Edgar Filing: MICROPAC INDUSTRIES INC

U. S. Securities and Exchange Commission
Washington, D. C. 20549

Form 10-KSB

(Mark One)

(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Required)

For the fiscal year ended November 30, 2004

(_) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)

For the transition period from ________ to ________
Commission file number 0-5109

MICROPAC INDUSTRIES, INC.

DELAWARE 75-1225149
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

905 E. WALNUT STREET 75040
GARLAND, TEXAS (Zip Code)

Issuer's telephone number (972) 272-3571

Securities to be registered under Section 12 (b) of the Act:

Title of each class Name of each exchange on which registered

Securities to be registered under Section 12 (g) of the Act:

COMMON STOCK $.10 par value
---------------------------

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 that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No

There is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.

Revenues for its most recent fiscal year: $15,356,000

The aggregate market value of the voting stock held by non-affiliates computed
by the average bid and asked prices of such stock, as of a specified date within
the past 60 days, is not determined due to non-activity on the market over the
last 5 years.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

The number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date was 2,578,315 as of November 30, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

None

PART I

Item 1. Business
----------------

INTRODUCTION
------------

Micropac Industries, Inc. (the "Company"), a Delaware corporation, manufactures
and distributes various types of hybrid microelectronic circuits, solid state
relays, power operational amplifiers, and optoelectronic components and
assemblies. The Company's products are used as components in a broad range of
military, space and industrial systems, including aircraft instrumentation and
navigation systems, power supplies, electronic controls, computers, medical
devices, and high-temperature (200o C) products.

The business was started in 1963 as a sole proprietorship. On March 3, 1969, the
Company was incorporated under the name of "Micropac Industries, Inc." in the
state of Delaware. The stock was publicly held by 559 shareholders on November
30, 2004.

PRODUCTS AND TECHNOLOGIES
-------------------------

The Company's products are either custom (being application specific circuits
designed and manufactured to meet the particular requirements of a single
customer) or standard, proprietary components such as catalog items.
Custom-designed components are estimated to account for approximately 50% of the
Company's sales for the fiscal year ended November 30, 2004, and 52% in fiscal
2003; standard components are estimated to account for approximately 50% of the
Company's sales for the fiscal year ended November 30, 2004, and 48% for fiscal
2003.

In 2004, the Company's investment in technology through research and
development, which was expensed, totaled approximately $438,000 ($303,000 in
2003). The Company's research and development expenditures were directed
primarily toward long-term specific customer requirements, some of which have
future potential as Micropac proprietary products, and product development and
improvement associated with the Company's space level and other high reliability
programs.

The Company provides a one year warranty from the date of shipment to the
original purchaser. The Company is obligated under this warranty to either
replace or repair defective goods or refund the purchase price paid by the
buyer.

SALES, MARKETING AND DISTRIBUTION
---------------------------------

The Company's products are marketed throughout the United States and in Western
Europe, through a direct technical sales staff, independent representatives and
independent stocking distributors. Approximately 25% of the sales for fiscal
year 2004 (17% in 2003) were to international customers. Sales to Western
European customers are made by independent representatives under the
coordination of the Company's office in Bremen, Germany. One major industrial
customer has opened an operation in China and during 2004 moved a major part of
their domestic operations to China. This customer accounted for 22% of
international sales, and a contract manufacturer in China accounted for 41% of
international sales.

CUSTOMERS
---------

The Company's major customers include contractors to the United States
government with fixed price contracts. Sales to these customers for Department
of Defense (DOD) and National Aeronautics and Space Administration (NASA)
contracts accounted for approximately 64% of the Company's fiscal net sales in
2004 compared to 62% in 2003.

During 2004, two customers accounted for 8% and 10% of the Company's sales
compared to 11% and 7% for the year ended November 30, 2003.

BACKLOG
-------

At November 30, 2004, the Company had a backlog of unfilled orders totaling
approximately $9,292,000 compared to approximately $3,799,000 at November 30,
2003. The Company expects to complete and ship most of its November 30, 2004
backlog during fiscal 2005.

EMPLOYEES
---------

At November 30, 2004, the Company had 121 full-time employees (compared to 112
at November 30, 2003), of which 28 were executive and managerial employees, 24
were engineers and quality-control personnel, 20 were clerical and
administrative employees, and 49 were production personnel. None of the
Company's employees were covered by collective bargaining agreements.

The Company is an Equal Opportunity Employer. It is the Company's policy to
recruit, hire, train and promote personnel in all job classifications, without
regard to race, religion, color, national origin, sex or age. Above and beyond
non-discrimination, we are committed to an Affirmative Action Program, dedicated
to the hiring, training, and advancement within the Company of minority group
members, women and handicapped individuals.

RISK FACTORS
------------

Pricing Pressures. The Company continues to experience pricing pressures from
some of its original equipment manufacturer (OEM) customers. In some cases, the
Company sells product under agreements with OEMs that require the Company, at
regular intervals, to review the pricing structure for possible reduction in
selling price for future orders. This requires the Company to improve its
productivity and to request similar price reduction from its supplier chain. If
one or both of the approaches by the Company does not succeed, product gross
margins will decrease affecting the Company's net earnings.

Limited Insurance Coverage. The Company operates manufacturing facilities in
Garland, Texas and Juarez, Mexico. These facilities use industrial machines and
chemicals that could provide risks of personal injury and/or property damage.
There is no assurance that accidents will not occur. If accidents do occur, the
Company could be exposed to substantial liability. The Company maintains
worker's compensation insurance and general liability insurance for protection
of its employees and for protection of the Company's assets. In addition to the
basic policies mentioned, the Company maintains an umbrella policy covering
claims up to $10 million dollars. The Company's financial position could be
materially affected by claims not covered or exceeding coverage currently
carried by the Company.

Environmental Regulations. The Company is subject to governmental regulations
pertaining to the use, storage, handling and disposal of hazardous substances
used in connection with its manufacturing activities. Failure of the Company to
control all activities dealing with hazardous chemicals could subject the
Company to significant liabilities or could cause the Company to cease its
manufacturing activities.

Product Liability. The use of the Company's products in commercial or government
applications may subject the Company to product liability claims. Although the
Company has not experienced any product liability claims, the sale of any
product may provide risk of such claims. Product liability claims brought
against the Company could have a material adverse effect on the Company's
operating results and financial condition.

Component Shortages or Obsolescence. The Company relies on suppliers to deliver
quality raw materials in a timely and cost effective manner. From time to time
vendors do not deliver the product as needed due to manufacturing problems or
possibly a decision not to furnish that product in the future. Such interruption
of supply or price increases could have a material adverse effect on the
Company.

Technological Changes. The Company's base products and technologies generally
have long life cycles. The Company's products are primarily used in military,
space or aerospace applications, which also have long life cycles. There can be
no assurance that the Company will be able to define, develop and market new
products and technologies on a timely and cost effective basis. Failure to
respond to customer's requirements, and to competitors progress in technological
changes could have a material adverse effect on the Company's business.

Changes in Government Policy. The Company could be adversely affected by changes
in laws and regulations made by U.S. and non U.S. governments and agencies
dealing with foreign shipments. Changes by regulatory agencies dealing with
environmental issues could affect the cost of the Company's products and make it
hard for a small company to be competitive with larger companies.

COMPETITION
-----------

The Company competes with two or more companies with respect to each of its
major products. Some of these competitors are larger and have greater capital
resources than the Company. Management believes the Company's competitive
position is favorable; however, no assurance can be given that the Company can
compete successfully in the future.

SUPPLY CHAIN
------------

The parts and raw materials for the Company's products are generally available
from more than one source. Except for certain optoelectronic products, the
Company does not manufacture the basic parts or materials used in production of
its products. From time to time, the Company has experienced difficulty in
obtaining certain materials when needed. The Company's inability to secure
materials for any reason could have adverse effects on the Company's ability to
deliver products on a timely basis. The Company uses capacitors, active
semiconductor devices (primarily in chip form), hermetic packages, ceramic
substrates, resistor inks, conductor pastes, precious metals and other materials
in its manufacturing operations.

Item 2. Properties
------------------

The Company occupies approximately 36,000 square feet of manufacturing,
engineering and office space in Garland, Texas. The Company owns 31,200 square
feet of that space and leases an additional 4,800 square feet. The Company
considers its facilities adequate for its current level of operations.

Item 3. Legal Proceedings
-------------------------

The Company is not involved in any material current or pending legal
proceedings.

Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------

No matters were submitted to vote of the Company's security holders through the
solicitation of proxies by the Company during the fourth quarter of the fiscal
year ended November 30, 2004.

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
--------------------------------------------------------------------------------
Matters
-------

On November 30, 2004, there were approximately 559 shareholders of record of the
Company's common stock. No prices have been presented since there is no
established public trading market for the Company's common stock. The stock of
the Company is closely held; and, therefore, certain shareholders have the
ability to significantly influence decisions.

On December 29, 2004, the Board of Directors of Micropac Industries, Inc.
approved the payment of a $.12 per share dividend to all shareholders of record
on January 25, 2005. The dividend payment will be paid to shareholders on or
about February 8, 2005.

On January 8, 2004, the Board of Directors of Micropac Industries, Inc. approved
the payment of a special dividend of $.05 per share to all shareholders of
record on January 30, 2004. The dividend payment was paid to shareholders on
February 13, 2004.

On August 27, 2003, the Company purchased 548,836 shares of the Company's common
stock pursuant to the terms of an agreement dated February 5, 2001, between the
Company and Nicholas Nadolsky, former Chairman of the Board and Chief Executive
Officer ("Agreement"). The Agreement obligated the Company to purchase any
shares of the Company's common stock owned by Mr. Nadolsky at the fair market
value thereof (but in no event less than the book value of such shares) in the
event of his death, permanent disability or termination of employment. Mr.
Nadolsky's employment terminated on May 1, 2003. By letter dated August 15,
2003, Mr. Nadolsky requested that the Company purchase the 548,836 shares of the
Company's common stock he owned pursuant to the requirements of the above
agreement and agreed that the fair value of each share of his common stock was
$2.68. The Company paid Mr. Nadolsky a total purchase price of $1,470,880. These
shares were subsequently retired.

Item 6. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------

Liquidity and Capital Resources
-------------------------------

The Company currently has an existing line of credit with a Texas banking
institution. The line of credit agreement provides the Company with up to
$3,000,000 for normal operation of the Company. The Company has not, to date,
used any of the available line of credit. The Company expects to continue to
generate adequate amounts of cash to meet its liquidity needs from the sale of
products and services and the collection thereof.

The Company realized $908,000 net in cash flows from operations in 2004. Cash
influx came primarily from the combination of net income totaling $1,408,000;
recovery of depreciation totaling $222,000, increase of accrued compensation of
$249,000, increase in other accrued liabilities of $272,000, increase in
accounts payable of $79,000, and an increase in tax liabilities of $196,000.
Cash was used to increase inventory $911,000, accounts receivables increased by
$449,000, deferred tax benefit increased $139,000 and an increase in prepaid
expense of $19,000. Inventories increased due to the purchase of long lead items
for shipments within the first half of 2005. Day's sales in accounts receivables
totaled approximately 53.0 days as of November 30, 2004, compared to 52.0 days
at November 30, 2003.

The Company used $182,000 in cash for investment in additional manufacturing
equipment, computers and facility improvements in 2004 compared to $181,000 in
2003.

As of November 30, 2004, the Company had $1,239,000 in cash and cash equivalents
and $2,507,000 in short term investments compared to $2,337,000 in cash and cash
equivalents and $812,000 in short term investments on November 30, 2003.

Company management believes it will meet its 2005 capital requirements through
the use of cash derived from operations for the year and/or usage of the
Company's short-term investments. There were no significant outstanding
commitments for equipment purchases or improvements at November 30, 2004.

Results of Operations 2004 vs. 2003

Three Months Ended Twelve Months Ended
11/30/04 11/30/03 11/30/04 11/30/03

Net Sales 100.0% 100.0% 100.0% 100.0%

Cost of sales 57.1% 67.6% 65.0% 69.8%
R & D 5.3% 2.4% 2.9% 2.4%
S, G, & A 18.7% 17.4% 17.6% 20.7%
Total Cost & Exp 81.1% 87.4% 85.5% 92.9%

Operating Income 18.9% 12.6% 14.5% 7.1%

Interest Income 0.3% 0.3% 0.2% 0.4%

Income Before Income Taxes 19.2% 12.3% 14.7% 7.5%

Provision for taxes 7.2% 3.8% 5.6% 2.6%

Net Income 12.0% 8.5% 9.1% 4.9%

Sales in 2004 were approximately $15,356,000, an increase of 22.9% or $2,866,000
compared to 2003 sales. The increase in sales is primarily attributable to
improved business conditions in the company's major market segments, combined
with the introduction of new products. New orders for fiscal year 2004 totaled
$20,946,000 compared to $11,191,000 for fiscal 2003. The increase in new orders
is attributable to increased funding on certain military programs, combined with
higher demand for some of the Company's standard products sold through
distribution channels, and increased penetration in the medical and industrial
markets. The Company's backlog as of November 30, 2004, was approximately
$9,292,000, compared to approximately $3,799,000 on November 30, 2003.

Custom-designed components are estimated to account for approximately 50% of the
Company's sales for the fiscal year ended November 30, 2004, and 52% in fiscal
2003; standard components are estimated to account for approximately 50% of the
Company's sales for the fiscal year ended November 30, 2004, and 48% for fiscal
2003.

Approximately 25% of the sales for fiscal year 2004 (17% in 2003) were to
international customers. Sales to Western European customers are made by
independent representatives under the coordination of the Company's office in

Bremen, Germany. One major industrial customer has opened an operation in China
and during 2004 moved a major part of their domestic operations to China. This
customer accounted for 22% of international sales, and a contract manufacturer
in China accounted for 41% of international sales.

During 2004, two customers accounted for 8% and 10% of the Company's sales
compared to 11% and 7% for the year ended November 30, 2003.

Sales for 2004 compared to 2003 increased 16% in the commercial market, 22% in
the military market, and 50% in the space market.

Cost of sales, as a percentage of net sales, was 65.0% in 2004 compared to 69.8%
in 2003. The cost of goods sold decrease of 4.8% is attributable to stable
operating expense on higher sales volume; changes in product mix, and yield
improvements on certain products. In actual dollars cost of sales increased
$1,253,000 for 2004, versus 2003. Cost of sales decreased $84,000 in the fourth
quarter of 2004, compared to the same period of 2003.

Expenses for research and development totaled $438,000 in 2004 compared to
$303,000 in 2003. Most of the research and development expenses were
concentrated on expanding the company's line of solid state power controllers,
high-temperature couplers, detectors, hall-effect devices; and enhancing
manufacturing processes to improve the Company's competitive position.

Selling, general, and administrative expenses totaled 17.6% of net sales in
2004, compared to 20.7% in 2003, based on higher sales. In dollars expensed,
selling, general and administrative expenses totaled $2,709,000 in 2004 compared
to $2,581,000 in 2003, an increase of $128,000, attributable to higher
commissions on increased sales and increased selling expense.

Interest income for fiscal 2004 totaled $32,000 compared to $50,000 for fiscal
2003. The decrease is related to lower interest rates on the Company's
investments.

Income before taxes for fiscal 2004 was approximately $2,265,000 or 14.7% of net
sales, compared to $933,000 or 7.5% of net sales in fiscal 2003. Net income
after taxes totaled approximately $1,408,000 or $.55 per share in 2004 versus
2003 net earnings of $611,000 or $.21 per share. Net income after taxes in 2004
increased $797,000 compared to 2003.

New Accounting Standards
------------------------

None

Item 7. Financial Statements
-----------------------------

The financial statements listed below appear on pages 12 through 21 of this
Report. The Company is not required to furnish the Supplementary Data required
by Item 302 of Regulation S-K.

Page No.

12 Report of Independent Registered Public Accounting Firm

13 Balance Sheets as of
November 30, 2004 and 2003

14 Statements of Income for the years ended
November 30, 2004 and 2003

15 Statements of Shareholders' Equity for the years
ended November 30, 2004 and 2003

16 Statements of Cash Flows for the years ended
November 30, 2004 and 2003

17-21 Notes to Financial Statements for the years ended
November 30, 2004 and 2003

Item 8. Changes in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------------------------
Financial Disclosure
--------------------

None.

PART III

Item 9. Directors & Executive Officers of The Registrant
--------------------------------------------------------

Information related to the Company's Directors and Executive Officers is set
forth in the Company's definitive proxy statement relating to the Company's
Annual Meeting of Stockholders to be held on or about March 4, 2005. The
information in the proxy is set forth under the heading "Election of Directors
and Information as to Directors, Nominees and Executive Officers." The proxy
statement will be filed with the Securities and Exchange Commission on or about
January 31, 2005, and such information is incorporated by reference.

Item 10. Executive Compensation
-------------------------------

Information related to executive compensation is set forth in the Company's
definitive proxy statement relating to the Company's Annual Meeting of
Stockholders to be held on or about March 4, 2005. The information in the proxy
is set forth under the heading "Executive Compensation." The proxy statement
will be filed with the Securities and Exchange Commission on or about January
31, 2005, and such information is incorporated by reference.

Item 11. Security Ownership of Certain Beneficial Owners & Management
---------------------------------------------------------------------

Information related to the ownership of certain beneficial owners and management
of the Company's Common Stock is set forth in the Company's definitive proxy
statement relating to the Company's Annual Meeting of Stockholders to be held on
or about March 4, 2005.

The information in the proxy is set forth under the heading "Securities
Ownership of Certain Beneficial Owners and Management." The proxy statement will
be filed with the Securities and Exchange Commission on or about January 31,
2005, and such information is incorporated by reference.

Item 12. Certain Relationships and Related Transactions
-------------------------------------------------------

Information relating to the business relationships and related transactions with
respect to the Company and certain Directors, executive officers, nominees for
election as Directors and beneficial owners of its securities is set forth in
the Company's definitive proxy statement relating to the Company's Annual
Meeting of Stockholders to be held on or about March 4, 2005. The proxy
statement will be filed with the Securities and Exchange Commission on or about
January 31, 2005, and such information is incorporated by reference.

Item 13. Exhibits and Reports on Form 8-K
-----------------------------------------

(a) Exhibits

31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes- Oxley Act of 2002

31.2 Certification of Chief Accounting Officer pursuant to Section
302 of the Sarbanes- Oxley Act of 2002

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley act of 2002.

32.2 Certification of Chief Accounting Officer pursuant to U. S. C.
section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley act of 2002.

(b) Form 8K -

On December 29, 2004, the Board of Directors of Micropac
Industries, Inc. approved the payment of a $.12 per share
dividend to all shareholders of record on January 25, 2005.
The dividend payment will be paid to shareholders on or about
February 8, 2005.

On January 8, 2004, the Board of Directors of Micropac
Industries, Inc. approved the payment of a special dividend of
$.05 per share to all shareholders of record on January 30,
2004. The dividend payment was paid to shareholders on
February 13, 2004.

At a Board of Directors meeting held on May 11, 2004, the
Board of Directors unanimously elected Mr. Nicholas Nadolsky
as a Member and Chairman of the Board, to serve in such
positions until the next annual meeting of shareholders or
until his earlier death, resignation or removal from office.
There is no employment agreement between Mr. Nadolsky and the
Company. Since 1980, the Company has leased a 4800 square foot
building from Mr. Nadolsky, at a current annual rental of
$39,600.

The Company submitted a FORM 8-K to the United States
Securities and Exchange Commission on August 27, 2003. The
following disclosure was included in the FORM 8-K: On August
27, 2003, the Company purchased 548,836 shares of the
Company's common stock pursuant to the terms of an agreement
dated February 5, 2001, between the Company and Mr. Nadolsky
("Agreement"). The Agreement obligated the Company to purchase
any shares of the Company's common stock owned by Mr. Nadolsky
at the fair market value thereof (but in no event less than
the book value of such shares) in the event of his death,
permanent disability or termination of employment. Mr.
Nadolsky's employment terminated on May 1, 2003.

By letter dated August 15, 2003, Mr. Nadolsky requested that
the Company purchase the 548,836 shares of the Company's
common stock he owned pursuant to the requirements of the
above agreement and agreed that the fair value of each share
of his common stock was $2.68. The Company paid Mr. Nadolsky a
total purchase price of $1,470,880.48.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

As of October 30, 2004, the Company carried out an evaluation,
under the supervision and with participation of the Company's
management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(e). Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material
information relating to the Company required to be included in
the Company's periodic SEC filings.

(b) Changes in internal controls.

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

MICROPAC INDUSTRIES, INC.

By:
-------------------------------
Connie Wood, President
and Chief Executive Officer
(Principal Executive Officer)

By:
-------------------------------
Patrick Cefalu, CFO and
Principal Accounting Officer

Dated: 01/31/2005

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on 01/31/2005

Connie Wood, Director H. Kent Hearn, Director
------------------------------ ------------------------------

James K. Murphey, Director Heinz-Werner Hempel, Director
------------------------------ ------------------------------

Nicholas Nadolsky, Director
------------------------------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Micropac Industries, Inc.:

We have audited the accompanying balance sheets of Micropac Industries, Inc. as
of November 30, 2004 and 2003, and the related statements of income,
shareholders' 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 Micropac Industries, Inc. as of
November 30, 2004 and 2003, and the results of its operations and its cash flows
for the years then ended in conformity with U.S. generally accepted accounting
principles.

KPMG LLP

Dallas, Texas,
January 20, 200

MICROPAC INDUSTRIES, INC.
-------------------------
BALANCE SHEETS
--------------
AS OF NOVEMBER 30, 2004 AND 2003
--------------------------------
(Dollars in thousands except share data)

ASSETS 2004 2003
------ -------- --------

CURRENT ASSETS:
Cash and cash equivalents $ 1,239 $ 2,337
Short-term investments 2,507 812
Receivables, net of allowance for doubtful accounts
of $121 for 2004 and $89 for 2003 2,326 1,877
Inventories
Raw materials and supplies 1,354 692
Work-in-process 1,346 1,097
-------- --------
Total inventories 2,700 1,789

Deferred income taxes 528 386
Prepaid expenses and other assets 90 71
-------- --------
Total current assets 9,390 7,272

PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land 80 80
Buildings 498 498
Facility improvements 796 797
Machinery and equipment 5,200 5,027
Furniture and fixtures 479 489
-------- --------
Total property, plant, and equipment 7,053 6,891
Less- accumulated depreciation (6,091) (5,889)
-------- --------
Net property, plant, and equipment 962 1,002
-------- --------

Total assets $ 10,352 $ 8,274
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES:
Accounts payable $ 387 $ 308
Accrued compensation 488 239
Accrued professional fees 11 23
Income taxes payable 306 110
Property taxes 66 65
Commissions payable 46 48
Deferred revenue 404 115
Other accrued liabilities 17 21
-------- --------
Total current liabilities 1,725 929

DEFERRED INCOME TAXES 72 69
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value, authorized 10,000,000 shares
3,078,315 issued 2,578,315 outstanding at November 30, 2004
and November 30, 2003 308 308
Paid-in capital 885 885
Treasury stock, at cost, 500,000 shares (1,250) (1,250)
Retained earnings 8,612 7,333
-------- --------
Total shareholders' equity 8,555 7,276
-------- --------
Total liabilities and shareholders' equity $ 10,352 $ 8,274
======== ========

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.
-------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED NOVEMBER 30, 2004 AND 2003
----------------------------------------------
(Dollars in thousands except share data)

2004 2003
----------- -----------

NET SALES $ 15,356 $ 12,490

COSTS AND EXPENSES:
Cost of sales 9,976 8,723
Research and development 438 303
Selling, general, and administrative expenses 2,709
----------- -----------
2,581

Total costs and expenses 13,123 11,607
----------- -----------

OPERATING INCOME BEFORE INTEREST AND INCOME TAXES 2,233 883

Interest income 32 50
----------- -----------

INCOME BEFORE INCOME TAXES 2,265 933

PROVISION (BENEFIT) FOR INCOME TAXES:
Current 996 387
Deferred (139) (65)
----------- -----------

Total provision for current and deferred taxes 857 322
----------- -----------

NET INCOME $ 1,408 $ 611
=========== ===========

BASIC AND DILUTED EARNINGS PER SHARE $ .55 $ .21
=========== ===========

WEIGHTED AVERAGE NUMBER OF SHARES, basic and diluted 2,578,315 2,944,206
=========== ===========

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.
-------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED NOVEMBER 30, 2004 AND 2003
----------------------------------------------
(Dollars in thousands)

Common Paid-in Treasury Retained
Stock Capital Stock Earnings Total
------- ------- ------- ------- -------

BALANCE, November 30, 2002 $ 363 $ 885 $(1,250) $ 8,450 $ 8,448

Common stock repurchase (55) -- -- (1,416) (1,471)
Dividend -- -- -- (312) (312)
Net income -- -- -- 611 611
------- ------- ------- ------- -------

BALANCE, November 30, 2003 308 885 (1,250) 7,333 7,276
------- ------- ------- ------- -------

Dividend -- -- -- (129) (129)
Net income -- -- -- 1,408 1,408
------- ------- ------- ------- -------

BALANCE, November 30, 2004 $ 308 $ 885 $(1,250) $ 8,612 $ 8,555
======= ======= ======= ======= =======

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.
-------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED NOVEMBER 30, 2004 AND 2003
----------------------------------------------
(Dollars in thousands)

2004 2003
------- -------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,408 $ 611
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 222 230
Deferred tax benefit (139) (65)
Changes in certain current assets and liabilities-
Increase in receivables, net (449) (76)
(Increase) decrease in inventories (911) 511
Increase in prepaid expenses and other assets (19) (15)
Increase (decrease) in accounts payable 79 (193)
Increase (decrease) in accrued compensation 249 (17)
Increase in income taxes payable 196 1
Increase (decrease) in all other accrued liabilities 272 (10)
------- -------

Net cash provided by operating activities 908 977

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Investments (1,695) (1,400)
Sale of Investments -- 3,428
Additions to property, plant, and equipment (182) (181)
------- -------
Net cash (used in) provided by investing activities (1,877) 1,847

CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock repurchase -- (1,471)
Dividends paid (129) (312)
------- -------

Net cash used in financing activities (129) (1,783)
------- -------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,098) 1,041

CASH AND CASH EQUIVALENTS, beginning of year 2,337 1,296
------- -------

CASH AND CASH EQUIVALENTS, end of year $ 1,239 $ 2,337
======= =======

SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for income taxes, net of refunds received $ 803 $ 386
======= =======

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.
-------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOVEMBER 30, 2004 AND 2003
--------------------------

1. BUSINESS DESCRIPTION:
------------------------------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
----------------------------------------------------

Revenue Recognition
-------------------

Revenues are recorded as deliveries are made based upon contract prices. Any
losses anticipated on fixed price contracts are provided for currently. Product
returns and warranties are accrued for when returned by the customer.

Short-Term Investments
----------------------

Short-term investments include certificates of deposits with maturities greater
than 90 days. These investments are reported at historical cost, which
approximates fair market value as of November 30, 2004 and 2003. All highly
liquid investments with maturities of 90 days or less are classified as cash
equivalents. All short-term investments are securities which the Company has the
ability and positive intent to hold to maturity. All held-to maturity securities
mature within one year.

Inventories
-----------

Inventories are stated at lower of cost or market value and include material,
labor and manufacturing overhead. All inventories are valued using the FIFO
(first-in, first-out) method of inventory valuation. The Company provides an
allowance for obsolete and overstocked inventory.

Income Taxes
------------

The Company accounts for income taxes using the asset and liability method.
Under this method the Company records deferred income taxes for the temporary
differences between the financial reporting basis and the tax basis of assets
and liabilities at enacted tax rates expected to be in effect when such amounts
are realized or settled. The resulting deferred tax liabilities and assets are
adjusted to reflect changes in tax law or rates in the period that includes the
enactment date.

Property, Plant, and Equipment
------------------------------

Property, plant, and equipment are carried at cost, and depreciation is provided
using the straight-line method at rates based upon the following estimated
useful lives (in years) of the assets:

Buildings................................................................15
Facility improvements..................................................8-15
Machinery and equipment................................................5-10
Furniture and fixtures..................................................5-8

The Company assesses long-lived assets for impairment under Financial Accounting
Standards board Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. When events or

circumstances indicate that an asset may be impaired, an assessment is
performed. The estimated future undiscounted cash flows associated with the
asset are compared to the asset's net book value to determine if a write down to
market value or discounted cash flow value is required. The Company adopted SFAS
144 on December 1, 2003. The adoption of SFAS 144 did not affect the Company's
financial statements.

Repairs and maintenance are charged against income when incurred. Improvements,
which extend the useful life of property, plant, and equipment are capitalized.

Research and Development Costs
------------------------------

Costs for the design and development of new products are expensed as incurred.

Comprehensive Income
--------------------

Comprehensive income includes net income and other comprehensive income which is
generally comprised of changes in the fair value of available-for-sale
marketable securities, foreign currency translation adjustments and adjustments
to recognise additional minimum pension liabilities. For each period presented
in the accompanying statement of income, comprehensive income and net income are
the same amount.

Basic and Diluted Earnings Per Share
------------------------------------

Basic and diluted earnings per share are computed based upon the weighted
average number of shares outstanding during the year. Diluted earnings per share
gives effect to all dilutive potential common shares. During 2004 and 2003, the
Company had no dilutive potential common stock.

Use of Estimates
----------------

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

3. NOTES PAYABLE TO BANKS:
--------------------------------

During fiscal 2004, the Company renewed an uncollateralized $3,000,000 line of
credit agreement with a bank. The interest rate is equal to the bank's prime
rate less 1/4%. The line of credit expires on June 7, 2005. The Company has not
utilized any portion of the available facility. The line of credit requires that
the Company maintain certain financial ratios. The Company was in compliance
with these covenants during the 2004 fiscal year.

4. RELATED PARTIES:
-------------------------

The Company leases a building from the Company's Chairman of the Board. A lease
was signed on July 1, 1999, for a term of five (5) years and renewed in April
2004 for three (3) years under similar terms and conditions as the prior lease.
Amounts paid under the lease agreement approximated $39,000 in 2004 and 2003.

Glast, Phillips & Murray, P.C. serves as the Company's legal counsel. Mr. James
K. Murphey, a director and member of the Company's audit committee, is a member
of Glast, Phillips & Murray, P.C.

Effective May 13, 2003, the Company's Board of Directors approved the formation
of an audit committee composed of the five (5) members of the Board. It is
possible that the members of the audit committee may resign from the committee
if future Securities and Exchange Commission rules establish a criteria that
such individuals are not independent due to their relationships with the
Company. The Board of Directors held eight (8) board meetings during the year
ended November 30, 2004. Directors receive a fee of $500.00 for each meeting.
The Audit Committee held four (4) meetings during the year ended November 30,
2004. Members of the Audit Committee received a fee of $500.00 for each meeting.

purchase any shares of the Company's common stock owned by Mr. Nadolsky at the
fair market value thereof (but in no event less than the book value of such
shares) in the event of his death, permanent disability or termination of
employment. Mr. Nadolsky's employment terminated on May 1, 2003. By letter dated
August 15, 2003, Mr. Nadolsky requested that the Company purchase the 548,836
shares of the Company's common stock he owned pursuant to the requirements of
the above agreement and agreed that the approximate fair value of each share of
his common stock was $2.68. The Company paid Mr. Nadolsky a total purchase price
of $1,470,880. These shares were subsequently retired.

5. PRODUCT WARRANTIES:
----------------------------

The Company records a reserve for product warranties based on known instances of
defects upon customer notification. The activity in the product liability
account is as follows:

Balance, November 30, 2003 $ 0
Expense for repaired product $ 33,600
Product warranty accruals $ 33,600
Balance, November 30, 2004 $ 0

6. LEASE COMMITMENTS:
---------------------------

Rent expenses for the years ended November 30, 2004 and 2003, was approximately
$45,000 and $42,000 respectively per year.

The Company's future minimum lease payments under non-cancelable operating
leases (including the related party lease described in note 4) for office and
manufacturing space with remaining terms in excess of one year are
approximately:

2005 $ 40,000
2006 $ 40,000
2007 $ 20,000
---------
Total $ 100,000

7. EMPLOYEE BENEFITS:
---------------------------

The Company sponsors an Employees' Profit Sharing Plan and Trust (the "Plan").
Pursuant to section 401(k) of the Internal Revenue Code, the Plan is available
to substantially all employees of the Company. Employee contributions to the
Plan are matched by the Company at amounts up to 6% of the participant's salary.
Contributions made by the Company were approximately $131,000 in 2004 and
$138,000 in 2003. Employees become vested in Company contributions at 20% after
two years, 40% after three years, 60% after four years, 80% after five years and
100% after six years. If the employee leaves the Company prior to being fully
vested, the unvested portion of the Company's contributions are forfeited and
such forfeitures are used to lower future Company contributions. The Company
does not offer other post retirement benefits to its employees at this time.

8. NEW ACCOUNTING STANDARDS
---------------------------------

None

9. INCOME TAXES:
----------------------

The income tax provision consisted of the following for the years ended November
30:

2004 2003
--------- ---------
Current Provision
Federal $ 854,000 $ 319,000
State 142,000 68,000
--------- ---------
996,000 387,000
Deferred Benefit
Federal (139,000) (65,000)
--------- ---------

Total $ 857,000 $ 322,000
========= =========

The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:

2004 2003
--------- ---------
Tax at 34% statutory rate $ 770,000 $ 317,000
State income taxes, net of federal benefit 82,000 45,000
Adjustment to prior year estimates 5,000 (40,000)
--------- ---------

Income tax provision $ 857,000 $ 322,000
========= =========

The components and changes in deferred tax assets and liabilities were as
follows:

November November
30, 2004 30, 2003
-------- --------
Current Deferred Taxes -
Allowance for doubtful accounts $ 45,000 $ 33,000
Inventory 280,000 267,000
Accrued liabilities and other 203,000 86,000
-------- --------
Net current deferred tax asset $528,000 $386,000
-------- --------

Non-current Deferred Taxes Liability
Depreciation and other $ 72,000 $ 69,000
-------- --------

Net deferred taxes $456,000 $317,000
======== ========

10. SIGNIFICANT CUSTOMER INFORMATION:
------------------------------------------

The Company's primary line of business relates to the design, manufacture, and
sale of hybrid microcircuits and optoelectronic components and assemblies. Sales
result primarily from subcontracts with customers for ultimate production and
delivery to the United States government. Sales to primary contractors for
defense and space related contracts accounted for 64% of total sales in 2004 and
62% of total sales in 2003. During 2004, two customers accounted for 8% and 10%
of the Company's sales compared to 11% and 7% for the year ended November 30,
2003.

11. SHAREHOLDERS' EQUITY:
------------------------------

On November 30, 2004, there were approximately 559 shareholders of record of the
Company's common stock. The stock of the Company is closely held; and,
therefore, certain shareholders/board members have the ability to significantly
influence decisions.

On January 8, 2004, the Board of Directors of Micropac Industries, Inc. approved
the payment of a special dividend of $0.05 per share for shareholders of record
as of January 30, 2004. This dividend was paid to the Company's shareholders on
February 13, 2004.

On August 27, 2003, the Company purchased 548,836 shares of the Company's common
stock pursuant to the terms of an agreement dated February 5, 2001, between the
Company and Mr. Nadolsky ("Agreement"). The Agreement obligated the Company to
purchase any shares of the Company's common stock owned by Mr. Nadolsky at the
fair market value thereof (but in no event less than the book value of such
shares) in the event of his death, permanent disability or termination of
employment. Mr. Nadolsky's employment terminated on May 1, 2003. By letter dated
August 15, 2003, Mr. Nadolsky requested that the Company purchase the 548,836
shares of the Company's common stock he owned pursuant to the requirements of
the above agreement and agreed that the fair value of each share of his common
stock was $2.68. The Company paid Mr. Nadolsky a total purchase price of
$1,470,880. These shares were subsequently retired.

On March 1, 2001, the Company's shareholders approved the 2001 Employee Stock
Option Plan (the "Stock Plan"). As of November 30, 2004, there were 500,000
options available to be granted; however, no options had been granted at
year-end.

12. SUBSEQUENT EVENTS
--------------------------

DIRECTORS AND OFFICERS
----------------------
NOVEMBER 30, 2004

NICHOLAS NADOLSKY
Chairman of the Board
Micropac Industries, Inc

CONNIE WOOD
Chief Executive Officer
Micropac Industries, Inc.

HEINZ-WERNER HEMPEL
Chief Operating Officer
Hanseatishe Waren Handelsgesellschaft MBH & Co. KG, Bremen, Germany

H. KENT HEARN
Stockbroker
Milkie-Ferguson, Dallas, Tx.

JAMES K. MURPHEY
Corporate Attorney
Glast, Phillips and Murray, Dallas, Tx.

PATRICK CEFALU
Chief Financial Officer
Micropac Industries, Inc.

MARK KING
Chief Operating Officer
Micropac Industries, Inc.

LEGAL COUNSEL TRANSFER AGENT & REGISTRAR
Glast, Phillips and Murray Securities Transfer
Dallas, Tx Frisco, Texas