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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
- - - - ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended: October 3, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OR 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 (I.R.S. Employer
incorporation or organization) Identification No.)
3601 E. UNIVERSITY DRIVE
PHOENIX, ARIZONA 85034
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 602/437-1520
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, without par value ON WHICH REGISTERED
(stated value $.10 per share) American Stock Exchange
$3.00 Senior Voting Cumulative American Stock Exchange
Convertible Preferred Stock
(par value $1.00 per share)
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K.[X]
As of December 15, 1998, the aggregate market value of the Registrant's Common
Stock and Preferred Stock held by non-affiliates (based upon the closing price
of the shares on the American Stock Exchange on December 15, 1998) was
approximately $18,900,000.
On December 15, 1998, 15,789,010 shares of the Registrant's Common Stock and
119,906 shares of the Registrant's Preferred Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement prepared in connection with the 1999
Annual Meeting of Shareholders are incorporated by reference into PART III of
this Annual Report.
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TABLE OF CONTENTS
Page
PART I
ITEM 1 BUSINESS
Forward Looking Statements and Associated Risks..................... 1
General............................................................. 1
Microelectronic Circuits and Components............................. 1
Microelectronic Segment Review...................................... 2
Display, Electromechanical and Mechanical Equipment and Components.. 3
Display and Electromechanical Segment Review........................ 3
Principal Customers................................................. 4
Research, Engineering and Development............................... 4
Regulatory Matters.................................................. 4
Employees........................................................... 5
Risk Factors........................................................ 5
ITEM 2 PROPERTIES.......................................................... 9
ITEM 3 LEGAL PROCEEDINGS................................................... 9
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................ 9
EXECUTIVE OFFICERS OF THE COMPANY................................... 9
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS..................................... 10
ITEM 6 SELECTED FINANCIAL DATA ............................................ 11
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................. 12
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 15
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................. 15
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................ 16
ITEM 11 EXECUTIVE COMPENSATION.............................................. 16
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................... 16
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................... 16
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K......................................................... 16
ITEM 15 SIGNATURES.......................................................... 21
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PART I
ITEM 1 BUSINESS
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain matters discussed in this document contain forward-looking statements.
The words "believe," "expect" and "anticipate" 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. Potential risks
and uncertainties include those set forth in the section titled "Risk Factors",
below. In light of these risks and uncertainties, there can be no assurance that
the forward-looking statements contained in this document will prove to be
accurate. Actual results may differ materially from those in the forward-looking
statements.
GENERAL
White Electronic Designs Corporation, formerly Bowmar Instrument Corporation
("the Company"), is an Indiana corporation organized in 1951. On October 26,
1998, after the close of the Company's fiscal year, the Company completed a
merger between its wholly owned subsidiary and Electronic Designs, Inc. ("EDI"),
pursuant to which EDI became a wholly owned subsidiary of the Company. In
connection with the merger, the Company's name was changed from Bowmar
Instrument Corporation to "White Electronic Designs Corporation." The financial
information included in this Form 10-K, is that of Bowmar Instrument Corporation
only because the merger was not completed until after the close of the fiscal
year.
The Company's principal business is the design, manufacture and sale of
microelectronic and semiconductor memory products for commercial, industrial and
military markets. The Company also manufactures and sells electromechanical and
mechanical equipment and components including electromechanical display devices,
components and packages and turnkey interface systems.
EDI is a Delaware corporation, originally organized in California in 1984. EDI
designs, manufactures and markets high performance memory solutions and Active
Matrix Liquid Crystal Displays ("AMLCD") for original equipment manufacturers
("OEM") in the global commercial, industrial and military markets.
The Company's principal executive offices are located at 3601 E. University
Drive, Phoenix, Arizona 85034, 602/437-1520. The principal offices of EDI are
located at One Research Drive, Westborough, Massachusetts 01581, 508/366-5151.
MICROELECTRONIC CIRCUITS AND COMPONENTS
The products designed, manufactured and sold by the Company in its
microelectronic division include high density, solid state memory products and
microprocessor circuits in both monolithic and modular form (multichip modules)
for use in commercial, industrial and military markets in U.S. and abroad.
High Density, Solid State Memory and Microprocessor Modules
The Company designs and manufactures high density, solid state memory modules
and microprocessor microcircuits. The memory modules are designed specifically
for use in adverse environmental conditions. They are designed to provide larger
amounts of mass memory, space reduction and faster data processing speeds. They
are used in both military and commercial applications and include static RAM
modules (SRAM), electronically erasable PROM modules (EEPROM), and Flash PROM
modules. The family of microprocessor modules supports the development of highly
complex systems including application-specific analog, mixed analog-digital and
logic functions. These products are designed to serve state-of-the-art high end
industrial and military markets and are intended to be used in portable, mobile
land-based, airborne and naval applications as well as high end data
communication and data processing systems.
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Multichip Modules
The Company designs and manufactures highly reliable, compact multichip modules
(MCM's). Multichip modules are used as components in a broad spectrum of
electronic devices where circuit reliability and size reduction is important. A
multichip module is a packaging technique that places several semiconductor
chips, interconnected with a high density substrate, into a compact package.
These can be designed to perform a wide variety of electronic functions, such as
amplifiers, regulators, switches, data converters, oscillators and decoders.
They are sold to serving principally the military market, as well as the
aerospace, medical and high temperature markets.
MICROELECTRONIC SEGMENT REVIEW
The products designed, manufactured, and sold by the Company in its
microelectronic segment are sold to private industry and to the United States
and foreign governments both through the Company's sales personnel and
independent sales representatives and distributors. In a time of strong demand
for memory and microprocessor products, as at present, sources of supply of IC
(integrated circuit) die and other components may be constrained and subject to
shortages. A multichip module manufacturer's ability to compete is heavily
dependent on its ability to maintain access to steady sources of supply. To
address these needs, the Company has maintained strong relationships with
leading semiconductor fabricators in the United States and the Far East. The
Company has no specific long-term contractual arrangement with its vendors. None
of the business of the microelectronic segment is seasonal. The Company does not
provide extended payment terms to its customers. Products in the microelectronic
segment are sold under a standard one year warranty and may be returned for
repair or replacement during the warranty period.
The backlog for products was approximately $6,877,000 and $10,967,000, at the
end of fiscal years 1998 and 1997, respectively. Approximately 93% of the
segment's fiscal 1997 backlog was shipped during fiscal 1998. Approximately 79%
of the fiscal 1998 year-end backlog is expected to be shipped during fiscal
1999. The backlog after fiscal 1999 is a result of customer requirements not
capacity restraints.
The principal competition of the Company in the commercial market for the
microelectronic segment are companies which are larger than the Company, have
substantially greater financial, technical, marketing, distribution and other
resources and have a much greater presence in the overall market. These
companies manufacture memory products in monolithic form and supply modules
which incorporate these devices in products that compete with the products of
the Company. The Company, on the other hand, generally purchases memory devices
from third parties and competes based on the value that it adds to the memory
devices. The Company competes in this market on the basis of many factors,
including access to advanced semiconductor products at competitive prices,
successful and timely product introduction, design capability, lead times,
quality, product specification, pricing and customer service.
There are few competitors for the military memory market business of the
Company. Companies compete for this business on the basis of many factors,
including cost and quality systems (which allow for compliance with U.S. and
foreign military standards), longer term access to advanced semiconductor
products in die and wafer form, successful and timely product introduction,
inclusion of products on standard military drawings, design capabilities, lead
times, product specification, pricing and customer service. The Company has
recently experienced increased price competition for the memory business. Some
competitors in the industry have competed for and won contracts bidding at or
below cost. There can be no assurance that such price competition will not
continue or that the Company can compete successfully based on price alone.
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DISPLAY, ELECTROMECHANICAL AND MECHANICAL EQUIPMENT AND COMPONENTS
The products designed, manufactured and sold by the Company in its
electromechanical segment include electromechanical components and packages,
electromechanical display devices, electronic display devices, interface systems
including keyboards and related sub-systems. The Company has determined to
combine the operations of its Technologies Division with EDI's Product Display
Division. The combined operations will focus on providing a greater number of
components to our customers.
Display Products
The Company now designs and manufactures at EDI AMLCDs of 5.0", 5.5", 6.4" and
10.4" diagonal panels in display head, monitor and computer system formats.
These displays offer significant advantages over other commercially available
displays. Significant features include sunlight readability and ruggedized
construction for operating temperatures from -35 to +85 degrees Celsius. The
Company intends to develop its display product segment by offering a broad range
of products based on different sized AMLCD panels, developing a personal
computer ("PC") technology based computer system which will incorporate such
displays, as well as developing advanced display driver electronics. As with any
new products, there is no assurance that the display products developed (or to
be developed) will be commercially acceptable or profitable.
Electromechanical Components and Packages
The Company's electromechanical components and instrument packages consist of
rotating devices, including gearheads, mechanical counters, dial drives,
mechanical packages and related devices. Specific applications for these
products include controls for automatically tuning airborne radio transmitters
and receivers, controls for fuel flow in jet engines and selected automatic
flight control servomechanisms. These products are sold principally to aircraft
instrument manufacturers as information displays in aerospace and ground
equipment.
Electromechanical Display Devices
The Company also produces digital displays, which permit a more accurate readout
of information than is feasible with analog meters. These include display
devices, which respond electromagnetically to electronic input signals, thus
eliminating mechanical transmission delays. These products are sold primarily to
aircraft instrument manufacturers.
Turnkey Interface Systems
The Company designs and manufactures, to customer specification, a variety of
keyboard assemblies for commercial and military applications. The Company has
the capability of meeting demanding requirements such as backlighting to meet
night vision goggle (NVG) compatibility, adverse environments, and the
integration of displays, including LCD's, and microprocessor technology.
DISPLAY AND ELECTROMECHANICAL SEGMENT REVIEW
The customers for the products of the display and electromechanical segment
include OEMs, primarily in the aerospace industry, and agencies of the U.S.
Government. The materials, products and services used by the Company to
manufacture its products in this segment are readily available from a variety of
sources. None of the business of the display and electromechanical segment is
seasonal.
Neither the needs of the Company for a continuing allotment of goods from its
suppliers nor the requirements of its customers for the products of the
electromechanical segment require the carrying of finished goods inventory. In
its purchase of components (some of which must be ordered months in advance),
the Company has not encountered, and does not anticipate encountering any
significant difficulty. The Company does not provide extended payment terms to
its customers. Products are sold under a standard one year warranty and may be
returned for repair or replacement during the warranty period.
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The electromechanical segment backlog was approximately $5,740,000 and
$6,049,000, at the end of fiscal years 1998 and 1997, respectively.
Approximately 87% of this segment's 1997 backlog was shipped during fiscal 1998.
Approximately 63% of the fiscal 1998 year-end backlog is expected to be shipped
during fiscal 1999. The backlog after 1999 is a result of customer requirements
not capacity restraints.
The principal basis of competition among display suppliers are display
performance (e.g., brightness, color capabilities, contrast and viewing angle),
size and weight, design flexibility, power usage, durability and ruggedness.
While the primary competition for the AMLCD is currently cathode ray tube
displays, the Company's products compete with other flat panel displays
including gas plasma and electroluminescent displays. The Company believes that
price, product reliability and the ability to meet delivery schedules are key
competitive factors. The Company competes with numerous other companies in the
display and electromechanical segment, many of which have greater financial
resources, larger technical and marketing resources and in some instances more
advanced technology products than those of the Company.
PRINCIPAL CUSTOMERS
In fiscal 1998 no single customer sales accounted for 10% of the Company's
sales. The majority of the Company's sales are made to the U.S. Government or to
U.S. Government prime contractors. These contracts can be for relatively large
dollar amounts, sometimes calling for deliveries over more than one year. The
award of new contracts or the expiration of old contracts could have a
significant short-term impact on sales and operating results.
RESEARCH, ENGINEERING AND DEVELOPMENT
Current research and product development activities are directed primarily
toward the improvement of existing standard products while some projects are
focused on the development of new products or processes. The Company devotes
minimal resources to pure research and development, but emphasizes the
application of its engineering expertise to the development and refinement of
proprietary products or technologies. Expenditures by the Company on research
and product development for fiscal years 1998, 1997 and 1996 amounted to
approximately $628,000, $610,000, and $580,000. Research and product development
efforts are principally conducted by the Company utilizing its engineering
staff.
REGULATORY MATTERS
Government Contracting Regulation
Most of the Company's business in fiscal 1998 was derived from subcontracts with
prime contractors of the U.S. Government. As a U.S. Government subcontractor,
the Company is subject to Federal Government contracting regulation. Under these
regulations, the U.S. Government is entitled for three years after final payment
on certain negotiated contracts or contract modifications to examine all of the
Company's cost records with respect to such contracts to determine whether the
Company furnished complete, accurate and current cost or pricing data to the
Government in connection with the negotiation of the price of the contract or
modification. The U.S. Government also has the right after final payment to seek
a downward adjustment to the price of a contract or modification if it
determines that the contractor failed to disclose complete, accurate and current
data. Historically the Company has not experienced significant downward
adjustments.
In addition, the Federal Acquisition Regulations govern the allowability of
costs incurred by the Company in the performance of U.S. Government contracts to
the extent that such costs are included in its proposals or are allocated to its
U.S. Government contracts during performance of those contracts.
The Company's subcontracts provide that they may be terminated at the
convenience of the U.S. Government. Upon such termination, the contractor is
normally entitled to receive the purchase price for delivered items,
reimbursement for allowable costs incurred and allocable to the contract and an
allowance for profit on the allowable costs incurred or adjustment for loss if
completion of performance would have resulted in a loss. In addition, the
Company's subcontracts provide for termination for default if the Company fails
to perform or breaches a material obligation. In the event of a termination for
default, the
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customer may have the unilateral right at any time to require the Company to
return unliquidated progress payments pending final resolution of the propriety
of the termination for default. The Company may also have to pay the excess, if
any, of the cost of purchasing a substitute item from a third party. If the
customer has suffered other ascertainable damages as a result of a sustained
default, the customer could demand payment of such damages by the Company.
In connection with the Company's U.S. Government business, the Company also is
subject to Government investigations of its policies, procedures and internal
controls for compliance with procurement regulations and applicable laws. The
Company may be subject to downward contract price adjustments, refund
obligations or civil and criminal penalties. In certain circumstances in which a
contractor has not complied with the terms of a contract or with regulations or
statutes, the contractor might be debarred or suspended from obtaining future
contracts for a specified period of time. Any such suspension or debarment of
the Company would have a material adverse effect on the Company's business.
It is the Company's policy to cooperate with the Government in any
investigations of which it has knowledge, but the outcome of any such Government
investigations cannot be predicted with certainty. In the opinion of management
of the Company, it has complied in all material respects with applicable
government requirements.
Environmental Protection
Compliance with federal, state and local laws or regulations which govern the
discharge of materials into the environment has not had a material adverse
effect upon the capital expenditures, earnings or competitive position of the
Company.
EMPLOYEES
As of the end of the fiscal year, the Company employed 160 persons. Of such
employees, 76 were employed in the microelectronic segment, 86 in the
electromechanical segment. A total of 58 of the Company's employees in the
electromechanical segment were employed pursuant to collective bargaining
agreements covering workers at the Company's Technologies Division in Fort
Wayne, Indiana. This agreement which expired on November 15, 1998 was renewed
for another three year term. The Company believes its labor relations are
satisfactory.
After the completion of the merger, the Company now has approximately 256
employees.
RISK FACTORS
POST-MERGER INTEGRATION
Achieving the benefits of the merger with EDI will depend in part upon the
integration of the businesses of Bowmar and EDI in an efficient manner, and
there can be no assurance that this will occur. The successful combination of
companies in a rapidly changing high technology industry may be more difficult
to accomplish than in other industries. The combination of the two companies
will require, among other things, integration of the companies' respective
product offerings and coordination of their sales and marketing and research and
development efforts. There can be no assurance that such integration will be
accomplished smoothly or successfully. The difficulties of such integration may
be increased by the necessity of coordinating geographically separated
organizations and addressing possible differences in corporate cultures and
management philosophies. The transition to a combined company will require
substantial attention from management. The diversion of management attention and
any difficulties encountered in the transition process could have an adverse
effect on the revenues and operating results of the Company. In addition, the
process of combining the two organizations could cause the interruption of, or a
disruption in, the activities of any or all of the companies' businesses, which
could have a material adverse effect on their combined operations. There can be
no assurance that the Company will realize any of the anticipated benefits of
the merger.
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OPERATING RESULTS
Gross Margins. The Company's gross margins may vary in the future as a result of
declining selling prices. The Company has recently experienced some reductions
in gross margins of its memory products as a result of lower selling prices
necessitated by intense competition for the military memory business. See
"Dependence on Defense Industries." In addition, the selling prices of the
Company's existing products are generally expected to decline over time. In
particular, sales of commercial memory products toward the end of a product's
life cycle are typically characterized by steep declines in sales and pricing,
the precise timing of which may be difficult to predict. The Company could
experience unexpected reductions in sales of products as customers anticipate
new product purchases. See "Risk of Technology Change and Development of New
Products." These factors could give rise to obsolete or excess inventory. To the
extent that the Company is unsuccessful in managing product transitions, its
business, financial condition and results of operations could be materially
adversely affected.
The Company expects it will continue to experience pressure on gross margins in
the foreseeable future. The Company's ability to maintain or increase net
revenue will be highly dependent upon its ability to increase unit sales volumes
of existing products and to introduce and sell new products in quantities
sufficient to compensate for the anticipated declines in selling prices.
Capital Expenditures, Research and Development and Other Costs. The need for
continued significant expenditures for capital equipment purchases, research and
development and ongoing customer service and support, among other factors, will
make it difficult for the Company to reduce its operating expenses in a
particular period if the Company's net sales for a period are not met because a
substantial component of the operating expenses are fixed costs. Accordingly,
there can be no assurance that the Company will be able to be profitable or that
it will not sustain losses in future periods. Due to the foregoing factors, it
is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such an
event, the price of the Company Common Stock may be materially adversely
affected.
Semiconductor Business. In connection with the Company's semiconductor memory
business and flat panel display operations, a wide array of factors could cause
the Company's results of operations and gross margins to fluctuate in the future
from period to period. The primary factors that might affect the Company's
results of operations in this regard include the cyclicability of the
semiconductor market; any loss of a principal customer or any short term loss of
a customer due to product inventory accumulation by the customer; any inability
to procure required components; any adverse changes in the mix of products sold
by the Company; and the recent and current downturn of the semiconductor market
which could cause a decline in selling unit prices, diminished inventory value,
and less demand for commercial memory products as customers restrict inventory
levels. See "Downturn of Semiconductor Industry."
Reduction in Inventory Values. Reduction in value of the Company's inventories
due to unexpected price declines, as has occurred in the past in connection with
a softening of the semiconductor industry, could adversely affect the Company's
results of operations. Such declines in inventory valuation have had an adverse
effect on EDI's financial condition and results of operations in the past and
could have an adverse effect on the Company's financial condition and results of
operations in future periods.
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DEPENDENCE ON DEFENSE INDUSTRIES
Current contracts of the Company with defense related companies and revenues
generated therefrom in the aggregate account for a material portion of the
Company's overall revenues. The defense contracts tend to require memory
products to be manufactured as compliant to military specifications. Military
capital expenditure levels have been declining for some years now and depend on
factors that are outside the control of the Company. In addition, the U.S.
defense industry has been moving toward the purchase of COTS products rather
than those manufactured as compliant to specified military standards. In fiscal
1998, military related sales accounted for approximately 95% of the Company's
overall sales. Changes in military spending and the shift in military demand for
avionic-microelectronics and COTS products have had an adverse effect on the
sales and profit of the Company. Continued reductions in military spending could
adversely affect the sales and profits of the Company.
DEPENDENCE ON INTERNATIONAL SALES AND PURCHASES
The Company anticipates that international sales will continue to account for a
significant portion of the Company's net sales. In addition, the majority of the
components used by the Company in connection with products for military
applications are acquired from foreign manufacturers worldwide, particularly
countries located in Southeast Asia. As a result, a significant portion of the
Company's sales and purchases are subject to the risks of international
business, including fluctuations in foreign currencies, especially Asian
markets, trade disputes, changes in regulatory requirements, tariffs and other
barriers, the possibility of quotas, duties, taxes or other changes or
restrictions upon the importation or exportation of the products being
implemented by the United States, timing and availability of export licenses and
the general economies of these countries in which the Company transact business.
Foreign suppliers of semiconductor related materials are regularly threatened
with, or involved in, pending trade disputes and sanctions which, if realized,
could materially adversely effect the Company by closing off critical sources of
supply for the raw materials used to produce its products. Bookings of the
Company are currently below prior years' bookings, largely because of the
current Asian economic crisis, which the Company expects will continue through
calendar year 1999.
DOWNTURN OF SEMICONDUCTOR INDUSTRY
The semiconductor industry has historically been characterized by wide
fluctuations in product supply and demand. The industry is currently in the
third year of a significant downturns. The adverse effect of a continued
downturn could be significant for the Company.
Certain developments over the last several years and trends, including price
erosion in semiconductor memories and the decline of the book to bill ratio to
below parity, have created considerable uncertainty for the Company with respect
to anticipated demand for integrated circuits in the near future. These
developments have resulted in declines in the average selling prices of some of
the Company's memory products and increased availability of most memory devices
which the Company purchases for incorporation in its products. The increased
availability of memory devices has caused an increase in competition and allowed
shorter lead times to Company customers. As a result of the increased
availability of commercial memory products, there can be no assurance that new
competitors will not enter the Company's markets, or that existing competitors,
particularly those who manufacture their own semiconductor devices, will not
cause the selling prices of some of the Company products to decline to a level
at which the Company cannot economically compete. See "Operating Results." Any
such market developments could have a material adverse effect on the Company
semiconductor packaging business.
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ABSENCE OF CONTRACTUALLY ASSURED SOURCES OF SUPPLY/GENERAL LIMITATIONS ON SUPPLY
The most significant raw materials that the Company purchases in its operations
are memory devices in wafer, die and component forms and AMLCD panels. In a time
of strong demand for memory integrated circuits and other products, sources of
supply of wafers, die and other components may be constrained and subject to
shortages, and the ability of the Company to compete is heavily dependent on its
ability to maintain access to steady sources of supply. The Company does not
have specific long-term contractual arrangements with its vendors, although it
believes it has good relationships with its vendors. No assurance can be given
that existing access to the current sources of supply of the Company may not be
impaired in the future. Any such impairment could have a material adverse effect
on the Company.
RISKS OF TECHNOLOGY CHANGE AND DEVELOPMENT OF NEW PRODUCTS
The Company's future results of operations will be dependent upon its ability to
improve and market its existing products and to develop, manufacture and market
new products. There can be no assurance that the Company will be able to
continue to improve and market its existing products or develop and market new
products, or that technological developments will not cause the Company's
products or technology to become obsolete or noncompetitive.
EDI's display products have been developed exclusively based on AMLCD products
procured from Sharp Electronics Corporation ("Sharp"). Competitors in the flat
panel display business are investing substantial resources in the development
and manufacture of flat panel displays using a number of alternative
technologies. In the event these efforts result in the development of products
that offer significant advantages over Sharp's and the Company's products, and
the Company is unable to improve its technology or develop or acquire
alternative technology that is more competitive, the Company's business and
results of operations will be adversely affected.
VOLATILE MARKET PRICE FOR COMPANY STOCK
The market price for the Company's Common Stock is subject to fluctuations in
response to a number of factors, including variations in the Company's quarterly
operating results, perceptions about market conditions in the microelectronics
industry and the effect of general economic conditions, many of which are
unrelated to the Company's operating performance. In addition, the stock market
generally has experienced significant price and volume fluctuations. These
market fluctuations could have a material adverse effect on the market price or
liquidity of the Company's Common Stock.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of federal, state and local governmental
regulations related to the storage, use, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Increasing public attention has been focused on the environmental impact of
microelectronic manufacturing operations. While the use of toxic, volatile or
otherwise hazardous substances by the Company is small, there can be no
assurance that changes in environmental regulations will not impose the need for
additional capital equipment or other requirements. Any failure by the Company
to control the use of, or to adequately restrict the discharge of, hazardous
substances under present or future regulations could subject the Company to
substantial liability or could cause its manufacturing operations to be
suspended. Such liability or suspension of manufacturing operations could have a
material adverse effect on the Company's business, financial conditions and
results of operations.
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ITEM 2 PROPERTIES
The Company leases a facility under an operating lease in Phoenix, Arizona
consisting of approximately 53,000 square feet. The facility is used as the
Company's corporate offices and for all manufacturing of the microelectronic
segment. In addition, the Company owns a facility in Ft. Wayne, Indiana
consisting of a building with approximately 75,000 square feet of space used for
the manufacture of electromechanical and mechanical equipment and components,
plus approximately ten acres of vacant land adjacent to the building. All of the
Company's property is security for the Company's line of credit and term loans
with Bank One. Management considers these properties to be well maintained and
adequate for their use. The 80,000 square foot building in Acton, Massachusetts
was sold in April 1998.
In connection with the Company's merger with EDI, the Company acquired through
EDI an operating lease at One Research Drive, Westborough, Massachusetts, the
former EDI headquarters. The lease is for a 33,000 square foot facility used for
the manufacture of commercial memory and display products and will expire in
2003. The Company also acquired the lease, which will expire in 2004, for EDI's
London sales office.
ITEM 3 LEGAL PROCEEDINGS
On April 25, 1996, the U.S. Attorney's Office for the State of Arizona undertook
an investigation of certain aspects of White Microelectronics contracts with
prime contractors with the Government. The investigation centered on the
interpretation of certain Government contract specified testing requirements on
incoming material. The Company is cooperating fully with the investigation. On
March 13, 1998, the Company was notified by the U.S. Attorney's Office for the
State of Arizona that is has closed its criminal investigation of White
Microelectronics and is seeking authority to disclose the substance of its
investigation to the Civil Section of the U.S. Attorney's Office so that the
Civil Section can determine whether there is sufficient basis for initiating a
civil proceeding against White Microelectronics.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
The names, ages, positions and business experience of all of the executive
officers of the Company are listed below. Officers are appointed annually by the
Board of Directors at the meeting of directors immediately following the Annual
Meeting of Shareholders and serve until the next annual election or until their
successors have been elected and qualified or as otherwise provided in the
Company's By-Laws.
There are no family relationships between any of the directors and executive
officers of the Company, nor any arrangement or understanding between any such
executive officer and any other person pursuant to which he was elected as an
executive officer.
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Name, Age & Position Business Experience During the Past Five Years
- - - -------------------- ----------------------------------------------
Hamid R. Shokrgozar, 38 Appointed President and Chief Executive Officer of the Company on
President and Chief Executive Officer January 3, 1998. Served as President of White Microelectronics
since 1993. Served as Vice President Engineering with White
Microelectronics from 1988 to 1993. Elected as a Director of the
Company in February 1998. Mr. Shokrgozar also served as Vice
Chairman of American Electronic Association (AEA-Arizona). He
received his Bachelors and Masters of science degree in
Engineering from California State University Fullerton. Mr.
Shokrgozar holds a U.S. Patent for the invention of "Stacked
Silicon Die Carrier Assembly."
Joseph G. Warren, Jr., 53 Appointed Vice President Finance, Chief Financial Officer and
Vice President Finance, Treasurer, Treasurer on July 12, 1995. From 1994 to 1995 served as Vice
Chief Financial Officer, Secretary President Finance & Chief Financial Officer of Axxess
Technologies, Inc. From 1993 to 1994 served as Secretary
Treasurer and Vice President of Golden Technologies, Inc.
From 1992 to 1993 served as President of Coors Ceramicon
Designs, Ltd., and from 1985 to 1992 served as Vice
President Finance of Coors Ceramics Company.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock and $3.00 Preferred Stock are currently traded on the
American Stock Exchange under the symbols WHT and WHT.PR, respectively. Prior to
the completion of the merger on October 26, 1998, the Company's Common Stock and
$3.00 Preferred Stock were traded on the American Stock Exchange under the
symbols BOM and BOM.PR. See Note 21 to the Consolidated Financial Statements in
this Form 10-K for the high and low sales prices for each of the Common Stock
and $3.00 Preferred Stock over the last two fiscal years.
As of December 15, 1998, there were approximately 6,775 holders of record of the
Common Stock and approximately 481 holders of record of the Company's $3.00
Preferred Stock. The Company has not paid cash dividends on its Common Stock and
does not expect to do so in the foreseeable future. The Company intends to
retain all earnings to provide funds for the operation and expansion of its
business. One of the Company's credit agreements precludes the payment of cash
dividends for both preferred and Common Stock in excess of $500,000 per year.
10
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ITEM 6 SELECTED FINANCIAL DATA
(In thousands of dollars, except share and per share data)
===========================================================================================================
FISCAL YEAR
OPERATIONS: 1998 1997 1996 1995 1994
- - - -----------------------------------------------------------------------------------------------------------
Net sales $ 28,998 $ 27,820 $ 25,317 $ 26,869 $ 27,821
- - - -----------------------------------------------------------------------------------------------------------
Gross margin $ 8,254 $ 10,702 $ 9,530 $ 9,564 $ 9,776
- - - -----------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes (Note 1) $ (567) $ 1,302 $ 1,290 $ 3,903 $ 2,175
- - - -----------------------------------------------------------------------------------------------------------
Weighted average number of common:
shares and equivalents-basic 6,675 6,641 6,462 6,426 6,390
shares and equivalents-fully diluted (Note 2) 8,289 8,285 8,179 8,178 8,154
- - - -----------------------------------------------------------------------------------------------------------
Income (loss) per common share:
Continuing operations - basic $ (0.14) $ 0.14 $ 0.14 $ 0.55 $ 0.28
Continuing operations - fully diluted (Note 2) $ 0.48 $ 0.27
- - - -----------------------------------------------------------------------------------------------------------
Net income per share - basic $ (0.02) $ 0.02 $ 0.14 $ 0.55 $ 0.28
Net income per share - fully diluted (Note 2) $ 0.48 $ 0.27
- - - -----------------------------------------------------------------------------------------------------------
Financial Positions (at year end):
Working capital $ 8,182 $ 9,822 $ 8,502 $ 6,889 $ 5,209
Total assets $ 14,898 $ 21,509 $ 16,538 $ 17,432 $ 13,783
Long-term debt $ 2,366 $ 4,546 $ 3,675 $ 3,992 $ 4,617
- - - -----------------------------------------------------------------------------------------------------------
Note 1 - See footnote 16 of the Consolidated Financial Statement provided
elsewhere herein for discussion of discontinued operations.
Note 2 - In 1998, 1997 and 1996, fully diluted net income per share is
considered to be the same as basic net income per share since the
effect of the potentially dilutive convertible preferred is
antidilutive.
Note 3 - No dividends have been declared or paid on Bowmar common shares.
There were 6,775 holders of record of White Electronic Designs
Corporation Common Stock on December 15, 1998.
This table should be read in conjunction with the Consolidated Financial
Statements provided elsewhere herein.
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ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
In December 1997, the Company's Board of Directors determined to implement a
series of actions to strategically reposition the Company, reduce corporate
overhead and realign management. First, the Company's Board determined to close
the Company's corporate headquarters in Phoenix, Arizona, which was accomplished
by the end of January, 1998. The Company now operates exclusively out of the new
White Electronic Designs Corporation facility located in Phoenix, Arizona. In
the first quarter of 1998, the Company expensed approximately $380,000
associated with the closing of the corporate office and the related severance
payments. Second, effective January 2, 1998, the Company's President and Chief
Executive Officer, Thomas K. Lanin, submitted his resignation, and the Company's
Board appointed Hamid Shokrgozar, the White Microelectronics division's current
president, as President and CEO of the Company. Finally, in December, 1997, the
Company's Board made a decision to sell the Technologies Division. As a
consequence thereof, a $1.3 million reserve for anticipated losses and the cost
of disposition was recorded in fiscal 1997.
Due to the merger with EDI, the Company's Board decided not to sell the
Technologies Division. As required by Emerging Issues Task Force 90-16, the
Company's historical financial information has been reclassified to reflect the
results of the Technologies Division to continuing operations. The $1.3 million
reserve was reversed during fiscal 1998, resulting in income after taxes of
$780,000.
Results of Operations 1998, 1997 & 1996
Fiscal 1998, 1997 and 1996 net sales were $28,998,000, $27,820,000 and
$25,317,000, respectively. The increase in net sales between fiscal 1998 and
1997 resulted principally from additional sales of new interface products in the
electromechanical segment. Fiscal 1998 sales in the microelectronic segment were
approximately $1.6 million lower than fiscal 1997 sales due to lower average
sales prices. The increase in net sales between fiscal 1997 and 1996 was caused
by a $600,000 increase for initial stocking orders for distributors in the
second quarter, a $1,400,000 increase in custom orders in the fourth quarter,
and new products which were introduced in the prior year in the microelectronics
division.
Gross margin, as a percentage of sales, decreased during fiscal 1998 to 28.5%
from 38.5% in fiscal 1997. Gross margins in the microelectronic segment were
approximately $6.9 million or 33.5% as compared to $9.0 million or 40.7% in
fiscal 1997. The decline is a result of the adverse effect on sales resulting
from a strong downward pricing pressure due to the competition and general
downturn in the industry as a whole. In addition, the Company increased its
inventory reserve by $500,000 in the microelectronics segment during the third
quarter of fiscal 1998 because of slow moving parts related to the lower than
anticipated business in Asia and the continuing slow down in military memory
sales. Gross margins in the electromechanical segment were approximately $1.4
million or 16.2% as compared to $1.7 million or 29.9% in 1997. The lower margins
are due to production problems associated with the introduction of new products.
Gross margin, as a percentage of sales, increased during fiscal 1997 to 38.5%
from 37.6% for fiscal 1996. Gross margins in the microelectronics division were
approximately $9.0 million or 40.7% as compared to $7.8 million or 41.6% in the
prior fiscal year. The increase in gross margin dollars was due to the increased
sales. The 0.9% decline in the gross margin percentage was a result of strong
downward pricing pressure brought about by a very competitive market. Gross
margin dollars in the electromechanical segment in fiscal 1997 were only
slightly lower than fiscal 1996, even though sales declined 13%. This was a
result of improved product mix and improved efficiency in the manufacturing
process.
Selling, general and administrative expenses for fiscal 1998 decreased $970,000
versus fiscal 1997 expenses. The decrease resulted from the savings realized
from closing the corporate office at the end of the 1998 first quarter, lower
sales cost for the electromechanical segment as a result of a reduction in
12
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expense associated with the sales department. Selling expenses were lower for
the microelectronics division because of lower commissions as a result of the
decline in sales.
Selling, general and administrative expenses in fiscal 1997 were 8.6% above 1996
expenses. The main reasons for the increase were an increase in advertising, up
$30,000, and sales commissions, up $210,000, relating to increased sales volume.
Legal expenses also increased in fiscal 1997 because of the investigation by the
U.S. Attorney's office. Selling, general and administrative payroll expense was
up $240,000 because of increased headcount to support higher sales volume.
Product development expenses for fiscal 1998 closely approximated fiscal 1997.
Product development expense in fiscal 1997 increased by $30,000 or 5.2% from
fiscal 1996. The main reason for the increase was the additional spending in the
microelectronics division on developing a microprocessor module in conjunction
with the Diehl business development alliance.
Interest expense for fiscal 1998 increased by $100,000 as compared to fiscal
1997. The increase is primarily a result of additional borrowings to finance the
Company's leasehold improvements for the microelectronics facility and financing
higher receivables, which occurred in the first six months of 1998.
Interest expense in fiscal 1997 declined by $ 105,000 as a result of both lower
rates and decreased average borrowing levels compared to fiscal 1996.
The Company incurred merger expenses of $1,005,000 relating to the EDI merger
during fiscal 1998. The costs primarily represent financial, legal, printing and
accounting service expenses. The Company anticipates that it will incur
additional expenses of approximately $2,100,000 during the first two quarters of
1999. These expenses are related to lower margins that result from the write-up
of inventories because of the allocation of the acquisition costs and severance
payments to former employees.
Other income for fiscal 1998 was $121,000 as compared to an expense of $137,000
in fiscal 1997. The income is mainly due to a tax settlement in fiscal 1998 that
resulted in income of $292,000. This income was partially offset by the
additional expenses incurred in fiscal 1998 to maintain and prepare the
Company's Acton, Massachusetts' property for sale. Other expense in fiscal 1997
consisted primarily of a one time $425,000 write-down on the Company's Acton,
Massachusetts property held for sale. This building and land were sold on April
30, 1998, for approximately $1,280,000. No additional gain or loss was realized
on the sale. The land and buildings are included in other assets at September
27, 1997. The offsetting other income is attributed to the proceeds from the
Acton leased facility until lease expiration in February 1997 and a $91,000 gain
on the sale of a stock investment by the Company.
The Company is subject to alternative minimum tax which, when combined with
state taxes, merger expenses, which are generally not deductible, and deferred
taxes resulted in a tax provision from continuing operations of $292,000,
$766,000 and $796,000 in fiscal years 1998, 1997 and 1996.
Financial Condition, Capital Resources and Liquidity
At October 3, 1998, working capital decreased to $8,182,000 from $9,822,000 at
September 27, 1997, principally as a result of a decrease in each current asset
category. However, this was largely offset by an approximate $4,300,000
reduction in current liabilities. Changes in the components of working capital
are detailed in the Company's Consolidated Statements of Cash Flows. The
Company's current ratio at fiscal year-end 1998 improved to approximately 3.7 to
1. Its total debt-to-equity ratio improved to approximately 0.6 to 1.
In fiscal 1998 and 1997, the Company generated $2,156,000 and $1,295,000
respectively of cash from operating activities. Net income in fiscal 1998,
without the effect of the reversal of reserve for loss from discontinued
operations was $1,869,000 lower than fiscal 1997. The major use of cash in
fiscal 1998 was $4,258,000 for the retirement of long term debt and payment of
the balance in the line of credit with Bank One of Arizona.
13
16
On April 30, 1998, the Company sold certain land and a building in Acton,
Massachusetts for approximately $1,280,000. No significant gain or loss was
realized on the date of sale.
The Company's capital expenditure plans are principally to expand manufacturing
capacity and are expected to be financed largely through existing credit lines,
and to a lesser extent, through funds provided from operations.
The major use of funds for capital expenditures in fiscal 1997 and 1998 was for
the build out of the new 53,000 square foot microelectronics division
manufacturing facility in Phoenix, Arizona. Expenditures for building and
manufacturing area improvements totaled $1,314,000 in fiscal 1997 and $224,000
in fiscal 1998. Additional expenditures for manufacturing and office equipment
account for the remaining $266,000 of property, plant and equipment purchases in
fiscal 1998. The new building expenditures in fiscal 1997 are the main reason
for the $1,520,000 increase from 1996 in property, plant and equipment.
Other major balance sheet account changes during fiscal 1998 include the
following items: accounts receivable decreased $1,433,000 mainly because of
shipment timing differences from previous years. Net inventories decreased
$2,650,000 from year-end 1997 amounts as the Company used the inventory
purchased in late fiscal 1997. Raw materials decreased $2,011,000 as the
components were used for production. Because of the inventory buildup in fiscal
1997, inventory purchases for fiscal 1998 were $1,549,324 below fiscal 1997
purchases. The current portion of long-term debt has decreased by $871,000
because of payment of a $1,000,000 short-term loan in addition to the retirement
of the Industrial Revenue Bonds which previously carried a $90,000 current
balance. This reduction was slightly offset by a $300,000 current portion
increase because the loan for lease hold improvements was refinanced to a
shorter maturity. Accounts payable decreased $818,000 as payments were made from
the inventory purchases in late fiscal 1997. Long term debt was decreased by
$3,051,000 during fiscal 1998. The proceeds from the sale of the land and
building in Acton, Massachusetts were used to retire the Industrial Revenue
Bonds, and to pay off $950,000 of the Bank One term loan. This decrease was
partially offset by a new term loan with Bank One for $1,200,000 set up to
finance the leasehold improvements for the White facility.
During fiscal 1998 the Company executed a modification to its credit facility
with Bank One, which extended the Company's due date on its revolving line of
credit to February 28, 2000 and modified certain restrictive covenants.
Subsequent to October 3, 1998 the Company revised its credit facility with Bank
One, which reduced annual principal payments and lowered the interest rate on
the term loan.
Management also anticipates that for the near term its cash payments for Federal
income taxes will be based on rates applicable to the alternative minimum tax as
it uses its net operating loss carryforwards.
Management believes that cash generated by operations, in addition to the
Company's borrowing capability, should be sufficient to fund the Company's cash
needs for the foreseeable future.
Seasonality and Inflation
The Company's business is not seasonal in nature. Management believes that the
Company's operations have not been materially affected by inflation.
Recently Enacted Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (SFAS 130), which establishes standard for
reporting and display of comprehensive income and its components for each period
reported. The provisions of this Statement are effective for fiscal years
beginning before December 15, 1997. Management believes that the Company
currently does not have items that would require presentation in a separate
statement of comprehensive income.
14
17
In June 1997, the Financial Accounting Standards Board (FASB) also issued
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS 131), which establishes standards
for the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This statement is effective for financial
statements for periods beginning after December 15, 1997. Management believes
this statement may require expanded disclosure in the Company's future financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
132, Employers Disclosure about Pensions and Other Postretirement Benefits,
which standardizes the disclosure requirements for pension and other
postretirement benefits. To the extent practicable, this statement requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures. This Statement is effective for fiscal years beginning after
December 15, 1997. Management believes this may require expanded disclosure in
the Company's future financial statement.
YEAR 2000
Many computer systems experience problems handling dates beyond the year 1999.
Many existing computer programs only use two digits to identify a year in the
date field. As a result, computer systems and/or software used by many computers
may need to be upgraded to comply with such "Year 2000" requirements. Such
systems and programs must be modified or replaced prior to January 1, 2000 in
order to remain functional. Significant uncertainty exists in the hardware and
software industry concerning the potential effects associated with such
compliance. The Company has undertaken a company-wide review of its Year 2000
exposure. The Company has surveyed its supporting systems and has implemented a
plan to make its systems Year 2000 compliant by March 1999. All current products
are now Year 2000 compliant. The Company has also been in contact with its major
suppliers and vendors, each of which is either Year 2000 compliant or is
completing system upgrades to become compliant. The Company is currently
responding to customer inquiries with respect to the Year 2000 issue. If
modifications and conversions to address the Year 2000 issue are not completed
on a timely basis or are not fully effective, the Year 2000 problem may have a
material adverse effect on the Company. The Company expects to implement
successfully the systems and programming changes necessary to address the Year
2000 issue and does not believe the cost of such actions will have a material
adverse effect on the Company, its results of operations or financial
conditions. The Company also relies, directly and indirectly, on the external
systems of business enterprises such as customers, suppliers, creditors, and
financial organizations for accurate exchange of data. Even if the Company's
products or its internal systems are not materially affected by the Year 2000
issue, the Company could be affected through disruptions in the operations of
issue on its internal systems and business operations, and there can be no
assurance that such will not result in a material disruption of its business,
financial condition or result of operations.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of this Annual Report for required financial statements and
supplementary data.
15
18
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item for directors is set forth in the
Company's 1999 Proxy Statement under the heading "Election of Directors" and the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" and is
incorporated herein by this reference as if set forth in full. The information
required by this Item for Executive Officers of the Company is set forth in Part
I of this Form 10-K as a separate item in Part I entitled "Executive Officers of
the Company."
ITEM 11 EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's 1999 Proxy
Statement under the heading "Executive Compensation" and is incorporated herein
by this reference as if set forth in full.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's 1999 Proxy
Statement under the heading "Principal Shareholders" and under the heading
"Election of Directors-Nominees" and is incorporated herein by this reference as
if set forth in full.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the Company's 1999 Proxy
Statement under the heading "Certain Transactions" and under the heading
"Compensation Committee Interlocks and Insider Participation" and is
incorporated herein by this reference as if set forth in full.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)(2) Financial Statements and Supplementary Data
Page
Consolidated Financial Statements
Report of Independent Accountants 22
Consolidated Balance Sheets as of October 3, 1998 and
September 27, 1997 23
16
19
Consolidated Statements of Income for the Years
Ended October 3, 1998, September 27, 1997 and
September 28, 1996 24
Consolidated Statements of Shareholders' Equity for
the Year Ended October 3, 1998, September 27, 1997
and September 28, 1996 25
Consolidated Statements of Cash Flows for the Years
Ended October 3, 1998, September 27, 1997 and
September 28, 1996 26
Notes to Consolidated Financial Statement 27
Financial Statement Schedules for the Years Ended October 3,
1998, September 27, 1997, and September 28, 1996.
Financial statement schedules have been omitted because either
they are not required or are not applicable, or because the
information has been included in the consolidated financial
statements or notes thereto.
(a)(3)Exhibits:
2.1 Agreement and Plan of Merger, dated May 3, 1998, by and among
Bowmar Instrument Corporation, 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, 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, Registration No.
333-56565).
*3.1 Amended and Restated Articles of Incorporation of White
Electronic Designs Corporation.
*3.2 Amended and Restated Code of By-Laws of White Electronic
Designs Corporation.
4.1 Rights Agreement, dated December 6, 1996, between Bowmar
Instrument Corporation and American Stock Transfer and Trust
Company, as Rights Agent (incorporated herein by reference to
Exhibit 5C to the Current Report on Form 8-K filed on 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).
4.2 Indenture, Bowmar Instrument Corporation 13 1/2% Convertible
Subordinated Debentures due December 15, 1995 (incorporated
herein by reference to Exhibit 4.4 to the Registration
Statement on Form S-7, Registration No. 2-70025).
*4.3 Stock Certificate of White Electronic Designs Corporation
10.1 Agreement to be Bound by Registration Rights Agreements,
dated as of May
17
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3, 1998, by and between Bowmar Instrument Corporation and Electronic
Designs, Inc. (incorporated herein by reference to Exhibit 10.1 to
the Registration Statement on Form S-4, Registration No. 333-56565).
10.2 Agreement to be Bound by Severance Agreements and Employment
Agreement, dated as of May 3, 1998, by and between Bowmar Instrument
Corporation and Electronic Designs, Inc. (incorporated herein by
reference to Exhibit 10.2 to the Registration Statement on Form S-4,
Registration No. 333-56565).
**10.3 Executive Employment Agreement by and between Hamid Shokrgozar and
Bowmar Instrument Corporation (incorporated herein by reference to
Exhibit 10.4(j) to the Quarterly Report on Form 10-Q for the
quarterly period ended April 4, 1998).
**10.4 Executive Employment Agreement by and between Joseph G. Warren, Jr.
and Bowmar Instrument Corporation (incorporated herein by reference
to Exhibit 10.7 to the Quarterly Report on Form 10-Q for the
quarterly period ended January 3, 1998).
10.5 Purchase and Sales Agreement, dated December 5, 1997, concerning the
sale of the Acton, Massachusetts facility (incorporated herein by
reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q for
the quarterly period ended January 3, 1998).
10.6 Fourth Amendment to Credit Agreement, dated as of March 16, 1998, by
and between Bowmar Instrument Corporation and Bank One, Arizona, NA
(incorporated herein by reference to Exhibit 10.4(h) to the
Quarterly Report on Form 10-Q for the quarterly period ended April
4, 1998).
10.7 Promissory Note Modification Agreement, dated March 16, 1998, by and
between Bowmar Instrument Corporation and Bank One, Arizona, NA
(incorporated herein by reference to Exhibit 10.4(i) to the
Quarterly Report on Form 10-Q for the quarterly period ended April
4, 1998).
10.8 Lease, dated February 23, 1990, by and between Bowmar/Ali, Inc. as
landlord and LAU Acquisition Corporation as tenant (incorporated
herein by reference to Exhibit 10.1(bb) to the Annual Report on Form
10-K filed for the fiscal year ended September 30, 1990).
**10.9 Employment Agreement dated August 15, 1991, as amended as of August
15, 1992, and as of June 1, 1995 between Gardiner S. Dutton and
Bowmar Instrument Corporation (incorporated herein by reference to
Exhibit 10.1(ff) to the Annual Report on Form 10-K for the fiscal
year ended September 30, 1992 and Exhibit 5(b) to Form 8-K dated
June 26, 1995).
**10.10 Form of Incentive Stock Option Agreement covering incentive stock
options granted under the Corporation's now terminated 1986 Plan, as
amended October 23, 1987 (incorporated here in by reference to
Exhibit 10.2(c) to the Annual Report on Form 10-K for the fiscal
year ended September 30, 1987).
**10.11 Form of Non-Incentive Stock Option Agreement covering non-incentive
stock options granted under the Corporation's now terminated 1986
Plan, as amended October 23, 1987 (incorporated by reference to
Exhibit 10.2(c) to the Annual Report on Form 10-K for the fiscal
year ended September 30, 1987).
**10.12 Bowmar Instrument Corporation Stock Option Plan for Non-Employee
Directors as amended February 4, 1994 (incorporated herein by
reference to Exhibit B to the Corporation's definitive Proxy
Statement, prepared in connection with the
18
21
1994 Annual Meeting of Shareholders).
**10.13 Non-Incentive Stock Option Agreement dated August 16, 1991, as
amended August 15, 1992, between Bowmar Instrument Corporation
and Gardiner S. Dutton (incorporated herein by reference to
Exhibit 10.1(ff) to the Annual Report on Form 10-K for the
fiscal year ended September 30, 1992).
**10.14 1994 Flexible Stock Plan (incorporated herein by reference to
Exhibit A to the Corporation's definitive Proxy Statement prepared
in connection with the 1994 Annual Meeting of Shareholders).
**10.15 Form of Agreement governing awards of restricted stock under the
Corporation's now terminated Restricted Plan (incorporated herein by
reference to the exhibit to Amendment No. 1 to the Registration
Statement of Form S-8 (No. 2-67645)).
10.16 Loan documents by and between Bank One, Arizona, NA and Bowmar
Instrument Corporation and its wholly owned subsidiary, Bowmar/ALI,
Inc. (incorporated herein by reference to exhibits 10.4a through
10.4g to the Annual Report on Form 10-K for the fiscal year ended
September 30, 1995).
10.17 Modification Agreement dated April 26, 1996, pursuant to the Loan
Agreement dated August 28, 1995 by and between Bank One, Arizona, NA
and the Registrant (incorporated herein by reference to Exhibit
10.4(b) to the Annual Report on Form 10-K for the fiscal year ended
September 28, 1996).
10.18 Second Modification Agreement dated August 9, 1996, pursuant to the
Loan Agreement dated August 28, 1995 by and between Bank One,
Arizona, NA and the Registrant (incorporated herein by reference to
Exhibit 10.4(c) to the Annual Report on Form 10-K for the fiscal
year ended September 28, 1996).
10.19 Third Modification Agreement dated March 28, 1997 pursuant to the
Loan Agreement dated August 28, 1995 by and between Bank One,
Arizona NA and the Registrant (incorporated herein by reference to
Exhibit 10.4(d) to the Form 10-Q for the quarter ended March 29,
1997).
10.20 Modification of Mortgage (Massachusetts) dated March 28, 1997 by and
between Bank One, Arizona NA and the Registrant and its wholly owned
subsidiary, Bowmar/ALI (incorporated herein by reference to Exhibit
10.4(e) to the Form 10-Q for the quarter ended March 29, 1997).
10.21 Modification of Mortgage (Indiana) dated March 28, 1997 by and
between Bank One, Arizona NA and the Registrant (incorporated herein
by reference to Exhibit 10.4(f) to the Form 10-Q for the quarter
ended March 29, 1997).
10.22 Revolving Promissory Note (RLT) dated March 28, 1997 by and between
Bank One, Arizona NA and the Registrant, for up to $1,200,000
(incorporated herein by reference to Exhibit 10.4(g) to the Form
10-Q for the quarter ended March 29, 1997).
10.23 Lease dated February 4, 1997 by and between Bowmar Instrument
Corporation as tenant and Gus Enterprises-XII, LLC as landlord
(incorporated by reference to Exhibit 10.5 to the Annual Report on
Form 10-K for the fiscal year ended September 27, 1997).
*21.1 Subsidiaries of White Electronic Designs Corporation.
*27.1 Financial Data Schedule.
- - - ----------
19
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* Filed herewith.
** Management compensatory contract, plan or arrangement.
(b) Reports on Form 8-K
Form 8-K to report change in Exchange Ratio filed August 28, 1998.
(c) See (a)(3) above.
(d) Not applicable.
20
23
ITEM 15 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WHITE ELECTRONIC DESIGNS CORPORATION
Date: December 22, 1998 /s/Joseph G. Warren, Jr.
------------------------------ ------------------------------------
Joseph G. Warren, Jr.
Vice President Finance, Secretary,
Treasurer and Chief Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date indicated:
/s/Norman T. Hall /s/Donald F. McGuinness
- - - ---------------------------------- ------------------------------------
Norman T. Hall Donald F. McGuinness
Director Chairman of the Board of Directors
Date: December 22, 1998 Date: December 22, 1998
------------------------------ -------------------------------
/s/Thomas M. Reahard /s/Thomas J. Toy
- - - ---------------------------------- ------------------------------------
Thomas M. Reahard Thomas J. Toy
Director Director
Date: December 22, 1998 Date: December 22, 1998
------------------------------ -------------------------------
/s/Hamid R. Shokrgozar /s/Joseph G. Warren, Jr.
- - - ---------------------------------- ------------------------------------
Hamid R. Shokrgozar Joseph G. Warren, Jr.
President, Chief Executive Officer Vice President Finance, Secretary,
and Director Treasurer and Chief Financial and
Accounting Officer
Date: December 22, 1998 Date: December 22, 1998
------------------------------ -------------------------------
/s/Edward A. White
- - - ----------------------------------
Edward A. White
Vice Chairman of the Board
and Director
Date: December 22, 1998
-----------------------------
21
24
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
WHITE ELECTRONIC DESIGNS CORPORATION
(formerly BOWMAR INSTRUMENT CORPORATION)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of White
Electronic Designs Corporation and Subsidiary (formerly Bowmar Instrument
Corporation) at October 3, 1998 and September 27, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
October 3, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Phoenix, Arizona
November 13, 1998 (except for the third
paragraph of Note 19 for which the date
is December 3, 1998.)
22
25
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
October 3, September 27,
1998 1997
- - - -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 1,069 $ 1,218
Accounts receivable, less allowance for
doubtful accounts of $79 and $43 3,007 4,476
Inventories 5,508 8,158
Prepaid expenses 344 539
Deferred income taxes 1,320 2,782
- - - -----------------------------------------------------------------------------------------------------------------------
Total Current Assets 11,248 17,173
Property, Plant and Equipment, net 2,361 2,642
Deferred Income Taxes 1,198 492
Other Assets, net 91 1,202
- - - -----------------------------------------------------------------------------------------------------------------------
Total Assets $ 14,898 $ 21,509
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 737 $ 1,608
Accounts payable 1,169 1,987
Accrued salaries and benefits 685 1,953
Other accrued expenses 475 503
Reserve for loss on discontinued operation 0 1,300
- - - -----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 3,066 7,351
Long Term Debt 2,366 4,546
Other Long term Liabilities 339 339
- - - -----------------------------------------------------------------------------------------------------------------------
Total Liabilities 5,771 12,236
- - - -----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (see Note 11)
- - - -----------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Preferred stock, $1.00 par value, authorized 500,000 shares,
issued 119,906, and 119,906 shares 120 120
Common stock, $0.10 stated value, authorized 15,000,000 shares,
issued 6,719,434 and 6,718,934 shares 672 672
Treasury stock, 44,442 shares, at stated value (4) (4)
Additional paid-in capital 6,610 6,609
Retained earnings 1,729 1,876
- - - -----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 9,127 9,273
- - - -----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 14,898 $ 21,509
=======================================================================================================================
See notes to Consolidated Financial Statements.
23
26
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except share and per share data)
FISCAL YEAR
1998 1997 1996
- - - ------------------------------------------------------------------------------------------------------------------------
Net sales $ 28,998 $ 27,820 $ 25,317
Cost of sales 20,744 17,118 15,787
- - - ------------------------------------------------------------------------------------------------------------------------
Gross margin 8,254 10,702 9,530
- - - ------------------------------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 6,500 7,470 6,878
Product development 628 610 580
Interest expense 517 417 522
Merger expense 1,005 0 0
Other expense (income), net (121) 137 (536)
- - - ------------------------------------------------------------------------------------------------------------------------
Total expenses 8,529 8,634 7,444
- - - ------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes (275) 2,068 2,086
Income tax expense (benefit) 292 766 796
- - - ------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (567) 1,302 1,290
- - - ------------------------------------------------------------------------------------------------------------------------
Discontinued operations (Note 16)
Reversal (Provision) for loss on disposition, net of deferred
income tax expense (benefit) of $520, ($520) and $0 780 (780) 0
- - - ------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations 780 (780) 0
- - - ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 213 $ 522 $ 1,290
========================================================================================================================
Earnings per share - basic, continuing operations $ (0.14) $ 0.14 $ 0.14
Earnings per share - basic, discontinued operations $ 0.12 $ (0.12) $ 0.00
- - - ------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE - BASIC $ (0.02) $ 0.02 $ 0.14
- - - ------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares and equivalents:
Basic 6,674,739 6,640,772 6,462,077
- - - ------------------------------------------------------------------------------------------------------------------------
For Fiscal 1998, 1997 and 1996 earnings per share assuming dilution is the same
as earnings per share basic and thus is not shown separately.
See notes to Consolidated Financial Statements.
24
27
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars, except share data)
Additional Total Share-
Preferred Common Treasury Paid-in Retained holders'
Stock Stock Stock Capital Earnings Equity
- - - --------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 $ 120 $ 650 $ (4) $ 6,245 $ 784 $ 7,795
================================================================================================================================
Net income 1,290 1,290
Issuance of common stock:
Exercise of options and
awards and related tax benefits
27,800 shares 3 70 73
Deferred compensation costs 15 15
Payment of preferred dividends (360) (360)
================================================================================================================================
BALANCE, SEPTEMBER 28, 1996 120 653 (4) 6,330 1,714 8,813
================================================================================================================================
Net income 522 522
Issuance of common stock:
Exercise of options and
awards and related tax
benefits 190,700 shares 19 270 289
Deferred compensation costs 9 9
Payment of preferred dividends (360) (360)
================================================================================================================================
BALANCE, SEPTEMBER 27, 1997 120 672 (4) 6,609 1,876 9,273
================================================================================================================================
Net income 213 213
Issuance of common stock:
Exercise of options and related tax
benefits, 500 shares 1 1
Payment of preferred dividends (360) (360)
================================================================================================================================
BALANCE, OCTOBER 3, 1998 $ 120 $ 672 $ (4) $ 6,610 $1,729 $ 9,127
================================================================================================================================
See notes to Consolidated Financial Statements
25
28
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
FISCAL YEAR
1998 1997 1996
- - - ----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 213 $ 522 $ 1,290
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 633 540 496
Allowance for doubtful accounts 36 (93) 34
Reserve for excess and obsolete inventory 566 113 66
Reserve for loss from discontinued operations (1,300) 1,300 0
Deferred income tax (benefit) expense 756 (98) 689
Net changes in balance sheet accounts:
Accounts receivable 1,433 (391) (144)
Inventories 2,084 (2,212) (705)
Prepaid expenses 195 (137) 55
Other assets (346) 462 19
Accounts payable (818) 1,055 (520)
Accrued salaries and benefits (1,268) 450 (589)
Other accrued expenses (28) (216) (382)
- - - ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,156 1,295 309
- - - ----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (490) (1,802) (365)
Proceeds from sales of property, plant and equipment 1,595 0 135
- - - ----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,105 (1,802) (230)
- - - ----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Borrowings under (payments on) line of credit, net (2,331) 2,331 0
Borrowings of long-term debt 1,207 190 4,200
Retirement of long-term debt (1,927) (833) (4,623)
Issuance of common stock 1 289 73
Payment of preferred stock dividends (360) (360) (360)
- - - ----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (3,410) 1,617 (710)
- - - ----------------------------------------------------------------------------------------------
Net change in cash (149) 1,110 (631)
Cash at beginning of year 1,218 108 739
- - - ----------------------------------------------------------------------------------------------
Cash at end of year $ 1,069 $ 1,218 $ 108
==============================================================================================
SUPPLEMENTAL CASH FLOWS INFORMATION:
Net cash paid for interest $ 500 $ 412 $ 511
Net cash paid for income taxes $ 120 $ 280 $ 139
Non-cash Investing and Financing Activities:
Capital lease agreements $ -- $ 235 $ --
- - - ----------------------------------------------------------------------------------------------
See notes to Consolidated Financial Statements
26
29
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
White Electronic Designs Corporation, formerly Bowmar Instrument Corporation and
its subsidiary (collectively "the Company"), designs and manufactures high
density, solid state memory modules, multichip modules, interface products, and
electromechanical components and packages. The Company's customers include both
domestic and international government contractors and commercial businesses. The
majority of the sales and earnings are generated by the memory and multichip
module product lines.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
The consolidated financial statements include the accounts of the
Company. All significant inter-company accounts and transactions are
eliminated. Certain amounts in prior fiscal years consolidated
financial statements have been reclassified to conform to current
presentation.
b. Fiscal Year-End
The Company's fiscal year-end is the Saturday nearest September 30.
c. Cash and Cash Equivalents
The Company considers all investments with original maturities of three
months or less to be cash equivalents.
d. Inventories
Inventories are stated at the lower of cost (principally first-in,
first-out) or market.
e. Property, Plant and Equipment
Property, plant and equipment, including property under capital lease
agreements, are stated at cost. Depreciation is determined on a
straight-line basis over the estimated useful lives ranging from 5 to
33 years for buildings and improvements and 3 to 10 years for machinery
and equipment. Leasehold improvements are amortized over the lives of
the leases or estimated useful lives of the assets, whichever is less.
When assets are sold or otherwise retired, the cost and accumulated
depreciation are removed from the books and the resulting gain or loss
is included in operating results.
f. Government Contracts
Sales under government contracts are recorded when the units are
shipped and accepted by the government.
g. Sales Recognition
Sales are recognized when the Company's products are shipped. The
Company records at the time of shipments, as an offset to sales, a
reserve for estimated returned goods.
h. Income Taxes
The Company files a consolidated tax return with its wholly owned
subsidiary. Temporary differences in the recognition of taxable income
for financial reporting and income tax purposes relate primarily to the
use of different depreciation methods and useful lives for tax
purposes, the allowances for doubtful accounts, inventory obsolescence
and the timing of reporting bonus expense.
i. Newly Issued Accounting Standards
In June, 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (SFAS 130), which
establishes standards for reporting and display of comprehensive income
and its components. This statement requires a separate statement to
report the components of comprehensive income for each period reported.
The provisions of this statement
27
30
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are effective for fiscal years beginning after December 15, 1997.
Management believes that the Company currently does not have items that
would require presentation of comprehensive income.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and
related Information (SFAS 131), which establishes standards for the way
the public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This statement is
effective for financial statements for periods beginning after December
15, 1997. Management believes this may require expanded disclosure in
the Company's future financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers Disclosure about Pensions and Other
Postretirement Benefits, which standardizes the disclosure requirements
for pension and other postretirement benefits. To the extent
practicable, this statement requires additional information on changes
in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures. This
Statement is effective for fiscal years beginning after December 15,
1997. Management believes this may require expanded disclosure in the
Company's future financial statement.
j. Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
k. Other Income and Expense
Fiscal 1998 Other Income includes a tax settlement of $292,000. This
was partially offset by expenses incurred on the Acton, Massachusetts
property prior to the sales date. Fiscal 1997 other expense includes a
$425,000 loss on the sale of the Acton, Massachusetts property, offset
by $288,000 of partial year rental income, gain on the sale of stock of
a former subsidiary, and miscellaneous income. Fiscal 1996 other income
includes $572,000 of full year net rental income for the Acton
property.
3. INVENTORIES
Inventories consist of the following:
October 3, 1998 September 27, 1997
- - - -----------------------------------------------------------------------
Raw materials $ 1,266,000 $ 3,277,000
Work-in-process 3,342,000 4,258,000
Finished goods 900,000 623,000
- - - -----------------------------------------------------------------------
Total Inventories $ 5,508,000 $ 8,158,000
=======================================================================
The inventories are net of reserve for excess and obsolete inventories of
$1,544,000 and $978,000 for fiscal 1998 and 1997 respectively.
28
31
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. OTHER ASSETS
Other assets declined in 1998 as a result of the sale of certain land and
buildings in Acton, MA. No significant gain or loss was recognized at the time
of the sale. The building was leased under an operating lease agreement which
ended in February, 1997. Rental income during fiscal years 1998, 1997, and 1996
was $0, $233,000 and $572,000 respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
October 3, 1998 September 27, 1997
- - - -----------------------------------------------------------------------------------------
Land $ 123,000 $ 123,000
Buildings and improvements 961,000 956,000
Machinery and equipment 5,857,000 7,525,000
Leasehold improvements 1,516,000 316,000
- - - -----------------------------------------------------------------------------------------
Total, at cost 8,457,000 8,920,000
Less accumulated depreciation and amortization 6,096,000 6,278,000
- - - -----------------------------------------------------------------------------------------
Net Property, Plant and Equipment $2,361,000 $2,642,000
=========================================================================================
At fiscal year-end 1998 and 1997, property, plant and equipment includes
approximately $609,000 and $608,000, respectively, of equipment under leases
that have been capitalized. Accumulated amortization for such equipment
approximated $567,000 and $379,000 for fiscal years 1998 and 1997, respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following:
October 3, 1998 September 27, 1997
- - - -----------------------------------------------------------------------------------
Bank One term loan $ 2,035,000 $ 3,405,000
Bank One term loan, Building 1,025,000 0
Bank One revolving line of credit 0 2,331,000
Industrial revenue bonds 0 270,000
Obligations under capital leases 43,000 148,000
- - - -----------------------------------------------------------------------------------
Sub-Total 3,103,000 6,154,000
Less current portion 737,000 1,608,000
- - - -----------------------------------------------------------------------------------
Total long term debt $ 2,366,000 $ 4,546,000
===================================================================================
The financing agreement with Bank One provides for a $4.0 million revolving line
of credit which expires February 28, 2000 and bears interest at .5% over the
Bank's prime rate (on October 3, 1998 the loan rate was 8.75%); term loan with
principal amount of $2,035,000 which bears interest at the rate of 1.25% over
the bank's prime rate. The term loan's rate on October 3, 1998 was 9.5% with
principal payments of $35,000 per month with the balance due on July 31, 2000.
In addition, the Company has another term loan with Bank One with a principal
amount of $1,025,000 which bears interest at the rate of 1.00% over the bank's
prime rate. This term loan's rate at October 3, 1998 was 9.25% with principal
payments of $25,000 per month with the balance due on March 31, 2002.
The Bank One financing is collateralized by all of the assets of the Company.
The financing agreement contains certain financial covenants and precludes the
payment of cash dividends for both Preferred and Common Stock in excess of
$500,000 per year. During 1998, the Company was in violation of a certain
financial covenant which has been waived by the bank.
In December 1998, the Company signed a new financing agreement with Bank One.
Under the terms of the agreement, both term loans were combined into one with
principal payments of $29,363 per month with the balance due on November 30,
2003 with interest at 2.5% over LIBOR.
29
32
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The new agreement also provides for a $6 million revolving line of credit that
expires on February 28, 2000.
The availability of cash under the revolving line of credit is based on eligible
accounts receivable and inventories. There is a charge of 1/4 of 1% per month on
the unused portion of the line of credit.
The aggregate maturities of the above term debt are approximately $737,000 in
1999, $1,941,000 in 2000, $300,000 in 2001 and $125,000 in 2002.
The weighted average interest rate on long term debt for fiscal 1998, 1997, and
1996 was approximately 11.00%, 9.9%, and 9.9% respectively.
7. INCOME TAXES
The provision for income taxes on continuing operations consists of the
following (in thousands of dollars):
Fiscal Year
1998 1997 1996
- - - -----------------------------------------------------------------------------
Current $ 56,000 $ 344,000 $ 107,000
Deferred 236,000 422,000 689,000
- - - -----------------------------------------------------------------------------
Income tax provision $ 292,000 $ 766,000 $ 796,000
=============================================================================
Based on the Company's taxable income in recent years and projecting future
taxable income over the period in which the deferred income tax assets are
deductible, the Company believes that it is more likely than not that it will
realize the benefit of the deferred tax assets.
A reconciliation of the provision for income taxes on continuing operations
between the U.S. statutory and effective rates follows (in thousands of
dollars):
Fiscal Year
1998 1997 1996
- - - -----------------------------------------------------------------------------------------------
Provision (benefits) at statutory rate $ (94) $ 703 $ 709
State taxes, net of federal benefit 115 93 131
Non deductible merger costs 271 0 0
Adjustment related to prior years tax returns 0 (30) (44)
- - - -----------------------------------------------------------------------------------------------
Effective Tax $ 292 $ 766 $ 796
- - - -----------------------------------------------------------------------------------------------
The income tax effect of loss carryforwards, tax credit carryforwards and
temporary differences between financial and tax reporting give rise to the
deferred income assets and liabilities. Deferred income taxes consisted of the
following:
October 3, 1998 September 27, 1997
- - - -------------------------------------------------------------------------------------------------------------
Current:
Inventories $ 932,000 $ 646,000
Accrued salaries, benefits, interest, expenses and reserves 229,000 1,360,000
Net operating loss carryforwards 159,000 776,000
- - - -------------------------------------------------------------------------------------------------------------
Subtotal 1,320,000 2,782,000
--------- ---------
Long Term:
Property, Plant and Equipment 95,000 264,000
Net operating loss carryforwards 890,000 84,000
Alternative minimum tax credits 146,000 144,000
Other 67,000 0
- - - -------------------------------------------------------------------------------------------------------------
Subtotal 1,198,000 492,000
- - - -------------------------------------------------------------------------------------------------------------
Total $2,518,000 $3,274,000
=============================================================================================================
As of October 3, 1998, the Company had federal net operating loss carryforward
for tax purposes of approximately $3,087,000 which expire from 2003 through
2005.
30
33
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BENEFIT PLANS
The Company has a defined benefit pension plan for union employees at its Fort
Wayne, Indiana facility pursuant to a collective bargaining agreement. Benefits
are based primarily on a benefits multiplier and years of service. The Company
funds the amount equal to the minimum funding required plus additional amounts
which may be approved by the Company from time to time. Net periodic pension
cost included the following components:
Fiscal Year
1998 1997 1996
- - - --------------------------------------------------------------------------------
Service cost benefits earned $ 70,000 $ 84,000 $ 71,000
Interest cost 143,000 138,000 135,000
Return on plan assets (192,000) (384,000) (110,000)
Amortization of transition asset (10,000) (10,000) (10,000)
Amortization of prior service costs 15,000 15,000 (17,000)
Deferral of gain to future years 36,000 245,000 0
- - - --------------------------------------------------------------------------------
Total pension cost $ 62,000 $ 88,000 $ 69,000
================================================================================
At October 3, 1998, the actuarial present value of accumulated benefit
obligations was $2,258,116 of which $2,206,392 was vested. The vested benefit
obligation is the actuarial present value of the vested benefits to which the
employee would be entitled if the employee separated immediately. Prepaid
pension cost at October 3, 1998 and September 27, 1997, was calculated as
follows:
October 3, 1998 September 27, 1997
- - - ------------------------------------------------------------------------------------------
Projected benefit obligation $ 2,258,000 $ 1,955,000
Market value of plan assets 2,354,000 2,279,000
- - - -----------------------------------------------------------------------------------------
Plan assets over projected benefit obligation 96,000 324,000
Unrecognized transition assets 0 (10,000)
Unrecognized past service costs 78,000 92,000
Unrecognized net loss (gain) 13,000 (199,000)
- - - -----------------------------------------------------------------------------------------
Prepaid Pension Cost $ 187,000 $ 207,000
=========================================================================================
Plan assets primarily consist of investments in mutual funds, corporate bonds
and money market funds. The weighted-average assumed discount rate was 6.5% and
the long-term rate of return on assets was 7.0%.
In addition, the Company has an Incentive Savings 401(k) Plan covering non-union
employees of the Company who have completed six months of service. The Company
matches employee contributions equal to 50% of the first 3% of a participant's
wage base. During each of the fiscal years 1998, 1997 and 1996, the Company made
contributions to the plan of approximately $63,000, $64,000, and $60,000
respectively.
9. STOCK OPTIONS AND AWARDS
The Company has adopted the disclosure only provision of Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS
123). As allowed by SFAS 123, the Company has elected to continue to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) in accounting for its stock option plans. Accordingly, since
all options are issued with exercise prices greater than or equal to the market
price on the rant date, no compensation cost has been recognized for the stock
option plans.
31
34
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Company's shareholder approved 1994 Flexible Stock Plan, Common Stock
is available for the grant of options, appreciation rights, restricted stock
awards, performance shares and other stock-based awards. The vesting and terms
of the options granted under this plan are determined when awarded by the Board
of Directors. At October 3,1998 there were 463,321 shares available for future
grants to directors, officers and employees at prices not less than the fair
value at the date of grant by the Board of Directors. At fiscal year-end 1998,
491,000 shares from the Company's 1994 plan are under option.
During fiscal 1995, the Board of Directors terminated the Company's shareholder
approved 1986 Stock Option Plan. At fiscal year-end 1998, 43,500 shares from the
Company's 1986 Plan remain under option.
The Company's shareholder approved Non-Qualified Stock Option Plan for Directors
provides for the issuance of options to purchase shares of Common Stock to
directors at an exercise price equal to the fair market value on the date of
issuance. At fiscal year end October 3, 1998, there were 130,274 shares
available for future grants to the directors. The options are exercisable as
early as six months after date of grant and expire in ten years. A total of
136,000 options under this Non-Qualified Plan have been issued to non-employee
directors and 132,000 options remain unexercised at October 3, 1998.
A summary of the Company's stock option activity and related information is as
follows:
- - - -----------------------------------------------------------------------------------------------------------------------------
Fiscal Year
1998 1997 1996
- - - -----------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
- - - -----------------------------------------------------------------------------------------------------------------------------
Beginning balance outstanding 661,500 $2.02 705,200 $2.41 582,000 $2.52
Granted 163,000 2.07 373,500 1.98 172,500 2.00
Exercised (500) 2.00 (190,700) 1.40 (27,800) 1.42
Canceled (157,500) 2.00 (226,500) 3.33 (21,500) 3.42
---------------------------------------------------------------------------
Ending balance outstanding 666,500 $2.04 661,500 $2.14 705,200 $2.41
- - - -----------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 484,375 $2.04 402,625 $2.18 426,825 $2.50
SHARES AVAILABLE FOR FUTURE GRANT 463,321 369,209 23,530
- - - -----------------------------------------------------------------------------------------------------------------------------
The following table summarizes additional information about the Company's stock
options outstanding as of October 3, 1998:
- - - --------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- - - --------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted-
Shares Average Average Average
Under Exercise Remaining Exercisable Exercise
Option Price Contractual Life Shares Price
- - - --------------------------------------------------------------------------------------------------------------------------
Range of exercise price:
$1.375 - $2.625 634,500 $1.97 4.5 years 452,375 $1.98
$3.125 - $3.563 32,000 $3.37 6.1 years 32,000 $3.37
- - - --------------------------------------------------------------------------------------------------------------------------
666,500 $2.04 4.6 years 484,375 $2.04
==========================================================================================================================
On December 6, 1996, the Board of Directors adopted a program to permit the
repricing of 213,500 options that were granted to officers and employees in 1995
under the Company's 1994 Flexible Stock Plan. The revised exercise price is
$2.00 per share (approximately 25% over the market price on the date of the
repricing) instead of the original exercise prices which ranged from $3.125 to
$3.375 per share. In the above table these options are shown as being canceled
and new options granted.
32
35
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
stock option plans under the fair value based method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
risk free interest rate of 5.51%, no common dividend, volatility factor of the
expected market price of the Company's Common Stock of 65%, and an expected
average life of the option of 5.5 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The pro forma
information for 1998 and 1997 follows: (In thousands except for per share
information):
- - - -------------------------------------------------------------------------
Fiscal Year
1998 1997
- - - -------------------------------------------------------------------------
Net income $213 $522
Option compensation expense 31 245
- - - -------------------------------------------------------------------------
Pro forma net income $182 $277
=========================================================================
Had the Company elected to adopt the recognition provisions of SFAS No. 123, net
income per share would have been unaffected for fiscal 1998 and been reduced by
$.03 for fiscal 1997.
During fiscal 1995, the Board of Directors terminated the Company's Restricted
Stock Award Plan under which shares of the Company's Common Stock were available
to certain officers and employees without the payment of cash consideration. The
cost of such awards at the date of grant was considered to be compensation and
was expensed over the vesting period. Amounts charged to expense in fiscal years
1997 and 1996, net of forfeitures, were $ 8,700 and $15,000, respectively. At
September 27, 1997, all of the shares previously awarded were vested.
10. FINANCIAL INSTRUMENTS
The financial position of the Company at October 3, 1998, includes certain
financial instruments which may have a fair value that is different from the
value currently reflected on the financial statements. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practical to estimate that value.
Cash and Cash Equivalents: Cash is invested in overnight securities, therefore
the fair value is equal to the carrying amount. The carrying amount of long term
debt is a reasonable estimate of fair value as stated rates of interest
approximate current market rates.
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under noncancelable lease
agreements some of which include renewal options of up to five years. Total rent
expense for 1998, 1997, and 1996 was $708,000, $376,000 and $356,000
respectively. Future minimum annual fixed rentals required under noncancelable
operating leases having an original term of more than one year are $769,000 in
1999, $676,000 in 2000, $653,000 in 2001, $591,000 in 2002, and $1,970,000
thereafter.
On April 25, 1996 the U.S. Attorney's Office for the State of Arizona undertook
an investigation of certain aspects of White Microelectronics contracts with
prime contractors with the Federal government. The investigation focused on the
interpretation of certain government contract specified testing requirements on
incoming material. The Company is cooperating fully with the investigation. 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 and is seeking authority to disclose the substance of its
investigation to the Civil Section of the U.S. Attorney's Office so that the
Civil Section can determine whether there is sufficient basis for initiating a
civil proceeding against White Microelectronics.
33
36
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. PREFERRED STOCK
Preferred shareholders vote equally with common shareholders. Each share of
preferred stock has one vote, is convertible into 13.33 shares of the Company's
Common Stock (stated value $0.10 per share), and pays annual dividends totaling
$3.00, payable quarterly on March 31, June 30, September 30 and December 31 of
each year. As of October 3, 1998, the Company has approximately 1,600,000 shares
of Common Stock reserved for the conversion of preferred stock. The preferred
stock is redeemable at the option of the Company at $25.00 per share on and
after January 1, 1998, and is not subject to mandatory redemption.
13. CONCENTRATIONS OF CREDIT RISK
The Company sells its products primarily to the defense and commercial
industries in the United States. In fiscal 1998, no customer sales accounted for
10% or more of the Company's sales. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. At certain times throughout the year the Company
may maintain certain bank accounts in excess of the FDIC insured limits. As of
October 3, 1998 and September 27, 1997, there was $948,000 and $949,000 of
uninsured cash respectively. The Company regularly reviews the creditworthiness
of the financial institutions with whom it conducts business.
14. DISPOSITIONS
The Company sold a certain stock investment in February 1997. This transaction
resulted in a gain of approximately $91,000 that was recorded in other income.
On April 30, 1998, the Company sold certain land and a building in Acton,
Massachusetts for approximately $1,200,000. No significant gain or loss was
realized on the date of sale.
The Company sold the production equipment and tooling used in the ordnance
product line in May, 1996. Additionally, in June 1996, the Company sold the
inventory, production equipment, test equipment and drawings that pertained to
the rapid heat transfer sterilizer product line. These transactions resulted in
a combined gain of approximately $90,000 which was recorded as other income.
Both product lines were a part of electromechanical segment sales.
15. SHAREHOLDERS RIGHTS PLAN
On December 6, 1996, the Board of Directors adopted a shareholder rights plan to
protect shareholders against unsolicited attempts to acquire control of the
Company which do not offer what the Company believes to be an adequate price for
all shareholders. To implement the plan, the Board declared a dividend of one
common share purchase right (a "Right" or "Rights") for each outstanding share
of the Company's Common Stock and entered into a rights agreement with American
Stock Trust and Transfer, as Rights Agents (the "Rights Agreement"). If and when
the Rights become exercisable, each Right will entitle the registered holder to
purchase from the Company one share of Common Stock of the Company at a purchase
price of $20.00 (subject to adjustment pursuant to certain anti-dilution
provisions) (the "Purchase Price"). The terms of the rights are set forth in the
Rights Agreements.
Separate certificates representing the Rights will be distributed only upon an
event triggering a distribution. Pursuant to the Rights Agreement, if a person
or group (an "Acquiring Person") acquires 15% or more of the Company's
outstanding voting stock or announces a tender or exchange offer that would
result in the ownership by the Acquiring Person of 15% or more of the
outstanding voting stock, the Rights certificates will be distributed and each
holder of the rights (other than the Acquiring Person) may either exercise the
Rights to acquire Common Stock of the Company at the then Purchase Price or
convert the Rights into that
34
37
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
number of shares of Common Stock equal to the Purchase Price times the number of
Rights held by the holder divided by 50% of the then current market price of the
Common Stock.
In the event that the Company is acquired in a merger or other transaction where
it is not the surviving corporation or where all or part of its Common Stock is
exchanged for securities, cash or property of another person, or in the event
that 50% or more of the Company's assets are sold, proper provision will be made
so that each holder of the right (other than the Acquiring Person) will have the
right to receive, upon exercise thereof, that number of shares of common stock
of the acquiring corporation which at the time of such transaction will have a
market value of two times the exercise price of the Right. Similarly, in the
event that a person acquires 15% or more of the outstanding Common Stock of the
Company, proper provision will be made so that each holder of a Right (other
than the Acquiring Person) will thereafter have the right to receive upon
exercise that number of shares of Common Stock of the Company having a market
value of two times the exercise price of the Right.
The Rights Agreement also contains an exchange option. At any time after a
person becomes an Acquiring Person, and prior to the acquisition by such
Acquiring Person of 50% or more of the outstanding Common Stock of the Company,
the Board of Directors may exchange the Rights (other than Rights owned by the
Acquiring Person, which Rights shall become void), in whole or in part, at an
exchange ratio of one share of Common Stock per Right.
Finally, the Rights are subject to redemption. At any time prior to the tenth
calendar day following the date of a public announcement that a person or group
has become an Acquiring Person, the Board of Directors of the Company may redeem
the Rights in whole, but not part, at a price of $.01 per Right.
The terms of the Rights may be amended by the Board of Directors without the
consent of the holders of the Rights, except that from and after such time as
any person becomes an Acquiring Person, no such amendment may adversely affect
the interests of the holders of the Rights. Until a Right is exercised, the
holder thereof, as such, will have no rights as a shareholder of the Company,
including, without limitation, the right to vote or to receive dividends. The
Rights cannot be bought, sold or otherwise traded separately from the Common
Stock. Certificates for Common Stock issued after the date of the Rights
Agreement carry a notation that indicates the Rights are attached. The Rights
will expire on December 5, 2006 unless extended or unless the Rights are earlier
redeemed by the Company. The Rights Agreement was amended in connection with the
EDI merger (See Note 19) to exempt from operation of the Rights Agreement the
execution of the Agreement and Plan of Merger with EDI and the transactions
contemplated thereby.
16. DISCONTINUED OPERATIONS
In December 1997 the Board of Directors decided to sell its Technologies
Division. As a result of this decision, the Company recorded, in the fourth
quarter of fiscal 1997 a reserve of $1,300,000 for estimated future losses
relating to the division.
On May 3, 1998, the Company reached a definitive agreement to merge with EDI.
One division of EDI manufactures active matrix liquid crystal displays (AMLCD).
EDI'S AMLCD products are sold mainly to aircraft instrument manufacturer.
Because of the merger, the Board of Directors has decided not to sell the
Technologies Division. Instead the Company has combined both divisions to
improve the performance of their product lines based on the complementary
products. As required by Emerging Issues Task Force 90-16, the above financial
information has been reclassified to reflect the results of the Technologies
Division in continuing operations.
35
38
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects the results of the discontinued operation for the
periods presented in the Company's Consolidated Statements of Income:
- - - -----------------------------------------------------------------------------------------------
Fiscal Years
- - - -----------------------------------------------------------------------------------------------
Technologies Division Operating Results 1998 1997 1996
- - - -----------------------------------------------------------------------------------------------
Net sales $ 8,444,000 $ 5,631,000 $ 6,477,000
Gross margin $ 1,369,000 $ 1,682,000 $ 1,692,000
Product development $ 92,000 $ 130,000 $ 157,000
Operating expenses $ 1,653,000 $ 1,602,000 $ 1,505,000
Operating income (loss) $ (376,000) $ (50,000) $ 30,000
- - - -----------------------------------------------------------------------------------------------
The components of net assets are as follows:
- - - --------------------------------------------------------------------------------------------------
Technologies Division October 3, 1998 September 27, 1997
- - - --------------------------------------------------------------------------------------------------
Receivables,net $ 831,000 $ 1,089,000
Inventories 1,942,000 1,958,000
Other current assets 214,000 385,000
Property and equipment Intangible and other assets (net) 593,000 700,000
Accounts payable and other current liabilities (593,000) (694,000)
Long-term debt (26,000) (41,000)
- - - --------------------------------------------------------------------------------------------------
Net Assets $ 2,961,000 $ 3,397,000
==================================================================================================
The approximate components of the reversal and (reserve) in fiscal 1998 and
fiscal 1997 respectively are as follows:
- - - -------------------------------------------------------------------------------------------
Technologies Division Fiscal Year 1998 Fiscal Year 1997
- - - -------------------------------------------------------------------------------------------
Reversal (reserve) for losses during phase out $ 800,000 $ (800,000)
Reversal (reserve) for costs of disposal 300,000 (300,000)
Reversal (reserve) for loss on sale 200,000 (200,000)
- - - -------------------------------------------------------------------------------------------
Total $ 1,300,000 $(1,300,000)
===========================================================================================
17. CLOSURE OF THE CORPORATE OFFICE
In an effort to reduce expenses and take advantage of the office space leased at
the White Microelectronics facility, it was decided that there was no continuing
need for the Company's corporate office. Therefore, the corporate office was
eliminated in the first quarter of fiscal 1998, which resulted in a charge in
the first quarter of fiscal 1998 of $380,000 for severance and other closing
costs.
18. EARNINGS PER SHARE
The Company has adopted the provisions of the Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128") effective January 3, 1998.
SFAS 128 requires the presentation of basic and diluted earnings per share.
Basic EPS is computed by dividing income available to common stockholders by the
weighted average number of common shares that were outstanding during the
period. Dilutive potential common shares consist of the incremental common
shares issuable upon exercise of stock options. All prior period earnings per
share amounts have been restated to comply with the SFAS 128.
36
39
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the disclosure requirements of SFAS 128, a reconciliation of
the numerator and denominator of basic and diluted EPS is provided as follows
(in thousands, except per Share amounts):
- - - ----------------------------------------------------------------------------------------------------------------
FISCAL 1998
- - - ----------------------------------------------------------------------------------------------------------------
Income Shares Per share
(Numerator) (Denominator) Amount
- - - ----------------------------------------------------------------------------------------------------------------
Loss from continuing operations, net of tax $ (567,000)
Less: preferred stock dividends 360,000
- - - ----------------------------------------------------------------------------------------------------------------
BASIC EPS
Loss applicable to continuing operations, net of tax $ (927,000) 6,674,739 $ (0.14)
Earnings applicable to discontinued operations, net of tax 780,000 6,674,739 $ 0.12
- - - ----------------------------------------------------------------------------------------------------------------
Loss available to common stockholders (147,000) $ (0.02)
EFFECTS OF DILUTIVE SECURITIES
Common stock options 15,644
- - - ----------------------------------------------------------------------------------------------------------------
DILUTIVE EPS
Loss available to common stockholders $ (147,000) 6,690,383 $ (0.02)
- - - ----------------------------------------------------------------------------------------------------------------
- - - ----------------------------------------------------------------------------------------------------------------------
FISCAL 1997
- - - ----------------------------------------------------------------------------------------------------------------------
Income Shares Per share
(Numerator) (Denominator) Amount
- - - ----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations, net of Tax 1,302,000
Less: preferred stock dividends 360,000
- - - ----------------------------------------------------------------------------------------------------------------------
BASIC EPS
Earnings applicable to continuing operations, net of tax 942,000 6,640,772 $ 0.14
Loss applicable to discontinued operations, net of tax (780,000) 6,640,772 $ (0.12)
- - - ----------------------------------------------------------------------------------------------------------------------
Earnings available to common stock holders 162,000 $ 0.02
EFFECTS OF DILUTIVE SECURITIES
Common stock options 45,661
- - - ----------------------------------------------------------------------------------------------------------------------
DILUTIVE EPS
Earnings available to common stock holders 162,000 6,686,433 $ 0.02
- - - ----------------------------------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------------------------------------------------
FISCAL 1996
- - - -------------------------------------------------------------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
- - - -------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations, net of tax $1,290.000
Less: preferred stock dividends 360,000
- - - -------------------------------------------------------------------------------------------------------------------------
BASIC EPS
Earnings applicable to continuing operations, net of tax 930,000 6,642,077 $0.14
- - - -------------------------------------------------------------------------------------------------------------------------
Earnings available to common stock holders 930,000 $0.14
EFFECTS OF DILUTIVE SECURITIES
Common stock options 118,392
- - - -------------------------------------------------------------------------------------------------------------------------
DILUTIVE EPS
Earnings available to common stock holders 930,000 6,760,469 $0.14
- - - -------------------------------------------------------------------------------------------------------------------------
The convertible preferred stock is not included in the calculation of dilutive
earnings per share, because its inclusion would be anti-dilutive.
19. SUBSEQUENT EVENTS
Effective October 26, 1998, the Company acquired EDI through a merger with a
wholly owned subsidiary of the Company. EDI manufactures and sells approximately
170 semiconductor memory products and 15 AMLCD products for a wide range of
commercial, industrial and military applications. Each share of EDI Common Stock
was exchanged for 1.275 shares of the Company's Common Stock, together with the
associated Common
37
40
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Purchase Rights under the Company Rights agreement, subject to payment of
cash in lieu of any fractional share.
The acquisition has been accounted for as a purchase. The excess of the
aggregate purchase price over the book value of net assets acquired will be
allocated to the fair value of the assets on the purchase date. If there is any
excess of the purchase price over the fair value, it will be allocated to
goodwill.
On December 3, 1998, the Board of Directors adopted a program to permit the
repricing of certain options to employees (excluding the Chief Executive Officer
and the Chief Financial Officer) of the Company. The revised exercise price is
$1.18 per share (the market closing price on the date of repricing) instead of
the original exercise prices which ranged from $1.375-$3.375 per share.
20. OPERATIONS BY BUSINESS SEGMENTS
The Company operates in two industry segments. These segments are the
manufacture and sale of (1) electromechanical and mechanical equipment and
components, which include electromechanical display devices, electromechanical
components and packages, keyboards and related subsystems and (2)
microelectronic equipment and components, which include high density solid state
memory modules and multichip microcircuits.
A significant portion of the Company's business activity in each business
segment is conducted either directly with, or as a subcontractor to entities
having contracts with, the United States Department of Defense.
As of October 3, 1998 and September 27, 1997, the Company's receivables from
such customers were approximately $1,173,000 and $2,118,000 respectively.
Certain major customers made up at least 10% of total segment sales in fiscal
years 1998 and 1996. Sales to one customer of the microelectronic segment in
fiscal 1998, 1997 and 1996 were 10%, 9% and 10%, respectively. Sales to one
customer of the electromechanical segment in fiscal 1998 were 24%.
Sales in each business segment are to unaffiliated customers. There are no
intersegment sales. Assets identifiable to industry segments are those assets
that are used in the Company's operations and do not include general corporate
assets. General corporate assets in 1997 consist primarily of cash, furniture
and fixtures, unamortized debt issue costs and the deferred income tax assets.
General corporate assets in fiscal 1998 consist of deferred income tax assets.
A significant portion of the Company's sales activity is sales to foreign
customers. Export sales as a percent of total sales in fiscal 1998, 1997 and
1996 were 20%, 26% and 24%, respectively.
Foreign Sales by Major Geographical Segment
(In thousands of dollars)
- - - -------------------------------------------------------------------------------
Fiscal 1998 Fiscal 1997 Fiscal 1996
- - - -------------------------------------------------------------------------------
Europe $1,960 $4,219 $4,042
Asia $3,700 $3,108 $2,151
- - - -------------------------------------------------------------------------------
Total $5,660 $7,327 $6,193
- - - -------------------------------------------------------------------------------
38
41
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARY
(FORMERLY BOWMAR INSTRUMENT CORPORATION AND SUBSIDIARY)
OPERATIONS BY BUSINESS SEGMENTS
(In thousands of dollars)
FISCAL YEAR
1998 1997 1996
- - - ---------------------------------------------------------------------------------------
NET SALES
Electromechanical $ 8,444 $ 5,631 $ 6,477
Microelectronic 20,554 22,189 18,840
- - - ---------------------------------------------------------------------------------------
Total $ 28,998 $ 27,820 $ 25,317
- - - ---------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Electromechanical $ (376) (50) 30
Microelectronics 2,569 4,171 3,561
- - - ---------------------------------------------------------------------------------------
Operating income 2,193 4,121 3,591
General corporate expense 946 1,211 983
Reserve loss on sale of Acton, MA property 0 425 0
Reserve for loss on discontinued operations (1,300) 1,300 0
Merger costs 1,005 0 0
Interest expense 517 417 522
Provision for income taxes 812 246 796
- - - ---------------------------------------------------------------------------------------
Net income $ 213 $ 522 $ 1,290
- - - ---------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Electromechanical $ 3,580 $ 4,132 $ 2,774
Microelectronics 8,800 11,502 8,677
General Corporate 2,518 5,875 5,087
- - - ---------------------------------------------------------------------------------------
Total $ 14,898 $ 21,509 $ 16,538
- - - ---------------------------------------------------------------------------------------
CAPITAL EXPENDITURES*
Electromechanical $ 70 $ 236 $ 21
Microelectronics 420 1,794 237
General corporate 0 7 20
- - - ---------------------------------------------------------------------------------------
Total $ 490 $ 2,037 $ 278
- - - ---------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION EXPENSE
Electromechanical $ 177 $ 176 $ 202
Microelectronics 456 335 237
General corporate 0 29 57
- - - ---------------------------------------------------------------------------------------
Total $ 633 $ 540 $ 496
- - - ---------------------------------------------------------------------------------------
*Includes expenditures under capital leases
39
42
21. INTERIM FINANCIAL RESULTS (UNAUDITED)
(In thousands of dollars, except per share data)
FISCAL 1998
Jan 3 Apr 4 Jul 4 Oct 3 Year
- - - -----------------------------------------------------------------------------------------------------------------
Net sales $ 7,632 $ 8,165 $ 7,198 $ 6,003 $ 28,998
- - - -----------------------------------------------------------------------------------------------------------------
Gross margin $ 2,591 $ 2,788 $ 1,550 $ 1,325 $ 8,254
- - - -----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes $ (86) $ 911 $ (594) $ (506) $ (275)
- - - -----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations $ (67) $ 570 $ (659) $ (411) $ (567)
- - - -----------------------------------------------------------------------------------------------------------------
Discontinued operations
Electromechanical Division (Note 16)
Loss on disposition net of deferred
income tax expense (benefit) of $159,
$9, $352, $0, $520 $ 276 $ (14) $ 518 $ -- $ 780
- - - -----------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $ 276 $ (14) $ 518 $ -- $ 780
- - - -----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 209 $ 556 $ (141) $ (411) $ 213
- - - -----------------------------------------------------------------------------------------------------------------
Net income per share - basic (a) $ 0.01 $ 0.07 $ (0.03) $ (0.07) $ (0.02)
- - - -----------------------------------------------------------------------------------------------------------------
Common stock market price: (b)
High 2 15/16 2 15/16 2 5/8 1 15/16
Low 1 3/4 2 3/4 1 15/16 7/8
- - - -----------------------------------------------------------------------------------------------------------------
Preferred market price: (b)
High 40 1/2 39 1/8 35 1/2 31
Low 30 1/4 34 1/4 29 22 1/2
- - - -----------------------------------------------------------------------------------------------------------------
FISCAL 1997
Dec 30 Mar 29 Jun 28 Sep 27 Year
- - - ------------------------------------------------------------------------------------------------------------------
Net sales $ 6,488 $ 6,698 $ 6,989 $ 7,645 $ 27,820
- - - ------------------------------------------------------------------------------------------------------------------
Gross margin $ 2,579 $ 2,609 $ 2,670 $ 2,844 $ 10,702
- - - ------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes $ 714 $ 663 $ 561 $ 130 $ 2,068
- - - ------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations $ 429 $ 398 $ 351 $ 124 $ 1,302
- - - ------------------------------------------------------------------------------------------------------------------
Discontinued operations
Electromechanical Division (Note 16)
Loss on disposition net of deferred
income tax expense (benefit) of
$0, $0, $0, ($520), ($520) $ -- $ -- $ -- $ (780) $ (780)
- - - ------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $ -- $ -- $ -- $ (780) $ (780)
- - - ------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 429 $ 398 $ 351 $ (656) $ 522
- - - ------------------------------------------------------------------------------------------------------------------
Net income per share - basic (a) $ 0.05 $ 0.05 $ 0.04 $ (0.12) $ 0.02
- - - ------------------------------------------------------------------------------------------------------------------
Common stock market price: (b)
High 1 3/4 2 3/16 2 15/16 2 13/16
Low 1 3/8 1 5/8 1 13/16 2 1/4
- - - ------------------------------------------------------------------------------------------------------------------
Preferred market price: (b)
High 32 34 40 39 1/2
Low 28 5/8 30 1/2 31 1/2 37
==================================================================================================================
(a) Earnings per share-assuming dilution is the same a earnings per share
and thus is not shown separately.
(b) Both common and preferred shares are traded on the American Stock
Exchange.
40
43
Exhibit Index
Exhibits:
2.1 Agreement and Plan of Merger, dated May 3, 1998, by and among Bowmar
Instrument Corporation, 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, 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, Registration No. 333-56565).
*3.1 Amended and Restated Articles of Incorporation of White Electronic
Designs Corporation.
*3.2 Amended and Restated Code of By-Laws of White Electronic Designs
Corporation.
4.1 Rights Agreement, dated December 6, 1996, between Bowmar Instrument
Corporation and American Stock Transfer and Trust Company, as Rights
Agent (incorporated herein by reference to Exhibit 5C to the Current
Report on Form 8-K filed on 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).
4.2 Indenture, Bowmar Instrument Corporation 13 1/2% Convertible
Subordinated Debentures due December 15, 1995 (incorporated herein
by reference to Exhibit 4.4 to the Registration Statement on Form
S-7, Registration No. 2-70025).
*4.3 Stock Certificate of White Electronic Designs Corporation
10.1 Agreement to be Bound by Registration Rights Agreements, dated as of
May
44
3, 1998, by and between Bowmar Instrument Corporation and Electronic
Designs, Inc. (incorporated herein by reference to Exhibit 10.1 to
the Registration Statement on Form S-4, Registration No. 333-56565).
10.2 Agreement to be Bound by Severance Agreements and Employment
Agreement, dated as of May 3, 1998, by and between Bowmar Instrument
Corporation and Electronic Designs, Inc. (incorporated herein by
reference to Exhibit 10.2 to the Registration Statement on Form S-4,
Registration No. 333-56565).
**10.3 Executive Employment Agreement by and between Hamid Shokrgozar and
Bowmar Instrument Corporation (incorporated herein by reference to
Exhibit 10.4(j) to the Quarterly Report on Form 10-Q for the
quarterly period ended April 4, 1998).
**10.4 Executive Employment Agreement by and between Joseph G. Warren, Jr.
and Bowmar Instrument Corporation (incorporated herein by reference
to Exhibit 10.7 to the Quarterly Report on Form 10-Q for the
quarterly period ended January 3, 1998).
10.5 Purchase and Sales Agreement, dated December 5, 1997, concerning the
sale of the Acton, Massachusetts facility (incorporated herein by
reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q for
the quarterly period ended January 3, 1998).
10.6 Fourth Amendment to Credit Agreement, dated as of March 16, 1998, by
and between Bowmar Instrument Corporation and Bank One, Arizona, NA
(incorporated herein by reference to Exhibit 10.4(h) to the
Quarterly Report on Form 10-Q for the quarterly period ended April
4, 1998).
10.7 Promissory Note Modification Agreement, dated March 16, 1998, by and
between Bowmar Instrument Corporation and Bank One, Arizona, NA
(incorporated herein by reference to Exhibit 10.4(i) to the
Quarterly Report on Form 10-Q for the quarterly period ended April
4, 1998).
10.8 Lease, dated February 23, 1990, by and between Bowmar/Ali, Inc. as
landlord and LAU Acquisition Corporation as tenant (incorporated
herein by reference to Exhibit 10.1(bb) to the Annual Report on Form
10-K filed for the fiscal year ended September 30, 1990).
**10.9 Employment Agreement dated August 15, 1991, as amended as of August
15, 1992, and as of June 1, 1995 between Gardiner S. Dutton and
Bowmar Instrument Corporation (incorporated herein by reference to
Exhibit 10.1(ff) to the Annual Report on Form 10-K for the fiscal
year ended September 30, 1992 and Exhibit 5(b) to Form 8-K dated
June 26, 1995).
**10.10 Form of Incentive Stock Option Agreement covering incentive stock
options granted under the Corporation's now terminated 1986 Plan, as
amended October 23, 1987 (incorporated here in by reference to
Exhibit 10.2(c) to the Annual Report on Form 10-K for the fiscal
year ended September 30, 1987).
**10.11 Form of Non-Incentive Stock Option Agreement covering non-incentive
stock options granted under the Corporation's now terminated 1986
Plan, as amended October 23, 1987 (incorporated by reference to
Exhibit 10.2(c) to the Annual Report on Form 10-K for the fiscal
year ended September 30, 1987).
**10.12 Bowmar Instrument Corporation Stock Option Plan for Non-Employee
Directors as amended February 4, 1994 (incorporated herein by
reference to Exhibit B to the Corporation's definitive Proxy
Statement, prepared in connection with the
45
1994 Annual Meeting of Shareholders).
**10.13 Non-Incentive Stock Option Agreement dated August 16, 1991, as
amended August 15, 1992, between Bowmar Instrument Corporation
and Gardiner S. Dutton (incorporated herein by reference to
Exhibit 10.1(ff) to the Annual Report on Form 10-K for the
fiscal year ended September 30, 1992).
**10.14 1994 Flexible Stock Plan (incorporated herein by reference to
Exhibit A to the Corporation's definitive Proxy Statement prepared
in connection with the 1994 Annual Meeting of Shareholders).
**10.15 Form of Agreement governing awards of restricted stock under the
Corporation's now terminated Restricted Plan (incorporated herein by
reference to the exhibit to Amendment No. 1 to the Registration
Statement of Form S-8 (No. 2-67645)).
10.16 Loan documents by and between Bank One, Arizona, NA and Bowmar
Instrument Corporation and its wholly owned subsidiary, Bowmar/ALI,
Inc. (incorporated herein by reference to exhibits 10.4a through
10.4g to the Annual Report on Form 10-K for the fiscal year ended
September 30, 1995).
10.17 Modification Agreement dated April 26, 1996, pursuant to the Loan
Agreement dated August 28, 1995 by and between Bank One, Arizona, NA
and the Registrant (incorporated herein by reference to Exhibit
10.4(b) to the Annual Report on Form 10-K for the fiscal year ended
September 28, 1996).
10.18 Second Modification Agreement dated August 9, 1996, pursuant to the
Loan Agreement dated August 28, 1995 by and between Bank One,
Arizona, NA and the Registrant (incorporated herein by reference to
Exhibit 10.4(c) to the Annual Report on Form 10-K for the fiscal
year ended September 28, 1996).
10.19 Third Modification Agreement dated March 28, 1997 pursuant to the
Loan Agreement dated August 28, 1995 by and between Bank One,
Arizona NA and the Registrant (incorporated herein by reference to
Exhibit 10.4(d) to the Form 10-Q for the quarter ended March 29,
1997).
10.20 Modification of Mortgage (Massachusetts) dated March 28, 1997 by and
between Bank One, Arizona NA and the Registrant and its wholly owned
subsidiary, Bowmar/ALI (incorporated herein by reference to Exhibit
10.4(e) to the Form 10-Q for the quarter ended March 29, 1997).
10.21 Modification of Mortgage (Indiana) dated March 28, 1997 by and
between Bank One, Arizona NA and the Registrant (incorporated herein
by reference to Exhibit 10.4(f) to the Form 10-Q for the quarter
ended March 29, 1997).
10.22 Revolving Promissory Note (RLT) dated March 28, 1997 by and between
Bank One, Arizona NA and the Registrant, for up to $1,200,000
(incorporated herein by reference to Exhibit 10.4(g) to the Form
10-Q for the quarter ended March 29, 1997).
10.23 Lease dated February 4, 1997 by and between Bowmar Instrument
Corporation as tenant and Gus Enterprises-XII, LLC as landlord
(incorporated by reference to Exhibit 10.5 to the Annual Report on
Form 10-K for the fiscal year ended September 27, 1997).
*21.1 Subsidiaries of White Electronic Designs Corporation.
*27.1 Financial Data Schedule.
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* Filed herewith.
** Management compensatory contract, plan or arrangement.