SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 QSB
OMB Approval
OMB Number XXXX-XXXX
Expires Approval Pending
Estimated Average Burden Hours Per Response 1.0
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
for the Quarter Ended August 27, 2005
For the Transition Period from_________ to _________
Commission File Number 0-5109
MICROPAC INDUSTRIES, INC.
Delaware 75-1225149
------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
905 E. Walnut, Garland, Texas 75040
--------------------------------------- ------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (972) 272-3571
------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 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
------- -------
On August 27, 2005, 2,578,315 shares of Common Stock, $.10 par value were
outstanding.
MICROPAC INDUSTRIES, INC.
FORM 10-QSB
AUGUST 27, 2005
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Statements of Operations for the three nine months
ended August 27, 2005 and August 28, 2004
Condensed Balance Sheets as of August 27, 2005 and November
30, 2004
Condensed Statements of Cash Flows for the nine months ended
August 27, 2005 and August 28, 2004
Notes to Financial Statements
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 3- CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
ITEM 2 - CHANGES IN SECURITIES
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION
ITEM 6 - 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) Reports on Form 8-K
SIGNATURES
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MICROPAC INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands except share data)
(Unaudited)
Statement of Operations Statement of Operations
For three months ended Year-to-date
08/27/05 08/28/04 08/27/05 08/28/04
----------- ----------- ----------- -----------
NET SALES $ 4,828 $ 4,242 $ 13,831 $ 11,411
COST AND EXPENSES:
Cost of goods sold (3,063) (2,937) (8,419) (7,720)
Research and development (101) (127) (392) (231)
Selling, general & administrative expenses (768) (685) (2,340) (1,971)
----------- ----------- ----------- -----------
Total cost and expenses (3,932) (3,749) (11,151) (9,922)
----------- ----------- ----------- -----------
OPERATING INCOME BEFORE INTEREST 896 493 2,680 1,489
AND INCOME TAXES
Interest income 20 9 54 19
----------- ----------- ----------- -----------
INCOME BEFORE TAXES $ 916 $ 502 $ 2,734 $ 1,508
Provision for taxes (348) (191) (1,039) (573)
----------- ----------- ----------- -----------
NET INCOME $ 568 $ 311 $ 1,695 $ 935
=========== =========== =========== ===========
NET INCOME PER SHARE, BASIC AND DILUTED $ 0.22 $ 0.12 $ 0.66 $ 0.36
DIVIDENDS PER SHARE $ 0.00 $ 0.00 $ 0.12 $ 0.05
WEIGHTED AVERAGE OF SHARES, Basic and diluted 2,578,315 2,578,315 2,578,315 2,578,315
These statements reflect all adjustments which, in the opinion of management,
are necessary for fair statement of the results for the interim period.
3
MICROPAC INDUSTRIES, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
ASSETS
CURRENT ASSETS 8/27/05 11/30/04
-------- --------
Cash and cash equivalents $ 1,042 $ 1,239
Short term investments 2,632 2,507
Receivables, net of allowance for doubtful accounts of $122 on 2,706 2,326
August 27, 2005 and $121 on November 30, 2004
Inventories:
Raw materials 1,669 1,354
Work-in-process 1,711 1,346
-------- --------
Total inventories 3,380 2,700
Prepaid expenses and other current assets 110 90
Deferred income tax 528 528
-------- --------
Total current assets 10,398 9,390
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 80 80
Buildings 498 498
Facility improvements 796 796
Machinery and equipment 5,649 5,200
Furniture and fixtures 488 479
-------- --------
Total property, plant, and equipment 7,511 7,053
Less accumulated depreciation (6,273) (6,091)
-------- --------
Net property, plant, and equipment 1,238 962
-------- --------
Total assets $ 11,636 $ 10,352
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 525 $ 387
Accrued compensation 374 488
Other accrued liabilities 226 140
Deferred revenue 414 404
Income taxes payable 85 306
-------- --------
Total current liabilities 1,624 1,725
-------- --------
DEFERRED INCOME TAXES 72 72
SHAREHOLDERS' EQUITY
Common stock, ($.10 par value), authorized 10,000,000 shares, 308 308
3,078,315 issued 2,578,315 outstanding at August 27, 2005
and November 30, 2004
Paid-in capital 885 885
Treasury stock, 500,000 shares, at cost (1,250) (1,250)
Retained earnings 9,997 8,612
-------- --------
Total shareholders' equity 9,940 8,555
-------- --------
Total liabilities and shareholders' equity $ 11,636 $ 10,352
======== ========
These statements reflect all adjustments which, in the opinion of management,
are necessary for fair statement of the results for the interim period.
4
MICROPAC INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months ended
08/27/05 08/28/04
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,695 $ 935
Adjustments to reconcile net income to
cash from operating activities:
Depreciation and amortization 181 164
Changes in current assets and liabilities:
Increase in accounts receivable (380) (320)
Increase in inventories (680) (648)
Increase in prepaid expenses and other current assets (20) (14)
Decrease in income taxes, prepaid and deferred (221) (55)
Increase in accounts payable 138 239
(Decrease) increase in accrued compensation (114) 31
Increase in other accrued liabilities and
deferred revenue 96 173
-------- --------
Net cash provided by operating activities 695 505
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments (125) (1,094)
Additions to property, plant and equipment (457) (132)
-------- --------
Net cash used in investing activities (582) (1,226)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividend (310) (129)
-------- --------
Net cash used in financing activities (310) (129)
-------- --------
Net change in cash and cash equivalents (197) (850)
Cash and cash equivalents at beginning of period 1,239 2,337
-------- --------
Cash and cash equivalents at end of period $ 1,042 $ 1,487
======== ========
Supplemental Cash Flow Disclosure:
Cash paid for income taxes $ 1,260 $ 633
======== ========
These statements reflect all adjustments, which, in the opinion of management,
are necessary for fair statement of the results for the interim period.
5
MICROPAC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1
In the opinion of management, the unaudited consolidated financial statements
include all adjustments (consisting of only normal, recurring adjustments)
necessary to present fairly the financial position as of August 27, 2005, the
cash flows for the nine months ended August 27, 2005 and August 28, 2004, and
the results of operations for the three and nine months ended August 27, 2005
and August 28, 2004. Unaudited financial statements are prepared on a basis
substantially consistent with those audited for the year ended November 30,
2004. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles in the United States have been condensed or omitted pursuant to the
rules and regulations promulgated by the Securities and Exchange Commission.
However, management believes that the disclosures contained are adequate to make
the information presented not misleading.
Note 2
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 sales and expenses during the reporting
period. Actual results could differ from those estimates.
Note 3
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 was paid to shareholders on February 8, 2005.
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.
Note 4
On March 1, 2001, the Company's shareholders approved the 2001 Employee Stock
Option Plan (the "Stock Plan"). As of August 27, 2005 there were 500,000 options
available to be granted. No options have been granted to date.
Note 5
On June 1, 2005 the Company renewed an uncollateralized $3,000,000 line of
credit agreement with a bank. The interest rate is equal to the prime rate less
1/4%. The line of credit requires that the Company maintain certain financial
ratios. The financial covenants require the Company to maintain a quick ratio of
at least 1:1, maintain a tangible net worth of $6,250,000 plus 75% of future net
income, and maintain a total liabilities to tangible net worth of less than
1.25:1. The Company is in compliance with these covenants. The Company has not,
to date, used any of the available line of credit.
Note 6
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. For the nine months ended
August 27, 2005 and August 28, 2004, the Company had no dilutive potential
common stock.
Note 7
Effective May 1, 2004, the Company and Ms. Wood, Chief Executive Officer and
President of the Company entered into a three (3) year employment agreement at a
base salary of $180,000 per annum.
Effective February 1, 2004, the Company and Mr. King, Chief Operating Officer
and Vice President of the Company entered into a two (2) year employment
agreement at a base salary of $150,000 per annum.
6
Effective February 1, 2004, the Company and Mr. Cefalu, Chief Financial Officer
and Vice President of the Company entered into a two (2) year employment
agreement at a base salary of $82,000 per annum.
Note 8
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.
.
7
MICROPAC INDUSTRIES, INC.
(Unaudited)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Business
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 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.
Results of Operations
Three months ended Year to Date
8/27/2005 8/28/2004 8/27/2005 8/28/2004
--------- --------- --------- ---------
NET SALES 100.00% 100.00% 100.00% 100.00%
COST AND EXPENSES:
Cost of goods sold 63.50% 69.24% 60.90% 67.66%
Research and development 2.10% 2.99% 2.80% 2.02%
Selling, general & administrative expenses 15.90% 16.15% 16.90% 17.27%
--------- --------- --------- ---------
Total cost and expenses 81.50% 88.38% 80.60% 86.95%
OPERATING INCOME BEFORE INTEREST 18.50% 11.62% 19.40% 13.05%
AND INCOME TAXES
Interest income 0.50% 0.21% 0.40% 0.17%
INCOME BEFORE TAXES 19.00% 11.83% 19.80% 13.22%
Provision for taxes 7.20% 4.50% 7.50% 5.02%
NET INCOME 11.80% 7.33% 12.30% 8.20%
Sales for the third quarter and the nine months ended August 27, 2005 totaled
$4,828,000 and $13,831,000, respectively. Sales for the third quarter increased
13.9% or $586,000 above sales for the same period of 2004, while sales for the
nine months of 2005 increased 21.2% or $2,420,000 above the first nine months of
2004. Sales increased 3% in the commercial market, 44% in the military market,
and 3% in the space market for the nine months ending August 27, 2005. The
increase in sales is primarily attributable to continued improved business
conditions in the Company's major market segments. Increased sales from the
introduction of new solid state power controller products and standard solid
state relays, combined with new custom optoelectronic assemblies and increased
requirements for standard optocouplers have improved the Company's performance
in the first nine months of 2005. Sales year to date were 33% in the commercial
market, 56% in the military market, and 11% in the space market compared to 39%
in the commercial market, 48% in the military market, and 14% in the space
market for the same period of 2004.
While sales in the fourth quarter are expected to increase over third quarter
sales, first quarter 2006 sales are expected to decrease due to completion of
significant contracts for custom optoelectronics assemblies and microcircuits
supplied to semiconductor equipment manufacturers.
8
Cost of goods sold for the third quarter 2005 versus 2004 totaled 63.50% and
69.30% of net sales, respectively, while cost of goods sold for the nine months
of the comparable period totaled 60.90% and 67.70%, respectively. The comparable
nine months cost of goods sold decrease as a percentage of net sales of 6.80% is
attributable to continued higher sales volume, changes in product mix, yield
improvements on certain standard optoelectronic products, combined with stable
fixed cost. As a percent of sales, material cost decreased .4%, overhead cost
decreased 2.8%, labor cost decreased 2.7%, and cost for obsolescence and
reserves decreased .9%.
Selling, general and administrative expenses for the third quarter and first
nine months of 2005 totaled 15.90% and 16.90% of net sales, respectively,
compared to 16.10% and 17.30% for the same period in 2004. In actual dollars
expensed, selling, general and administrative expenses increased $83,000 in the
third quarter of 2005, compared to 2004, and increased $369,000 for the first
nine months of 2005, versus 2004, attributable to increased commission on higher
sales volume, increased travel expenses, and higher expenses associated with
preparation for future Sarbanes-Oxley section 404 compliance.
Net income for the third quarter and year to date 2005 totaled $568,000 and
$1,695,000, respectively, compared to $311,000 and $935,000 for the comparable
periods in 2004. Net income per share totaled $.66 and $.36 for the comparable
nine months of 2005 and 2004, respectively. The increase in net income is
associated with higher sales, lower cost as a percent of sales, and continued
control of overhead and general and administrative expenses. Sales to one
customer for custom optoelectronics assemblies accounted for 65% of the increase
in net income. Based on completion of this contract , and lower anticipated
sales in the early part of 2006, net income is expected to decrease.
Total assets increased $1,284,000 to $11,636,000 as of August 27, 2005 from
$10,352,000 as of November 30, 2004 with a decrease in cash and short-term
investments of $72,000, inventory increase of $680,000, accounts receivable
increase of $380,000, increase in prepaid expense of $20,000, and an increase in
net property, plant, and equipment of $276,000.
Accounts receivable, net totaled $2,706,000 as of August 27, 2005 and represents
an increase of $380,000 since November 30, 2004, due to increased sales.
Inventories totaled $3,380,000 at the end of the third quarter 2005 compared to
$2,700,000 on November 30, 2004, an increase of $680,000. Raw materials
inventories increased $315,000 since November 30, 2004, while work-in-process
inventories increased $365,000. The increase in raw materials is attributable to
the purchase and receipt of long lead-time material and an increase of piece
parts to support the higher sales volume.
Current liabilities totaled $1,624,000 on August 27, 2005 representing a
decrease of $101,000 from November 30, 2004; primarily associated with an
increase in accounts payable of $138,000 due to increased materials purchases to
support the higher sales volume, a decrease of $114,000 in accrued payroll, a
reduction of $221,000 in provision for income taxes, an increase in deferred
revenue of $10,000 based on higher reserves associated with advance payments
from customers, and an increase of $86,000 in other accrued liabilities.
Shareholders' equity increased $1,385,000 in the first nine months of 2005.
Earnings per share for the nine month period totaled $.66 per share.
Liquidity and Capital Resources
-------------------------------
Cash and short-term investments as of August 27, 2005 totaled $3,674,000
compared to $3,746,000 on November 30, 2004, a decrease of $72,000. Cash flow
from operations was $695,000 for the first nine months offset by a cash dividend
of $310,000 and $457,000 invested in automated production and test equipment,
and $125,000 invested in short term investments.
As of August 27, 2005 cash flows from operating activities were $695,000
compared to $505,000 as of August 28, 2004.
Capital expenditures through the third quarter of 2005 totaled $457,000 compared
to $132,000 as of August 28, 2004. These purchases were financed internally with
the Company's cash, and included automated production and test equipment.
A special cash dividend of $310,000 was paid on February 8, 2005 to all
shareholders of record.
On June 1, 2005 the Company renewed an uncollateralized $3,000,000 line of
credit agreement with a bank. The interest rate is equal to the prime rate less
1/4%. The line of credit requires that the Company maintain certain financial
ratios. The financial covenants require the Company to maintain a quick ratio of
at least 1:1, maintain a tangible net worth of $6,250,000 plus 75% of future net
income, and maintain a total liabilities to tangible net worth of less than
1.25:1. The Company is in compliance with these covenants. The Company has not,
to date, used any of the available line of credit.
The Company expects to generate adequate amounts of cash from the sale of
products and services and the collection thereof to meet its liquidity needs.
9
Outlook
-------
New orders for the third quarter and year-to-date 2005 totaled $5,527,000 and
$14,676,000, respectively, compared to $5,158,000 and $15,456,000 for the
comparable periods of 2004 or an increase of 7.2% and a decrease of 5.1%
respectively.
The Company's major new orders received in the third quarter of 2005 were
$500,000 for custom design assemblies and $400,000 for microcircuits for
industrial applications, $1,700,000 for custom and new standard solid state
relays and solid state power controller products for military and space
applications and $900,000 for standard optoelectronics products sold through
distribution channels.
The major year to date decrease was reduced customer nonrecurring engineering
funding releases of approximately $1,000,000 and a reduction of $2,400,000 in
new orders from one customer in the industrial semiconductor business offset by
new orders of $1,700,000 for a new custom optoelectronic assembly for an
existing customer, $700,000 from one medical device company and new orders for
custom and new standard products for military and space applications totaling
$2,100,0000.
Backlog totaled $10,044,000 on August 27, 2005 compared to $7,809,000 as of
August 28, 2004 and $9,292,000 on November 30, 2004. The majority of the backlog
is expected to be shipped in the next twelve (12) months and represents a good
mix of the company's products and technologies with 11% in the commercial
market, 57% in the military market, and 32% in the space market.
The Company cannot assure that the results of operations for the interim period
presented are indicative of total results for the entire year due to
fluctuations in customer delivery schedules, or other factors over which the
Company has no control.
Cautionary Statement
This Form 10-QSB contains forward-looking statements that are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Actual results could differ materially. Investors are warned that
forward-looking statements involve risks and unknown factors including, but not
limited to, customer cancellation or rescheduling of orders, problems affecting
delivery of vendor-supplied raw materials and components, unanticipated
manufacturing problems and availability of direct labor resources.
Such risks and uncertainties include, but are not limited to historical
volatility and cyclicality of the semiconductor and semiconductor capital
equipment markets that are subject to significant and often rapid increases and
decreases in demand. In addition, the Company produces silicon phototransistors
and light emitting diode die for use in certain military, standard and custom
products. Fabrication efforts sometimes may not result in successful results,
limiting the availability of these components. Competitors offer commercial
level alternatives and our customers may purchase our competitors' products if
the Company is not able to manufacture the products using these technologies to
meet the customer demands. Approximately $1,740,000 of the Company's backlog is
dependent on these semiconductors.
The Company disclaims any responsibility to update the forward-looking
statements contained herein, except as may be required by law.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Chief Executive Officer and Chief Financial Officer of the Company
evaluated the Company's disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15 (e) as of August 27, 2005 and, based on
this evaluation, concluded that the Company's disclosure controls and
procedures are functioning in an effective manner to ensure that the
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act, is recorded,
processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. .
(b) Changes in internal controls.
There has been no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over
financial reporting.
10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company is not involved in any material current or pending legal
proceedings.
ITEM 2. CHANGES IN SECURITIES
---------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
ITEM 5. OTHER INFORMATION
-----------------
None
ITEM 6. 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) Reports on Form 8-K
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. This dividend was paid to
shareholders on February 8, 2005.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
MICROPAC INDUSTRIES, INC.
October 11, 2005 /s/ Connie Wood
Date -----------------------
Connie Wood
Chief Executive Officer
October 11, 2005 /s/ Patrick Cefalu
Date -----------------------
Patrick Cefalu
Chief Financial Officer
11