##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2008ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
 Commission file number I-4334
 SUNAIR SERVICES CORPORATION
 (Exact name of Registrant as specified in its charter)
 Florida
    
    59-0780772(State or other jurisdiction of incorporation 
or organization)
    
    (I.R.S. Employer Identification No.)
 595 South Federal Highway, Suite 500
Boca Raton, Florida
    
    33432(Address of principal executive offices)
    
    (Zip Code)
 (561) 208-7400
 (Registrants telephone number, including area code)
  
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
   Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  o þ




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##### 



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
INDEX
  
 PageNo.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2008 and September 30, 2007 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Six Months Ended March 31, 2008 and
2007 (Unaudited)
    
    
    5Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008
and 2007 (Unaudited)
    
    
    6Condensed Consolidated Statements of Changes in Stockholders Equity and Comprehensive
(Loss) Income for the Six Months ended March 31, 2008 (Unaudited)
    
    
    7Condensed Consolidated Statement of Cash Flows for the Six Months Ended March 31, 2008 and
2007 (Unaudited)
    
    
    8Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    10Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    32Item 1A.
    
    Risk Factors
    
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3.
    
    Defaults Upon Senior Securities
    
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    32Item 5.
    
    Other Information
    
    
    32Item 6.
    
    Exhibits
    
    
    33Signatures
    
    
    34EX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO
   
 2




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##### Table of Contents



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)
 March 31, 2008
    
    
    September 30, 2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    3,276,604
    
    
    $
    2,781,838Accounts receivable, net
    
    
    4,768,613
    
    
    
    3,481,064Inventories, net
    
    
    2,060,048
    
    
    
    1,826,636Prepaid and other current assets
    
    
    1,762,752
    
    
    
    2,185,909Total Current Assets
    
    
    11,868,017
    
    
    
    10,275,447PROPERTY, PLANT, AND EQUIPMENT, net
    
    
    2,029,081
    
    
    
    2,118,552OTHER ASSETS:Note receivable
    
    
    2,000,000
    
    
    
    2,000,000Software costs, net
    
    
    271,104
    
    
    
    359,375Customer list, net
    
    
    9,318,905
    
    
    
    10,958,234Goodwill
    
    
    62,112,528
    
    
    
    60,675,353Other assets
    
    
    409,103
    
    
    
    390,294Total Other Assets
    
    
    74,111,640
    
    
    
    74,383,256TOTAL ASSETS
    
    $
    88,008,738
    
    
    $
    86,777,255
  3




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2008 AND SEPTEMBER 30, 2007
(UNAUDITED)
 March 31, 2008
    
    
    September 30, 2007LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    2,191,722
    
    
    $
    2,346,395Accrued expenses
    
    
    3,917,539
    
    
    
    4,263,674Unearned revenues
    
    
    1,003,036
    
    
    
    952,417Customer deposits
    
    
    3,562,953
    
    
    
    3,166,264Notes payable and capital leases, current portion
    
    
    1,838,327
    
    
    
    409,029Total Current Liabilities
    
    
    12,513,577
    
    
    
    11,137,779LONG TERM LIABILITIES:Notes payable and capital leases, net of current portion
    
    
    4,635,520
    
    
    
    5,545,456Note payable -related party
    
    
    5,000,000
    
    
    
    5,000,000Revolving line of credit
    
    
    10,532,796
    
    
    
    6,732,796Total Long Term Liabilities
    
    
    20,168,316
    
    
    
    17,278,252TOTAL LIABILITIES
    
    
    32,681,893
    
    
    
    28,416,031COMMITMENTS & CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, no par value, 8,000,000 shares
authorized, none issued and outstanding
    
    
    
    
    
    
    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
    
    
    1,309,110
    
    
    
    1,309,110Additional paid-in capital
    
    
    52,581,524
    
    
    
    52,378,437Retained earnings
    
    
    1,403,998
    
    
    
    4,585,007Accumulated other comprehensive gain  cumulative translation adjustment
    
    
    32,213
    
    
    
    88,670Total Stockholders Equity
    
    
    55,326,845
    
    
    
    58,361,224TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    88,008,738
    
    
    $
    86,777,255
  4




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
 2008
    
    
    2007SALESLawn and pest control services sales
    
    $
    27,647,194
    
    
    $
    25,990,136Telephone communications sales
    
    
    5,049,233
    
    
    
    5,875,549Total sales
    
    
    32,696,427
    
    
    
    31,865,685COST OF SALESLawn and pest control services cost of sales
    
    
    10,425,089
    
    
    
    9,319,837Telephone communications cost of sales
    
    
    2,338,867
    
    
    
    3,219,253Total cost of sales
    
    
    12,763,956
    
    
    
    12,539,090GROSS PROFIT
    
    
    19,932,471
    
    
    
    19,326,595SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    22,462,331
    
    
    
    19,982,156LOSS FROM OPERATIONS
    
    
    (2,529,860
    )
    
    
    (655,561
    )OTHER INCOME (EXPENSES):Interest income
    
    
    122,331
    
    
    
    119,418Interest expense
    
    
    (728,140
    )
    
    
    (675,713
    )(Loss) gain on disposal of assets
    
    
    (6,157
    )
    
    
    10,518Total Other Income (Expenses)
    
    
    (611,966
    )
    
    
    (545,777
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (3,141,826
    )
    
    
    (1,201,338
    )INCOME TAX (PROVISION) BENEFIT
    
    
    (39,183
    )
    
    
    269,991LOSS FROM CONTINUING OPERATIONS
    
    
    (3,181,009
    )
    
    
    (931,347
    )INCOME FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX PROVISION OF $0 and $562,933
IN 2008 and 2007, RESPECTIVELY
    
    
    
    
    
    
    1,312,060NET (LOSS) INCOME
    
    $
    (3,181,009
    )
    
    $
    380,713BASIC AND DILUTED (LOSS) INCOME PER SHARE:CONTINUING OPERATIONS
    
    $
    (0.24
    )
    
    $
    (0.07
    )DISCONTINUED OPERATIONS
    
    $
    
    
    
    $
    0.10NET (LOSS) INCOME
    
    $
    (0.24
    )
    
    $
    0.03WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC and DILUTED
    
    
    13,091,088
    
    
    
    13,041,634
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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
 2008
    
    
    2007SALESLawn and pest control services sales
    
    $
    14,198,297
    
    
    $
    13,601,619Telephone communications sales
    
    
    2,578,029
    
    
    
    3,316,464Total sales
    
    
    16,776,326
    
    
    
    16,918,083COST OF SALESLawn and pest control services cost of sales
    
    
    5,458,133
    
    
    
    4,758,071Telephone communications cost of sales
    
    
    1,186,723
    
    
    
    1,732,989Total cost of sales
    
    
    6,644,856
    
    
    
    6,491,060GROSS PROFIT
    
    
    10,131,470
    
    
    
    10,427,023SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    10,868,570
    
    
    
    10,345,084(LOSS) INCOME FROM OPERATIONS
    
    
    (737,100
    )
    
    
    81,939OTHER INCOME (EXPENSES):Interest income
    
    
    68,427
    
    
    
    51,644Interest expense
    
    
    (348,513
    )
    
    
    (387,390
    )(Loss) gain on disposal of assets
    
    
    (10,827
    )
    
    
    32,224Total Other Income (Expenses)
    
    
    (290,913
    )
    
    
    (303,522
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (1,028,013
    )
    
    
    (221,583
    )INCOME TAX (PROVISION)
    
    
    (39,183
    )
    
    
    (47,312
    )(LOSS) FROM CONTINUING OPERATIONS
    
    
    (1,067,196
    )
    
    
    (268,895
    )INCOME FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX BENEFIT OF $0 and $206,770
IN 2008 and 2007, RESPECTIVELY
    
    
    
    
    
    
    49,917NET (LOSS)
    
    $
    (1,067,196
    )
    
    $
    (218,978
    )BASIC AND DILUTED (LOSS) PER SHARE:CONTINUING OPERATIONS
    
    $
    (0.08
    )
    
    $
    (0.02
    )DISCONTINUED OPERATIONS
    
    $
    
    
    
    $
    0.00NET (LOSS) INCOME
    
    $
    (0.08
    )
    
    $
    (0.02
    )WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC and DILUTED
    
    
    13,091,088
    
    
    
    13,066,578
  6




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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)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at September 30, 2007
    
    
    13,091,088
    
    
    $
    1,309,110
    
    
    $
    52,378,437
    
    
    $
    4,585,007
    
    
    $
    88,670
    
    
    $
    58,361,224Comprehensive income:Net (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,181,009
    )
    
    
    
    
    
    
    (3,181,009
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,457
    )
    
    
    (56,457
    )Comprehensive (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,181,009
    )
    
    
    (56,457
    )
    
    
    (3,237,466
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    203,087
    
    
    
    
    
    
    
    
    
    
    
    203,087Balance at March 31, 2008
    
    
    13,091,088
    
    
    $
    1,309,110
    
    
    $
    52,581,524
    
    
    $
    1,403,998
    
    
    $
    32,213
    
    
    $
    55,326,845
  7




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
 2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (3,181,009
    )
    
    $
    380,713Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:Depreciation
    
    
    454,946
    
    
    
    470,443Amortization
    
    
    1,952,805
    
    
    
    1,159,023Deferred taxes
    
    
    
    
    
    
    269,100Bad debt reserve
    
    
    
    
    
    
    5,747Inventory reserve
    
    
    (423,193
    )
    
    
    77,962Loss (gain) on sale of assets
    
    
    6,157
    
    
    
    (2,380,398
    )Stock-based compensation expense
    
    
    203,087
    
    
    
    240,808Stock issued for services rendered
    
    
    
    
    
    
    45,000(Increase) decrease in assets:Accounts receivable
    
    
    (1,214,763
    )
    
    
    (1,644,822
    )Income tax receivable
    
    
    
    
    
    
    23,842Inventories
    
    
    202,980
    
    
    
    (351,078
    )Prepaid and other current assets
    
    
    400,471
    
    
    
    (411,620
    )Other assets
    
    
    3,875
    
    
    
    393,372Increase (decrease) in liabilities:Accounts payable and accrued expenses
    
    
    (758,450
    )
    
    
    2,327,681Unearned revenue
    
    
    50,619
    
    
    
    67,321Income taxes payable
    
    
    
    
    
    
    (1,057
    )Customer deposits
    
    
    392,892
    
    
    
    134,091Net Cash (Used In) Provided By Operating Activities
    
    
    (1,909,583
    )
    
    
    806,128CASH 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
    
    
    
    2,531,963Net Cash (Used In) Provided by Investing Activities
    
    
    (1,258,556
    )
    
    
    649,043
  8




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
 2008
    
    
    2007CASH 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
    )
    
    
    99,867NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    494,766
    
    
    
    598,331CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,781,838
    
    
    
    1,601,110CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    3,276,604
    
    
    $
    2,199,441SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for income taxes
    
    $
    
    
    
    $
    Cash paid during the period for interest
    
    $
    676,228
    
    
    $
    549,113SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Common stock issued in acquisition
    
    $
    
    
    
    $
    300,000Debt incurred in acquisitions
    
    $
    600,000
    
    
    $
    1,500,000
  9




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. Basis of Consolidated Financial Statement Presentation
    2. Summary of Significant Accounting Policies
 Income taxes
  Reclassification
   Recent Accounting Pronouncements
 Business Combinations
 10




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Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51 (FASB No. 160)
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment of FASB Statement No. 115
 Fair Value Measurements
 3. Acquisitions
 Acquisition of Marshall Pest Control of SW FL, Inc.
   Goodwill
    
    $
    1,487,775Customer list
    
    
    225,204Accounts receivable
    
    
    68,989Inventory
    
    
    13,199Fixed assets
    
    
    62,475Total
    
    $
    1,857,642
 11




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##### Table of Contents



Acquisition of Archer Exterminators, Inc. (Archer)
  Acquisition of Valentines Indoor Pest Management, Inc. (Valentine)
  Acquisition of David Burke, Inc. D/B/A Florida Exterminating (Florida Exterminating)
  Acquisition of Summer Rain Fertilization Company (Summer Rain)
  Acquisition of Howell Environmental, Inc. (Howell)
  Acquisition of Longboat Key Pest Control, Inc. (Longboat Key)
  Purchase Price Allocation
  Goodwill
    
    $
    9,344,859Customer list
    
    
    2,159,885Accounts receivable
    
    
    641,666Inventory
    
    
    62,418Fixed assets
    
    
    576,424Prepaid expenses
    
    
    210,644Customer deposits
    
    
    (79,281
    )Deferred revenue
    
    
    (677,539
    )Total
    
    $
    12,239,076
 12




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Pro-Forma Results of Operations
  For the ThreeMonths Ended
    
    
    For the Six MonthsMarch 31,
    
    
    Ended March 31,2007
    
    
    2007Revenues
    
    $
    18,584,507
    
    
    $
    35,590,962Net income
    
    $
    205,744
    
    
    $
    1,146,631Net income per shareBasic and diluted
    
    $
    0.02
    
    
    $
    0.09
  4. Note Receivable
  13




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5. Revolving Line of Credit
    6. Notes Payable
    14




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##### Table of Contents



2008
    
    $
    1,838,3272009
    
    
    2,056,5992010
    
    
    1,435,1042011
    
    
    1,143,8172012
    
    
    Thereafter
    
    
    6,473,847Less: current portion
    
    
    1,838,327Long term portion
    
    $
    4,635,520
 7. Notes Payable-Related Party
  8. Income Taxes
  9. Stock Options
   15




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WeightedAvg. Exercise
    
    
    RemainingShares
    
    
    Price
    
    
    LifeBalances, beginning of period
    
    
    585,092
    
    
    $
    6.94Granted
    
    
    369,000
    
    
    $
    1.76Exercised
    
    
    
    
    
    $
    Expired/Forfeited
    
    
    (58,476
    )
    
    $
    8.15Options outstanding, end of period
    
    
    895,616
    
    
    $
    4.55
    
    
    
    6.30Options exercisable, end of period
    
    
    443,685
    
    
    $
    6.44
    
    
    
    5.09Options available for future grants
    
    
    111,051
  Fair Value
   For the Six Months Ended March 31,2008
    
    2007Expected 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
   16




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##### Table of Contents



10. Discontinued Operations
    (dollars in thousands)For the Six Months EndedMarch 31, 2007Percipia, 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
    
    
    2,183Income tax (provision)
    
    
    (822
    )Gain on sale of assets from discontinued operations, net of income taxes
    
    
    1,361Income from discontinued operations, net of income taxes
    
    $
    1,312
 11. Commitments and Contingencies
  Litigation
   17




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12. Goodwill and Intangible Assets
  Goodwill
    
    
    Customer Lists
    
    
    TotalEnding balance, September 30, 2007
    
    $
    60,675,353
    
    
    $
    10,958,234
    
    
    $
    71,633,587Acquisition of businesses
    
    
    1,487,775
    
    
    
    225,204
    
    
    
    1,712,979Purchase price adjustment
    
    
    (50,600
    )
    
    
    
    
    
    
    (50,600
    )62,112,528
    
    
    
    11,183,438
    
    
    
    73,295,966Less amortization expense
    
    
    
    
    
    
    (1,864,533
    )
    
    
    (1,864,533
    )Ending balance, March 31, 2008
    
    $
    62,112,528
    
    
    $
    9,318,905
    
    
    $
    71,431,433
  2008
    
    
    2007Goodwill
    
    
    (a
    )
    
    
    (a
    )Customer lists (b)
    
    
    5
    
    
    
    8Weighted 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.
  AggregateAmortizationExpense2008
    
    $
    3,724,4032009
    
    
    3,724,4032010
    
    
    1,426,7432011
    
    
    384,0602012
    
    
    59,296Total Aggregate Amortization Expense
    
    $
    9,318,905
 13. Net Income (Loss) Per Share
  18




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##### Table of Contents



14. Segment and Geographic Information
   For the Six Months Ended March 31,2008
    
    
    2007Net revenues:Lawn and pest control services
    
    $
    27,647,194
    
    
    $
    25,990,136Telephone communications
    
    
    5,049,233
    
    
    
    5,875,549Total net revenues
    
    $
    32,696,427
    
    
    $
    31,865,685Operating income (loss):Lawn and pest control services
    
    $
    1,523,281
    
    
    $
    2,555,710Telephone communications
    
    
    332,231
    
    
    
    228,404Unallocated home office expenses
    
    
    (4,385,372
    )
    
    
    (3,439,675
    )Total operating loss
    
    $
    (2,529,860
    )
    
    $
    (655,561
    )March 31,
    
    
    September 30,2008
    
    
    2007Identifiable property plant and equipment:Lawn and pest control services
    
    $
    1,988,340
    
    
    $
    2,062,451Telephone communications
    
    
    40,741
    
    
    
    56,101Total identifiable property plant and equipment
    
    $
    2,029,081
    
    
    $
    2,118,552
  15. Related Parties
   19




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##### Table of Contents



Item 2. Managements Discussion And Analysis of Financial Condition and Results of Operations
 Cautionary Statement Regarding Forward Looking Information:
  Company Overview
   20




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##### Table of Contents



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 Valentines 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.
  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




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##### Table of Contents



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 EndedMarch 31,2008
    
    
    2007Lawn and pest control services
    
    $
    14,198
    
    
    $
    13,602Telephone communications
    
    
    2,578
    
    
    
    3,316Total revenue
    
    $
    16,776
    
    
    $
    16,918
 Lawn and Pest Control Services
  Telephone Communications
  Cost of Sales:
 (dollars in thousands)For the Three Months Ended March 31,2008
    
    
    2007Lawn and pest control services
    
    $
    5,458
    
    
    $
    4,758Telephone communications
    
    
    1,187
    
    
    
    1,733Total cost of sales
    
    $
    6,645
    
    
    $
    6,491
 Lawn and Pest Control Services
  
    
    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




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##### Table of Contents



Telephone Communications
  Gross Profit:
 (dollars in thousands)For the Three Months Ended March 31,2008
    
    
    2007Lawn and pest control services
    
    $
    8,740
    
    
    $
    8,844Telephone communications
    
    
    1,391
    
    
    
    1,583Total gross profit
    
    $
    10,131
    
    
    $
    10,427
 Lawn and Pest Control Services
  Telephone Communications
  
    
    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
    
    
    2007Selling
    
    $
    1,918
    
    
    $
    2,379General and administrative
    
    
    7,792
    
    
    
    7,258Depreciation and amortization
    
    
    1,159
    
    
    
    708Total operating expenses
    
    $
    10,869
    
    
    $
    10,345
 23




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##### Table of Contents




    
    Middletons 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.
  
    
    Middletons 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.
  
    
    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 EndedMarch 31,2008
    
    
    2007Interest income
    
    $
    69
    
    
    $
    52Interest expense
    
    
    (349
    )
    
    
    (388
    )(Loss) gain on disposal of assets
    
    
    (11
    )
    
    
    32Total other income (expenses)
    
    $
    (291
    )
    
    $
    (304
    )
  24




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##### Table of Contents



Income Tax (Provision) from Continuing Operations:
 (dollars in thousands)For the Three Months EndedMarch 31,2008
    
    
    2007Income tax (provision)
    
    $
    (39
    )
    
    $
    (47
    )
  Discontinued Operations:
 (dollars in thousands)For the Three Months EndedMarch 31, 2007Income from discontinued operations, net of income taxes
    
    $
    50Gain (loss) on sale of assets from discontinued
operations, net of income taxes
    
    
    Income from discontinued operations, net of taxes
    
    $
    50
  
    
    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




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##### Table of Contents



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
    
    
    2007Lawn and pest control services
    
    $
    27,647
    
    
    $
    25,990Telephone communications
    
    
    5,049
    
    
    
    5,876Total revenue
    
    $
    32,696
    
    
    $
    31,866
 Lawn and Pest Control Services
  Telephone Communications
  Cost of Sales:
 (dollars in thousands)For the Six Months Ended March 31,2008
    
    
    2007Lawn and pest control services
    
    $
    10,425
    
    
    $
    9,320Telephone communications
    
    
    2,339
    
    
    
    3,219Total cost of sales
    
    $
    12,764
    
    
    $
    12,539
 Lawn and Pest Control Services
  
    
    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
  26




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##### Table of Contents



Gross Profit:
 (dollars in thousands)For the Six Months Ended March 31,2008
    
    
    2007Lawn and pest control services
    
    $
    17,222
    
    
    $
    16,671Telephone communications
    
    
    2,710
    
    
    
    2,656Total gross profit
    
    $
    19,932
    
    
    $
    19,327
 Lawn and Pest Control Services
  
    
    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
  
    
    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
    
    
    2007Selling
    
    $
    3,928
    
    
    $
    4,209General and administrative
    
    
    16,204
    
    
    
    14,394Depreciation and amortization
    
    
    2,330
    
    
    
    1,379Total operating expenses
    
    $
    22,462
    
    
    $
    19,982
 27




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##### Table of Contents




    
    Middletons 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.
  
    
    Middletons 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.
  
    
    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
    
    
    2007Interest income
    
    $
    122
    
    
    $
    119Interest expense
    
    
    (728
    )
    
    
    (676
    )(Loss) gain on disposal of assets
    
    
    (6
    )
    
    
    11Total other income (expenses)
    
    $
    (612
    )
    
    $
    (546
    )
  
    
    Middletons 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




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##### Table of Contents



Income Tax (Provision) Benefit from Continuing Operations:
 (dollars in thousands)For the Six Months Ended March 31,2008
    
    
    2007Income tax (provision) benefit
    
    $
    (39
    )
    
    $
    270
  Discontinued Operations:
 (dollars in thousands)For the Six Months EndedMarch 31, 2007Percipia, 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
    
    
    2,183Income tax (provision)
    
    
    (822
    )Gain on sale of assets from discontinued operations, net of income taxes
    
    
    1,361Income from discontinued operations, net of income taxes
    
    $
    1,312
  
    
    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




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##### Table of Contents



Liquidity and Capital Resources
        30




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##### Table of Contents



Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  31




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##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Director
    
    Affirmative Votes
    
    
    Withheld VotesJoseph Di Martino
    
    
    8,650,805
    
    
    
    2,488,683Mario B. Ferrari
    
    
    7,962,656
    
    
    
    3,176,832Arnold Heggestad, Ph. D.
    
    
    8,651,805
    
    
    
    2,487,683Steven Oppenheim
    
    
    8,650,270
    
    
    
    2,489,218Richard C. Rochon
    
    
    7,963,156
    
    
    
    3,176,332Charles P. Steinmetz
    
    
    7,963,121
    
    
    
    3,176,367
 
 Item 5. Other Information
  32




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##### Table of Contents



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*
 
 *
    
    Filed herewith 33




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##### Table of Contents



SIGNATURES
  SUNAIR SERVICES CORPORATIONDate: May 15, 2008
    /s/ John J. HayesJohn J. HayesPresident and Chief Executive Officer Date: May 15, 2008
    /s/ Edward M. Carriero, Jr.Edward M. Carriero, Jr.Chief Financial Officer 34