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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-QSB þ
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number I-4334 SUNAIR ELECTRONICS, INC. 
  FLORIDA
    
    59-0780772(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
    
    (I.R.S. EMPLOYER
IDENTIFICATION NO.)3005 SW THIRD AVE., FT. LAUDERDALE, FL.
    
    33315(ADDRESS OR PRINCIPAL EXECUTIVE OFFICE)
    
    (ZIP CODE)
 ISSUERS TELEPHONE NUMBER (INCLUDING AREA CODE)

    (954) 525-1505
 NONE   Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ Noo Registrants common
stock - par value 10 cents, outstanding as of May 13, 2005  - 9,014,870 shares. Transitional Small Business Disclosure format. Yes o No þ




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SUNAIR ELECTRONICS, INC. AND SUBSIDIARY INDEX
***** PAGE NO.********PART I. FINANCIAL INFORMATION:ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    
    3CONSOLIDATED CONDENSED BALANCE SHEETS    MARCH 31, 2005 AND SEPTEMBER 30, 2004
    
    3CONSOLIDATED CONDENSED STATEMENTS OF INCOME    SIX MONTHS ENDED MARCH 31, 2005 AND 2004
    
    5CONSOLIDATED CONDENSED STATEMENTS OF INCOME    THREE MONTHS ENDED MARCH 31, 2005 AND 2004
    
    6CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  SIX MONTHS ENDED MARCH 31, 2005 AND 2004
    
    7NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF THE CONSOLIDATED CONDENSED STATEMENTS
    
    16ITEM 3. CONTROLS AND PROCEDURES
    
    18PART II. OTHER INFORMATION
    
    19ITEM 1. LEGAL PROCEEDINGS
    
    19ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    19ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    19ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    19ITEM 5. OTHER INFORMATION
    
    19ITEM 6. EXHIBITS
    
    20SIGNATURES
    
    21Articles of Amend. to the Articles of Inc.First Tranche WarrantSecond Tranche WarrantEmployment Agreement-John HayesEmployment Agreement-James E. LaurentEmployment Agreement-Synnott B. DurhamEmployment Agreement-Henry A. BuddeSection 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CFO Certification
  - 2 -




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PART I. FINANCIAL INFORMATION SUNAIR ELECTRONICS, INC. AND SUBSIDIARIES 
  ASSETS 03/31/05
    
    
    9/30/04CURRENT ASSETS:Cash and cash equivalents
    
    $
    27,745,052
    
    
    $
    3,872,224Accounts receivable, net
    
    
    3,040,087
    
    
    
    3,080,875Interest receivable
    
    
    10,875
    
    
    
    108,013Inventories
    
    
    7,106,299
    
    
    
    7,258,955Investments
    
    
    
    
    
    
    2,913,601Deferred tax asset
    
    
    61,200
    
    
    
    180,725Prepaid and other current assets
    
    
    773,835
    
    
    
    315,469Total Current Assets
    
    
    38,737,348
    
    
    
    17,729,862NOTE RECEIVABLE
    
    
    405,590
    
    
    
    405,590PROPERTY, PLANT, AND EQUIPMENT, NET
    
    
    660,205
    
    
    
    703,381OTHER ASSETSSoftware costs, net
    
    
    4,037,384
    
    
    
    3,955,513Goodwill
    
    
    852,683
    
    
    
    852,683Total
Other Assets
    
    
    4,890,067
    
    
    
    4,808,196TOTAL ASSETS
    
    $
    44,693,210
    
    
    $
    23,647,029
 The accompanying notes are an integral part of these financial statements - 3 -




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PART I. FINANCIAL INFORMATION SUNAIR ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) LIABILITIES AND STOCKHOLDERS EQUITY 03/31/05
    
    
    9/30/04CURRENT LIABILITIES:Accounts payable
    
    $
    1,131,972
    
    
    $
    1,501,864Accrued expenses
    
    
    845,189
    
    
    
    1,186,250Bank lines of credit
    
    
    47,000
    
    
    
    2,047,000Unearned revenues
    
    
    100,689
    
    
    
    115,857Loan from shareholder
    
    
    22,800
    
    
    
    22,800Notes payable
    
    
    23,028
    
    
    
    33,585Income taxes payable
    
    
    448,232
    
    
    
    212,688Payable in connection with
acquisition of Telecom FM
    
    
    0
    
    
    
    1,500,000Total Current Liabilities
    
    
    2,618,910
    
    
    
    6,620,044DEFERRED TAX LIABILITY
    
    
    199,200
    
    
    
    199,000STOCKHOLDERS 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,
9,014,870, and 4,006,620 shares
issued and outstanding at March 31,
2005 and September 30, 2004
respectively
    
    
    901,487
    
    
    
    400,662Additional paid-in-capital
    
    
    27,612,264
    
    
    
    3,852,106Retained earnings
    
    
    13,310,724
    
    
    
    12,575,217Translation adjustment
    
    
    50,625
    
    
    
    Total Stockholders Equity
    
    
    41,875,100
    
    
    
    16,827,985TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    44,693,210
    
    
    $
    23,647,029
 The accompanying notes are an integral part of these financial statements. - 4 -




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CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED) SIX MONTHS ENDED03/31/05
    
    
    03/31/04SALES
    
    $
    9,940,320
    
    
    $
    4,530,456COST OF SALES
    
    
    5,537,526
    
    
    
    2,519,019GROSS PROFIT
    
    
    4,402,794
    
    
    
    2,011,437SELLING GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    3,419,467
    
    
    
    1,030,174INCOME FROM OPERATIONS
    
    
    983,327
    
    
    
    981,263OTHER INCOME:Interest income
    
    
    150,426
    
    
    
    124,483Interest expense
    
    
    (32,140
    )
    
    
    Other expense
    
    
    (18,306
    )
    
    
    (4,045
    )Total Other Income
    
    
    99,980
    
    
    
    120,438INCOME
BEFORE (PROVISION) FOR INCOME TAXES
    
    
    1,083,307
    
    
    
    1,101,701(PROVISION) FOR INCOME TAXES
    
    
    (347,800
    )
    
    
    (308,600
    )NET INCOME
    
    $
    735,507
    
    
    $
    793,101NET INCOME PER COMMON SHARE:BASIC
    
    $
    0.14
    
    
    $
    0.21DILUTED
    
    $
    0.11
    
    
    $
    0.20WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    5,412,524
    
    
    
    3,787,249DILUTED
    
    
    6,667,402
    
    
    
    3,876,088
 The accompanying notes are an integral part of these financial statements - 5 -




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CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED) THREE MONTHS ENDED03/31/05
    
    
    03/31/04SALES
    
    $
    4,846,332
    
    
    $
    3,215,882COST OF SALES
    
    
    2,736,727
    
    
    
    1,820,770GROSS PROFIT
    
    
    2,109,605
    
    
    
    1,395,112SELLING GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    1,628,952
    
    
    
    543,623INCOME FROM OPERATIONS
    
    
    480,653
    
    
    
    851,489OTHER INCOME:Interest income
    
    
    114,650
    
    
    
    62,051Interest expense
    
    
    (12,258
    )
    
    
    Other expense
    
    
    (11,460
    )
    
    
    (2,878
    )Total Other Income
    
    
    90,932
    
    
    
    59,173INCOME
BEFORE (PROVISION) FOR INCOME TAXES
    
    
    571,585
    
    
    
    910,662(PROVISION) FOR INCOME TAXES
    
    
    (208,483
    )
    
    
    (290,100
    )NET INCOME
    
    $
    363,102
    
    
    $
    620,562NET INCOME PER COMMON SHARE:BASIC
    
    $
    0.05
    
    
    $
    0.16DILUTED
    
    $
    0.04
    
    
    $
    0.16WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    6,848,203
    
    
    
    3,809,777DILUTED
    
    
    9,993,921
    
    
    
    3,903,353
 The accompanying notes are an integral part of these financial statements - 6 -




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CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED) SIX MONTHS ENDED03/31/05
    
    
    03/31/04CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    735,507
    
    
    $
    793,101Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:Depreciation
    
    
    96,249
    
    
    
    78,921Amortization
    
    
    159,437
    
    
    
    14,337Deferred taxes
    
    
    119,725
    
    
    
    Translation adjustment
    
    
    50,625
    
    
    
    Inventories reserve
    
    
    52,571
    
    
    
    (Increase) decrease in Assets:Accounts receivable
    
    
    40,788
    
    
    
    (422,043
    )Interest receivable
    
    
    97,138
    
    
    
    1,810Inventories
    
    
    100,085
    
    
    
    375,121Prepaid and other current assets
    
    
    (458,366
    )
    
    
    (28,811
    )Increase (decrease) in Liabilities:Accounts payable and accrued expenses
    
    
    (710,953
    )
    
    
    (269,051
    )Unearned revenue
    
    
    (15,168
    )
    
    
    Income taxes payable
    
    
    235,544
    
    
    
    600Net Cash Provided By Operating Activities
    
    
    503,182
    
    
    
    543,985CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant, and equipment
    
    
    (67,410
    )
    
    
    (14,050
    )Proceeds from sale of held-to-maturity
investment
    
    
    2,913,601
    
    
    
    Software development costs
    
    
    (226,971
    )
    
    
    Cash paid for acquisition of Telecom FM
    
    
    (1,500,000
    )
    
    
    Purchases of investments
    
    
    
    
    
    
    (498,546
    )Net Cash Provided By (Used In) Investing
Activities
    
    
    1,119,220
    
    
    
    (512,596
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    18,563
    
    
    
    176,512Repayment of line of credit
    
    
    (2,000,000
    )
    
    
    Repayment of notes payable
    
    
    (10,557
    )
    
    
    Proceeds
from sale of common stock, net
    
    
    24,242,420
    
    
    
    Net Cash Provided By Financing Activities
    
    
    22,250,426
    
    
    
    176,512NET INCREASE IN CASH
AND CASH EQUIVALENTS
    
    
    23,872,828
    
    
    
    207,901CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    3,872,224
    
    
    
    1,022,175CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    27,745,052
    
    
    $
    1,230,076SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:Cash paid during the year for income taxes
    
    $
    125,000
    
    
    $
    308,000Cash paid during the year for interest
    
    $
    32,140
    
    
    $
    
 The accompanying notes are an integral part of these financial statements - 7 -




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NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS  1.
    Basis of Consolidated Financial Statement Presentation:The accompanying unaudited consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange Commission
and in accordance with the instructions to Form 10-QSB and do not include all the
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with accounting principles generally accepted in the
United States of America. The information furnished in the interim financial statements
includes normal recurring adjustments and reflects all adjustments, which, in the
opinion of management, are necessary for a fair presentation of such financial
statements. For further information refer to the consolidated financial statements and
footnotes thereto included in the Companys most recent audited consolidated financial
statements and notes thereto included in its September 30, 2004 annual report on Form
10-KSB. Operating results for the six months ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the year ending September 30, 2005.2.
    Significant Accounting Policies: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 consolidated financial
statements and accompanying notes. Actual results could differ from those estimates.Accounts Receivable
Accounts receivable consist of balances due from sales. The Company monitors accounts
receivable and provides allowances when considered necessary. As of
March 31, 2005 and September 30, 2004,
the Company established an allowance of $48,485.Investments
Certain investments that management has the intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion of discounts that
are recognized in interest income using the interest method over the period to maturity.Marketable and debt securities which management has classified as trading are carried at
fair value with net unrealized gains and losses reported in operations. Realized gains
and losses on marketable equity and debt securities are recognized upon sale using the
specific identification method.Inventories
Inventories, which consist of raw materials, work-in-process, and finished goods, are
stated at the lower of cost or market value, cost being determined using the first in,
first out method. Fixed and variable manufacturing costs and overhead are included in
the carrying values of finished goods and work-in-process. The Company records reserves
for inventory shrinkage and obsolescence, when considered necessary. For the six months
ended March 31, 2005, inventory shrinkage and obsolescence reserves increased $52,571. - 8 -




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Property, Plant, and Equipment
Property, plant and equipment are carried at cost. Depreciation is provided over the
estimated useful lives of the assets using both the straight-line and accelerated
methods. The estimated useful lives used to compute depreciation are as follows: Buildings and improvements
    
    
    10 to 30 yearsMachinery and equipment
    
    
    4 to 10 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.Software Costs
The Company capitalizes certain costs associated with software development in accordance
with statement of Financial Accounting Standard #86 (FASB #86) Accounting for the costs
of computer software to be sold, leased, or otherwise marketed. The Company amortizes
costs over 10 years, the estimated useful life of the asset.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 exceeds 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 assets impaired during the first six months ended March 31, 2005.Income (Loss) Per Share
Basic earnings per share amounts are computed by dividing the net income by the weighted
average number of common shares outstanding. Diluted earnings per share amounts are
computed by dividing net income by the weighted average number of shares of common
stock, common stock equivalents, and stock options outstanding during the period.Revenue Recognition
Sales revenues are recorded when products are shipped and title has passed to
unaffiliated customers. Installation revenues are considered earned at the time the
project is completed. Maintenance contracts are recorded as unearned revenues at the
time of collection and are recognized as income monthly over the term of the contract.
Interest and dividends earned on investments are recorded when earned.Advertising Costs
The Company expenses advertising costs as incurred.Research and Development
Expenditures for research and development are charged to operations as incurred. - 9 -




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Foreign Currency Translation
Telecoms functional currency is the British Pound Sterling, its local currency.
Accordingly, balance sheet accounts are translated at exchange rates in effect at the
end of the year and income statement accounts are translated at average exchange rates
for the year. Translation gains and losses are included as a separate component of
stockholders equity as cumulative translation adjustments. Foreign currency
transaction gains and losses are included in other income and expenses.Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income. Other
comprehensive income includes certain changes in equity that are excluded from net
income. At March 31, 2005 and September 30, 2004, accumulated other comprehensive income was comprised of
cumulative foreign currency translation adjustments.3.
    Acquisitions:Acquisition of Percipia, Inc. and SubsidiaryFor purposes of expanding into the telecommunication market, the Company completed its
acquisition of all the issued and outstanding common stock of Percipia, Inc.
(Percipia), and its wholly owned subsidiary, Percipia Networks, Inc on August 6, 2004.
The consideration paid by the Company consisted of cash of $841,510 (including $53,550
paid to retire all outstanding stock options of Percipia and $127,960 paid for
acquisition costs) and 190,000 shares of its common stock valued at $997,500 based on an
average price of $5.25 over the thirty days prior to the acquisition for a total
purchase price of $1,839,010. As a result, Percipia became a wholly owned subsidiary of
the Company. For accounting purposes, the effective date of the acquisition was June
30, 2004.The following table sets forth the preliminary allocation of the purchase price to
Percipias tangible and intangible assets acquired and liabilities assumed as of July 1,
2004: Cash
    
    $
    17,690A/R
    
    
    425,417Inventory
    
    
    380,750Deferred tax assets
    
    
    653,000Fixed assets
    
    
    95,453Software
    
    
    2,700,000Note receivable and other assets
    
    
    80,362Goodwill
    
    
    852,683Accounts payable
    
    
    (239,098
    )Accrued liabilities
    
    
    (555,877
    )Deferred tax liability
    
    
    (860,000
    )Unearned revenues
    
    
    (145,106
    )Line of credit
    
    
    (99,300
    )Notes payable
    
    
    (1,428,089
    )Capital leases
    
    
    (38,875
    )Total
    
    $
    1,839,010
 - 10 -




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The goodwill resulting from this acquisition is expected to be amortized over fifteen
years for tax purposes. - 11 -




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Acquisition of CPM FM Limited (formerly known as Telecom FM Limited)On October 5, 2004, the Company, through a wholly owned
subsidiary, Sunair
Communications, Limited, a private limited company incorporated in England (SCL),
entered into a definitive asset purchase agreement by and among SCL,
CPM FM Limited
(formerly known as Telecom FM Limited) (Telecom), a private limited company
incorporated in England, and TFM Group Limited, a private limited company incorporated
in England and the sole shareholder of Telecom, pursuant to which the
Company acquired
substantially all of the assets and assumed certain liabilities of Telecom for
$1,500,000 cash. The purpose of this acquisition was to expand into the
telecommunication market.In addition, the Company incurred $340,913 of transaction costs consisting principally
of legal and accounting fees.The transaction was closed on October 11, 2004 and, as stated in the asset purchase
agreement, became effective on September 1, 2004.The following table sets forth the allocation of the purchase
price to Telecoms
tangible assets acquired and liabilities assumed as of September 1, 2004: Inventories
    
    $
    910,282Accounts receivable
    
    
    1,303,570Prepaid expenses and other current assets
    
    
    171,103Fixed assets
    
    
    22,763Software costs
    
    
    1,164,699Accounts payable
    
    
    (991,475
    )Bank overdraft
    
    
    (411,773
    )Accrued expenses
    
    
    (238,136
    )Loan payable
    
    
    (90,120
    )Total
    
    $
    1,840,913
  The $1,500,000 due to the principles of Telecom were accrued
as payable as of September
30, 2004. Of this amount, $1,250,000 was paid in October of 2004. Costs accrued in
connection with the acquisition of $249,312 are included in accrued expenses as of
September 30, 2004. - 12 -




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Pro-forma results of operationsThe following sets forth the Companys results of operations for the six months and
three months ended March 31, 2005 as if the acquisitions had taken place on October 1, 2003. SIX MONTHS ENDED MARCH 31,2005
    
    
    2004Revenues
    
    $
    9,940,320
    
    
    $
    8,489,420Net income
    
    $
    735,507
    
    
    $
    625,399Earnings per shareBasic
    
    $
    0.14
    
    
    $
    0.17Diluted
    
    $
    0.11
    
    
    $
    0.16
 THREE MONTHS ENDED MARCH 31,2005
    
    
    2004Revenues
    
    $
    4,846,332
    
    
    $
    5,733,787Net income
    
    $
    363,102
    
    
    $
    731,217Earnings per shareBasic
    
    $
    0.05
    
    
    $
    0.19Diluted
    
    $
    0.04
    
    
    $
    0.19
  4.
    InventoriesInventories consist of the following: 03/31/05
    
    
    09/30/04Materials
    
    $
    1,799,699
    
    
    $
    1,565,463Work in progress
    
    
    4,112,914
    
    
    
    4,117,503Finished goods
    
    
    1,193,686
    
    
    
    1,575,989$
    7,106,299
    
    
    $
    7,258,955
  5.
    Earnings Per Common Share:Basic earnings per share amounts are computed by dividing the net income by the weighted
average number of common shares outstanding. Diluted earnings per share amounts are
computed by dividing net income by the weighted average number of shares of common
stock, common stock equivalents, and stock options outstanding during the period.6.
    Preferred Stock:At March 31, 2005, the Company had 8,000,000 authorized shares of preferred stock,
no par value, that may be issued at such terms and provisions as determined by the board
of directors. None are outstanding. - 13 -




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7.
    Stock Options and Warrants:At the fiscal year ended September 30, 2004, options to purchase 270,000 shares of the Companys
common stock at $2.25 per share had been issued to key employees of the Company. 45,600 stock
options were exercised in fiscal 2003 and 78,450 stock options were exercised in fiscal 2004. Due
to a majority change in ownership in November 2003, all of the Companys outstanding stock options
became fully vested and exercisable. At the beginning of the current fiscal year, there were
options outstanding to purchase 145,950 shares of common stock at $2.25 per share of which 8,250
stock options were exercised in the first fiscal quarter. These options are fully vested and are
exercisable until November 21, 2005.On February 4, 2005, the shareholders of the Company approved the issuance of options outside of
the existing option plan to three directors. The options are for the purchase of 60,000 shares of
common stock at $4.79 per share and are fully vested and exercisable at March 31, 2005.Pursuant to employment agreements entered into in February, 2005 between the Company and Mr.
Laurent, Mr. Durham and Mr. Budde, officers of the Company, an aggregate of 60,000 options were
granted for the purchase of the Companys common stock at $13.78 per share. The options will vest
equally over a period of 24 months at a rate of 1,666 per month so long as the option holder is
currently employed by the Company.On February 8, 2005, the Company completed its sale of 5,000,000 units to Coconut Palm Capital
Investors 11, Ltd., a Florida limited partnership (Coconut Palm) pursuant to a Purchase Agreement
dated as of November 17, 2004, by and between the Company and Coconut Palm (the Purchase
Agreement). The aggregate purchase price paid by Coconut Palm for the units was $25 million. The
units consist of 5 million shares of the Companys common stock, warrants to purchase an additional
five million shares of the Companys common stock at an exercise price of $6.00 per share, which
are immediately exercisable and will expire after three years; and warrants to purchase an
additional five million shares of the Companys common stock at an exercise price of $7.00 per
share, which are immediately exercisable and will expire after five years.In addition, on February 8, 2005 a grant for 166,667 stock options to purchase 166,667 shares of
common stock at $5.00 per share became effective for options granted to the President/CEO of the
Company. The options will vest equally over a period of four years beginning in November, 2005.There are 333,333 options outstanding which were granted to two individuals contingent upon their
employment with the Company. At March 31, 2005, these individuals were not employed by Sunair.8.
Equipment and Service Information:The following table sets forth sales and cost of sales information for equipment and
services in the Companys high frequency single sideband communications business. SIX
    
    
    THREEMONTHS
    
    
    MONTHSENDED
    
    
    ENDED03/31/05
    
    
    03/31/05SalesEquipment
    
    
    
    
    
    $
    8,781,461
    
    
    $
    4,280,075Service
    
    
    
    
    
    
    1,158,859
    
    
    
    566,257Total Sales
    
    
    
    
    
    $
    9,940,320
    
    
    $
    4,846,332Cost of SalesEquipment
    
    
    
    
    
    $
    5,080,861
    
    
    $
    2,533,720Service
    
    
    
    
    
    
    456,665
    
    
    
    203,007Total Cost of Sales
    
    
    
    
    
    $
    5,537,526
    
    
    $
    2,736,727
  9.
    Recent Accounting Pronouncements:In January 2003, the FASB issued interpretations No. 46, Consolidation of Variable
Interest Entities. FIN No. 46 addresses consolidation by business enterprises of
variable interest entities (formerly Special Purpose Entities or SPES). The Company
does not have any variable interest entities as defined by FIN No. 46 and therefore the
interpretation did not affect the Companys financial position, results of operations or
cash flows.In April 2003, the FASB issued Statement No. 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. This statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities under
Statement No. 133, Accounting for Derivatives Instruments and Hedging Activities. The
provisions of this statement are effective for all derivatives and hedging activities
entered into after June 30, 2003. The Company did not have any derivatives or hedging
activities and therefore the standard did not affect the Companys financial position,
results of operations or cash flows.In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards
on the classification and measurement of certain instruments with characteristics of
both liabilities and equity. The provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2002 and to all other instruments
that exist as of the beginning of the first interim financial reporting period beginning
after June 15, 2003. SFAS No. 150 did not have a material effect on the Companys
financial Statements.In December 2004, the FASB issued FASB No. 123 Accounting for Stock-Based Compensation
 RevisedIn December 2004, the FASB issued SFAS No. 123R, Accounting for Stock-Based
Compensation. This statement is a revision to SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for stock issued to
employees. This statement requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service, the requisite service
period (usually the vesting period). The grant-date fair value of employee share options
and similar instruments will be estimated using option-pricing models.In addition, a public entity is required to measure the cost of employee services
received in exchange for an award of liability instruments based on its current fair
value. The fair value of that award will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during the requisite - 14 -




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service period will be recognized as compensation cost over that period.For public entities that do not file as small business issuers, this statement is
effective as of the beginning of the first annual reporting period that
begins after June 15, 2005.For public entities that file as small business issuers, this statement is effective as
of the beginning of the first annual reporting period that begins after
December 15, 2005.At the required effective date, all public entities that used the fair value based
method for either recognition or disclosure under Statement 123 are required to apply
this statement using a modified version of prospective application. Under that
transition method, compensation cost is recognized on or after the required effective
date for the portion of outstanding awards for which the requisite service has not yet
been rendered, based on the grant-date fair value of those awards calculated under
Statement 123 for either recognition or pro-forma disclosures. For periods before the
required effective date, those entities may elect to apply the modified version of
retrospective application under which financial statements for prior periods are
adjusted on a basis consistent with the pro forma disclosures required for those periods
by Statement 123. The Company has not yet determined which methodology it will adopt
but believes that the impact that the adoption of SFAS No. 123R will have on its
financial position or results of operations will approximate the magnitude of the
stock-based employee compensation cost pursuant to the disclosure requirements of SFAS
No. 148.EITF 03-11, Reporting Gains and Losses on Derivative Instruments that are Subject to
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
and Not Held for Trading Purposes.In July 2003, the EITF reached a consensus that all gains and losses (realized and
unrealized) on derivative instruments within the scope of SFAS 133 should be shown net
in the income statement, whether or not settled physically, if the derivative
instruments are held for trading purposes. However, the EITF recognized that there may
be contracts within the scope of SFAS 133 considered not held for trading purposes that
warrant further consideration as to the appropriate income statement classification of
the gains and losses. In EITF 03 11, the EITF clarified certain criteria to use in
determining whether gains and losses related to non-trading derivative instruments
should be shown net in the income statement. The adoption of EITF 03-11 did not have a
material effect on the Companys financial position, results of operations or cash
flows. - 15 -




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Item 2. Managements Discussion and Analysis or Plan of Operation Cautionary statement regarding forward looking information: Some of the statements in this quarterly report, 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 or
those of our industry to be materially different from any future results, performance or
achievements expressed or implied by those forward-looking statements. Among the factors that could
cause actual results, performance or achievement 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 risks inherent in new product and service introductions 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. General: Sunair Electronics, Inc. (Sunair, the Company, us, we or our) is a Florida corporation
organized in 1956. The Company is engaged in the design, manufacture and sale of high frequency single
sideband communications equipment and the software development, design, integration testing and
documentation of
C4ISR systems utilized for long range voice and data communications in
fixed station, mobile and marine military and governmental applications. Percipia, Inc. (Percipia), an Ohio corporation, is a wholly owned subsidiary which
provides installation and maintenance of telephony systems, and develops and customizes software
for telephony systems to various industries, most notably hospitality. Telecom FM Limited (Telecom), a United Kingdom corporation, is a wholly owned subsidiary which
distributes and installs telecommunication devices providing fixed wireless access to network and
data service providers. Sunair products and engineering capabilities are marketed both domestically and internationally and
are primarily intended for strategic military and other governmental applications. Sales are
executed direct through systems engineering companies, worldwide commercial and foreign
governmental agencies or direct to the U.S. Government. Sunairs line of equipment is composed of proprietary HF/SSB radio equipment and ancillary items
sold as operating units or combined into sophisticated systems that may interface with
workstations, antennae, power sources, modems, message switching devices, cryptographic equipment
software and the like provided by others. Sunair products employ advanced solid state designs with
computer controlled networking capabilities. In addition, the Company custom designs systems
incorporating various combinations of equipment into racks and control consoles that may interface
with value added products and systems of - 16 -




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other manufacturers. With the acquisitions of Percipia
and Telecom, the Company now installs and maintains telephony and fixed wireless systems. Pursuant to the previously announced purchase agreement dated as of November 17,2004 (the Purchase
Agreement) by and between the Company and Coconut Palm Capital Investors 11, Ltd., a Florida
limited partnership (Coconut Palm), on February 8, 2005, Coconut Palm completed its purchase of 5
million units. The units consist of 5 million newly issued shares of common stock of the Company
and warrants to purchase an additional 10 million shares of common stock at exercise prices ranging
from $6.00 per share to $7.00 per share. The warrants are immediately exercisable and will expire
at times of three and five years from closing. The aggregate purchase price for the units was $25
million. Following the closing of the transaction, Coconut Palm beneficially owns 15 million
shares, or 78.9%, of the common stock of the Company (assuming
exercise of the warrants). The Company intends to use the proceeds from the sale of the units to fund initial acquisitions
that have operations in the pest and termite control services sector and to form a new pest and
termite control services division. Ultimately, the Company anticipates that with the sale of the
units and the formation of its new pest and termite control services division, it will no longer
operate solely through its traditional business segments. Furthermore, as the Company is able to
grow its new pest and termite control services division through acquisitions and, eventually
through internal organic growth, it is contemplated that this new segment will become the Companys
dominant operation. Accordingly, if the Company is successful in implementing this strategy, it
will represent a fundamental shift in the nature of the Companys business. In connection with the investment by Coconut Palm, the Company entered into an employment agreement
with John J. Hayes under which he became the Companys President and Chief Executive Officer
beginning February 15, 2005. The Company anticipates that as it acquires pest and termite control
companies, it will enter into employment agreements with additional persons for the new termite
control services division. In addition, James E. Laurent, the
Companys then current President and
Chief Executive Officer, Synnott B. Durham, the Companys then current corporate Secretary and Chief
Financial Officer, and Henry A. Budde, the Companys then current Vice President of Operations, have
entered into employment agreements with the Company, which became effective upon the closing of the
transaction. Mr. Laurent serves as the President of the high frequency single sideband
communications business. Mr. Durham will remain the Chief
Financial Officer of the Company and now
serves as the Vice President of Finance of the high frequency single sideband communications
business. Mr. Budde serves as the Vice President of Operations of the high frequency single
sideband communications business. In connection with this change in business strategy, and in accordance with the Purchase Agreement,
the Company also agreed to use its best efforts to enter into a definitive agreement as soon as
practicable to divest itself of certain non-core assets acquired in connection with the Companys
purchase of: (i) Percipia; and (ii) the assets of Telecom, at a purchase price equal to the amount
the Company paid for such assets plus the amount of any intercompany debt incurred and advances
made in connection with such purchases. - 17 -




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Liquidity: For the first six months ended March 31, 2005, the Company had positive cash flow from operations
of $503,182 due to reductions in accounts receivable and reductions in inventories for shipments
made from inventory purchased in prior periods. Accounts receivable decreased on payments against
large shipments made toward 2004 fiscal year end. Cash flows provided by investing activities for the six months ended March 31, 2005 were $1,119,220
due to proceeds from the sale of held-to-maturity investments less amounts paid for the purchase of
property, plant, and equipment, software development and cash paid for the acquisition of the
assets of Telecom. Cash flows provided by financing activities for the six months ended March 31, 2005 were
$22,250,426 which consisted of proceeds from the sale of stock pursuant to the closing of the
Purchase Agreement with Coconut Palm and the exercise of stock options less the repayment of the
line of credit and paydown of notes payable. During the first six months of fiscal 2005, the Company had short term investments and cash or cash
equivalents more than adequate to cover known requirements, unforeseen events or uncertainties that
might occur. The Companys known requirements consist of normal operating expenses. During this
six month period, cash and cash equivalents had an average balance of $18,228,000 as opposed to an
average balance of $1,738,000 for the twelve months ended September 30, 2004. Cash equivalents are
money market funds that are readily available for immediate use should the occasion arise. The
current ratio of the Company as of March 31, 2005 was 14.8 compared to 2.6 as of September 30,
2004. The Company records reserves for inventory shrinkage and obsolescence, when considered necessary.
For the six months just ended, inventory shrinkage and
obsolescence reserves increased $52,571 due to expected inventory shrinkage. Accounts receivable
consist of balances due from sales. The Company monitors accounts receivables and provides
allowances when considered necessary. As of March 31, 2005, the Company had an allowance of
$48,485. Non cash interim reserves are maintained to cover items such as warranty repairs in process and
other charges that may be in dispute. Capital Resources: During the first six months of fiscal 2005, $67,410 was spent for capital assets. These funds were
primarily used for new computer hardware. $226,971 was spent for software development costs. No
expenditures are contemplated for plant expansion or extensive maintenance in fiscal 2005. The
Company has no long term debt and none is contemplated, except the Company may incur debt or use
cash to finance acquisitions although there are currently no
definitive agreements in connection with any
acquisitions. Liabilities consist of current accounts payable, accrued expenses related to the
current accounting period, the current and long term portion of income taxes payable, amounts due
under the management services agreement described below and compensation to management. Effective upon the closing of the Purchase Agreement with Coconut Palm, the Company entered into a
five-year management services agreement with RPC Financial Advisors, LLC (RPC), pursuant to which
RPC agreed to provide management services for the Companys newly created pest and termite control
services division. The Company has agreed to pay a management fee during the first year of the
management services agreement in the amount of $1,562,500. Following the first year and thereafter, the management fee will be
equal to 1% of the gross revenues from operations of the pest and termite control services
division. Richard Rochon and Mario Ferrari, both of whom are affiliates of Coconut Palm and each
of whom are members of the Companys board of directors, are also affiliates of RPC. Results of Operations: First
six months of fiscal year ending 2005 compared to first six months of fiscal year ended 2004. During the first six months of the current fiscal year ended March 31, 2005, sales of $9,940,320
were up 119.4% or $5,409,864 from the same period one year ago due to increased shipments on orders
received in fiscal 2004, the first six months of fiscal 2005 and the added revenues produced by the
two subsidiaries acquired in the fourth quarter of fiscal year ended September 30, 2004. Backlog
of $5,283,000 was higher at March 31, 2005 compared to $3,331,000 at March 31, 2004. Cost of sales was slightly higher at 55.7% of sales in the first six months of fiscal 2005 as
compared to 55.6% of sales for the same period one year ago due to a change in the product mix.
Inventories decreased 2.1% or $152,656 for the first six months of fiscal 2005 due to increased
shipments against orders received in the fourth quarter of fiscal 2004 and the first six months of
fiscal 2005. The Company continues its efforts to reduce inventories to lower levels. Selling, general and administrative expenses increased 231.9% or $2,389,293 due to increased
overhead expenses associated with the operation of Percipia and Telecom. Expenses continue to
be incurred for expanded market exposure. Interest income increased $25,943 due to the investment of proceeds received on the sale of stock
in February of 2005 less the redemption of the PEFCO notes in the first quarter of fiscal 2005.
Interest expense was incurred on a $2,000,000 bank line of credit. Other expenses incurred were
due to a loss on the redemption of the PEFCO notes. The Companys marketing efforts continue to follow up on opportunities in the Middle East,
Asia, North Africa, and India. Projects are being pursued and we believe progress is showing
strong major order prospects in India and a Persian gulf country. We believe that we may receive a
production order (valued at $1 million) in the Middle East which is projected to close within the
next quarter for deliveries in fiscal year 2006. These major opportunities include system
integration requirements which match our focused growth area of the radio communications group.
Forecasts are promising in the new telecom software and wireless telecommunications areas as well.
The Company has received orders for HF radio systems to be installed into shelters for the U.S.
Marine Corps. Deliveries under the U.S. Coast Guard orders are scheduled to continue through the
first three months of fiscal year 2006. 
 Item 3. Controls and procedures (a) Evaluation of disclosure controls and procedures. The term disclosure controls and procedures
is defined in Rule 13a  15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This
term refers to the controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files under the Exchange
Act is recorded, processed, summarized and reported within required time periods. Our chief
executive officer and our chief financial officer have concluded,
based on their evaluation as of March 31, 2005, that our disclosure controls and procedures are effective. (b) Changes in internal control over financial reporting. There have been no changes in our
internal control over financial reporting during the quarter ended March 31, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. - 18 -




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Part II Other Information 
 Item 1. Legal Proceedings None 
 Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders The Company held its 2004 Annual Meeting of Stockholders on February 4, 2005. At the meeting,
the following persons were elected or re-elected to serve as directors, with the votes indicated: Director
    
    Affirmative Votes
    
    
    Withheld VotesMichael D. Herman
    
    
    3,504,241
    
    
    
    188,908Dr. Arnold Heggestad
    
    
    3,608,113
    
    
    
    168,736James E. Laurent
    
    
    3,589,213
    
    
    
    187,636Steven P. Oppenheim
    
    
    3,588,913
    
    
    
    187,936Richard C. Rochon
    
    
    3,607,229
    
    
    
    169,620Mario B. Ferrari
    
    
    3,587,941
    
    
    
    188,908
 Also at the meeting the stockholders approved the following proposals, with the votes indicated:  1.
    The issuance of shares of the Companys common stock in connection with the proposed sale to
Coconut Palm of up to 5,000,000 units at a purchase price of $5.00 per unit. FOR: 2,754,240
    
    AGAINST: 65,098
    
    ABSTAIN: 2,530
    
    BROKER NON-VOTES: 3,072,881
  2.
    An increase in the size of the Companys Board of Directors from 5 to 7 members. FOR: 2,754,886
    
    AGAINST: 65,422
    
    ABSTAIN: 1,560
    
    BROKER NON-VOTES: 3,072,881
  3.
    Amendments to the Companys Articles of Incorporation to: (i) change the Companys corporate
name to Sunair, Inc.; (ii) allow the Company to engage in any lawful business; and (iii) increase
the number of the Companys authorized shares of capital stock to 108,000,000 shares, of which
100,000,000 shares will be common stock and 8,000,000 shares will be preferred stock. FOR: 2,663,946
    
    AGAINST: 136,526
    
    ABSTAIN: 1,396
    
    BROKER NON-VOTES: 3,072,881
  4.
    The issuance of an aggregate of 60,000 options to purchase shares of the Companys common
stock to 3 of the Companys current directors outside of the Companys existing stock option plan; FOR: 2,628,975
    
    AGAINST: 188,367
    
    ABSTAIN: 4,526
    
    BROKER NON-VOTES: 3,072,881
  5.
    The Companys 2004 Stock Incentive Plan. FOR: 2,650,500
    
    AGAINST: 168,238
    
    ABSTAIN: 3,130
    
    BROKER NON-VOTES: 3,072,881
  6.
    To act upon such other business as may properly come before the Annual Meeting of Shareholders
and any and all adjournments or postponements of the Annual Meeting of Shareholders. FOR: 3,576,963
    
    AGAINST: 174,148
    
    ABSTAIN: 4,738
    
    BROKER NON-VOTES: 0
 
 Item 5. Other Information None - 19 -




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Part II Other Information (Continued) 
 Item 6. Exhibits 3.1
    
    Articles of Amendment to the Articles of Incorporation.4.1
    
    First Tranche Warrant, dated February 8, 2005, issued by
Sunair Electronics, Inc. to Coconut Palm Capital
Investors II, Ltd.4.2
    
    Second Tranche Warrant, dated February 8, 2005, issued by
Sunair Electronics, Inc. to Coconut Palm Capital
Investors II, Ltd.10.6
    
    2004 Stock Incentive Plan (incorporated by reference to
the Definitive Proxy Statement filed with the SEC on January 18, 2005).*10.7
    
    Employment Agreement between Sunair Electronics, Inc. and
John Hayes.*10.8
    
    Employment Agreement between Sunair Electronics, Inc. and James E. Laurent.*10.9
    
    Employment Agreement between Sunair Electronics, Inc. and
Synnott B. Durham.*10.10
    
    Employment Agreement between Sunair
Electronics, Inc. and
Henry A. Budde.*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.
    - 20 -




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SIGNATURES Pursuant to the requirements of the securities and exchange act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized. Sunair Electronics, Inc.Date May 16, 2005
    
    /s/ John J. HayesJohn J. Hayes, Presidentand Chief Executive OfficerDate May 16, 2005
    
    /s/ Synnott B. DurhamSynnott B. Durham,Chief Financial Officer
 - 21 -