Sunair Services Corporation
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K/A
CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 31, 2006
SUNAIR SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
         
Florida   1-04334   59-0780772
(State or Other Jurisdiction   (Commission   (I.R.S. Employer
of Incorporation)   File Number)   Identification No.)
3005 Southwest Third Avenue
Fort Lauderdale, Florida 33315
(Address of Principal Executive Office) (Zip Code)
(954) 525-1505
(Registrant’s telephone number, including area code)
Not Applicable
(Former Name or Former Address, If Changed Since Last Report.)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2 (b))
o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4 (c))
 
 

 

Section 9 — Financial Statements and Exhibits
TABLE OF CONTENTS

Item 9.01 Financial Statements and Exhibits
SIGNATURES

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Item 9.01 Financial Statements and Exhibits.
On March 31, 2006, Middleton Pest Control, Inc., an indirect wholly-owned subsidiary of the Registrant, acquired substantially all of the assets of Ron Fee, Inc., a Florida Subchapter S corporation (“Ron Fee”).
This Current Report on Form 8-K/A contains the information required by Item 9.01 of Form 8-K relating to the acquisition of Ron Fee.
(a)   Financial Statements of Business Acquired.
 
    The financial statements of Ron Fee are attached as Exhibit A to this Current Report on Form 8-K/A.
 
(b)   Pro Forma Financial Information.
 
    The pro forma financial information relating to the Ron Fee acquisition are attached as Exhibit B to this Current Report on Form 8-K/A.
 
(c)   Shell company Transactions.
 
    Not applicable.
 
(d)   Exhibits.
 
    Not applicable.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
             
    SUNAIR SERVICES CORPORATION
 
            
Date: June 13, 2006
  By:     /s/ SYNNOTT B. DURHAM
 
     
 
      Synnott B. Durham    
 
      Chief Financial Officer    

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EXHIBIT A
RON FEE, INC.
AUDITED FINANCIAL STATEMENTS
CONTENTS
     
    Page
INDEPENDENT AUDITORS’ REPORT
   1
 
BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004
   2
 
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31 2005 AND 2004
   4
 
STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
   5
 
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
   6
 
NOTES TO FINANCIAL STATEMENTS
   7

 

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INDEPENDENT AUDITORS’ REPORT
To the Board of Directors
Ron Fee, Inc.
Spring Hill, Florida
We have audited the accompanying balance sheets of Ron Fee, Inc. (a Florida Subchapter S Corporation) as of December 31, 2005 and 2004 and the related statements of income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ron Fee, Inc. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, on March 31, 2006, the Company entered into an asset purchase agreement with Sunair Services Corporation through its wholly-owned subsidiary Middleton Pest Control, Inc. (“Middleton”). Middleton provided $5,525,000 as consideration for the acquisition that closed on March 31, 2006.
/s/ Berenfeld Spritzer Shechter & Sheer
April 27, 2006
Sunrise, Florida

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RON FEE, INC.
BALANCE SHEETS
AS OF DECEMBER 31,
ASSETS
                 
    2005     2004  
CURRENT ASSETS:
                
 
                
Cash
   $ 21,794     $ 54,659  
Accounts receivable, net
     207,083       180,916  
Inventories
     87,431       36,189  
Prepaid and other current assets
     40,854       8,505  
 
            
 
                
Total Current Assets
     357,162       280,269  
 
            
 
                
Property, plant and equipment, net
     1,224,833       1,222,406  
 
            
 
                
Other assets
     1,144       1,144  
 
            
 
                
TOTAL ASSETS
   $ 1,583,139     $ 1,503,819  
 
            
The accompanying notes are an integral part of these financial statements.

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RON FEE, INC.
BALANCE SHEETS
AS OF DECEMBER 31,
LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
    2005     2004  
CURRENT LIABILITIES:
                
 
                
Notes payable — Line of credit
   $ —     $ 206,257  
Customer deposits
     63,241       29,568  
Accounts payable
     6,771       9,417  
Accrued expenses
     8,556       11,623  
Notes payable, current portion
     5,664       23,555  
 
            
 
                
Total Current Liabilities
     84,232       280,420  
 
            
 
                
Notes payable, net of current portion
     24,325       42,873  
 
            
 
                
COMMITMENTS AND CONTINGENCIES:
                
Total Liabilities
     108,557       323,293  
 
            
 
                
STOCKHOLDERS’ EQUITY:
                
 
                
Common stock, $1.00 par value, 1,000 shares authorized and 800 shares issued and outstanding
     800       800  
Contributed capital
     71,281       71,281  
Retained earnings
     1,402,501       1,108,445  
 
            
 
                
Total Stockholders’ Equity
     1,474,582       1,180,526  
 
            
 
                
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   $ 1,583,139     $ 1,503,819  
 
            
The accompanying notes are an integral part of these financial statements.

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RON FEE, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
                 
    2005     2004  
SALES
   $ 4,315,092     $ 3,815,064  
 
                
COST OF SALES
     1,713,768       1,568,152  
 
            
 
                
GROSS PROFIT
     2,601,324       2,246,912  
 
                
SELLING AND ADMINISTRATIVE EXPENSES
     2,241,472       2,114,814  
 
            
 
                
INCOME FROM OPERATIONS
     359,852       132,098  
 
            
 
                
OTHER INCOME (EXPENSES):
                
Interest income
     144       99  
Interest expense
     (10,336 )     (15,622 )
Gain on sale of asset
     176,933       310,947  
 
            
Total Other Income (Expenses)
     166,741       295,424  
 
            
 
                
NET INCOME
   $ 526,593     $ 427,522  
 
            
The accompanying notes are an integral part of these financial statements.

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RON FEE, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
                                         
    COMMON STOCK     CONTRIBUTED     RETAINED     STOCKHOLDERS’  
    SHARES     AMOUNT     CAPITAL     EARNINGS     EQUITY  
BALANCE, DECEMBER 31, 2003
     800     $ 800     $ 71,281     $ 791,378     $ 863,459  
 
                                        
CASH DISTRIBUTIONS
                     —       (110,455 )     (110,455 )
 
                                        
NET INCOME — DECEMBER 31, 2004
                     —       427,522       427,522  
 
                              
 
                                        
BALANCE, DECEMBER 31, 2004
     800       800       71,281       1,108,445       1,180,526  
 
                              
 
                                        
CASH DISTRIBUTIONS
                     —       (232,537 )     (232,537 )
 
                                        
NET INCOME — DECEMBER 31, 2005
                     —       526,593       526,593  
 
                              
 
                                        
BALANCE, DECEMBER 31, 2005
     800     $ 800     $ 71,281     $ 1,402,501     $ 1,474,582  
 
                              
The accompanying notes are an integral part of these financial statements.

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RON FEE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
                 
    2005     2004  
CASH FLOWS FROM OPERATING ACTIVITIES:
                
Net Income
   $ 526,593       427,522  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation
     198,404       192,000  
Bad debt expense
     47,000       33,000  
Gain on disposals
     (176,933 )     (310,947 )
(Increase) Decrease in Assets:
                
Accounts receivable
     (73,167 )     (51,105 )
Inventories
     (51,242 )     14,630  
Prepaid and other current assets
     (32,349 )     11,652  
Increase (Decrease) in Liabilities:
                
Accounts payable and accrued expenses
     (5,712 )     (37,228 )
Customer deposits
     33,673       29,568  
 
            
Net Cash Provided By Operating Activities
     466,267       309,092  
 
            
 
                
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Purchase of property, plant, and equipment
     (361,800 )     (69,917 )
Proceeds from sale of property
     370,552       162,470  
 
            
Net Cash Provided By Investing Activities
     8,752       92,553  
 
            
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Repayment of note payable
     (69,091 )     (147,860 )
Repayment of line of credit
     (226,247 )     (116,882 )
Proceeds from line of credit
     19,991       27,028  
Distributions paid
     (232,537 )     (110,455 )
 
            
Net Cash Used In Financing Activities
     (507,884 )     (348,169 )
 
            
 
                
NET INCREASE (DECREASE) IN CASH
     (32,865 )     53,476  
 
                
CASH, BEGINNING OF YEAR
     54,659       1,183  
 
            
 
                
CASH, END OF YEAR
   $ 21,794     $ 54,659  
 
            
 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                
Cash paid during the year for interest
   $ 10,336     $ 15,623  
 
            
 
                
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
                
The Company purchased property and equipment and in conjunction with the acquisitions, liabilities were incurred as follows:
                
Fair value of assets acquired
   $ 44,416     $ 78,850  
Cash paid for the assets
     —       —  
 
            
Liabilities incurred
   $ 44,416     $ 78,850  
 
            
The accompanying notes are an integral part of these financial statements.

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RON FEE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business activity
Ron Fee, Inc. (the “Company”), a Florida corporation, provides lawn, shrub and household pest control and subterranean termite control programs to both residential and commercial customers in West Central Florida.
Basis of Presentation
The Company has prepared the financial statements in accordance with accounting principles generally accepted in the United States of America.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Accounts receivable
Accounts receivable consists of balances due from sales. The Company monitors accounts receivable and maintains allowances for anticipated losses. Accordingly, the Company has established allowances for doubtful accounts based on the individual accounts receivable balances. As of December 31, 2005 and 2004 the reserves for such accounts totaled $80,000 and $33,000, respectively.
Inventories
Inventories are stated at the lower of cost or market value, cost being determined using the first in, first out method.
Property, plant, and equipment
Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. The estimated useful lives used to compute depreciation are as follows:
     
Building
  40 years
Furniture, fixtures and equipment
  5 to 7 years
Leasehold improvements and vehicles
  5 years
The cost of maintenance and repairs is charged to expense as incurred; renewals and betterments are capitalized. When properties are retired or otherwise disposed of, the cost of such properties and the related accumulated depreciation are removed from the accounts. Any profit or loss is credited, or charged to income.

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RON FEE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of long-lived assets and long-lived assets to be disposed of
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the assets exceed the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no asset impairments during the years ended December 31, 2005 and 2004.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash.
The Company maintains cash balances at one financial institution. The accounts at this financial institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. As of December 31, 2005 and 2004 the company did not have cash in excess of the FDIC limits.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company does not pay federal corporate income taxes on its taxable income. Instead, the stockholders are liable for individual federal income taxes on their respective shares.
Revenue recognition
Sales revenues are recorded at the time services are performed. Generally, pest control customers sign an initial one year contract, and the Company defers recognition of these payments and recognizes the revenue as services are performed.
Advertising costs
The Company expenses advertising costs as incurred. Advertising expenses totaled approximately $33,712 and $22,999 for the years ended December 31, 2005 and 2004, respectively.
Fair value of financial instruments
The Company’s financial instruments consist primarily of cash, accounts receivable, accounts payable, accrued liabilities and loans and notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair values due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.

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RON FEE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31:
                 
    2005     2004  
Land
   $ 201,368     $ 259,906  
Building
     642,725       623,232  
Furniture and fixtures
     42,885       25,399  
Equipment — operating and office
     268,144       212,311  
Vehicles
     1,334,347       1,344,373  
 
            
 
     2,489,469       2,465,221  
Accumulated Depreciation
     1,264,636       1,242,815  
 
            
 
                
 
   $ 1,224,833     $ 1,222,406  
 
            
Depreciation expense consists of $198,404 and $192,000 during the years ended December 31, 2005 and 2004, respectively.
NOTE 3 — NOTES PAYABLE
The Company has equipment loans with various financial institutions. Interest rates range from 0% to 9% per annum. The loans mature from various dates through 2010. The loans are collateralized by the various equipment financed. Total interest expense as of December 31, 2005 and 2004 totaled $10,336 and $15,623, respectively.
The following is a summary of scheduled future principal payments as of December 31, 2005:
             
    Year ended December 31,        
 
   2006   $ 5,664  
 
   2007     6,195  
 
   2008     6,775  
 
   2009     7,410  
 
   2010     3,945  
 
          
 
   Total notes payable   $ 29,989  
 
          

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RON FEE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE 4 — LINE OF CREDIT
The Company has a $300,000 revolving line of credit with a financial institution that is payable, interest only, monthly and accrues at a variable annual rate equal to the sum of 3.15% per annum (One-Month LIBOR). At December 31, 2005 and 2004 the amount payable on the line of credit totaled $0 and $206,257, respectively.
NOTE 5 — COMMITMENTS AND CONTINGENCIES
LEASES
The Company has operating leases for vehicles through 2009. At December 31, 2005 the future minimum lease payments were as follows:
         
2006
   $ 18,816  
2007
     18,816  
2008
     11,625  
2009
     5,383  
 
      
 
Total
   $ 54,640  
 
      
Total expense related to the operating leases for the years ended December 31, 2005 and 2004 were $11,036 and $0, respectively.
NOTE 6 — EMPLOYEES’ RETIREMENT PLAN
The Company maintains an employee 401(k) retirement plan for substantially all of its full-time employees. The Company matches 100% of employee contributions up to 4% of the employees’ annual salary. For the years ended December 31, 2005 and 2004, the Company made contributions totaling approximately $34,268 and $31,942, respectively.
NOTE 7 — CONCENTRATIONS
During the fiscal year 2005, the Company’s two largest vendors represented approximately 92% and 12% of total purchases. For fiscal year 2004, the Company’s largest vendor represented approximately 81% of total purchases. No other vendors accounted for more than 10% of total purchases.
NOTE 8 — SUBSEQUENT EVENTS
On March 31, 2006 the Company entered into an Asset Sale Agreement with Middleton Pest Control, Inc. (“Middleton”) to sell substantially all of it’s assets for $5,525,000.

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EXHIBIT B
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
CONTENTS
         
    Page
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
    1  
 
        
COMBINING BALANCE SHEET AS OF SEPTEMBER 30, 2005
    2  
 
        
COMBINING STATEMENT OF INCOME FOR THE
YEAR ENDED SEPTEMBER 30, 2005
    3  
 
        
COMBINING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2006
     4  
 
        
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
    5  

 

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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma condensed combined financial statements gives effect to the acquisition (the “Acquisition”) of Ron Fee, Inc. (“Ron Fee”) by Middleton Pest Control, Inc. (“Middleton”), a wholly-owned subsidiary of Sunair Services Corporation (“Sunair”). The total consideration paid in the Acquisition was approximately $5,525,000 and is recorded using the purchase method of accounting.
The unaudited pro forma condensed combined financial statements also give effect to other transactions that occurred during the period, based on unaudited pro forma information presented in previously filed Annual Reports on Form 8-K/A for the acquisition of Spa Creek Services, LLC d/b/a Pest Environmental (“Spa Creek”).
The following presents the Company’s unaudited pro forma condensed combined financial information as of September 30, 2005, for the fiscal year ended September 30, 2005 and for the six months ended March 31, 2006. The unaudited pro forma condensed combined balance sheets as of September 30, 2005 and March 31, 2006 give effect to the transactions as if they had occurred on October 1, 2004. The unaudited pro forma condensed combined statement of income for the year ended September 30, 2005 and condensed combined statement of operations for the six months ended March 31, 2006 give effect to the Acquisition as if it had occurred as of the beginning of such period.
The unaudited pro forma condensed combined financial statements should be read together with the Company’s consolidated financial statements as of September 30, 2005, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
We are providing the unaudited pro forma condensed combined financial information for illustrative purposes only. The results may have been different had these transactions actually occurred during the periods presented. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have been achieved had the transactions actually occurred during the periods presented or the future results that the Company will experience. The unaudited pro forma condensed combining statements of operations do not give effect to any cost savings or operating synergies expected to result from the acquisition and divestiture or the costs to achieve such cost savings or operating synergies.

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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
PRO FORMA FINANCIAL STATEMENTS — UNAUDITED — BALANCE SHEET
September 30, 2005
                                                                                 
                    Pro Forma                                                  
    Sunair     Spa Creek     Adjustments For             Ron Fee,     Pro Forma             Pro Forma                
    Services     Services, LLC     Spa Creek             Inc.     Adjustments For             Adjustments                
    Corporation     Historical     Services, LLC             Historical     Ron Fee, Inc.             For Stock             Pro Forma  
    (1)     Unaudited     Acquisition     Notes     Unaudited     Acquisition     Notes     Issuance     Notes     Information  
ASSETS
                                                                                
Cash and cash equivalents
   $ 3,220,699     $ 649,669     $ (6,383,088 )     (2 )(3)   $ 76,733     $ (4,076,733 )     (5 )(6)   $ 13,655,674       (8 )   $ 7,142,954  
 
                                                                                
 
                                                     (5 )(6)                        
Accounts receivables, net
     4,983,714       108,572       24,357       (2 )(3)     210,720       23,827       (5 )(6)     —               5,351,190  
 
                                                                                
Interest receivable
     14,488       —       —               —       —               —               14,488  
Inventories
     7,609,727       54,246       12,229       (2 )(3)     106,042       (15,557 )     (5 )(6)     —               7,766,687  
 
                                                                                
Deferred tax asset
     315,837       —       —               —       —               —               315,837  
Prepaid and other current assets
     1,435,146       21,580       (21,580 )     (3 )     32,767       (32,767 )     (6 )     —               1,435,146  
Property, plant and equipment, net
     2,321,008       124,846       (94,846 )     (2 )(3)     1,175,842       (735,864 )     (5 )(6)     —               2,790,986  
 
                                                                                
Notes receivables
     334,986       32,976       (32,976 )     (3 )     —       —               —               334,986  
Other assets
     80,393       14,766       (14,766 )     (3 )     1,144       (1,144 )     (6 )     —               80,393  
Non-compete, net
     —       996,227       (996,227 )     (3 )     —       —               —               —  
Software costs, net
     3,938,402       —       —               —       —               —               3,938,402  
Customer lists, net
     10,262,250       —       262,000       (2 )     —       1,554,000       (5 )     —               12,078,250  
Goodwill
     43,599,379       2,769,534       2,752,398       (2 )(3)     —       3,329,914       (5 )     —               52,451,225  
 
                                                                  
Total Assets
   $ 78,116,029     $ 4,772,416     $ (4,492,499 )           $ 1,603,248     $ 45,676             $ 13,655,674             $ 93,700,544  
 
                                                                  
 
                                                                                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
 
                                                                                
Accounts payable
   $ 4,630,304     $ 13,649     $ (13,649 )     (3 )   $ 84,275     $ (84,275 )     (6 )   $ —             $ 4,630,304  
Accrued expenses and other liabilities
     2,274,312       343,306       (298,306 )     (3 )     10,585       314,447       (5 )(6)     —               2,644,344  
 
                                                                                
Deferred tax liability
     188,400       —       (122,638 )     (4 )     —       310,751       (7 )     —               376,513  
Unearned revenues
     181,216       —       —               —       73,570       (5 )     —               254,786  
Customer deposits
     1,490,677       257,427       22,490       (2 )(3)     29,568       (7,668 )     (5 )(6)     —               1,792,494  
 
                                                                                
Bank line of credit
     12,000,000       —       —               —       —               —               12,000,000  
Due to shareholder
     —       —       —               —       —               —               —  
Loan from parent
     —       —       —               —       —               —               —  
Notes payable and capital leases
     5,426,467       6,292,270       (6,292,270 )     (3 )     31,325       1,197,097       (5 )(6)     —               6,654,889  
 
     —       —       —               —       —               —               —  
 
                                                                  
Total Liabilities
     26,191,376       6,906,652       (6,704,373 )             155,753       1,803,922               —               28,353,330  
Common Stock
     1,018,638       —       —               800       (800 )     (6 )     285,715       (8 )     1,304,353  
Additional Paid in Capital
     37,759,670       —       —               71,281       (71,281 )      (6 )     13,369,959       (8 )     51,129,629  
Member’s Capital
     —       500,000       (500,000 )     (3 )     —       —               —               —  
Retained earnings (deficit)
     13,170,774       (2,634,236 )     2,711,874       (3 )     1,375,414       (1,686,165 )     (6 )     —               12,937,661  
Translation adjustment
     (24,429 )     —       —               —       —               —               (24,429 )
 
                                                                  
Total Stockholders’ Equity
     51,924,653       (2,134,236 )     2,211,874               1,447,495       (1,758,246 )             13,655,674               65,347,214  
 
                                                                  
Total Liabilities and Stockholders’ Equity
   $ 78,116,029     $ 4,772,416     $ (4,492,499 )           $ 1,603,248     $ 45,676             $ 13,655,674             $ 93,700,544  
 
                                                                  
The accompanying notes are an integral part of these statements of financial information.

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Table of Contents

SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
PRO FORMA FINANCIAL STATEMENTS — UNAUDITED — STATEMENT OF INCOME
YEAR ENDED 9/30/2005
                                                                 
                    Pro Forma                                      
    Sunair     Spa Creek Services,     Adjustments For                     Pro Forma                
    Services     LLC     Spa Creek Services,             Ron Fee, Inc.     Adjustments For                
    Corporation     Historical     LLC             Historical     Ron Fee, Inc.             Pro Forma  
    (1)     Unaudited     Acquisition     Notes     Unaudited     Acquisition     Notes     Information  
Revenues
   $ 31,451,770     $ 3,583,615     $ —             $ 4,179,553     $ —             $ 39,214,938  
 
                                                                
Cost of revenues
     21,244,761       413,053       —               1,654,442       —               23,312,256  
 
                                                    
 
                                                                
Gross Profit
     10,207,009       3,170,562       —               2,525,111       —               15,902,682  
 
                                                                
Selling, general and administrative expenses
     10,020,901       3,658,012       45,000       (3 )     2,276,022       —               15,999,935  
 
                                                    
 
                                                                
Income (loss) from operations
     186,108       (487,450 )     (45,000 )             249,089       —               (97,253 )
 
                                                                
Other income (expenses)
     (6,109 )     20,998       —               590,778       —               605,667  
 
                                                    
 
Income (loss) before provision for income taxes
     179,999       (466,452 )     (45,000 )             839,867       —               508,414  
 
                                                                
Benefit (provision) for income taxes
     415,558       —       122,638       (4 )     —       (310,751 )     (7 )     227,445  
 
                                                    
 
NET INCOME (LOSS)
   $ 595,557     $ (466,452 )   $ 77,638             $ 839,867     $ (310,751 )           $ 735,859  
 
                                                    
 
                                                                
Pro-forma net income per common share:
                                                                
Basic
   $ 0.08                                                     $ 0.09  
 
                                                            
Diluted
   $ 0.05                                                     $ 0.06  
 
                                                            
 
                                                                
Weighted average of pro-forma shares outstanding:
                                                                
Basic
     7,556,857                                                       7,842,482  
 
                                                            
Diluted
     11,478,074                                                       12,171,594  
 
                                                            
The accompanying notes are an integral part of these statements of financial information.

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Table of Contents

SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
PRO FORMA FINANCIAL STATEMENTS — UNAUDITED — STATEMENT OF OPERATIONS
SIX MONTHS ENDED 3/31/2006
                                                                 
            Spa Creek Services,     Pro Forma                     Pro Forma                
    Sunair     LLC     Adjustments For             Ron Fee, Inc.     Adjustments                
    Services     Historical     Spa Creek Services,             Historical     For                
    Corporation     Unaudited     LLC             Unaudited     Ron Fee, Inc.             Pro Forma  
    (1)     (9)     Acquisition     Notes     (10)     Acquisition     Notes     Information  
Revenues
   $ 27,651,312     $ 755,304     $ —             $ 2,277,922     $ —             $ 30,684,538  
 
                                                                
Cost of revenues
     11,933,476       85,855       —               796,276       —               12,815,607  
 
                                                    
 
                                                                
Gross Profit
     15,717,836       669,449       —               1,481,646       —               17,868,931  
 
                                                                
Selling, general and administrative expenses
     16,713,752       654,573       —               1,055,633       —               18,423,958  
 
                                                    
 
                                                                
Income (loss) from operations
     (995,916 )     14,876       —               426,013       —               (555,027 )
 
                                                                
Other income (expenses)
     (632,573 )     (173,845 )     —               (87,777 )     —               (894,195 )
 
                                                    
 
                                                                
Income (loss) before provision for income taxes
     (1,628,489 )     (158,969 )     —               338,236       —               (1,449,222 )
 
                                                                
Benefit (provision) for income taxes
     466,057       —       (58,819 )     (9 )     —       125,147       (10 )     532,385  
 
                                                    
 
                                                                
NET INCOME (LOSS)
   $ (1,162,432 )   $ (158,969 )   $ (58,819 )           $ 338,236     $ 125,147             $ (916,837 )
 
                                                    
 
                                                                
Pro-forma net income per common share:
                                                                
Basic
   $ (0.10 )                                                   $ (0.07 )
 
                                                            
Diluted
   $ (0.10 )                                                   $ (0.07 )
 
                                                            
 
                                                                
Weighted average of pro-forma shares outstanding:
                                                                
Basic
     11,646,412                                                       13,060,559  
 
                                                            
Diluted
     11,661,482                                                       13,075,631  
 
                                                            
The accompanying notes are an integral part of these statements of financial information

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Table of Contents

SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
Pro Forma Financial Statements — September 30, 2005
(1)   The Spa Creek and Ron Fee acquisitions were completed December 16, 2005 and March 31, 2006, respectively. As such their respective assets and liabilities are not included in the historical balance sheets of Sunair as of September 30, 2005. Spa Creek’s historical balance sheet as of September 30, 2005 is derived from unaudited client data, filed in previous Form 8-K/A. Ron Fee’s historical balance sheet as of September 30, 2005 is derived from unaudited client data.
Spa Creek Acquisition
(2)   Spa Creek entered into a definitive Asset Purchase Agreement by and among Middleton and Spa Creek. On December 16, 2005, Middleton acquired substantially all of the assets and assumed certain liabilities of Spa Creek for a total price of $5,733,419. The acquisition of Spa Creek has been accounted for using the purchase method of accounting. Purchase accounting requires that the assets and liabilities acquired be recorded at their fair value at the date of acquisition. The preliminary purchase price allocation, as follows, is based on managements’ best estimate of fair values.
         
Goodwill
   $ 5,521,932  
Customer list
     262,000  
Accounts receivable
     132,929  
Inventory
     66,475  
Property, plant and equipment
     30,000  
Customer deposits
     (279,917 )
 
      
 
        
Total
   $ 5,733,419  
 
      
(3)   In the acquisition of Spa Creek, Middleton did not purchase the assets and liabilities in its entirety. Adjustments are necessary to eliminate the assets and liabilities reported in the historical financial information of Spa Creek not acquired by Middleton. The acquisition agreement also incorporated consulting services from the prior owners in the amount of $15,000 per month for three months.
 
(4)   Spa Creek existed as a Limited Liability Company and was taxed as a partnership prior to the acquisition. In lieu of partnership income taxes, under the Internal Revenue Code the partners were taxed on their proportionate share of the Company’s taxable income. Therefore, the historical financial information does not contain provisions or liabilities for federal and state income taxes. Adjustment is necessary to account for the income tax effect on the pro forma financial information. The income tax effect adjustment is based on a blended tax rate of 37%.

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Table of Contents

SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
Ron Fee Acquisition
(5)   Ron Fee entered into a definitive Asset Purchase Agreement by and among Middleton and Ron Fee. On March 31, 2006, Middleton acquired substantially all of the assets and assumed certain liabilities of Ron Fee for a total price of $5,525,000. The acquisition of Ron Fee has been accounted for using the purchase method of accounting. Purchase accounting requires that the assets and liabilities acquired be recorded at their fair value at the date of acquisition. The preliminary purchase price allocation, as follows, is based on managements’ best estimate of fair values.
         
Goodwlll
   $ 3,330,000  
Customer list
     1,554,000  
Accounts receivable
     235,000  
Inventory
     91,000  
Property, plant and equipment
     440,000  
Customer deposits
     (96,000 )
Notes payable
     (29,000 )
 
      
 
        
Total
   $ 5,525,000  
 
      
(6)   In the acquisition of Ron Fee, Middleton did not purchase the assets and liabilities in its entirety. Adjustments are necessary to eliminate the assets and liabilities reported in the historical financial information of Ron Fee not acquired by Middleton.
(7)   Ron Fee existed as a Subchapter S Corporation and was taxed under the provisions as such prior to the acquisition. In lieu of the Subchapter S provisions, Ron Fee did not pay federal corporate incomes taxes on its taxable income. Therefore, the historical financial information does not contain provisions or liabilities for federal and state income taxes. Adjustment is necessary to account for the income tax effect on the pro forma financial information. The income tax effect adjustment is based on a blended tax rate of 37%.
Stock Issuance
(8)   On January 27, 2006, Sunair completed the sales of its securities to investors in a private placement pursuant to purchase agreements, dated December 15, 2005. The securities sales transpired through two tranches. Pursuant to the purchase agreements, Sunair sold 2,857,146 shares of its common stock at a price per share of $5.25 and warrants to purchase 1,000,000 shares of its common stock at an exercise price of $6.30 (subject to adjustment) with net proceeds to Sunair of approximately $13.7 million. The issuance of stock in relation to this private placement assisted Sunair in the financing of the acquisitions.

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Table of Contents

SUNAIR SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
Pro Forma Financial Statements — March 31, 2006
Spa Creek
(9)   The Spa Creek acquisition was completed on December 16, 2005. The March 31, 2006 balance sheet of Sunair incorporates the respective assets acquired and liabilities assumed in the acquisition. The March 31, 2006 statement of operations of Sunair includes the operations of Spa Creek for the period December 16, 2005 through March 31, 2006. The historical unaudited financial information for Spa Creek represents operations from October 1, 2005 through the date of acquisition (December 16, 2005) to reflect the combined pro forma information for the six month period ended March 31, 2006.
 
    Spa Creek existed as a Limited Liability Company and was taxed as a partnership prior to the acquisition. In lieu of partnership income taxes, under the Internal Revenue Code the partners were taxed on their proportionate shares of the Company’s taxable income. Therefore, the historical financial information does not contain provisions or liabilities for federal and state income taxes. Adjustment is necessary to account for the income tax effect on the pro forma financial information. The income tax effect adjustment is based on a blended tax rate of 37%.
Ron Fee
(10)   The Ron Fee acquisition was completed on March 31, 2006. The March 31, 2006 balance sheet of Sunair incorporates the respective assets acquired and liabilities assumed in the acquisition. The March 31, 2006 statement of operations of Sunair does not include the operations of Ron Fee for the six months ended March 31, 2006. The historical unaudited financial information for Ron Fee represents the operations for the six month period ended March 31, 2006.
 
    Ron Fee existed as a Subchapter S Corporation and was taxed under the provisions as such prior to the acquisition. In lieu of the Subchapter S provisions, Ron Fee did not pay federal corporate incomes taxes on its taxable income. Therefore, the historical financial information does not contain provisions or liabilities for federal and state income taxes. Adjustment is necessary to account for the income tax effect on the pro forma financial information. The income tax effect adjustment is based on a blended tax rate of 37%.

7