White Electronic Designs 10-Q 2001 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2001

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                 

Commission File Number 1-4817

WHITE ELECTRONIC DESIGNS CORPORATION
(Exact name of registrant as specified in its charter)

Indiana (State or other jurisdiction of incorporation or organization)	35-0905052 (I.R.S. Employer Identification No.)
3601 East University Drive Phoenix, Arizona (Address of principal executive offices)	85034 (Zip Code)
Registrant’s telephone number, including area code:	602/437-1520

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X   No         

At August 3, 2001, 19,549,182 shares of the Registrant’s Common Stock were outstanding.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEET
		CONSOLIDATED STATEMENT OF OPERATIONS
		CONSOLIDATED STATEMENT OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 2001 COMPARED TO THE PERIODS ENDED JULY 1, 2000
	ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II
	ITEM 5 OTHER INFORMATION
	ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
	SIGNATURES

WHITE ELECTRONIC DESIGNS CORPORATION

AND

SUBSIDIARIES

Index

PART I	FINANCIAL INFORMATION		2-11
	Item 1.	Financial Statements
		Consolidated Balance Sheets June 30, 2001, (Unaudited) and September 30, 2000	2
		Consolidated Statements of Operations for the Three Months and Nine Months ended June 30, 2001 and July 1, 2000, (Unaudited)	3
		Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2001 and July 1, 2000, (Unaudited)	4
		Notes to Consolidated Financial Statements (Unaudited)	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	12
PART II	OTHER INFORMATION		13
	Item 5.	Other Information	13
	Item 6.	Exhibits and Reports on Form 8-K	13

1

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands of dollars)

			June 30,		September 30,
			2001		2000
			(unaudited)
ASSETS
Current Assets
	Cash		$	2,437	$	1,857
	Accounts receivable, less allowance for doubtful accounts of $589 and $417			11,257		14,658
	Inventories, net			19,371		23,884
	Prepaid expenses			1,575		1,752
	Deferred income taxes			2,990		1,829
		Total Current Assets		37,630		43,980
Property, plant and equipment, net				8,237		8,025
Deferred income taxes				1,782		2,128
Goodwill and intangibles				8,479		690
Other assets, net				196		173
		Total Assets	$	56,324	$	54,996
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Current portion of long term debt		$	1,458	$	6,835
	Accounts payable			4,417		8,832
	Accrued salaries and benefits			1,885		3,342
	Accrued expenses			4,115		1,593
		Total Current Liabilities		11,875		20,602
Long term debt				1,047		1,519
Other long term liabilities				1,361		1,252
		Total Liabilities		14,283		23,373
		Shareholders’ Equity		42,041		31,623
		Total Liabilities and Shareholders’ Equity	$	56,324	$	54,996

The accompanying notes are an integral part of these financial statements.

2

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands of dollars except share data)

		Three months ended				Nine months ended
		June 30,		July 1,		June 30,		July 1,
		2001		2000		2001		2000
Revenues		$	22,087	$	23,035	$	75,382	$	62,483
Cost of revenues			14,886		15,083		55,721		40,395
Gross profit			7,201		7,952		19,661		22,088
Operating expenses:
	Research and development		1,413		1,167		4,186		3,529
	Selling, general and administrative		3,463		3,401		11,281		10,431
	Amortization of goodwill and purchased intangible assets		394		190		752		568
	Interest expense		101		159		464		435
	Total expenses		5,371		4,917		16,683		14,963
Income before income taxes			1,830		3,035		2,978		7,125
Provision for income taxes			780		1,170		1,336		2,757
Net income		$	1,050	$	1,865	$	1,642	$	4,368
Basic net income per share		$	0.05	$	0.10	$	0.09	$	0.25
Basic weighted average common shares			19,537,615		18,257,834		19,120,993		17,254,330
Diluted net income per share		$	0.05	$	0.10	$	0.08	$	0.23
Diluted weighted average-common shares and equivalents			20,257,257		19,477,096		20,601,370		19,330,848

The accompanying notes are an integral part of these financial statements

3

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands of dollars)

		Nine Months Ended
		June 30,			July 1,
		2001			2000
Net cash provided by operating activities		$	8,177		$	499
INVESTING ACTIVITIES:
Cash paid in acquisition, net of cash acquired			(531	)		—
Acquisition of property, plant & equipment			(1,479	)		(1,565	)
Net cash used in investing activities			(2,010	)		(1,565	)
FINANCING ACTIVITIES:
Borrowings/(payback) of line of credit, net			(5,377	)		1,293
Retirement of long-term debt			(472	)		(432	)
Issuance of common stock			262			1813
Redemption of preferred stock			—			(89	)
Payment of preferred stock dividend			—			(18	)
Net cash provided/(used) by financing activities			(5,587	)		2,567
Net change in cash		$	580		$	1,501
Cash at beginning of year			1,857			305
Cash at end of quarter		$	2,437		$	1,806
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest		$	464		$	435
NON CASH INVESTING AND FINANCING ACTIVITIES
	Issuance of common stock for business combination with Panelview, Inc.	$	7,992		$	—

The accompanying notes are an integral part of these financial statements.

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. CONSOLIDATED FINANCIAL STATEMENTS

The consolidated balance sheet as of June 30, 2001, the consolidated statements of operations for the third quarter and nine months ended June 30, 2001 and July 1, 2000, and the consolidated statements of cash flows for the nine months ended June 30, 2001 and July 1, 2000, have been prepared by the Registrant and are unaudited. The consolidated balance sheet of September 30, 2000, was derived from the audited financial statements. It is the opinion of management that all adjustments, which are of a normal recurring nature necessary to present fairly such financial statements, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000. The results of operations for the above noted quarter and nine months ended June 30, 2001 are not necessarily indicative of the operating results for the full year.

The preparation of financial statements in accordance 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, as well as revenues and expenses reported for the periods presented. The Company regularly assesses these estimates and, while actual results may differ, management believes that the estimates are reasonable.

Certain amounts in the financial statements and notes thereto have been reclassified to conform to current classifications.

2. NATURE OF OPERATIONS

White Electronic Designs Corporation and its subsidiaries design and manufacture 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 original equipment manufacturers in the telecommunications, defense, and instrumentation industries. The majority of the sales and operating income are generated by the microelectronic business segment.

3. EARNINGS (LOSS) PER SHARE

The Company has adopted the provisions of the Statement of Financial Accounting Standards No. 128, Earnings Per Share (“SFAS 128”). SFAS 128 requires the presentation of basic and diluted earnings per share (EPS). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed giving effect to all potential dilutive common shares that were outstanding during the period unless they are antidilutive. Potential dilutive common shares consist of the incremental common shares issuable upon exercise of stock options or conversion of the preferred shares to common shares.

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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:

	Three months ended
	June 30, 2001						July 1, 2000
	Income		Shares		Per Share		Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount
Net Income	$	1,050,000					$	1,865,000
Basic EPS Income available to common stock	$	1,050,000		19,537,615	$	0.05	$	1,865,000		18,257,834	$	0.10
Effect of Dilutive Securities Common stock options				719,642						1,219,263
Diluted EPS Income available to Common stock holders	$	1,050,000		20,257,257	$	0.05	$	1,865,000		19,477,096	$	0.10

		Nine months ended
		June 30, 2001						July 1, 2000
		Income		Shares		Per Share		Income		Shares		Per Share
		(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount
Net Income/(loss)		$	1,642,000					$	4,368,000
Less: Preferred stock dividends			—						89,000
Basic EPS
Income available to common stock		$	1,642,000		19,120,993	$	0.09	$	4,279,000		17,254,330	$	0.25
Effect of Dilutive Securities
	Conversion of Preferred Stock		—		—				89,000		710,376
	Common stock options				665,877						1,366,141
	Shares issued for Panelview purchase				814,500						—
Diluted EPS
Income available to Common stock holders		$	1,642,000		20,601,370	$	0.08	$	4,368,000		19,330,848	$	0.23

4. INVENTORIES

Inventories consist of the following (in thousands of dollars):

	June 30, 2001		September 30, 2000
Raw materials	$	9,314	$	12,163
Work-in-process		7,461		9,952
Finished goods		2,596		1,769
Total Inventories	$	19,371	$	23,884

Raw materials include reserves of $3,561,000 as of June 30, 2001 and $594,000 as of September 30, 2000.

During the second quarter, the Company undertook a review of its Microelectronic inventories in regard to slowing demand for products in the electronics industries. Based on this analysis, the Company took a reserve against inventory of $3,000,000 for items in which there was limited visibility of demand over the next twelve months. The charge for this reserve was recorded in the Company’s cost of revenue amount.

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5. OPERATIONS BY BUSINESS SEGMENT

The Company has two reportable business segments, each of which requires different design and manufacturing resources, and each serves customers in different markets. The Microelectronic segment manufactures mainly memory products for use domestically and internationally in telecommunications, data communications and military aerospace markets. The Microelectronic segment is comprised of a commercial and a military division. The Display segment manufactures liquid crystal displays, display viewing enhancements, and electromechanical components for customers in the aviation and instrumentation industries. Its customer base is also domestic and international. The Company’s Panelview subsidiary is included in the segment reporting information for the current fiscal year in the Display segment.

	Three Months Ended				Nine Months Ended
(In thousands of dollars)	June 30, 2001		July 1, 2000		June 30, 2001		July 1, 2000
Net Sales
Microelectronics	$	15,101	$	20,045	$	59,534	$	52,563
Display		6,986		2,990		15,848		9,920
Total Net Sales	$	22,087	$	23,035	$	75,382	$	62,483
Income Before Tax
Microelectronics	$	1,498	$	2,804	$	1,793	$	5,963
Display		332		231		1,185		1,162
Total Income Before Tax	$	1,830	$	3,035	$	2,978	$	7,125

	As of		As of
Identifiable Assets	June 30, 2001		September 30, 2000
Microelectronics	$	28,564	$	39,392
Display		19,882		7,508
General corporate		7,878		8,096
Total Assets	$	56,324	$	54,996

6. ACQUISITION OF PANELVIEW

On January 29, 2001, the Company completed the acquisition of Panelview, Inc., a manufacturer of display products located in Oregon. Panelview provides optical enhancements to display products sold to the transportation, medical and instrumentation markets.

The Company issued 905,000 shares of common stock in exchange for all of the outstanding shares of Panelview. Based on the average market price of the Company’s common stock in the period a few days before the acquisition date, the transaction had a value of approximately $9.0 million. This amount consists of $8,880,313 based on the market value of 905,000 shares of common stock, and $142,289 of direct acquisition costs. In addition, the former shareholders of Panelview can earn up to an additional $1 million of the Company’s common stock if certain revenue and operating contribution targets are met. The targets are based on Panelview’s performance over the twelve-month period from February 2001 through January 2002. If the targets are achieved, the stock will be issued in April 2002.

As of June 30, 2001, the financial results of the Panelview division do not make it appear likely that they will achieve the revenue and operating contribution targets required to earn an additional $1 million of the Company’s stock. Therefore, no liability has been accrued for this cost, at this time.

7

Panelview will continue to operate as a wholly owned subsidiary of the Company and is included in the Display segment. The combination was treated as a purchase for financial reporting purposes based on the following data.

Purchase Price based on Stock & Acquisition Costs	$	9,022,602
Liabilities Assumed		2,161,632
Total Purchase Cost	$	11,184,234
Assets Received		2,644,611
Acquired Goodwill	$	8,539,623
Amortization period of goodwill (in months)		80
Goodwill expense per month	$	106,745

As part of the purchase agreement, 90,500 shares of common stock were held in escrow pending any future claims that may arise against Panelview. If no claims arise, these shares will be issued January 29, 2002. A purchase liability, based on the market value of the common shares at the time of acquisition, of $883,125 has been accrued as a current liability.

7. RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has recently released FAS 142 concerning the amortization of goodwill from mergers accounted for using the purchase accounting method. The standard basically changes the method of expensing purchased goodwill from monthly amortization to a method that measures impairment of the goodwill asset. The Company intends to adopt FAS 142 in fiscal year 2002, which begins on September 30, 2001. The adoption of this standard will stop the amortization of the monthly goodwill expense from the Panelview purchase of $106,745 (See note 6.). At the end of fiscal 2002, or during the fiscal year, if necessary, the Company will assess the value of the goodwill asset for impairment, and calculate changes to its value. If the value of the asset is found to be impaired, an appropriate writedown expense will be taken at that time.

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 2001 COMPARED TO THE PERIODS ENDED JULY 1, 2000

Net Sales

Net Sales increased 21% to $75.4 million for the nine months ended June 30, 2001 compared to $62.5 million for the nine months ended July 1, 2000. This increase was primarily due to a 13% increase in sales of Microelectronic components to $59.5 million from $52.6 million. Sales of commercial memory products increased 13% from the previous year because of substantially higher shipment volumes in the first and second quarter of the current fiscal year. Sales of high reliability products increased 14% from the same period of the previous year based on higher shipment volumes and an increased percentage of module products, which have higher average selling prices than monolithic products. Display sales were $5.9 million higher than last year. Although Display volume has increased, the majority of the increase is due to the inclusion of Panelview’s $4.8 million of sales in the Fiscal 2001 reported sales.

For the quarter ended June 30, 2001, net sales decreased to $22.1 million from $23.0 million in the third quarter of the previous year, a 4% decrease. Sales in the commercial division fell 41%, a $5.2 million dollar decrease, to $7.6 million. The sales decrease was directly related to a slow down in the telecommunication and data communication markets. The decrease in sales for the commercial division

8

was partially offset by an increase in sales by the high reliability and display divisions. High reliability sales rose 4% over the comparable period in the prior year to $7.5 million. Although the average sales price of high reliability product decreased from the prior year, volume increased 10.4%. Display sales increased by $4.0 million from the prior year because of the inclusion of Panelview sales for the quarter of $3.2 million and an increase of $800,000 in ruggedized display sales.

Sales of semiconductor products, such as the components used to make memory products, have historically been cyclical, and subject to wide fluctuations in supply and demand. Currently, the industry is experiencing a slowdown in demand for memory components. While this decrease in demand has increased the availability of components, it has reduced the demand from our customers for some of our products, especially in the Commercial division, which sells mainly to the telecommunications industry. The length and extent of this economic slowdown is difficult to forecast. Therefore, the Company’s ability to continue to increase sales and profits will also depend on the continued growth of various electronics industries that use its products such as manufacturers of telecommunications equipment, networking equipment, and military equipment. There can be no assurances as to when this recovery will occur.

During the first nine months of fiscal 2001, 9% of total Company sales were to Cisco Systems. In addition, 10% of total Company sales were to Lucent Technologies. No other customer accounted for more than 5% of total Company sales during the first nine months. During the third quarter of Fiscal 2001, 12% of total Company sales were to Lucent Technologies, and 5% of total Company sales were to Ericsson. No other customer accounted for more than 5% of total sales during the third quarter. The loss of business from these customers could have an adverse impact on the Company’s financial performance. Companies in the telecommunications industry have released warnings over the past several months of slowing growth rates across the industry. This could also have an adverse affect on the Company’s future sales to this customer base.

The Company’s sales have not been seasonal over the course of a year.

Gross Margin

Gross margin as a percentage of net sales was 26.1% in the first nine months of Fiscal 2001, compared to 35.4% the first nine months of the comparative year. The Microelectronic segment saw a decline of margins to 24.0% from 34.1%. This decline was primarily caused by approximately $4.3 million of inventory related charges taken in the Microelectronic segment. Approximately $1.3 million of this charge related to product that was scrapped because of poor yields or obsolescence. The remaining $3.0 million was an inventory reserve taken against raw materials and finished goods. Because of a slowdown in demand for the Company’s products in the telecommunication industry, the inventory is not expected to be used within the next twelve months and therefore has a high probability of becoming obsolete over that period. Gross margin for the Display segment saw a decline during the first nine months to 34.0% from 42.0% in the previous year. Even though actual gross margin on Display sales increased by $1.2 million from the previous year, the percentage declined mainly because of the inclusion of Panelview products that traditionally have margins around 20%, while our ruggedized display products have margins around 40%.

Gross margins for the third quarter as a percentage of net sales decreased to 32.6% from 34.5% in the previous year. Gross margin percents for the microelectronic segment were approximately the same at 33.8% compared to 33.7% from the previous year. The stability was due to a reduction of costs including payroll expenses throughout the microelectronic segment, which helped to offset the lower average selling price of the current quarter. Gross margin for the Display segment declined to 29.9% from 39.8% mainly because of the inclusion of Panelview products in the third quarter which have margins of approximately 20% versus approximately 40% for our ruggedized display products.

The Company could experience competitive pressures in its markets from existing companies which could: 1) reduce the demand for its products, 2) limit its ability to hold current average selling prices, 3) restrict access to electronic and display components from our key suppliers, or 4) make it harder to hire and retain key people in the manufacturing, technical, and engineering areas. Unfavorable events in any of these areas could impact the Company’s ability to manufacture product and maintain current sales or

9

gross margin levels. Accordingly, there can be no assurance that the Company will be able to sustain its recent gross margins.

Research and Development Expenses

Research and development expenses for the nine months ended June 30, 2001 increased $657,000 from the same period in the previous year. These expenses totaled 5.6% of net sales for the current period, which was consistent with the same comparable period of the prior year. The main source of the increase came from the Microelectronic segment, which increased spending $681,000 from the previous year. During this period, the Microelectronic segment spent $230,000 to begin development of tamper resistant memory modules. Additional engineers were hired for the commercial division, as product development for the MCP products increased due to an increased demand for higher density, space saving solutions. Other major ongoing product development efforts in the Microelectronic segment include SDRAM, SSRAM, microprocessor modules, ball grid array products, development of new packaging designs for memory products, and qualification of new semiconductor products. The Display segment research and development expenses were $24,000 less than last year due to a reduction in interface equipment development.

For the quarter ended June 30, 2001, research and development expenses increased $246,000 from the previous year, totaling 6.4% of net sales. The Microelectronic segment increased spending by $289,000 for the three months ended June 30, 2001, $100,000 of which was directly related to the development of tamper resistant memory modules; while the Display research and development expenses decreased $43,000 from last year. The reduction in research and development expenses for interface products was partially offset by a $26,000 increase based on the inclusion of spending for Panelview products.

The Company believes continued strategic investment in process technology and product development is essential for it to remain competitive in the markets it serves. The Company is committed to appropriate levels of expenditures for research and development.

Selling, General and Administrative Expenses

Selling expenses for the nine months ended June 30, 2001, increased $771,000 from the same period of the previous year. Microelectronic sales expense represented $351,000 of this increase, while Display accounted for $420,000 of the increase. The largest component of the increase in Microelectronic sales expenses was a $214,000 increase in sales commission expenses based on a 13% sales increase for the segment from the previous year. The remaining increase was due to expenses for advertising and marketing to support sales in the commercial and military markets. The increase in the Display segment was mainly due to the inclusion of $431,000 of selling expenses for the Panelview division since its acquisition date.

For the quarter ended June 30, 2001, total selling expenses were $114,000 lower than the same period in the previous year. Microelectronic segment expenses were $410,000 lower than last year mainly due to minimal marketing projects in the third quarter and a reduction of overall selling expenses, including travel and salaries, in an effort to reduce costs. Commission expenses for the quarter were also $274,000 lower than the comparable quarter due to a 25% reduction of total sales for that segment. Selling expenses for the Display segment were $296,000 higher than the same period last year mainly because of the inclusion of $285,000 of selling expenses from the Panelview division.

General and administrative expenses, including corporate expenses, increased $79,000 overall for the nine months ended June 30, 2001, due to the inclusion of $292,000 of expenses from the Panelview division. This increase was offset by a decrease in corporate-wide employee incentive pay expense.

General and administrative expense for the quarter ended June 30, 2001, increased $177,000 when compared to the same period in the previous year. This increase was mainly due to the inclusion of $190,000 of Panelview general and administrative expenses.

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Interest Expense

Interest expense increased $29,000 for the nine months ended June 30, 2001, and decreased $58,000 for the three months ended June 30, 2001, when compared to the same periods of the previous year. Additional borrowings against the line of credit have declined during the third quarter due to an increased cash flow because of collection of accounts receivable and reduced inventory purchases. Interest rates have decreased significantly since last year with averages for the nine-month period dropping from 8.9% to 8.4% and quarterly averages declining from 9.2% to 7.3%.

Amortization of Goodwill and Intangible Assets

Amortization expense increased $184,000 for the nine months ended June 30, 2001, and increased $204,000 for the three months ended June 30, 2001, when compared to the same period of the previous year. The $39,000 per month of goodwill expense associated with the Electronic Designs and Crystallume merger in 1995 was fully amortized as of September 2000, resulting in a $350,000 decrease in amortization expense for the nine-month period. This decrease was offset by $534,000 of goodwill amortization expense resulting from the January 29, 2001 merger with Panelview.

Beginning in fiscal year 2002, the Company will adopt FAS 142 (see note 7.). The effect of this accounting standard will be to stop the monthly amortization of the goodwill acquired in the purchase of Panelview (see note 6.) The adoption of this standard for fiscal 2002 will reduce amortization expense by $106,745 per month.

Liquidity and Capital Resources

Cash on hand as of June 30, 2001 totaled $2.4 million. During the first nine months of fiscal 2001, cash provided by operations was approximately $8.2 million. The sum of net income, depreciation, and amortization totaled approximately $3.7 million. Accounts receivable and inventory were significantly lower on June 30, 2001, accounting for a large portion of net cash provided. Those changes in assets, along with a $516,000 stock option tax benefit, helped to offset the reduction of accounts payable.

Accounts receivable decreased $4.6 million from the fiscal year ended September 30, 2000. This decrease is consistent with lower quarterly sales in the third quarter when compared to the fourth quarter of last year. Sales were $22.1 million in the third versus $25.1 million in the fourth quarter of 2000. The current accounts receivable balance of $11.3 million represents 51% of the current quarterly sales rate and is lower than the 58% ratio at September 30, 2000. The decreased ratio reflects a higher collection rate in the Microelectronic segment. Accounts receivable totals include $1.2 million of receivables from the Panelview acquisition, resulting in a net decrease of receivables of $3.4 million from September 30, 2000.

Inventory levels have decreased $6.1 million from the year ended September 30, 2000. This decrease is partially the result of a $3.0 million inventory reserve taken against Microelectronic inventory, offset by the inclusion of $1.6 million of Panelview display inventory, resulting in a net decrease of $4.5 million from September 30, 2000. Inventory purchases within the fiscal third quarter of 2001 have been minimized in an effort to further reduce inventory on hand. The current inventory balances also take into account projected fourth quarter production requirements and order cancellations. Inventory amounts, when compared to the current quarterly sales rate, decreased from 95.1% of fourth quarter sales at year-end to 87.7% of sales for the last quarter. The Company is currently adjusting its inventory levels to match projected production requirements. The Company will continue to review inventory levels against projected demand, for obsolescence and lower of cost or market factors, and make appropriate adjustments when needed.

Accounts payable as of June 30, 2001, was $4.4 million less than at the end of fiscal 2000. The decrease was attributable to the decrease in inventory purchases and a company-wide reduction in overall spending. The inclusion of Panelview’s accounts payable of $566,000 in the Fiscal 2001 amounts partially offset the pay down of accounts payable.

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Capital expenditures for the nine months ended June 30, 2001, totaled approximately $1.5 million. Approximately $1.2 million was spent on production equipment for the Microelectronic manufacturing facilities, including $213,000 spent on an expansion to house the tamper-resistant memory module coating processes. The remaining capital expenditure funds were spent on computer equipment and various manufacturing equipment throughout the Company. Capital expenditures for the remaining portion of fiscal 2001 will probably be at a lower quarterly rate than the amounts incurred in the first nine months because the Company believes it currently has capacity to meet productions requirements for the remainder of the fiscal year. Cash from operations, line of credit borrowings, or operating lease financing will fund future capital expenditures.

The Company uses a $12 million revolving credit agreement with Bank One for short-term financing needs. As of the end of the third quarter, the Company was in compliance with all debt covenant requirements in the loan agreement. The Company believes that cash generated by operations, in addition to its borrowing capability, should be sufficient to fund its cash needs for the next twelve months.

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 other similar statements of expectations identify forward-looking statements, and include expectations regarding the future demand for the Company’s products, the effect of interest rate changes and future research and development and capital expenditures, that speak only as of the date the statement is made. These forward-looking statements are based largely 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 are described above and in the Company’s Annual Report on Form 10-K for the year ended September 30, 2000, and Registration Statement on Form S-3 dated April 11, 2001, under the heading “Risk Factors”. 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. Actual results may differ materially from those in the forward-looking statements.

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of the end of the quarter ended June 30, 2001 the Company had an outstanding balance of $830,000 borrowed against its revolving line of credit with Bank One. During the first nine months, the average total outstanding balance of the line of credit on a daily basis was approximately $3.9 million. Interest is charged against the borrowings based on two rates: the Bank One “prime rate,” which is similar to the prime rate charged by major banking institutions in the United States, and a rate based on LIBOR (the London Interbank Offering Rate) plus 2.25%. During the first nine months of fiscal 2001, the Bank One prime rate averaged 8.42%, and was at 6.75% as of June 30, 2001. During the first nine months, the LIBOR plus 2.25% rate averaged 7.1%, and was at 6.4% as of May 30, 2001, which was the last date funds were in that account. During the first nine months, an average balance of $2.4 million was funded using the LIBOR plus 2.25% rate.

The Company is subject to changes in prime rate based on Federal Reserve actions and general market interest fluctuations. The Company is also subject to fluctuations in the LIBOR rate. Based on average borrowings of $3.9 million for the first nine months, a hypothetical rate increase of 0.5% would increase interest expense approximately $4,875 per quarter. Using the quarter ending outstanding balance of $830,000, a 0.5% rate increase would increase interest expense approximately $1,038 per quarter from the current expense level. The Company believes that moderate interest rate increases will not have a material adverse impact on its results of operations, or financial position, in the foreseeable future.

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PART II

ITEM 5

OTHER INFORMATION

On January 29, 2001, the Company completed the acquisition of Panelview, Inc., a manufacturer of display products located in Oregon. Panelview provides optical enhancements to display products sold to the transportation, medical and instrumentation markets.

The Company issued 905,000 shares of common stock in exchange for all of the outstanding shares of Panelview. Based on the average market price of the Company’s common stock in the period a few days before the acquisition date, the transaction had a value of approximately $9.0 million. This amount consists of $8,880,313 based on the market value of 905,000 shares of common stock, and $142,289 of direct acquisition costs. In addition, the former shareholders of Panelview can earn up to an additional $1.0 million of the Company’s common stock if certain revenue and operating contribution targets are met. The targets are based on Panelview’s performance over the twelve-month period from February 2001 through January 2002. If the targets are achieved, the stock will be issued in April 2002.

As part of the purchase agreement, 90,500 shares of common stock were held in escrow pending any future claims that may arise against Panelview. If no claims arise, these shares will be issued January 29, 2002. A purchase liability, based on the market value of the common shares at the time of acquisition, of $883,125 has been accrued as a current liability.

As of June 30, 2001, the financial results of the Panelview division do not make it appear likely that it will achieve the revenue and operating contribution targets required to earn an additional $1.0 million of the Company’s stock. Therefore, no liability has been accrued for this cost.

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ITEM 6

EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

2.1	Agreement and Plan of Merger dated May 3, 1998 by and among Bowmar Instrument Corporation and Electronic Designs, Inc. and Bravo Acquisition Subsidiary, Inc. (incorporated herein by reference to Exhibit 2 to the current Report on Form 8-K filed on May 6, 1998.)
2.1A	Amendment to Agreement and Plan of Merger dated June 9, 1998 (incorporated herein by reference to Exhibit 2.1A to the Registration Statement on Form S-4, filed on June 11, 1998, Registration No. 333-56565).
2.1B	Amendment to Agreement and Plan of Merger dated August 24, 1998 (incorporated herein by reference to Exhibit 2.1B to the Registration Statement on Form S-4, filed on September 2, 1998, Registration No. 333-56565).
3.1	Amended and Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Annual Report on Form 10-K filed December 24, 1998).
3.2	Amended and Restated Code of By-laws (incorporated herein by reference to Exhibit 3.2 to Annual Report on Form 10-K filed December 24, 1998).
4.1A	Amendment No. 1 to Rights Agreement, effective as of May 3, 1998 (incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-4, filed on June 11, 1998, Registration No. 333-56565).

     Reports on Form 8-K.

     None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

WHITE ELECTRONIC DESIGNS CORPORATION

/S/ Hamid R. Shokrgozar
Chief Executive Officer

/S/ William J. Rodes
William J. Rodes
Chief Accounting Officer

Dated: August 13, 2001

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