##### 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 June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                to
 Commission file number I-4334
 SUNAIR SERVICES CORPORATION
 (Exact name of Registrant as specified in its charter)
 Florida
    
    59-0780772(State or other jurisdiction of incorporation 
or organization)
    
    (I.R.S. Employer Identification No.)595 South Federal Highway, Suite 500
Boca Raton, Florida
    
    33432(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ  o þ




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##### 



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
INDEX
 PageNo.PART I.
    
    FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2008 and September 30, 2007 (Unaudited)
    
    
    3-4Condensed Consolidated Statements of Operations for the Nine Months Ended June 30, 2008 and
2007 (Unaudited)
    
    
    5Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2008
and 2007 (Unaudited)
    
    
    6Condensed Consolidated Statements of Changes in Stockholders Equity and Comprehensive
(Loss) Income for the Nine Months ended June 30, 2008 (Unaudited)
    
    
    7Condensed Consolidated Statement of Cash Flows for the Nine Months Ended June 30, 2008 and
2007 (Unaudited)
    
    
    8-9Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    10Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II.
    
    OTHER INFORMATION
    
    
    32Item 1.
    
    Legal Proceedings
    
    
    32Item 1A.
    
    Risk Factors
    
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3.
    
    Defaults Upon Senior Securities
    
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    32Item 5.
    
    Other Information
    
    
    32Item 6.
    
    Exhibits
    
    
    33Signatures
    
    
    
    
    34Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
  2




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2008 AND SEPTEMBER 30, 2007
(UNAUDITED)
 June 30, 2008
    
    
    September 30, 2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    2,122,853
    
    
    $
    2,781,838Accounts receivable, net
    
    
    5,813,628
    
    
    
    3,481,064Inventories, net
    
    
    2,289,498
    
    
    
    1,826,636Prepaid and other current assets
    
    
    2,185,475
    
    
    
    2,185,909Total Current Assets
    
    
    12,411,454
    
    
    
    10,275,447PROPERTY, PLANT, AND EQUIPMENT, net
    
    
    2,061,151
    
    
    
    2,118,552OTHER ASSETS:Note receivable
    
    
    2,000,000
    
    
    
    2,000,000Software costs, net
    
    
    231,575
    
    
    
    359,375Customer list, net
    
    
    8,387,804
    
    
    
    10,958,234Goodwill
    
    
    62,112,528
    
    
    
    60,675,353Other assets
    
    
    472,537
    
    
    
    390,294Total Other Assets
    
    
    73,204,444
    
    
    
    74,383,256TOTAL ASSETS
    
    $
    87,677,049
    
    
    $
    86,777,255
  3




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##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2008 AND SEPTEMBER 30, 2007
(UNAUDITED)
 June 30, 2008
    
    
    September 30, 2007LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    3,438,362
    
    
    $
    2,346,395Accrued expenses
    
    
    3,663,847
    
    
    
    4,263,674Unearned revenues
    
    
    1,015,039
    
    
    
    952,417Customer deposits
    
    
    3,541,632
    
    
    
    3,166,264Notes payable and capital leases, current portion
    
    
    2,322,899
    
    
    
    409,029Total Current Liabilities
    
    
    13,981,779
    
    
    
    11,137,779LONG TERM LIABILITIES:Notes payable and capital leases, net of current portion
    
    
    3,870,970
    
    
    
    5,545,456Note payable -related party
    
    
    5,000,000
    
    
    
    5,000,000Revolving line of credit
    
    
    9,600,000
    
    
    
    6,732,796Total Long Term Liabilities
    
    
    18,470,970
    
    
    
    17,278,252TOTAL LIABILITIES
    
    
    32,452,749
    
    
    
    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 June 30, 2008 and September 30, 2007, respectively
    
    
    1,309,110
    
    
    
    1,309,110Additional paid-in capital
    
    
    52,763,676
    
    
    
    52,378,437Retained earnings
    
    
    1,113,475
    
    
    
    4,585,007Accumulated other comprehensive gain  cumulative translation adjustment
    
    
    38,039
    
    
    
    88,670Total Stockholders Equity
    
    
    55,224,300
    
    
    
    58,361,224TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    87,677,049
    
    
    $
    86,777,255
  4




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
 2008
    
    
    2007SALESLawn and pest control services sales
    
    $
    42,231,802
    
    
    $
    39,186,677Telephone communications sales
    
    
    9,193,230
    
    
    
    10,119,736Total sales
    
    
    51,425,032
    
    
    
    49,306,413COST OF SALESLawn and pest control services cost of sales
    
    
    15,963,179
    
    
    
    14,338,576Telephone communications cost of sales
    
    
    4,155,167
    
    
    
    5,256,246Total cost of sales
    
    
    20,118,346
    
    
    
    19,594,822GROSS PROFIT
    
    
    31,306,686
    
    
    
    29,711,591SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    33,767,074
    
    
    
    30,390,898LOSS FROM OPERATIONS
    
    
    (2,460,388
    )
    
    
    (679,307
    )OTHER INCOME (EXPENSES):Interest income
    
    
    148,193
    
    
    
    166,583Interest expense
    
    
    (1,118,172
    )
    
    
    (949,391
    )Gain on disposal of assets
    
    
    5,069
    
    
    
    10,513Total Other Income (Expenses)
    
    
    (964,910
    )
    
    
    (772,295
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (3,425,298
    )
    
    
    (1,451,602
    )INCOME TAX (PROVISION) BENEFIT
    
    
    (46,234
    )
    
    
    445,205LOSS FROM CONTINUING OPERATIONS
    
    
    (3,471,532
    )
    
    
    (1,006,397
    )INCOME FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX PROVISION OF $0 and $448,667
IN 2008 and 2007, RESPECTIVELY
    
    
    
    
    
    
    721,343NET LOSS
    
    $
    (3,471,532
    )
    
    $
    (285,054
    )BASIC AND DILUTED LOSS PER SHARE:CONTINUING OPERATIONS
    
    $
    (0.27
    )
    
    $
    (0.08
    )DISCONTINUED OPERATIONS
    
    $
    
    
    
    $
    0.06NET LOSS
    
    $
    (0.27
    )
    
    $
    (0.02
    )WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC and DILUTED
    
    
    13,091,088
    
    
    
    13,058,119
  5




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
 2008
    
    
    2007SALESLawn and pest control services sales
    
    $
    14,584,609
    
    
    $
    13,196,542Telephone communications sales
    
    
    4,143,997
    
    
    
    4,244,188Total sales
    
    
    18,728,606
    
    
    
    17,440,730COST OF SALESLawn and pest control services cost of sales
    
    
    5,538,089
    
    
    
    5,018,740Telephone communications cost of sales
    
    
    1,816,299
    
    
    
    2,036,992Total cost of sales
    
    
    7,354,388
    
    
    
    7,055,732GROSS PROFIT
    
    
    11,374,218
    
    
    
    10,384,998SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    11,304,743
    
    
    
    10,408,742INCOME (LOSS) FROM OPERATIONS
    
    
    69,475
    
    
    
    (23,744
    )OTHER INCOME (EXPENSES):Interest income
    
    
    25,862
    
    
    
    47,165Interest expense
    
    
    (390,032
    )
    
    
    (273,683
    )Gain on disposal of assets
    
    
    11,226
    
    
    
    Total Other Income (Expenses)
    
    
    (352,944
    )
    
    
    (226,518
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (283,469
    )
    
    
    (250,262
    )INCOME TAX PROVISION
    
    
    (7,051
    )
    
    
    (83,279
    )LOSS FROM CONTINUING OPERATIONS
    
    
    (290,520
    )
    
    
    (333,541
    )LOSS FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX BENEFIT OF $0 and $372,579
IN 2008 and 2007, RESPECTIVELY
    
    
    
    
    
    
    (332,226
    )NET LOSS
    
    $
    (290,520
    )
    
    $
    (665,767
    )BASIC AND DILUTED LOSS PER SHARE:CONTINUING OPERATIONS
    
    $
    (0.02
    )
    
    $
    (0.03
    )DISCONTINUED OPERATIONS
    
    $
    
    
    
    $
    (0.02
    )NET LOSS
    
    $
    (0.02
    )
    
    $
    (0.05
    )WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC and DILUTED
    
    
    13,091,088
    
    
    
    13,091,088
  6




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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, 2008
(UNAUDITED)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at September 30, 2007
    
    
    13,091,088
    
    
    $
    1,309,110
    
    
    $
    52,378,437
    
    
    $
    4,585,007
    
    
    $
    88,670
    
    
    $
    58,361,224Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,471,532
    )
    
    
    
    
    
    
    (3,471,532
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,631
    )
    
    
    (50,631
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,471,532
    )
    
    
    (50,631
    )
    
    
    (3,522,163
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    385,239
    
    
    
    
    
    
    
    
    
    
    
    385,239Balance at June 30, 2008
    
    
    13,091,088
    
    
    $
    1,309,110
    
    
    $
    52,763,676
    
    
    $
    1,113,475
    
    
    $
    38,039
    
    
    $
    55,224,300
  7




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
 2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (3,471,532
    )
    
    $
    (285,054
    )Adjustments
to reconcile net loss to net cash (used in) provided by operating activities:Depreciation
    
    
    669,212
    
    
    
    691,590Amortization
    
    
    2,927,177
    
    
    
    1,754,442Deferred taxes
    
    
    
    
    
    
    (20,380
    )Bad debt reserve
    
    
    266,008
    
    
    
    (80,753
    )Inventory reserve
    
    
    (380,858
    )
    
    
    137,962Gain on sale of assets
    
    
    (5,069
    )
    
    
    (2,193,415
    )Stock-based compensation expense
    
    
    385,239
    
    
    
    486,385Stock issued for services rendered
    
    
    
    
    
    
    45,000(Increase) decrease in assets:Accounts receivable
    
    
    (2,525,786
    )
    
    
    (16,097
    )Income tax receivable
    
    
    
    
    
    
    352,393Interest receivable
    
    
    45,286
    
    
    
    (43,916
    )Inventories
    
    
    (68,803
    )
    
    
    (499,982
    )Prepaid and other current assets
    
    
    (71,495
    )
    
    
    (297,219
    )Note receivable
    
    
    
    
    
    
    334,986Other assets
    
    
    (55,603
    )
    
    
    358,601Increase (decrease) in liabilities:Accounts payable and accrued expenses
    
    
    234,501
    
    
    
    1,471,329Unearned revenue
    
    
    62,622
    
    
    
    76,505Income taxes payable
    
    
    
    
    
    
    (1,195
    )Customer deposits
    
    
    371,571
    
    
    
    491,090Net Cash (Used In) Provided By Operating Activities
    
    
    (1,617,530
    )
    
    
    2,762,272CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant, and equipment
    
    
    (550,093
    )
    
    
    (296,563
    )Software development costs
    
    
    
    
    
    
    (281,388
    )Cash paid for business acquisitions
    
    
    (1,000,000
    )
    
    
    (2,598,432
    )Net proceeds from sale of assets
    
    
    52,684
    
    
    
    2,344,980Net Cash (Used In) Investing Activities
    
    
    (1,497,409
    )
    
    
    (831,403
    )
  8




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
 2008
    
    
    2007CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of line of credit (net)
    
    
    (932,797
    )
    
    
    (1,000,000
    )Proceeds from line of credit
    
    
    3,800,000
    
    
    
    Repayment of notes payable and capital leases
    
    
    (360,618
    )
    
    
    (92,347
    )Net Cash Provided By (Used In) Financing Activities
    
    
    2,506,585
    
    
    
    (1,092,347
    )Effect of exchange rate fluctuations on cash
    
    
    (50,631
    )
    
    
    150,338NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (658,985
    )
    
    
    988,860CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,781,838
    
    
    
    1,601,110CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    2,122,853
    
    
    $
    2,589,970SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for income taxes
    
    $
    
    
    
    $
    Cash paid during the period for interest
    
    $
    1,139,933
    
    
    $
    1,071,750SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Common stock issued in acquisition
    
    $
    
    
    
    $
    300,000Debt incurred in acquisitions
    
    $
    600,000
    
    
    $
    2,235,000
  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
 Revenue Recognition
       10




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Income taxes
  Reclassification
   Recent Accounting Pronouncements
 
 Determination of the
Useful Life of Intangible Assets
 Business Combinations
 11




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##### Table of Contents



Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51 (FASB No. 160)
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment of FASB Statement No. 115
 Fair Value Measurements
 3. Acquisitions
 Acquisition of Marshall Pest Control of SW FL, Inc.
   Goodwill
    
    $
    1,487,775Customer list
    
    
    225,204Accounts receivable
    
    
    68,989Inventory
    
    
    13,199Fixed assets
    
    
    62,475Total
    
    $
    1,857,642
 12




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##### Table of Contents



Acquisition of Archer Exterminators, Inc. (Archer)
  Acquisition of Valentines Indoor Pest Management, Inc. (Valentine)
  Acquisition of David Burke, Inc. D/B/A Florida Exterminating (Florida Exterminating)
  Acquisition of Summer Rain Fertilization Company (Summer Rain)
  Acquisition of Howell Environmental, Inc. (Howell)
  Acquisition of Longboat Key Pest Control, Inc. (Longboat Key)
  Purchase Price Allocation
  Goodwill
    
    $
    9,344,859Customer list
    
    
    2,159,885Accounts receivable
    
    
    641,666Inventory
    
    
    62,418Fixed assets
    
    
    576,424Prepaid expenses
    
    
    210,644Customer deposits
    
    
    (79,281
    )Deferred revenue
    
    
    (677,539
    )Total
    
    $
    12,239,076
 13




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##### Table of Contents



Pro-Forma Results of Operations
  For the Three Months
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2007
    
    2007Revenues
    
    $
    18,795,133
    
    
    $
    54,197,394Net (loss) income
    
    $
    (266,516
    )
    
    $
    856,116Net (loss) income per shareBasic and diluted
    
    $
    (0.02
    )
    
    $
    0.07
  4. Note Receivable
  5. Revolving Line of Credit
    14




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##### Table of Contents



6. Notes Payable
       2008
    
    $
    2,322,8992009
    
    
    1,555,7582010
    
    
    1,773,2122011
    
    
    542,0002012
    
    
    Thereafter
    
    
    6,193,869Less: current portion
    
    
    2,322,899Long term portion
    
    $
    3,870,970
 7. Note Payable-Related Party
  8. Income Taxes
 15




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9. Stock Options
    WeightedAvg. Exercise
    
    RemainingShares
    
    Price
    
    LifeOptions outstanding at October 1, 2007
    
    
    585,092
    
    
    $
    6.94Granted
    
    
    388,500
    
    
    $
    1.83Exercised
    
    
    
    
    
    $
    Expired/Forfeited
    
    
    (60,976
    )
    
    $
    9.74Options outstanding at June 30, 2008
    
    
    912,616
    
    
    $
    4.58
    
    
    
    6.06Options exercisable at June 30, 2008
    
    
    495,387
    
    
    $
    6.15
    
    
    
    5.03Options available for future grants at June 30, 2008
    
    
    94,051
  Fair Value
   16




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##### Table of Contents



For the Nine Months Ended June 30,2008
    
    2007Expected dividend yield
    
    
    
    
    
    
    Expected price volatility
    
    
    58.11 - 59.58
    %
    
    
    63.12
    %Risk-free interest rate
    
    
    2.80 - 3.49
    %
    
    
    4.73
    %Expected life of options
    
    5 - 8.25 years
    
    8 years
   10. Discontinued Operations
    (dollars in thousands)For the Nine Months EndedJune 30, 2007Percipia, Inc.  Net loss
    
    $
    (1,013
    )Pre-tax (loss) from discontinued operations
    
    
    (1,013
    )Income tax benefit
    
    
    373(Loss) from discontinued operations, net of income taxes
    
    
    (640
    )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
    
    $
    721
 (dollars in thousands)For the Three Months EndedJune 30, 2007Percipia, Inc.  Net loss
    
    $
    (705
    )Income tax benefit (provision)
    
    
    373Loss from discontinued operations, net
of taxes
    
    
    (332
    )
 17




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##### Table of Contents



11. Commitments and Contingencies
  Litigation
   12. Goodwill and Intangible Assets
  Goodwill
    
    
    Customer Lists
    
    
    TotalEnding balance, September 30, 2007
    
    $
    60,675,353
    
    
    $
    10,958,234
    
    
    $
    71,633,587Acquisition of businesses
    
    
    1,487,775
    
    
    
    225,204
    
    
    
    1,712,979Purchase price adjustment
    
    
    (50,600
    )
    
    
    
    
    
    
    (50,600
    )62,112,528
    
    
    
    11,183,438
    
    
    
    73,295,966Less amortization expense
    
    
    
    
    
    
    (2,795,634
    )
    
    
    (2,795,634
    )Ending balance, June 30, 2008
    
    $
    62,112,528
    
    
    $
    8,387,804
    
    
    $
    70,500,332
  2008
    
    2007Goodwill
    
    
    (a
    )
    
    
    (a
    )Customer lists (b)
    
    
    5
    
    
    
    8Weighted average
    
    
    5
    
    
    
    8
 
 (a)
    
    Goodwill is not amortized but, along with all other intangible assets, is reviewed for
possible impairment each year at September 30th or when indicators of impairment exist.(b)
    
    Change in estimated useful life for customer lists during the fourth quarter of 2007.  18




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##### Table of Contents



AggregateAmortizationExpense2008
    
    $
    3,724,4032009
    
    
    3,502,5282010
    
    
    828,1032011
    
    
    311,5542012
    
    
    21,216Total Aggregate Amortization Expense
    
    $
    8,387,804
 13. Net Income (Loss) Per Share
  14. Segment and Geographic Information
   For the Nine Months Ended June 30,2008
    
    
    2007Net revenues:Lawn and pest control services
    
    $
    42,231,802
    
    
    $
    39,186,678Telephone communications
    
    
    9,193,230
    
    
    
    10,119,735Total net revenues
    
    $
    51,425,032
    
    
    $
    49,306,413Operating income (loss):Lawn and pest control services
    
    $
    2,785,836
    
    
    $
    3,469,340Telephone communications
    
    
    903,016
    
    
    
    658,758Unallocated home office expenses
    
    
    (6,149,240
    )
    
    
    (4,807,405
    )Total operating loss
    
    $
    (2,460,388
    )
    
    $
    (679,307
    )
 June 30,
    
    
    September 30,2008
    
    
    2007Identifiable property plant and equipment:Lawn and pest control services
    
    $
    2,026,734
    
    
    $
    2,062,451Telephone communications
    
    
    34,417
    
    
    
    56,101Total identifiable property plant and equipment
    
    $
    2,061,151
    
    
    $
    2,118,552
  19




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##### Table of Contents



15. Related Parties
     16. Subsequent Events
    20




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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
    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.
 21




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##### Table of Contents




    
    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.
 Results of Operations
 Results of Operations for the Three Months Ended June 30, 2008 as Compared to the Three Months
Ended June 30, 2007.
 Revenue:
 (dollars in thousands)For the Three Months EndedJune 30,2008
    
    
    2007Lawn and pest control services
    
    $
    14,585
    
    
    $
    13,197Telephone communications
    
    
    4,144
    
    
    
    4,244Total revenue
    
    $
    18,729
    
    
    $
    17,441
 Lawn and Pest Control Services
  Telephone Communications
  22




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##### Table of Contents



Cost of Sales:
 (dollars in thousands)For the Three Months Ended June 30,2008
    
    
    2007Lawn and pest control services
    
    $
    5,538
    
    
    $
    5,019Telephone communications
    
    
    1,816
    
    
    
    2,037Total cost of sales
    
    $
    7,354
    
    
    $
    7,056
 Lawn and Pest Control Services
  
    
    Chemical costs increased by $0.2 million for the three months ended June 30, 2008 as
compared to the same period in 2007. The price of petroleum based chemical and fertilizer
products increased due to higher oil prices.
    
    Payroll costs increased by $0.2 million for the three months ended June 30, 2008 as
compared to the same period in 2007 due to an increase in activity and wage increases.
    
    Vehicle costs increased by $0.1 million for the three months ended June 30, 2008
compared to the same period in 2007 primarily due to an increase in fuel and vehicle
maintenance costs.
 Telephone Communications
  Gross Profit:
 (dollars in thousands)For the Three Months EndedJune 30,2008
    
    
    2007Lawn and pest control services
    
    $
    9,047
    
    
    $
    8,178Telephone communications
    
    
    2,328
    
    
    
    2,207Total gross profit
    
    $
    11,375
    
    
    $
    10,385
 Lawn and Pest Control Services
  Telephone Communications
  23




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##### Table of Contents



Operating Expenses:
 Selling, General and Administrative Expenses:
 (dollars in thousands)For Three Months Ended June 30,2008
    
    
    2007Selling
    
    $
    2,261
    
    
    $
    2,493General and administrative
    
    
    7,888
    
    
    
    7,216Depreciation and amortization
    
    
    1,156
    
    
    
    700Total operating expenses
    
    $
    11,305
    
    
    $
    10,409
   
    
    Middletons selling costs decreased by $0.2 million for the three months ended June 30,
2008 as compared to the same time period in 2007 as a result of a decrease in advertising
expense.
  
    
    Middletons general and administrative expenses increased by $0.8 million for the three
months ended June 30, 2008 as compared to the same period in 2007. The increase in general and
administrative expenses was primarily driven by:
 
    
    Payroll expenses increased by $0.2 million for the three month period ended June 30,
2008 as compared to the same period in 2007 as a result of the increase in staff due to the
purchase and integration of several acquired companies, 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.
    
    Vehicle expenses increased by $0.3 million due to higher fuel and maintenance costs.
Occupancy expenses increased by $0.1 million due to our expansion and increased facility
lease rates.
    
    Customer damage expenses increased $0.1 for the three months ended June 30, 2008 as
compared to the same period in 2007. During the quarter ended June 30, 2007 the reserve
for customer damages was reduced by $0.2 based on historical trends in claims.
    
    The Company moved to a lockbox system in August 2007. Lockbox fees and statement
fulfillment expenses were $0.1 million for the three months ended June 30, 2008. There were
no lockbox fees and statement costs for the same time period in 2007. The implementation of
a lockbox system has enabled us to streamline our billing and cash receipts processing and
has improved our ability to manage cash flow.
  
    
    Corporate depreciation and amortization expenses increased by $0.5 million for the
three months ended June 30, 2008 as compared to the same period in 2007 mostly attributable
to an increase in the amortization of intangible assets due to our acquisition activity
coupled with the change in estimated useful life for customer lists from 8 years to 5
years, which occurred during the fourth quarter of fiscal year 2007.
 24




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##### Table of Contents



Other Income (Expenses):
 (dollars in thousands)For the Three Months Ended June 30,2008
    
    
    2007Interest income
    
    $
    26
    
    
    $
    47Interest expense
    
    
    (390
    )
    
    
    (274
    )Gain on disposal of assets
    
    
    11
    
    
    
    Total other income (expenses)
    
    $
    (353
    )
    
    $
    (227
    )
  Income Tax (Provision) from Continuing Operations:
 (dollars in thousands)For the Three Months Ended June 30,2008
    
    
    2007Income tax (provision)
    
    $
    (7
    )
    
    $
    (83
    )
  Discontinued Operations:
 (dollars in thousands)For the Three MonthsEndedJune 30, 2007Income from discontinued operations, net of income taxes
    
    $
    (332
    )Gain (loss) on sale of assets from discontinued
operations, net of income taxes
    
    
    Income from discontinued operations, net of taxes
    
    $
    (332
    )
  
    
    On August 1, 2007, we sold all the outstanding shares of Percipia. The results of
operations for the three months ended June 30, 2007 related to Percipia have been
classified as discontinued operations.
 25




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##### Table of Contents



Results of Operations
 Results of Operations for the Nine Months Ended June 30, 2008 as Compared to the Nine Months Ended
June 30, 2007.
 Revenue:
 (dollars in thousands)For the Nine Months EndedJune 30,2008
    
    
    2007Lawn and pest control services
    
    $
    42,232
    
    
    $
    39,186Telephone communications
    
    
    9,193
    
    
    
    10,120Total revenue
    
    $
    51,425
    
    
    $
    49,306
 Lawn and Pest Control Services
  Telephone Communications
  Cost of Sales:
 (dollars in thousands)For the Nine Months Ended June 30,2008
    
    
    2007Lawn and pest control services
    
    
    15,963
    
    
    $
    14,339Telephone communications
    
    
    4,155
    
    
    
    5,256Total cost of sales
    
    
    20,118
    
    
    $
    19,595
 Lawn and Pest Control Services
  
    
    Chemical costs increased by $0.6 million for the nine months ended June 30, 2008 as
compared to the same period in 2007. The price of petroleum based chemical and fertilizer
products increased due to higher oil prices.
    
    Payroll costs increased by $0.4 million for the nine months ended June 30, 2008 as
compared to the same period in 2007. The increase is due to the increase in staff as a
result of the integration of several acquired companies and an increase in wage rates.
 26




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##### Table of Contents




    
    Vehicle costs increased by $0.6 million for the nine months ended June 30, 2008
compared to the same period in 2007 primarily due to an increase in fuel and vehicle
maintenance costs.
 Telephone Communications
  Gross Profit:
 (dollars in thousands)For the Nine Months EndedJune 30,2008
    
    
    2007Lawn and pest control services
    
    $
    26,269
    
    
    $
    24,848Telephone communications
    
    
    5,038
    
    
    
    4,863Total gross profit
    
    $
    31,307
    
    
    $
    29,711
 Lawn and Pest Control Services
  Telephone Communications
  
    
    Gross profit increased for the nine months ended June 30, 2008 compared to the same
time period in 2007 despite a $0.9 million decrease in revenue for the same period. The
gross margin increased to 54.8% in 2008 compared to 48.1% in 2007 due to a shift in product
mix.
 Operating Expenses:
 Selling, General and Administrative Expenses:
 (dollars in thousands)For the Nine Months Ended June 30,2008
    
    
    2007Selling
    
    $
    6,188
    
    
    $
    6,696General and administrative
    
    
    24,093
    
    
    
    21,629Depreciation and amortization
    
    
    3,486
    
    
    
    2,066Total operating expenses
    
    $
    33,767
    
    
    $
    30,391
   27




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##### Table of Contents




    
    Middletons selling costs decreased by $0.4 million for the nine months ended June 30, 2008
as compared to the same time period in 2007 as a result of reduction in advertising expense.
  
    
    Middletons general and administrative expenses increased by $2.5 million for the nine months
ended June 30, 2008 as compared to the same period in 2007. The increase in general and
administrative expenses was primarily driven by:
 
    
    An increase in payroll expense of $1.0 million and an increase in payroll taxes of $0.2
million for the nine month period ended June 30, 2008 as compared to the same period in
2007 as a result of the increase in staff as a result of the purchase and integration of
several acquired companies, 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 $0.3 million due to our expansion and increased
facility lease rates.
    
    The Company moved to a lockbox system in August 2007. Lockbox fees and statement
fulfillment expenses were $0.3 million for the nine months ended June 30, 2008. There were
no lockbox fees and statement costs for the same time period in 2007. The implementation of
a lockbox system has enabled us to streamline our billing and cash receipts processing and
has improved our ability to manage our cash flow.
    
    Vehicle expenses increased by $0.4 million primarily due to higher fuel costs.
  
    
    Corporate depreciation and amortization expenses increased by $1.4 million for the nine
months ended June 30, 2008 as compared to 2007 due to a significant increase in the
amortization of intangible assets due to our acquisition activity coupled with the change in
estimated useful life for customer lists from 8 years to 5 years, which occurred during the
fourth quarter of fiscal year 2007.
 Other Income (Expenses):
 (dollars in thousands)For the Nine Months Ended June 30,2008
    
    
    2007Interest income
    
    $
    148
    
    
    $
    167Interest expense
    
    
    (1,118
    )
    
    
    (950
    )Gain on disposal of assets
    
    
    5
    
    
    
    11Total other income (expenses)
    
    $
    (965
    )
    
    $
    (772
    )
  
    
    Middletons interest expense increased by $0.2 million for the nine months ended June 30,
2008 as compared to the nine months ended June 30, 2007. The lawn and pest services segment
incurred an additional $2.5 million in debt related to acquisitions completed since June 30,
2007.
 28




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##### Table of Contents



Income Tax (Provision) Benefit from Continuing Operations:
 (dollars in thousands)For the Nine Months Ended June 30,2008
    
    
    2007Income tax (provision) benefit
    
    $
    (46
    )
    
    $
    445
  Discontinued Operations:
 (dollars in thousands)For the Nine Months EndedJune 30, 2007Income from discontinued operations, net of income taxes
    
    $
    (640
    )Gain (loss) on sale of assets from discontinued
operations, net of income taxes
    
    
    1,361Income from discontinued operations, net of taxes
    
    $
    721
  
    
    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 nine months ended June 30, 2007 related to Percipia have been classified as
discontinued operations.
 29




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##### Table of Contents



Liquidity and Capital Resources
        30




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##### Table of Contents



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




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##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  32




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##### Table of Contents



Item 6. Exhibits
 31.1
    
    Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2
    
    Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1
    
    Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*32.2
    
    Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
 *
    
    Filed herewith 33




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##### Table of Contents



SIGNATURES
  SUNAIR SERVICES CORPORATIONDate: August 14, 2008
    /s/ Jack I. RuffJack I. RuffPresident and Chief Executive OfficerDate: August 14, 2008
    /s/ Edward M. Carriero, Jr.Edward M. Carriero, Jr.Chief Financial Officer 34