www.sunairservices.com AMEX: SNR Recent Market Price: (2/14/07) $3.50 52-Week Range $3.00-$5.40 Shares Outstanding 13.02M Float 4.99 M Market Capitalization $45.82 M Total Debt (as of 12/31/06) $14.89M Sept. 30 fiscal year-end Company Overview Sunair Services Corporation, headquartered in Boca Raton, through its wholly owned subsidiary Middleton Pest Control, Inc. provides pest control and lawn care services to both residential and commercial customers in Central and Northeast Florida. The Company is focused on growing its Company through select regional acquisitions and internal growth in the lawn and pest control industry. Sunair acquired Middleton Pest Control, Inc., its cornerstone brand for the Southeast, in June 2005. In January 2006, Sunair Services raised $15 million through the sale of approximately 3 million shares at $5.25 per share and began to build out Middleton through tuck-in acquisitions in the U.S. Southeast region. During calendar 2006, the company completed six acquisitions, five of which have been fully integrated into Middleton. The sixth acquisition, completed in December 2006 is expected to be fully integrated into the company within six months. All of Sunair s current resources are dedicated to building out of its Southeast platform. Longer term, the Company expects to establish one or two additional platforms to expand its presence in the southern half of the United States. Since its acquisition, Middleton has grown its reported revenue from $31.4 million to approximately $46.4 million as September 30, 2006, a 48% increase; reported EBITDA has risen 100% to $4.2, up from $2.1 million. For the same period, the company increased its customer base from 74,000 customers to 119,000 customers. Based on opportunities for growth in this $11 billion lawn and pest control industry the Company s long-term objective is to be among the top ranked companies in its industry. Through a subsidiary Sunair is also involved in the telephone communications business. Reflecting its shift in business focus, that began when the Company acquired Middleton, Sunair divested its legacy high frequency radio business and associated real estate for approximately $8.0 million in the latter part of fiscal 2006. Proceeds realized from the sale as well as any future divestitures will be redeployed to continue the Company s aggressive tuck-in acquisition and internal growth strategy. INVESTMENT CONSIDERATIONS $11 Billion Lawn and Pest Control Industry Only Publicly-Held Company Offering Lawn and Pest Control Services Under One Brand Creating Value for Long-term Growth through Tuck-in Acquisitions and Organic Growth Strong Pipeline Provides Opportunity to Become Leading Regional Presence Seasoned Management Team 1
Sunair s Regional Business Strategy to Drive Growth Establish Platform Target Acquisitions Leverage Maximize Value Acquire platform companies to serve as foundation for superregional growth strategy Complete smaller tuck-in acquisitions Integrate acquisitions Grow organically Cross-sell services Technician & equipment Service strategy Administration Overhead Revenue growth Increased margins Tuck-in Acquisitions Accelerating Growth Sunair is dedicated to creating shareholder value through organic growth and profit margin expansion and tuck-in acquisitions accelerate both of these. The Company looks to acquire well managed, successful companies in the pest control industry which will serve as the brand into which it will fold smaller companies. Today, as stated above, the Sunair is focused on growing its Southeast platform Middleton. Sunair paid approximately 1xs revenue for the six acquisitions. Currently, these acquisitions are generating approximately $15 million in revenue. Positive National Reputation Makes Middleton an Attractive Buyer Middleton has developed national recognition in its industry for its exceptional customer service, great work environment and strong management team. This recognition, coupled with a reputation for strong customer and employee retention makes them an attractive buyer to targeted companies. It has also resulted in companies that are interested in being acquired contacting the Company directly. Middleton has a strong pipeline of acquisition candidates, currently approximating $25 million. Organic Growth -- Cross-selling Opportunities to Generate Increased Customer Sales Sunair is also looking to grow its acquisitions both organically and through the cross-selling of its four services. To management s knowledge Middleton is the only publicly-held company offering lawn, shrub, general pest control and termite services under one brand in the lawn and pest control industry. The Company therefore has the opportunity to leverage its acquisitions becoming a one-stop shop for its customers lawn and pest control needs Middleton s extensive training program and expertise in both lawn and pest control services provides the company s sales force with the know-how to offer all four services to both existing and potential customers. A lead for one service has the potential to turn into additional services being purchased. All 26 branches offer all four services and as of December 2006, 15% of the company s acquired customer base had signed up for additional services. 2
Profit Margin Expansion Economies of Scale to Reduce Costs and Improve Margins For fiscal 2006, combined revenues for Middleton and its first five acquisitions grew organically by approximately 10%; the industry as a whole is growing approximately 5%. The Company s ability to offer four services out of its branches is allowing it to leverage fixed costs in both industries. The Company is achieving economies of scale as it consolidates acquisitions into Middleton through three distinct centralized administrative call centers which support 26 customer service centers. Increasing route density is improving the efficiency of technicians and their equipment. Vehicle and G&A expenses have been reduced as a percentage of sales. They are also benefiting from the elimination of redundant back office functions. These measures, combined with increasing sales and the acceptance of higher prices from acquired client bases leads to improving margins. Middleton Lawn & Pest Control, headquartered in Orlando, FL became a wholly owned subsidiary of Sunair Services on June 8, 2005. The company currently provides lawn and pest control services to approximately 119,000 customer accounts, from 26 locations in most of peninsular Florida. The four services offered by the company are lawn and ornamental, general pest control (95% residential and 5% commercial) and termite service. As of September 30, 2006,approximately 50% of Middleton s customers utilized lawn care services, 25% general pest control and 25% termite. Lawn Care 50% General Pest Control 25% Middleton s TTM EBITDA Margin Progression Termite 25% 7% 9% 11% 13% 15% 20% Average revenue from each of Middleton s customer s is between $400 and $500 per year. On a fiscal basis, Middleton reported approximately $46.0 million in revenue in 2006. Currently, Sunair estimates that Middleton s run rate is in excess of $50 million. At Acquisition Rep. Sept. 30 '06 Run Rate Objective 3
Significant Progress in Revenue, EBITDA and Customer Base since Acquisition Middleton has made significant progress in growing its business since its acquisition by Sunair in June 2005. The company s TTM revenue has grown from $31.0 million* at the time of acquisition, June 2005, to approximately $46.0 million at September 30, 2006, a 48% increase. For the same period, EBITDA rose 100% from approximately $2.1 million* at the time of the acquisition to $4.2 million. TTM Revenue TTM EBITDA Extensive Training and Development Programs The Company provides extensive training and development programs for all of its employees to ensure customers are provided with effective and environmentally-conscious treatment of their homes and property Initial training is for a period of two to four weeks. In addition to training manuals, Internet based Etraining is used in both initial and advanced curricula. Etraining currently includes 60 modules that include application procedures for all three services as well a specific disease/pest issues. $50.0 $40.0 $30.0 $20.0 $10.0 $- $31.4 Increa se of 48% $46.4 At Acquisition Sept. 30, 2006 $5.0 $4.0 $3.0 $2.0 $1.0 $- $2.1 $4.2 Increase of 100% At Acquisition Sept. 30, 2006 Advanced training includes Powerpoint training as well as company expert lectures. Successful completion of Etraining and graduate training classes provides employees with increases in compensation of between 13%-15%. Middleton s customer base has also increased significantly growing 60% to 119,000 customers as of September 30, 2006, up from 74,000 in June 2005. 140,000 120,000 100,000 80,000 60,000 40,000 20,000 *unaudited - Customers 74,000 119,000 Increase of 60% At Acquisition Sept. 30, 2006 Competitive Distinction Middleton competes with both the large national brands including Terminex, Ecolab and Orkin as well as smaller regional players. Basic training generally takes between 100 200 hours, depending on the position. Ongoing training requires 125 hours per year. Monthly ongoing training is conducted by managers and supervisors to ensure that the company s technicians are up to date on seasonally specific issues. Customer Convenience Provided through Online Scheduling Customers have the ability to go online to both purchase/renew, schedule and reschedule their service using Middleton s proprietary software program found on the Company s website at www.middletonpest.com By entering this secured site, customers are able to access the technician s schedule for the area in which they live and schedule a service call at a time that is convenient for them. In addition, all of Middleton s sales people are provided with a tablet PC computer which allows them to immediately schedule any service that has been sold to a new or existing customer. This is possible based on 4
the sales people being able to access the proper technician s schedule by way of a wireless connection into the company s centralized data base. Each of these capabilities is providing Middleton with improved customer service and greater efficiency in both of its industries. Middleton is in the process of applying for patents on each of these software programs. Building Brand Identity through Integrated Advertising and Marketing Strategy Sunair is building brand identity for Middleton through aggressive sales and marketing initiatives. The Company invests approximately six to eight percent of revenue dollars into its regional radio, television, print and direct mail campaigns. In the past few years including this most current year, Middleton received the highest awards from the National Advertising Federation for their advertising campaigns. Middleton is also well recognized through its heavy community involvement in the areas it serves where it continues to support a number of organizations including, Little League and many other organizations supporting both education and families. The Company s growing sales force mentioned above is expanding brand awareness for Middleton through their active selling of four services to customers. Opportunities for Growth in Industry and at Middleton 20 16 12 8 United States, accounting for over $1 billion in revenue. The Company believes the Florida lawn care industry to also be in excess of approximately $500 million. Based on these dynamics, Sunair Services believes that Florida alone has the potential to be a $200 million market for Middleton and the Company has established an interim financial objective of a run rate of $100 million. New household formations and aging population demographics provide additional opportunities for Middleton to continue to grow its base not only in Florida, but also in states in the southeast. According to a U.S. Bureau of Labor Statistics survey annual expenditures for lawn and pest control services increase with age, even into post-retirement ($) Pest Control Service Av. Annual Expenditures (1) 9 Geographical Footprint 11 12 13 14 19 Florida/Southeast Region Provides Further Opportunity for Growth There continues to be a major influx of people moving to Florida with the State adding approximately 400,000 residents in 2004. According to the NPMA, Florida is also the largest pest control market in the 4 2 0 Under 25 25-34 35-44 45-54 55-64 65-74 75+ Lawn Care Services Av. Annual Expenditures (1) ($) 145 150 135 125 115 95 100 75 50 25 0 65 25 5 Under 25 25-34 35-44 45-54 55-64 65-74 75+ 5
Industry Overview The lawn and pest control business is an $11 billion industry nationwide, with pest control representing approximately $ 7 billion and lawn care $4 billion. Pest Control A study by Specialty Products Consultants (May 2004) projected revenues in the pest control industry to be $6.8 billion in 2005. Over the past five years the industry has experienced a 6% CAGR, and revenues are projected to grow 4.8% annually through 2020. Since 2000, the number of households using pest control has grown from 18% to approximately, 23%. Households Using Professional a Professional Pest Control 24% 23% 22% 21% 20% 19% 18% 2000 2001 2002 2003 2004 2005 Pest control is a highly fragmented industry. According to Pest Control Technology, in 2005 four publicly-traded companies Terminix, Orkin Pest Control, Ecolab, and J.C. Ehrlich (acquired by Rentokil, the largest pest control company in the United Kingdom in 2005) accounted for $2.2 billion of the industry s sales. Middleton Pest Customer Breakdown Commercial 20% Control ranked as No 20 in the top 100 leading service providers with $36 million in sales for 2005. Ninety-six privately-held companies reported sales of approximately $1.5 billion last year with the remaining $3 billion in sales coming from 19,000 small independent operators. Lawn Care The lawn care industry (defined as companies that provide fertilization, disease, weed control and pest control to lawns, trees and shrubs) had estimated revenues of $4 billion in 2004. According to industry sources, growth rates are estimated to be in the mid single digits over the next 3-5 years. There has been considerable consolidation in the lawn care industry in the past 15 years and as a result, there are few regional providers. Over 70% of the industry is made up of small independent service providers. Today with sales of $1 billion, TruGreen Chemlawn is the industry leader. The number two company is Scotts Lawn Service with approximately $200 million in revenues and Middleton ranks number three with company owned run rate revenue (distinguished from companies comprised of franchises) of approximately $25-$30 million. The customer base for lawn care services is 80% residential and 20% commercial with fees for residential lawn services, depending on location, ranging on average between $300 and $500 annually. Representative Services Lawn fertilization Weed control Disease control Insect control Ornamental (tree and shrub care) No mowing Residential 80% 6
Strong Management Team Sunair Services has a talented and capable management team. John Hayes, the Company s President and CEO has over 20 years experience in the lawn care industry. Prior to joining Sunair, he was executive vice president of The TruGreen Companies, a division of ServiceMaster Company from 2000-2005. From 1975 to 1989, under Mr. Hayes leadership TruGreen grew from $100,000 in sales to over $100 million. In 1987, TruGreen was sold to Waste Management and he was appointed president. He left the company in 1989, and prior to rejoining TruGreen in 2000, Mr. Hayes served in various capacities as a private investor. Greg Clendenin is the CEO of Sunair Southeast Pest Holdings, Inc., the holding arm of Middleton Lawn and Pest Control. Mr. Clendenin has extensive experience in both the pest control and lawn service industries having worked in various capacities for Middleton from 1979-1989. He became president of Middleton in 1996. From 1989 to 1996, Mr. Clendenin was the Chief Operations Officer for All America Termite and Pest Control dba Sears Authorized Termite and Pest Control. Financial Highlights Revenues for the three months ended December 31, 2006 were $15.9 million compared to revenues of $11.2 million for the three months ended December 31, 2005. The Company reported a net income of $599,691 for the three months ended December 31, 2006, or $ 0.05 per basic and diluted share, compared to a net loss of $(364,543), or $(0.03) per basic and diluted share for the same period last year. Income from discontinued operations for fiscal first quarter 2007, including a gain on the sale of real estate property associated with the previously sold and discontinued high frequency radio business resulted in a realized tax effected gain of approximately $1.36 million, or $0.11 per basic and diluted share, compared to a tax effected gain for the three month period ended December 31, 2005 of approximately $195,000 or $0.02 per basic and diluted share. The Company reported losses from continuing operations of $(761,785) or $(0.06) per basic and diluted share and $(559,190) or $(0.05) per basic and diluted share for the three months ended December 31, 2006 and 2005 respectively. During his tenure in Sears, sales grew from $45 million to $100 million, primarily from organic growth. In 2003, Mr. Clendenin received the National Leadership Award 7
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005 (UNAUDITED) For The Three For The Three Months Ended Months Ended December 31, 2006 December 31, 2005 SALES $15,886,255 $11,225,575 COST OF SALES 6,892,013 4,614,085 GROSS PROFIT 8,994,242 6,611,490 SELLING AND ADMINISTRATIVE EXPENSES 9,881,703 7,176,680 LOSS FROM CONTINUING OPERATIONS (887,461) (565,190) OTHER INCOME (EXPENSE): Interest Income 67,774 1,469 Interest Expense (288,323) (411,175) Other (22,801) (4,789) TOTAL OTHER INCOME (EXPENSE) (243,350) (414,495) LOSS FROM CONTINUING OPERATIONS BEFORE FOR INCOME TAXES (1,130,811) (979,685) INCOME TAX BENEFIT 369,026 420,495 LOSS FROM CONTINUING OPERATIONS (761,785) (559,190) INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX PROVISION OF $821,426 AND $100,272 FOR DECEMBER 31, 2006 AND 2005 RESPECTIVELY 1,361,476 194,647 NET INCOME (LOSS) $599,691 ($364,543) BASIC AND DILUTED INCOME (LOSS) PER SHARE: CONTINUING OPERATIONS ($0.06) ($0.05) DISCONTINUED OPERATIONS $0.11 $0.02 NET INCOME (LOSS) $0.05 ($0.03) WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 13,017,233 10,512,464 DILUTED 13,017,233 10,512,464 8
Non-GAAP Financial Measures EBITDA is a Non-GAAP financial measure. EBITDA is defined as income (loss) from operations plus net interest expense, provision for income taxes, depreciation and amortization. We have included this non-gaap financial measure because we believe EBITDA is an indicator of the profitability and performance of our core operations and reflects the changes in our operating results. EBITDA is not intended to be an alternative measure of operating income or gross profit margin as determined in accordance with generally accepted accounting principles. The Non-GAAP EBITDA measurement has certain material limitations, including: It does not include interest expense. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate profits and cash flows. Therefore any measure that excludes interest expense has material limitations; It does not include depreciation and amortization expense. Because we use capital assets, depreciation is necessary element of our costs and ability to generate profits. In addition, because a significant portion of our assets consist of customer lists that were acquired in connection with our acquisitions of companies in the Lawn and Pest Control Services segment, amortization is necessary element of our costs and ability to generate profits. Therefore, any measure that excludes deprecation and amortization expense has material limitations; It does not include provision for income taxes. Because the payment of income taxes is a necessary element of our costs, particularly in the future, any measure that excludes tax expense has material limitations; and We compensate for these limitations by using EBITDA as only one of several comparative tools, together with GAAP measurements, to assist in the evaluation of our profitability and operating results. A reconciliation of EBITDA to the loss from continuing operations for the three months ended December 31, 2006 is shown below: Loss from continuing operations $ ( 761,785) Reconciliation Items: Interest Expense-Net 220,549 Income Tax Benefit (369,026) Depreciation and Amortization 797,324 EBITDA (112,938) Non cash equity based compensation expense 261,984 EBITDA plus Non cash equity based compensation $ 149,046 9
SUNAIR SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005 (UNAUDITED) ASSETS December 31, 2006 December 31, 2005 CURRENT ASSETS: Cash and cash equivalents $ 1,580,897 $ 1,601,110 Accounts receivable, net 6,077,875 4,919,595 Income tax receivable 352,393 352,393 Interest receivable 21,537 11,084 Inventories, net 2,318,454 2,328,205 Deferred tax asset 137,389 137,387 Prepaid and other current assets 932,430 1,163,508 Note receivable - current 334,986 334,986 Total Current Assets 11,755,961 10,848,268 PROPERTY, PLANT, AND EQUIPMENT, net 2,370,940 2,538,434 OTHER ASSETS Note receivable 2,000,000 2,000,000 Software costs, net 3,897,164 3,938,465 Customer list, net 11,944,754 11,247,099 Goodwill 55,517,787 52,818,269 Other assets 655,190 522,427 Total Other Assets 74,014,895 70,526,260 TOTAL ASSETS $ 88,141,796 $ 83,912,962 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,654,634 $ 2,743,523 Accrued expenses 2,493,780 2,831,162 Unearned revenues 1,266,222 589,365 Customer deposits 2,348,345 2,677,364 Capitalized leases, current portion 26,742 8,796 Notes payable, current portion 135,006 138,374 Total Current Liabilities 9,924,729 8,988,584 LONG TERM LIABILITIES Capitalized leases, net of current portion - 20,027 Notes payable, net of current portion 3,182,233 1,723,642 Note payable -related party 5,000,000 5,000,000 Revolving line of credit 8,456,477 8,000,000 Deferred tax liability 564,628 112,226 Total Long Term Liabilities 17,203,338 14,855,895 Total Liabilities 27,128,067 23,844,479 STOCKHOLDERS' 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, 13,017,559 and 13,007,559 shares issued and outstanding at September 30, 2006 and 2005, respectively 1,301,757 1,300,757 Additional paid-in capital 51,809,752 51,548,768 10
Contact Information Stan Smith Susan Garland ssmith@rpcp.com Analysts/Investors 561-955-7300 212-827-3775 sgarland@financialrelationsboard.com Information Regarding Forward Looking Statements Some of the statements in this investment profile, including those that contain the words, "anticipate", "believe", "plan", "estimate", "expect", "should", "intend" and other similar expressions, are forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements expressed or implied by those forward-looking statements. Among the factors that could cause actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements are general economic conditions, competition, potential technology changes, changes in or the lack of anticipated changes in the regulatory environment in various countries, the ability to raise additional capital to finance expansion, the risks inherent in new product and service introduction and the entry into new geographic markets and other factors included in our filings with the Securities and Exchange Commission (the "SEC"). Copies of our SEC filings are available from the SEC or may be obtained upon request from us. We do not undertake any obligation to update the information contained herein, which speaks only as of this date. The Financial Relations Board serves as financial relations counsel to this company, is acting on the Company s behalf in issuing this bulletin and receiving compensation therefore. The information contained herein is furnished for information purposes only and is not to be construed as an offer to buy or sell securities. 11