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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

OR

Commission File Number 1-4817

WHITE ELECTRONIC DESIGNS CORPORATION

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.

At February 4, 2003, 20,716,269 shares of the Registrant’s Common Stock were outstanding.

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WHITE ELECTRONIC DESIGNS CORPORATION
AND
SUBSIDIARIES

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

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

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

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

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

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

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION

The condensed consolidated balance sheet as of December 28, 2002, the consolidated statement of operations for the three months ended December 28, 2002 and December 29, 2001, and the condensed consolidated cash flows for the three months ended December 28, 2002 and December 29, 2001, have been prepared by the Company and are unaudited. The consolidated balance sheet as of September 28, 2002, was derived from the audited consolidated 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 consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 28, 2002. The results of operations for the above noted three months ended December 28, 2002 are not necessarily indicative of the operating results for the full year.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, 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 consolidated financial statements and notes thereto have been reclassified to conform to current classifications.

2. EARNINGS PER SHARE

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.

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:

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Options excluded from the calculation of diluted net income per share were 195,000, as the exercise price was greater than the average share price for the period.

3. INVENTORIES

Net inventories consist of the following (in thousands of dollars):

4. ACCRUED EXPENSES

Accrued expenses consists of the following major categories:

Deferred revenue represents cash payments for products that have not been completed and shipped.

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. OPERATIONS BY BUSINESS SEGMENT

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. Certain industries require these semiconductor parts to pass specific qualifications due to their application requirements of those components. A commercial grade component generally meets the standard of industries such as the telecommunication and computer networking industries. A higher-grade component, known as a high-reliability component, is needed in industries such as aerospace defense and military equipment industries. High-reliability components are designed to meet more stringent standards and are resistant to adverse conditions, such as extreme temperatures, both high and low. High-reliability components can also be used in commercial and industrial applications where components are exposed to harsh conditions. The microelectronic segment also offers tamper resistant coating technology, which is used to secure microelectronics in various military applications.

The Company’s second business segment is the display segment. The display segment manufactures ruggedized and commercial liquid crystal displays and display viewing enhancements. Ruggedized displays are manufactured to perform in harsh environmental conditions. Commercial display products offer greater viewing performance than off-the-self displays, but are not designed for harsh environmental conditions. The display segment serves a number of markets, to include transportation, GPS systems, military avionics, commercial avionics, medical patient monitors, and various military applications.

The Company’s segments have common customers, mainly in the aerospace defense industry. Different purchasing groups within the customers’ parent company, however, usually purchase the products from each segment. There are no inter-segment sales.

The assets identified by segment are those assets used in the Company’s 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.

The Company sells its products primarily to original equipment manufacturers, or electronic assembly houses in the United States. Two customers from the display segment, Garmin International, and General Electric’s Medical Division accounted for 14% and 9.5%, respectively, of total Company sales for the three months ended December 28, 2002. The loss of either of these customers would have a material effect on the Company’s results of operations.

A significant portion of the Company’s business activity in each segment is from contractors who have contracts with the United States Department of Defense.

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. STOCK OPTIONS AND STOCK PURCHASE PLANS

The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (SFAS 148). 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.

A summary of the Company’s stock option activity and related information is as follows:

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes additional information about the Company’s stock options outstanding as of December 28, 2002.

Stock Purchase Plans

No shares were issued under the employee stock purchase plan during the quarter ended December 28, 2002, thus the pro forma information does not include employee stock purchase plan data.

Pro forma information regarding net income and earnings per share is required by SFAS No. 148, and has been determined as if the Company had accounted for its stock option plans under the fair value

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 required under FAS 123 for the first quarter of fiscal year 2003 and 2002 is as follows:

(In thousands of dollars except 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 the first quarter of fiscal years 2003 and 2002 is not necessarily representative of the pro forma impact on reported results for future years.

The Black-Scholes option-pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility.

7. CREDIT FACILITY

The Company had the use of an $8.0 million revolving credit agreement with Bank One for short-term financing needs and amended that agreement as of January 13, 2003, to change the interest rate to approximate LIBOR plus 1.5%. As of the end of December, 2002, the LIBOR rate was approximately 1.45%. The revolving credit agreement extends until March 29, 2004.

8. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 141, Business Combinations (SFAS 141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 superseded APB Opinion No. 16, Business Combinations. The provisions of SFAS 141 require that the purchase method of accounting be

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

used for all business combinations initiated after June 30, 2001; provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill; and, require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. SFAS 141 also requires that upon adoption of SFAS 142, certain intangible assets be reclassified into or out of goodwill based on certain criteria. SFAS 142 supersedes APB Opinion No. 17, Intangible Assets, and is effective for fiscal years beginning after December 15, 2001, although earlier adoption is encouraged. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that such assets be tested annually for impairment (and in interim periods if events or circumstances indicate that the related carrying amount may be impaired), require that reporting units be identified for purposes of assessing potential impairments, and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.

SFAS 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, which is used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

The Company adopted SFAS 142 effective September 29, 2002 and discontinued amortization as of that date. During the first quarter of fiscal 2003, the Company identified its reporting unit with goodwill (Panelview), and completed the first step impairment test as of September 29, 2002. As no impairment was identified by the first step test, completion of the second step test was not required. The fair value of the Panelview reporting unit was determined using the discounted cash flow model using a growth rate of 5% and a discount rate of 15%.

Amortization for the three months ended December 28, 2002 relates to the Company’s intangible assets, while amortization for the three months ended December 29, 2001 relates to goodwill and intangible assets, including $372,000 goodwill amortization.

On a comparative basis, net income not including goodwill amortization for the three months ended December 28, 2002 and for the three months ended December 29, 2001 would have been as follows:

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars except per share data)

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also requires additional disclosure by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. The initial recognition and measurement provisions of FIN 45 are applicable for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ended after December 15, 2002.

The Company estimates potential warranty obligations for its products based on annual product sales and historical customer product return data. Based on this data, the Company records estimated warranty reserves and expense needed to account for the estimated cost of product returns.

Following is a reconciliation of warranty liability as of December 28, 2002 since September 28, 2002:

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards No. 143 (SFAS 143), Accounting for Asset Retirement Obligations. FAS 143 changes the way in which long-lived asset retirement obligations are recognized on the balance sheet and income statement. The Company believes that adoption of this standard will have no material effect on the Company’s financial reporting and disclosure.

9. SUBSEQUENT EVENTS

On January 22, 2003, the Company acquired Interface Data Systems, Inc. (“IDS”), a privately held corporation headquartered in Phoenix, Arizona. IDS designs and manufactures membrane keypads, silver

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

flexible circuits, graphic overlays, sensors, electro luminescent lamps (EL), control panels, keypad/controller assemblies, and handheld and desktop electronic devices for original equipment manufacturers. IDS currently serves the home appliances, consumer electronics, industrial process controls, medical and communications industries. The Company maintains manufacturing facilities in Phoenix, Arizona and Columbus, Ohio and has an extensive network of strategic manufacturing alliances in China and Taiwan. Approximate annual revenue of IDS is $24 million. The purchase price of the acquisition included a cash payment of $9.0 million, and approximately 577,000 of White Electronic Designs Corporation’s common stock, as well as the assumption of certain IDS employee stock options and warrants. It is unknown at this time which segment IDS revenues will fall under in the future. Please see the Form 8-K filed by the Company on January 24, 2003 for more information.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED DECEMBER 28, 2002 COMPARED TO THE THREE MONTH PERIOD ENDED DECEMBER 29, 2001

Overview

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto as of and for the year ended September 28, 2002 included in our Annual Report of Form 10-K filed with the Securities Exchange Commission on December 23, 2002. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to certain factors, including those discussed below and in Exhibit 99.1 to this Report on Form 10-Q.

White Electronic Designs Corporation and its subsidiaries (collectively “the Company”) design and manufacture high density, microelectronic memory products, active 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, medical, and instrumentation industries. The Company operates under two business segments, microelectronics and display, with the majority of sales and operating income generated by the microelectronic business segment.

Revenue for the three months ended December 28, 2002 totaled $23.6 million, which was an increase of $2.2 million over the three months ended December 29, 2001. The increase was mostly attributable to increased sales of high-reliability product in the microelectronic segment, while commercial sales in the same segment continue to remain low due to the downturn in the data and tele-communication markets.

Gross profit increased $1.6 million to $8.4 million for the three months ended December 28, 2002 from $6.8 million for the three months ended December 29, 2001. The majority of the increase in gross profit was contributed by the microelectronic segment, which offset the slight decrease in gross profit in the display segment.

Overall operating expenses for the three months ended December 28, 2002, totaled $5.1 million and were $204,000 higher than the comparable period of the previous year. The majority of the increase was due to higher selling and general and administrative costs in both the display and microelectronic segments.

The financial condition and results of operations for the three months ended December 28, 2002 and for the three months ended December 29, 2001 do not include any financial data from the Company’s Interface Data Systems subsidiary, as the acquisition of IDS did not occur until January 22, 2003.

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Results of Operations
(In thousands of dollars)
(Unaudited)

Net Sales

Net sales for the three months ended December 28, 2002 increased to $23.6 million from $21.4 million for the three months ended December 29, 2001, resulting in a 10% increase in revenue.

The microelectronic segment as a whole increased to $13.8 million of sales for the three months ended December 28, 2002 from $11.7 million for the three months ended December 29, 2001, accounting for an 18% increase in segment revenue. Sales in the commercial market of the microelectronic segment remained flat at approximately $3.7 million for both periods. High-reliability sales in the microelectronic segment increased $2.1 million over the comparable quarter, accounting for a 26% increase in high-reliability microelectronic revenue. High-reliability sales of the microelectronic segment totaled $10.1 million for the three months ended December 28, 2002 compared to $8.0 million for the three months ended December 29, 2001. The increase was primarily due to an increase in the number of parts sold and an increase in the average unit-selling price.

Display revenue for the three months ended December 28, 2002 totaled $9.8 million, and was slightly higher than the $9.7 million of sales for the three months ended December 29, 2001. Mechanical and interface component sales decreased slightly when compared to the previous year, but the decrease was offset by an increase in display sales for that segment. While high-reliability display sales decreased approximately $1.2 million during the first quarter of fiscal year 2003, commercial display sales increased approximately $1.4 million.

Approximately $3.3 million of display revenue for the three months ended December 28, 2002 came from one customer, Garmin International Inc., accounting for 14.0% of total Company revenue and 33.7% of total display segment revenue for the first quarter of fiscal year 2003. Another display customer, the Medical Division of General Electric, accounted for 9.5% of total Company revenue and 22.9% of display segment revenue for the first quarter of fiscal year 2003. No other customer accounted for more than 10% of

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segment or Company revenue for the period. Please see Exhibit 99.1 for the concentration risk associated with high sales to a limited number of customers.

The Company expects that total Company sales will increase significantly as a result of the IDS acquisition.

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

Gross Profit

Total company gross profit increased 24% to $8.4 million for the three months ended December 28, 2002 from $6.8 million for the three months ended December 29, 2001. Total company gross margin as a percentage of sales increased to 35.7% from 31.9% for the three-month periods ended December 28, 2002 and December 29, 2001, respectively. The majority of the increase in gross profit and gross margin as a percentage of sales came from high-reliability sales, which have a higher margin than commercial microelectronics.

Gross profit for the microelectronic segment increased to $6.2 million for the three months ended December 28, 2002 compared to $4.5 million for the three months ended December 29, 2001. Gross margin as a percentage of microelectronic segment sales was 45.2% and 38.5% for the quarters ended December 28, 2002, and December 29, 2001, respectively. The majority of the increase related to high-reliability products and was attributable to a higher average selling price due to the product mix sold during the quarter. Sales in the first quarter of fiscal year 2003 had a higher percentage of module products, which generally have a higher selling price and profit than monolithic parts. The first quarter of fiscal 2003 also included increased sales of tamper resistant coated products and ball grid arrays and higher revenue billed for the development of custom products to meet specific customer applications. Gross profit on commercial sales in the microelectronic segment increased slightly over the comparative period due to a variation in product mix. While the gross margin percentage of sales in the microelectronic segment has increased over the last four consecutive quarters, the Company can make no assurance that gross margin will continue at the current rate or will continue to grow at the current growth rate.

Gross profit for the display segment decreased slightly, totaling $2.2 million and $2.3 million for the three months ended December 28, 2002 and December 29, 2001, respectively. Although the actual number of units sold increased in the first quarter of fiscal 2003 over the first quarter of fiscal 2002, the average selling price decreased due to competitive pricing demands from the display market and the increase in the number of commercial components sold. The increase in commercial sales and the decrease in high-reliability sales also affected the gross margins, as high-reliability components typically carry a higher gross margin than commercial components.

The Company expects that total Company gross margin will decrease with the inclusion of IDS revenue, as the gross margin for its commercial products generally ranges between 15% and 20% of sales due to competition from foreign and domestic companies with similar products.

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Quarterly Revenue and Gross Margin Trend
(In thousands of dollars)
(Unaudited)

Revenue and Gross Margin Trend

On a quarter-to-quarter basis, the Company has maintained consistent sales from the quarters ended December 2001 through December 2002, with quarterly revenue averaging between $21 to $24 million over that time. Gross margin as a percentage of sales increased during the quarter ended December 28, 2002, due to the change in product mix in the high-reliability microelectronic segment and higher average selling prices for that period.

Operating Expenses
(In thousands of dollars)
(Unaudited)