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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

     (Mark One)

     For the quarterly period ended: January 3, 2004

OR

     For the transition period from                    to                   

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. Yes   X   No      

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   X   No      

At February 9, 2004, 24,210,921 shares of the Registrant’s Common Stock were outstanding.

WHITE ELECTRONIC DESIGNS CORPORATION
AND SUBSIDIARIES

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(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
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands of dollars, except share and per share data)

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

* See Note 2; Restatement of Interim Consolidated Financial Statements

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

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

* See Note 2; Restatement of Interim Consolidated Financial Statements

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands of dollars, except share data)

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. INTERIM FINANCIAL INFORMATION

The consolidated balance sheet as of January 3, 2004, the consolidated statements of operations for the three months ended January 3, 2004 and December 28, 2002, the consolidated statements of cash flows for the three months ended January 3, 2004 and December 28, 2002, and the consolidated statement of shareholder’s equity for the three months ended January 3, 2004 have been prepared by the Company and are unaudited. The consolidated balance sheet as of September 27, 2003, was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 27, 2003. The Company’s fiscal year end is the Saturday nearest to September 30th. It is the Company’s policy to adjust its annual calendar to include an additional week in the first quarter of its fiscal year when necessary. Such adjustment was required in fiscal 2004, and as a result, the quarter ended January 3, 2004 includes fourteen (14) weeks of activity while the quarter ended December 28, 2002, includes thirteen (13) weeks of activity. The Company believes that this additional week of activity in fiscal 2004 did not have a material impact on its quarterly results of operations. 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. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2003. The results of operations for the three months ended January 3, 2004 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 net sales 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. RESTATEMENT OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS

As a result of a change in the way the Company conducted business with a reseller that began in fiscal 2003, it was determined that revenue related to shipments to that reseller should be recognized at the time the reseller sells the product to its end customers rather than at the time the goods are shipped to the reseller. As a consequence, the Company restated its unaudited interim financial information for the three months ended December 28, 2002 to reflect the effects of this change. As a result, the previously reported unaudited operating results for the quarter ended December 28, 2002 have been restated as follows (in thousands, except per share data):

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As a result of the restatement, $248,000 of net sales and $138,000 of related gross profit were deferred as of December 28, 2002.

3. MERGERS AND ACQUISITIONS

The Company acquired Interface Data Systems (“IDS”) in January 2003 for approximately $18.6 million. The accompanying pro forma statement of operations information gives effect to the IDS acquisition as if it had occurred at the beginning of fiscal 2003 and the results of operations were included in the quarter ended December 28, 2002. The pro forma information is included only for purposes of illustration, and does not necessarily indicate what the Company’s operating results would have been had the acquisition of IDS been completed at the beginning of fiscal 2003.

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars except share data)

4. 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 that would be issued 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:

Options excluded from the calculation of diluted earnings per share were 140,125 and 195,000, as the exercise price was greater than the average share price for the period.

* See Note 2; Restatement of Interim Consolidated Financial Statements

5. STOCK BASED COMPENSATION

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.

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 SFAS 123 for the three months ended January 3, 2004 and December 28, 2002 is as follows (in thousands of dollars except per share information):

* See Note 2; Restatement of Interim Consolidated Financial Statements

The stock compensation expense was estimated for these options using the Black-Scholes option pricing model using the following weighted average assumptions:

6. INVENTORIES

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

Raw materials included approximately $1.7 million and $2.4 million at January 3, 2004 and September 27, 2003, respectively, for which the Company had received advance payment from the customer. Approximately $0.7 million of inventories were written off against the reserve during the quarter ended January 3, 2004.

7. INTANGIBLE ASSETS

The Company’s acquired intangible assets, all of which are subject to amortization, consist of the

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

following as of January 3, 2004 and September 27, 2003 (in thousands of dollars):

Changes in the carrying amount of acquired intangible assets during the three months ended January 3, 2004 (in thousands of dollars):

     Estimated Aggregate Future Amortization Expense:

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8.

PROPERTY, PLANT, AND EQUIPMENT, NET

Property, plant, and equipment consist of the following (in thousands of dollars):

Depreciation expense was $965,000 and $634,000 for the three months ended January 3, 2004 and December 28, 2002, respectively.

9.

ACCRUED EXPENSES

Accrued expenses consist of the following major categories (in thousands of dollars):

The following table summarizes activity in the warranty reserve for the three months ended January 3, 2004 (in thousands of dollars):

10.

PUBLIC OFFERING OF COMMON STOCK

In July 2003, the Company completed a public offering of its common stock, which resulted in net proceeds (after deducting underwriting discounts and commissions and offering expenses) of approximately $22.0 million. The Company initially sold 2,200,000 common shares on July 8, 2003 and an additional 202,874 shares on August 1, 2003, following the exercise by the underwriters of an over-

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

allotment option. In July 2003, the Company used a portion of the proceeds from the offering to repay all outstanding amounts owing under its term loan with Bank One. The Company expects to use the remaining net proceeds for potential acquisitions and general corporate purposes, including expansion of research and development relating to new products and our anti-tamper technology for microelectronic products.

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FINANCIAL DATA BY BUSINESS SEGMENT

The Company has two business segments each of which requires different design and manufacturing resources and generally serves customers in different markets. The microelectronic segment accounted for approximately 57% of total Company sales in the first quarter of 2004, while the display segment accounted for approximately 43% of total Company sales in the first quarter of 2004.

The microelectronic segment packages semiconductor products mainly used in embedded systems, including single board computers, hand held processors, test equipment, servers and data loggers. Products are sold to military prime contractors and commercial OEMs in the aerospace, defense, military equipment, computer networking and telecommunication and data communication industries. A commercial grade product generally meets the standard of industries such as the consumer electronic, computer networking and telecommunication and data communication industries. Higher performing products, also known as high-reliability products, are needed in certain industries, such as aerospace, defense, and military equipment, and are often referred to as “military” products. Military products are designed to meet more stringent standards and are resistant to adverse conditions, such as high and low extreme temperatures. High-reliability products can also be used in industrial applications where products are exposed to harsh conditions. The microelectronic segment also includes Anti-Tamper technology processing for mission critical semiconductor components in military applications, to prevent reverse engineering of secure electronic circuits.

The display segment serves a number of markets with products and solutions that are incorporated into global positioning systems, automatic teller machines, point of sales (“POS”) order confirmation displays, home appliances, consumer electronics, medical devices, outdoor displays, military avionics and various military applications. Our display segment manufactures enhanced viewing liquid crystal displays, interface devices and electromechanical assemblies. Enhanced viewing liquid crystal displays can be either ruggedized or commercial. Ruggedized displays are manufactured to perform in harsh environmental conditions primarily in military and high-end industrial applications, while commercial display products offer greater viewing performance than off-the-self displays, but are not designed for harsh environmental conditions. Interface devices include electromechanical components and instrument packages that can consist of ruggedized keyboards, aircraft trim panels, rotating devices, mechanical packages, membrane keypads, silver flexible circuits, graphic overlays, control panels, and keypad/controller assemblies.

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. Transfers of inventory between segments are made at cost, and are treated as transfers between locations.

The assets identified by segment are those assets used in the Company’s operations and do not include general corporate assets such as cash, marketable securities, and deferred tax assets. Capital expenditures exclude equipment under operating leases.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

No customer accounted for more than 10% of total sales during the quarter ended January 3, 2004. However, in the three months ended January 3, 2004, Northrop Grumman accounted for approximately 13% and Unisys accounted for approximately 11% of microelectronic segment net sales, while Whirlpool accounted for approximately 13% of display segment net sales.

In three months ended December 28, 2002, General Electric Medical Division (“GE Medical”) accounted for approximately 23% and Garmin International (“Garmin”) accounted for approximately 34% of display segment net sales, respectively. In the three months ended January 3, 2004, sales to these two customers accounted for 6% and 5% of total segment sales, respectively.

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. Military sales were $13.1 million and $12.4 million for the quarters ended January 3, 2004 and December 28, 2002, respectively.

Foreign customers accounted for a significant portion of the Company’s sales. Foreign sales as a percentage of total sales in the three months ended January 3, 2004 and December 28, 2002 were 19% and 35%, respectively. The decrease in sales to Taiwan was caused by a reduction of sales to Garmin International from the previous year. A summary of net sales by geographic region is as follows (in thousands of dollars):

* See Note 2; Restatement of Interim Consolidated Financial Statements

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

A summary of results of operations by business segment is as follows:

OPERATIONS BY BUSINESS SEGMENT
(In thousands of dollars)