##### 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, 2007
 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 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
  o o þ
  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 December 31, 2007 (Unaudited) and September 30, 2007
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2007 and 2006 (Unaudited)
    
    
    5Condensed Consolidated Statements of Changes in Stockholders Equity and Comprehensive (Loss) Income for the
three months ended December 31, 2007 (Unaudited)
    
    
    6Condensed Consolidated Statement of Cash Flows for the Three Months Ended December 31, 2007 and 2006 (Unaudited)
    
    
    7Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    33PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    33Item 1A.
    
    Risk Factors
    
    
    33Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3.
    
    Defaults Upon Senior Securities
    
    
    34Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    34Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    34Signatures
    
    
    
    
    35EX-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
   
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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 DECEMBER 31, 2007 AND SEPTEMBER 30, 2007
(UNAUDITED)
 December 31, 2007
    
    
    September 30, 2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,366,757
    
    
    $
    2,781,838Accounts receivable, net
    
    
    5,439,666
    
    
    
    3,481,064Inventories, net
    
    
    1,601,180
    
    
    
    1,826,636Prepaid and other current assets
    
    
    1,679,786
    
    
    
    2,185,909Total Current Assets
    
    
    10,087,389
    
    
    
    10,275,447PROPERTY, PLANT, AND EQUIPMENT, net
    
    
    2,193,662
    
    
    
    2,118,552OTHER ASSETS:Note receivable
    
    
    2,000,000
    
    
    
    2,000,000Software costs, net
    
    
    306,714
    
    
    
    359,375Customer list, net
    
    
    10,250,006
    
    
    
    10,958,234Goodwill
    
    
    62,112,528
    
    
    
    60,675,353Other assets
    
    
    446,774
    
    
    
    390,294Total Other Assets
    
    
    75,116,022
    
    
    
    74,383,256TOTAL ASSETS
    
    $
    87,397,073
    
    
    $
    86,777,255
  3




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##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 AND SEPTEMBER 30, 2007
(UNAUDITED)
 December 31, 2007
    
    
    September 30, 2007LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    2,827,660
    
    
    $
    2,346,395Accrued expenses
    
    
    3,202,532
    
    
    
    4,263,674Unearned revenues
    
    
    789,734
    
    
    
    952,417Customer deposits
    
    
    2,896,919
    
    
    
    3,166,264Notes payable and capital leases, current portion
    
    
    392,540
    
    
    
    409,029Total Current Liabilities
    
    
    10,109,385
    
    
    
    11,137,779LONG TERM LIABILITIES:Notes payable and capital leases, net of current portion
    
    
    6,129,630
    
    
    
    5,545,456Note payable -related party
    
    
    5,000,000
    
    
    
    5,000,000Revolving line of credit
    
    
    9,832,796
    
    
    
    6,732,796Total Long Term Liabilities
    
    
    20,962,426
    
    
    
    17,278,252TOTAL LIABILITIES
    
    
    31,071,811
    
    
    
    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 December 31, 2007 and September 30, 2007, respectively
    
    
    1,309,110
    
    
    
    1,309,110Additional paid-in capital
    
    
    52,520,449
    
    
    
    52,378,437Retained earnings
    
    
    2,471,194
    
    
    
    4,585,007Accumulated other comprehensive gain  cumulative
translation adjustment
    
    
    24,509
    
    
    
    88,670Total Stockholders Equity
    
    
    56,325,262
    
    
    
    58,361,224TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    87,397,073
    
    
    $
    86,777,255
  4




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
 2007
    
    
    2006SALESLawn and pest control services sales
    
    $
    13,448,897
    
    
    $
    12,388,515Telephone communications sales
    
    
    2,471,204
    
    
    
    2,559,088Total sales
    
    
    15,920,101
    
    
    
    14,947,603COST OF SALESLawn and pest control services cost of sales
    
    
    4,966,956
    
    
    
    4,561,766Telephone communications cost of sales
    
    
    1,152,144
    
    
    
    1,486,264Total cost of sales
    
    
    6,119,100
    
    
    
    6,048,030GROSS PROFIT
    
    
    9,801,001
    
    
    
    8,899,573SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    11,593,761
    
    
    
    9,637,073LOSS FROM OPERATIONS
    
    
    (1,792,760
    )
    
    
    (737,500
    )OTHER INCOME (EXPENSES):Interest income
    
    
    53,904
    
    
    
    67,774Interest expense
    
    
    (379,627
    )
    
    
    (288,323
    )Gain (Loss) on disposal of assets
    
    
    4,670
    
    
    
    (21,706
    )Total Other Income (Expenses)
    
    
    (321,053
    )
    
    
    (242,255
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (2,113,813
    )
    
    
    (979,755
    )INCOME TAX (EXPENSE) BENEFIT
    
    
    
    
    
    
    317,303LOSS FROM CONTINUING OPERATIONS
    
    
    (2,113,813
    )
    
    
    (662,452
    )INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX PROVISION OF $0 and $769,703
IN 2007 and 2006, RESPECTIVELY
    
    
    
    
    
    
    1,262,143NET (LOSS) INCOME
    
    $
    (2,113,813
    )
    
    $
    599,691BASIC AND DILUTED INCOME (LOSS) PER SHARE:CONTINUING OPERATIONS
    
    $
    (0.16
    )
    
    $
    (0.05
    )DISCONTINUED OPERATIONS
    
    $
    
    
    
    $
    0.10NET (LOSS) INCOME
    
    $
    (0.16
    )
    
    $
    0.05WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC and DILUTED
    
    
    13,091,088
    
    
    
    13,017,233
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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007
(UNAUDITED)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon 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)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,113,813
    )
    
    
    
    
    
    
    (2,113,813
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,161
    )
    
    
    (64,161
    )Comprehensive (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,113,813
    )
    
    
    (64,161
    )
    
    
    (2,177,974
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    142,012
    
    
    
    
    
    
    
    
    
    
    
    142,012Balance at December 31. 2007
    
    
    13,091,088
    
    
    $
    1,309,110
    
    
    $
    52,520,449
    
    
    $
    2,471,194
    
    
    $
    24,509
    
    
    $
    56,325,262
  6




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
 2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (2,113,813
    )
    
    $
    599,691Adjustments to reconcile net (loss) income to
net cash (used in) operating activities:Depreciation
    
    
    227,383
    
    
    
    235,918Amortization
    
    
    978,299
    
    
    
    561,406Deferred taxes
    
    
    
    
    
    
    452,400Bad debt reserve
    
    
    
    
    
    
    5,747Inventories reserve
    
    
    374
    
    
    
    77,962Gain on sale of assets
    
    
    (4,670
    )
    
    
    (2,346,367
    )Stock issued for services rendered
    
    
    
    
    
    
    45,000Stock-based compensation expense
    
    
    142,012
    
    
    
    216,984(Increase) decrease in assets:Accounts receivable
    
    
    (1,885,817
    )
    
    
    (1,130,709
    )Interest receivable
    
    
    
    
    
    
    (10,453
    )Inventories
    
    
    238,282
    
    
    
    (64,710
    )Prepaid and other current assets
    
    
    478,493
    
    
    
    410,289Other assets
    
    
    (28,852
    )
    
    
    (108,785
    )Increase (decrease) in liabilities:Accounts payable and accrued expenses
    
    
    (837,518
    )
    
    
    84,429Unearned revenue
    
    
    (162,683
    )
    
    
    (682
    )Customer deposits
    
    
    (273,142
    )
    
    
    (369,825
    )Net Cash (Used In) Operating Activities
    
    
    (3,241,652
    )
    
    
    (1,341,705
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant, and equipment
    
    
    (193,991
    )
    
    
    (98,204
    )Software development costs
    
    
    
    
    
    
    (95,768
    )Cash paid for business acquisitions
    
    
    (1,000,000
    )
    
    
    (1,500,000
    )Net proceeds from sale of assets
    
    
    8,047
    
    
    
    2,522,274Net Cash (Used In) Provided by Investing Activities
    
    
    (1,185,944
    )
    
    
    828,302
  7




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
 2007
    
    
    2006CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from line of credit
    
    
    3,100,000
    
    
    
    456,477Repayment of notes payable and capital leases
    
    
    (32,316
    )
    
    
    (46,858
    )Net Cash Provided By Financing Activities
    
    
    3,067,684
    
    
    
    409,619Effect of exchange rate fluctuations on cash
    
    
    (55,169
    )
    
    
    83,571NET (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (1,415,081
    )
    
    
    (20,213
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,781,838
    
    
    
    1,601,110CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,366,757
    
    
    $
    1,580,897SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for income taxes
    
    $
    
    
    
    $
    Cash paid during the period for interest
    
    $
    397,159
    
    
    $
    257,463SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Common stock issued in acquisition
    
    $
    
    
    
    $
    300,000Debt incurred in acquisitions
    
    $
    600,000
    
    
    $
    1,500,000
  8




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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
 Principles of consolidation
  Use of Estimates
  Cash and cash equivalents
  Accounts Receivable
  Inventories
  9




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Property, Plant, and Equipment
  Leasehold improvements
    
    3 to 10 yearsMachinery and equipment
    
    4 to 10 years
  Software Costs
  Customer Lists
 Accounting for Impairment or Disposal of Long-Lived Assets, (FASB No. 144).
 Accounting Changes and Error Corrections
 Goodwill
 Goodwill and Other Intangible Assets
 10




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Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
  Income (loss) per share
  Revenue Recognition
  11




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Leases
 Accounting for Leases,
 Advertising Costs
  Foreign Currency Translation
  Comprehensive Income
  Fair value of financial instruments
  Concentration of credit risk
  Stock-based Compensation
 Share-Based
Payments
 12




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Income taxes
 Accounting for Income Taxes Accounting for Uncertainty in Income Taxes
 Reclassification
   Recent Accounting Pronouncements
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51 (FASB No. 160)
 13




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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
 14




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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)
   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
 15




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Pro-Forma Results of Operations
  For the ThreeMonths EndedDecember 31,2006Revenues
    
    $
    16,656,825Net (loss)
    
    $
    (428,899
    )Net (loss) per share
Basic and diluted
    
    $
    (0.03
    )
  4. Inventories
 Inventories consist of the following:
 December 31,
    
    
    September 30,2007
    
    
    2007Materials
    
    $
    1,188,726
    
    
    $
    1,146,261Finished goods
    
    
    412,454
    
    
    
    680,375$
    1,601,180
    
    
    $
    1,826,636
  5. Note Receivable
  16




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##### Table of Contents



6. Property, Plant and Equipment
  December 31,
    
    
    September 30,2007
    
    
    2007Leasehold improvements
    
    $
    1,050,561
    
    
    $
    1,146,561Automobiles
    
    
    3,402,452
    
    
    
    3,288,057Machinery and equipment
    
    
    3,799,200
    
    
    
    3,545,8808,252,213
    
    
    
    7,980,498Accumulated Depreciation
    
    
    6,058,551
    
    
    
    5,861,946$
    2,193,662
    
    
    $
    2,118,552
  7. Revolving Line of Credit
    8. Notes Payable
    17




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2008
    
    $
    392,5402009
    
    
    3,286,4772010
    
    
    1,686,9792011
    
    
    1,156,1742012
    
    
    Thereafter
    
    
    6,522,170Less: current portion
    
    
    392,540Long term portion
    
    $
    6,129,630
 9. Notes Payable-Related Party
  10. Income Taxes
  11. Stock Options
  18




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##### Table of Contents



WeightedAvg. Exercise
    
    
    RemainingShares
    
    
    Price
    
    
    LifeBalances, beginning of period
    
    
    585,092
    
    
    $
    6.94Granted
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    Expired/Forfeited
    
    
    (33,812
    )
    
    $
    9.68Options outstanding, end of period
    
    
    551,280
    
    
    $
    6.77
    
    
    
    5.39Options exercisable, end of period
    
    
    411,247
    
    
    $
    6.75
    
    
    
    5.23Options available for future grants
    
    
    455,387
  Options Outstanding
    
    Options ExercisableWeightedAverageExercise
    
    Options
    
    Remaining
    
    Exercise
    
    OptionsPrice
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable$  3.23
    
    
    35,000
    
    
    
    7.1
    
    
    $
    3.23
    
    
    
    31,356$  3.40
    
    
    25,000
    
    
    
    7.62
    
    
    $
    3.40
    
    
    
    2,380$  4.79
    
    
    40,000
    
    
    
    1.59
    
    
    $
    4.79
    
    
    
    40,000$  5.00
    
    
    166,667
    
    
    
    5.09
    
    
    $
    5.00
    
    
    
    131,850$  5.35
    
    
    20,000
    
    
    
    6.12
    
    
    $
    5.35
    
    
    
    20,000$  5.60
    
    
    90,000
    
    
    
    5.96
    
    
    $
    5.60
    
    
    
    67,993$  6.09
    
    
    17,500
    
    
    
    6.1
    
    
    $
    6.09
    
    
    
    8,307$11.40
    
    
    157,113
    
    
    
    5.43
    
    
    $
    11.40
    
    
    
    109,361551,280
    
    
    
    
    
    
    
    
    
    
    
    411,247
  Fair Value
  19




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##### Table of Contents



For the Three Months Ended December 31,2007
    
    2006Expected dividend yield
    
    
    
    Expected price volatility
    
    61.75-70.07%
    
    65.21-70.07%Risk-free interest rate
    
    3.76-4.76%
    
    3.76-4.61%Expected life of options
    
    5-8.25 years
    
    5-8.25 years
   12. Discontinued Operations
   20




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##### Table of Contents



(dollars in thousands)For the Three Months EndedDecember 31, 2006Percipia, Inc.  Net loss
    
    $
    (151
    )Pre-tax (loss) from discontinued operations
    
    
    (151
    )Income tax benefit
    
    
    52(Loss) from discontinued operations, net of income taxes
    
    
    (99
    )Gain on sale of assets from discontinued operations
    
    
    2,183Income tax (provision)
    
    
    (822
    )Gain on sale of assets from discontinued operations, net of income taxes
    
    
    1,361Income from discontinued operations, net of income taxes
    
    $
    1,262
 13. Employee Benefits
  14. Commitments and Contingencies
  Litigation
   21




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##### Table of Contents



15. 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
    
    
    
    
    
    
    (933,432
    )
    
    
    (933,432
    )Ending balance, December 31, 2007
    
    $
    62,112,528
    
    
    $
    10,250,006
    
    
    $
    72,362,534
  2007
    
    
    2006Goodwill
    
    
    (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. See
Note 2- Summary of Significant Accounting Policies.
  AggregateAmortizationExpense2008
    
    $
    3,724,4032009
    
    
    3,724,4032010
    
    
    2,150,0662011
    
    
    539,5352012
    
    
    111,599Total Aggregate Amortization Expense
    
    $
    10,250,006
 16. Net Income (Loss) Per Share
  22




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##### Table of Contents



For the Three Months EndedDecember 31,2007
    
    
    2006Basic and diluted net (loss) per share from continuing operations:Net (loss) from continuing operations
    
    $
    (2,113,813
    )
    
    $
    (662,452
    )Shares used in computation:Weighted average shares outstanding
    
    
    13,091,088
    
    
    
    13,017,233Basic and diluted net (loss) per share from continuing operations:
    
    $
    (0.16
    )
    
    $
    (0.05
    )
  For the Three Months EndedDecember 31,2007
    
    
    2006Dilutive securities:Options/warrants
    
    
    11,000,000
    
    
    
    11,000,000Total anti-dilutive shares
    
    
    11,000,000
    
    
    
    11,000,000
 17. Segment and Geographic Information
  23




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##### Table of Contents



For the Three MonthsEnded December 31,2007
    
    
    2006Net revenues:Lawn and pest control services
    
    $
    13,448,897
    
    
    $
    12,388,515Telephone communications
    
    
    2,471,204
    
    
    
    2,559,088Total net revenues
    
    $
    15,920,101
    
    
    $
    14,947,603Operating income (loss):Lawn and pest control services
    
    $
    467,511
    
    
    $
    1,001,530Telephone communications
    
    
    124,376
    
    
    
    20,441Unallocated home office expenses
    
    
    (2,384,647
    )
    
    
    (1,759,471
    )Total operating loss
    
    $
    (1,792,760
    )
    
    $
    (737,500
    )
 December 31,
    
    
    September 30,2007
    
    

2007Identifiable property plant and equipment:Lawn and pest control services
    
    $
    2,146,717
    
    
    $
    2,112,214Telephone communications
    
    
    46,945
    
    
    
    258,726Total identifiable property plant and equipment
    
    $
    2,193,662
    
    
    $
    2,370,940




18. Related Parties








19. Subsequent Events






24



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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
   25




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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.
 26




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##### Table of Contents



Results of Operations
 Three Months Ended December 31, 2007 compared to the Three Months Ended December 31, 2006
 Revenue:
 (dollars in thousands)For the Three Months EndedDecember 31,2007
    
    
    2006Lawn and pest control services
    
    $
    13,449
    
    
    $
    12,389Telephone communications
    
    
    2,471
    
    
    
    2,559Total revenue
    
    $
    15,920
    
    
    $
    14,948
 Lawn and Pest Control Services
  Telephone Communications
  Cost of Sales:
 (dollars in thousands)For the Three Months EndedDecember 31,2007
    
    
    2006Lawn and pest control services
    
    $
    4,967
    
    
    $
    4,562Telephone communications
    
    
    1,152
    
    
    
    1,486Total cost of sales
    
    $
    6,119
    
    
    $
    6,048
 Lawn and Pest Control Services
  
    
    Chemical costs increased by $0.2 million for the three months ended December 31, 2007
as compared to the same period in 2006, proportionate to the increase in revenue.
    
    Payroll expenses increased by $0.1 million for the three months ended December 31, 2007
as compared to the same period in 2006 primarily due to an increase in sales training
costs.
    
    Vehicle costs increased by $0.1 million for the three months ended December 31, 2007
compared to the same period in 2006 primarily due to an increase in fuel costs.
 27




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##### Table of Contents



Telephone Communications
  Gross Profit:
 (dollars in thousands)For the Three Months EndedDecember 31,2007
    
    
    2006Lawn and pest control services
    
    $
    8,482
    
    
    $
    7,827Telephone communications
    
    $
    1,319
    
    
    
    1,073Total gross profit
    
    $
    9,801
    
    
    $
    8,900
 Lawn and Pest Control Services
  
    
    The increase in gross profit of 8.4% period over period is proportionate to the
increase in revenue period over period.
 Telephone Communications
  
    
    Gross profit increased for the three months ended December 31, 2007 compared to the
same time period in 2006 despite a decrease in revenue. The gross margin increased to
53.4% in 2007 compared to 41.9% in 2006 due to a shift in product mix.
 Operating Expenses:
 Selling, General and Administrative Expenses:
 (dollars in thousands)For the Three Months EndedDecember 31,2007
    
    
    2006Selling
    
    $
    2,023
    
    
    $
    1,820General and administrative
    
    
    8,400
    
    
    
    7,147Depreciation and amortization
    
    
    1,171
    
    
    
    670Total operating expenses
    
    $
    11,594
    
    
    $
    9,637
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##### Table of Contents




    
    Middletons selling costs increased by $0.1 million for the three months ended December
31, 2007 as compared to the same time period in 2006 as a result of costs associated with
the recruiting and training of new sales consultants.
  
    
    Middletons general and administrative expenses increased by $1.0 million for the three
months ended December 31, 2007 as compared to the same period in 2006. The increase was
primarily driven by payroll expenses which increased by $0.6 million for the three month
period ended December 31, 2007 as compared to the same period in 2006 as a result of the
purchase and integration of several acquisitions, expansion of staff
related to meeting our compliance requirements with regards to Sarbanes-Oxley and an increase in staff related to the conversion of our
existing operating software to a new system. Occupancy expenses increased by $0.1
million due to our expansion and increased facility lease rates. Vehicle expenses
increased by $0.1 million due to higher fuel costs.
  
    
    Corporate depreciation and amortization expenses increased by $0.5 million for the
three months ended December 31, 2007 as compared to 2006 due to a significant increase in
the amortization of intangible assets due to our acquisition activity coupled with the
change in estimated useful life for
customer lists from 8 years to 5 years, which occurred during the fourth quarter of fiscal
year 2007.
 Other Income (Expenses):
 (dollars in thousands)For the Three MonthsEnded December 31,2007
    
    
    2006Interest income
    
    $
    54
    
    
    $
    68Interest expense
    
    
    (380
    )
    
    $
    (288
    )Gain (Loss) on disposal of assets
    
    
    5
    
    
    $
    (22
    )Total other income (expenses)
    
    $
    (321
    )
    
    $
    (242
    )
  29




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##### Table of Contents




    
    Middletons interest expense increased by $0.1 million for the three months ended
December 31, 2007 as compared to the three months ended December 31, 2006. The lawn and
pest services segment incurred an additional $4.2 million in debt related to acquisitions
since December 31, 2006.
 Income Tax (Expenses) Benefit from Continuing Operations:
 (dollars in thousands)For the Three Months EndedDecember 31,2007
    
    
    2006Income tax (expense) benefit
    
    $
    
    
    
    $
    317
  Discontinued Operations:
 (dollars in thousands)For the Three Months EndedDecember 31, 2006Percipia, Inc.  Net loss
    
    $
    (151
    )Pre-tax (loss) from discontinued operations
    
    
    (151
    )Income tax benefit
    
    
    52(Loss) from discontinued operations, net of income taxes
    
    
    (99
    )Gain on sale of assets from discontinued operations
    
    
    2,183Income tax (provision)
    
    
    (822
    )Gain on sale of assets from discontinued operations, net of income taxes
    
    
    1,361Income from discontinued operations, net of income taxes
    
    $
    1,262
  
    
    On November 20, 2006, we closed a transaction to sell the real estate property
associated with the previously sold high frequency radio business for $2.7 million in cash
and a recognized gain in the amount of $2.2 million, $1.4 million net of income taxes.
    
    On August 1, 2007, we sold all the outstanding shares of Percipia. The results of operations for the
three months ended December 31, 2006 related to Percipia have been classified as
discontinued operations.
 30




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Liquidity and Capital Resources
        31




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##### Table of Contents



Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Exchange Rate Risk
  32




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  
 PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  Our shareholders may incur substantial dilution.
  33




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##### Table of Contents



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
 3.1
    
    Sunair Services Corporation Amended
and Restated Bylaws, effective as of December 18, 2007
(incorporated by reference to Exhibit 3.1 in the Companys
Current Report Form 8-K filed with the SEC on December 20, 2007).10.1
    
    Separation and Release Agreement
dated as of October 29, 2007 between Sunair Southeast Pest
Holdings, Inc. and Gregory Clendenin (incorporated by reference to
Exhibit 10.1 in the Companys
Current Report Form 8-K filed with the SEC on November 1, 2007).10.2
    
    Consulting Agreement dated as of
October 29, 2007 between Sunair Southeast Pest Holdings, Inc.
and George Clendenin (incorporated by reference to Exhibit 10.2 in the Companys
Current Report Form 8-K filed with the SEC on November 1, 2007).31.1
    
    Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by Interim Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification by Interim Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 34




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##### Table of Contents



SIGNATURES
  SUNAIR SERVICES CORPORATIONDate: February 14, 2008
    /s/  John J. HayesJohn J. HayesPresident and Chief Executive Officer Date: February 14, 2008
    /s/  Edward M. Carriero, Jr.Edward M. Carriero, Jr.Interim Chief Financial Officer 35