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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: July 1, 2000
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 35-0905052
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3601 EAST UNIVERSITY DRIVE
PHOENIX, ARIZONA 85034
(Address of principal executive offices) (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 July 1, 2000, 18,306,988 shares of the Registrant's Common Stock were
outstanding.
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WHITE ELECTRONIC DESIGNS CORPORATION
AND
SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION............................................ 2-13
Item 1. Financial Statements
Consolidated Balance Sheets
July 1, 2000, (Unaudited) and
October 2, 1999.................................... 2
Consolidated Statements of Operations for the
Third quarter and Nine months ended
July 1, 2000 and July 3, 1999, (Unaudited)......... 3
Statement of Shareholders' Equity
Third quarter Ended July 1, 2000 (Unaudited)........ 4
Consolidated Statements of Cash Flow for the
Nine months ended July 1, 2000
and July 3, 1999, (Unaudited)........................ 5
Notes to Consolidated Financial
Statements (Unaudited)............................. 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................................... 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................. 13
PART II OTHER INFORMATION................................................
Item 2. Changes in Securities and Use of Proceeds............ 13
Item 6. Exhibits and Reports on Form 8-K..................... 14
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WHITE ELECTRONIC DESIGNS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
- ---------------------------------------------------------------------------------------
July 1, October 2,
2000 1999
(unaudited)
- ---------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 1,806 $ 305
Accounts receivable, less allowance for
doubtful accounts of $436 and $304 14,001 10,374
Inventories 17,190 14,583
Prepaid expenses 2,122 354
Deferred income taxes 1,761 2,098
- ---------------------------------------------------------------------------------------
Total Current Assets 36,880 27,714
Property, plant and equipment, net 7,768 7,445
Deferred income taxes 1,978 1,978
Goodwill and intangibles 876 1,444
Other assets, net 135 190
- ---------------------------------------------------------------------------------------
Total Assets $ 47,637 $ 38,771
=======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt $ 6,652 $ 5,165
Accounts payable 6,697 4,697
Accrued salaries and benefits 2,455 2,240
Accrued expenses 1,183 3,028
- ---------------------------------------------------------------------------------------
Total Current Liabilities 16,987 15,130
Long term debt 1,623 2,249
Other long term liabilities 1,252 1,190
- ---------------------------------------------------------------------------------------
Total Liabilities 19,862 18,569
- ---------------------------------------------------------------------------------------
Shareholders' Equity 27,775 20,202
- ---------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 47,637 $ 38,771
=======================================================================================
The accompanying notes are an integral part of these financial statements.
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WHITE ELECTRONIC DESIGNS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(in thousands of dollars, except share and per share data)
- --------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $ 23,035 $ 15,172 $ 62,483 $ 40,434
Cost of revenues 15,083 10,580 40,395 30,683
- --------------------------------------------------------------------------------------------------------------------------------
Gross margin 7,952 4,592 22,088 9,751
- --------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 1,167 888 3,529 2,751
Selling, general and administrative 3,401 2,561 10,431 7,435
Merger expenses 0 0 0 850
Amortization of intangible assets 190 189 568 543
Interest expense 159 126 435 333
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses 4,917 3,764 14,963 11,912
- --------------------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes 3,035 828 7,125 (2,161)
Income tax expense/(benefit) 1,170 335 2,757 (860)
- --------------------------------------------------------------------------------------------------------------------------------
Income/(loss) from operations $ 1,865 $ 493 $ 4,368 $ (1,301)
- --------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations
net of income tax benefit of $28 0 0 0 (342)
Net income/(loss) 1,865 493 4,368 (1,643)
- --------------------------------------------------------------------------------------------------------------------------------
Income/(loss) per share, continuing operations $ 0.10 $ 0.03 $ 0.25 $ (0.11)
Loss per share, discontinued operations - - - (0.02)
================================================================================================================================
Basic net income/(loss) per share $ 0.10 $ 0.03 $ 0.25 $ (0.13)
Basic weighted average common shares 18,257,834 15,808,401 17,254,330 15,189,362
================================================================================================================================
Diluted net income/(loss) per share $ 0.10 $ 0.03 $ 0.23 $ (0.13)
Diluted weighted average-common shares
and equivalents 19,477,096 15,808,401 19,330,848 15,189,362
================================================================================================================================
The accompanying notes are an integral part of these financial statements
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WHITE ELECTRONIC DESIGNS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JULY 1, 2000
(UNAUDITED)
(In thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------------------
Additional Total Share-
Preferred Common Treasury Paid-in Retained holders'
Stock Stock Stock Capital Earnings Equity
- -------------------------------------------------------------------------------------------------------------------------------
Balance, October 2, 1999 $ 120 $ 1,591 $ (4) $37,272 $(18,777) $ 20,202
Common stock issuance for exercise
of options: 808,701 shares 79 1,733 1,812
Tax benefit related to exercise
of stock options 1,500 1,500
Payment of preferred dividend (89) (89)
Net income 4,368 4,368
Conversion of preferred stock
to common stock: 1,588,693 shares (120) 159 (57) (18)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, July 1, 2000 $ - $ 1,829 $ (4) $40,448 $(14,498) $ 27,775
===============================================================================================================================
The accompanying notes are an integral part of these financial statements.
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WHITE ELECTRONIC DESIGNS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
Nine Months Ended
July 1, July 3,
2000 1999
- ----------------------------------------------------------------------------------------------------------
Net cash (used) by operating activities $ (1,001) $ (2,268)
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Acquisition of property, plant & equipment (1,565) (1,722)
Cash acquired in acquisition 224
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,565) $ (1,498)
==========================================================================================================
FINANCING ACTIVITIES:
Borrowings under line of credit, net 1,293 3,848
Retirement of long-term debt (432) (2,571)
Issuance of common stock 1,813 3
Tax benefit upon issuance of common stock for options 1,500 -
Payment of preferred stock dividend (89) (270)
Redemption of preferred stock (18) -
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 4,067 $ 1,010
- ----------------------------------------------------------------------------------------------------------
Net change in cash 1,501 (2,756)
Cash at beginning of year 305 2,756
- ----------------------------------------------------------------------------------------------------------
Cash at end of period $ 1,806 $ -
==========================================================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES
Details of acquisition
Fair value of assets acquired - $ 18,074
Fair value of liabilities assumed - (5,351)
==========================================================================================================
Net assets acquired - $ 12,723
Acquisition costs - $ (650)
- ----------------------------------------------------------------------------------------------------------
Stock issued in connection with the merger - $ 12,073
==========================================================================================================
The accompanying notes are an integral part of these financial statements.
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WHITE ELECTRONIC DESIGNS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of July 1, 2000, the consolidated statements
of income for the Third quarter ended July 1, 2000 and July 3, 1999, and the
consolidated statements of cash flows for the Nine months ended July 1, 2000 and
July 3, 1999, have been prepared by the Registrant without audit. In the opinion
of management 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 October
2, 1999. The results of operations for the above noted quarter ended July 1,
2000, are not necessarily indicative of the operating results for the full year.
2. 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. 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. All prior period earnings per share
amounts have been restated to comply with the SFAS 128.
The computation of net earnings (loss) per share is based on the weighted
average number of shares of common stock outstanding during the periods
presented.
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:
- --------------------------------------- ---------------------------------------------------------------------------------
THIRD QUARTER ENDED
JULY 1, 2000 JULY 3, 1999
- --------------------------------------- ---------------------------------------- ----------------------------------------
Per Per
Income Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- --------------------------------------- ------------- --------------- ---------- ------------ --------------- -----------
Earnings (loss), net of tax $ 1,865,000 $493,000
Less: Preferred stock dividends - 90,000
- --------------------------------------- ------------- --------------- ---------- ------------ --------------- -----------
BASIC EPS
Earnings (loss), net of tax $ 1,865,000 18,257,834 $0.10 $403,000 15,808,401 $0.03
- --------------------------------------- ------------- --------------- ---------- ------------ --------------- -----------
Effect of Dilutive Securities
Conversion of Preferred Stock -
Common stock options 1,219,263
- --------------------------------------- ------------- --------------- ---------- ------------ --------------- -----------
DILUTED EPS
Earnings (loss) available to
Common stock holders $ 1,865,000 19,477,096 $0.10 $403,000 15,808,401 $0.03
- --------------------------------------- ------------- --------------- ---------- ------------ --------------- -----------
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- --------------------------------------- ----------------------------------------------------------------------------------
NINE MONTHS ENDED
JULY 1, 2000 JULY 3, 1999
- --------------------------------------- ---------------------------------------- -----------------------------------------
Per Per
Income Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- --------------------------------------- ------------- --------------- --------- -------------- --------------- -----------
Earnings (loss), net of tax $ 4,368,000 $(1,301,000)
Less: Preferred stock dividends 89,000 270,000
- --------------------------------------- ------------- --------------- --------- -------------- --------------- -----------
BASIC EPS
Earnings (loss), net of tax $ 4,279,000 17,254,330 $0.25 $(1,571,000) 15,189,362 $(0.13)
- --------------------------------------- ------------- --------------- --------- -------------- --------------- -----------
Effect of Dilutive Securities
Conversion of Preferred stock $ 89,000 710,376
Common stock options 1,366,141
- --------------------------------------- ------------- --------------- --------- -------------- --------------- -----------
DILUTED EPS
Earnings (loss) available to
Common stock holders $ 4,368,000 19,330,848 $0.23 $(1,571,000) 15,189,362 $(0.13)
- --------------------------------------- ------------- --------------- --------- -------------- --------------- -----------
During the quarter ended July 3, 1999, the convertible preferred stock and the
common stock options were not included in the computation of diluted EPS because
their inclusion would have been antidilutive.
3. INVENTORIES
Inventories consist of the following (in thousands of dollars):
- --------------------------------------- -------------------------------------- -------------------------------------
JULY 1, 2000 OCTOBER 2, 1999
- --------------------------------------- -------------------------------------- -------------------------------------
Raw materials $9,376 $ 7,373
Work-in-process 6,538 4,659
Finished goods 1,276 2,551
- --------------------------------------- -------------------------------------- -------------------------------------
Total Inventories $ 17,190 $14,583
- --------------------------------------- -------------------------------------- -------------------------------------
4. COMMITMENTS AND CONTINGENCIES
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. In July 2000, the Company began
receiving refund checks for previously paid tariffs. The Company is currently
analyzing these refunds.
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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 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.
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
(In thousands of dollars) July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
- ----------------------------------------------------------------------------------------------------------------
NET SALES
Microelectronics $ 20,045 $ 12,142 $ 52,563 $ 31,436
Display 2,990 3,030 9,920 8,998
- ----------------------------------------------------------------------------------------------------------------
TOTAL NET SALES $ 23,035 $ 15,172 $ 62,483 $ 40,434
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAX
Microelectronics $ 2,804 $ 584 $ 5,963 $ (1,195)
Display 231 244 1,162 (116)
Merger costs 0 0 - (850)
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCOME BEFORE TAX $ 3,035 $ 828 $ 7,125 $ (2,161)
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS As of July 1, 2000 As of October 2, 1999
- ----------------------------------------------------------------------------------------------------------------------
Microelectronics $31,950 $24,239
Display 7,631 8,517
General corporate 8,056 6,117
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $47,637 $38,771
- ----------------------------------------------------------------------------------------------------------------------
During the first nine months of fiscal 2000, one customer, a large manufacturer
in the telecommunications industry, accounted for 17% of total company sales.
6. CHANGES IN CREDIT FACILITY
During the month of January 2000, the Company completed a new revolving credit
agreement with Bank One. This agreement increased our maximum borrowing limit to
$12 million from the previous limit of $6 million. The actual borrowing limit at
any time is subject to available accounts receivable and inventory balances. As
of the end of the third quarter, we were in compliance with all debt covenant
requirements in the loan agreement.
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.
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7. REDEMPTION OF CONVERTIBLE 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 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 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NET SALES
Net Sales increased 55% to $62.5 million for the nine months ended July 1, 2000
from $40.4 million in the same period of 1999. This increase was primarily due
to a 67% increase in sales of microelectronic components to $52.6 million from
$31.4 million. Sales of commercial memory products increased 79% 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 50% 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 were $922,000 higher than last year
on slightly higher shipment volumes, a 10% increase.
For the quarter ended July 1, 2000 net sales increased to $23.0 million from
$15.2 million in the previous year, a 52% increase. Again, this increase was
primarily caused by a 60% increase in sales of commercial memory products based
on higher shipment volumes and increased average selling prices on new product
sales. Sales of high reliability memory products were 75% higher than last year
because of substantially higher shipment volumes. Display sales for the third
quarter were approximately the same as last year at $3.0 million, as shipment
volumes and selling prices were comparable to the same period of the previous
year.
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.
Our continued 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. During the first nine months of fiscal 2000, approximately
17% of total Company sales were attributable to one customer in the
telecommunications industry. The loss of business from this customer could have
an adverse impact on our financial performance.
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GROSS MARGIN
Gross margin as a percentage of net sales improved to 35.4% in the first nine
months of fiscal 2000, from 24.1% in the previous year. The microelectronic
segment saw margins improve to 34.1% from 22.3%. The main causes of this
improvement were 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 42.0% from 30.3% in the previous year because of a
higher ratio of liquid crystal display sales as compared to electromechanical
products, and cost reductions at the Fort Wayne facility.
Gross margins for the third quarter as a percentage of net sales improved to
34.5% from 30.3% in the previous year. Gross margin percents for the
microelectronic segment improved to 33.7% from 29.2% mainly because of higher
shipment volumes in both the commercial and high reliability memory products,
and a favorable mix toward products with higher average selling prices. Gross
margin for the Display segment improved to 39.8% from 34.3% mainly because of
shipping a higher proportion 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, such
as purchasing new capital equipment to improve our efficiencies in the
manufacturing areas to increase our throughput. We are working 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 be able to meet all of our personnel requirements for
both of our business segments.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the nine months ended July 1, 2000
increased $778,000 from the same period in the previous year totaling 5.6% of
net sales. The main source of the increase came from the microelectronic
segment, which increased spending $868,000 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
$90,000 lower than last year mainly because of reductions in spending for
interface and mechanical products. Spending on liquid crystal display
development was approximately the same as last year and totaled 9.6% of net
sales.
For the three months ended July 1, 2000, research and development expenses
increased by $279,000 from the previous year, totaling 5.1% of net sales. The
microelectronic segment increased spending by $265,000 for the three months
ended July 1, 2000, which equaled 4.1% of net sales. Display research and
development expenses decreased $14,000 from last year and totaled 11.3% of sales
with the majority of spending for liquid crystal display development.
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.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses for the nine months ended July 1, 2000, increased $1.8 million
from the same period of the previous year. Increases in spending for
microelectronic sales represented $1.6 million of this increase. The largest
component of the increase in microelectronic expenses was a $1.4 million
increase in sales commission expenses based on a 65% 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 $206,000 higher than last year and were mainly used to target the aviation
markets.
For the three months ended July 1, 2000, selling expenses were $482,000 higher
than the same period in the previous year. Microelectronic segment expenses were
$335,000 higher than last year mainly because of a $451,000 increase in sales
commission expense based on an 65% sales increase for the segment. Selling
expenses for the Display segment were $147,000 higher than the same period last
year mainly because of higher payroll expense based on increased headcount and
$40,000 higher advertising expenses.
General and administrative expenses increased $1.2 million for the nine months
ended July 1, 2000, and increased $357,000 for the three months ended July 1,
2000, when compared to the same periods in the previous year. This increase is
mainly due to higher salary and benefit expenses relating to employee incentive
pay, legal expenses, and cost associated with shareholder services. Also, the
move of our common stock from the American Stock Exchange to the NASDAQ National
Market, accounted for approximately $100,000 of listing expenses in the third
quarter
For the nine months ended July 1, 2000, selling, general and administrative
expense decreased as a percent of sales to 16.7% from 18.4% in the prior year.
For the third quarter, selling, general, and administrative expenses decreased
to 14.8% of sales, from 16.9% in the previous year.
The merger expense of $850,000, which was incurred during the first nine months
of fiscal 1999, were costs relating to the merger of Bowmar Instrument
Corporation and Electronic Designs, Inc., which occurred on October 26, 1998 and
formed White Electronic Designs Corporation.
INTEREST EXPENSE
Interest expense increased $102,000 for the nine months ended July 1, 2000, and
increased $33,000 for the three months ended July 1, 2000 when compared to the
same periods in the previous year. The increase for the first nine months was
caused by additional borrowings against our line of credit to support higher
inventory levels in anticipation of higher third quarter sales, and higher
interest rates.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization expense increased $24,000 for the nine months ended July 1, 2000
and did not change for the three months ended July 1, 2000 when compared to the
same periods in the previous year. Nine months of amortization has been taken in
Fiscal 2000, while only eight months of amortization were included in the same
period of Fiscal 1999 because of the timing of the merger.
YEAR 2000
We have continued to monitor all of our Year 2000 compliance issues through July
2000. There were no additional costs incurred for Year 2000 compliance in the
third quarter. We have not experienced any significant problems with suppliers,
customers, or shipments because of Year 2000 compliance issues through the month
of July 2000. We do not expect any business interruptions because of Year 2000
compliance issues in the future.
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FINANCIAL CONDITION AND LIQUIDITY
Cash on hand as of July 1, 2000 totaled $1,806,000. During the first nine months
of fiscal 2000, cash used for operations was approximately $1,001,000. The sum
of net income, depreciation, and amortization totaled approximately $6.2 million
for the nine-month period. However, increases in accounts receivable,
inventories, accounts payable and other assets, based on higher levels of sales
activity, used approximately $7.2 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 $1.3 million
from year-end.
Also in the third quarter, we recorded an increase in prepaid taxes because of
an expected $1.5 million tax benefit from the exercise of stock options during
the first nine months. Without this entry, cash provided from operations would
have totaled $438,000.
Other uses of cash during the first nine months of fiscal 2000 included capital
expenditures of $1.6 million, reduction of long-term debt of $432,000, payment
of accrued expenses of $1.6 million, first quarter preferred dividend payment of
$89,000, and redemption of 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 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 dividend was paid in the third quarter.
Accounts receivable has increased $3.6 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 ($23.0 million versus $17.6 million in the
fourth quarter of 1999). The current accounts receivable balance of $14.0
million represents 61% of the current quarterly sales rate and is consistent
with the 59% ratio at October 2, 1999.
Inventory levels have increased $2.6 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 ($23.0 million versus $17.6 million in the
fourth quarter of 1999). The current inventory balances also take into account
projected fourth quarter 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, decreased from 83% of sales at year-end to 75% of sales for the last
quarter. We believe we are holding inventory levels, which are appropriate,
based on lead times for our raw materials and projected production requirements.
Accounts payable were $2.0 million higher than 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 nine months ended July 1, 2000 totaled
approximately $1.6 million. Approximately $900,000 has been spent to increase
production capacity for our commercial memory products and over $400,000 has
been spent to upgrade our hi-rel manufacturing equipment. An additional $70,000
was spent to install a new enterprise resource computer system that will be used
to improve manufacturing and administrative efficiencies throughout the Company.
Other expenditures included test, manufacturing, and computer equipment for the
high reliability and display divisions. We expect capital expenditures for the
remaining portion of fiscal 2000 to be less than levels achieved during the
first nine months. 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
million from the previous limit of $6 million. The actual borrowing limit at any
time is subject to available accounts receivable and inventory balances. As of
the end of the third quarter, we were in compliance with all debt covenant
requirements in the loan agreement. We believe that cash generated by
operations, in addition to our
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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.
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
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 our Annual Report on Form 10-K 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 RISKS
As of the end of the quarter ended July 1, 2000 we had an outstanding balance of
$6.0 million borrowed against our revolving line of credit with Bank One. During
the third quarter, the average outstanding balance on a daily basis was
approximately $4.2 million. The interest charged against these borrowings is the
Bank One "prime rate," which is similar to the prime rate charged by major
banking institutions in the United States. During the third quarter of fiscal
2000 this rate averaged 9.25%, and was at 9.50% as of July 1, 2000. Currently,
LIBOR plus 2.25% is approximately .6% lower than the Bank One "prime rate."
While we expect our borrowing rate change to decrease our interest expense, we
will still be subject to interest rate fluctuations based on LIBOR.
Based on average borrowings of $4.2 million per quarter, a hypothetical rate
change of 0.5% would increase our interest expense approximately $5,250 per
quarter from current expense levels. Using an average outstanding balance of
$6.0 million, a 0.5% rate increase would increase our interest expense
approximately $7,500 per quarter 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.
PART II
ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
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.
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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS.
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).
4.1 Rights Agreement, dated as of December 6, 1996 between the Registrant
and American Stock Transfer and Trust Corporation (incorporated herein by
reference to Exhibit 5C to the Current Report on Form 8-K filed December 19,
1996).
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, Registration No. 333-56565).
10.28* First Amendment to Loan and Security Agreement effective as of June
3, 2000 Promissory Note effective June 3, 2000 Notice of Final Agreement
effective June 3, 2000
11* Earnings per share computation
27* Financial Data Schedule
* Filed herewith.
b. 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
Corporate Controller
Dated: August 9, 2000
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