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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 March 31, 2009
 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.)
 1350 E. Newport Center Drive, Suite 201Deerfield Beach, FL
    
    33442-7712(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
 o 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
 Page No.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2009 and September 30, 2008 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Six Months Ended March 31, 2009 and 2008 (Unaudited)
    
    
    5Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008 (Unaudited)
    
    
    6Condensed Consolidated Statements of Changes in Stockholders Equity and Comprehensive (Loss) Income for the Six Months ended March 31, 2009 (Unaudited)
    
    
    7Condensed Consolidated Statement of Cash Flows for the Six Months Ended March 31, 2009 and 2008 (Unaudited)
    
    
    8Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    10Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4T.
    
    Controls and Procedures
    
    
    25PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3.
    
    Defaults Upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    27Signatures
    
    
    
    
    28EX-31.1EX-31.2EX-32.1EX-32.2
  2




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PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2009 AND SEPTEMBER 30, 2008
(UNAUDITED)
 March 31,
    
    
    September 30,2009
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,267,875
    
    
    $
    2,974,382Accounts receivable, net
    
    
    1,905,884
    
    
    
    2,597,447Inventories, net
    
    
    1,185,965
    
    
    
    1,403,832Prepaid and other current assets
    
    
    631,856
    
    
    
    2,829,535Total Current Assets
    
    
    4,991,580
    
    
    
    9,805,196PROPERTY, PLANT, AND EQUIPMENT, net
    
    
    1,601,888
    
    
    
    1,907,213OTHER ASSETS:Software costs, net
    
    
    439,849
    
    
    
    246,979Customer list, net
    
    
    5,594,502
    
    
    
    7,456,704Goodwill
    
    
    62,112,528
    
    
    
    62,112,528Other assets
    
    
    227,751
    
    
    
    254,790Total Other Assets
    
    
    68,374,630
    
    
    
    70,071,001TOTAL ASSETS
    
    $
    74,968,098
    
    
    $
    81,783,410
  3




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2009 AND SEPTEMBER 30, 2008
(UNAUDITED)
 March 31,
    
    
    September 30,2009
    
    
    2008LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,218,066
    
    
    $
    1,787,406Accrued expenses
    
    
    3,470,494
    
    
    
    3,256,342Unearned revenues
    
    
    665,272
    
    
    
    863,770Customer deposits
    
    
    2,855,478
    
    
    
    3,149,715Revolving line of credit, current portion
    
    
    
    
    
    
    4,100,000Notes payable and capital leases, current portion
    
    
    2,574,012
    
    
    
    2,306,189Total Current Liabilities
    
    
    10,783,322
    
    
    
    15,463,422LONG TERM LIABILITIES:Notes payable and capital leases, net of current portion
    
    
    3,101,922
    
    
    
    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
    
    
    13,601,922
    
    
    
    14,182,184TOTAL LIABILITIES
    
    
    24,385,244
    
    
    
    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 March 31, 2009 and September 30, 2008, respectively
    
    
    1,309,110
    
    
    
    1,309,110Additional paid-in capital
    
    
    52,872,519
    
    
    
    52,756,311Accumulated deficit
    
    
    (3,598,775
    )
    
    
    (1,927,617
    )Total Stockholders Equity
    
    
    50,582,854
    
    
    
    52,137,804TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    74,968,098
    
    
    $
    81,783,410
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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
 2009
    
    
    2008SALES
    
    $
    25,324,234
    
    
    $
    27,815,388COST OF SALES
    
    
    9,604,002
    
    
    
    10,855,628GROSS PROFIT
    
    
    15,720,232
    
    
    
    16,959,760SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    17,143,024
    
    
    
    19,821,852LOSS FROM OPERATIONS
    
    
    (1,422,792
    )
    
    
    (2,862,092
    )OTHER INCOME (EXPENSES):Interest income
    
    
    1,852
    
    
    
    108,726Interest expense
    
    
    (476,559
    )
    
    
    (725,937
    )Loss on disposal of assets
    
    
    (10,353
    )
    
    
    (6,157
    )Gain on extinguishment of debt
    
    
    25,000
    
    
    
    Total Other Income (Expenses)
    
    
    (460,060
    )
    
    
    (623,368
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (1,882,852
    )
    
    
    (3,485,460
    )INCOME TAX PROVISION
    
    
    
    
    
    
    LOSS FROM CONTINUING OPERATIONS
    
    
    (1,882,852
    )
    
    
    (3,485,460
    )INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX
BENEFIT OF $0 and $0 IN 2009 and 2008, RESPECTIVELY
    
    
    211,694
    
    
    
    304,451NET LOSS
    
    $
    (1,671,158
    )
    
    $
    (3,181,009
    )BASIC AND DILUTED (LOSS) INCOME PER SHARE:CONTINUING OPERATIONS
    
    $
    (0.14
    )
    
    $
    (0.26
    )DISCONTINUED OPERATIONS
    
    $
    0.01
    
    
    $
    0.02NET LOSS
    
    $
    (0.13
    )
    
    $
    (0.24
    )WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC and DILUTED
    
    
    13,091,088
    
    
    
    13,091,088
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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
 2009
    
    
    2008SALES
    
    $
    12,604,368
    
    
    
    $14,337,757COST OF SALES
    
    
    4,552,309
    
    
    
    5,615,361GROSS PROFIT
    
    
    8,052,059
    
    
    
    8,722,396SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    8,926,832
    
    
    
    9,667,352LOSS FROM OPERATIONS
    
    
    (874,773
    )
    
    
    (944,956
    )OTHER INCOME (EXPENSES):Interest income
    
    
    151
    
    
    
    62,689Interest expense
    
    
    (213,534
    )
    
    
    (346,310
    )Gain (loss) on disposal of assets
    
    
    1,471
    
    
    
    (10,827
    )Total Other Income (Expenses)
    
    
    (211,912
    )
    
    
    (294,448
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (1,086,685
    )
    
    
    (1,239,404
    )INCOME TAX PROVISION
    
    
    
    
    
    
    LOSS FROM CONTINUING OPERATIONS
    
    
    (1,086,685
    )
    
    
    (1,239,404
    )INCOME
FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX BENEFIT OF $0 and $0 IN 2009 and 2008, RESPECTIVELY
    
    
    275,000
    
    
    
    172,208NET LOSS
    
    $
    (811,685
    )
    
    
    $(1,067,196
    )BASIC AND DILUTED (LOSS) INCOME PER SHARE:CONTINUING OPERATIONS
    
    $
    (0.08
    )
    
    $
    (0.09
    )DISCONTINUED OPERATIONS
    
    $
    0.02
    
    
    
    $0.01NET LOSS
    
    $
    (0.06
    )
    
    $
    (0.08
    )WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC and DILUTED
    
    
    13,091,088
    
    
    
    13,091,088
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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, 2009
(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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,671,158
    )
    
    
    (1,671,158
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,671,158
    )
    
    
    (1,671,158
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    116,208
    
    
    
    
    
    
    
    116,208Balance at March 31, 2009
    
    
    13,091,088
    
    
    $
    1,309,110
    
    
    $
    52,872,519
    
    
    $
    (3,598,775
    )
    
    $
    50,582,854
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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
 2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,671,158
    )
    
    $
    (3,181,009
    )Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:Depreciation
    
    
    417,499
    
    
    
    454,946Amortization
    
    
    1,862,202
    
    
    
    1,952,805Bad debt reserve
    
    
    107,646
    
    
    
    168,194Inventory reserve
    
    
    
    
    
    
    (423,193
    )Loss on sale of assets
    
    
    10,353
    
    
    
    6,157Gain on extinguishment of debt
    
    
    (25,000
    )
    
    
    Stock-based compensation expense
    
    
    116,208
    
    
    
    203,087(Increase) decrease in assets:Accounts receivable
    
    
    583,917
    
    
    
    (1,382,957
    )Inventories
    
    
    217,867
    
    
    
    202,980Prepaid and other current assets
    
    
    2,197,679
    
    
    
    400,471Other assets
    
    
    27,039
    
    
    
    3,875Increase (decrease) in liabilities:Accounts payable and accrued expenses
    
    
    (355,188
    )
    
    
    (758,450
    )Unearned revenue
    
    
    (198,498
    )
    
    
    50,619Customer deposits
    
    
    (294,237
    )
    
    
    392,892Net Cash Provided By (Used In) Operating Activities
    
    
    2,996,329
    
    
    
    (1,909,583
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant, and equipment
    
    
    (156,784
    )
    
    
    (289,352
    )Software development costs
    
    
    (192,870
    )
    
    
    Cash paid for business acquisitions
    
    
    
    
    
    
    (1,000,000
    )Net proceeds from sale of assets
    
    
    34,257
    
    
    
    30,796Net Cash (Used In) Investing Activities
    
    
    (315,397
    )
    
    
    (1,258,556
    )
  8




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
 2009
    
    
    2008CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of line of credit
    
    
    (4,100,000
    )
    
    
    Proceeds from line of credit
    
    
    
    
    
    
    3,800,000Repayment of notes payable and capital leases
    
    
    (287,439
    )
    
    
    (80,638
    )Net Cash (Used In) Provided By Financing Activities
    
    
    (4,387,439
    )
    
    
    3,719,362Effect of exchange rate fluctuations on cash
    
    
    
    
    
    
    (56,457
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,706,507
    )
    
    
    494,766CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,974,382
    
    
    
    2,781,838CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,267,875
    
    
    $
    3,276,604SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    529,822
    
    
    $
    676,228SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING   
ACTIVITIES:Debt incurred in acquisitions
    
    $
    
    
    
    $
    600,000
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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
         10




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Fair Value
Measurements
        The Fair Value Option for Financial Assets and Financial
Liabilitiesincluding an amendment of FASB Statement No. 115 .
   11




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Determination of the
Useful Life of Intangible Assets
 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
   12




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4. Revolving Line of Credit
   5. Notes Payable
       2009
    
    $
    2,574,0122010
    
    
    2,558,1242011
    
    
    543,7982012
    
    
    2013
    
    
    Thereafter
    
    
    5,675,934Less: current portion
    
    
    2,574,012Long-term portion
    
    $
    3,101,922
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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
    
    
    45,000
    
    
    $
    1.56Exercised
    
    
    
    
    
    $
    Expired/Forfeited
    
    
    (272,374
    )
    
    $
    5.10Options outstanding at March 31, 2009
    
    
    630,575
    
    
    $
    4.16
    
    
    
    5.75Options exercisable at March 31, 2009
    
    
    390,935
    
    
    $
    5.37
    
    
    
    4.99Options available for future grants at March 31, 2009
    
    
    209,425
  14




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For the Six Months Ended March 31,2009
    
    2008Expected dividend yield
    
    
    
    Expected price volatility
    
    64.87-65.13%
    
    63.76-64.36%Risk-free interest rate
    
    1.48-1.60%
    
    2.8-3.09%Expected life of options
    
    4.5-5.25 years
    
    4.5-5.25 years
   9. Discontinued Operations
   15




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For the Six Months Ended March 31,2009
    
    
    2008Income from discontinued operations
    
    $
    211,694
    
    
    $
    304,451Pre-tax income from discontinued operations
    
    
    211,694
    
    
    
    304,451Income tax benefit
    
    
    
    
    
    
    Income from discontinued operations, net of income tax
    
    $
    211,694
    
    
    $
    304,451
 10. Commitments and Contingencies
  Litigation
 Lawsuit filed by the Dissident Group against the Company
   Complaint filed by the Company against the Dissident Group
 th th
   11. Goodwill and Intangible Assets
  Goodwill
    
    
    Customer Lists
    
    
    TotalEnding balance, September 30, 2008
    
    $
    62,112,528
    
    
    $
    7,456,704
    
    
    $
    69,569,232Less amortization expense
    
    
    
    
    
    
    (1,862,202
    )
    
    
    (1,862,202
    )Ending balance, March 31, 2009
    
    $
    62,112,528
    
    
    $
    5,594,502
    
    
    $
    67,707,030
 16




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AnnualAmortizationExpense2009
    
    $
    2,793,3022010
    
    
    2,150,0652011
    
    
    539,5362012
    
    
    111,5992013
    
    
    Total Amortization Expense
    
    $
    5,594,502
 12. Net Income (Loss) Per Share
  13. Related Parties
   
 
 Item 2. Managements Discussion And Analysis of Financial Condition and Results of Operations
 Cautionary Statement Regarding Forward Looking Information:
  17




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Company Overview
    Acquisitions:
 
    
    In October 2007 we acquired substantially all the assets of Marshall Pest Control of SW FL,
Inc.
 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 March 31, 2009 as Compared to the Three Months
Ended March 31, 2008.
 Revenue, Cost of Sales, and Gross Profit:
 (dollars in thousands)For the Three Months Ended
March 31,2009
    
    
    2008Revenue:
    
    $
    12,604
    
    
    $
    14,338Cost of sales
    
    
    4,552
    
    
    
    5,615Gross Profit
    
    $
    8,052
    
    
    $
    8,723
 Revenue
  18




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Cost of Sales
  
    
    Payroll costs decreased $0.3 million for the three months ended March 31, 2009 as compared to
the three months ended March 31, 2008. The reduction in payroll costs was due to a decrease
in sales activity and a change in the compensation program for pest control technicians.
    
    Chemical costs decreased $0.3 million for the three months ended March 31, 2009 as compared
to the three months ended March 31, 2008, proportionate to the decrease in sales.
    
    Vehicle costs decreased $0.4 million for the three months ended March 31, 2009 as compared to
the three months ended March 31, 2008. Vehicle lease costs decreased $0.1 million due to a
reduction in the size of the vehicle fleet. Fuel decreased $0.2 million due to a decrease in
oil prices. Vehicle repairs and maintenance decreased $0.1 million due to a reduction in the
size of the fleet and a discontinuation of our third party
vehicle maintenance program.
 Gross Profit
  Operating Expenses:
 Selling, General and Administrative Expenses:
 (dollars in thousands)For the Three Months Ended March 31,2009
    
    
    2008Selling
    
    $
    1,332
    
    
    $
    1,467General and administrative
    
    
    6,473
    
    
    
    7,078Depreciation and amortization
    
    
    1,122
    
    
    
    1,123Total operating expenses
    
    $
    8,927
    
    
    $
    9,668
   
    
    Advertising costs increased by $0.2 million for the three months ended March 31, 2009 as
compared to the same time period in 2008. The Company increased its advertising spending in
the spring to coincide with the termite season and the beginning of the pest season.
 
    
    Sales payroll costs decreased by $0.3 million for the three months ended March 31, 2009 as
compared to the same time period in 2008. The reduction in sales payroll costs was due to a
decrease in sales commissions paid as a result of a decrease in revenue.
  
    
    Middletons general and administrative expenses decreased by $1.0 million for the three
months ended March 31, 2009 as compared to the three months ended March 31, 2008. Payroll
expenses decreased by $0.2 million primarily due to a reduction in headcount. Vehicle expenses
decreased $0.2 million due to lower fuel costs and reduced fleet size. Professional fees
decreased $0.1 million. Health insurance expenses decreased by $0.1 million due to a reduction
in headcount. Bad debt expenses decreased by $0.1 million due to improved collections.
Office and printing expenses decreased by $0.1 million primarily due to the closing of branch
offices.
 19




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
    
    Corporate general and administrative expenses increased by $0.4 million for the three months
ended March 31, 2009 as compared to the three months ended March 31, 2008. 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. Professional fees increased by $0.5 million. The Company incurred $0.5
million in legal and SEC costs related to a shareholder dispute. Investment bank fees of $0.1
were incurred in connection with an evaluation of strategic alternative opportunities for the
Company.
  Other Income (Expenses):
 (dollars in thousands)For the Three Months Ended March 31,2009
    
    
    2008Interest income
    
    $
    
    
    
    $
    63Interest expense
    
    
    (213
    )
    
    
    (346
    )Gain (loss) on disposal of
assets
    
    
    1
    
    
    
    (11
    )Total other expenses
    
    $
    (212
    )
    
    $
    (294
    )
  Income Tax (Provision) from Continuing Operations:
 (dollars in thousands)For the Three Months Ended March 31,2009
    
    
    2008Income tax (provision) benefit
    
    $
    
    
    
    $
    
  Discontinued Operations:
 (dollars in thousands)For the Three Months Ended March 31,2009
    
    
    2008Sunair Communications  Net gain
    
    $
    275
    
    
    $
    Telecom FM  Net income
    
    
    
    
    
    
    172Pre-tax income from discontinued operations
    
    
    275
    
    
    
    172Income tax benefit
    
    
    
    
    
    
    Income from discontinued operations, net
of income taxes
    
    $
    275
    
    
    $
    172
 20




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##### Table of Contents




    
    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. The activity for the three months ended March 31, 2008 represents the
operations of Telecom FM for that period.
 
    
    As of September 30, 2008 a reserve was set up for the entire amount of a $2.0 million note
receivable due from Sunair Electronics LLC, relating to the sale of our legacy high frequency
radio business, as collection of this note is doubtful due to recent adverse developments at
Sunair Electronics LLC. In February 2009 a payment of $275,000 was received from Sunair
Electronics LLC as settlement of the note receivable. This amount was recorded as income from
discontinued operations in the accompanying condensed consolidated statements of operations
for the three months ended March 31, 2009.
 Results of Operations
 Results of Operations for the Six Months Ended March 31, 2009 as Compared to the Six Months Ended
March 31, 2008.
 Revenue, Cost of Sales, and Gross Profit:
 (dollars in thousands)For the Six Months Ended March 31,2009
    
    
    2008Revenue:
    
    $
    25,324
    
    
    $
    27,815Cost of sales
    
    
    9,604
    
    
    
    10,855Gross Profit
    
    $
    15,720
    
    
    $
    16,960
 Revenue
  Cost of Sales
  
    
    Payroll costs decreased $0.4 million for the six months ended March 31, 2009 as compared to
the six months ended March 31, 2008. The reduction in payroll costs was due to a decrease in
sales activity and a change in the compensation program for pest control technicians.
 
    
    Chemical costs decreased $0.2 million for the six months ended March 31, 2009 as compared to
the six months ended March 31, 2008, due to the decrease in sales.
 
    
    Vehicle costs decreased $0.6 million for the six months ended March 31, 2009 as compared to
the six months ended March 31, 2008. Vehicle lease costs decreased $0.1 million due to a
reduction in the size of the vehicle fleet. Fuel decreased $0.3 million due to a decrease in
oil prices. Vehicle repairs and maintenance decreased $0.2 million due to a reduction in the
size of the fleet and a discontinuation of our third party
vehicle maintenance program.
 21




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##### Table of Contents



Gross Profit
  Operating Expenses:
 Selling, General and Administrative Expenses:
 (dollars in thousands)For the Six Months Ended March 31,2009
    
    
    2008Selling
    
    $
    2,203
    
    
    $
    3,021General and administrative
    
    
    12,704
    
    
    
    14,556Depreciation and amortization
    
    
    2,236
    
    
    
    2,245Total operating expenses
    
    $
    17,143
    
    
    $
    19,822
   
    
    Advertising costs decreased by $0.1 million for the six months ended March 31, 2009 as
compared to the same time period in 2008 mainly due to reduced use of television advertising.
    
    Sales payroll costs decreased by $0.7 million for the six months ended March 31, 2009 as
compared to the same time period in 2008. 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 $1.9 million for the six months
ended March 31, 2009 as compared to the six months ended March 31, 2008. Payroll expenses
decreased by $0.5 million primarily due to a reduction in headcount. Vehicle expenses
decreased $0.3 million due to lower fuel costs and reduced fleet size. Office and printing
expenses decreased by $0.2 million primarily due to lower costs for printed materials and the
closing of branch offices. Health insurance decreased $0.2 million due to a reduction in
headcount. Bad debt expense decreased $0.1 million due to improved collections. Outsourcing
costs decreased by $0.3 million, primarily due to a decrease in professional fees. Facility
costs decreased by $0.1 million and customer damage costs decreased by $0.1 million.
    
    Corporate general and administrative expenses were flat for the six months ended March 31,
2009 as compared to the six months ended March 31, 2008. An increase of $0.4 million in legal
and professional fees, primarily due to a shareholders dispute was offset by a decrease in
management fees of $0.4 million, a result of the Amended Management Services Agreement between
the Company and RPC Financial Advisors, LLC, (a related party), that
commenced on February 8, 2008, which resulted in lower
management fees.
  22




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##### Table of Contents



Other Income (Expenses):
 (dollars in thousands)For the Six Months Ended March 31,2009
    
    
    2008Interest income
    
    $
    2
    
    
    $
    109Interest expense
    
    
    (477
    )
    
    
    (726
    )Loss on disposal of assets
    
    
    (10
    )
    
    
    (6
    )Gain on extinguishment of debt
    
    
    25
    
    
    
    Total other expenses
    
    $
    (460
    )
    
    $
    (623
    )
  Income Tax (Provision) from Continuing Operations:
 (dollars in thousands)For the Six Months Ended March 31,2009
    
    
    2008Income tax (provision) benefit
    
    $
    
    
    
    $
    
  Discontinued Operations:
 (dollars in thousands)For the Six Months Ended March 31,2009
    
    
    2008Sunair Communications, Inc.  Net gain
    
    $
    216
    
    
    $
    Percepia  Net loss
    
    
    (4
    )
    
    
    Telecom FM  Net income
    
    
    
    
    
    
    304Pre-tax income from discontinued operations
    
    
    212
    
    
    
    304Income tax benefit
    
    
    
    
    
    
    Income from discontinued operations, net of income taxes
    
    $
    212
    
    
    $
    304
  
    
    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. The activity for the three months ended March 31, 2008 represents the
operations of Telecom FM for that period.
 
    
    As of September 30, 2008 a reserve was set up for the entire amount of a $2.0 million note
receivable due from Sunair Electronics LLC, relating to the sale of our legacy high frequency
radio business, as collection of this note is doubtful due to recent adverse developments at
Sunair Electronics LLC. In February 2009 a payment of $275,000 was received from Sunair
Electronics LLC as
settlement of the note receivable. This amount was recorded as income from discontinued
operations in the accompanying condensed consolidated statements of operations for the six months
ended March 31, 2009.
 23




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##### Table of Contents



Liquidity and Capital Resources
        24




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##### 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
  25




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##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Lawsuit filed by the Dissident Group against the Company
   Complaint filed by the Company against the Dissident Group
    
 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
    
    
    8,801,993
    
    
    
    2,339,557Mario B. Ferrari
    
    
    8,793,093
    
    
    
    2,348,457Robert Griffin
    
    
    8,395,785
    
    
    
    2,745,765Arnold Heggestad, Ph.D.
    
    
    8,390,460
    
    
    
    2,751,090Steven P. Oppenheim
    
    
    8,801,993
    
    
    
    2,339,557Richard C. Rochon
    
    
    8,812,025
    
    
    
    2,329,525Charles P. Steinmetz
    
    
    8,812,036
    
    
    
    2,329,514
 
 Item 5. Other Information
  26




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##### Table of Contents



Item 6. Exhibits
 10.1
    
    Third Amendment to the Credit Agreement dated as of January
22, 2009 and effective as of January 28, 2009 by and among Sunair
Services Corporation, its domestic subsidiaries, the lenders, parties
thereto and Wachovia Bank, National Association as administrative
agent for the lenders (incorporated by reference to Exhibit 10.1 in
the Companys Current Report on Form 8-K filed with the SEC on
February 2, 2009).10.2
    
    Letter dated May 19, 2009 between Wachovia Bank, National Association and Sunair Services Corporation31.1
    
    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 27




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##### Table of Contents



SIGNATURES
  SUNAIR SERVICES CORPORATIONDate: May 20, 2009
    /s/ Jack I. RuffJack I. RuffPresident and Chief Executive OfficerDate: May 20, 2009
    /s/ Edward M. Carriero, Jr.Edward M. Carriero, Jr.Chief Financial Officer 28