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EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - MICROPAC INDUSTRIES INCmicropac322.htm
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - MICROPAC INDUSTRIES INCmicropac321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES - MICROPAC INDUSTRIES INCmicropac312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES - MICROPAC INDUSTRIES INCmicropac311.htm

United States Securities and Exchange Commission

WASHINGTON, D.C. 20549

 

FORM 10-K

 

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended November 30, 2019
or
[  ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ___________to ___________
 

Commission file number 000-5109

 

Micropac Industries, Inc.

(Exact name of registrant as specified in charter)

 

Delaware       75-1225149
(State or other jurisdiction of incorporation or organization)       (I.R.S. Employer Identification No.)
         
905 E. Walnut Street, Garland, TX   75040   972/272-3571
(Address of principal executive offices)   (Zip Code)   (Telephone No.)
         
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class   Name of each exchange on which registered
None   N/A

 

Securities Registered Pursuant to Section 12(g) of the Act:
Common stock, par value $0.10 per share
(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] 

Smaller reporting company [X]

Emerging growth company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of May 25, 2019 representing the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $5,688,000, The number of shares of the registrant’s common stock, $0.10 par value, outstanding as of February 10, 2020 was 2,578,315.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The definitive proxy statement to be filed with the Securities and Exchange Commission relating to the registrant’s Annual Meeting of Shareholders, to be held March 12, 2020 is incorporated by reference in Part III to the extent described therein.

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Table of Contents

 

    Page
Part I  
Item 1. Business 3
Item 1A. Risk Factors 5
Item 1B. Unresolved Staff Comments 8
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Mine Safety Disclosure 9
   
Part II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities             9 
     
Item 6. Selected Financial Data 10
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 15
Item 8. Financial Statements and Supplementary Data

15

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

27
Item 9A. Controls and Procedures 27
Item 9B. Other Information 25
   
Part III  
     
Item 10. Directors, Executive Officers and Corporate Governance 29
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters            33
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 33
Item 14. Principal Accountant Fees and Services 34
   
Part IV  
     
Item 15. Exhibits, Financial Statement Schedules 34
Item 16. Form 10K Summary 34
  Signatures 35

 

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PART I

 

 

Item 1. Business

 

INTRODUCTION

 

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

 

The Company’s facilities are certified and qualified by the Defense Logistics Agency (DLA) to MIL-PRF-38534 (class K-space level) and MIL-PRF-19500 JANS (space level) and are certified to ISO 9001:2008 and AS 9100D. Micropac is a National Aeronautics and Space Administration (NASA) core supplier, and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company has Underwriters Laboratories (UL) approval on our industrial power controllers.

 

The Company’s core technology is microelectronic and optoelectronic designs to include the packaging and interconnecting of multi-chip microelectronics modules. Other technologies include light emitting and light sensitive materials and products, including light emitting diodes and silicon phototransistors, and electronic integration used in the Company’s optoelectronic components and assemblies.

 

The business of the Company 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 441 shareholders on November 30, 2019.

 

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. Custom-designed components and assemblies accounted for approximately 42% of the Company’s sales for the fiscal year ended November 30, 2019, and were 44% for fiscal 2018. Standard components and assemblies accounted for approximately 58% of the Company’s sales for the fiscal year ended November 30, 2019, and were 56% for fiscal 2018.

 

The Company provides microelectronics, sensors and displays, and optoelectronics products, to include components and assemblies that offer a wide range of products sold to the industrial, medical, military, aerospace and space markets.

 

The microelectronic technologies, including custom microcircuits, solid state relays, power operational amplifiers, and regulators accounted for 32% of the Company’s business in 2019 compared to 26% in 2018. Sensors and displays accounted for 43% of the Company’s business and the optocouplers product accounted for 25% of the Company’s business in 2019, compared to 48% and 26% in 2018, respectively.

 

The Company’s basic products and technologies include:

 

·Custom design hybrid microelectronic circuits
·Solid state relays and power controllers
·Custom optoelectronic assemblies and components
·Optocouplers
·Light-emitting diodes
·Hall-Effect sensors
·Displays
·Power operational amplifiers
·Fiber optic components and assemblies
·High temperature (200º C) products
·Radiation tolerant electronics

 

Micropac’s products are primarily sold to original equipment manufacturers (OEM’s) who serve the following major markets:

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·Military/Aerospace – aircraft instrumentation, guidance and navigation systems, control circuitry, power supplies, laser positioning
·Medical – optoelectronic sensors and electronics
·Space – control circuitry, power monitoring and sensing
·Industrial – power control equipment, robotics

 

The Company has two patents. The Company has no licenses, franchises or labor contracts. The Company’s trademark “Mii” is registered with the U.S. Patent and Trademark Office.

 

Sales of our products internationally are subject to government regulations, including export control regulations of the U.S. Department of State and Department of Commerce. Violation of these regulations by the Company could result in monetary penalties and denial of export privileges. The Company is not aware of any violations of export control regulations or similar applicable government regulations.

 

Five of the Company’s principal product families require government approval. Further, a significant portion of our business is military and is dependent on maintaining our facility certifications to MIL-PRF-38534 and MIL-PRF-19500. In addition, several customers require the Company maintain AS 9100 certifications. We expect to maintain these certifications and qualifications; however, the loss of any of these certifications would have a significant negative impact on our business.

 

Government regulations impose certain controls on chemicals used in electronics and semiconductor manufacturing. Micropac has obtained appropriate environmental permits, and routinely monitors and reports the wastewater stream results to the local governing agency. Micropac is classified as a small generator of hazardous waste, and the annual cost of complying with the regulations is minimal.

 

In 2019, the Company’s investment in technology through research and development, which was expensed, totaled approximately $1,707,000 ($1,271,000 in 2018). The Company’s research and development expenditures were directed primarily toward standard proprietary microelectronic products, including industrial power controllers and DC-DC converters, fiber optic transceivers, high voltage optocouplers and continued product development and improvement associated with the Company’s space level and other high reliability products.

 

In addition to the Company’s investment in research and development, various customers paid the Company approximately $2,326,000 in non-recurring engineering revenue with $1,716,000 recorded within cost of goods sold associated with the development of custom products for specific applications.

 

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.

 

CUSTOMERS

 

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 11% of the sales for fiscal year 2019 (10% in 2018) 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.

 

Sales through the Company’s distribution channels were $8,507,000 in 2019 compared to $5,396,000 in 2018, or 33% and 26% of sales, respectively.

 

The Company’s major customers include contractors to the United States government. Sales to these customers for the Department of Defense (DOD) and NASA contracts accounted for approximately 59% of the Company’s revenues in 2019 compared to 62% in 2018.

 

The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies, Raytheon, Boeing and L-3Harris Technologies. One customer accounted for 20% of the Company’s sales during 2019 and three customers accounted for 14%, 13% and 10% of the Company’s sales during 2018.

 

BACKLOG

 

At November 30, 2019, the Company had a backlog of unfilled orders totaling approximately $22,021,000 compared to approximately $17,132,000 at November 30, 2018. The Company expects to complete and ship the majority of its November 30, 2019 backlog during fiscal 2020.

 

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EMPLOYEES

 

At November 30, 2019, the Company had 132 full-time employees (compared to 123 at November 30, 2018), of which 14 were executive and managerial employees, 35 were engineers and quality-control personnel, 14 were clerical and administrative employees, and 69 were production personnel. None of the Company’s employees are 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, veterans, and handicapped individuals.

 

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 with regard to our product reliability and integrity, past performance, customer service and responsiveness, timely delivery and pricing; however, no assurance can be given that the Company can compete successfully in the future.

 

There are approximately 47 independent manufacturing companies who are certified to supply microcircuits to MIL-PRF-38534 or supply semiconductors to MIL-PRF-19500, in addition to OEM’s, who manufacture hybrid microcircuits for their internal needs. Micropac may compete with all of these for hybrid microcircuit, power management and optoelectronics business. Some of the Company’s primary competitors are Anaren Microwave, Broadcom Inc., Cobham Advanced Electronic Solutions, and Infineon Technologies.

 

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 and could result in loss of customers or sales. However, the Company has not been materially affected by such shortages. 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. The Company’s delivery commitments to customers allow for adequate lead times for production of the products including lead time for order and receipt from the supply chain.

 

Some of the Company’s primary suppliers are NTK Technologies, Cirexx International, Schott Electronic Packaging, Semi-Dice, Micross Components, and Materion Advanced Materials.

 

Item 1A. Risk Factors

This annual report on Form 10-K contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, but are 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. The risks and uncertainties described below are not the only risks and uncertainties we face. There may be risks and uncertainties not presently known to us or that we do not deem material at this time.

 

The Company disclaims any responsibility to update the forward-looking statements contained herein, except as may be required by law.

 

Fabrication efforts may not be successful

 

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.

 

5 
 

Majority shareholder ability to control the election of the Board of Directors

 

The Company’s majority shareholder, Mr. Heinz-Werner Hempel, established a partnership organized under the laws of Germany, which owns 1,952,577 shares or 75.7% of the outstanding voting shares. Mr. Hempel, through the partnership, has the ability to control the election of the Company’s Board of Directors and elect individuals who may be more attuned to such majority shareholder’s vision for the Company and not necessarily to those of minority shareholders as to the policies and directions of the Company. However, the ability to control the election of the Board of Directors does not modify the fiduciary duties of the Board of Directors to represent the interests of all shareholders.

 

There are limited shares for purchase and sale

 

A small number of shares are available for public purchase and sale. The Company’s reported share price may be subject to extreme fluctuations, or one or a few trades may determine the reported market price, due in part to the small number of shares traded at any time.

 

We experience pricing pressures from customers for reduction in selling prices

 

The Company continues to experience pricing pressures from some of its OEM customers. In some cases, the Company’s customers request the review of pricing for possible reduction in selling price on future orders. This requires the Company to improve its productivity and to request similar price reductions from its supplier chain. If one or both of the approaches by the Company does not succeed, the Company could be required to reduce the selling price on future orders, reducing the product gross margins and affecting the Company’s net earnings in order to receive future orders from the customer. However, the Company has no agreement that requires a reduction in the selling price on any current customer order. All contracts are firm fixed pricing.

 

We are subject to cybersecurity risks

 

Cybersecurity risks and attacks continue to grow. Cybersecurity attacks are evolving and not always predictable. Attacks include malicious software, threats to information technology infrastructure, denial-of-service attacks on websites, attempts to gain unauthorized access to data, and other breaches. Data breaches can originate with authorized or unauthorized persons. Authorized persons could inadvertently or intentionally release confidential or proprietary information, and recipients could misuse data. Such events could lead to interruption of our operations or business, unauthorized release or use of information, compromise of data, damage to our reputation, damage to our customers or vendors, and increased costs to prevent, respond to or mitigate any events.

 

Insurance coverage and exposure to substantial claims or liabilities

 

The Company operates manufacturing facilities in Garland, Texas and subcontracts portions of the Company’s manufacturing to a contract manufacturer in 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 Garland, Texas and for equipment and inventory located at the contract manufacturer in Juarez, Mexico. In addition to the basic policies mentioned, the Company maintains an umbrella insurance policy. The Company reviews all insurance coverage on an annual basis, and makes any necessary adjustments based on risk assessment and changes in its business. In the opinion of the Company’s management, and its insurance advisors, the Company is adequately insured; however, 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 increasingly stringent environmental laws and regulations, including those relating to air emissions, wastewater discharges, chemical and hazardous waste management and disposal. Some of these environmental laws hold owners or operators of land or businesses liable for their own and for previous owners’ or operators’ releases of hazardous or toxic substances or wastes. Other environmental laws and regulations require that we obtain and comply with environmental permits. To date, costs of complying with environmental requirements have not been material. Future events, including those relating to climate change or greenhouse gas emissions, could require the Company to incur expenses related to installation of pollution control equipment, or investigation and cleanup of contaminated sites. If the Company fails to comply with environmental laws and regulations, the Company could be subject to significant liabilities or be required to curtail or cease its manufacturing activities. Changes in environmental laws or regulations could affect the cost of the Company’s products and make it hard for the Company to be competitive with larger companies.

6 
 

The Company is heavily dependent on a few major customers

 

The Company’s major customers include contractors to the United States government. Sales to these customers for DOD and NASA contracts accounted for approximately 59% of the Company’s revenues in 2019 compared to 62% in 2018. The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies, Raytheon, Boeing and L-3Harris Technologies. One customer accounted for 20% of the Company’s sales during 2019 and three customers accounted for 14%, 13% and 10% of the Company’s sales during 2018. The contracts of our customers with the United States government may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government, which would in turn might materially affect the Company’s sales. The loss of any one of these customers or a significant reduction in their purchases would be likely to adversely affect our business.

 

Reductions or changes in U.S. government spending

 

The loss or significant reduction of a U.S. government or NASA program in which our major customers participate could adversely affect our business. U.S. government contracts generally are conditioned on the continuing availability of Congressional appropriations. Congress usually appropriates funds for on-going programs on a fiscal year basis even though contract performance may extend over many years. At the beginning of a major program, the contract is often only partially funded, and additional monies are committed only as Congress makes appropriations in future fiscal years. In addition, most U.S. government contracts are subject to modification if funding is changed. Key programs in which our customers participate must compete with other programs for consideration during the federal budgeting and appropriation process, and support and funding for any U.S. government program may be influenced by general economic conditions, political considerations and other factors. A decline in support and funding for programs in which our customers participate could result in contract terminations, delays in contract awards, failure to extend contracts, cancellation of planned procurements and fewer new business opportunities for our customers. Our business may be adversely affected as a result of changes or reductions in U.S. government or NASA spending.

 

We are significantly affected by 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 in trade agreements or taxes on imports or exports could adversely affect our operations or financial condition.

 

Sales of our products internationally are subject to government regulations, including export control regulations of the U.S. Department of State and Department of Commerce. Changes in these regulations could adversely affect our business. Violation of these regulations by the Company could result in monetary penalties and denial of export privileges.

 

The Company is subject to the Foreign Corrupt Practices Act (FCPA), which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business.  Any violation of the FCPA or similar laws and regulations could result in significant expenses, divert management attention, have a material adverse effect on our business, our financial condition and our results of operations and otherwise have a negative impact on the Company and its reputation.

 

We may incur product liability claims

 

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 significant product liability claims, the risk of such claims continues. Product liability claims brought against the Company could have a material adverse effect on the Company’s operating results and financial condition.

 

Our products may have errors or defects that we find only after deployment

 

Our products are complex, designed to be incorporated in sophisticated applications, and may contain undetected defects, errors, or failures. Although our products are generally tested during manufacturing, prior to shipping, they may contain defects that are discovered only after the products are incorporated in customer applications. The occurrence of any defects, errors, or failures could result in installation delays, product returns, termination of contracts with our customers, diversion of our resources, increased service and warranty costs, and other losses to our customers, their end users, or to us. Any of these occurrences could also result in the loss of customers, and could damage our reputation, which could reduce our sales. In addition to the risk of unanticipated warranty or recall expenses, our customer contracts may contain provisions that could cause us to incur penalties, be liable for damages, or incur other expenses, if we experience difficulties with respect to the functionality, deployment, operation, and availability of our products and services.

7 
 

Component shortages from suppliers could affect ability to manufacture products or delay shipments to customers

 

The Company relies on suppliers to deliver quality raw materials in a timely and cost-effective manner. Most of the materials and components are generally available from multiple sources; however, from time to time vendors do not deliver the product as needed due to manufacturing problems or a decision to discontinue that product. Such interruption of supply or price increases could have a material adverse effect on the Company’s operations; however, the Company is not currently impacted by material shortages.

 

We must maintain the ability to enhance our products and develop new products for the military, space or aerospace markets

 

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. Our future success may, however, depend in part on our ability to enhance the functionality of our existing products in a timely and cost-effective manner, our ability to continue close working relationships with major customers for the design of their new products, and our ability to develop new products and technologies for existing and emerging markets. We must also continue to make significant investments in research and development efforts in order to meet customer specifications for specially fabricated products. We may not be able to retain or obtain engineers, or other technical support staff, to conduct our research and development efforts as needed. 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 our customers’ requirements and to our competitors’ progress in technological changes could have a material adverse effect on the Company’s business.

 

The Company has potential warranty obligations

 

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. An unexpected number of warranty claims could negatively impact the profitability of the Company.

 

The Company may default on its line of credit

 

The Company currently has an existing line of credit with a Texas banking institution. In connection therewith, the Company is obligated to maintain certain minimum financial requirements in order to receive advances therefrom. The Company is currently in compliance with such financial requirements, but there is no guarantee that the Company will remain in compliance. If the Company does not maintain compliance with each of the requirements, its ability to receive advances from the line of credit will be impaired.

 

 

Item 1B. Unresolved Staff Comments

None.

 

 

Item 2. Properties

The Company occupies approximately 37,000 square feet of manufacturing, engineering and office space in Garland, Texas. The Company owns 32,200 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.

 

In addition, the Company purchased 9.2 acres of land in Garland, Texas for $1,438,000. With the purchase of this tract of land, it is the intent of the Company to consolidate the three existing buildings into a new manufacturing center in the future.

The Company also subcontracts some manufacturing to Inmobiliaria San Jose De Ciuddad Juarez S.A. DE C.V., a maquila contract manufacturer in Juarez, Mexico. The Company owns all equipment and inventory with temporary importation into Mexico under the maquila rules of Mexico. The Company does not lease or own any real property in Mexico.

 

The Company employs a sales team in Bremen, Germany who coordinates sales to Western European customers made by independent representatives. The sales manager maintains an office in a private residence. The Company does not lease or own any real property in Germany, or any other foreign country.

8 
 

 

Item 3. Legal Proceedings

 

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

 

 

Item 4. Mine Safety Disclosure

None.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information, Holders and Dividends

 

On February 4, 2020, there were 440 shareholders of record of the Company’s common stock. The stock of the Company is closely held; and, therefore, certain shareholders have the ability to significantly influence decisions. The Company’s common stock is quoted on the OTC Bulletin Board under the symbol “MPAD.OB”. The following sets forth the high and low sell price for each quarter during the last two fiscal years:

 

   HIGH  LOW
Fiscal Year Ended November 30, 2019  PRICE  PRICE
      Fourth Quarter  $14.24   $10.50 
      Third Quarter  $12.24   $9.30 
      Second Quarter  $10.00   $9.00 
      First Quarter  $9.52   $8.12 
           
  Fiscal Year Ended November 30, 2018          
      Fourth Quarter  $8.50   $7.50 
      Third Quarter  $8.49   $7.70 
      Second Quarter  $9.00   $7.90 
      First Quarter  $8.60   $7.25 

 

The market price of a share of the common stock as of February 4, 2020, the latest practical date, was $14.10.

 

During the three month period ended November 30, 2019, approximately 31,800 shares of the Company’s common stock were traded in the over-the-counter market at a price range of $10.50 to $14.00 per share. For the two year period ending November 30, 2019, approximately 176,900 shares of the Company’s common stock were traded in the over-the-counter market at prices ranging from a low of $7.25 to a high of $14.00. The Company’s reported share price may be subject to extreme fluctuations, or one or a few trades may determine the reported market price, due in part to the small number of shares traded at any time.

 

On December 11, 2018, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 9, 2019. The dividend was paid to shareholders on February 8, 2019.

 

On December 10, 2019, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 8, 2020. The dividend will be paid to shareholders on or about February 14, 2020.

 

Securities Issued under Equity Compensation Plan

 

None.

 

 

9 
 

 

Item 6. Selected Financial Data

Not applicable.

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

   Twelve Months Ended
    11/30/19    11/30/18 
           
Net Sales   100.0%   100.0%
           
Cost of goods sold   54.0%   62.0%
Research and Development   6.7%   6.1%
Selling, General, and Administrative   22.3%   25.6%
  Cost & Expenses   83.0%   93.7%
           
Operating Income   17.0%   6.3%
           
Other income and interest income net   0.5%   0.5%
           
Income before Income Taxes   17.4%   6.8%
           
Provision for taxes   2.9%   (0.1)%
           
Net Income   14.6%   6.9%
           

 

The Company designs, manufactures and distributes various types of microelectronic circuits including solid state relays and power controllers, optoelectronic components, and sensor and display components and assemblies. The Company’s products are used as components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200o C) products.

 

The Company’s facilities are certified and qualified by the Defense Logistics Agency (DLA) to MIL-PRF-38534 (class K-space level) and MIL-PRF-19500 JANS (space level) and are certified to ISO 9001:2008 and AS 9100C. Micropac is a National Aeronautics and Space Administration (NASA) core supplier, and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company has Underwriters Laboratories (UL) approval on our industrial power controllers.

 

The Company’s core technology is microelectronic and optoelectronic designs to include the packaging and interconnecting of multi-chip microelectronics modules. Other technologies include light emitting and light sensitive materials and products, including light emitting diodes and silicon phototransistors, and electronic integration used in the Company’s optoelectronic components and assemblies.

 

Company sales totaled $25,450,000 resulting in an increase of $4,483,000 from 2018. The increase was associated with an increase in sales of standard solid state relay microelectronic products and two custom medical products.

 

At November 30, 2019, the Company had a backlog of unfilled orders totaling approximately $22,021,000 compared to approximately $17,132,000 at November 30, 2018 with an increase in bookings of microelectronic standard relays. The Company expects to complete and ship the majority of its November 30, 2019 backlog during fiscal 2020.

 

New orders for fiscal year 2019 totaled $30,179,000 compared to $25,532,000 for fiscal 2018. Approximately $11,464,000 of the new orders received in 2019 was delivered to customers in 2019, along with approximately $13,896,000 of the Company’s $17,132,000 backlog of orders at November 30, 2018 resulting in revenue of $25,450,000.

 

Cost of goods sold, as a percentage of net sales, was 54.0% in 2019 compared to 62.0% in 2018 with higher margins from the increase in sales of solid state relay microelectronic products. In actual dollars, cost of sales increased $752,000 for 2019 versus 2018 with an increase in cost due to higher sales.

10 
 

In 2019, the Company’s investment in technology through research and development, which was expensed, totaled approximately $1,707,000 ($1,271,000 in 2018). The Company’s research and development expenditures were directed primarily toward standard proprietary power management products, including industrial power controllers and DC-DC converters, fiber optic transceivers, high voltage optocouplers and continued product development and improvement associated with the Company’s space level and other high reliability products.

 

In addition to the Company’s investment in research and development, various customers paid the Company approximately $2,326,000 in non-recurring engineering revenue with $1,716,000 recorded within cost of goods sold associated with the development of custom products for specific applications.

 

Selling, general, and administrative expenses totaled 22.3% of net sales in 2019 compared to 25.6% in 2018. In dollars expensed, selling, general and administrative expenses totaled $5,673,000 in 2019 as compared to $5,384,000 in 2018, an increase or $289,000 with the addition of outside sales employees and associated travel expense.

 

Other income and net interest income for fiscal 2019 totaled $122,000 compared to $111,000 for fiscal 2018.

 

Income before taxes for fiscal 2019 was approximately $4,439,000, or 17.4% of net sales, compared to $1,422,000, or 6.8% of net sales in fiscal 2018.

 

Provisions for income tax for fiscal 2019 totaled $726,000 compared to a tax benefit of $(19,000) for fiscal 2018. The Company’s effective income tax rate was 16.5% for the year ended November 30, 2019 and (1.3)% for the year ended November 30, 2018. The effective tax rate in 2018 is associated with a R&D tax credit of $390,000 offset by a $52,000 change related to the change in tax law in 2018.

 

Net income totaled approximately $3,713,000 or $1.44 per share in 2019 versus 2018 net income of $1,441,000 or $0.56 per share.

 

Liquidity and Capital Resources

 

On April 23, 2018, the Company renewed the Loan Agreement with a Texas banking institution. The Loan Agreement provides for revolving credit loans, in amounts not to exceed a total principal balance of $6,000,000. The Loan Agreement also contains financial covenants to maintain at all times including (i) minimum working capital of not less than $4,000,000, (ii) a ratio of senior funded debt, minus the Company’s balance sheet cash on hand to the extent in excess of $2,000,000 to EBITDA of not more than 3.0 to 1.0, and (iii) a ratio of free cash flow to debt service of not less than 1.2 to 1.0. The Company has not, to date, drawn any amounts under the revolving line of credit and is currently in compliance with the financial covenants.

 

The Company provided $3,944,000 of cash from operating activities in 2019 compared to the $1,674,000 of cash provided by operating activities in 2018. The increase in net cash provided by operations is due to higher revenues in 2019. The Company used $249,000 in cash for investment in additional manufacturing equipment in 2019 compared to $293,000 in 2018.

 

The Company issued a dividend payment of $0.10 per share to all shareholders of record for each of the last two years. The total dividend payment was $258,000 per year.

 

As of November 30, 2019, the Company had $13,890,000 in cash and cash equivalents compared to $10,483,000 in cash and cash equivalents on November 30, 2018. The Company held $2,089,000 in short term investments at November 30, 2019 and $2,058,000 at November 30, 2018. The Company anticipates that it will use some of this cash for the construction of a new manufacturing center. In addition, the Company continues on-going investigations for the use of cumulative cash for business expansion and improvements, such as operational improvements, new product expansion, facility upgrades, and acquisition opportunities.

 

Company management believes it will meet its 2019 capital requirements through the use of cash derived from operations for the year and/or usage of the Company’s cash and cash equivalents. There were no significant outstanding commitments for equipment purchases or improvements at November 30, 2019.

 

Off-Balance Sheet Arrangements

 

The Company has no significant off-balance sheet arrangements.

 

Critical Accounting Policies

 

11 
 

Revenue Recognition

 

On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. The ASU replaces most existing revenue recognition guidance in the United States. The standard permits the use of either the full retrospective or modified retrospective transition method.

 

Based on a review of its customer contracts, the Company has determined that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with the Company’s historical revenue recognition model. 

 

The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

To achieve that core principle, the Company applied the following steps:

 

1. Identify the contract(s) with a customer.

 

The Company designs, manufactures and distributes various types of microelectronic circuits, optoelectronics, and sensors and displays. The Company’s products are used as components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200o C) products.

 

The Company’s revenues are from purchase orders and/or contracts with customers associated with manufacture of products. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

2. Identify the performance obligations in the contract.

 

The majority of the Company’s purchase orders or contracts with customers contain a single performance obligation, the shipment of products.

 

3. Determine the transaction price.

 

The transaction price reflects the Company’s expectations about the consideration it will be entitled to receive from the customer at a fixed price per unit shipped based on the terms of the contract or purchase order with the customer. To the extent our actual costs vary from the fixed price that was negotiated, we will generate more or less profit or could incur a loss.

 

4. Allocate the transaction price to the performance obligations in the contract.

 

5. Recognize revenue when (or as) the Company satisfies a performance obligation.

This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. The Company receives purchase orders for products to be delivered over multiple dates that may extend across reporting periods. The Company accounting policy treats shipping and handling activities as a fulfillment cost. The Company invoices for each delivery upon shipment and recognizes revenues at the fixed price for each distinct product delivered when transfer of control has occurred, which is generally upon shipment.

 

For certain contracts under which the Company produces products with no alternative use and for which the Company has an enforceable right to payment during the production cycle, the Company recognizes revenue for the cost incurred of work in process plus a margin at the end of each period and records a contract asset (unbilled receivable). The majority of these products are shipped weekly and monthly to the customer and the contract require us to manage and limit the level of work in process to meet the scheduled delivery dates.

 

In addition, the Company may have a contract or purchase order to provide a non-recurring engineering service to a customer. These contracts are reviewed and performance obligations are determined and we recognize revenue at the point in time in which each performance obligation is fully satisfied.

 

Effective as of the beginning of the first quarter of fiscal 2019, we adopted Topic 606 using the modified retrospective

12 
 

method and recognized a cumulative effect adjustment to retained earnings based on any open contracts at that time for which revenue recognition has changed from a point-in-time recognition model to an over-time recognition model. While the impact to net sales and net income was not material to our results of operations, the future impact of Topic 606 is dependent on the mix and nature of specific customer contracts.

Upon adoption, we recognized an increase in retained earnings of $55,000. The details of the adjustment to retained earnings upon adoption as well as the effects of the balance sheet are as follows:

   Balance at     Balance at
Assets  November 30, 2018  Adjustment due to Topic 606  December 1, 2018
   Contract assets  $0   $242   $242 
   Work in process  $1,985   $(173)  $1,812 
Deferred income tax net  $57   $(15)  $42 
Shareholder equity               
   Retained Earnings  $24,800   $55   $24,855 
                

The following table summarize the effects of the new standard on selected line items within the Company’s Condensed Statement of Operations for three months and year ended November 30, 2019.

Three months ended November 30, 2019

   As Reported 

Balance without adoption of

Topic 606

  Effect of change
Net sales  $7,484   $7,515   $31 
Cost of goods sold  $(3,615)  $(3,597)  $(18)
Income before taxes  $1,829   $1,842   $13 
Income tax  $362   $365   $3 
Net Income  $1,468   $1,478   $10 

 

Year ended November 30, 2019

   As Reported 

Balance without adoption of

Topic 606

  Effect of change
Net sales  $25,450   $24,931   $(519)
Cost of goods sold  $(13,753)  $(14,105)  $352 
Income before taxes  $4,439   $4,272   $(167)
Income tax  $726   $691   $(35)
Net Income  $3,713   $3,581   $(132)

 

Disaggregation of Revenue

The following table summarizes the Company’s net sales by product line.

   Nov. 30, 2019  Nov. 30, 2018
Microelectronics  $8,037   $5,395 
Optoelectronics   6,356    5,419 
Sensors and Displays   11,057    10,153 
   $25,450   $20,967 
           
Timing of revenue recognition          
Recognized at a point in time  $24,931   $20,967 
Recognized over time   519    —   
    Total Revenue  $25,450   $20,967 

 

The following table summarizes the Company’s net sales by major market.

13 
 

 

2019 Sales by Major Market
   Military  Space  Medical  Commercial  Total
Domestic Direct   6,517    1,777    4,220    1,730    14,244 
Domestic Distribution   7,705    210    120    471    8,507 
International   358    2,003    —      338    2,699 
    14,580    3,990    4,341    2,539    25,450 
                          
2018 Sales by Major Market
     Military      Space      Medical      Commercial      Total  
Domestic Direct   8,024    2,285    1,881    1,360    13,550 
Domestic Distribution   4,964    178    —      254    5,396 
International   535    1,383    —      103    2,021 
    13,523    3,846    1,881    1,717    20,967 

 

 

Receivables, net, Contract Assets and Contract Liabilities

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet.

 

Receivables, net, contract assets and contract liabilities were as follows:

 

   November 30, 2019  November 30, 2018
Receivables, net   3,382    3,772 
Contract assets   519    243 
Deferred Revenue   390    1,238 

 

Revenue recognized in 2019 that was included in the deferred revenue liability balance at the beginning of the year was $1,024,000.

 

Contract costs

 

The Company does not have material incremental costs to obtain a contract in the form of sales commissions or bonuses. The Company incurs other immaterial costs to obtain and fulfill a contract; however, the Company has elected the practical expedient under ASC 340-40-24-4 to recognize all incremental costs to obtain a contract as an expense when incurred if the amortization period is one year or less.

 

Inventories

 

Inventories are stated at lower of cost or net realizable 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 determines the need to write inventory down to the lower of cost or net realizable value via an analysis based on the usage of inventory over a three year period and projected usage based on current backlog.

 

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.

 

The Company records a liability for an unrecognized tax benefit for a tax position that is not “more-likely-than-not” to be sustained.  The Company did not record any liability for uncertain tax positions as of November 30, 2019.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into United States tax law, which among other provisions lowered the corporate tax rate to 21%.

 

In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 118 to provide

14 
 

guidance for companies that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts under ASC 740. In accordance with SAB 118, a company must reflect the income tax effect of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, the company must record a provisional estimate in the financial statements.

 

ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Consequently, as of the date of enactment, and during the twelve months ended November 30, 2018, we revalued all deferred tax assets and liabilities at the newly enacted Federal corporate US income tax rate. This revaluation as of enactment resulted in a non-cash provision of $77,000 to income tax expense and a corresponding reduction in the net deferred tax asset.

 

New Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The ASU requires the use of an “expected loss” model for instruments measured at amortized cost, in which companies will be required to estimate the lifetime expected credit loss and record an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the financial asset. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and requires a modified-retrospective approach to adoption. The Company believes that adopting ASU 2016-13 will have no material impact on the financial statements and related disclosures.

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

 

Item 8. Financial Statements and Supplementary Data

 

Page No.

 

16Report of Independent Registered Public Accounting Firm - Whitley Penn LLP

 

17Balance Sheets as of November 30, 2019 and 2018

 

18Statements of Income for the years ended November 30, 2019 and 2018

 

19Statements of Shareholders’ Equity for the years ended November 30, 2019 and 2018

 

20Statements of Cash Flows for the years ended November 30, 2019 and 2018

 

21-27Notes to Financial Statements as of and for the years ended November 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

15 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Board of Directors and Shareholders

Micropac Industries, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Micropac Industries, Inc. (the “Company”) as of November 30, 2019 and 2018, and the related statements of income, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of November 30, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

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 are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

We have served as the Company's auditor since 2016.

 

/s/ Whitley Penn LLP  
Whitley Penn LLP  
   
Dallas, Texas  
February 12, 2020  

 

 

 

 

 

 

 

16 
 

MICROPAC INDUSTRIES, INC.

BALANCE SHEETS

NOVEMBER 30, 2019 AND 2018

(Dollars in thousands except share and per share data)

 

CURRENT ASSETS    2019       2018  
                
               
Cash and cash equivalents  $13,890   $10,483 
Short-term investments   2,089    2,058 
Receivables, net of allowance for doubtful accounts of
$0 at November 30, 2019 and 2018
   3,382    3,772 
        Contract assets   519    —   
Inventories:          
Raw materials and supplies   4,427    4,593 
Work-in process   2,616    1,985 
                             Total inventories   7,403    6,578 
Prepaid income tax   —      407 
Prepaid expenses and other assets   572    511 
                             Total current assets   27,495    23,809 
           
PROPERTY, PLANT AND EQUIPMENT, at cost:          
Land   1,518    1,518 
Buildings   498    498 
Facility improvements   1,109    1,109 
Furniture and fixtures   977    953 
Construction in process equipment   645    607 
Machinery and equipment   9,027    8,841 
                      Total property, plant, and equipment   13,774    13,526 
Less accumulated depreciation   (10,125)   (9,746)
                                     Net property, plant, and equipment   3,649    3,780 
           
Deferred income taxes, net   —      57 

 

Total assets

  $31,144   $27,646 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $851   $707 
Accrued compensation   1,287    747 
Deferred revenue   390    1,238 
Property taxes   104    88 
Income tax   213    —   
Other accrued liabilities   26    123 
                        Total current liabilities   2,871    2,903 
           
Deferred income taxes, net   20    —   
Commitments and contingencies          
           
SHAREHOLDERS’ EQUITY          
Common stock, $.10 par value, authorized 10,000,000
shares, 3,078,315 issued and 2,578,315 outstanding at
November 30 2019 and 2018
   308    308 
Additional paid-in-capital   885    885 
       Treasury stock, 500,000 shares, at cost   (1,250)   (1,250)
Retained earnings   28,310    24,800 
           
                                Total shareholders’ equity   28,253    24,743 
           
                                        Total liabilities and shareholders’ equity  $31,144   $27,646 
           

See accompanying notes to financial statements.

17 
 

MICROPAC INDUSTRIES, INC.

STATEMENTS OF INCOME

FOR THE YEARS ENDED NOVEMBER 30, 2019 AND 2018

(Dollars in thousands except share and per share data)

 

 

     2019      2018  
NET SALES  $25,450   $20,967 
           
COST AND EXPENSES:          
    Cost of goods sold   13,753    13,001 
    Research and development   1,707    1,271 
    Selling, general & administrative expenses   5,673    5,384 
           
                                    Total cost and expenses   21,133    19,656 
           
OPERATING INCOME   4,317    1,312 
           
    Other income   27    44 
    Interest income, net   95    67 
           
INCOME BEFORE INCOME TAXES   4,439    1,422 
           
PROVISION (BENEFIT) FOR INCOME TAXES          
    Current   663    (165)
    Deferred   63    146 
         Total tax expense (benefit) provision   726    (19)
           
NET INCOME  $3,713   $1,441 
           
NET INCOME PER SHARE, BASIC AND DILUTED  $1.44   $0.56 
           
WEIGHTED AVERAGE OF SHARES, basic and diluted   2,578,315    2,578,315 
           
DIVIDENDS PER SHARE  $0.10   $0.10 

 

 

 

 

 

 

 

See accompanying notes to financial statements.

18 
 

MICROPAC INDUSTRIES, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED NOVEMBER 30, 2019 AND 2018

(Dollars in thousands)

 

 

   Common  Additional  Treasury  Retained   
   Stock  paid-in-capital  Stock  Earnings  Total
                
Balance, November 30, 2017  $308   $885   $(1,250)  $23,617   $23,560 
     Dividend   —      —      —      (258)   (258)
     Net Income   —      —      —      1,441    1,441 
Balance, November 30, 2018   308    885    (1,250)   24,800    24,743 
     Impact of change in accounting policy   —      —      —      55    55 
     Dividend   —      —      —      (258)   (258)
     Net Income   —      —      —      3,713    3,713 
Balance, November 30, 2019  $308   $885   $(1,250)  $28,310   $28,253 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to financial statements.

19 
 

MICROPAC INDUSTRIES, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED NOVEMBER 30, 2019 AND 2018

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:             2019              2018
Net income  $3,713   $1,441 
Adjustments to reconcile net income to          
          net cash provided by operating activities:          
    Depreciation   379    319 
    Deferred tax expense   63    146 
    Changes in certain current assets and liabilities:          
        Increase (decrease) in accounts receivable   390    (310)
        (Increase) decrease in contract assets   (276)   —   
        (Increase) decrease in inventories   (638)   (713)
        Increase in prepaid expenses and other assets   (61)   (237)
        Decrease (increase) decrease in prepaid income taxes   434    (203)
        Increase (decrease) in deferred revenue   (847)   846 
        Increase (decrease) in accounts payable   144    335 
        Increase in accrued compensation   540    43 
        Increase in income taxes payable   185    23 
        (Decrease) increase in all other accrued liabilities   (82)   (16)
           
                       Net cash provided by operating activities   3,944    1,674 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
        Proceeds from maturity of short-term investments   4,138    4,082 
        Purchase of short-term investments   (4,168)   (4,110)
        Additions to property, plant and equipment   (249)   (293)
           
                         Net cash used in investing activities   (279)   (321)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
         Cash dividend   (258)   (258)
           
                         Net cash used in financing activities   (258)   (258)
           
Net increase in cash and cash equivalents   3,407    1,095 
           
Cash and cash equivalents at beginning of period   10,483    9,388 
           
Cash and cash equivalents at end of period  $13,890   $10,483 
           
Supplemental Cash Flow Disclosure:          
               Cash paid for income taxes  $44   $16 

 

 

 

 

 

 

 

See accompanying notes to financial statements.

 

 

 

20 
 

MICROPAC INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS

NOVEMBER 30, 2019 AND 2018

 

 

1.BUSINESS DESCRIPTION:

 

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

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Revenue Recognition

 

On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. The ASU replaces most existing revenue recognition guidance in the United States. The standard permits the use of either the full retrospective or modified retrospective transition method.

 

Based on a review of its customer contracts, the Company has determined that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with the Company’s historical revenue recognition model. 

 

The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

To achieve that core principle, the Company applied the following steps:

 

1. Identify the contract(s) with a customer.

 

The Company designs, manufactures and distributes various types of microelectronic circuits, optoelectronics, and sensors and displays. The Company’s products are used as components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200o C) products.

 

The Company’s revenues are from purchase orders and/or contracts with customers associated with manufacture of products. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

2. Identify the performance obligations in the contract.

 

The majority of the Company’s purchase orders or contracts with customers contain a single performance obligation, the shipment of products.

 

3. Determine the transaction price.

 

The transaction price reflects the Company’s expectations about the consideration it will be entitled to receive from the customer at a fixed price per unit shipped based on the terms of the contract or purchase order with the customer. To the extent our actual costs vary from the fixed price that was negotiated, we will generate more or less profit or could incur a loss.

 

4. Allocate the transaction price to the performance obligations in the contract.

 

5. Recognize revenue when (or as) the Company satisfies a performance obligation.

 

This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. The Company receives purchase orders for products to be delivered over multiple dates that may

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extend across reporting periods. The Company accounting policy treats shipping and handling activities as a fulfillment cost. The Company invoices for each delivery upon shipment and recognizes revenues at the fixed price for each distinct product delivered when transfer of control has occurred, which is generally upon shipment.

 

For certain contracts under which the Company produces products with no alternative use and for which the Company has an enforceable right to payment during the production cycle, the Company recognizes revenue for the cost incurred of work in process plus a margin at the end of each period and records a contract asset (unbilled receivable). The majority of these products are shipped weekly and monthly to the customer and the contract require us to manage and limit the level of work in process to meet the scheduled delivery dates.

 

In addition, the Company may have a contract or purchase order to provide a non-recurring engineering service to a customer. These contracts are reviewed and performance obligations are determined and we recognize revenue at the point in time in which each performance obligation is fully satisfied.

 

Effective as of the beginning of the first quarter of fiscal 2019, we adopted Topic 606 using the modified retrospective method and recognized a cumulative effect adjustment to retained earnings based on any open contracts at that time for which revenue recognition has changed from a point-in-time recognition model to an over-time recognition model. While the impact to net sales and net income was not material to our results of operations, the future impact of Topic 606 is dependent on the mix and nature of specific customer contracts.

Upon adoption, we recognized an increase in retained earnings of $55,000. The details of the adjustment to retained earnings upon adoption as well as the effects of the balance sheet are as follows:

   Balance at     Balance at
Assets  November 30, 2018  Adjustment due to Topic 606  December 1, 2018
   Contract assets  $0   $242   $242 
   Work in process  $1,985   $(173)   $1,812 
Deferred income tax net  $57   $(15)   $42 
Shareholder equity               
   Retained Earnings  $24,800   $55   $24,855 
                

The following table summarize the effects of the new standard on selected line items within the Company’s Condensed Statement of Operations for three months and year ended November 30, 2019.

Three months ended November 30, 2019

   As Reported 

Balance without adoption of

Topic 606

  Effect of change
Net sales  $7,484   $7,515   $31 
Cost of goods sold  $(3,615)   $(3,597)   $(18) 
Income before taxes  $1,829   $1,842   $13 
Income tax  $362   $365   $3 
Net Income  $1,468   $1,478   $10 

 

Year ended November 30, 2019

   As Reported 

Balance without adoption of

Topic 606

  Effect of change
Net sales  $25,450   $24,931   $(519) 
Cost of goods sold  $13,753   $14,105   $352 
Income before taxes  $4,439   $4,272   $(167) 
Income tax  $726   $691   $(35) 
Net Income  $3,713   $3,581   $(132) 

 

Disaggregation of Revenue

The following table summarizes the Company’s net sales by product line.

22 
 

 

   Nov. 30, 2019  Nov. 30, 2018
Microelectronics  $8,037   $5,395 
Optoelectronics   6,356    5,419 
Sensors and Displays   11,057    10,153 
   $25,450   $20,967 
           
Timing of revenue recognition          
Recognized at a point in time  $24,931   $20,967 
Recognized over time   519    —   
    Total Revenue  $25,450   $20,967 

 

The following table summarizes the Company’s net sales by major market.

2019 Sales by Major Market
   Military  Space  Medical  Commercial  Total
Domestic Direct   6,517    1,777    4,220    1,730    14,244 
Domestic Distribution   7,705    210    120    471    8,507 
International   358    2,003    —      338    2,699 
    14,580    3,990    4,341    2,539    25,450 
                          
2018 Sales by Major Market
     Military      Space      Medical      Commercial      Total  
Domestic Direct   8,024    2,285    1,881    1,360    13,550 
Domestic Distribution   4,964    178    —      254    5,396 
International   535    1,383    —      103    2,021 
    13,523    3,846    1,881    1,717    20,967 

 

 

Receivables, net, Contract Assets and Contract Liabilities

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet.

 

Receivables, net, contract assets and contract liabilities were as follows:

 

   November 30, 2019  November 30, 2018
Receivables, net   3,382    3,772 
Contract assets   519    243 
Deferred Revenue   390    1,238 

 

Revenue recognized in 2019 that was included in the deferred revenue liability balance at the beginning of the year was $1,024,000.

Contract costs

 

The Company does not have material incremental costs to obtain a contract in the form of sales commissions or bonuses. The Company incurs other immaterial costs to obtain and fulfill a contract; however, the Company has elected the practical expedient under ASC 340-40-24-4 to recognize all incremental costs to obtain a contract as an expense when incurred if the amortization period is one year or less.

 

 

Short-Term Investments

 

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The Company has $2,089,000 and $2,058,000 in short-term investments at November 30, 2019 and 2018, respectively. Short-term investments consist of certificates of deposits with maturities greater than 90 days. These investments are reported at historical cost, which approximates fair value. 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 intent to hold to maturity and mature within one year.

 

Inventories

 

Inventories are stated at lower of cost or net realizable 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 determines the need to write inventory down to the lower of cost or net realizable value via an analysis based on the usage of inventory over a three year period and projected usage based on current backlog.

 

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.

 

The Company records a liability for an unrecognized tax benefit for a tax position that is not “more-likely-than-not” to be sustained.  The Company did not record any liability for uncertain tax positions as of November 30, 2019.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into United States tax law, which among other provisions lowered the corporate tax rate to 21%.

 

In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 118 to provide guidance for companies that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts under ASC 740. In accordance with SAB 118, a company must reflect the income tax effect of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, the company must record a provisional estimate in the financial statements.

 

ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Consequently, as of the date of enactment, and during the twelve months ended November 30, 2018, we revalued all deferred tax assets and liabilities at the newly enacted Federal corporate US income tax rate.  This revaluation as of enactment resulted in a non-cash provisional estimate of $77,000 to income tax expense and a corresponding reduction in the net deferred tax asset.

 

 

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 in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) ASC 360-10-35, Property, Plant and Equipment – Subsequent Measurement. 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 less cost to sell is required.

 

Repairs and maintenance are expensed as incurred. Improvements which extend the useful lives of property, plant, and equipment are capitalized.

 

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Research and Development Costs

 

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

 

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 2019 and 2018, 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 of America 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.FAIR VALUE MEASUREMENT:

 

The Company had no financial assets and liabilities measured at fair value on a recurring basis as of November 30, 2019 and 2018.  The fair value of financial instruments such as cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate their carrying amount based on the short maturity of these instruments.  There were no nonfinancial assets measured at fair value on a nonrecurring basis at November 30, 2019 and 2018.

 

 

4.NOTES PAYABLE TO BANKS;

 

On May 30, 2019, the Company renewed the Loan Agreement with a Texas banking institution. The Loan Agreement provides for revolving credit loans, in amounts not to exceed a total principal balance of $6,000,000. The Loan Agreement also contains financial covenants to maintain at all times including (i) minimum working capital of not less than $4,000,000, (ii) a ratio of senior funded debt, minus the Company’s balance sheet cash on hand to the extent in excess of $2,000,000 to EBITDA of not more than 3.0 to 1.0, and (iii) a ratio of free cash flow to debt service of not less than 1.2 to 1.0. The Company has not, to date, drawn any amounts under the revolving line of credit and is currently in compliance with the financial covenants.

 

 

5.PRODUCT WARRANTIES

 

In general, the Company warrants that its products, when delivered, will be free from defects in material workmanship under normal use and service. The obligations are limited to replacing, repairing or giving credit for, at the option of the Company, any products that are returned within one year after the date of shipment. The Company does not provide extended warranties.

 

The Company reserves for potential warranty costs based on historical warranty claims experience. While management considers the process to be adequate to effectively quantify its exposure to warranty claims based on historical performance, changes in warranty claims on a specific or cumulative basis may require management to adjust its reserve for potential warranty costs.

 

Warranty expense was approximately $117,000 and $85,000 in 2019 and 2018, respectively.

 

The following table summarizes product warranty activity recorded during the years ended November 30, 2019 and 2018.

 

   2019  2018
Beginning balance  $25   $25 
Additions for current year provision   117    85 
Payments for current year   (117)   (85)
Ending balance  $25   $25 

 

 

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6.LEASE COMMITMENTS:

 

Rent expense for each of the years ended November 30, 2019 and 2018 was $50,000 and $50,000 respectively.

 

The Company has no future minimum lease payments under non-cancellable operating leases for office and manufacturing space with remaining terms in excess of one year.

 

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). Under the new standard, lessees will be required to recognize lease assets and liabilities for all leases, with certain exceptions, on their balance sheets. Public business entities are required to adopt the standard for reporting periods beginning after December 15, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

 

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 expensed and totaled approximately $363,000 in 2019 and $325,000 in 2018. Employees become vested in Company contributions in 20% increments in years two through six of employment. If the employee leaves the Company prior to being fully vested, the unvested portion of the Company 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.INCOME TAXES:

 

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

 

   2019  2018
Current Provision:          
Federal  $625,000   $(202,000)
State   38,000    37,000 
    663,000    (165,000)
           
Deferred federal tax expense   63,000    146,000 
           
Total  $726,000   $(19,000)

 

 

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

 

   2019  2018
Tax at statutory rate  $932,000   $299,000 
State income taxes, net of federal benefit   31,000    30,000 
Section 199 Adjustment   —      (32,000)
Research and Development Tax Credit   (277,000)   (390,000)
Tax law change   —      52,000 
Permanent differences and other   40,000    22,000 
           
Income tax provision (benefit)  $726,000   $(19,000)

 

 

 

 

 

 

 

 

26 
 

The components of deferred tax assets and liabilities were as follows:

 

   2019  2018
Deferred tax assets (liabilities)          
Inventory  $215,000   $215,000 
Deferred revenue, sales returns and warranty   8,000    5,000 
Other accrued liabilities   35,000    96,000 
Depreciation   (278,000)   (259,000)
Net deferred assets (liabilities)  $(20,000)  $57,000 

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax-planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. 

 

 

9.SIGNIFICANT CUSTOMER INFORMATION:

 

The Company’s major customers include contractors to the United States government. Sales to these customers for DOD and NASA contracts accounted for approximately 59% of the Company’s revenues in 2019 compared to 62% in 2018. The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies, Raytheon, Boeing and L-3Harris Technologies. The Company’s top 10 customers accounted for 45% of the Company’s sales during 2019 and 49% of the Company’s sales during 2018. One customer accounted for 20% of the Company’s sales during 2019 and three customers accounted for 14%, 13% and 10% of the Company’s sales during 2018.

 

 

10.SHAREHOLDERS’ EQUITY:

 

On December 12, 2017, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 10, 2018. The dividend was paid to shareholders on February 8, 2018.

 

On December 11, 2018, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 9, 2019. The dividend was paid to shareholders on February 8, 2019.

 

 

11.SUBSEQUENT EVENTS:

 

On December 10, 2019, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 8, 2020. The dividend will be paid to shareholders on or about February 14, 2020.

 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

 

The Company’s Chief Executive Officer and Chief Financial Officer (the Certifying Officers) are responsible for establishing and maintaining disclosure controls and procedures for the Company. The Certifying Officers have designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared. The Certifying Officers have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the Rules) under the Securities Exchange Act of 1934 (or Exchange Act)) and determined that as of November 30, 2019, the Company's disclosure controls and procedures were effective.

 

27 
 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Management of Micropac is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), the Company’s management conducted an evaluation of the effectiveness of its internal control over financial reporting as of November 30, 2019 as required by the Securities Exchange Act of 1934 Rule13a-15(c). In making this assessment, the Company’s management used the criteria set forth in the framework in “Internal Control – Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation conducted under the framework in “Internal Control – Integrated Framework” (2013), management concluded that the Company’s internal control over financial reporting was effective as of November 30, 2019.

 

During our most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

This annual report does not include an attestation report of our registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered independent public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

 

Item 9B. Other Information

None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28 
 

PART III

 

In accordance with General Instruction G(3) of Form 10-K, the information required by this Part III is incorporated by reference to Micropac Industries, Inc.’s definitive proxy statement relating to its 2019 Annual Meeting of Stockholders, as set forth below. The 2020 Proxy Statement will be filed with the Securities and Exchange Commission on or about February 12, 2020.

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Name Age Position with the Company Director Since
       
Mark King 65 CEO, President and Member  
    of Audit Committee and  
    Chairman of the Board October 2005
       
Heinz-Werner Hempel 91 Director and Member of  
    Audit Committee February 1997
       
Richard K. Hoesterey 77 Secretary, Director and  
    Member of Audit Committee October 2010
       
Christine B. Dittrich 67 Director and Member of  
    Audit Committee October 2015
       
Gerald Tobey 66 Director and Member of  
    Audit Committee June 2017
       
Donald Robinson 54

Director and Member of 

 
    Audit Committee December 2019
       
Shaunna Black 65 Director and Member of  
    Audit Committee December 2019
       
Patrick S. Cefalu 62 CFO, Executive Vice President N/A

 

Mr. King is the current President and Chief Executive of the Company. Prior to November 2002, Mr. King was the President and Chief Operating Officer of Lucas Benning Power Electronics. Mr. King joined the Company in November of 2002, and was elected Chief Executive Officer, President and Director in October 2005.

 

Mr. Hempel has served as the Chief Operating Officer of Hanseatische Waren-Gesellschaft MBH & Co, KG, Bremen, Germany for over 25 years.

 

Mr. Hoesterey is an experienced executive with over 35 years in general management and manufacturing operations management in a variety of industries including high tech electronics, industrial products, and power regulation. He served as the President and Chief Executive Officer of Components Corporation of America from January 2000 to August 2009. In September 2009, he began serving as the President and Chief Executive Officer of R.K. Hoesterey & Associates.

 

Ms. Dittrich was an Executive Vice President of Raytheon Systems Company and the General Manager of the Sensor and Electronic Systems segment. Before working for Raytheon, Ms. Dittrich was a Senior Vice President of Texas Instruments (TI) Systems Group, a Malcolm Baldrige Quality Award winner, and the General Manager of the Electronic Systems Division. Her prior assignments include TI Systems Group Vice President and Engineering Manager, Software Engineering Director for the defense business, and Senior Member of Technical Staff. She has had senior executive responsibility for product engineering efforts that involve large scale software and hardware development and integration. Ms. Dittrich provided consulting services with a focus on business strategy and operational performance to various technology companies after leaving Raytheon. She became a Visiting Scientist at the Carnegie Mellon University Software Engineering Institute (SEI), a Federally Funded Research and Development Center and chaired the SEI Board of Advisors for over 10 years. She was a Fellow of the Cutter Business Technical Council and a senior consultant for Cutter Consortium. In addition, she has held membership positions on the Army Science Board, the Department of Defense Software Best Practices - Airlie Software Council and other advisory boards.

 

29 
 

Mr. Tobey was a Vice President of Business Development at Raytheon Missile Systems Company retiring in 2016 following a 38 year career in the defense, aerospace, and civil security sectors. He also served as Vice President of International Business Development for both Raytheon's Missile Systems and Network Centric Systems businesses. Until 1997, when Texas Instruments' Defense Systems and Electronics Group was acquired by Raytheon, Mr. Tobey served as that company's Vice President of International Business Development and Managing Director of Texas Instruments UK, Ltd. (a wholly owned TI subsidiary). During Mr. Tobey's career, he has served in various business creation and capture, strategy, program and manufacturing management positions both in the U.S. and abroad. Mr. Tobey holds a Bachelor of Science and a Masters of Business Administration degree from Utah State University. He is a graduate of the U.S. Defense Department's Defense Acquisition University, and has completed Executive Study at the Anderson School of Management at UCLA.

 

Mr. Robinson is a practical, executive-level leader interested in making a difference within organizations and maximizing the potential collective impact of people. He has deep experience in corporate strategy, structuring and executing successful complex corporate initiatives, manufacturing, and mergers and acquisitions. As a partner-level consultant, Mr. Robinson has led engagements in strategy development, M&A integration and executing complex corporate initiatives. His industry experience includes time as an Industrial Engineer with Texas Instruments’ Defense Systems Group and as an executive over industrial engineering, safety and quality systems with Decibel Products, a $35M in annual revenue manufacturer which grew into Allen Telecom. He served on the Chicago and North Texas chapter boards of the National Association of Corporate Directors (NACD), a national organization focused on providing information and education to corporate directors. Mr. Robinson served as a Business Leadership Center Instructor at the SMU Cox School of Business in Dallas, TX and is a two-time recipient of the Teaching Excellence Award. He holds an MBA from the University of Dallas and a B.S. in Industrial Engineering from Texas A&M University.

 

Ms. Shaunna Black is President of Shaunna Black and Associates. Ms. Black advises companies on global operations, provides experienced executive talent, and coaches leadership teams. The focus of her company is start-ups, business turnarounds and growth, strategy, organization and systems design, and leadership development. Ms. Black is an innovative and highly accomplished operations/manufacturing executive, who enables leaders to rapidly solve complicated problems. She has managed operations internationally in 25 countries. Ms. Black’s methodology delivers extraordinary performance utilizing the power of diverse, multi-generational teams, creating high performance cultures and metrics-driven systems. She has expertise in leadership and team development, technical and systems design, and production methodology in the technology, industrial, manufacturing and hospitality sectors. Her executive career has provided significant experience in strategy, global operations, technology, risk management and sustainability. Ms. Black has served on Audit, Governance, Safety/Risk and M&A Committees. Her industry experience includes Texas Instruments Vice President, (24 years) Dallas/Fort Worth Area including Vice President, Worldwide Facilities - responsible for the design, construction and operation of TI facilities, environmental, safety and health programs, global real estate, worldwide security, and TI's sustainability strategy; Vice President, Dallas Fabrication - Manager for semiconductor manufacturing in one of TI's premier analog wafer fabrication facilities; and Vice President, Worldwide Facilities and Worldwide Environmental, Safety and Health.

 

Mr. Cefalu has over 35 years of experience in management, manufacturing and financial operations in a variety of industries. Mr. Cefalu has been the Chief Financial Officer and Executive Vice President of the Company since September 2001.

 

Board Meetings and Committees

 

The Board of Directors held five (5) board meetings during the year ended November 2019. Directors received a fee of $1,500 (other than Mr. King) for each meeting attended during the year ended November 2019. In addition, the Board agreed to pay an annual retainer of $10,000 to Mr. Eugene Robinson, Mr. Hoesterey, Ms. Dittrich and Mr. Tobey. The Directors attended all of the meetings excluding Mr. Hempel who attended one of the meetings.

 

The Audit Committee held four (4) meetings during the year ended November 30, 2019. Members of the Audit Committee received a fee of $750 for each meeting attended during the year ended November 2019. Mr. King did not receive any payments for attending meetings of the Audit Committee.

 

 

 

 

 

 

 

 

 

30 
 

 

Director Compensation 2019
   Director  Audit Committee  Other fees  Total Fees
Heinz-Werner Hempel  $1,500   $750    —     $2,250 
Richard K. Hoesterey  $17,500   $3,000    —     $20,500 
Eugene Robinson  $17,500   $3,000    —     $20,500 
Christine Dittrich  $17,500   $3,000    —     $20,500 
Gerald Tobey  $17,500   $3,000    —     $20,500 

 

Mr. King does not receive any additional compensation for serving as a Director and as a member of the Audit Committee.

 

With the exception of Mr. King and Mr. Hempel, members of the Audit Committee are considered independent members under the Securities and Exchange Act rules and regulations.

 

The Board of Directors does not have a nominating or compensation committee or committees performing similar functions. The Board of Directors formed an Audit Committee on May 13, 2002. The members of the Audit Committee operate pursuant to a charter developed by the Board of Directors.

 

The Audit Committee has reviewed with management and the independent auditors the quality and adequacy of the Company's significant accounting policies. The Audit Committee has considered and reviewed with the independent auditors their audit plans, the scope of the audit, and the identification of audit risks. The Audit Committee has reviewed and discussed the audited financial statements with management and has discussed such financial statements with the independent auditors.

 

The Audit Committee has received the written disclosures and the report from the independent accountant required by the applicable requirements of the Public Company Accounting Oversight Board (United States) regarding the independent accountant’s communications with the Audit Committee concerning independence and has discussed with the independent accountants the independent accountant’s independence. Based upon the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s annual report on Form 10-K for the fiscal year ended November 30, 2019, for filing with the Securities and Exchange Commission.

 

Management has the responsibility for the preparation and integrity of the Company's financial statements and the independent registered public accounting firm have the responsibility for the audit of those statements. It is not the duty of the Audit Committee to conduct audits to determine that the Company’s financial statements are complete and accurate and are in accordance with accounting principles generally accepted in the United States. In giving its recommendations, the Audit Committee considered (a) management's representation that such financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States of America, and (b) the report of the Company’s independent auditors with respect to such financial statements.

 

Section 16(a) Beneficial Owner Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company's directors, executive officers, and 10% stockholders to file reports of ownership and reports of change in ownership of the Company's equity securities with the Securities and Exchange Commission. Directors, executive officers, and 10% stockholders are required to furnish the Company with copies of all Section16(a) forms they file. Based on information provided by such persons and a review of the copies of such reports furnished, the Company believes that during the fiscal year ended November 30, 2019, the Company's directors, executive officers, and 10% stockholders filed on a timely basis all reports required by Section 16(a) of the Exchange Act.

 

Code of Ethics

 

The Company has adopted a code of ethics that applies to the Company’s principal executive officer and principal financial officer. In addition, the Company has a code of conduct for all employees, officers and directors of the Company.

 

 

31 
 

 

Item 11. Executive Compensation

The information set forth in the 2020 Proxy Statement under the heading “Management Remuneration and Transactions” is incorporated herein.

 

The following table shows as of November 30, 2019, all cash compensation paid to, or accrued and vested for the account of Mr. Mark King, President and Chief Executive Officer and Mr. Patrick Cefalu, Vice President and Chief Financial Officer. Mr. King and Mr. Cefalu received no non-cash compensation during 2019.

 

Annual Compensation
Name and Principal Position   Year    Annual Salary    Bonus    All Other Compensation (a)    Total 
                          
Mark King,   2019   $286,536   $15,000   $36,115   $337,651 
President and   2018   $283,706   $14,000   $34,603   $334,309 
Chief Executive Officer (1)   2017   $270,093   $0   $33,600   $303,693 
                          
Patrick Cefalu,   2019   $178,264   $15,000   $30,748   $224,012 
Vice President and   2018   $173,358   $14,000   $29,595   $216,953 
Chief Financial Officer   2017   $159,033   $0   $24,507   $183,510 

 

(a)Reflects amounts contributed by Micropac Industries, Inc., under Micropac’s 401(k) profit sharing plan; unused vacation pay; life insurance premiums paid; and reimbursement for medical expenses under Micropac’s Family Medical Reimbursement Plan.

 

 

(1) Effective November 2005, Mr. King’s existing employment agreement was revised to provide that Mr. King would serve as the Company’s President and Chief Executive Officer, and a member on the Board of Directors and Audit Committee at a base salary of $186,400 for a term of three (3) years. In December 2005, the Company and Mr. King amended his employment agreement to increase his annual base salary to $225,000. In June 2009, the Company and Mr. King amended his employment agreement to increase his annual base salary to $247,104 for renewable terms of three (3) years with annual increases based on consumer price index with additional increases to be determined by the Board of Directors. The June 2009 amendment also provides under certain events, either the Company or Mr. King can terminate the agreement upon a payment to Mr. King of 18 or 36 months’ salary as severance payments.

 

The Board of Directors reviews and approves the Company’s annual bonus payments structure. In 2019 Mr. King and Mr. Cefalu received a bonus payment of $15,000.

 

Amount included in all other compensation relating to employee benefit plans

 

The Company maintains a Family Medical Reimbursement Plan for the benefit of its executive officers and their dependents. The Plan is funded through a group insurance policy issued by an independent carrier and provides for reimbursement of 100% of all bona fide medical and dental expenses that are not covered by other medical insurance plans capped at an annual family maximum. During the fiscal year ended November 30, 2019, the Company paid $12,612 in premiums each for Mr. King and Mr. Cefalu which amounts are included in the "All Other Compensation" column shown in the preceding remuneration table.

 

In July 1984, the Company adopted a Salary Reduction Plan pursuant to Section 401(k) of the Internal Revenue Code. The Plan's benefits are available to all Company employees who are at least 18 years of age and have completed at least six months of service to the Company as of the beginning of a Plan year. Plan participants may elect to defer up to 15% of their total compensation as their contributions, subject to the maximum allowed by the Internal Revenue code 401(k), and the Company matches their contributions up to a maximum of 6% of their total compensation. A participant's benefits vest to the extent of 20% after two years of eligible service and become fully vested at the end of six years. During the fiscal year ended November 30, 2019, the Company made contributions to the Plan for Mr. King in the amount of $16,500 and for Mr. Cefalu in the amount of $11,596 which amount is included in the "All Other Compensation" column shown in the preceding remuneration table.

 

Employment agreements of the Company’s officers provide that they may elect to carry over any unused vacation time to subsequent periods or elect to be paid for such unused vacation time. Mr. King and Mr. Cefalu did not receive any unused vacation pay in 2018.

 

32 
 

During the fiscal year ended November 30, 2019, the Company paid life insurance premiums for the benefit of Mr. King and Mr. Cefalu valued at $7,003 and $6,540, respectively.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table shows the number and percentage of shares of the Company's common stock beneficially owned (a) by each person known by the Company to own 5% or more of the outstanding common stock, (b) by each director and nominee, and (c) by all present officers and directors as a group.

 

Name and Address of Beneficial Owner (1) Number of Shares Beneficially Owned Percent of Class (1)
     
Heinz-Werner Hempel (2) (3) (4) 1,952,577 75.7%
     
Shaunna Black (3) 0 0%
     
Patrick Cefalu 0 0%
     
Christine Dittrich (3) 0 0%
     
Richard K. Hoesterey (3) 0 0%
     
Stanley Kesselman 159,409 6.2%
c/o Maxim Group    
405 Lexington Avenue, 2nd Floor    
New York, NY    
     
Mark King (3) 14,100 Less than 0.6%
     
Donald Robinson (3) 0 0%
     
Gerald Tobey (3) 0 0%
     
All officers and directors as a group 1,966,677 76.3%
(7 Persons)    
     

 

 

(1)Calculated on the basis of the 2,578,315 outstanding shares. There are no options, warrants, or convertible securities outstanding. The address of each person listed, other than Stanley Kesselman, is 905 East Walnut Street, Garland, Texas 75040.

 

(2)The Company and Mr. Heinz-Werner Hempel are parties to an Ancillary Agreement entered into in March 1987. The Ancillary Agreement primarily obligates the Company to register Mr. Hempel’s stock and allows Mr. Hempel to participate in any sale of stock by the Company.

 

(3)A director of the Company. Each incumbent director has been nominated for re-election at the Annual Meeting.

 

(4)Effective October 10, 2007, Mr. Hempel transferred all of the shares of the Company’s common stock owned by him and consisting of 1,952,577 shares, to a partnership organized under the laws of Germany. This partnership is composed of Mr. Hempel, his son, and his daughter. As the consideration for this transfer, Mr. Hempel received a 99.98% share in this partnership and received the sole voting and management control. His son and daughter each own a 0.01% ownership interest in this partnership.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

None.

33 
 

 

Item 14. Principal Accountant Fees and Services

 

Whitley Penn LLP was selected as the Company’s independent registered public accounting firm in 2016 and has been responsible for the Company's financial audit for the fiscal years ended November 30, 2016 through November 30, 2019.

 

 

Management anticipates that a representative from Whitley Penn LLP will be present at the Annual Meeting and will be given the opportunity to make a statement if he or she desires to do so. It is also anticipated that such representative will be available to respond to appropriate questions from stockholders.

 

AUDIT FEES

 

The fees for professional services rendered for the audit of our annual financial statements for each of the fiscal years ended November 30, 2019 and November 30, 2018, and the reviews of the financial statements included in our Quarterly Reports on Form 10-Q during those periods were $129,500 and $129,000, respectively.

 

TAX FEES

 

Whitley Penn LLP fees for tax return preparation services were $26,000 in 2019, and $27,000 in 2018.

 

ALL OTHER FEES

 

Whitley Penn LLP fees for audit of the Company’s 401K plan was $10,000 in 2019.

 

The Audit Committee requests that the Principal Accounting Firm provide the committee with the anticipated charges of all accounting and tax related services to be performed in advance of performing such services. The Audit Committee approves all services in advance of the performance of such services.

 

 

Part IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(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 18 U. S. C. section 1350,as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.

 

Item 16. Form 10K Summary

None.

 

 

 

 

 

 

 

 

34 
 

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: /s/ Mark King
    Mark King
    President and Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Patrick Cefalu
    Patrick Cefalu
    Executive Vice President
    and Chief Financial Officer
    (Principal Accounting Officer)
     
Dated: 02/12/2020    

 

 

 

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 02/12/2020.

 

 

 

/s/ Mark King      
Mark King, Director   Heinz-Werner Hempel, Director  
       
       
/s/ Richard Hoesterey   /s/ Gerald Tobey  
Richard Hoesterey, Director   Gerald Tobey, Director  
       
       
/s/ Christine Dittrich      
Christine Dittrich, Director      

 

 

 

 

 

35 
 

DIRECTORS AND OFFICERS

NOVEMBER 30, 2019

 

 

MARK KING

President and Chief Executive Officer

Chairman of the Board

Micropac Industries, Inc.

 

 

HEINZ-WERNER HEMPEL

Chief Operating Officer

Hanseatishe Waren Handelsgesellschaft MBH & Co. KG, Bremen, Germany

 

 

RICHARD HOESTEREY

Retired

 

EUGENE ROBINSON

Retired

 

CHRISTINE DITTRICH

Retired

 

GERALD TOBEY

Retired

 

 

PATRICK CEFALU

Executive Vice President

Chief Financial Officer

Micropac Industries, Inc.

 

 

 

 

 

 

 

 



 

  LEGAL COUNSEL   TRANSFER AGENT & REGISTRAR
  Glast, Phillips & Murray, P. C.   Securities Transfer
  Dallas, Texas   Plano, Texas