##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
   o
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
  SUNAIR SERVICES CORPORATION
 
  FLORIDA
    
    59-0780772(STATE OR OTHER JURISDICTION OF
INCORPORATIONOR ORGANIZATION)
    
    (I.R.S. EMPLOYER IDENTIFICATION NO.)3005 SW THIRD AVE., FT. LAUDERDALE, FL.
    
    33315(ADDRESS OR PRINCIPAL EXECUTIVE OFFICE)
    
    (ZIP CODE)
 (954) 525-1505
  
   x o
  o x
  o x




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##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
 INDEX
 PAGE NO.PART I. FINANCIAL INFORMATION
    
    
    2ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    
    
    2CONSOLIDATED CONDENSED BALANCE SHEETS  JUNE 30, 2006 AND SEPTEMBER 30, 2005
    
    
    2CONSOLIDATED CONDENSED STATEMENTS OF INCOME  NINE MONTHS ENDED JUNE 30, 2006 AND 2005
    
    
    4CONSOLIDATED CONDENSED STATEMENTS OF INCOME  THREE MONTHS ENDED JUNE 30, 2006 AND 2005
    
    
    5CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  NINE MONTHS ENDED JUNE 30, 2006 AND 2005
    
    
    6NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    17ITEM 3. CONTROLS AND PROCEDURES
    
    
    21PART II. OTHER INFORMATION
    
    
    22ITEM 1. LEGAL PROCEEDINGS
    
    
    22ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    22ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    22ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    22ITEM 5. OTHER INFORMATION
    
    
    22ITEM 6. EXHIBITS
    
    
    22SIGNATURES
    
    
    23EX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO CertificationEX-32.2 Section 906 CFO Certification




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements (Unaudited)
 SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 (UNAUDITED)
 June 30, 2006
    
    
    September 30, 2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,322,279
    
    
    $
    3,220,699Accounts receivable, net
    
    
    5,028,140
    
    
    
    4,983,714Interest receivable
    
    
    4,238
    
    
    
    14,488Note receivable
    
    
    334,986
    
    
    
    Inventories
    
    
    8,362,790
    
    
    
    7,609,727Deferred tax asset
    
    
    87,512
    
    
    
    315,837Prepaid and other current assets
    
    
    2,680,377
    
    
    
    1,435,146Total Current Assets
    
    
    17,820,322
    
    
    
    17,579,611NOTE RECEIVABLE
    
    
    
    
    
    
    334,986PROPERTY, PLANT, AND EQUIPMENT, net
    
    
    2,785,797
    
    
    
    2,321,008DEFERRED TAX ASSET
    
    
    1,167,627
    
    
    
    OTHER ASSETSSoftware costs, net
    
    
    3,934,319
    
    
    
    3,938,402Customer list, net
    
    
    11,659,443
    
    
    
    10,262,250Goodwill
    
    
    53,842,806
    
    
    
    43,599,379Other Assets
    
    
    122,347
    
    
    
    80,393Total Other Assets
    
    
    69,558,915
    
    
    
    57,880,424TOTAL ASSETS
    
    $
    91,332,661
    
    
    $
    78,116,029
  -2-




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
 June 30, 2006
    
    
    September 30, 2005LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    2,395,123
    
    
    $
    4,630,304Accrued expenses
    
    
    3,994,890
    
    
    
    2,274,312Unearned revenues
    
    
    622,561
    
    
    
    181,216Customer deposits
    
    
    2,452,342
    
    
    
    1,490,677Capital leases, current portion
    
    
    10,684
    
    
    
    41,561Notes payable, current portion
    
    
    147,067
    
    
    
    90,645Total Current Liabilities
    
    
    9,622,667
    
    
    
    8,708,715LONG TERM LIABILITYCapital leases, net of current portion
    
    
    
    
    
    
    6,712Notes payable, net of current portion
    
    
    1,750,154
    
    
    
    287,549Notes payable related party
    
    
    5,000,000
    
    
    
    5,000,000Deferred tax liability
    
    
    
    
    
    
    188,400Revolving line of credit
    
    
    10,500,000
    
    
    
    12,000,000Total Long Term Liabilities
    
    
    17,250,154
    
    
    
    17,482,661Total Liabilities
    
    
    26,872,821
    
    
    
    26,191,376STOCKHOLDERS EQUITY:Preferred stock, no par value, 8,000,000
shares authorized, none issued and
outstanding
    
    
    
    
    
    
    Common stock, $.10 par value, 25,000,000
shares authorized, 13,060,559, and
10,186,377 shares issued and outstanding
at June 30, 2006 and September 30, 2005,
respectively.
    
    
    1,306,056
    
    
    
    1,018,638Additional paid-in-capital
    
    
    51,614,143
    
    
    
    37,759,670Retained earnings
    
    
    11,524,767
    
    
    
    13,170,774Translation adjustment
    
    
    14,874
    
    
    
    (24,429
    )Total Stockholders Equity
    
    
    64,459,840
    
    
    
    51,924,653TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    91,332,661
    
    
    $
    78,116,029
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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED CONDENSED STATEMENTS OF INCOME
 (UNAUDITED)
 Nine Months EndedJune 30, 2006
    
    
    June 30, 2005SALES
    
    $
    42,894,512
    
    
    $
    17,737,834COST OF SALES
    
    
    20,332,531
    
    
    
    10,137,798GROSS PROFIT
    
    
    22,561,981
    
    
    
    7,600,036SELLING
GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    24,731,750
    
    
    
    6,494,653INCOME (LOSS) FROM OPERATIONS
    
    
    (2,169,769
    )
    
    
    1,105,383OTHER INCOME (EXPENSE):Interest income
    
    
    43,452
    
    
    
    255,722Interest expense
    
    
    (978,948
    )
    
    
    (51,357
    )Other income (expense)
    
    
    53,045
    
    
    
    (24,416
    )Total Other Income (Expense)
    
    
    (882,451
    )
    
    
    179,949INCOME (LOSS) BEFORE BENEFIT
(PROVISION) FOR INCOME TAXES
    
    
    (3,052,220
    )
    
    
    1,285,332BENEFIT
(PROVISION) FOR INCOME TAXES
    
    
    1,406,212
    
    
    
    (320,674
    )NET INCOME (LOSS)
    
    $
    (1,646,008
    )
    
    $
    964,658NET INCOME (LOSS) PER COMMON SHARE:BASIC
    
    $
    (0.14
    )
    
    $
    0.14DILUTED
    
    $
    (0.14
    )
    
    $
    0.11WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    12,117,794
    
    
    
    6,704,827DILUTED
    
    
    12,117,794
    
    
    
    8,917,332
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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED CONDENSED STATEMENTS OF INCOME
 (UNAUDITED)
 Three Months EndedJune 30, 2006
    
    
    June 30, 2005SALES
    
    $
    15,243,200
    
    
    $
    7,797,514COST OF SALES
    
    
    8,399,055
    
    
    
    4,600,272GROSS PROFIT
    
    
    6,844,145
    
    
    
    3,197,242SELLING GENERAL AND ADMINISTRATIVE
EXPENSES
    
    
    8,017,998
    
    
    
    3,075,186INCOME (LOSS) FROM OPERATIONS
    
    
    (1,173,853
    )
    
    
    122,056OTHER INCOME (EXPENSE):Interest income
    
    
    12,580
    
    
    
    105,296Interest expense
    
    
    (310,503
    )
    
    
    (19,217
    )Other income (expense)
    
    
    48,045
    
    
    
    (6,110
    )Total Other Income (Expense)
    
    
    (249,878
    )
    
    
    79,969INCOME (LOSS) BEFORE BENEFIT
(PROVISION) FOR INCOME TAXES
    
    
    (1,423,731
    )
    
    
    202,025BENEFIT FOR INCOME TAXES
    
    
    940,155
    
    
    
    27,126NET INCOME (LOSS)
    
    $
    (483,576
    )
    
    $
    229,151NET INCOME (LOSS) PER COMMON SHARE:BASIC
    
    $
    (.04
    )
    
    $
    0.03DILUTED
    
    $
    (.04
    )
    
    $
    0.02WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    13,060,559
    
    
    
    9,289,434DILUTED
    
    
    13,060,559
    
    
    
    13,468,887
  -5-




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine Months EndedJune 30, 2006
    
    
    June 30, 2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (1,646,008
    )
    
    $
    964,658Adjustments to reconcile net income
(loss) to net cash provided by operating activities:Depreciation
    
    
    659,483
    
    
    
    201,102Amortization
    
    
    1,509,594
    
    
    
    327,024Deferred taxes
    
    
    (1,127,702
    )
    
    
    119,725Bad debt reserve
    
    
    137,992
    
    
    
    Equity based compensation
    
    
    486,217
    
    
    
    Inventories reserve
    
    
    29,698
    
    
    
    79,300(Increase) decrease in Assets:Accounts receivable
    
    
    292,550
    
    
    
    (113,653
    )Interest receivable
    
    
    10,250
    
    
    
    108,013Inventories
    
    
    (625,800
    )
    
    
    284,261Prepaid and other current assets
    
    
    (1,245,231
    )
    
    
    (468,254
    )Other assets
    
    
    (41,954
    )
    
    
    Increase (decrease) in Liabilities:Accounts payable and accrued expenses
    
    
    (839,627
    )
    
    
    656,652Unearned revenue
    
    
    367,775
    
    
    
    88,082Income taxes payable
    
    
    
    
    
    
    (35,238
    )Customer deposits
    
    
    648,214
    
    
    
    Net Cash (Used In) Provided By Operating Activities
    
    
    (1,384,549
    )
    
    
    2,211,672CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant, and equipment
    
    
    (441,929
    )
    
    
    (152,298
    )Software development costs
    
    
    (436,892
    )
    
    
    (388,762
    )Cash paid for acquisitions
    
    
    (11,695,506
    )
    
    
    (38,133,506
    )Proceeds from redemption of held-to-maturity investments
    
    
    
    
    
    
    2,913,601Net Cash (Used In) Investing Activities
    
    $
    (12,574,327
    )
    
    $
    (35,760,965
    )
  -6-




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months EndedJune 30, 2006
    
    
    June 30, 2005CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of line of credit
    
    $
    (1,500,000
    )
    
    $
    (7,047,000
    )Proceeds from line of credit
    
    
    
    
    
    
    16,000,000Repayment of loan from shareholder
    
    
    
    
    
    
    (22,800
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    47,138Proceeds from the sale of common stock
    
    
    13,655,672
    
    
    
    24,173,203Payment on capital leases
    
    
    (37,589
    )
    
    
    Repayment of notes payable
    
    
    (96,930
    )
    
    
    (27,965
    )Net Cash Provided By Financing Activities
    
    
    12,021,153
    
    
    
    33,122,576Effect of Exchange Rate Fluctuations on Cash
    
    
    39,303
    
    
    
    (2,207
    )NET
DECREASE IN CASH
AND CASH EQUIVALENTS
    
    
    (1,898,420
    )
    
    
    (428,924
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    3,220,699
    
    
    
    3,872,224CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,322,279
    
    
    $
    3,443,300SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid
during the period for income taxes
    
    $
    
    
    
    $
    400,000Cash paid
during the period for interest
    
    $
    978,948
    
    
    $
    131,679SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Common stock issued in acquisitions
    
    $
    100,000
    
    
    $
    10,000,000Note payable issued in acquisitions
    
    $
    1,475,000
    
    
    $
    5,000,000
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 1.
    
    Basis Of Consolidated Financial Statement Presentation
  2.
    
    Significant Accounting Policies
 Use Of Estimates
  Accounts Receivable
  Investments
   Inventories
  -8-




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Property, Plant, And Equipment
  Buildings and improvements
    
    
    10 to 30 yearsMachinery and equipment
    
    
    4 to 10 years
  Software Costs
  Customer List
      -9-




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Impairment Of Long-Lived Assets And Long-Lived Assets To Be Disposed Of
  Income (Loss) Per Share
  Revenue Recognition
  Advertising Costs
  Research And Development
  Foreign Currency Translation
  -10-




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Comprehensive Income
  Stock-Based Compensation
   3.
    
    Acquisitions
 Acquisition of Middleton Pest Control, Inc.
  -11-




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Cash
    
    $
    1,377,035Accounts receivable
    
    
    1,504,821Inventory
    
    
    546,129Prepaid assets
    
    
    662,565Fixed assets
    
    
    1,587,781Other assets
    
    
    63,762Customer list
    
    
    10,500,000Goodwill
    
    
    40,297,345Accounts payable
    
    
    (590,377
    )Accrued liabilities
    
    
    (930,739
    )Customer deposits
    
    
    (1,550,611
    )Notes payable
    
    
    (457,170
    )Total
    
    $
    53,010,541
 Acquisition of Four Seasons Lawn and Pest Control, Inc.
  Acquisition
of Spa Creek Services, LLC.
    Goodwill
    
    $
    5,521,932Customer list
    
    
    262,000Accounts receivable
    
    
    132,929Inventory
    
    
    66,475Fixed assets
    
    
    30,000Customer deposits
    
    
    (279,917
    )Total
    
    $
    5,733,419
 Acquisition of Par Pest Control, Inc.
  -12-




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Acquisition of Pestec Pest Control, Inc.
  Acquisition of Ron Fee, Inc.
    Goodwill
    
    $
    3,330,000Customer list
    
    
    1,554,000Accounts receivable
    
    
    235,000Inventory
    
    
    91,000Fixed assets
    
    
    440,000Accounts payable
    
    
    (74,000
    )Customer deposits
    
    
    (22,000
    )Notes payable  autos
    
    
    (29,000
    )Total
    
    $
    5,525,000
 Pro-Forma
Results of Operations
  Nine months ended June 30,2006
    
    
    2005Revenues
    
    $
    46,194,259
    
    
    $
    45,707,786Net income
    
    $
    (2,808,175
    )
    
    $
    1,901,146Earnings per shareBasic
    
    $
    (.23
    )
    
    $
    .28Diluted
    
    $
    (.23
    )
    
    $
    .21
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4.
    
    Inventories
  June 30, 2006
    
    
    September 30, 2005Materials
    
    $
    1,736,283
    
    
    $
    2,942,827Work in progress
    
    
    4,755,197
    
    
    
    3,533,734Finished goods
    
    
    1,871,310
    
    
    
    1,133,166$
    8,362,790
    
    
    $
    7,609,727
 5.
    
    Revolving Line of Credit
   6.
    
    Earnings Per Common Share
  7.
    
    Preferred Stock
  8.
    
    Stock-Based Compensation
 Summary
of plans
    -14-




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Fair
Value
    Three
    
    
    NineMonths Ended
    
    
    Months EndedJune 30, 2005
    
    
    June 30, 2005Net income:As reported
    
    $
    229,151
    
    
    $
    964,658Add: Stock-based compensation expense, as reported
    
    
    
    
    
    
    Deduct: Stock-based compensation expense, pro forma
    
    
    (63,287
    )
    
    
    (158,218
    )Net income, pro forma
    
    
    165,864
    
    
    
    806,440Net income per share, basic:Basic, as reported
    
    $
    0.03
    
    
    $
    0.14Stock-based compensation expense, pro forma
    
    
    (0.01
    )
    
    
    (0.02
    )Net income per share, basic, pro forma
    
    $
    0.02
    
    
    $
    0.12Net income per share, diluted:Diluted, as reported
    
    
    0.02
    
    
    
    0.11Stock-based compensation expense, pro forma
    
    
    0.00
    
    
    
    (0.02
    )Net income per share, diluted, pro forma
    
    $
    0.02
    
    
    $
    0.09
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For the Three
    
    
    For the NineMonths Ended June 30,
    
    
    Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Expected term (in years)
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    8Volatility
    
    
    31
    %
    
    
    31
    %
    
    
    31
    %
    
    
    31
    %Interest rate
    
    
    4.14
    %
    
    
    3.86
    %
    
    
    4.14
    %
    
    
    3.86Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value at grant date
    
    $
    4.43
    
    
    $
    6.33
    
    
    $
    4.43
    
    
    $
    6.33
   9.
    
    Sale of Securities  Private Placement
  10.
    
    Segment Information:
  2006
    
    
    2005Net revenues:Lawn and
pest control services
    
    $
    33,157,360
    
    
    $
    3,349,393High
frequency radio
    
    
    3,891,586
    
    
    
    7,962,338Telephone
communications
    
    
    5,845,566
    
    
    
    6,426,103Total net revenues
    
    $
    42,894,512
    
    
    $
    17,737,834Operating income (loss):Lawn and
pest control services
    
    $
    2,459,587
    
    
    
    338,237High
frequency radio
    
    
    463,047
    
    
    
    1,088,623Telephone
communications
    
    
    (796,593
    )
    
    
    (141,528
    )Unallocated home office expenses
    
    
    (5,178,261
    )
    
    
    Total operating income (loss)
    
    $
    (3,052,220
    )
    
    $
    1,285,332
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11.
    
    Recent Accounting Pronouncements:
    
 Item 2. Managements Discussion and Analysis or Plan of Operation
 Cautionary Statement Regarding Forward Looking Information:
  -17-




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General:
 4
 The Lawn and Pest Control Services Segment
    -18-




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Liquidity:
      -19-




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##### Table of Contents



Capital Resources:
     Results of Operations:
   -20-




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Item 3. Controls and Procedures
   -21-




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 31.1
    
    Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 -22-




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SIGNATURES
  SUNAIR SERVICES
CORPORATIONDate: August 14, 2006
    /s/ John J. HayesJohn J. Hayes, Presidentand Chief Executive OfficerDate: August 14, 2006
    /s/ Synnott B. DurhamSynnott B. Durham,Chief Financial Officer -23-