##### 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 1934
 For the quarterly period ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from       to
 Commission file number I-4334
 SUNAIR SERVICES CORPORATION
 (Exact name of Registrant as specified in its charter)
 Florida
    
    59-0780772(State or other jurisdiction of incorporation 
or organization)
    
    (I.R.S. Employer Identification No.)595 South Federal Highway, Suite 500Boca Raton, Florida
    
    33432(Address of principal executive offices)
    
    (Zip Code)
 (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
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




---



##### 



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
INDEX
 PageNo.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of December 31, 2008 (Unaudited) and September 30, 2008
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2008
and 2007 (Unaudited)
    
    
    5Condensed Consolidated Statements of Changes in Stockholders Equity and Comprehensive (Loss)
Income for the Three Months ended December 31, 2008 (Unaudited)
    
    
    6Condensed Consolidated Statement of Cash Flows for the Three Months Ended December 31, 2008 and
2007 (Unaudited)
    
    
    7Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22Signatures
    
    
    23EX-31.1EX-31.2EX-32.1EX-32.2
  2




---



##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 AS OF DECEMBER 31, 2008 AND SEPTEMBER 30, 2008
 (UNAUDITED)
 December 31,
    
    
    September 30,2008
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,693,138
    
    
    $
    2,974,382Accounts receivable, net
    
    
    1,968,529
    
    
    
    2,597,447Inventories, net
    
    
    1,053,738
    
    
    
    1,403,832Prepaid and other current assets
    
    
    596,360
    
    
    
    2,829,535Total Current Assets
    
    
    5,311,765
    
    
    
    9,805,196PROPERTY, PLANT, AND EQUIPMENT, net
    
    
    1,723,417
    
    
    
    1,907,213OTHER ASSETS:Software costs, net
    
    
    340,634
    
    
    
    246,979Customer list, net
    
    
    6,525,603
    
    
    
    7,456,704Goodwill
    
    
    62,112,528
    
    
    
    62,112,528Other assets
    
    
    406,573
    
    
    
    254,790Total Other Assets
    
    
    69,385,338
    
    
    
    70,071,001TOTAL ASSETS
    
    $
    76,420,520
    
    
    $
    81,783,410
  3




---



##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND SEPTEMBER 30, 2008
(UNAUDITED)
 December 31,
    
    
    September 30,2008
    
    
    2008LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,465,781
    
    
    $
    1,787,406Accrued expenses
    
    
    2,910,865
    
    
    
    3,256,342Unearned revenues
    
    
    687,791
    
    
    
    863,770Customer deposits
    
    
    2,538,729
    
    
    
    3,149,715Revolving line of credit, current portion
    
    
    1,300,000
    
    
    
    4,100,000Notes payable and capital leases, current portion
    
    
    3,781,424
    
    
    
    2,306,189Total Current Liabilities
    
    
    12,684,590
    
    
    
    15,463,422LONG TERM LIABILITIES:Notes payable and capital leases, net of current portion
    
    
    1,918,150
    
    
    
    3,682,184Note payable -related party
    
    
    5,000,000
    
    
    
    5,000,000Revolving line of credit, net of current portion
    
    
    5,500,000
    
    
    
    5,500,000Total Long Term Liabilities
    
    
    12,418,150
    
    
    
    14,182,184TOTAL LIABILITIES
    
    
    25,102,740
    
    
    
    29,645,606COMMITMENTS & 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 December 31, 2008 and September 30, 2008, respectively
    
    
    1,309,110
    
    
    
    1,309,110Additional paid-in capital
    
    
    52,795,760
    
    
    
    52,756,311Accumulated deficit
    
    
    (2,787,090
    )
    
    
    (1,927,617
    )Total Stockholders Equity
    
    
    51,317,780
    
    
    
    52,137,804TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    76,420,520
    
    
    $
    81,783,410
  4




---



##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
 2008
    
    
    2007SALES
    
    $
    12,719,866
    
    
    $
    13,477,631COST OF SALES
    
    
    5,051,693
    
    
    
    5,240,267GROSS PROFIT
    
    
    7,668,173
    
    
    
    8,237,364SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    8,216,192
    
    
    
    10,154,500LOSS FROM OPERATIONS
    
    
    (548,019
    )
    
    
    (1,917,136
    )OTHER INCOME (EXPENSES):Interest income
    
    
    1,701
    
    
    
    46,037Interest expense
    
    
    (263,025
    )
    
    
    (379,627
    )(Loss) gain on disposal of assets
    
    
    (11,824
    )
    
    
    4,670Gain on extinguishment of debt
    
    
    25,000
    
    
    
    Total Other Income (Expenses)
    
    
    (248,148
    )
    
    
    (328,920
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (796,167
    )
    
    
    (2,246,056
    )INCOME TAX PROVISION
    
    
    
    
    
    
    LOSS FROM CONTINUING OPERATIONS
    
    
    (796,167
    )
    
    
    (2,246,056
    )(LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX BENEFIT OF $0 and $0
IN 2008 and 2007, RESPECTIVELY
    
    
    (63,306
    )
    
    
    132,243NET LOSS
    
    $
    (859,473
    )
    
    $
    (2,113,813
    )BASIC AND DILUTED (LOSS) INCOME PER SHARE:CONTINUING OPERATIONS
    
    $
    (0.06
    )
    
    $
    (0.17
    )DISCONTINUED OPERATIONS
    
    $
    (0.01
    )
    
    $
    0.01NET LOSS
    
    $
    (0.07
    )
    
    $
    (0.16
    )WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC and DILUTED
    
    
    13,091,088
    
    
    
    13,091,088
  5




---



##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 AND COMPREHENSIVE (LOSS) INCOME
 FOR THE THREE MONTHS ENDED DECEMBER 31, 2008
 (UNAUDITED)
 Additional
    
    
    
    
    
    TotalCommon Stock
    
    Paid-in
    
    Accumulated
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    EquityBalance at September 30, 2008
    
    
    13,091,088
    
    
    $
    1,309,110
    
    
    $
    52,756,311
    
    
    $
    (1,927,617
    )
    
    $
    52,137,804Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (859,473
    )
    
    
    (859,473
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (859,473
    )
    
    
    (859,473
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    39,449
    
    
    
    
    
    
    
    39,449Balance at December 31, 2008
    
    
    13,091,088
    
    
    
    1,309,110
    
    
    $
    52,795,760
    
    
    $
    (2,787,090
    )
    
    
    51,317,780
  6




---



##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
 2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (859,473
    )
    
    $
    (2,113,813
    )Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:Depreciation
    
    
    206,609
    
    
    
    227,383Amortization
    
    
    931,101
    
    
    
    978,299Bad debt reserve
    
    
    60,854
    
    
    
    28,734Inventory reserve
    
    
    
    
    
    
    374Loss (gain) on sale of assets
    
    
    11,824
    
    
    
    (4,670
    )Gain on extinguishment of debt
    
    
    (25,000
    )
    
    
    Stock-based compensation expense
    
    
    39,449
    
    
    
    142,012(Increase) decrease in assets:Accounts receivable
    
    
    568,064
    
    
    
    (1,914,551
    )Inventories
    
    
    350,094
    
    
    
    238,282Prepaid and other current assets
    
    
    2,233,175
    
    
    
    478,493Other assets
    
    
    (151,783
    )
    
    
    (28,852
    )Increase (decrease) in liabilities:Accounts payable and accrued expenses
    
    
    (667,102
    )
    
    
    (837,518
    )Unearned revenue
    
    
    (175,979
    )
    
    
    (162,683
    )Customer deposits
    
    
    (610,986
    )
    
    
    (273,142
    )Net Cash Provided By (Used In) Operating Activities
    
    
    1,910,847
    
    
    
    (3,241,652
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant, and equipment
    
    
    (65,395
    )
    
    
    (193,991
    )Software development costs
    
    
    (93,655
    )
    
    
    Cash paid for business acquisitions
    
    
    
    
    
    
    (1,000,000
    )Net proceeds from sale of assets
    
    
    30,758
    
    
    
    8,047Net Cash (Used In) Investing Activities
    
    
    (128,292
    )
    
    
    (1,185,944
    )
  7




---



##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
 2008
    
    
    2007CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of line of credit (net)
    
    
    (2,800,000
    )
    
    
    Proceeds from line of credit
    
    
    
    
    
    
    3,100,000Repayment of notes payable and capital leases
    
    
    (263,799
    )
    
    
    (32,316
    )Net Cash (Used In) Provided By Financing Activities
    
    
    (3,063,799
    )
    
    
    3,067,684Effect of exchange rate fluctuations on cash
    
    
    
    
    
    
    (55,169
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,281,244
    )
    
    
    (1,415,081
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,974,382
    
    
    
    2,781,838CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,693,138
    
    
    $
    1,366,757SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    341,543
    
    
    $
    397,159SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Debt incurred in acquisitions
    
    $
    
    
    
    $
    600,000
  8




---



##### Table of Contents



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
         9




---



##### Table of Contents



Fair Value
Measurements
        The Fair Value Option for Financial Assets and Financial
Liabilitiesincluding an amendment of FASB Statement No. 115 .
   Determination of the
Useful Life of Intangible Assets
 10




---



##### Table of Contents



Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51 .
 3. Acquisition
   Goodwill
    
    $
    1,487,775Customer list
    
    
    225,204Accounts receivable
    
    
    68,989Inventory
    
    
    13,199Fixed assets
    
    
    62,475Total
    
    $
    1,857,642
   11




---



##### Table of Contents



4. Revolving Line of Credit
   5. Notes Payable
       2009
    
    $
    3,781,4242010
    
    
    1,361,9742011
    
    
    556,1762012
    
    
    2013
    
    
    Thereafter
    
    
    5,699,574Less: current portion
    
    
    3,781,424Long term portion
    
    $
    1,918,150
 12




---



##### Table of Contents



6. Note Payable-Related Party
  7. Income Taxes
  8. Stock Options
   WeightedAvg. Exercise
    
    RemainingShares
    
    Price
    
    LifeOptions outstanding at October 1, 2008
    
    
    857,949
    
    
    $
    4.59
    
    
    
    5.88Granted
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    Expired/Forfeited
    
    
    (246,085
    )
    
    $
    4.64Options outstanding at December 31, 2008
    
    
    611,864
    
    
    $
    4.57
    
    
    
    5.80Options exercisable at December 31, 2008
    
    
    375,377
    
    
    $
    5.91
    
    
    
    5.02Options available for future grants at December 31, 2008
    
    
    228,136
    13




---



##### Table of Contents



For the Three Months Ended December 31,2008
    
    2007Expected dividend yield
    

    

    

    Expected price volatility
    

    57.52-60.69%

    

    61.75-70.07%Risk-free interest rate
    

    2.80 - 3.49%

    

    3.76-4.76%Expected life of options
    
    4.5-8 years
    
    5-8.25 years
   9. Discontinued Operations
   For the Three Months Ended December 31,2008
    
    
    2007(Loss) income from discontinued operations
    
    $
    (63,306
    )
    
    $
    132,243Pre-tax (loss) income from discontinued operations
    
    
    (63,306
    )
    
    
    132,243Income tax benefit
    
    
    
    
    
    
    (Loss) income from discontinued operations, net of income tax
    
    $
    (63,306
    )
    
    $
    132,243
 10. Commitments and Contingencies
  14




---



##### Table of Contents



Litigation
  11. Goodwill and Intangible Assets
  Goodwill
    
    Customer Lists
    
    TotalEnding balance, September 30, 2008
    
    $
    62,112,528
    
    
    $
    7,456,704
    
    
    $
    69,569,232Less amortization expense
    
    
    
    
    
    
    (931,101
    )
    
    
    (931,101
    )Ending balance, December 31, 2008
    
    $
    62,112,528
    
    
    $
    6,525,603
    
    
    $
    68,638,131
  AggregateAmortizationExpense2009
    
    $
    3,724,4032010
    
    
    2,150,0652011
    
    
    539,5362012
    
    
    111,5992013
    
    
    Total Aggregate Amortization Expense
    
    $
    6,525,603
 12. Net Income (Loss) Per Share
  13. Related Parties
   15




---



##### Table of Contents



16




---



##### 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
    Acquisitions:
 
    
    In October 2007 we acquired substantially all the assets of Marshall Pest Control of SW
FL, Inc. (Marshall).
 Dispositions:
 
    
    In September 2008 we sold all the issued and outstanding stock of Telecom FM Limited,
(Telecom FM), a wholly-owned subsidiary operating in our Telephone Communications
business segment.
 Results of Operations
 Results of Operations for the Three Months Ended December 31, 2008 as Compared to the Three Months
Ended December 31, 2007.
 17




---



##### Table of Contents



Revenue, Cost of Sales, and Gross Profit:
 (dollars in thousands)For the Three Months EndedDecember 31,2008
    
    
    2007Revenue:
    
    $
    12,720
    
    
    $
    13,477Cost of sales
    
    
    5,052
    
    
    
    5,240Gross Profit
    
    $
    7,668
    
    
    $
    8,237
 Revenue
  Cost of Sales
  
    
    Payroll costs decreased $0.1 million for the three months ended December 31, 2008 as
compared to the three months ended December 31, 2007, primarily due to a reduction in new
sales.
    
    Vehicle costs decreased $0.1 million for the three months ended December 31, 2008 as
compared to the three months ended December 31, 2007, primarily
due to lower fuel costs and reduced fleet size.
 Gross Profit
  Operating Expenses:
 Selling, General and Administrative Expenses:
 (dollars in thousands)For the Three Months Ended December 31,2008
    
    
    2007Selling
    
    $
    871
    
    
    $
    1,554General and administrative
    
    
    6,231
    
    
    
    7,478Depreciation and amortization
    
    
    1,114
    
    
    
    1,123Total operating expenses
    
    $
    8,216
    
    
    $
    10,155
  18




---



##### Table of Contents




    
    Advertising costs decreased by $0.3 million for the three months ended December 31, 2008
as compared to the same time period in 2007 mainly due to reduced use of television
advertising.
    
    Sales payroll costs decreased by $0.4 million for the three months ended December 31,
2008 as compared to the same time period in 2007. The reduction in sales payroll costs was
due to a decrease in sales commissions paid as a result of a decrease
in new sales activity.
  
    
    Middletons general and administrative expenses decreased by $0.9 million for the three
months ended December 31, 2008 as compared to the three months ended December 31, 2007.
Payroll expenses decreased by $0.3 million primarily due to a reduction in headcount.
Vehicle expenses decreased $0.1 million due to lower fuel costs
and reduced fleet size. Professional fees
decreased $0.1 million. Office and printing expenses decreased by $0.1 million primarily
due to lower costs for printed materials and customer damage costs decreased by $0.1
million.
    
    Corporate general and administrative expenses decreased by $0.4 million for the three
months ended December 31, 2008 as compared to the three months ended December 31, 2007.
Management fees decreased by $0.2 million as a result of the Amended Management Services
Agreement between the Company and RPC (a related party) that commenced on February 8, 2008, resulting in lower management fees. Legal
and professional fees decreased by $0.1 million. Stock-based compensation decreased by $0.1
million due to a number of grants that were forfeited during the three months ended December
31, 2008 coupled with a reduction in the average market price from $2.47 for the three
months ended December 31, 2007 to $1.84 for the three months ended December 31, 2008.
  Other Income (Expenses):
 (dollars in thousands)For the Three Months EndedDecember 31,2008
    
    
    2007Interest income
    
    $
    2
    
    
    $
    46Interest expense
    
    
    (263
    )
    
    
    (380
    )(Loss) gain on disposal of assets
    
    
    (12
    )
    
    
    5Gain on extinguishment of debt
    
    
    25
    
    
    
    Total other income (expenses)
    
    $
    (248
    )
    
    $
    (329
    )
  19




---



##### Table of Contents



Income Tax (Provision) from Continuing Operations:
 (dollars in thousands)For the Three Months EndedDecember 31,2008
    
    
    2007Income tax (provision) benefit
    
    $
    
    
    
    $
    
  Discontinued Operations:
 (dollars in thousands)
    
    
    (dollars in thousands)For the Three Months Ended
    
    
    For the Three Months EndedDecember 31, 2008
    
    
    December 31, 2007Sunair Communications  Net loss
    
    $
    (59
    )
    
    $
    Percepia  Net loss
    
    
    (4
    )
    
    
    Telecom FM  Net income
    
    
    
    
    
    
    132Pre-tax (loss) income from discontinued operations
    
    
    (63
    )
    
    
    132Income tax benefit
    
    
    
    
    
    
    (Loss) income from discontinued operations, net of income taxes
    
    $
    (63
    )
    
    $
    132
  
    
    On September 30, 2008 we completed the sale of all the issued and outstanding stock of
Telecom FM, a wholly owned subsidiary operating in our Telephone Communications business
segment. The effective date of the sale was September 1, 2008. The aggregate purchase
price paid to the Company for Telecom FM was $3.6 million, which included the payment of
outstanding inter-company debt in the amount of $1.2 million. The gain on the sale of
Telecom FM amounted to $0.4 million.
    
    For the three months ended December 31, 2008 there were some miscellaneous charges
related to our discontinued operations which we continue to classify as discontinued
operations in accordance with FASB No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
 Liquidity and Capital Resources
    20




---



##### Table of Contents



Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4t. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  21




---



##### 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
  
 Item 5. Other Information
  
 Item 6. Exhibits
 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 22




---



##### Table of Contents



SIGNATURES
  SUNAIR SERVICES CORPORATIONDate: February 13, 2009
    /s/ Jack I. RuffJack I. RuffPresident and Chief Executive OfficerDate: February 13, 2009
    /s/ Edward M. Carriero, Jr.Edward M. Carriero, Jr.Chief Financial Officer 23