly
installments of principal and interest in the amount of $3,285 through March 29, 2011 and $5,795
through September 20, 2008, respectively. Balances at December 31, 2007 and September 30, 2007,
totaled $167,683 and $192,367, 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 $220
to $687, expiring in various years through 2010. Balances at December 31, 2007 and September 30,
2007, totaled $61,973 and $68,765, respectively.
17
The Company has notes payable relating to certain acquisitions as described in Note 3- Acquisitions
which bear interest at 6% and 7%, with one not payable bearing interest at LIBOR plus 2% per annum
(6.43% at December 31, 2007), 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 2011. The note payable balances for the acquisition debt at December 31, 2007 and September
30, 2007, totaled $6,277,000 and $5,677,000, respectively. At December 31, 2007 and September 30,
2007, $275,000 of these acquisition notes payable were classified as current portion.
Interest expense incurred for the notes payable amounted to $109,888 and $36,914 for the three
months ended December 31, 2007 and 2006, respectively.
Minimum future principal payments required under the above notes payable as of December 31, 2007,
for each of the next five years and in the aggregate are:
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
392,540 |
|
2009 |
|
|
3,286,477 |
|
2010 |
|
|
1,686,979 |
|
2011 |
|
|
1,156,174 |
|
2012 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
6,522,170 |
|
Less: current portion |
|
|
392,540 |
|
|
|
|
|
Long term portion |
|
$ |
6,129,630 |
|
|
|
|
|
9. Notes Payable-Related Party
The Company has a $5,000,000 subordinated note payable to related parties, in connection with the
acquisition of Middleton. As of December 31, 2007 these parties include the former CEO of Middleton and a Director of the
Company, who was appointed CEO of Middleton effective January 18,
2008. See Note 19 Subsequent Events. Interest is paid semi-annually at prime (7.25% as of December 31, 2007). The note payable
is due in full on June 7, 2010. Interest expense related to this note payable amounted to $108,767
and $104,284, for three months ended December 31, 2007 and 2006, respectively.
10. Income Taxes
The Company had an income tax provision for continuing operations of $0 and $317,303 for the three
months ended December 31, 2007 and 2006,respectively. The Company did not have an income tax
benefit for the three months ended December 31, 2007 as the Company has $13.5 million of net
operating losses carryforwards which expire in 2026 and which are fully reserved. In addition, the
Company does not have any net operating loss carrybacks . As a result the Company was unable to
recognize an income tax benefit for the quarter ended December 31, 2007. For the three months
ended December 31, 2006, the Company had an income tax provision of $769,703 related to
discontinued operations.
11. Stock Options
At the annual meeting of shareholders held on February 4, 2005, the shareholders approved the
adoption of the Companys 2004 Stock Incentive Plan with an aggregate of 800,000 shares of the
Companys unissued common stock, to replace the Companys 2000 Stock Option Plan, which was
approved by the Companys shareholders at a shareholders meeting held on January 24, 2000. The
800,000 shares authorized under the 2004 Stock Incentive Plan are reserved for issuance to
officers, directors, employees and prospective employees as incentive stock options, non-qualified
stock options, restricted stock awards, other equity awards and performance based stock incentives.
The option price, numbers of shares and grant date are determined at the discretion of the
Companys board of directors or the committee overseeing the 2004 Stock Incentive Plan.
18
No stock options were granted during the three months ended December 31, 2007 and 2006. There were
no stock options exercised during the three months ended December 31, 2007.
Stock options activity for the three months ended December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Avg. Exercise |
|
|
Remaining |
|
|
|
Shares |
|
|
Price |
|
|
Life |
|
Balances, beginning of period |
|
|
585,092 |
|
|
$ |
6.94 |
|
|
|
|
|
Granted |
|
|
|
|
|
$ |
|
|
|
|
|
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
Expired/Forfeited |
|
|
(33,812 |
) |
|
$ |
9.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period |
|
|
551,280 |
|
|
$ |
6.77 |
|
|
|
5.39 |
|
Options exercisable, end of period |
|
|
411,247 |
|
|
$ |
6.75 |
|
|
|
5.23 |
|
Options available for future grants |
|
|
455,387 |
|
|
|
|
|
|
|
|
|
Stock options outstanding and exercisable at December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Exercise |
|
Options |
|
Remaining |
|
Exercise |
|
Options |
Price |
|
Outstanding |
|
Life |
|
Price |
|
Exercisable |
$ 3.23
|
|
|
35,000 |
|
|
|
7.1 |
|
|
$ |
3.23 |
|
|
|
31,356 |
|
$ 3.40
|
|
|
25,000 |
|
|
|
7.62 |
|
|
$ |
3.40 |
|
|
|
2,380 |
|
$ 4.79
|
|
|
40,000 |
|
|
|
1.59 |
|
|
$ |
4.79 |
|
|
|
40,000 |
|
$ 5.00
|
|
|
166,667 |
|
|
|
5.09 |
|
|
$ |
5.00 |
|
|
|
131,850 |
|
$ 5.35
|
|
|
20,000 |
|
|
|
6.12 |
|
|
$ |
5.35 |
|
|
|
20,000 |
|
$ 5.60
|
|
|
90,000 |
|
|
|
5.96 |
|
|
$ |
5.60 |
|
|
|
67,993 |
|
$ 6.09
|
|
|
17,500 |
|
|
|
6.1 |
|
|
$ |
6.09 |
|
|
|
8,307 |
|
$11.40
|
|
|
157,113 |
|
|
|
5.43 |
|
|
$ |
11.40 |
|
|
|
109,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
551,280 |
|
|
|
|
|
|
|
|
|
|
|
411,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in the 551,280 options outstanding are 206,667 options that were
granted outside of the 2004 Stock Incentive Plan.
Fair Value
On January 1, 2006, the Company adopted the provisions of FASB No. 123R 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 FASB No. 123R, under which
stock-based compensation for the three months ended December 31, 2007 and 2006 is based on grant
date fair value estimated in accordance with the provisions of FASB No. 123R and compensation
expense for all stock-based compensation awards granted subsequent to January 1, 2006, as well as
the unvested portion of previously granted awards that remained outstanding as of January 1, 2006
based on the grant date fair value estimated in accordance with the provisions of FASB No. 123R. In
addition, options granted to certain members of the board of directors as payment for Board
Services recorded in accordance with FASB No. 123R and the issuance of restricted stock awards and
stock units are also included in stock-based compensation for the three months ended December 31,
2007 and 2006. The Company recognizes
compensation expense for restricted stock awards and restricted stock units on a straight-line
basis over the requisite service period of the award. For the three months ended December 31, 2007
and 2006, respectively, the Company recorded $142,012 and $216,984 of stock-based compensation
expense which has been classified as selling, general and administrative expenses.
19
The fair value of stock-based awards was estimated using the Black-Scholes model, on the date of
grant, with the following weighted-average assumptions:
|
|
|
|
|
|
|
For the Three Months Ended December 31, |
|
|
2007 |
|
2006 |
Expected dividend yield
|
|
|
|
|
Expected price volatility
|
|
61.75-70.07%
|
|
65.21-70.07% |
Risk-free interest rate
|
|
3.76-4.76%
|
|
3.76-4.61% |
Expected life of options
|
|
5-8.25 years
|
|
5-8.25 years |
The Companys computation of the expected volatility for the three months ended December 31, 2007
and 2006 is based primarily upon historical volatility and the expected term of the option. The
expected term is based on the historical exercise experience under the share-based plans of the
underlying award (including post-vesting employment termination behavior) and represents the period
of time the share-based awards are expected to be outstanding. The interest rate is based on the
U.S. Treasury yield in effect at the time of grant for a period commensurate with the estimated
expected life.
As of
December 31, 2007, approximately $683,291 of total unrecognized compensation costs related to
non-vested stock options is expected to be recognized over a weighted average period of 1.21 years.
12. Discontinued Operations
On August 1, 2007, the Companysold all the outstanding shares of Percipia, a wholly-owned
subsidiary, in our Telephone Communications segment for approximately $4.0 million in cash, of
which $750,000 was placed in an escrow account pending the resolution of certain tax matters.
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 $2.2 million, $1.4 million net of income taxes.
20
The accompanying consolidated condensed statements of operations for the three months presented
have been adjusted to classify Percipia as discontinued operations. Selected statements of
operations data for the Companys discontinued operations is as follows:
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended |
|
|
|
December 31, 2006 |
|
Percipia, Inc. Net loss |
|
$ |
(151 |
) |
|
|
|
|
Pre-tax (loss) from discontinued operations |
|
|
(151 |
) |
Income tax benefit |
|
|
52 |
|
|
|
|
|
(Loss) from discontinued operations, net of income taxes |
|
|
(99 |
) |
|
|
|
|
|
|
|
|
|
Gain on sale of assets from discontinued operations |
|
|
2,183 |
|
|
|
|
|
Income tax (provision) |
|
|
(822 |
) |
|
|
|
|
Gain on sale of assets from discontinued operations, net of income taxes |
|
|
1,361 |
|
|
|
|
|
Income from discontinued operations, net of income taxes |
|
$ |
1,262 |
|
|
|
|
|
13. Employee Benefits
Middleton has a profit sharing and 401(k) Plan. Under the Plan, eligible employees may contribute
up to 15% of their annual compensation. During the three months ended December 31, 2007 and 2006,
the Company contributed $57,354, and $48,046, respectively.
14. Commitments and Contingencies
The Company leases office space under operating leases expiring in various years through 2012, and
vehicles under operating leases expiring in various years through 2014. Certain leases provide for
renewal options for periods from one to five years at their fair rental value at the time of
renewal. In the normal course of business, operating leases are generally renewed or replaced by
other leases. Rent expense and vehicle lease expense was $837,367 and
$818,516 for the three months
ended December 31, 2007 and 2006, respectively.
Litigation
We are involved in litigation from time to time in the ordinary course of our business. Except for
the litigation described below, we do not believe that any litigation in which we are currently
involved, individually or in the aggregate, is material to our financial condition or results of
operations.
In October 2007, the Company filed a lawsuit in the Circuit Court for the Ninth Judicial Circuit in
the State of Florida against a number of former employees of Middleton for violation of their
non-compete agreements. In addition, certain of these former employees pursued and hired away
employees of Middleton which is also a violation of the existing employee non-compete agreements.
The Company is seeking injunctive relief and damages. In October 2007, the Company also filed a
lawsuit against a competitor for tortious interference as they hired these former employees knowing
that they were in violation of the Companys non-compete agreement. The lawsuits were recently
filed and are in discovery stages. At this time it is too early to tell what the likelihood of the
outcome will be as well as the amount of damages that the Company may be entitled to.
21
15. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following as December 31, 2007 and September 30,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
Customer Lists |
|
|
Total |
|
Ending balance, September 30, 2007 |
|
$ |
60,675,353 |
|
|
$ |
10,958,234 |
|
|
$ |
71,633,587 |
|
Acquisition of businesses |
|
|
1,487,775 |
|
|
|
225,204 |
|
|
|
1,712,979 |
|
Purchase price adjustment |
|
|
(50,600 |
) |
|
|
|
|
|
|
(50,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
62,112,528 |
|
|
|
11,183,438 |
|
|
|
73,295,966 |
|
Less amortization expense |
|
|
|
|
|
|
(933,432 |
) |
|
|
(933,432 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2007 |
|
$ |
62,112,528 |
|
|
$ |
10,250,006 |
|
|
$ |
72,362,534 |
|
|
|
|
|
|
|
|
|
|
|
The table below presents the weighted average life in years of the Companys intangible
assets.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Goodwill |
|
|
(a |
) |
|
|
(a |
) |
Customer lists (b) |
|
|
5 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Weighted average |
|
|
5 |
|
|
|
8 |
|
|
|
|
|
|
|
|
(a) |
|
Goodwill is not amortized but, along with all other intangible assets, is reviewed for
possible impairment each year at September 30th or when indicators of impairment exist. |
(b) |
|
Change in estimated useful life for customer lists during the fourth quarter of 2007. See
Note 2- Summary of Significant Accounting Policies. |
The table below reflects the estimated aggregate customer account amortization for each of the
five succeeding years of the Companys existing customer account base as of December 31, 2007:
|
|
|
|
|
|
|
Aggregate |
|
|
|
Amortization |
|
|
|
Expense |
|
2008 |
|
$ |
3,724,403 |
|
2009 |
|
|
3,724,403 |
|
2010 |
|
|
2,150,066 |
|
2011 |
|
|
539,535 |
|
2012 |
|
|
111,599 |
|
|
|
|
|
Total Aggregate Amortization Expense |
|
$ |
10,250,006 |
|
|
|
|
|
16. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average number of shares
outstanding during the period. Due to the Companys losses from continuing operations, dilutive
potential common shares were excluded from the computation of diluted loss per share, as inclusion
would be anti-dilutive for the periods presented.
22
Loss per share data for continuing operations were computed as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Basic and diluted net (loss) per share from continuing operations: |
|
|
|
|
|
|
|
|
Net (loss) from continuing operations |
|
$ |
(2,113,813 |
) |
|
$ |
(662,452 |
) |
Shares used in computation: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
13,091,088 |
|
|
|
13,017,233 |
|
|
|
|
|
|
|
|
Basic and diluted net (loss) per share from continuing operations: |
|
$ |
(0.16 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
The following table summarizes the weighted average dilutive securities that were excluded
from the above computation of diluted net income (loss) per share because their inclusion would
have an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Dilutive securities: |
|
|
|
|
|
|
|
|
Options/warrants |
|
|
11,000,000 |
|
|
|
11,000,000 |
|
|
|
|
|
|
|
|
Total anti-dilutive shares |
|
|
11,000,000 |
|
|
|
11,000,000 |
|
|
|
|
|
|
|
|
17. Segment and Geographic 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.
23
Certain financial information for each segment is provided below as of December 31, 2007 and
September 30, 2007, and for the three months ended December 31:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
Net revenues: |
|
|
|
|
|
|
|
|
Lawn and pest control services |
|
$ |
13,448,897 |
|
|
$ |
12,388,515 |
|
Telephone communications |
|
|
2,471,204 |
|
|
|
2,559,088 |
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
15,920,101 |
|
|
$ |
14,947,603 |
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Lawn and pest control services |
|
$ |
467,511 |
|
|
$ |
1,001,530 |
|
Telephone communications |
|
|
124,376 |
|
|
|
20,441 |
|
Unallocated home office expenses |
|
|
(2,384,647 |
) |
|
|
(1,759,471 |
) |
|
|
|
|
|
|
|
Total operating loss |
|
$ |
(1,792,760 |
) |
|
$ |
(737,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2007 |
|
Identifiable property plant and equipment: |
|
|
|
|
|
|
|
|
Lawn and pest control services |
|
$ |
2,146,717 |
|
|
$ |
2,112,214 |
|
Telephone communications |
|
|
46,945 |
|
|
|
258,726 |
|
|
|
|
|
|
|
|
Total identifiable property plant and equipment |
|
$ |
2,193,662 |
|
|
$ |
2,370,940 |
|
|
|
|
|
|
|
|
The Company operates worldwide, primarily in North America. No single country or geographic region,
other than North America, is significant to the overall operations of the Company.
18. Related Parties
The Company pays management fees to RPC Financial Advisors, LLC (RPC), a related party.
Management fees for the three months ended December 31, 2007 and 2006 totaled $390,625 and
$391,769, respectively. On January 7, 2008, the Company entered into an Amended Management Services
Agreement, see Note 19-Subsequent Events for additional information.
The Company issued a note payable to related parties in connection with the acquisition of
Middleton, as discussed in Note 9-Note Payable-Related Party.
The Company received a note receivable from former related parties through the sale of Sunair
Communications, the high frequency radio segment, as more fully described in Note 5-Note
Receivable.
19. Subsequent Events
On January 7, 2008, the Company entered into a management services agreement (Management Services
Agreement or the Amended Management Services Agreement) with RPC, which supersedes and replaces
the management services agreement (the Previous Management Services Agreement) dated February 8,
2005, as amended, between the Company and RPC. Pursuant to the Amended Management Services
Agreement, the Company provided RPC with notice that the Previous Management Services Agreement
would not be renewed and that the Amended Management Services Agreement would be effective as of
February 8, 2008.
The
Amended Management Services Agreement is for a term of three years which
commenced on February
8, 2008 and expires on February 7, 2011. The Company will pay RPC a monthly management fee equal
to one (1%) of the monthly gross revenues of the Company, which will be payable monthly based on
the average monthly revenues of the preceding quarter. RPC will also receive a transaction fee of
up to 2% of the Aggregate Consideration received by the Company in a Transaction (as such
capitalized terms are defined in the Management Services Agreement). Pursuant to the Management
Services Agreement, RPC will provide the Company with services similar to those provided in the
Previous Management Services Agreement. After the initial term of three years, the Management
Services Agreement will automatically renew for successive one year terms, unless either RPC or the
Company terminates the agreement upon 30 days notice.
24
Effective January 18, 2008, the Company appointed Charles P. Steinmetz to serve as the Chief
Executive Officer of Middleton. Mr. Steinmetz was the majority owner of Middleton from 1977 until
it was purchased by the Company in June 2005 and has served as a director of the Company since that
time.
On
February 12, 2008 (the Closing Date), the Company amended its revolving line of credit terms and conditions (the
Second Amendment) which included an extension of the maturity date to January 7, 2009 from October
1, 2008, reduced the capacity under the credit agreement from
$16.0 million to $13.5 million as of the Closing Date, to $12.75 million as of June 30, 2008
and to $11.75 million as of
September 30, 2008. The Second Amendment also modified the financial covenants relating to
consolidated EBITDA, the leverage ratio and the fixed charge coverage ratio, which amendments are
effective as of December 31, 2007. Based on the revised financial covenants included in the Second
Amendment, the Company was in compliance with the financial covenants
in its revolving line of credit as of December 31, 2007.
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 Annual
Report on Form 10-K for the fiscal year ended September 30, 2007
filed with the Securities and Exchange Commission (the
SEC) on January 15, 2008 and other filings with 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.
Company Overview
Sunair Services Corporation 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. We intend to divest ourselves of our remaining telecommunications
subsidiary, Telecom FM Limited (Telecom FM), as soon as is practicable. However, we cannot assure you of the timing of
such disposition, or the amount of net proceeds we will receive upon such disposition.
25
To date the acquisitions and divestitures have been as follows:
Acquisitions:
|
|
|
June 2005 we acquired the issued and outstanding stock of Middleton, 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 as Pest Environmental Services, Inc. |
|
|
|
|
January 2006 we acquired substantially all the assets of Par Pest Control, Inc., D/B/A
Paragon Termite & Pest Control. |
|
|
|
|
February 2006 we acquired substantially all the assets of Pestec Pest Control, Inc. |
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|
March 2006 we acquired substantially all the assets of Ron Fee, Inc. |
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|
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|
November 2006 we acquired substantially all the assets of Archer Exterminators, Inc. |
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|
|
|
February 2007 we acquired substantially all the assets of Valentines Indoor Pest
Management, Inc. |
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|
April 2007 we acquired substantially all the assets of David Burke, Inc., D/B/A Florida
Exterminating. |
|
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|
May 2007 we acquired substantially all the assets of Summer Rain Fertilization Company. |
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|
August 2007 we acquired substantially all the assets of Howell Environmental, Inc. |
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|
September 2007 we acquired substantially all the assets of Longboat Key Pest Control,
Inc. |
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|
October 2007 we acquired substantially all the assets of Marshall Pest Control of SW
FL, Inc. |
All of these acquisitions of lawn care and pest control companies have been made by Middleton, our
platform company, and are being integrated into its operations.
Dispositions:
|
|
|
September 2006 we sold substantially all the assets of
Sunair Communications Inc., our high
frequency radio business. |
|
|
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|
November 2006 we sold real estate associated with the previously sold high frequency
radio business. |
|
|
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|
August 2007 we sold all the issued and outstanding stock
of Percipia, Inc. (Percipia), a wholly-owned subsidiary
in our telephone communications segment. |
26
Results of Operations
Three Months Ended December 31, 2007 compared to the Three Months Ended December 31, 2006
Revenue:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Lawn and pest control services |
|
$ |
13,449 |
|
|
$ |
12,389 |
|
Telephone communications |
|
|
2,471 |
|
|
|
2,559 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
15,920 |
|
|
$ |
14,948 |
|
|
|
|
|
|
|
|
Lawn and Pest Control Services
Revenue from the lawn and pest control services segment is comprised of lawn, pest control and
termite services. Revenue in the segment increased by $1.1 million or 8.6% for the three months
ended December 31, 2007 as compared to the three months ended December 31, 2006. The revenue
increase was primarily attributable to the integration of our acquisitions since December 31, 2006.
Telephone Communications
Our remaining telephone communications subsidiary, Telecom FM, manufactures and sells least cost
routing devices. Revenue from Telecom FM decreased by $0.1 million or 3.4% for the three months
ended December 31, 2007 as compared to the three months ended December 31, 2006.
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Lawn and pest control services |
|
$ |
4,967 |
|
|
$ |
4,562 |
|
Telephone communications |
|
|
1,152 |
|
|
|
1,486 |
|
|
|
|
|
|
|
|
Total cost of sales |
|
$ |
6,119 |
|
|
$ |
6,048 |
|
|
|
|
|
|
|
|
Lawn and Pest Control Services
Cost of sales in the lawn and pest control services segment increased by $0.4 million or 8.9% to
$5.0 million or 36.9% of revenue for the three months ended December 31, 2007 as compared to $4.6
million or 36.8% of revenue for the three months ended December 31, 2006.
|
|
|
Chemical costs increased by $0.2 million for the three months ended December 31, 2007
as compared to the same period in 2006, proportionate to the increase in revenue. |
|
|
|
|
Payroll expenses increased by $0.1 million for the three months ended December 31, 2007
as compared to the same period in 2006 primarily due to an increase in sales training
costs. |
|
|
|
|
Vehicle costs increased by $0.1 million for the three months ended December 31, 2007
compared to the same period in 2006 primarily due to an increase in fuel costs. |
27
Telephone Communications
Cost of sales in our telephone communications segment decreased by $0.3 million or 22.5% to $1.2
million or 46.6% of revenue for the three months ended December 31, 2007 as compared to $1.5
million or 58.1% of revenue for the three months ended December 31, 2006, primarily related to a
decrease in product costs due to a shift in product mix.
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Lawn and pest control services |
|
$ |
8,482 |
|
|
$ |
7,827 |
|
Telephone communications |
|
$ |
1,319 |
|
|
|
1,073 |
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
9,801 |
|
|
$ |
8,900 |
|
|
|
|
|
|
|
|
Lawn and Pest Control Services
The gross profit of the lawn and pest control services segment increased by $0.7 million or 8.4% to
$8.5 million or 63.1% of revenue for the three months ended December 31, 2007 as compared to $7.8
million or 63.2% of revenue for the three months ended December 31, 2006:
|
|
|
The increase in gross profit of 8.4% period over period is proportionate to the
increase in revenue period over period. |
Telephone Communications
The gross profit in the telecommunications segment increased by $0.2 million or 23.0% to $1.3
million for the three months ended December 31, 2007 as compared to $1.1 million for the three
months ended December 31, 2006.
|
|
Gross profit increased for the three months ended December 31, 2007 compared to the
same time period in 2006 despite a decrease in revenue. The gross margin increased to
53.4% in 2007 compared to 41.9% in 2006 due to a shift in product mix. |
Operating Expenses:
Selling, General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Selling |
|
$ |
2,023 |
|
|
$ |
1,820 |
|
General and administrative |
|
|
8,400 |
|
|
|
7,147 |
|
Depreciation and amortization |
|
|
1,171 |
|
|
|
670 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
11,594 |
|
|
$ |
9,637 |
|
|
|
|
|
|
|
|
28
Selling, general and administrative expenses (SG&A expense) increased by $2.0 million or 20.3% to
$11.6 million or 72.8% of revenue for the three months ended December 31, 2007 as compared to $9.6
million or 64.5% of revenue for the three months ended December 31, 2006.
Selling expenses increased by $0.2 million or 11.2% to $2.0 million or 12.7% of revenue for the
three months ended December 31, 2007 as compared to $1.8 million or 12.2% of revenue for the three
months ended December 31, 2006.
|
|
|
Middletons selling costs increased by $0.1 million for the three months ended December
31, 2007 as compared to the same time period in 2006 as a result of costs associated with
the recruiting and training of new sales consultants. |
General and administrative expenses increased by $1.3 million or 17.5% to $8.4 million or 52.8% of
revenue for the three months ended December 31, 2007 as compared to$7.1 million or 47.8% of revenue
for the three months ended December 31, 2006.
|
|
|
Middletons general and administrative expenses increased by $1.0 million for the three
months ended December 31, 2007 as compared to the same period in 2006. The increase was
primarily driven by payroll expenses which increased by $0.6 million for the three month
period ended December 31, 2007 as compared to the same period in 2006 as a result of the
purchase and integration of several acquisitions, expansion of staff
related to meeting our compliance requirements with regards to Sarbanes-Oxley and an increase in staff related to the conversion of our
existing operating software to a new system. Occupancy expenses increased by $0.1
million due to our expansion and increased facility lease rates. Vehicle expenses
increased by $0.1 million due to higher fuel costs. |
Depreciation and amortization expenses increased by $0.5 million or 74.7% to $1.2 million or 7.4%
of revenue for the three months ended December 31, 2007 as compared to $0.7 million or 4.5% of
revenue for the three months ended December 31, 2006.
|
|
|
Corporate depreciation and amortization expenses increased by $0.5 million for the
three months ended December 31, 2007 as compared to 2006 due to a significant increase in
the amortization of intangible assets due to our acquisition activity coupled with the
change in estimated useful life for
customer lists from 8 years to 5 years, which occurred during the fourth quarter of fiscal
year 2007. |
Other Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months |
|
|
|
Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
Interest income |
|
$ |
54 |
|
|
$ |
68 |
|
Interest expense |
|
|
(380 |
) |
|
$ |
(288 |
) |
Gain (Loss) on disposal of assets |
|
|
5 |
|
|
$ |
(22 |
) |
|
|
|
|
|
|
|
Total other income (expenses) |
|
$ |
(321 |
) |
|
$ |
(242 |
) |
|
|
|
|
|
|
|
Other
expenses decreased by $0.1 million or 32.5% for the three months ended December 31,2007
as compared to the three months ended December 31, 2006.
29
|
|
|
Middletons interest expense increased by $0.1 million for the three months ended
December 31, 2007 as compared to the three months ended December 31, 2006. The lawn and
pest services segment incurred an additional $4.2 million in debt related to acquisitions
since December 31, 2006. |
Income Tax (Expenses) Benefit from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Income tax (expense) benefit |
|
$ |
|
|
|
$ |
317 |
|
|
|
|
|
|
|
|
Income tax (expense) from continuing operations decreased by $0.3 million for the three months
ended December 31, 2007 as compared to the three months ended December 31, 2006. The Company did
not have an income tax benefit for the three months ended December 31, 2007 as the Company has
$13.5 million of net operating losses carryforwards which expire in 2026 and which are fully
reserved. In addition, the Company does not have any net operating loss carrybacks . As a result
the Company was unable to recognize an income tax benefit for the quarter ended December 31, 2007.
Discontinued Operations:
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended |
|
|
|
December 31, 2006 |
|
Percipia, Inc. Net loss |
|
$ |
(151 |
) |
|
|
|
|
Pre-tax (loss) from discontinued operations |
|
|
(151 |
) |
Income tax benefit |
|
|
52 |
|
|
|
|
|
(Loss) from discontinued operations, net of income taxes |
|
|
(99 |
) |
|
|
|
|
Gain on sale of assets from discontinued operations |
|
|
2,183 |
|
|
|
|
|
Income tax (provision) |
|
|
(822 |
) |
|
|
|
|
Gain on sale of assets from discontinued operations, net of income taxes |
|
|
1,361 |
|
|
|
|
|
Income from discontinued operations, net of income taxes |
|
$ |
1,262 |
|
|
|
|
|
As indicated earlier, our significant divestitures have been recorded as discontinued
operations:
|
|
|
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 $2.2 million, $1.4 million net of income taxes. |
|
|
|
|
On August 1, 2007, we sold all the outstanding shares of Percipia. The results of operations for the
three months ended December 31, 2006 related to Percipia have been classified as
discontinued operations. |
30
Liquidity and Capital Resources
Generally our working capital needs are funded from operations and advances under our revolving
line of credit. In the lawn care and pest control business segment customers are billed when
service is rendered and payment is usually received in less than thirty (30) days. In the
telecommunication business segment customers are billed when orders are shipped and payment is
usually received in sixty (60) to one hundred twenty (120) days from the billing date. Materials
related to telecommunications equipment production must be purchased significantly in advance of
the billing date and payment terms with vendors generally range between thirty (30) and sixty (60) days.
As of December 31, 2007, our liquidity and capital resources included cash and equivalents of $1.4
million, a working capital deficit of less than $(0.1) million
and $1.4 million was available under our revolving
line of credit. As of September 30, 2007, our liquidity and capital resources included cash and
equivalents of $2.8 million, a working capital deficit of $(0.9) million and $9.0 million available under
our revolving line of credit.
Cash used
in operating activities was $3.2 million for the three months
ended December 31, 2007 as
compared to cash used in operating activities of $1.3 million for the three months ended December
31, 2006. During the three months ended December 31, 2007 the primary sources of cash from
operating activities were reductions in prepaid expenses of $0.5 million and inventory of $0.2
million. The primary uses of cash from operating activities for the three months ended December 31,
2007 were increase in accounts receivable of $1.9 million, reduction in accounts payable and
accrued expenses of $0.8 million, reduction in customer deposits of $0.3 million, reduction in
unearned revenue of $0.2 million and funding of cash loss of $0.8 million.
Net cash
used in investing activities was $1.2
million during the three months ended
December 31, 2007 as compared to cash provided by investing activities of $0.8 million for the three months
ended December 31, 2006. During the three months ended December 31, 2007 the primary uses of cash
from investing activities
during the three months ended December 31, 2007 were cash paid for business acquisitions of $1.0
million and the purchase of property, plant and equipment of $0.2 million.
Net cash
provided by financing activities was $3.1
million for the three months ended
December 31, 2007 as compared to $0.4 million for the three months ended December 31, 2006. During the three
months ended December 31, 2007 the primary source of cash from
financing activities was proceeds from revolving line of credit of $3.1 million.
Cash flows from discontinued operations are included in the consolidated statement of cash flows
within operating, investing and financing activities for the three months ended December 31, 2006.
Our uses of cash for fiscal 2008 will be principally for working capital needs, capital
expenditures and debt service. We are not anticipating significant acquisition activity in fiscal
2008. We believe that we can fund our planned business activities from a combination of cash flows
from operations and funds available under our revolving line of credit. On February 12, 2008, we
amended our revolving line of credit terms and conditions (the Second Amendment) which included
an extension of the maturity date to January 7, 2009 from October 1, 2008, reduced the capacity
under the credit agreement from $16.0 million to $13.5 million effective February 12, 2008,
to $12.75 million as of June 30, 2008 and to $11.75 million as of September 30, 2008. The Second
Amendment also modified the financial covenants relating to consolidated EBITDA, the leverage ratio
and the fixed charge coverage ratio, which amendments are effective as of December 31, 2007. Based
on the revised financial covenants included in the Second Amendment, we were in compliance with the financial
covenants in its revolving line of credit at December 31, 2007.
31
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies in the Notes to the Condensed Consolidated
Financial Statements for a discussion of recent accounting pronouncements and their effect, if any,
on the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position, results of
operations or cash flows due to adverse changes in financial and commodity market prices and rates.
We are exposed to market risk in the areas of changes in United States and international borrowing
rates and changes in foreign currency exchange rates. Historically and as of December 31, 2007, we
have not used derivative instruments or engaged in hedging activities to minimize market risk.
Interest Rate Risk
Our exposure to market risk resulting from changes in interest rates results from the variable rate
of our credit facility with Wachovia Bank, National Association. An increase in interest rates
would result in lower earnings and increased cash outflow and lower borrowing capacity. The
interest rate on our credit facility is compounded daily based upon the LIBOR rate, plus a variable
percentage based on our leverage ratio. The effect of each 1% increase in the LIBOR rate on our
credit facility would result in an annual increase in interest expense of less than $0.1 million.
We do not believe that near-term changes in the interest rates, if any, will result in a material
effect on our financial condition or results of operation.
Exchange Rate Risk
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 condensed 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.
32
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Interim Chief Financial
Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e)
of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Interim Chief
Financial Officer concluded that, at December 31, 2007, our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commissions rules and forms.
(b) Changes in Internal Controls
There was no change in our internal controls or in other factors that could affect these controls
during the quarter ended December 31, 2007 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in litigation from time to time in the ordinary course of our business. Except for
the litigation described below, we do not believe that any litigation in which we are currently
involved, individually or in the aggregate, is material to our financial condition or results of
operations.
In October 2007, we filed a lawsuit in the Circuit Court for the Ninth Judicial Circuit in the
State of Florida against a number of former employees of Middleton for violation of their
non-compete agreements. In addition, certain of these former employees pursued and hired away
employees of Middleton which is also a violation of the existing employee non-compete agreements.
The Company is seeking injunctive relief and damages. In October 2007, we also filed a lawsuit
against one of our competitors for tortuous interference as they hired these former employees
knowing that they were in violation of our non-compete agreement. The lawsuits were recently filed
and are in discovery stages. At this time it is too early to tell what the likelihood of the
outcome will be as well as the amount of damages that we may be entitled to.
Item 1A. Risk Factors
You should
refer to Item 1A, Risk Factors included in the September 30, 2007 Annual Report
on Form 10-K for a comprehensive list of our risk factors. The following risk factor was included
in this section as a recent change in the risk factor materialized. If the following risk factor or
those incorporated by reference into this report materialize, our financial condition and results
of operations could be materially and adversely affected and the value of our stock could decline.
The risks and uncertainties described below and incorporated by reference into this report are
those that we currently believe may materially affect us. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may materially and adversely
affect our business operations.
Our shareholders may incur substantial dilution.
Our shareholders may incur substantial dilution of their percentage of ownership interests if our
warrant holders exercise their warrants. As of February 11, 2008, we have warrants outstanding to
purchase (i) 5 million shares of our common stock at an exercise price of $7.00 per share, will
expire on February 7, 2010 and (ii) 1 million shares of our common stock at an exercise price of
$6.30 per share, which will expire on January 27, 2011. Upon exercise of the warrants, up to an
additional 6,000,000 shares of our common stock would be outstanding. In addition, the warrants
issued to our warrant holders contain certain anti-dilution provisions that if triggered, would
cause a decrease in the exercise price of the warrants and would result in more shares of common
stock being issuable upon exercise of the warrants. The warrants also provide for other customary
anti-dilution adjustments to the exercise price in the event of stock splits, stock dividends,
recapitalizations, reorganizations, reclassifications, distributions and business combinations, as
well as adjustments in the event of cash dividends and other specified distributions. Adjustments
to the warrants pursuant to these provisions may result in significant dilution to the ownership
interests of our existing shareholders and may adversely affect the market price of our common
stock. The anti-dilution provisions may also limit our ability to obtain additional financing on
terms favorable to us. On February 8, 2008, 5 million warrants to purchase 5 million shares of our
common stock at an exercise price of $6.00 per share expired.
33
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
|
|
|
3.1
|
|
Sunair Services Corporation Amended
and Restated Bylaws, effective as of December 18, 2007
(incorporated by reference to Exhibit 3.1 in the Companys
Current Report Form 8-K filed with the SEC on December 20, 2007). |
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10.1
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Separation and Release Agreement
dated as of October 29, 2007 between Sunair Southeast Pest
Holdings, Inc. and Gregory Clendenin (incorporated by reference to
Exhibit 10.1 in the Companys
Current Report Form 8-K filed with the SEC on November 1, 2007). |
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10.2
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Consulting Agreement dated as of
October 29, 2007 between Sunair Southeast Pest Holdings, Inc.
and George Clendenin (incorporated by reference to Exhibit 10.2 in the Companys
Current Report Form 8-K filed with the SEC on November 1, 2007). |
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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 |
34
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: February 14, 2008 |
/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: February 14, 2008 |
/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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35