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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 June 30, 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 June 30, 2009 and September 30, 2008 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Nine Months Ended June 30, 2009 and 2008 (Unaudited)
    
    
    5Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2009 and 2008 (Unaudited)
    
    
    6Condensed Consolidated Statements of Changes in Stockholders Equity and Comprehensive (Loss) Income for the Nine Months ended June 30, 2009 (Unaudited)
    
    
    7Condensed Consolidated Statement of Cash Flows for the Nine Months Ended June 30, 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
    
    
    19Item 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
    
    
    27Item 3.
    
    Defaults Upon Senior Securities
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Item 5.
    
    Other Information
    
    
    27Item 6.
    
    Exhibits
    
    
    27Signatures
    
    
    27EX-10.1EX-10.2EX-10.3EX-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 JUNE 30, 2009 AND SEPTEMBER 30, 2008
(UNAUDITED)
 June 30,
    
    
    September 30,2009
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,615,681
    
    
    $
    2,974,382Accounts receivable, net
    
    
    2,102,393
    
    
    
    2,597,447Inventories, net
    
    
    1,036,135
    
    
    
    1,403,832Prepaid and other current assets
    
    
    589,085
    
    
    
    2,829,535Total Current Assets
    
    
    5,343,294
    
    
    
    9,805,196PROPERTY, PLANT, AND EQUIPMENT, net
    
    
    1,447,217
    
    
    
    1,907,213OTHER ASSETS:Software costs
    
    
    539,830
    
    
    
    246,979Customer list, net
    
    
    4,663,401
    
    
    
    7,456,704Goodwill
    
    
    62,112,528
    
    
    
    62,112,528Other assets
    
    
    234,919
    
    
    
    254,790Total Other Assets
    
    
    67,550,678
    
    
    
    70,071,001TOTAL ASSETS
    
    $
    74,341,189
    
    
    $
    81,783,410
  3




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2009 AND SEPTEMBER 30, 2008
(UNAUDITED)
 June 30,
    
    
    September 30,2009
    
    
    2008LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,341,138
    
    
    $
    1,787,406Accrued expenses
    
    
    3,138,754
    
    
    
    3,256,342Unearned revenues
    
    
    597,217
    
    
    
    863,770Customer deposits
    
    
    2,902,711
    
    
    
    3,149,715Revolving line of credit, current portion
    
    
    
    
    
    
    4,100,000Notes payable and capital leases, current portion
    
    
    4,007,998
    
    
    
    2,306,189Total Current Liabilities
    
    
    11,987,818
    
    
    
    15,463,422LONG TERM LIABILITIES:Notes payable and capital leases, net of current portion
    
    
    1,580,214
    
    
    
    3,682,184Note payable -related party
    
    
    5,000,000
    
    
    
    5,000,000Revolving line of credit, net of current portion
    
    
    5,000,000
    
    
    
    5,500,000Total Long Term Liabilities
    
    
    11,580,214
    
    
    
    14,182,184TOTAL LIABILITIES
    
    
    23,568,032
    
    
    
    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 June 30, 2009 and September 30, 2008, respectively
    
    
    1,309,110
    
    
    
    1,309,110Additional paid-in capital
    
    
    52,946,498
    
    
    
    52,756,311Accumulated deficit
    
    
    (3,482,451
    )
    
    
    (1,927,617
    )Total Stockholders Equity
    
    
    50,773,157
    
    
    
    52,137,804TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    74,341,189
    
    
    $
    81,783,410
  4




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
 2009
    
    
    2008SALES
    
    $
    38,450,322
    
    
    $
    42,479,822COST OF SALES
    
    
    14,222,619
    
    
    
    16,548,557GROSS PROFIT
    
    
    24,227,703
    
    
    
    25,931,265SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    25,375,918
    
    
    
    29,294,668LOSS FROM OPERATIONS
    
    
    (1,148,215
    )
    
    
    (3,363,403
    )OTHER INCOME (EXPENSES):Interest expense
    
    
    (675,310
    )
    
    
    (1,115,079
    )Interest income
    
    
    1,852
    
    
    
    127,513Gain on disposal of assets
    
    
    145
    
    
    
    5,069Gain on extinguishment of debt
    
    
    55,000
    
    
    
    Total Other Expenses
    
    
    (618,313
    )
    
    
    (982,497
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (1,766,528
    )
    
    
    (4,345,900
    )INCOME TAX PROVISION
    
    
    
    
    
    
    LOSS FROM CONTINUING OPERATIONS
    
    
    (1,766,528
    )
    
    
    (4,345,900
    )INCOME FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX BENEFIT OF $0 and $0
IN 2009 and 2008, RESPECTIVELY
    
    
    211,694
    
    
    
    874,368NET LOSS
    
    $
    (1,554,834
    )
    
    $
    (3,471,532
    )BASIC AND DILUTED (LOSS) INCOME PER SHARE:CONTINUING OPERATIONS
    
    $
    (0.13
    )
    
    $
    (0.33
    )DISCONTINUED OPERATIONS
    
    $
    0.01
    
    
    $
    0.07NET LOSS
    
    $
    (0.12
    )
    
    $
    (0.26
    )WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC and DILUTED
    
    
    13,091,088
    
    
    
    13,091,088
  5




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
 2009
    
    
    2008SALES
    
    $
    13,126,088
    
    
    $
    14,664,435COST OF SALES
    
    
    4,618,617
    
    
    
    5,692,928GROSS PROFIT
    
    
    8,507,471
    
    
    
    8,971,507SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    8,232,894
    
    
    
    9,472,816INCOME (LOSS) FROM OPERATIONS
    
    
    274,577
    
    
    
    (501,309
    )OTHER INCOME (EXPENSES):Interest expense
    
    
    (198,751
    )
    
    
    (389,142
    )Interest income
    
    
    
    
    
    
    18,787Gain on disposal of assets
    
    
    10,498
    
    
    
    11,226Gain on extinguishment of debt
    
    
    30,000
    
    
    
    Total Other Expenses
    
    
    (158,253
    )
    
    
    (359,129
    )INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES
    
    
    116,324
    
    
    
    (860,438
    )INCOME TAX PROVISION
    
    
    
    
    
    
    INCOME (LOSS) FROM CONTINUING OPERATIONS
    
    
    116,324
    
    
    
    (860,438
    )INCOME FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX BENEFIT OF $0 and $0
IN 2009 and 2008, RESPECTIVELY
    
    
    
    
    
    
    569,918NET INCOME (LOSS)
    
    $
    116,324
    
    
    $
    (290,520
    )BASIC AND DILUTED INCOME (LOSS) PER SHARE:CONTINUING OPERATIONS
    
    $
    0.01
    
    
    $
    (0.06
    )DISCONTINUED OPERATIONS
    
    $
    
    
    
    $
    0.04NET INCOME (LOSS)
    
    $
    0.01
    
    
    $
    (0.02
    )WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    13,091,088
    
    
    
    13,091,088DILUTED
    
    
    13,099,143
    
    
    
    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 NINE MONTHS ENDED JUNE 30, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,554,834
    )
    
    
    (1,554,834
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,554,834
    )
    
    
    (1,554,834
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    190,187
    
    
    
    
    
    
    
    190,187Balance at June 30, 2009
    
    
    13,091,088
    
    
    $
    1,309,110
    
    
    $
    52,946,498
    
    
    $
    (3,482,451
    )
    
    $
    50,773,157
  7




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
 2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,554,834
    )
    
    $
    (3,471,532
    )Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:Depreciation
    
    
    620,988
    
    
    
    669,212Amortization
    
    
    2,793,303
    
    
    
    2,927,177Bad debt reserve
    
    
    142,296
    
    
    
    266,008Inventory reserve
    
    
    
    
    
    
    (380,858
    )Gain on sale of assets
    
    
    
    
    
    
    (5,069
    )Gain on extinguishment of debt
    
    
    (55,000
    )
    
    
    Stock-based compensation expense
    
    
    190,187
    
    
    
    385,239(Increase) decrease in assets:Accounts receivable
    
    
    352,758
    
    
    
    (2,525,786
    )Inventories
    
    
    367,697
    
    
    
    (68,803
    )Prepaid and other current assets
    
    
    2,240,450
    
    
    
    (71,495
    )Other assets
    
    
    19,871
    
    
    
    (10,317
    )Increase (decrease) in liabilities:Accounts payable and accrued expenses
    
    
    (563,856
    )
    
    
    234,501Unearned revenue
    
    
    (266,553
    )
    
    
    62,622Customer deposits
    
    
    (247,004
    )
    
    
    371,571Net Cash Provided By (Used In) Operating Activities
    
    
    4,040,303
    
    
    
    (1,617,530
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant, and equipment
    
    
    (206,274
    )
    
    
    (550,093
    )Software development costs
    
    
    (292,851
    )
    
    
    Cash paid for business acquisitions
    
    
    
    
    
    
    (1,000,000
    )Net proceeds from sale of assets
    
    
    45,282
    
    
    
    52,684Net Cash Used In Investing Activities
    
    
    (453,843
    )
    
    
    (1,497,409
    )
  8




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
 2009
    
    
    2008CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of line of credit (net)
    
    
    (4,600,000
    )
    
    
    (932,797
    )Proceeds from line of credit
    
    
    
    
    
    
    3,800,000Repayment of notes payable and capital leases
    
    
    (345,161
    )
    
    
    (360,618
    )Net Cash (Used In) Provided By Financing Activities
    
    
    (4,945,161
    )
    
    
    2,506,585Effect of exchange rate fluctuations on cash
    
    
    
    
    
    
    (50,631
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,358,701
    )
    
    
    (658,985
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,974,382
    
    
    
    2,781,838CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,615,681
    
    
    $
    2,122,853SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    765,754
    
    
    $
    1,139,933SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Debt incurred in acquisitions
    
    $
    
    
    
    $
    600,000
  9




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. Basis of Consolidated Financial Statement Presentation
    2. Summary of Significant Accounting Policies
        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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##### Table of Contents



Accounting for Transfers of Financial Assets an
amendment to SFAS No. 140
     Determination of the
Useful Life of Intangible Assets
 Business Combinations
 12




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##### Table of Contents



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
   4. Revolving Line of Credit
   13




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5. Notes Payable
       2010
    
    $
    4,007,9982011
    
    
    1,038,2142012
    
    
    542,0002013
    
    
    2014
    
    
    Thereafter
    
    
    5,588,212Less: current portion
    
    
    4,007,998Long term portion
    
    $
    1,580,214
 14




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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
    
    
    (294,124
    )
    
    $
    4.85Options outstanding at June 30, 2009
    
    
    608,825
    
    
    $
    4.24
    
    
    
    5.46Options exercisable at June 30, 2009
    
    
    418,871
    
    
    $
    5.24
    
    
    
    4.85Options available for future grants at June 30, 2009
    
    
    231,175
  15




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For the Three Months Ended June 30,2009
    
    2008Expected dividend yield
    
    
    
    Expected price volatility
    
    64.87-65.13%
    
    58.11-59.58%Risk-free interest rate
    
    1.48-1.60%
    
    2.8-3.49%Expected life of options
    
    4.5-5.25 years
    
    5-8.25 years
   9. Discontinued Operations
   16




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For the Nine Months Ended June 30,2009
    
    
    2008Income from discontinued operations
    
    $
    211,694
    
    
    $
    874,368Pre-tax income from discontinued operations
    
    
    211,694
    
    
    
    874,368Income tax benefit
    
    
    
    
    
    
    Income from discontinued operations, net
of income tax
    
    $
    211,694
    
    
    $
    874,368
 10. Commitments and Contingencies
  Litigation
  Lawsuit filed by the Dissident Group against the Company
   Complaint filed by the Company against the Dissident Group
  17




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11. Goodwill and Intangible Assets
  Goodwill
    
    
    Customer Lists
    
    
    TotalEnding balance, September 30, 2008
    
    $
    62,112,528
    
    
    $
    7,456,704
    
    
    $
    69,569,232Less amortization expense
    
    
    
    
    
    
    (2,793,303
    )
    
    
    (2,793,303
    )Ending balance, June 30, 2009
    
    $
    62,112,528
    
    
    $
    4,663,401
    
    
    $
    66,775,929
  AnnualAmortizationExpense2010
    
    $
    3,502,5292011
    
    
    828,1032012
    
    
    311,5552013
    
    
    21,2142014
    
    
    Total Amortization Expense
    
    $
    4,663,401
 12. Net Income (Loss) Per Share
  For The Three Months Ended
    
    
    For The Nine Months EndedJune 30, 2009
    
    
    June 30, 2008
    
    
    June 30, 2009
    
    
    June 30, 2008Common stock:Weighted average number of shares outstanding  basic
    
    
    13,091,088
    
    
    
    13,091,088
    
    
    
    13,091,088
    
    
    
    13,091,088Effect of dilutive securities:Options and Warrants
    
    
    8,055
    
    
    
    
    
    
    
    
    
    
    
    Weighted average number of shares outstanding  diluted
    
    
    13,099,143
    
    
    
    13,091,088
    
    
    
    13,091,088
    
    
    
    13,091,088Options and Warrants not included above (anti-dilutive)
    
    
    355,700
    
    
    
    912,616
    
    
    
    532,713
    
    
    
    786,504Shares outstanding:Beginning outstanding shares
    
    
    13,091,088
    
    
    
    13,091,088
    
    
    
    13,091,088
    
    
    
    13,091,088Issuance of shares
    
    
    
    
    
    
    Ending outstanding shares
    
    
    13,091,088
    
    
    
    13,091,088
    
    
    
    13,091,088
    
    
    
    13,091,088
 13. Related Parties
  18




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14. Subsequent Events
    
 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.
 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.
 19




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Results of Operations
 Results of Operations for the Three Months Ended June 30, 2009 as Compared to the Three Months
Ended June 30, 2008.
 Revenue, Cost of Sales, and Gross Profit:
 (dollars in thousands)For the Three Months Ended June 30,2009
    
    
    2008Revenue
    
    $
    13,126
    
    
    $
    14,664Cost of sales
    
    
    4,619
    
    
    
    5,693Gross Profit
    
    $
    8,507
    
    
    $
    8,971
 Revenue
  Cost of Sales
  
    
    Payroll costs decreased $0.4 million primarily due to the reduction
in services rendered and the
transition of our compensation structure in our acquired branches to mirror the rest of the
Company.
 
    
    Chemical costs decreased $0.3 million primarily due to the decrease in lawn and ornamental
revenue.
 
    
    Vehicle costs decreased $0.3 million due to a reduction in fuel prices and a decrease in the
repair and maintenance costs. The Company reduced its fleet size by 97 vehicles as part of a
rightsizing initiative to better manage our costs which also included the discontinuation of
our third party vehicle maintenance program which was brought in house.
 Gross Profit
  Selling, General and Administrative Expenses:
 (dollars in thousands)For the Three Months Ended June 30,2009
    
    
    2008Selling
    
    $
    1,408
    
    
    $
    1,536General and administrative
    
    
    5,708
    
    
    
    6,820Depreciation and amortization
    
    
    1,117
    
    
    
    1,117Total operating expenses
    
    $
    8,233
    
    
    $
    9,473
 20




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##### Table of Contents




    
    Payroll expenses decreased $0.5 million as a result of reducing our headcount.
 
    
    Vehicle expenses decreased $0.2 million due to lower fuel costs and reduced fleet size.
 
    
    Health insurance expenses decreased by $0.2 million due to a reduction in headcount and
the renegotiation of our health and dental insurance rates with our provider, along with
adjustments to our employee contribution levels.
 
    
    Office and printing expenses decreased by $0.1 million primarily due to a focused effort
to maintain tight controls on inventory, structure the bidding on materials and the
consolidation of three of our branches into three other nearby branch locations.
 Other Income (Expenses):
 (dollars in thousands)For the Three Months Ended June 30,2009
    
    
    2008Interest expense
    
    $
    (198
    )
    
    $
    (389
    )Interest income
    
    
    
    
    
    
    19Gain on disposal of assets
    
    
    10
    
    
    
    11Gain on extinguishment of debt
    
    
    30
    
    
    
    Total other expenses
    
    $
    (158
    )
    
    $
    (359
    )
  Income Tax (Provision) from Continuing Operations:
 (dollars in thousands)For the Nine Months Ended June 30,2009
    
    
    2008Income tax (provision) benefit
    
    $
    
    
    
    $
    
  Discontinued Operations:
 (dollars in thousands)For the Three Months Ended June 30,2009
    
    
    2008Telecom FM  Net income
    
    $
    
    
    
    $
    570Pre-tax income from
discontinued operations
    
    
    
    
    
    
    570Income tax benefit
    
    
    
    
    
    
    Income from discontinued
operations, net of income
taxes
    
    $
    
    
    
    $
    570
 21




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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 June 30, 2008 represents the
operations of Telecom FM for that period.
 Net Income (Loss)
  Results of Operations
 Results of Operations for the Nine Months Ended June 30, 2009 as Compared to the Nine Months Ended
June 30, 2008.
 Revenue, Cost of Sales, and Gross Profit:
 (dollars in thousands)For the Nine Months Ended June 30,2009
    
    
    2008Revenue
    
    $
    38,450
    
    
    $
    42,480Cost of sales
    
    
    14,223
    
    
    
    16,548Gross Profit
    
    $
    24,227
    
    
    $
    25,932
 Revenue
  Cost of Sales
  
    
    Payroll costs decreased $0.8 million primarily due to the reduction in services rendered, and the
transition of our compensation structure in our acquired branches to mirror the rest of the
Company.
    
Chemical costs decreased $0.6 million which is proportionate to the decline in revenue.
 
    
    Vehicle costs decreased $0.9 million. Fuel purchases decreased $0.5 million due to the
reduction in fuel prices and the decrease in gallons purchased due to lower activity. Repair
and maintenance costs decreased $0.3 million and vehicle lease costs decreased $0.1 million.
The Company reduced its fleet size by 97 vehicles from June 30, 2008 to June 30, 2009 as part
of a rightsizing initiative to better manage our costs which also included the discontinuation
of our third party vehicle maintenance program which was brought in house.
 Gross Profit
  22




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##### Table of Contents



Operating Expenses:
 Selling, General and Administrative Expenses:
 (dollars in thousands)For the Nine Months Ended June 30,2009
    
    
    2008Selling
    
    $
    3,611
    
    
    $
    4,557General and administrative
    
    
    18,412
    
    
    
    21,376Depreciation and amortization
    
    
    3,353
    
    
    
    3,362Total operating expenses
    
    $
    25,376
    
    
    $
    29,295
    
    
    Payroll expenses decreased by $1.0 million primarily due to a reduction in headcount.
 
    
    Vehicle expenses decreased $0.5 million due to lower fuel costs and a reduced fleet size.
 
    
    Office and printing expenses decreased by $0.3 million primarily due to tighter controls on
office supply inventory and print expenditures.
 
    
    Health insurance expenses decreased by $0.4 million due to a reduction in headcount and the
renegotiation of our health and dental insurance rates with our provider, along with
adjustments to our employee contribution levels.
 
    
    Outsourcing costs decreased by $0.3 million, primarily due to a decrease in professional
fees.
 
    
    Facility costs, customer damage expenses and miscellaneous expenses decreased a combined $0.3
million.
 
    
    Corporate general and administrative expenses were increased by $0.1 million. An increase of
$0.5 million in legal and professional fees, primarily due to a shareholders dispute was
partially 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), which was effective as of February 8, 2008, which resulted in lower management fees.
 Other Income (Expenses):
 (dollars in thousands)For the Nine Months Ended June 30,2009
    
    
    2008Interest expense
    
    $
    (675
    )
    
    $
    (1,115
    )Interest income
    
    
    2
    
    
    
    128Gain on disposal of assets
    
    
    
    
    
    
    5Gain on extinguishment of debt
    
    
    55
    
    
    
    Total other expenses
    
    $
    (618
    )
    
    $
    (982
    )
 23




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##### Table of Contents



Income Tax (Provision) from Continuing Operations:
 (dollars in thousands)For the Nine Months Ended June 30,2009
    
    
    2008Income tax (provision) benefit
    
    $
    
    
    
    $
    
  Discontinued Operations:
 (dollars in thousands)For the Nine Months Ended June 30,2009
    
    
    2008Sunair Communications  Net gain
    
    $
    216
    
    
    $
    Percepia  Net loss
    
    
    (4
    )
    
    
    Telecom FM  Net income
    
    
    
    
    
    
    874Pre-tax income from
discontinued operations
    
    
    212
    
    
    
    874Income tax benefit
    
    
    
    
    
    
    Income from discontinued
operations, net of income taxes
    
    $
    212
    
    
    $
    874
  
    
    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 nine months ended June 30, 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 nine months ended June 30, 2009.
 Net Income (Loss)
  24




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##### Table of Contents



Liquidity and Capital Resources
        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
  26




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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
 10.1
    
    Letter dated May 19, 2009 between Wachovia Bank, National Association and Sunair Services Corporation.10.2
    
    Amendment Number 1 to Subordinated Promissory Note effective as of June 30, 2009 between
Sellers representative on behalf of Charles P. Steinmetz, the Charles P. Steinmetz
Irrevocable Trusts, dated April 22, 2002 for the benefit of Mathew A. Steinmetz and Louis
Steinmetz, respectively, and Gregory A. Clendenin, as Trustee of the Gregory A. Clendenin Trust,
dated September 11, 1997, as amended.10.3
    
    Letter dated August 11, 2009 between Wachovia Bank, National Association and Sunair Services Corporation.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 27




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##### Table of Contents



SIGNATURES
  SUNAIR SERVICES CORPORATIONDate: August 14, 2009
    /s/ Jack I. RuffJack I. RuffPresident and Chief Executive OfficerDate: August 14, 2009
    /s/ Edward M. Carriero, Jr.Edward M. Carriero, Jr.Chief Financial Officer 28