ITEM 1 BUSINESS
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain matters discussed in this document contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. The words "believe," "expect," anticipate" and similar statements of expectation and statements regarding expected shipments of backlog, availability of supplies, increases in revenues and profits, and expected inventory and expenditure levels identify forward-looking statements that speak only as of the date the statement is made. These forward-looking statements are based on Management's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond the Company's control. Certain risks and uncertainties that may cause actual results, performance, or achievements to be materially different from those expressed, or implied, by the forward-looking statements include those set forth in the section titled "Risk Factors," below. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this document will prove to be accurate. Forward-looking statements speak only as of the date the statement was made. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements.
GENERAL
White Electronic Designs Corporation is an Indiana corporation organized in 1951. On October 26, 1998, Bowmar Instrument Corporation ("Bowmar") merged with Electronic Designs, Inc. ("EDI"). In connection with the merger, Bowmar changed its name to White Electronic Designs Corporation (the "Company.") While Bowmar was the legal acquirer, the merger was accounted for as a reverse acquisition purchase whereby EDI was deemed to have acquired Bowmar for financial reporting purposes. Consistent with the reverse acquisition purchase accounting treatment, the historical financial statements presented for periods prior to the merger date are the financial statements of EDI, not the previously reported consolidated financial statements of Bowmar. The operations of both companies combined as White Electronic Designs Corporation have been included in the financial statements from the date of the merger.
The average market value of the Bowmar common stock and preferred stock for a reasonable period of time before and after the announcement of the merger determined the purchase price for accounting purposes. The average market value of Bowmar stock used to record the purchase was $1.26 per share for common stock with 6,674,992 shares outstanding and $26.94 per share for preferred stock with 119,906 shares outstanding at the merger date. The aggregate value of the stock and stock options outstanding used to record the purchase were $11,633,000 and $440,000 respectively. In addition, direct expenses of the purchase of $650,000 consisting of legal, accounting and other fees were included in the purchase price recorded.
The Company allocated costs in excess of net assets acquired of $4,075,000, to inventory, fixed assets, and intangible assets, which are being amortized over various periods ranging from 3 months to 15 years on a straight-line basis.
The Company has two business segments. Each of the two business segments require different design and manufacturing resources and serve customers in different markets. The microelectronic segment manufactures high-density semiconductor memory and microprocessor products for use in telecommunications, data communications and military aerospace markets. The display segment manufactures liquid crystal displays and electromechanical components for customers mainly in the aviation industry. The Company's executive offices are located at 3601 E. University Drive, Phoenix, Arizona 85034, (602) 437-1520.
MICROELECTRONIC BUSINESS SEGMENT
Financial information for the microelectronic segment is disclosed in Note 18 of Notes to the Consolidated Financial Statements.
Commercial products use SRAM, DRAM and Flash memory components with existing packaging technologies to create space saving solutions in industry standard configurations (SIMMS, DIMMS, BGA), multiple bare die on laminate (MCM-L), and boards packaged using standards established by the personal computer memory card international association (PCMCIA cards). Commercial memory module products range in density from 2 megabit to one gigabit, with data widths from 8 to 144 bits, and access speeds as fast as 8 nanoseconds in various package options. Commercial products are sold mainly to original equipment manufacturers in the network and telecommunications industries.
Military products use SRAM, EEPROM, SDRAM and Flash memory components in ceramic packages and laminate to produce high-density multichip packages and monolithic products for use in adverse environmental conditions. Multichip packaging is a technique that places several semiconductor chips into a compact package. A monolithic product does the same using only one semiconductor chip. Military products range in density from one megabit to 288 megabits, with data widths of 8 to 72, and speeds as fast as 15 nanoseconds in various package options. Military products are sold primarily to both foreign and domestic government contractors in the aerospace industry. Product sales are spread over many different programs such as aircraft, missiles and communications equipment.
The products designed, manufactured, and sold by the Company in its microelectronic segment are sold to original equipment manufacturers in the United States, Europe and Asia through the Company's sales personnel and independent sales representatives and distributors. In a time of strong demand for memory and microprocessor products, as at present, sources of supply of IC (integrated circuit) die and other components may be constrained and subject to shortages. Because of long lead times quoted from vendors, the Company may buy larger than normal amounts of inventory, when it is available, to adequately meet the requirements of future production. Therefore, it is not uncommon to see an increase in inventory during periods of die allocation. A manufacturer's ability to compete is heavily dependent on its ability to maintain access to steady sources of supply. To address these needs, the Company has maintained strong relationships with leading semiconductor fabricators in the United States and the Far East. The Company has no specific long-term contractual arrangement with its vendors. The Company's microelectronic segment business is not seasonal. The Company does not provide extended payment terms to its customers. Products in the microelectronic segment are sold under a standard one-year warranty and may be returned for repair or replacement during the warranty period.
The backlog and proforma backlog for microelectronic products was approximately $38,445,000 and $20,630,000, at the end of fiscal years 2000 and 1999, respectively. Approximately 90% of the segment's fiscal 1999 backlog was shipped during fiscal 2000. Approximately 90% of the fiscal 2000 year-end backlog is expected to be shipped during fiscal 2001. The backlog after fiscal 2001 is a result of customer requirements and demand for the products, not capacity restraints.
The Company's principal competitors in the commercial module market, Smart Module Technology, a subsidiary of Solectron Corp., Simple Technology, Inc. (STEC) and Interworks, a subsidiary of Sanmina Corp. are larger than the Company and have substantially greater financial, technical, marketing, distribution and other resources. Smart Modular, Inc. manufactures a broad range of memory modules in high volume. In addition, the Company competes with a number of smaller companies, and larger semiconductor companies, who are now in the market or may in the future, enter the market. The Company competes in this market on the basis of many factors, including access to advanced semiconductor products at competitive prices, successful and timely product introduction, design capability, lead times, quality, product specification, pricing and customer service.
The two main military market competitors are the microelectronics division of Aeroflex Corp. and Austin Semiconductor. Both competitors are part of business organizations that are larger than the Company and
have greater financial and other resources. There are few competitors for the military memory market business of the Company. Companies compete for this business on the basis of many factors, including cost and quality systems (which allow for compliance with U.S. and foreign military standards), longer term access to advanced semiconductor products in die and wafer form, successful and timely product introduction, inclusion of products on standard military drawings, design capabilities, lead times, product specification, pricing and customer service.
DISPLAY SEGMENT REVIEW
Financial information for the display segment is disclosed in Note 18 of Notes to the Consolidated Financial Statements.
The Company designs and manufactures AMLCDs (ranging in size from 4.0" to 18.1") diagonal panels in display head, monitor and computer system formats. These displays offer significant advantages over other commercially available displays. Significant features include sunlight readability and ruggedized construction for operating temperatures from -35 to +85 degrees Celsius. The Company is growing its display product segment by offering a broad range of products based on different sized AMLCD panels, as well as developing advanced display driver electronics. As with any new products, there is no assurance that the display products developed (or to be developed) will be commercially acceptable or profitable. Display products are sold mainly to customers in the aviation and aerospace industries.
The Company's electromechanical components and instrument packages consist of rotating devices, including gearheads, mechanical counters, dial drives, mechanical packages and related devices. Specific applications for these products include controls for automatically tuning airborne radio transmitters and receivers, controls for fuel flow in jet engines and selected automatic flight control servomechanisms. These products are sold principally to aircraft instrument manufacturers as information displays in aerospace and ground equipment.
The Company also produces digital displays, which permit a more accurate readout of information than is feasible with analog meters. These include display devices, which respond electromagnetically to electronic input signals, thus eliminating mechanical transmission delays. These products are sold primarily to aircraft instrument manufacturers.
The Company designs and manufactures, to customer specification, a variety of keyboard assemblies for commercial and military applications. The Company has the capability of meeting demanding requirements such as backlighting to meet night vision goggle (NVG) compatibility, adverse environments, and the integration of displays, including LCD's, and microprocessor technology.
Neither the needs of the Company for a continuing allotment of goods from its suppliers nor the requirements of its customers for the products of the display segment require the carrying of finished goods inventory. In its purchase of components (some of which must be ordered months in advance), the Company has not encountered, and does not anticipate encountering any significant difficulty. To ensure an adequate supply of display glass, the Company has maintained strong relationships with leading glass manufacturers in the Far East. The Company does not provide extended payment terms to its customers. Products are sold under a standard one-year warranty and may be returned for repair or replacement during the warranty period.
The display segment backlog and proforma backlog was approximately $9,705,000 and $10,870,000 at the end of fiscal years 2000 and 1999, respectively. Approximately 95% of this segment's 1999 backlog was shipped during fiscal 2000. Approximately 95% of the fiscal 2000 year-end backlog is expected to be shipped during fiscal 2001. The backlog after 2001 is a result of customer requirements not capacity restraints. There are no seasonality factors affecting the display business.
The principal basis of competition among display suppliers are display performance (e.g., brightness, color capabilities, contrast and viewing angle), size and weight, design flexibility, power usage, durability and ruggedness. While the primary competition for the AMLCD is currently cathode ray tube displays, the
Company's products compete with other flat panel displays including gas plasma and electroluminescent displays. The Company believes that price, product reliability and the ability to meet delivery schedules are key competitive factors. The Company competes with numerous other companies in the display and electromechanical segment, many of which have greater financial resources, larger technical and marketing resources and in some instances more advanced technology products than those of the Company.
PRINCIPAL CUSTOMERS
In fiscal 2000, our sales to Lucent Technologies accounted for 19% of the Company's sales. No other customer accounted for more than 5% of total sales. Sales are split between original equipment manufacturers in the network and telecommunications industries, board assembly companies, and U.S. prime contractors in the defense industry. Sales to prime contractors can be for relatively large dollar amounts and sometimes call for deliveries over more than one year. The award of new contracts or the expiration of old contracts could have a significant short-term impact on sales and operating results. Sales of commercial memory products are usually based on high volume purchase orders with deliveries scheduled over several months. The award of new purchase orders is based upon the Company's ability to supply the OEM or assembly company with products that meet current technological and quality requirements. The Company sells memory and display products to over 400 companies throughout the world. Customers for the Company's microelectronic products include Arrow Electronics, Cabletron Systems, Cisco Systems, Credence Systems, Honeywell, Intel/Dialogic, Lockheed Martin, Lucent Technologies, Network Appliance, Northrop Grumman, Raytheon and Qualcomm. Of these customers, Lucent accounted for 23% of microelectronic segment sales, and Network Appliance accounted for 5.6% of segment sales. No other customer accounted for more than 5% of microelectronic segment sales. The Company's display customers include Ametek Aerospace, Avex Aerospace, Avidyne, Avnet, Computing Devices, GTE Government Systems, Hamilton Standard, Hamilton Sundstrand, Honeywell, Litton, Lockheed Martin, Rockwell, Smiths Industries, Transas Aviation, Trimble Navigation, and the United States Department of Defense. As a percent of display segment sales, the U.S. Department of Defense accounted for 20%, Smiths Industries 8%, Litton 8%, Lockheed Martin 7%, Computing Devices 7%, and Honeywell 6% of display segment sales. Total Company foreign sales for fiscal 2000, 1999, and 1998 were $14,367,000, $10,472,000 and $7,753,000 respectively.
RESEARCH, ENGINEERING AND DEVELOPMENT
Current research and product development activities are directed primarily toward the improvement of existing standard products. Some projects, however, are focused on the development of new products or processes. The Company devotes minimal resources to pure research and development, but emphasizes the application of its engineering expertise to the development and refinement of proprietary products or technologies. Expenditures by the Company on research and product development for fiscal years 2000, 1999 and 1998 amounted to approximately $5,014,000, $3,651,000, and $2,559,000, respectively. Research and product development efforts are principally conducted by the Company's engineering staff.
We believe that continued strategic investment in process technology and product development is essential for us to remain competitive in the markets we serve. We are committed to the appropriate levels of expenditures for research and development.
REGULATORY MATTERS
Government Contracting Regulation
A significant portion of the Company's business in fiscal 2000 was derived from subcontracts with prime contractors of the U.S. Government. As a U.S. Government subcontractor, the Company is subject to Federal Government contracting regulation. Under these regulations, the U.S. Government is entitled for three years after final payment on certain negotiated contracts or contract modifications to examine all of the Company's cost records with respect to such contracts to determine whether the Company furnished complete, accurate and current cost or pricing data to the government in connection with the negotiation of the price of the contract or modification. The U.S. Government also has the right after final payment to seek
a downward adjustment to the price of a contract or modification if it determines that the contractor failed to disclose complete, accurate and current data. Historically the Company has not experienced significant downward adjustments.
In addition, the Federal Acquisition Regulations govern the allowability of costs incurred by the Company in the performance of U.S. Government contracts to the extent that such costs are included in its proposals or are allocated to U.S. Government contracts during performance of those contracts.
The Company's subcontracts provide that they may be terminated at the convenience of the U.S. Government. Upon such termination, the contractor is normally entitled to receive the purchase price for delivered items, reimbursement for allowable costs incurred and allocable to the contract and an allowance for profit on the allowable costs incurred or adjustment for loss if completion of performance would have resulted in a loss. In addition, the Company's subcontracts provide for termination for default if the Company fails to perform or breaches a material obligation. In the event of a termination for default, the customer may have the unilateral right at any time to require the Company to return unliquidated progress payments pending final resolution of the propriety of the termination for default. The Company may also have to pay the excess, if any, of the cost of purchasing a substitute item from a third party. If the customer has suffered other ascertainable damages as a result of a sustained default, the customer could demand payment of such damages by the Company.
In connection with the Company's U.S. Government business, the Company also is subject to Government investigations of its policies, procedures and internal controls for compliance with procurement regulations and applicable laws. The Company may be subject to downward contract price adjustments, refund obligations or civil and criminal penalties. In certain circumstances in which a contractor has not complied with the terms of a contract or with regulations or statutes, the contractor might be debarred or suspended from obtaining future contracts for a specified period of time. Any such suspension or debarment of the Company would have a material adverse effect on the Company's business.
It is the Company's policy to cooperate with the Government in any investigations of which it has knowledge, but the outcome of any such Government investigations cannot be predicted with certainty. The Company believes it has complied in all material respects with applicable government requirements.
Environmental Protection
Compliance with federal, state and local laws or regulations, which govern the discharge of materials into the environment, has not had a material adverse effect upon the capital expenditures, earnings or competitive position of the Company.
EMPLOYEES
As of the end of the fiscal year, the Company employed 274 persons. Of such employees, 173 were employed in the microelectronic segment and 96 in the display segment and 5 in corporate administration. A total of 53 of the Company's employees in the display segment were employed pursuant to collective bargaining agreements covering workers at the Company's Display Division in Fort Wayne, Indiana. This agreement is effective through October 2001. The Company believes its labor relations are satisfactory.
FINANCIAL INFORMATION BY GEOGRAPHIC SEGMENT
See Note 18 in Notes to the Consolidated Financial Statement for information relating to foreign sales by geographic segment.
RISK FACTORS
OPERATING RESULTS
Capital Expenditures, Research and Development and Other Costs. The need for continued significant expenditures for capital equipment purchases, research and development and ongoing customer service and support, among other factors, will make it difficult for the Company to reduce its operating expenses in a particular period if the Company's net sales for a period are not met because a substantial component of the operating expenses are fixed costs. Accordingly, there can be no assurance that the Company will be able to be profitable or that it will not sustain losses in future periods. Due to the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such an event, the price of the Company Common Stock may be materially adversely affected.
Microelectronic Business. In connection with the Company's microelectronics memory business, a wide array of factors could cause the Company's results of operations and gross margins to fluctuate in the future from period to period. The primary factors that might affect the Company's results of operations in this regard include the cyclic ability of the semiconductor market; any loss of a principal customer or any short term loss of a customer due to product inventory accumulation by the customer; any inability to procure required components; any adverse changes in the mix of products sold by the Company; and any downturn of the semiconductor market which could cause a decline in selling unit prices, diminished inventory value, and less demand for commercial memory products as customers restrict inventory levels.
Reduction in Inventory Values. Reduction in value of the Company's inventories due to unexpected price declines, as has occurred in the past in connection with a softening of the semiconductor industry, could adversely affect the Company's results of operations. Such declines in inventory valuation have had an adverse effect on the Company's financial condition and results of operations in the past and could have an adverse effect on the Company's financial condition and results of operations in future periods.
DEPENDENCE ON DEFENSE INDUSTRIES
Our current contracts with defense-related companies account for a material portion of the Company's overall revenues. Military capital expenditure levels have been declining for some years now and depend on factors that are outside the control of the Company. In addition, the U.S. defense industry has been moving toward the purchase of commercial "off-the-shelf" (COTS) products rather than those manufactured as compliant to specified military standards. In fiscal 2000, military and display related sales accounted for approximately 46% of the Company's overall sales. Changes in military spending and the shift in military demand for microelectronics products have had an adverse effect on the sales and profit of the Company. Continued reductions in military spending could adversely affect the sales and profits of the Company.
DEPENDENCE ON INTERNATIONAL SALES AND PURCHASES
The Company anticipates that international sales will continue to account for a significant portion of the Company's net sales. In fiscal 2000, foreign sales accounted for approximately 16% of the Company's overall sales. In addition, the majority of the components used by the Company in connection with products for military applications are acquired from foreign manufacturers worldwide, particularly countries located in Asia. As a result, a significant portion of the Company's sales and purchases are subject to the risks of international business, including fluctuations in foreign currencies, trade disputes, changes in regulatory requirements, tariffs and other barriers, the possibility of quotas, duties, taxes or other changes or restrictions upon the importation or exportation of the products being implemented by the United States, timing and availability of export licenses and the general economies of these countries in which the Company transacts business. Foreign suppliers of semiconductor related materials are regularly threatened with, or involved in, pending trade disputes and sanctions which, if realized, could materially adversely effect the Company by closing off critical sources of supply for the raw materials used to produce our products.
DOWNTURN OF THE TELECOMMUNICATIONS INDUSTRY
Over the past several years, the telecommunications industry has seen explosive growth in sales mainly because of advances in computer technology, development of enhanced signal carrying technologies, and the expansion of the Internet. We currently sell a large majority of our commercial microelectronic products to original equipment manufacturers in the telecommunications industry. The growth of this industry has helped our commercial division grow significantly in the last two years. However, there can be no assurances that the industry will continue to grow at these high rates. The Internet is still in a formative and developmental stage. There may be unpredictable changes in the future that may cause reduced growth in Internet usage. It would be reasonable to assume that the telecommunications industry could someday experience a downturn in business, similar to many other industries that grew and matured. Given our current dependence on this industry for a large portion of our sales and profits, a downturn would have a material adverse effect on our business.
ABSENCE OF CONTRACTUALLY ASSURED SOURCES OF SUPPLY/GENERAL LIMITATIONS ON SUPPLY
The most significant raw materials that the Company purchases in its operations are memory devices in wafer, die and component forms and AMLCD panels. In a time of strong demand for memory integrated circuits and other products, sources of supply of wafers, die and other components may be constrained and subject to shortages, and the ability of the Company to compete is heavily dependent on its ability to maintain access to steady sources of supply. AMLCD panels may also be in short supply, at times. The Company does not have specific long-term contractual arrangements with its vendors, although it believes it has good relationships with its vendors. No assurance can be given that existing access to the current sources of supply of the Company may not be impaired in the future. Any such impairment could have a material adverse effect on the Company.
MAINTAINING QUALIFIED PERSONNEL
The Company's ability to compete in the market and successfully manufacture quality products is dependent on our ability to attract and retain qualified employees in the areas of product design, engineering, operations management, manufacturing production, and sales. The demand for people with expertise in these areas has been very high for the past several years, and competition for qualified talent is intense. We currently have open requirements for people in these areas, and have been unable to fill the positions for several months. This personnel shortage could limit our ability to expand both of our business segments. Also, the loss of key personnel in any one of these areas could have a material adverse effect on the results of the business segment.
RISKS OF TECHNOLOGY CHANGE AND DEVELOPMENT OF NEW PRODUCTS
The Company's future results of operations will be dependent upon its ability to improve and market its existing products and to develop, manufacture and market new products. There can be no assurance that the Company will be able to continue to improve and market its existing products or develop and market new products, or that technological developments will not cause the Company's products or technology to become obsolete or noncompetitive.
The Company's display products have been developed exclusively based on AMLCD products procured from Sharp Electronics Corporation ("Sharp"). Competitors in the flat panel display business are investing substantial resources in the development and manufacture of flat panel displays using a number of alternative technologies. In the event these efforts result in the development of products that offer significant advantages over Sharp's and the Company's products, and the Company is unable to improve its technology or develop or acquire alternative technology that is more competitive, the Company's business and results of operations will be adversely affected.
VOLATILE MARKET PRICE FOR COMPANY STOCK
The market price for the Company's common stock is subject to fluctuations in response to a number of factors, including variations in the Company's quarterly operating results, perceptions about market conditions in the microelectronics industry and the effect of general economic conditions, many of which are unrelated to the Company's operating performance. In addition, the stock market generally has experienced significant price and volume fluctuations. These market fluctuations could have a material adverse effect on the market price or liquidity of the Company's Common Stock.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of federal, state and local governmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. Increasing public attention has been focused on the environmental impact of microelectronic manufacturing operations. While the use of toxic, volatile or otherwise hazardous substances by the Company is small, there can be no assurance that changes in environmental regulations will not impose the need for additional capital equipment or other requirements. Any failure by the Company to control the use of, or to adequately restrict the discharge of, hazardous substances under present or future regulations could subject the Company to substantial liability or could cause its manufacturing operations to be suspended. Such liability or suspension of manufacturing operations could have a material adverse effect on the Company's business, financial conditions and results of operations.
ITEM 2
ITEM 2 PROPERTIES
The Company leases a facility under an operating lease in Phoenix, Arizona consisting of approximately 53,000 square feet. The facility is used as the Company's corporate offices and for all manufacturing of the military components of the microelectronic segment. The Company also leases a 33,000 square foot facility located in Westborough, Massachusetts for manufacturing and development of commercial microelectronic products and display products. The Company also subleases its former sales office in London, England under a long-term lease expiring in 2004. In addition, the Company owns a facility in Ft. Wayne, Indiana consisting of a building with approximately 75,000 square feet of space used for the manufacture of display and electromechanical products. The Company also owns ten acres of vacant land adjacent to the building. All of the Company's property has been pledged as security for the Company's line of credit and term loans with Bank One. Management considers these properties to be well maintained and adequate for their use. All properties have additional capacity, which could be utilized in the event of increased production requirements.
ITEM 3
ITEM 3 LEGAL PROCEEDINGS
On April 25, 1996 the U.S. Attorney's Office for the State of Arizona undertook an investigation of certain aspects of White Microelectronics contracts with prime contractors for the Federal government. The investigation focused on the interpretation of certain government contract specified testing requirements on incoming material. On March 13, 1998, the Company was notified by the U.S. Attorney's Office for the State of Arizona that it had closed its criminal investigation of White Microelectronics. On June 2, 2000 the Company reached a settlement with the U.S. Attorney's office concerning the Federal government's claim for civil damages based on their findings from the investigation. All payments have been made, in full, to settle all claims regarding this investigation.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. EXECUTIVE OFFICERS OF THE COMPANY
The names, ages, positions and business experience of all of the executive officers of the company are listed below. Officers are appointed annually by the Board of Directors at the meeting of directors immediately following the Annual Meeting of Shareholders and serve until the next annual election or until their successors have been elected and qualified or as otherwise provided in the Company's by-laws.
There are no family relationships between any of the directors and executive officers of the Company nor any arrangement or understanding between any such executive officer and any other person pursuant to which he was elected as an executive officer.
PART II
ITEM 5
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is currently traded on the NASDAQ National Market under the symbol WEDC. Prior to June 8, 2000, the Company's common stock was traded on the American Stock Exchange. The following table sets forth the high and low sales prices for the common stock by quarter over the last two fiscal years.
As of December 15, 2000, there were approximately 6,669 holders of record of the Common Stock. The Company has not paid cash dividends on its Common Stock and does not expect to do so in the foreseeable future. The Company intends to retain all earnings to provide funds for the operation and expansion of its business. One of the Company's credit agreements precludes the payment of cash dividends on the Company's common stock.
On January 5, 2000, the Company announced that it would redeem all outstanding shares of its Senior Voting Convertible Preferred Stock effective 5:00 p.m. (EST) February 7, 2000. During that period, holders of 117,523 shares of Senior Voting Convertible Preferred Stock exercised their right to convert such shares into 1,566,566 shares of the Company's Common Stock. The issuance was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) of the Act. The shares of the preferred stock were converted to common stock with no additional payment to the holders. An additional 723 shares of preferred stock were redeemed at the redemption price of $25.00 per share. A total of $18,075 was paid to redeem these shares. During the first quarter of fiscal 2000, 1,660 shares of preferred stock were converted into 22,127 shares of common stock with no additional payment to the holders.
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA (In thousands of dollars, except share and per share data)
Note 1: As a result of the merger October 26, 1998 of White Electronic Designs Corporation (formerly Bowmar Instrument Corporation) and Electronic Designs, Inc. (EDI), which was accounted for as a purchase by EDI of Bowmar, the financials for the 1996, 1997, and 1998 fiscal year ended include only the results of EDI.
Note 2 - See footnote 16 of the Consolidated Financial Statement provided elsewhere herein for discussion of discontinued operations.
Note 3 - In 1999 and 1998, fully diluted net income per share is considered to be the same as basic net income per share since the effect of the potentially dilutive convertible preferred is antidilutive.
This table should be read in conjunction with the Consolidated Financial Statements provided elsewhere herein.
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
On October 26, 1998, Bowmar Instrument Corporation ("Bowmar") merged with Electronic Designs, Inc. ("EDI"). In connection with the merger, Bowmar changed its name to White Electronic Designs Corporation (the "Company"). While Bowmar was the legal acquirer, the merger was accounted for as a reverse acquisition purchase whereby EDI was deemed to have acquired Bowmar for financial reporting purposes. Consistent with the reverse acquisition purchase accounting treatment, the historical financial statements presented for periods prior to the merger date are the financial statements of EDI, not the previously reported consolidated financial statements of Bowmar. The operations of both companies combined as White Electronic Designs have been included in the financial statements from the date of the merger.
Results of Operations Fiscal 2000 vs Fiscal 1999
Revenues
Net Sales increased 51% to $87.6 million for the year ended September 30, 2000 from $58.0 million in the same period of 1999. This increase was primarily due to a 63% increase in sales of microelectronic components to $74.3 million from $45.5 million. Sales of commercial memory products increased 74% from the previous year because of substantially higher shipment volume combined with increased average selling prices based on new product sales. Sales of high reliability products increased 48% from the previous year based on higher shipment volumes of monolithic products and level average selling prices when compared to the previous year. Display sales increased 6%, or $731,000, from the previous year on slightly higher shipment volumes.
Sales of semiconductor products, such as the components used to make our memory products, have historically been cyclical, and subject to wide fluctuations in supply and demand. Currently, the industry is experiencing high demand for certain memory components. While this demand has strengthened average selling prices, it has also caused a shortage of certain components. We have already seen lead-times for components, such as Flash and SRAM products, increase substantially. We are currently working to assure a steady flow of supplies from our vendors. The ability to increase our sales in the future will be dependent on our ability to obtain adequate supplies of semiconductor products from the manufacturers. There can be no assurances that we will be able to increase our allocations from the semiconductor vendors. Any increase in revenues and profits will also depend on the continued growth of various electronics industries that use our products such as manufacturers of telecommunications equipment, networking equipment, and military equipment.
Gross Margin
Gross margin as a percentage of net sales improved to 35.6% for the period ended September 30, 2000, from 26.8% in the previous year. The microelectronic segment saw margins improve to 34.6% from 25.6%. The improvement was primarily because of higher shipment volumes in both the commercial and high reliability memory products, which spread fixed manufacturing costs over more units, and a favorable product mix which included new commercial products and memory modules which have a higher average selling price. Gross margin for the display segment improved to 41.2% from 30.9% in the previous year because of a higher ratio of liquid crystal display sales and higher shipments of ruggedized liquid crystal displays which had higher selling prices than the product mix last year.
While gross margins have improved substantially since last year, we could experience competitive pressures in our markets from existing companies which could: 1) limit our ability to hold current average selling prices, 2) restrict our access to electronic and display components, or 3) make it harder for us to hire and retain key people in the manufacturing, technical, and engineering areas. Unfavorable events in any of these areas could impact our ability to manufacture product and maintain current sales or gross margins levels.
Accordingly, there can be no assurance we will be able to sustain our recent gross margins. We have taken various actions to maintain our gross margins, including purchasing new capital equipment to improve our efficiencies in the manufacturing areas to increase our throughput. We continue to work with semiconductor and display glass manufacturers to improve the availability of raw materials. We have also implemented programs to hire new employees and train, and retain our current employees to meet our production requirements. However, we currently have open requirements for engineering, marketing, and manufacturing personnel who are needed to pursue growth opportunities in both our business segments. We have been unable to fill these positions for several months. This personnel shortage could limit our ability to expand both of our business segments. Given the current demands of the labor market, there can be no assurance that we will meet all of our personnel requirements for either of our business segments.
Selling, General and Administrative Expenses
Selling expenses for the year ended September 30, 2000, increased $2.3 million from the same period of the previous year. Increases in spending for microelectronic sales represented $1.8 million of this increase. The largest component of the increase in microelectronic expenses was a $1.3 million increase in sales commission expenses based upon a 63% sales increase for the segment from the previous year. The remaining increase was mainly due to expenses for new sales personnel, advertising and marketing to support sales into the telecommunications markets. Selling expenses for the display segment were $510,000 higher than last year and were mainly used to target the aviation markets.
General and administrative expenses increased $1.2 million for the year ended September 30, 2000, when compared to the same period in the previous year. This increase is mainly due to higher salary and benefit expenses relating to employee incentive pay, legal expenses, costs associated with shareholder services and the change in listing of our common stock from the American Stock Exchange to the NASDAQ National Market.
For the year ended September 30, 2000, selling, general and administrative expense decreased as a percentage of sales to 16.1% from 18.4% in the prior year.
Research and Product Development Expenses
Research and development expenses for the year ended September 30, 2000 increased $1.4 million from the previous year and totaled 5.7% of net sales. The main source of the increase came from the microelectronic segment, which increased spending $1.5 million from the previous year. Major ongoing product development efforts include SDRAM, microprocessor modules, ball grid array products, development of new packaging designs for memory products, and qualification of new semiconductor products. The display segment expenses were $116,000 lower than last year mainly because of reductions in spending for interface and mechanical products. Spending on liquid crystal display development was approximately 10% of net sales in 2000.
We believe that continued strategic investment in process technology and product development is essential for us to remain competitive in the markets we serve. We are committed to the appropriate levels of expenditures for research and development.
Merger Expense
The merger expense of $850,000 incurred during fiscal 1999, related to the merger of Bowmar Instrument Corporation and Electronic Designs, Inc., which occurred on October 26, 1998 and formed White Electronic Designs Corporation. These expenses consisted mainly of severance costs and charges for professional services to complete the merger. No additional merger related costs were incurred during fiscal year 2000.
Discontinued Operations
In connection with the October 1997 sale by EDI of its Crystallume Diamond Products Division, the Company had recorded a receivable in the amount of $625,000. As previously disclosed, the buyer asserted an indemnity claim against the Company and refused to pay the $625,000 balance due, including the initial installment of $250,000, which was due on October 1, 1998. The Company and the buyer have resolved this matter. In exchange for executing mutual releases the Company has reduced the receivable to $325,000. The results of this settlement are reflected in the fiscal 1999 Statement of Income under results from discontinued operations.
Liquidity and Capital Resources
Cash on hand as of September 30, 2000 totaled $1,857,000. During fiscal year 2000, cash provided by operations was approximately $858,000. The sum of net income, depreciation, and amortization totaled approximately $9.0 million for the period. However, increases in accounts receivable, inventories, accounts payable and other assets, based on higher levels of sales activity, used approximately $11.0 million for working capital requirements. Cash balances increased approximately $1.5 million during the period. This increase was funded by borrowings under our line of credit, which increased $1.5 million from year-end.
During fiscal 2000, we recorded an increase in prepaid taxes because of an expected $2.8 million tax benefit from the exercise of stock options during the fiscal year. Without this entry, cash used by operations totaled $1,935,000.
Other uses of cash during fiscal 2000 included capital expenditures of $2.3 million, reduction of long-term debt of $730,000, first quarter Convertible Preferred Stock dividend payment of $89,000, and redemption of Convertible Preferred Stock of $18,075.
During the second quarter, we completed the redemption of our Convertible Preferred Stock. Over 99% of the shareholders elected to convert their Convertible Preferred Shares into shares of common stock. The remaining shareholders were paid a total of $18,075 based on redemption price of $25.00 per share. The redemption ended our requirement to pay quarterly dividends on the Preferred Shares of $89,000, and no dividends were paid after the first quarter.
Accounts receivable have increased $4.3 million from the year ended October 2, 1999. This increase is consistent with our higher quarterly sales when compared to the fourth quarter of last year ($25.1 million versus $17.6 million in the fourth quarter of 1999). The current accounts receivable balance of $14.7 million represents 58% of the current quarterly sales rate and is consistent with the 59% ratio at October 2, 1999.
Inventory levels have increased $9.3 million from the year ended October 2, 1999. This increase is consistent with our higher quarterly sales when compared to the fourth quarter of last year ($25.1 million versus $17.6 million in the fourth quarter of 1999). The current inventory balances also take into account projected production requirements. Also, because of potential semiconductor component shortages in the future, we are sometimes required to purchase inventory in advance of our needs to ensure a steady flow of material through the factory. Inventory amounts, when compared to the current quarterly sales rate, increased to 95% of quarterly sales at year-end 2000 compared to 83% of quarterly sales at year end 1999. We believe we are holding appropriate inventory levels, based upon lead times for our raw materials and projected production requirements.
Accounts payable were $4.1 million higher at the end of fiscal year 2000 than at the end of fiscal 1999. This is consistent with increased levels of production and requirements for raw materials as stated above.
Capital expenditures for the year ended September 30, 2000 totaled approximately $2.3 million. Approximately $1,273,000 has been spent to increase production capacity for our commercial memory products and over $700,000 has been spent to upgrade our hi-rel manufacturing equipment. Approximately $168,000 was spent to upgrade equipment in our Display division. We expect capital expenditures for fiscal
2001 to be at approximately the same level as fiscal 2000. Future capital expenditures will be funded by cash from operations, line of credit borrowings, or operating lease financing.
During the month of January 2000, we completed a new revolving credit agreement with Bank One. This agreement increased our maximum borrowing limit to $12.0 million from the previous limit of $6.0 million. The actual borrowing limit at any time is subject to available accounts receivable and inventory balances. As of the end of the fiscal year, we were in compliance with all debt covenant requirements in the loan agreement. We believe that cash generated by operations, in addition to our borrowing capability, should be sufficient to fund our cash needs for the next twelve months.
To improve our borrowing costs, during the month of June 2000, we negotiated a change to our revolving credit agreement with Bank One. The change allows us to borrow from our available line of credit at a rate of LIBOR (London Interbank Offering Rate) + 2.25% instead of the current prime rate. There were no other changes to the agreement.
Interest Expense
Interest expense increased $144,000 for the year ended September 30, 2000, when compared to the same period in the previous year. The increase was caused by additional borrowings against our line of credit to support higher inventory levels necessary to meet sales requirements.
Amortization of Intangible Assets
Amortization expense increased $21,000 for the year ended September 30, 2000. Twelve months of amortization has been taken in Fiscal 2000, while only eleven months of amortization were included in the same period of Fiscal 1999 because of the timing of the merger.
Seasonality and Inflation
The Company's business is not seasonal in nature. Management believes that the Company's operations have not been materially affected by inflation.
Certain matters discussed in this document contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. The words "believe," "expect," anticipate" and similar statements of expectation and statements regarding expected shipments of backlog, availability of supplies, increases in revenues and profits, and expected inventory and expenditure levels identify forward-looking statements that speak only as of the date the statement is made. These forward-looking statements are based on Management's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond the Company's control. Certain risks and uncertainties that may cause actual results, performance, or achievements to be materially different from those expressed, or implied, by the forward-looking statements include those set forth in the section titled "Risk Factors," below. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this document will prove to be accurate. Forward-looking statements speak only as of the date the statement was made. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements.
Recently Enacted Accounting Pronouncements
On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 establishes four criteria for revenue recognition, and clarifies the SEC's interpretation of other revenue recognition situations. The Company complies with the guidelines established for revenue recognition in SAB 101.
On May 2, 2000 the Emerging Issues Task Force (EITF) issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs. EITF 00-10 focuses on shipping and handling fees billed to customers and costs incurred by those companies that sell goods. The Company believes that adoption of this standard will have
no material effect on the Company's financial reporting and disclosure.
On April 3, 2000, the Financial Accounting Standards Board (FASB) issued FIN 44, Accounting for certain transactions involving stock compensation - an interpretation of APB 25. FIN 44 clarifies the application of Opinion 25 for certain issues. The Company believes that adoption of this standard will have no material effect on the Company's financial reporting and disclosure.
Year 2000
The Company surveyed its supporting computer systems and replaced, or upgraded all non-compliant systems to meet year 2000 compliance at Fiscal Year end 1999. We have continued to monitor all of our Year 2000 compliance issues through September 2000. There were no additional costs incurred for Year 2000 compliance in this period. We have not experienced any significant problems with suppliers, customers, or shipments because of Year 2000 compliance issues through the month of September 2000. We do not expect any business interruptions because of Year 2000 compliance issues in the future.
Results of Operations Fiscal 1999 vs 1998
Revenues
Fiscal 1999 and 1998 revenues were $58,038,000 and $32,772,000. The increase in net sales between fiscal 1999 and 1998 is due to the inclusion in the financial presentation for fiscal 1999 of the combined results of the former Bowmar and EDI. If the net sales of Bowmar had been included in the fiscal 1998, combined sales would have been $61,770,000. The primary reasons for the decrease in combined sales include reductions in spending from year to year in the defense industry, the lower average sales prices and the lower demand in the military memory market brought on by the conversion to commercial-off-the-shelf ("COTS") parts.
Gross Margins
As a percentage of sales, gross margin increased 1.3% during fiscal 1999 to 26.8% from 21.5% in fiscal 1998. If Bowmar's fiscal 1998 sales and cost of goods sold were included, gross margin as a percentage of sales would have increased in fiscal 1999 by 2% from fiscal 1998. This is mainly due to lower cost of sales and improved production efficiencies which were primarily due to lower material costs and headcount decreases. Cost of goods sold was negatively impacted by merger expenses resulting from the write up of inventories because of the allocation of the acquisition costs and severance payments to former employees.
Selling, General and Administrative Expenses
The inclusion of Bowmar's selling, general and administrative expenses in fiscal 1998 would have resulted in a decrease of $2,981,000 in fiscal 1999 compared to fiscal 1998. The decrease results from lower sales cost and commissions due to reorganization in the sales departments. In addition, the Company realized savings in selling, general and administrative expenses due to merger related efficiencies.
Research and Product Development Expenses
Product development expenses for fiscal 1999 increased by $1,092,000 from fiscal 1998. The inclusion of Bowmar's product development expenses in fiscal 1998 would have resulted in an increase of $464,000 in fiscal 1999 versus fiscal 1998. Product development expenses for fiscal 1998 increased $424,000 from fiscal 1997. The yearly increases are due primarily to increases in salaries and project costs associated with new product development.
Liquidity and Capital Resources
At October 2, 1999, working capital increased to $12,584,000 from $5,207,000 at September 30, 1998, principally as a result of the increase in current assets due to the merger. The Company's current ratio at fiscal year end 1999 improved to approximately 1.8 to 1. The Company's total debt-to-equity ratio remained at approximately 0.9 to 1.
In fiscal 1999 and 1998, the Company used $2,275,000 and generated $13,000 respectively of cash from operating activities. The major uses of cash in fiscal 1999 were $2,717,000 for the retirement of long term debt and $2,109,000 in payments for capital expenditures. Depreciation and amortization expense was $2,244,000 during fiscal 1999.
Capital expenditures in fiscal 1999 primarily consisted of $400,000 for upgrading to a new computer system and related costs, $700,000 for test equipment and $125,000 for facility upgrades. The remaining $884,000 in expenditures was for manufacturing and general office equipment.
The Company's capital expenditure plans are principally to expand manufacturing capacity and are expected to be financed largely through existing credit lines, and to a lesser extent, through funds provided from operating leases.
With the inclusion of Bowmar's balance sheet account balances as of the date of the merger, other major changes in balance sheet accounts during fiscal 1999 include: an increase in accounts receivable of $4,394,000 mainly due to shipment timing differences from previous years; an increase in inventories of $2,433,000 in connection with the higher year-end backlog; accounts payables and accrued expenses that partially offset the above working capital changes by increasing $2,556,000 from fiscal 1998. The current portion of long-term debt increased $2,104,000 relating to the Company's line of credit, which increased to $4,730,000 from $2,332,000 at the end fiscal 1998. This increase was partially offset by retirement of the current portion of long-term debt of $2,332,000 during fiscal 1999.
Interest Expense
Interest expense increased $351,000 from fiscal 1998 mainly because of increased borrowings under the line of credit.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of the fiscal year ended September 30, 2000 we had an outstanding balance of $6.2 million borrowed against our revolving line of credit with Bank One. During the fiscal year, the average outstanding balance on a daily basis was approximately $4.0 million. The interest charged against these borrowings is a combination of the Bank One "prime rate," which is similar to the prime rate charged by major banking institutions in the United States, and the London Interbank Offering Rate (LIBOR) plus 2.25%. During fiscal 2000 the "prime rate" averaged 9.19%, and was at 9.5% as of September 30, 2000. Currently, LIBOR plus 2.25% is approximately 8.88%.
Based on average borrowings of $4.0 million per year, a hypothetical rate change of 0.5% would increase our interest expense approximately $20,000 per year from current expense levels. Using an average outstanding balance of $6.0 million, a 0.5% rate increase would increase our interest expense approximately $30,000 per year from current expense levels. We believe that moderate interest rate increases will not have a material adverse impact on our results of operations, or financial position, in the foreseeable future.
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of this Annual Report for the Consolidated Financial Statements of the Company and required supplementary data.
PART III
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item for directors is set forth in the Company's 2001 Proxy Statement relating to the Company's Annual Meeting of Stockholders to be held on February 22, 2001, (the "2001 Proxy Statement"), under the heading "Election of Directors" and the heading "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by this reference as if set forth in full. The information required by this Item for Executive Officers of the Company is set forth in Part I of this Form 10-K, under the heading "Executive Officers of the Company."
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's 2001 Proxy Statement under the heading "Executive Compensation" and is incorporated herein by this reference as if set forth in full, however, the information set forth under the headings "Report of the Compensation Committee" and "Stock Price Performance Graph" contained in the 2001 Proxy Statement are not incorporated by reference.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's 2001 Proxy Statement under the heading "Principal Stockholders" and under the heading "Security Ownership by Management" and is incorporated herein by this reference as if set forth in full.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the Company's 2001 Proxy Statement under the heading "Certain Transactions" and under the heading "Compensation Committee Interlocks and Insider Participation" and is incorporated herein by this reference as if set forth in full.
PART IV
ITEM 14
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Supplementary Data
(a)(2) Financial Statement Schedules for the Years Ended September 30, 2000, October 2, 1999, and September 30, 1998
Financial statement schedules have been omitted because either they are not required or are not applicable, or because the information has been included in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
(b) Reports on Form 8-K
None.
(c) See (a)(3) above.
(d) Not applicable.
* Filed herewith.
** Management compensatory contract, plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WHITE ELECTRONIC DESIGNS CORPORATION
Date: December 27, 2000 /s/William J. Rodes --------------------- --------------------------- William J. Rodes Chief Accounting Officer, Secretary, Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated:
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF WHITE ELECTRONIC DESIGNS CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholder's equity, and of cash flows present fairly, in all material respects, the financial position of White Electronic Designs Corporation and Subsidiary at September 30, 2000 and October 2, 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Phoenix, Arizona November 10, 2000
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands of dollars)
The accompanying notes are an integral part of these consolidated financial statements. WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME (In thousands of dollars except data and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands of dollars, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands of dollars)
The accompanying notes are an integral part of these financial statements.
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
White Electronic Designs Corporation, formerly Bowmar Instrument Corporation and its subsidiary (collectively "the Company"), designs and manufactures high density, microelectronic memory products, advanced matrix liquid crystal displays, interface products, and electromechanical components and packages. The Company's customers include both domestic and international government contractors and original equipment manufacturers. The majority of the sales and operating income are generated by the microelectronic business segment.
2. MERGER WITH ELECTRONIC DESIGNS, INC.
On October 26, 1998, Bowmar Instrument Corporation ("Bowmar") merged with Electronic Designs, Inc. ("EDI"). In connection with the merger, Bowmar changed its name to White Electronic Designs Corporation (the "Company"). While Bowmar was the legal acquirer, the merger was accounted for as a reverse acquisition purchase whereby EDI was deemed to have acquired Bowmar for financial reporting purposes. Consistent with the reverse acquisition purchase accounting treatment, the historical financial statements presented for periods prior to the merger date are the financial statements of EDI, not the previously reported consolidated financial statements of Bowmar. The operations of both companies combined as White Electronic Designs Corporation have been included in the financial statements from the date of the merger. Pursuant to the Merger each outstanding share of common stock of EDI was converted into 1.275 shares of common stock of Bowmar.
The following unaudited pro forma information shows the results of operations of EDI and Bowmar for the fiscal year ended 1998 assuming the companies had combined as of October 1, 1997.
This pro forma information does not purport to be indicative of the results that actually would have been obtained if the companies had been combined during the periods presented and is not intended to be a projection of future results.
3. SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of the Company. All significant inter-company accounts and transactions are eliminated. Certain amounts in prior fiscal years consolidated financial statements have been reclassified to conform to current presentation.
b. Fiscal Year-End
The Company's fiscal year-end is the Saturday nearest September 30.
c. Fair Value of Financial Instruments
The Company values financial instruments as required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments ("SFAS No. 107"). The carrying amounts of cash and cash equivalents and bank notes payable approximate fair value due to the short maturity of those instruments. The fair value of marketable securities and long-term investments is determined based on quoted market prices. The fair value of long-term obligations is estimated by discounting the future cash flows required under the terms of each respective debt agreement by current market rates for the same of similar issues of debt with similar remaining maturities.
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
d. Inventories
Inventories are valued at the lower of cost or market with costs determined using the average and standard costs methods with standard costs approximating actual.
e. Property, Plant and Equipment
Property, plant and equipment, including property under capital lease agreements, are stated at cost. Depreciation is determined on a straight-line basis over the estimated useful lives ranging from 5 to 20 years for buildings and improvements and 3 to 7 years for machinery and equipment. Leasehold improvements are amortized over the lives of the leases or estimated useful lives of the assets, whichever is less. When assets are sold or otherwise retired, the cost and accumulated depreciation are removed from the books and the resulting gain or loss is included in operating results.
f. Intangible Assets
Intangible assets represent the goodwill generated from the October 26, 1998 merger with White Electronic Designs Corporation and the October 10, 1995 acquisition of Electronic Designs, Inc. These assets are being amortized over periods ranging from four to five years. The intangible asset balances and related accumulated amortization as of fiscal year end 2000 and 1999 are as follows:
g. Government Contracts
Sales under government contracts, which are usually based on firm fixed price contracts, are recorded when the units are shipped and accepted by the government.
h. Sales Recognition and Accounts Receivable
The majority of the Company's sales are recognized when the products are shipped to the customer. Some product shipments to distributors may be returned based on conditions set forth in their distributor agreement. Therefore, product sales on these shipments to distributors are not recognized until the distributor ships the products to the end user customer. The Company also maintains reserves for warranty return expense based on normal return rates. In addition, the Company has reserves for potential credit losses, and distributor price protection adjustments. Based on historical experience, the Company believes it has adequate reserves to account for potential losses or adjustments. Write-offs for uncollectible accounts totaled $112,188 in fiscal 2000, $36,000 in fiscal 1999, and $26,000 in fiscal 1998.
i. Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are recognized, net of any valuation allowance, for deductible temporary differences and net operating loss and tax credit carryforwards.
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
i. Newly Issued Accounting Standards
On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 establishes four criteria for revenue recognition, and clarifies the SEC's interpretation of other revenue recognition situations. The Company does not believe that the adoption of SAB101 will have a significant impact on the consolidated financial statements.
On May 2, 2000 the Emerging Issues Task Force (EITF) issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs. EITF 00-10 focuses on shipping and handling fees billed to customers and costs incurred by those companies that sell goods. The Company believes that adoption of this standard will have no material effect on the Company's financial reporting and disclosure.
On April 3, 2000, the Financial Accounting Standards Board (FASB) issued FIN 44, Accounting for certain transactions involving stock compensation - an interpretation of APB 25. FIN 44 clarifies the application of Opinion 25 for certain issues. The Company believes that adoption of this standard will have no material effect on the Company's financial reporting and disclosure.
k. Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 reported period. Actual results could differ from those estimates.
l. Research and Development
Expenditures for research and development are expensed as incurred.
4. INVENTORIES
Inventories consist of the following:
The inventories are net of reserve for excess and obsolete inventories of $2,216,000 and $1,691,000 for fiscal 2000 and 1999 respectively.
5. OTHER ASSETS
Other assets for fiscal 2000 were $173,000. Other assets for fiscal 2000 consist of $22,500 in bank loan origination costs, $83,000 in security deposits and $67,500 in other general deposits. Other assets for fiscal 1999 consist of $57,000 in bank loan origination costs, $42,000 in security deposits and $91,000 in other general deposits.
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
At fiscal year-end 2000 and 1999, property, plant and equipment held under capital leases amounted to $375,000 and $375,000 respectively. Related accumulated amortization on this property and equipment amounted to $375,000 and $304,000 at the end of fiscal 2000 and 1999, respectively. Amortization expense for such equipment approximated $70,300, $94,000, and $94,000 for fiscal years 2000, 1999 and 1998, respectively.
7. LONG-TERM DEBT
Long-term debt consists of the following:
The availability of cash under the revolving line of credit is based on eligible accounts receivable and inventories. There is a charge of 1/4 of 1% per month on the unused portion of the line of credit.
The revolving line of credit agreement includes a covenant that precludes the payment of cash dividends on common stock.
The aggregate maturities of the above debt excluding the revolving line of credit are approximately $628,000 in 2001, $628,000 in 2002 and $891,000 in 2003.
The weighted average interest rate on long-term debt for fiscal 2000, 1999, and 1998 was approximately 9.05%, 8.05%, and 9.25% respectively.
8. INCOME TAXES
The provision (benefits) for income taxes on continuing operations consists of the following:
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the provision for income taxes on continuing operations between the U.S. statutory and effective rates follows:
The income tax effect of loss carry forwards, tax credit carryforwards and temporary differences between financial and tax reporting give rise to the deferred income assets and liabilities.
Deferred income taxes consisted of the following:
Based on the Company's taxable income in recent years and projecting future taxable income over the period in which the deferred income tax assets are deductible, the Company believes that it is more likely than not that it will realize the benefit of the deferred tax assets.
As of September 30, 2000, the Company had federal net operating loss carry forward for tax purposes of approximately $12,857,000, which expire at various dates through 2018. In addition, the Company has state tax net operating loss carryforwards of $2,995,000, which expire at various dates through 2003.
Ownership changes, as defined in Internal Revenue Code (IRC Section 382), have limited the amount of net operating loss tax credit carryforwards that can be utilized by the Company annually to offset future taxable income.
9. BENEFIT PLAN
The benefit plan statement lists pension benefit information as of September 30, 2000, pursuant to the Company's defined benefit pension plan for union employees at its Fort Wayne, Indiana facility pursuant to a
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
collective bargaining agreement. Benefits are based primarily on a benefits multiplier and years of service. The Company funds the amount equal to the minimum funding required plus additional amounts which may be approved by the Company from time to time. The following statements list pension benefit information as of September 30, 2000 and October 2, 1999.
In addition, the Company has an Incentive Savings 401(k) Plan covering non-union employees of the Company who have completed six months of service. During fiscal 2000, the Company matched employee
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contributions equal to 50% of the first 6% of a participant's wage base. During each of the fiscal years 2000, 1999, and 1998, the Company made contributions to the plan of approximately $219,375, $133,475, and $119,000 respectively.
10. STOCK OPTIONS, WARRANTS, AND STOCK PURCHASE PLANS
The Company has adopted the disclosure only provision of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123). As allowed by SFAS 123, the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its stock option plans. Accordingly, since all options are issued with exercise prices greater than or equal to the market price on the grant date, no compensation cost has been recognized for the stock option plans.
In connection with the merger with Electronic Design, Inc., Bowmar assumed all outstanding EDI options and EDI warrants exercisable for shares of EDI common stock and each such EDI option and EDI warrant was by virtue of the merger and without any action on the part of the holder thereof, exercisable for shares of Bowmar stock having the same terms and condition as the EDI options and EDI warrants (including such terms and conditions as may be incorporated by reference into the agreements evidencing EDI options and EDI warrants pursuant to the plans or arrangements pursuant to which such EDI options and EDI warrants were granted) except that the number of shares issuable upon exercise has been multiplied by the Exchange Ratio of 1.275 and rounded to the nearest whole number of shares of Bowmar Stock and the exercise price per share of EDI Stock under such option or warrants equals the exercise price per share of EDI Stock under such EDI options or EDI warrant divided by the Exchange ratio of 1.275 and rounded to the nearest cent.
Common Stock Warrants
During the year ended September 30, 1997, EDI, as part of a service agreement with an outside firm, issued warrants to purchase 45,000 shares of common stock at an exercise price of $3.875 per share, which vest upon achievement of specified goals. These warrants expired in December 1999. The Company assigned a value of $90,000 to these warrants, which was amortized to the income statement over the service period.
At September 30, 2000, warrants to purchase 56,281 shares of common stock issued prior to October 1, 1995, with an exercise price of $2.22, (using the exchange ratio of 1.275) and expiration date of August, 2001 were outstanding.
Stock Options Plans
In February 1987, EDI adopted the 1987 Stock Option Plan (the "Plan"). The Plan, as amended, allows for the issuance of up to 2,259,748 shares of the Company's common stock. Options granted under the Plan must be granted at the fair market value of such shares on the date of grant and must have an expiration date no more that ten years from the date of grant. Generally, options vest over a five-year period and expire five years from the date of grant. Additionally, in October 1995, in connection with the acquisition of EDI-MA, fully vested options to purchase 314,826 shares of the Company's common stock at $0.22 per share that were valued at $598,000 were issued to employee in exchange for fully vested options of EDI-MA. At the date of the merger with White Electronic Designs Corporation, Bowmar assumed all then outstanding unexercised EDI options and converted the number of shares issuable upon exercise and the exercise price per share using the 1.275 exchange ratio. Both EDI plans were then terminated, and there are no shares available for future grants. At September 30, 2000 there were 738,184 shares from the 1987 Stock Option Plan under option, and 149,493 shares from the EDI-MA acquisition plan under option.
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under Bowmar's shareholder approved 1994 Flexible Stock Plan, Common Stock is available for the grant of options, appreciation rights, restricted stock awards, performance shares and other stock-based awards. The vesting and terms of the options granted under this plan are determined when awarded by the Board of Directors. At September 30, 2000 there were 225,325 shares available for future grants to directors, officers and employees at prices not less than the fair value at the date of grant by the Board of Directors. At fiscal year-end 2000, 877,400 shares from the Company's 1994 plan are under option.
During fiscal 1995, the Board of Directors terminated Bowmar's shareholder approved 1986 Stock Option Plan. At fiscal year-end 2000, 1,500 shares from Bowmar's 1986 Plan remain under option.
The Company's approved Non-Qualified Stock Option Plan for Directors provides for the issuance of options to purchase shares of Common Stock to directors at an exercise price equal to the fair market value on the date of grant. At September 30, 2000, there were 153,492 shares available for future grants to the directors. The options are exercisable as early as six months after date of grant and expire in ten years. A total of 285,000 options under this Non-Qualified Plan have been issued to non-employee directors and 215,000 options remain unexercised at September 30, 2000.
During fiscal 1999, the Company's Board of Directors approved an independent grant to Mr. McGuinness for a nonqualified stock option to purchase up to 102,000 shares of common stock at an exercise price of $1.125 per share, vesting ratably over three years. At September 30, 2000, 102,000 shares from this independent option right are still under option.
A summary of the Company's stock option activity and related information is as follows:
The beginning balance of shares under option for fiscal 2000 was calculated by converting EDI's balance of option shares outstanding by the $1.125 exchange ratio and adding Bowmar's balance of option shares outstanding at fiscal year end 1999.
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes additional information about the Company's stock options outstanding as of September 30, 2000.
On December 6, 1996, the Bowmar Board of Directors approved the repricing of 213,500 options that were granted to officers and employees in 1995 under the Company's 1994 Flexible Stock Plan. The revised exercise price is $2.00 per share (approximately 25% over the market price on the date of the repricing) instead of the original exercise prices, which ranged from $3.125 to $3.375 per share.
On December 3, 1998, the Board of Directors approved the repricing of options to employees (excluding the Chief Executive Officer and the Chief Financial officer) of the Company. The revised exercise price is $1.125 per share (the market closing price on the date of repricing) instead of the original exercise prices that ranged from $1.688 to $3.490 per share. In the above table these options are shown as being canceled and new options granted.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its stock option plans under the fair value based method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options. The pro forma information for 2000, 1999 and 1998 follows: (In thousands except for per share information):
Because additional option grants are expected to be made in future years and options vest over several years, the pro forma impact on fiscal years 2000, 1999, and 1998 is not necessarily representative of the pro forma impact on reported results for future years.
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Purchase Plans
In November 1995, the EDI Board of Directors adopted the 1996 Employee Stock Purchase Plan. This plan provided for the purchase by employees of up to 250,000 shares of common stock at 85% of the fair market value on the first or last day of the offering period (as defined in the plan), whichever is lower. This plan was terminated in October 1998 resulting from the merger of EDI and the Company. There were no shares issued under this plan in fiscal 2000. There were no shares issued under this plan in fiscal 1999. There were 17,744 shares issued at $1.66 under this plan in fiscal 1998.
11. FINANCIAL INSTRUMENTS
The financial position of the Company at September 30, 2000, includes certain financial instruments, which may have a fair value that is different from the value currently reflected on the financial statements. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value.
Cash and Cash Equivalents: Cash is invested in overnight securities; therefore the fair value is equal to the carrying amount. The carrying amount of long-term debt is a reasonable estimate of fair value as stated rates of interest approximate current market rates.
12. COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under noncancelable lease agreements some of which include renewal options of up to five years. Total rent expense for 2000, 1999, and 1998 was $1,207,000, $1,337,000 and $609,000 respectively. Future minimum annual fixed rentals required under noncancelable operating leases having an original term of more than one year are $1,240,000 in 2001, $1,256,000 in 2002, $755,000 in 2003, $458,000 in 2004 and $481,000 thereafter.
On April 25, 1996 the U.S. Attorney's Office for the State of Arizona undertook an investigation of certain aspects of White Microelectronics contracts with prime contractors for the Federal government. The investigation focused on the interpretation of certain government contract specified testing requirements on incoming material. On March 13, 1998, the Company was notified by the U.S. Attorney's Office for the State of Arizona that it has closed its criminal investigation of White Microelectronics. On June 2, 2000 the Company reached a settlement with the U.S. Attorney's office concerning the Federal government's claim for civil damages based on their findings from the investigation. The settlement did not exceed the previous accrual made in the financial statements, and all payments have been made in full to settle all claims regarding this investigation. An accrual reversal of $250,000 was recorded in general and administrative expense during the third quarter.
During the past two years, the Company was required to pay tariffs on certain imported parts. The Company believed that the tariffs were not justified and appealed the assessment. In May 2000, the Department of Commerce issued a clarification to the Customs Department concerning these tariff assessments. The ruling validated the Company's position and resulted in a refund of previously paid tariffs of approximately $909,000.
13. PREFERRED STOCK
On January 5, 2000, the Company announced that it would redeem all outstanding shares of its Senior Voting Convertible Preferred Stock effective 5:00 p.m. (EST) February 7, 2000. During that period, holders of 117,523 shares of Senior Voting Convertible Preferred Stock exercised their right to convert such shares into 1,566,566 shares of the Company's Common Stock. The issuance was exempt from registration under
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) of the Act. The shares of the Preferred Stock were converted to common stock with no additional payment to the holders. An additional 723 shares of Preferred Stock were redeemed at the redemption price of $25.00 per share. A total of $18,075 was paid to redeem these shares.
14. CONCENTRATIONS OF CREDIT RISK
The Company sells its products primarily to large original equipment manufacturers, or electronic assembly houses in the United States. In fiscal 2000, one customer accounted for 19% of the Company's sales, that customer is Lucent Technologies. No other customer accounted for more than 5% of the total sales. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. At certain times throughout the year the Company may maintain certain bank accounts in excess of the FDIC insured limits.
15. SHAREHOLDERS RIGHTS PLAN
On December 6, 1996, the Board of Directors adopted a shareholder rights plan to protect shareholders against unsolicited attempts to acquire control of the Company, which do not offer what the Company believes to be an adequate price for all shareholders. To implement the plan, the Board declared a dividend of one common share purchase right (a "Right" or "Rights") for each outstanding share of the Company's Common Stock and entered into a rights agreement with American Stock Trust and Transfer, as Rights Agents (the "Rights Agreement"). If and when the Rights become exercisable, each Right will entitle the registered holder to purchase from the Company one share of Common Stock of the Company at a purchase price of $20.00 (subject to adjustment pursuant to certain anti-dilution provisions) (the "Purchase Price"). The terms of the rights are set forth in the Rights Agreements.
Separate certificates representing the Rights will be distributed only upon an event triggering a distribution. Pursuant to the Rights Agreement, if a person or group (an "Acquiring Person") acquires 15% or more of the Company's outstanding voting stock or announces a tender or exchange offer that would result in the ownership by the Acquiring Person of 15% or more of the outstanding voting stock, the Rights certificates will be distributed and each holder of the rights (other than the Acquiring Person) may either exercise the Rights to acquire Common Stock of the Company at the then Purchase Price or convert the Rights into that number of shares of Common Stock equal to the Purchase Price times the number of Rights held by the holder divided by 50% of the then current market price of the Common Stock.
In the event that the Company is acquired in a merger or other transaction where it is not the surviving corporation or where all or part of its Common Stock is exchanged for securities, cash or property of another person, or in the event that 50% or more of the Company's assets are sold, proper provision will be made so that each holder of the right (other than the Acquiring Person) will have the right to receive, upon exercise thereof, that number of shares of common stock of the acquiring corporation which at the time of such transaction will have a market value of two times the exercise price of the Right. Similarly, in the event that a person acquires 15% or more of the outstanding Common Stock of the Company, proper provision will be made so that each holder of a Right (other than the Acquiring Person) will thereafter have the right to receive upon exercise that number of shares of Common Stock of the Company having a market value of two times the exercise price of the Right.
The Rights Agreement also contains an exchange option. At any time after a person becomes an Acquiring Person, and prior to the acquisition by such Acquiring Person of 50% or more of the outstanding Common Stock of the Company, the Board of Directors may exchange the Rights (other than Rights owned by the Acquiring Person, which Rights shall become void), in whole or in part, at an exchange ratio of one share of Common Stock per Right.
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Finally, the Rights are subject to redemption. At any time prior to the tenth calendar day following the date of a public announcement that a person or group has become an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not part, at a price of $.01 per Right.
The terms of the Rights may be amended by the Board of Directors without the consent of the holders of the Rights, except that from and after such time as any person becomes an Acquiring Person, no such amendment may adversely affect the interests of the holders of the Rights. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. The Rights cannot be bought, sold or otherwise traded separately from the Common Stock. Certificates for Common Stock issued after the date of the Rights Agreement carry a notation that indicates the Rights are attached. The Rights will expire on December 5, 2006 unless extended or unless the Rights are earlier redeemed by the Company. The Rights Agreement was amended in connection with the EDI merger to exempt from operation of the Rights Agreement the execution of the Agreement and Plan of Merger with EDI and the transactions contemplated thereby.
16. DISCONTINUED OPERATIONS
On May 13, 1997, the Company announced the decision to divest Crystallume. As a consequence, the Company recorded a provision for loss on disposal of Crystallume of $973,000, which included a provision for operating losses during the phase out period (May 13, 1997 to the estimated date of disposal). Revenues related to discontinued operations were $744,000 for fiscal 1997. The losses from discontinued operations for fiscal 1997 were recorded net of current income tax benefits of $649,000. The results of Crystallume have been retroactively separated from the Company's ongoing operations in the consolidated statement of operations and, at September 30, 1997, the assets of Crystallume, consisting primarily of fixed assets, have been separately classified on the balance sheet as a current asset.
On October 27, 1997, the Company sold the assets, effective as of October 1, 1997, of Crystallume pursuant to an Asset Purchase Agreement (the "Agreement"). The assets sold include all intellectual property, manufacturing equipment, inventories and certain specific contracts related to Crystallume's diamond films and coating business. The buyer assumed none of the liabilities, except that it assumed the obligation to perform under the acquired contracts with Crystallume's customers, facility lessor and equipment lessors. The purchase price consisted of: $500,000 in cash at closing; $625,000 payable over three years, plus simple interest at 9.5%; and an agreement for future payments based on product and license revenues earned by the buyer using Crystallume intellectual property over the next five and seven years, respectively.
On October 1, 1998, the date that the first installment in the amount of $250,000 was due, the Company received a letter from the buyer asserting certain indemnity claims under the Agreement in the amount of the total purchase price and claimed its right to set-off its indemnifiable damages against amounts due to the Company. The Company and the buyer have resolved this matter. In exchange for executing mutual releases, the Company has reduced the receivable to $325,000. In fiscal 1999, $200,000 was received and $125,000 was received in fiscal 2000. This settlement resulted in a loss of $342,000 net taxes in fiscal 1999.
17. EARNINGS PER SHARE
The Company has adopted the provisions of the Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128") effective January 3, 1998. SFAS 128 requires the presentation of basic and diluted earnings per share. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon exercise of stock options. All prior period earnings per share amounts have been restated to comply with the SFAS 128.
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts):
The convertible preferred stock is not included in the calculation of dilutive earnings per share for fiscal 1999, because its inclusion would be anti-dilutive. The effect of common stock equivalents is not included in fiscal 1999 diluted loss per share calculation as their inclusion would be anti-dilutive.
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. OPERATIONS BY BUSINESS SEGMENTS
The Company operates in two business segments. The microelectronic segment packages semiconductor products mainly for memory storage. Its products are sold to original equipment manufacturers in the telecommunications, computer networking, aerospace defense, and military equipment industries. The display segment designs and manufactures AMLCD's and other interface products. Display products are sold mainly to customers in the aviation and aerospace industries. The segments have common customers, mainly in the aerospace defense industry. However, the products from each segment are usually purchased by different purchasing groups within the parent company. There are no intersegment sales. Transfers of inventory between segments are made at cost, and are treated simply as transfers between locations.
The assets identified by segment are those assets used in the companies operations and do not include general corporate assets such as cash, goodwill, or deferred tax assets. Capital expenditures report asset purchases and do not include equipment added through the use of operating leases.
A significant portion of the Company's business activity in each segment is from contractor's who have contracts with the United States Department of Defense.
The Company has two reportable business segments, each of which requires different design and manufacturing resources, and serve customers in different markets. The Microelectronic segment manufactures mainly memory products for use in telecommunications, data communications and military aerospace markets. The Display segment manufactures liquid crystal displays and electromechanical components for customers mainly in the aviation industry.
A significant portion of the Company's sales are to foreign customers. Export sales as a percent of total sales in fiscal 2000, 1999, and 1998 were 16%, 18%, and 24% respectively.
Foreign Sales by Major Geographic Segment (in thousands of dollars)
WHITE ELECTRONIC DESIGNS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATIONS BY BUSINESS SEGMENTS
19. INTERIM FINANCIAL RESULTS (UNAUDITED) (In thousand of dollars, except per share data)
(a) Earnings per share-assuming dilution is the same as earnings per share in fiscal 1999. (b) Both common and preferred shares were traded on the American Stock Exchange. On June 8, 2000, the Company began trading on the NASDAQ National Market. On February 7, 2000, the Preferred Stock was redeemed.
Exhibit Index
* Filed herewith.
** Management compensatory contract, plan or arrangement.