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 March 31, 2008 |
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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 No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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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 4/30/08, the Registrant had 13,091,088 shares outstanding 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 MARCH 31, 2008 AND SEPTEMBER 30, 2007
(UNAUDITED)
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March 31, 2008 |
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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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$ |
3,276,604 |
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$ |
2,781,838 |
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Accounts receivable, net |
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4,768,613 |
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3,481,064 |
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Inventories, net |
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2,060,048 |
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1,826,636 |
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Prepaid and other current assets |
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1,762,752 |
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2,185,909 |
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Total Current Assets |
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11,868,017 |
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10,275,447 |
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PROPERTY, PLANT, AND EQUIPMENT, net |
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2,029,081 |
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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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271,104 |
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359,375 |
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Customer list, net |
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9,318,905 |
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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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409,103 |
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390,294 |
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Total Other Assets |
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74,111,640 |
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74,383,256 |
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TOTAL ASSETS |
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$ |
88,008,738 |
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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 MARCH 31, 2008 AND SEPTEMBER 30, 2007
(UNAUDITED)
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March 31, 2008 |
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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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$ |
2,191,722 |
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$ |
2,346,395 |
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Accrued expenses |
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3,917,539 |
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4,263,674 |
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Unearned revenues |
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1,003,036 |
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952,417 |
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Customer deposits |
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3,562,953 |
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3,166,264 |
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Notes payable and capital leases, current portion |
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1,838,327 |
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409,029 |
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Total Current Liabilities |
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12,513,577 |
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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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4,635,520 |
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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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10,532,796 |
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6,732,796 |
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Total Long Term Liabilities |
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20,168,316 |
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17,278,252 |
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TOTAL LIABILITIES |
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32,681,893 |
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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, $.10 par value, 100,000,000 shares
authorized, 13,091,088 shares issued and outstanding
at March 31, 2008 and September 30, 2007, respectively |
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1,309,110 |
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1,309,110 |
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Additional paid-in capital |
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52,581,524 |
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52,378,437 |
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Retained earnings |
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1,403,998 |
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4,585,007 |
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Accumulated other comprehensive gain cumulative translation adjustment |
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32,213 |
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88,670 |
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Total Stockholders Equity |
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55,326,845 |
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58,361,224 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
88,008,738 |
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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 SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
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2008 |
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2007 |
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SALES |
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Lawn and pest control services sales |
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$ |
27,647,194 |
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$ |
25,990,136 |
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Telephone communications sales |
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5,049,233 |
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5,875,549 |
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Total sales |
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32,696,427 |
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31,865,685 |
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COST OF SALES |
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Lawn and pest control services cost of sales |
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10,425,089 |
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9,319,837 |
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Telephone communications cost of sales |
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2,338,867 |
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3,219,253 |
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Total cost of sales |
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12,763,956 |
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12,539,090 |
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GROSS PROFIT |
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19,932,471 |
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19,326,595 |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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22,462,331 |
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19,982,156 |
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LOSS FROM OPERATIONS |
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(2,529,860 |
) |
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(655,561 |
) |
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OTHER INCOME (EXPENSES): |
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Interest income |
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122,331 |
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119,418 |
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Interest expense |
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(728,140 |
) |
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(675,713 |
) |
(Loss) gain on disposal of assets |
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(6,157 |
) |
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10,518 |
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Total Other Income (Expenses) |
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(611,966 |
) |
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(545,777 |
) |
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LOSS FROM OPERATIONS BEFORE INCOME TAXES |
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(3,141,826 |
) |
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(1,201,338 |
) |
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INCOME TAX (PROVISION) BENEFIT |
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(39,183 |
) |
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269,991 |
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LOSS FROM CONTINUING OPERATIONS |
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(3,181,009 |
) |
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(931,347 |
) |
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INCOME FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX PROVISION OF $0 and $562,933
IN 2008 and 2007, RESPECTIVELY |
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1,312,060 |
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NET (LOSS) INCOME |
|
$ |
(3,181,009 |
) |
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$ |
380,713 |
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BASIC AND DILUTED (LOSS) INCOME PER SHARE: |
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CONTINUING OPERATIONS |
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$ |
(0.24 |
) |
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$ |
(0.07 |
) |
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DISCONTINUED OPERATIONS |
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$ |
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$ |
0.10 |
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NET (LOSS) INCOME |
|
$ |
(0.24 |
) |
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$ |
0.03 |
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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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13,041,634 |
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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 OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
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2008 |
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2007 |
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SALES |
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Lawn and pest control services sales |
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$ |
14,198,297 |
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$ |
13,601,619 |
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Telephone communications sales |
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2,578,029 |
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3,316,464 |
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Total sales |
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16,776,326 |
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16,918,083 |
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COST OF SALES |
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Lawn and pest control services cost of sales |
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5,458,133 |
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4,758,071 |
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Telephone communications cost of sales |
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1,186,723 |
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1,732,989 |
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Total cost of sales |
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6,644,856 |
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6,491,060 |
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GROSS PROFIT |
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10,131,470 |
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10,427,023 |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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10,868,570 |
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10,345,084 |
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(LOSS) INCOME FROM OPERATIONS |
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(737,100 |
) |
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81,939 |
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OTHER INCOME (EXPENSES): |
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Interest income |
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68,427 |
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|
51,644 |
|
Interest expense |
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(348,513 |
) |
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(387,390 |
) |
(Loss) gain on disposal of assets |
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(10,827 |
) |
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32,224 |
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Total Other Income (Expenses) |
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|
(290,913 |
) |
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(303,522 |
) |
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LOSS FROM OPERATIONS BEFORE INCOME TAXES |
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(1,028,013 |
) |
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(221,583 |
) |
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INCOME TAX (PROVISION) |
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(39,183 |
) |
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(47,312 |
) |
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(LOSS) FROM CONTINUING OPERATIONS |
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(1,067,196 |
) |
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(268,895 |
) |
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INCOME FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX BENEFIT OF $0 and $206,770
IN 2008 and 2007, RESPECTIVELY |
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|
49,917 |
|
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NET (LOSS) |
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$ |
(1,067,196 |
) |
|
$ |
(218,978 |
) |
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BASIC AND DILUTED (LOSS) PER SHARE: |
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|
|
|
|
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CONTINUING OPERATIONS |
|
$ |
(0.08 |
) |
|
$ |
(0.02 |
) |
|
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DISCONTINUED OPERATIONS |
|
$ |
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
NET (LOSS) INCOME |
|
$ |
(0.08 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
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|
|
|
|
|
|
BASIC and DILUTED |
|
|
13,091,088 |
|
|
|
13,066,578 |
|
|
|
|
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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 CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE (LOSS) INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 2008
(UNAUDITED)
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Accumulated |
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Additional |
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Other |
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Total |
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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 |
|
Balance at September 30, 2007 |
|
|
13,091,088 |
|
|
$ |
1,309,110 |
|
|
$ |
52,378,437 |
|
|
$ |
4,585,007 |
|
|
$ |
88,670 |
|
|
$ |
58,361,224 |
|
Comprehensive income: |
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Net (loss) |
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|
|
|
|
|
|
|
|
|
|
|
|
(3,181,009 |
) |
|
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|
|
|
|
(3,181,009 |
) |
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,457 |
) |
|
|
(56,457 |
) |
|
|
|
|
|
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|
|
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|
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|
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Comprehensive (loss) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
(3,181,009 |
) |
|
|
(56,457 |
) |
|
|
(3,237,466 |
) |
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
203,087 |
|
|
|
|
|
|
|
|
|
|
|
203,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008 |
|
|
13,091,088 |
|
|
$ |
1,309,110 |
|
|
$ |
52,581,524 |
|
|
$ |
1,403,998 |
|
|
$ |
32,213 |
|
|
$ |
55,326,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3,181,009 |
) |
|
$ |
380,713 |
|
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
454,946 |
|
|
|
470,443 |
|
Amortization |
|
|
1,952,805 |
|
|
|
1,159,023 |
|
Deferred taxes |
|
|
|
|
|
|
269,100 |
|
Bad debt reserve |
|
|
|
|
|
|
5,747 |
|
Inventory reserve |
|
|
(423,193 |
) |
|
|
77,962 |
|
Loss (gain) on sale of assets |
|
|
6,157 |
|
|
|
(2,380,398 |
) |
Stock-based compensation expense |
|
|
203,087 |
|
|
|
240,808 |
|
Stock issued for services rendered |
|
|
|
|
|
|
45,000 |
|
(Increase) decrease in assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,214,763 |
) |
|
|
(1,644,822 |
) |
Income tax receivable |
|
|
|
|
|
|
23,842 |
|
Inventories |
|
|
202,980 |
|
|
|
(351,078 |
) |
Prepaid and other current assets |
|
|
400,471 |
|
|
|
(411,620 |
) |
Other assets |
|
|
3,875 |
|
|
|
393,372 |
|
Increase (decrease) in liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
(758,450 |
) |
|
|
2,327,681 |
|
Unearned revenue |
|
|
50,619 |
|
|
|
67,321 |
|
Income taxes payable |
|
|
|
|
|
|
(1,057 |
) |
Customer deposits |
|
|
392,892 |
|
|
|
134,091 |
|
|
|
|
|
|
|
|
Net Cash (Used In) Provided By Operating Activities |
|
|
(1,909,583 |
) |
|
|
806,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property, plant, and equipment |
|
|
(289,352 |
) |
|
|
(202,470 |
) |
Software development costs |
|
|
|
|
|
|
(162,018 |
) |
Cash paid for business acquisitions |
|
|
(1,000,000 |
) |
|
|
(1,518,432 |
) |
Net proceeds from sale of assets |
|
|
30,796 |
|
|
|
2,531,963 |
|
|
|
|
|
|
|
|
Net Cash (Used In) Provided by Investing Activities |
|
|
(1,258,556 |
) |
|
|
649,043 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Repayment of line of credit (net) |
|
|
|
|
|
|
(900,000 |
) |
Proceeds from line of credit |
|
|
3,800,000 |
|
|
|
|
|
Repayment of notes payable and capital leases |
|
|
(80,638 |
) |
|
|
(56,707 |
) |
|
|
|
|
|
|
|
Net Cash Provided By (Used In) Financing Activities |
|
|
3,719,362 |
|
|
|
(956,707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash |
|
|
(56,457 |
) |
|
|
99,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
494,766 |
|
|
|
598,331 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
2,781,838 |
|
|
|
1,601,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
3,276,604 |
|
|
$ |
2,199,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
676,228 |
|
|
$ |
549,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
9
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 include the accounts of
Sunair Services Corporation and its subsidiaries (the Company), required to be consolidated in
accordance with U.S. generally accepted accounting principles (GAAP). The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with the accounting
policies described in the September 30, 2007 Annual Report on Form 10-K except for the accounting
policy relating to accounting for uncertainty in income taxes, and should be read in conjunction
with the consolidated financial statements and notes thereto.
The unaudited condensed consolidated financial statements for the six and three months ended March
31, 2008 and 2007 included herein have been prepared in accordance with the instructions for Form
10-Q under the Securities Exchange Act of 1934, as amended, and Article 8 of Regulation S-X under
the Securities Act of 1933, as amended. Certain information and footnote disclosures normally
included in financial statements prepared in conformity with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant to such rules and
regulations relating to interim financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain only normal recurring adjustments necessary to present fairly the Companys
financial position as of March 31, 2008, and the results of its operations and cash flows for the
six and three months ended March 31, 2008 and 2007. Operating results for the six months ended
March 31, 2008 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
Income taxes
Effective October 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes. 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 Company did not have any unrecognized tax benefits and there was no effect on the
financial condition or results of operations as a result of implementing FIN 48. The Company does
not have any interest and penalties in the statement of operations for the six and three months
ended March 31, 2008. The tax years 2004-2007 remain subject to examination by major tax
jurisdictions.
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 all the issued and outstanding common stock of Percipia, Inc.
(Percipia). For purposes of comparability, the results of these operations have been
reclassified from continuing operations to discontinued operations for the six months ended March
31, 2007 presented in the accompanying condensed consolidated statements of operations. See Note
10- 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.
10
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 year 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 on its consolidated financial statements.
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 Pest Control, Inc. (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 |
|
|
|
|
|
11
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 cash 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 at the time
it becomes probable that the contingency will be resolved and payment will be received.
Purchase Price Allocation
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 March 31, 2008:
|
|
|
|
|
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 |
|
|
|
|
|
12
Pro-Forma Results of Operations
The following sets forth the Companys results of operations for the six months ended March 31,
2007 as if the acquisitions had taken place on October 1, 2006.
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
|
|
|
|
Months Ended |
|
|
For the Six Months |
|
|
|
March 31, |
|
|
Ended March 31, |
|
|
|
2007 |
|
|
2007 |
|
Revenues |
|
$ |
18,584,507 |
|
|
$ |
35,590,962 |
|
Net income |
|
$ |
205,744 |
|
|
$ |
1,146,631 |
|
Net income per share
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
0.02 |
|
|
$ |
0.09 |
|
The pro-forma results of operations for the three and six months ended March 31, 2008 are not
presented since there was an insignificant difference between pro-forma and actual results for the
period as our sole acquisition Marshall was acquired on October 2, 2007.
4. Note Receivable
Pursuant to the Asset Purchase Agreement on September 8, 2006 between the Company and Sunair
Electronics, LLC formerly known as 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 London Interbank Offering Rate (LIBOR) plus 3% (5.49% at March 31,
2008) which is payable monthly starting on October 1, 2006. Accrued interest income through March
31, 2008, included in prepaid and other current assets in the accompanying condensed consolidated
balance sheets amounted to $57,132. At September 30, 2007 accrued interest income amounted to
$55,560. 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.
13
5. 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 $13.5 million as of March 31, 2008.
Interest is compounded daily based upon the LIBOR plus 5.0%. The interest rate at March 31, 2008 was approximately 7.49%. 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
March 31, 2008 and September 30, 2007, respectively, amounted to $10,532,796 and $6,732,796. At
March 31, 2008, the availability under the revolving line of credit amounted to $1,967,204 which is
net of a $1.0 million outstanding letter of credit.
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 modified 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
March 31, 2008, the Company was in compliance with its financial covenants.
6. Notes Payable
The Company has a capital lease for certain office equipment. The balance of the capital lease at
March 31, 2008 and September 30, 2007, totaled $14,643 and $16,353, respectively.
The Company has 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 March 31, 2008 and September 30, 2007,
totaled $142,666 and $192,367, respectively.
The Company has 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 March 31, 2008 and
September 30, 2007, totaled $39,538 and $68,765, respectively.
14
The Company has notes payable relating to certain acquisitions as described in Note 3- Acquisitions
which bear interest at 6% and 7%, with one note payable bearing interest at LIBOR plus 2% per annum
(4.49% at March 31, 2008), with interest payable in semi-annual installments ranging in the amounts
of $3,000 to $49,000 and principal due at maturity. The notes expire in various years through 2011.
The note payable balances for the acquisition debt at March 31, 2008 and September 30, 2007,
totaled $6,277,000 and $5,677,000, respectively.
Interest expense incurred for the notes payable amounted to $217,528 and $107,640 for the six and
three months ended March 31, 2008, respectively, and $91,557 and $54,643 for the six and three
months ended March 31, 2007, respectively.
Minimum future principal payments required under the above notes payable as of March 31, 2008, for
each of the next five years and in the aggregate are:
|
|
|
|
|
2008 |
|
$ |
1,838,327 |
|
2009 |
|
|
2,056,599 |
|
2010 |
|
|
1,435,104 |
|
2011 |
|
|
1,143,817 |
|
2012 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
6,473,847 |
|
Less: current portion |
|
|
1,838,327 |
|
|
|
|
|
Long term portion |
|
$ |
4,635,520 |
|
|
|
|
|
7. 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 March 31, 2008 these related parties include Charles Steinmetz, the
former CEO of Middleton from 1977 through June 2005 and the current CEO, who was appointed to serve
as CEO of Middleton again effective January 18, 2008. 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. Interest is paid semi-annually at prime (5.25% as of March 31,
2008). The note payable is due in full on June 7, 2010. Interest expense related to this note
payable amounted to $183,835 and $75,068, for the six and three months ended March 31, 2008,
respectively, and $207,250 and $102,966 for the six and three months ended March 31, 2007,
respectively.
8. Income Taxes
The Company did not have an income tax provision or benefit for the six and three months ended
March 31, 2008, respectively, 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 three and six months ended March 31, 2008. The income tax provision of $39,183
for the three months ended March 31, 2008 relates to foreign income taxes incurred by Telecom FM.
For the six and three months ended March 31, 2007, the Company had an income tax benefit
(provision) of $269,991 and ($47,312) for continuing operations, respectively.
9. 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.
There were 369,000 and 35,000 options granted during the three months ended March 31, 2008 and
2007, respectively.
15
Stock options activity for the six months ended March 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Avg. Exercise |
|
|
Remaining |
|
|
|
Shares |
|
|
Price |
|
|
Life |
|
Balances, beginning of period |
|
|
585,092 |
|
|
$ |
6.94 |
|
|
|
|
|
Granted |
|
|
369,000 |
|
|
$ |
1.76 |
|
|
|
|
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
Expired/Forfeited |
|
|
(58,476 |
) |
|
$ |
8.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period |
|
|
895,616 |
|
|
$ |
4.55 |
|
|
|
6.30 |
|
Options exercisable, end of period |
|
|
443,685 |
|
|
$ |
6.44 |
|
|
|
5.09 |
|
Options available for future grants |
|
|
111,051 |
|
|
|
|
|
|
|
|
|
Included in the 895,616 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 six and three months ended March 31, 2008 and 2007 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 six
and three months ended March 31, 2008 and 2007. 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. The Company recorded $203,087 and $61,075 of stock-based compensation
expense which has been classified as selling, general and administrative expenses for the six and
three months ended March 31, 2008, respectively, and $240,808 and $23,824 for the six and three
months ended March 31, 2007, respectively.
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 Six Months Ended March 31, |
|
|
2008 |
|
2007 |
Expected dividend yield
|
|
|
|
|
Expected price volatility
|
|
63.76-64.36%
|
|
65.21-70.07% |
Risk-free interest rate
|
|
2.8-3.09%
|
|
3.76-4.61% |
Expected life of options
|
|
4.50-5.25 years
|
|
5-8.25 years |
The Companys computation of the expected volatility for the six months ended March 31, 2008 and
2007 is based primarily upon historical volatility and the expected term of the option. The Company
continues to use the simplified method of determining the expected term provided under SAB 110 as
sufficient historical data is not available. 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 March 31, 2008, approximately $811,657 of total unrecognized compensation costs related to
non-vested stock options is expected to be recognized over a weighted average period of 2.51 years.
16
10. Discontinued Operations
On August 1, 2007, the Company sold 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.
The accompanying consolidated condensed statements of operations for the six 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 Six Months Ended |
|
|
|
March 31, 2007 |
|
Percipia, Inc. Net loss |
|
$ |
(308 |
) |
|
|
|
|
Pre-tax (loss) from discontinued operations |
|
|
(308 |
) |
Income tax benefit |
|
|
259 |
|
|
|
|
|
(Loss) from discontinued operations, net of income taxes |
|
|
(49 |
) |
|
|
|
|
|
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 |
|
$ |
1,312 |
|
|
|
|
|
11. 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 $1,792,213 and $954,846 for the six and
three months ended March 31, 2008, respectively, and $1,653,070 and $834,554 for the six and three
months ended March 31, 2007, 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. This matter was settled during
the three months ended March 31, 2008 for an immaterial amount.
17
12. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following at March 31, 2008 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 |
|
|
|
|
|
|
(1,864,533 |
) |
|
|
(1,864,533 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2008 |
|
$ |
62,112,528 |
|
|
$ |
9,318,905 |
|
|
$ |
71,431,433 |
|
|
|
|
|
|
|
|
|
|
|
The table below presents the weighted average life in years of the Companys intangible assets.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
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. |
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 March 31, 2008:
|
|
|
|
|
|
|
Aggregate |
|
|
Amortization |
|
|
Expense |
2008
|
|
$ |
3,724,403 |
|
2009
|
|
|
3,724,403 |
|
2010
|
|
|
1,426,743 |
|
2011
|
|
|
384,060 |
|
2012
|
|
|
59,296 |
|
|
|
|
|
|
Total Aggregate Amortization Expense
|
|
$ |
9,318,905 |
|
|
|
|
|
|
13. 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 in the form of warrants were excluded from the computation of diluted loss
per share, as inclusion would be anti-dilutive for the periods presented.
18
14. Segment and Geographic Information
The Company manages its business and has segregated its activities into two business segments; (i)
Pest control, lawn and shrub care, subterranean and drywood termite control and mosquito reduction
services and (ii) installation and maintenance of telephone communication systems.
Certain financial information for each segment is provided below as of March 31, 2008 and September
30, 2007, and for the six months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net revenues: |
|
|
|
|
|
|
|
|
Lawn and pest control services |
|
$ |
27,647,194 |
|
|
$ |
25,990,136 |
|
Telephone communications |
|
|
5,049,233 |
|
|
|
5,875,549 |
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
32,696,427 |
|
|
$ |
31,865,685 |
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Lawn and pest control services |
|
$ |
1,523,281 |
|
|
$ |
2,555,710 |
|
Telephone communications |
|
|
332,231 |
|
|
|
228,404 |
|
Unallocated home office expenses |
|
|
(4,385,372 |
) |
|
|
(3,439,675 |
) |
|
|
|
|
|
|
|
Total operating loss |
|
$ |
(2,529,860 |
) |
|
$ |
(655,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Identifiable property plant and equipment: |
|
|
|
|
|
|
|
|
Lawn and pest control services |
|
$ |
1,988,340 |
|
|
$ |
2,062,451 |
|
Telephone communications |
|
|
40,741 |
|
|
|
56,101 |
|
|
|
|
|
|
|
|
Total identifiable property plant and equipment |
|
$ |
2,029,081 |
|
|
$ |
2,118,552 |
|
|
|
|
|
|
|
|
The Company operates worldwide, primarily in North America. Middleton operates entirely within the
State of Florida and Telecom FM operates primarily in Spain, the United Kingdom and Italy.
15. Related Parties
The Company pays management fees to RPC Financial Advisors, LLC (RPC), a related party. 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. Management fees for the six and three months ended
March 31, 2008 totaled $689,470 and $298,845, respectively, and $782,394 and $390,625 for the six
and three months ended March 31 2007, respectively.
19
The Company issued a note payable to related parties in connection with the acquisition of
Middleton, as discussed in Note 7-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 4-Note
Receivable.
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 (the Company we or us) 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.
20
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. |
|
|
|
|
March 2006 we acquired substantially all the assets of Ron Fee, Inc. |
|
|
|
|
November 2006 we acquired substantially all the assets of Archer Exterminators, Inc. |
|
|
|
|
February 2007 we acquired substantially all the assets of Valentines Indoor Pest Management, Inc. |
|
|
|
|
April 2007 we acquired substantially all the assets of David Burke, Inc., D/B/A Florida Exterminating. |
|
|
|
|
May 2007 we acquired substantially all the assets of Summer Rain Fertilization Company. |
|
|
|
|
August 2007 we acquired substantially all the assets of Howell Environmental, Inc. |
|
|
|
|
September 2007 we acquired substantially all the assets of Longboat Key Pest Control, Inc. |
|
|
|
|
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. |
|
|
|
|
November 2006 we sold real estate associated with the previously sold high frequency radio business. |
|
|
|
|
August 2007 we sold all the issued and outstanding stock of Percipia, Inc. (Percipia), a wholly-owned subsidiary
in our telephone communications segment. |
21
Results of Operations
Results of Operations for the Three Months Ended March 31, 2008 as Compared to the Three Months
Ended March 31, 2007.
Revenue:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Lawn and pest control services |
|
$ |
14,198 |
|
|
$ |
13,602 |
|
Telephone communications |
|
|
2,578 |
|
|
|
3,316 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
16,776 |
|
|
$ |
16,918 |
|
|
|
|
|
|
|
|
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 $0.6 million or 4.4% for the three months
ended March 31, 2008 as compared to the three months ended March 31, 2007. 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 $0.7 million or 22.3% for the three months
ended March 31, 2008 as compared to the three months ended March 31, 2007. During the second
quarter of fiscal year 2007 Telecom FM received a series of large orders due to a change in
legislation. This did not occur in the quarter ended March 31, 2008.
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Lawn and pest control services |
|
$ |
5,458 |
|
|
$ |
4,758 |
|
Telephone communications |
|
|
1,187 |
|
|
|
1,733 |
|
|
|
|
|
|
|
|
Total cost of sales |
|
$ |
6,645 |
|
|
$ |
6,491 |
|
|
|
|
|
|
|
|
Lawn and Pest Control Services
Cost of sales in the lawn and pest control services segment increased by $0.7 million or 14.7% to
$5.5 million or 38.4% of revenue for the three months ended March 31, 2008 as compared to $4.8
million or 35.0% of revenue for the three months ended March 31, 2007.
|
|
|
Chemical costs increased by $0.2 million for the three months ended
March 31, 2008 as compared to the same period in 2007. The price of
petro-based chemical and fertilizer products increased due to higher
fuel prices. |
|
|
|
|
Vehicle costs increased by $ 0.4 million for the three months ended
March 31, 2008 compared to the same period in 2007 primarily due to an
increase in fuel and vehicle maintenance costs. |
22
Telephone Communications
Cost of sales in our telephone communications segment decreased by $0.5 million or 31.5% to $1.2
million or 46.0% of revenue for the three months ended March 31, 2008 as compared to $1.7 million
or 52.3% of revenue for the three months ended March 31, 2007, 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 March 31, |
|
|
|
2008 |
|
|
2007 |
|
Lawn and pest control services |
|
$ |
8,740 |
|
|
$ |
8,844 |
|
Telephone communications |
|
|
1,391 |
|
|
|
1,583 |
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
10,131 |
|
|
$ |
10,427 |
|
|
|
|
|
|
|
|
Lawn and Pest Control Services
The gross profit of the lawn and pest control services segment decreased by $0.1 million or 1.2% to
$8.7 million or 61.6% of revenue for the three months ended March 31, 2008 as compared to $8.8
million or 65.0% of revenue for the three months ended March 31, 2007.
Telephone Communications
The gross profit in the telecommunications segment decreased by $0.2 million or 12.1% to $1.4
million for the three months ended March 31, 2007 as compared to $1.6 million for the three months
ended March 31, 2007.
|
|
|
Gross profit decreased for the three months ended March 31,
2008 compared to the same time period in 2007 primarily due to
a decrease in revenue. The gross margin increased to 54.0% in
2008 compared to 47.7% in 2007 due to a reduction in cost of
sales resulting from a shift in product mix. |
Operating Expenses:
Selling, General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Selling |
|
$ |
1,918 |
|
|
$ |
2,379 |
|
General and administrative |
|
|
7,792 |
|
|
|
7,258 |
|
Depreciation and amortization |
|
|
1,159 |
|
|
|
708 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
10,869 |
|
|
$ |
10,345 |
|
|
|
|
|
|
|
|
23
Selling, general and administrative expenses (SG&A expense) increased by $0.5 million or 5.1% to
$10.9 million or 64.8% of revenue for the three months ended March 31, 2008 as compared to $10.3
million or 61.1% of revenue for the three months ended March 31, 2007.
Selling expenses decreased by $0.5 million or 19.4% to $1.9 million or 11.4% of revenue for the
three months ended March 31, 2008 as compared to $2.4 million or 14.1% of revenue for the three
months ended March 31, 2007.
|
|
|
Middletons selling costs decreased by $0.3 million for the three
months ended March 31, 2008 as compared to the same time period in
2007 as a result of a decrease in advertising expense. |
General and administrative expenses increased by $0.5 million or 7.4% to $7.8 million or 46.3% of
revenue for the three months ended March 31, 2008 as compared to $7.4 million or 43.8% of revenue
for the three months ended March 31, 2008.
|
|
|
Middletons general and administrative expenses increased by $0.7
million for the three months ended March 31, 2008 as compared to the
same period in 2007. The increase was primarily driven by payroll
expenses which increased by $0.2 million for the three month period
ended March 31, 2008 as compared to the same period in 2007 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. Health insurance expenses also
increased by $0.1 million. |
Depreciation and amortization expenses increased by $0.5 million or 63.9% to $1.2 million or 6.9 %
of revenue for the three months ended March 31, 2008 as compared to $0.7 million or 4.2% of revenue
for the three months ended March 31, 2007.
|
|
|
Corporate depreciation and amortization expenses increased by $0.5
million for the three months ended March 31, 2008 as compared to 2007
mostly attributable to an 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 |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Interest income |
|
$ |
69 |
|
|
$ |
52 |
|
Interest expense |
|
|
(349 |
) |
|
|
(388 |
) |
(Loss) gain on disposal of assets |
|
|
(11 |
) |
|
|
32 |
|
|
|
|
|
|
|
|
Total other income (expenses) |
|
$ |
(291 |
) |
|
$ |
(304 |
) |
|
|
|
|
|
|
|
Other expenses decreased by $13,000 or 4.3% for the three months ended March 31, 2008 as compared
to the three months ended March 31, 2008.
24
Income Tax (Provision) from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Income tax (provision) |
|
$ |
(39 |
) |
|
$ |
(47 |
) |
|
|
|
|
|
|
|
The income tax provision from continuing operations decreased slightly for the three months ended
March 31, 2008 as compared to the three months ended March 31, 2007. The income tax provision of
$39,183 for the three months ended March 31, 2008 relates to foreign income taxes incurred by
Telecom FM. The Company did not recognize an income tax benefit for the three months ended March
31, 2008 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.
Discontinued Operations:
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Three Months Ended |
|
|
|
March 31, 2007 |
|
Income from discontinued operations, net of income taxes |
|
$ |
50 |
|
Gain (loss) on sale of assets from discontinued
operations, net of income taxes |
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes |
|
$ |
50 |
|
|
|
|
|
As indicated earlier, our significant divestitures have been recorded as discontinued operations:
|
|
|
On August 1, 2007, we sold all the outstanding shares of Percipia. The
results of operations for the three months ended March 31, 2007
related to Percipia have been classified as discontinued operations. |
25
Results of Operations
Results of Operations for the Six Months Ended March 31, 2008 as Compared to the Six Months Ended
March 31, 2007.
Revenue:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Six Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Lawn and pest control services |
|
$ |
27,647 |
|
|
$ |
25,990 |
|
Telephone communications |
|
|
5,049 |
|
|
|
5,876 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
32,696 |
|
|
$ |
31,866 |
|
|
|
|
|
|
|
|
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 $1.7 million or 6.4% for the six months ended
March 31, 2008 as compared to the six months ended March 31, 2007. 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 $0.8 million or 14.1% for the six months
ended March 31, 2008 as compared to the six months ended March 31, 2007. During the second quarter
of fiscal year 2007 Telecom FM received a series of large orders due to a change in legislation.
This did not occur in the quarter ended March 31, 2008.
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Six Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Lawn and pest control services |
|
$ |
10,425 |
|
|
$ |
9,320 |
|
Telephone communications |
|
|
2,339 |
|
|
|
3,219 |
|
|
|
|
|
|
|
|
Total cost of sales |
|
$ |
12,764 |
|
|
$ |
12,539 |
|
|
|
|
|
|
|
|
Lawn and Pest Control Services
Cost of sales in the lawn and pest control services segment increased by $1.1 million or 11.9% to
$10.4 million or 37.7% of revenue for the six months ended March 31, 2008 as compared to $9.3
million or 35.9% of revenue for the six months ended March 31, 2007.
|
|
|
Chemical costs increased by $0.4 million for the six months ended
March 31, 2008 as compared to the same period in 2007. The price of
petro-based chemical and fertilizer products increased due to higher
fuel prices. |
|
|
|
|
Vehicle costs increased by $0.5 million for the six months ended March
31, 2008 compared to the same period in 2007 primarily due to an
increase in fuel and vehicle maintenance costs. |
Telephone Communications
Cost of sales in our telephone communications segment decreased by $0.9 million or 27.3% to $2.3
million or 46.3% of revenue for the six months ended March 31, 2008 as compared to $3.2 million or
54.8% of revenue for the six months ended March 31, 2007, primarily related to a decrease in
product costs due to a shift in product mix.
26
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Six Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Lawn and pest control services |
|
$ |
17,222 |
|
|
$ |
16,671 |
|
Telephone communications |
|
|
2,710 |
|
|
|
2,656 |
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
19,932 |
|
|
$ |
19,327 |
|
|
|
|
|
|
|
|
Lawn and Pest Control Services
The gross profit of the lawn and pest control services segment increased by $0.6 million or 3.3% to
$17.2 million or 62.3% of revenue for the six months ended March 31, 2008 as compared to $16.7
million or 64.1% of revenue for the six months ended March 31, 2007.
|
|
|
The increase in gross profit of 3.3% for the six months ended March
31, 2008 over the same period in the prior year is proportionate to
the increase in revenue during those periods. |
Telephone Communications
The gross profit in the telecommunications segment increased by $0.1 million or 2.0% to $2.7
million for the six months ended March 31, 2007 as compared to $2.6 million for the six months
ended March 31, 2007.
|
|
|
Gross profit increased for the six months ended March 31, 2008
compared to the same time period in 2007 despite a decrease in
revenue. The gross margin increased to 53.7% in 2008 compared to 45.2%
in 2007 due to a shift in product mix. |
Operating Expenses:
Selling, General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Six Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Selling |
|
$ |
3,928 |
|
|
$ |
4,209 |
|
General and administrative |
|
|
16,204 |
|
|
|
14,394 |
|
Depreciation and amortization |
|
|
2,330 |
|
|
|
1,379 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
22,462 |
|
|
$ |
19,982 |
|
|
|
|
|
|
|
|
27
Selling, general and administrative expenses (SG&A expense) increased by $2.5 million or 12.4% to
$22.5 million or 68.7% of revenue for the six months ended March 31, 2008 as compared to $20.0
million or 62.7% of revenue for the six months ended March 31, 2007.
Selling expenses decreased by $0.3 million or 6.7% to $3.9 million or 12.0% of revenue for the six
months ended March 31, 2008 as compared to $4.2 million or 13.2% of revenue for the six months
ended March 31, 2007.
|
|
Middletons selling costs decreased by $0.2 million for the six months
ended March 31, 2008 as compared to the same time period in 2007 as a
result of reduction in advertising expense. |
General and administrative expenses increased by $1.8 million or 12.6% to $16.2 million or 49.6% of
revenue for the six months ended March 31, 2008 as compared to $14.4 million or 45.2% of revenue
for the six months ended March 31, 2008.
|
|
Middletons general and administrative expenses increased by $1.8 million for the six months ended March
31, 2008 as compared to the same period in 2007. The increase in general and administrative expenses was
primarily driven by: |
|
|
|
An increase in payroll expense of $0.7 million and an increase in payroll taxes of $0.1 million for
the six month period ended March 31, 2008 as compared to the same period in 2007 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 $0.2 million due to our expansion and increased facility lease
rates. |
|
|
|
|
The Company moved to a lockbox system in August 2007. Lockbox fees and statement fulfillment
expenses were $0.2 million for the six months ended March 31, 2008. There were no lockbox fees and
statement costs for the same time period in 2007. The implementation of a lockbox system has enabled us to
streamline our cash receipts processing and has improved our cash flow. |
|
|
|
|
Vehicle expenses increased by $0.2 million primarily due to higher fuel costs. |
|
|
|
|
Professional fees increased by $0.3 million due to the temporary use of IT and marketing
consultants. |
Depreciation and amortization expenses increased by $0.9 million or 117.1% to $2.3 million or 7.1%
of revenue for the six months ended March 31, 2008 as compared to $1.4 million or 4.3% of revenue
for the six months ended March 31, 2007.
|
|
Corporate depreciation and amortization expenses increased by $1.0
million for the six months ended March 31, 2008 as compared to 2007
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 Six Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Interest income |
|
$ |
122 |
|
|
$ |
119 |
|
Interest expense |
|
|
(728 |
) |
|
|
(676 |
) |
(Loss) gain on disposal of assets |
|
|
(6 |
) |
|
|
11 |
|
|
|
|
|
|
|
|
Total other income (expenses) |
|
$ |
(612 |
) |
|
$ |
(546 |
) |
|
|
|
|
|
|
|
Other expenses increased by $0.1 million or 12.1% for the six months ended March 31, 2008 as
compared to the six months ended March 31, 2008.
|
|
Middletons interest expense increased by $0.1 million for the six
months ended March 31, 2008 as compared to the six months ended March
31, 2007. The lawn and pest services segment incurred an additional
$3.3 million in debt related to acquisitions since March 31, 2007. |
28
Income Tax (Provision) Benefit from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Six Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Income tax (provision) benefit |
|
$ |
(39 |
) |
|
$ |
270 |
|
|
|
|
|
|
|
|
Income tax benefit from continuing operations decreased by $0.3 million for the six months ended
March 31, 2008 as compared to the six months ended March 31, 2007. The income tax provision of
$39,183 for the six months ended March 31, 2008 relates to foreign income taxes incurred by Telecom
FM. The Company did not have an income tax benefit for the six months ended March 31, 2008
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.
Discontinued Operations:
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
For the Six Months Ended |
|
|
|
March 31, 2007 |
|
Percipia, Inc. Net loss |
|
$ |
(308 |
) |
|
|
|
|
Pre-tax (loss) from discontinued operations |
|
|
(308 |
) |
Income tax benefit |
|
|
259 |
|
|
|
|
|
(Loss) from discontinued operations, net of income taxes |
|
|
(49 |
) |
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 |
|
$ |
1,312 |
|
|
|
|
|
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 six months ended March 31, 2007 related
to Percipia have been classified as discontinued operations. |
29
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 March 31, 2008, our liquidity and capital resources included cash and equivalents of $3.3
million, a working capital surplus of $0.4 million and $2.0 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 $1.9 million for the six months ended March 31, 2008 as
compared to cash provided by operating activities of $0.8 million for the six months ended March
31, 2007. During the six months ended March 31, 2008 the primary sources of cash from operating
activities were increases in prepaid expenses of $0.5 million, increases in inventories of $0.2
million and an increase in customer deposits of $0.4 million. The primary uses of cash from
operating activities for the six months ended March 31, 2008 were increase in accounts receivable
of $1.2 million, reduction in accounts payable and accrued expenses of $0.8 million and funding of
cash loss of $1.0 million.
Net cash used in investing activities was $1.3 million during the six months ended March 31, 2008
as compared to cash provided by investing activities of $0.6 million for the six months ended March
31, 2007. During the six months ended March 31, 2008 the primary uses of cash from investing
activities were cash paid for the acquisition of Marshall of $1.0 million and capital expenditures
of $0.3 million. For the six months ended March 31, 2007 the primary source of cash provided by
investing activities was $2.5 million of net proceeds from the sale of assets offset by $1.5
million used for business acquisitions and $0.2 million used for the purchase of capital
expenditures.
Net cash provided by financing activities was $3.7 million for the six months ended March 31, 2008
as compared to the repayment of debt of $1.0 million for the six months ended March 31, 2007.
During the six months ended March 31, 2008 the primary source of cash from financing activities was
proceeds from revolving line of credit of $3.8 million.
Cash flows from discontinued operations are included in the consolidated statement of cash flows
within operating, investing and financing activities for the six months ended March 31, 2008 and
2007.
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. 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 March 31, 2008.
30
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
Not applicable.
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 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 Chief Financial Officer
concluded that, at March 31, 2008, 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 March 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
31
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, 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 alleging that they hired these former
employees knowing that they were in violation of the Companys non-compete agreement. This matter
was settled during the three months ended March 31, 2008 for an immaterial amount.
Item 1A. Risk Factors
Not applicable.
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
The Company held its Annual Meeting of Shareholders on February 21, 2008. At the meeting, the
following persons were elected to serve as directors, with the votes indicated:
|
|
|
|
|
|
|
|
|
Director |
|
Affirmative Votes |
|
|
Withheld Votes |
|
Joseph Di Martino |
|
|
8,650,805 |
|
|
|
2,488,683 |
|
Mario B. Ferrari |
|
|
7,962,656 |
|
|
|
3,176,832 |
|
Arnold Heggestad, Ph. D. |
|
|
8,651,805 |
|
|
|
2,487,683 |
|
Steven Oppenheim |
|
|
8,650,270 |
|
|
|
2,489,218 |
|
Richard C. Rochon |
|
|
7,963,156 |
|
|
|
3,176,332 |
|
Charles P. Steinmetz |
|
|
7,963,121 |
|
|
|
3,176,367 |
|
Item 5. Other Information
None.
32
Item 6. Exhibits
|
|
|
10.1
|
|
Second Amendment to the Credit Agreement dated as of February 12, 2008 by and among Sunair Services Corporation, its
domestic subsidiaries from time to time parties thereto, the lenders parties thereto and Wachovia Bank, National Association
as administrative agent for the lenders (incorporated by reference to Exhibit 10.1 in the Form 8-K filed with the SEC on
February 15, 2008). |
|
|
|
31.1
|
|
Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
31.2
|
|
Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
32.1
|
|
Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
|
|
|
32.2
|
|
Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
33
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.
|
|
|
|
|
|
SUNAIR SERVICES CORPORATION
|
|
Date: May 15, 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: May 15, 2008 |
/s/ Edward M. Carriero, Jr.
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Edward M. Carriero, Jr. |
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Chief Financial Officer |
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