-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SkUapfRci91Alo2KoQs+X7A80nJaU11bMDBKkOonUGsSPrAGR8fqjUlanh9bKm9c r96fICAnjSDTzsdlh2FsyA== 0000355948-98-000015.txt : 19980831 0000355948-98-000015.hdr.sgml : 19980831 ACCESSION NUMBER: 0000355948-98-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980828 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RICHARDSON ELECTRONICS LTD/DE CENTRAL INDEX KEY: 0000355948 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 362096643 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12906 FILM NUMBER: 98699774 BUSINESS ADDRESS: STREET 1: 40W267 KESLINGER RD CITY: LAFOX STATE: IL ZIP: 60147 BUSINESS PHONE: 7082082200 MAIL ADDRESS: STREET 1: 40W267 KESLINGER ROAD CITY: LAFOX STATE: IL ZIP: 60147 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended May 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File No. 0-12906 RICHARDSON ELECTRONICS, LTD. (Exact name of registrant as specified in its charter) Delaware 36-2096643 (State of incorporation) (I.R.S. Employer Identification No.) 40W267 Keslinger Road, P.O. Box 393, LaFox, Illinois 60147-0393 (Address of principal executive offices) Registrant's telephone number including area code: (630) 208-2200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:Common Stock, $.05 par value 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. [ ] As of August 24, 1998, there were outstanding 11,288,726 shares of Common Stock, $.05 par value, and 3,235,621 shares of Class B Common Stock, $.05 par value, which are convertible into Common Stock on a share for share basis, of the registrant and the aggregate market value of such shares, based on the reported last sale price of the common stock on such date, held by non- affiliates of the registrant was approximately $104,800,000. (Cover page continued) page 1 Portions of the 1998 Annual Report to Stockholders of registrant for fiscal year ended May 31, 1998 are incorporated in Parts I, II, and IV of this Report. Portions of the registrant's Proxy Statement dated September 3, 1998 for the Annual Meeting of Stockholders scheduled to be held October 6, 1998, which will be filed pursuant to Regulation 14(A), are incorporated by reference in Part III of this Report. Except as specifically incorporated herein by reference, the above mentioned Annual Report to Stockholders and Proxy Statement are not deemed filed as part of this report. The exhibit index is located at pages 16 through 23. Page 2 PART I Item 1. Business Introduction and Business Strategy Richardson Electronics, Ltd. is a specialized international distributor of electronic components, equipment and assemblies primarily for niche industrial applications. Its products include electron tubes, microwave generators, radio frequency ("RF") and microwave components, power semiconductors, data display monitors and electronic security products and systems. These products are used to control, switch or amplify electrical power or signals, or as display, recording or alarm devices in a variety of industrial, communication, medical and scientific applications. Richardson differentiates itself by providing engineered solutions to its customers. Its capabilities extend beyond simple product distribution to include specialty product manufacturing and systems integration and include value-added services such as component assembly, prototype design and manufacture, testing, kitting and logistics. The Company's objective is to be the preeminent international supplier of niche electronic components to industrial and commercial users. To fulfill this objective, the Company employs the following basic strategies: Capitalize on Engineering and Manufacturing Expertise. Richardson believes that its success is largely attributable to its core engineering and manufacturing competency and skill in identifying cost competitive solutions for its customers. Historically, the Company's primary business was the distribution and manufacture of electron tubes and it continues to be a major supplier of these products. Today, the Company out-sources manufacturing requirements for products sold in volume, but retains its engineering and manufacturing expertise, leveraging this knowledge in finding engineered solutions for the customers' applications, not only in electron tube technology but in each of the product areas in which it specializes. Approximately 45% of the Company's sales are derived from products the Company electronically or physically modifies or sells under its own brand names. Specialize in Selected Niche Markets. The Company specializes in selected niche markets which demand technical service and where price is not the primary competitive factor. Richardson seldom competes against commodity distributors. In many parts of its business, the Company's principal competitors are not other distributors but rather original equipment manufacturers ("OEMs"). The Company offers engineered solutions to its customers including the design, prototype manufacturing and/or electrical or mechanical modification and distribution of approximately 80,000 products ranging in price from $1 to $100,000 each. The Company estimates that over 60% of its sales are attributable to products intended for replacement and repair applications, in contrast to use as components in new original equipment. Leverage Customer Base. The Company strives to grow by offering new products to its existing customer base. The Company has followed the migration of its 3 customers from electron tubes to newer technologies, primarily semiconductors. Sales of products other than electron tubes represented 60.8% of sales in the year ended May 31, 1998, compared to 38.5% five years ago. Maintain Superior Customer Service. The Company maintains more than 300,000 part numbers in its inventory data base. More than 80% of all orders received by 6:00 p.m. are shipped complete the same day. Provide Global Service. Richardson has kept pace with the globalization of the electronics industry, and addresses the growing demands in lesser developed countries for modern business and industrial equipment, as well as related parts, service and technical assistance. Today, the Company's operations are worldwide in scope through 88 sales offices, including 31 located outside of the United States. In fiscal 1998, 51.6% of sales were derived from outside the United States. Maintain State-of-the-Art Information Systems. Through a global, information systems network, all offices have real-time access to the Company's database including customer information, product cross-referencing, competitive market analysis, stock availability and quotation activity. Customers have on-line access to product information via Richardson's web site. The Company offers electronic data interchange to those customers requiring this type of service. Growth Strategy Richardson's long range plan for growth and profit maximization is defined in three broad categories: internal growth, continuous operational improvement and acquisitions. Each category is discussed in the following paragraphs: Internal Growth. The Company believes that, in most circumstances, internal growth provides the best means of expanding its business. Both geographic and product line expansion have and will be employed. In many instances, Richardson's original product line, electron tubes, provides the foundation for establishing new customer relationships, particularly in developing countries where older technologies are still predominately employed. From that base, the Company can identify and capitalize on new market opportunities for its other products. Over the last five years the Company has expanded its sales offices from 22 to 88 to support its new business development efforts. Expansion of the Company's product offerings is an on-going program. Of particular note, the following areas have generated significant recent sales gains: microwave generators; medical imaging components; amplifiers, transmitters and pallets for wireless communication; and CCTV security systems. Additional opportunities currently being explored include flat panel displays, monitors and solar energy power tubes. Continuous Operational Improvement. During the last three years, the Company embarked on a vigorous program to improve operating efficiencies and asset utilization. Incentive programs were revised to heighten Richardson managers' commitment to these goals. As a result, selling, general and administrative expenses as a percent of sales were reduced from 23.4% in fiscal 1995 to 21.5% in 1998. Inventory turns improved from 1.7 to 2.2 over the same period. 4 Additional programs are on-going. The Company believes European logistics and stocking levels may offer additional opportunities for cost savings. Acquisitions. The Company has a successful record of acquiring and integrating businesses. Since 1980, 24 companies or significant product lines have been acquired by the Company. The Company evaluates acquisition opportunities on an ongoing basis. The Company's acquisition criteria require that a target provide either (i) product line growth opportunities permitting Richardson to leverage its existing customer base or (ii) additional geographic coverage of Richardson's existing product offerings. In the last three years, the Company's acquisition pace has accelerated with the purchases of eight businesses includ- ing, most significantly, Tubemaster (medical imaging-EDG), Compucon (interconnect devices for RF applications-SSC) and Burtek and Security Service International (security systems-SSD). Strategic Business Units The marketing, sales, product management and purchasing functions of Richardson are organized as four strategic business units: Electron Device Group ("EDG"), Solid State and Components ("SSC"), Display Products Group ("DPG") and Security Systems Division ("SSD"). Common logistics, information systems, finance, legal, human resources and general administrative functions support the entire organization. The Company is highly centralized with most corporate functions located at its administrative headquarters and principal stocking facility in LaFox, Illinois. Electron Device Group EDG's principal products, electron tubes, are used to control, switch, os- cillate or amplify electrical power. This technology has been used for more than 80 years in electronic circuitry throughout the industrialized world. With such a vast installed base, replacement applications represent EDG's primary focus. In certain situations, including high power broadcasting and industrial equipment, electron tubes are the only economical technology capable of meeting power requirements or withstanding severe environmental or other operating conditions. EDG serves a multitude of industries including automotive, avionics, commu- nications, marine, plastics, rubber, steel and textile. Several major applica- tions include dielectric and induction heating, motor speed controls, radar, resistance welding equipment and television and radio broadcast equipment. Microwave generator systems are designed and assembled by the Company for use in the manufacture of wafers for the semiconductor industry and other industrial heating applications. In addition to the industries set forth above, Richardson believes the in- creased emphasis on containment of medical costs offers significant opportunities to supply the diagnostic medical imaging market, estimated by the Company at $900 million annually. EDG distributes high voltage switch tubes, x- ray tubes and image intensifiers used in x-ray imaging equipment and specialty tubes for analytical equipment, as well as camera tubes, photomultipliers, switch tubes, magnetrons, hydrogen thyratrons and imaging equipment to the 5 medical industry. In the last several years, the Company has capitalized on its engineering skill, expanding its product offering to include assistance in systems integration and upgrades of existing medical equipment to incorporate state-of-the-art imaging systems. In 1996, Richardson purchased two North American facilities, one for x-ray tube reloading and the second for digital imaging systems. During 1997, the Company continued its growth in the medical imaging market and established a European facility to supply the European market with reloaded x-ray tubes. Certain sectors of the electron tube market in which the Company partici- pates are modestly contracting due to the continued substitution of semiconductor technology for traditional electron tube applications. EDG is expanding its customer base beyond North America and Europe. As industrialized countries convert to solid state, equipment employing tube technology is frequently redeployed to lesser developed areas of the world. Richardson's global expansion is, in part, to capitalize on this opportunity. The annual global market for electron tubes served by EDG is estimated by the Company to be more than $3.0 billion. As a result of product line and global expansion, EDG sales increased in each of the last three years. The following is a description of EDG's major product groups: Power Amplifier / Oscillator Tubes are vacuum or gas-filled tubes used in applications where current or voltage amplification and/or oscillation is required. Some areas of use are induction heating, diathermy equipment, communications and radar systems and power supplies for voltage regulation or amplification. X-ray Tubes and X-ray Image Intensifiers are glass and glass/metal vacuum tubes which generate high-frequency radiation for use in industrial, analytical and medical equipment. Stationary anode x-ray tubes are used primarily for inspection and non-destructive testing of solid materials and in crystallography. Rotating anode x-ray tubes are primarily used in medical applications, including fluoroscopy and computer-aided tomography (CAT-scan). Microwave Generators incorporate magnetrons which are high vacuum oscilla- tor tubes used to generate energy at microwave frequencies. The pulsed magnetron is predominantly used to generate high energy microwave signals for radar applications. Magnetrons are also used in vulcanizing rubber, food processing, packaging, wood / glue drying, in the manufacture of wafers for the semiconductor industry and other industrial heating applications such as microwave ovens and by the medical industry for sterilization and cancer therapy. Broadcast Equipment includes video products, camera tubes, klystrons, transmitters and accessories used for radio and television broadcasting. Hydrogen Thyratrons are electron tubes capable of high speed and high volt- age switching. They are used to control the power in laser and radar equipment and in linear accelerators for cancer treatment. 6 Thyratrons and Rectifiers are vacuum or gas-filled tubes used to control the flow of electrical current. Thyratrons are used to control ignitrons, electric motor speed controls, theatrical lighting and machinery such as printing presses and various types of medical equipment. Rectifiers are used to restrict electric current flow to one direction in power supply applications. Industrial Receiving Tubes are vacuum tubes used to regulate or amplify small amounts of power in a wide variety of electrical and electronic equipment. Communications, medical instrumentation, consumer electronics, audiophile and industrial controls are typical applications for this product. Ignitrons are mercury pool tubes used to control the flow of large amounts of electrical current. Their primary applications are in welding equipment, power conversion, fusion research and power rectification equipment. Solid State and Components SSC serves many of the same customers and industries as EDG and focuses its broad product offerings on two specialized markets. Because of the Company's expertise in electron tube technology, it developed a strong competency in power semiconductors. From this base in power semiconductors, SSC has expanded into related products for Radio Frequency ("RF") and microwave components. In addition to the distribution of products, SSC provides design, prototype assembly, kitting, testing and other essential services to these markets. SSC's RF and microwave components are used by the emerging wireless and telecommunications markets as well as Richardson's traditional communications, broadcast and avionics customers. SSC's power semiconductors and related components serve industrial markets in power conversion applications. The majority of SSC's business is with OEMs. Because time-to-market is so critical in today's electronics industry, OEMs are outsourcing engineering design-in of devices and components. Richardson employs its core engineering expertise and distribution competency in wireless and industrial applications to meet customer requirements for design-in and prototype assembly of silicon controlled rectifier assemblies, amplifiers, pallets and other components. In October 1996, the Company acquired Compucon, a distributor of intercon- nect devices operating in the northeastern United States. This acquisition brought to the Company a new product line and management with the specialized knowledge of its applications. The Company has achieved significant growth in this line by expanding Compucon's regional specialization through its worldwide sales network. The following is a description of SSC's major product groups: RF and Microwave Devices include a wide variety of components, such as mix- ers, switches, amplifiers, oscillators and RF diodes, which are used in telecom munications and other related markets, such as broadcast, cable TV, cellular and PCS, satellite, wireless LANs and various other wireless applications. 7 Power Semiconductors are solid-state, high-frequency power amplifiers used in broadcast, cellular, aircraft and satellite communications and in many types of electronic instrumentation. In many circumstances, the customer prefers to acquire the complete assembly as opposed to the discrete transistor. Accordingly, the Company expanded its product offering to include design and prototype assembly of amplifiers and pallets incorporating RF power transistors. Interconnect Devices are passive components used to connect all types of electronic equipment including those employing RF technology. Silicon Controlled Rectifiers ("SCRs"), Heat Sink Assemblies and Power Semiconductor Modules are used in many industrial control applications because of their ability to switch large amounts of power at high speeds. These silicon power devices are capable of operating at up to 4,000 volts at 2,000 amperes. High Voltage and Power Capacitors are used in industrial, avionics, medical and broadcast applications for filtering, high-current by-pass, feed-through capacitance for harmonic attenuation, pulse shaping, grid and plate blocking, tuning of tank circuits, antenna coupling and energy discharge. Display Products Group DPG sells data display and instrumentation cathode ray tubes ("CRTs") that are used in data display, marine, medical, radar and avionic applications. It recently expanded its product line to include flat panel displays and monitors. DPG's primary market is users of replacement CRTs and related components, principally large manufacturing and service companies. Its customer base also includes both independent and original equipment service organizations. Richardson estimates worldwide annual factory sales of CRTs excluding television tubes to be $2 billion. DPG offers a cost effective alternative to purchasing a complete data display monitor by replacing only the defective CRT. In addition to product sales, DPG provides engineered solutions to its customers including system integration, extensive cross-referencing and other value-added capabilities that enable DPG to offer off-the-shelf availability for more than 200,000 manufacturers' part numbers from an inventory of approximately 200 standard CRTs. Computer terminals and monitors, broadcast monitors, viewfinders and Tele- PrompTersr, radar and instrumentation displays are some of the many product applications. Large mainframe systems, using multiple data display terminals, represent the largest market served by DPG. Typical users include hospitals, airports, airlines, brokerage offices, banks, television studios, utilities and assembly lines. The following is a description of DPG's major product groups: Cathode Ray Tubes are vacuum tubes which convert an electrical signal into a visual image to display information on computer terminals or televisions. CRTs are used in various environments, including hospitals, financial institutions, airports and numerous other applications wherever electronic data is shared by large user groups. The product line includes both monochrome and color tubes. 8 Data Display Monitors are peripheral components incorporating a color or monochrome CRT capable of displaying an analog or digitally generated video signal. Flat Panel Displays are display monitors incorporating a liquid crystal display or plasma panel, rather than a CRT, typically a few inches in depth and ranging from 10" to 42" measured diagonally. Security Systems Division SSD serves the commercial security and surveillance industry with a primary emphasis on closed circuit television ("CCTV") systems and components. SSD's strategy is to leverage Richardson's existing customer base of Fortune 1000 customers and other large end users, as opposed to security dealers or retailers. SSD's principal value-added service is system design. The Company believes that due to heightened concerns over crime and the increasing incidence of liability claims, industrial and commercial organizations are expanding the use of CCTV systems to monitor and document activities in a wide range of applications. Industry sources estimate that North American wholesale sales of CCTV and related security equipment were $750 million in 1997 with a projected annual growth rate of 10% through 2000. In addition to its CCTV product offerings, SSD provides electronic components for burglar and fire detection systems, access control systems and commercial sound systems. Technology is changing continuously in the electronic surveillance indus- try. SSD offers its customers engineered solutions including systems integration, education and training. These engineered solutions assure SSD's customers remain at the forefront of the industry in terms of product knowledge and end user requirements. SSD's sales increased significantly in 1996, 1997 and 1998. Acquisitions and a significant increase in SSD's field sales force were principally responsible for these significant sales gains. In February 1997 and August 1997, respectively, the Company acquired Burtek and Security Services International, both of which are security systems distributors operating in Canada, with combined annual sales of $38 million. The following is a description of SSD's major product groups: CCTV Products which include cameras, lenses, monitors, scanners, time lapse recorders and associated accessories, are used in surveillance applications and for monitoring hazardous environments in the workplace. Burglar and Fire Detection Systems are devices used to detect unauthorized access to an area or the presence of smoke or fire. Commercial Sound Systems are sound reproduction components used in back- ground music, paging and telephonic interconnect systems. Distribution and Marketing The Company purchases vacuum tubes, RF and power semiconductors, related electronic components and electronic security products and systems from various sources, including Advanced Power Technology, Burle Industries, Clinton 9 Electronics, Communication and Power Industries ("CPI"), Covimag, Dunlee, Ericsson, General Electric, Hi Sharp, Huber & Suhner, Jennings, Litton, M/A- COM, MPD, New Japan Radio, Orion/Daewoo, Panasonic, Pelco, Philips, Powerex, QMI, RF Prime, RF Products, Samsung, Samtell, Sanyo, SGS THOMSON, Semtech, Sensormatic, Sony, Stanford Microdevices, Stellex Microwave Systems, Teletube, Toshiba, Triton Services, and Varian Associates. No single outside supplier accounted for more than 10% of the Company's purchases in any one of the last three years, other than CPI, which accounted for 8.4%, 10.3% and 12.6% of purchases in fiscal 1998, 1997 and 1996, respectively. In 1991, the Company settled an antitrust suit with the U.S. Department of Justice related to its participation in the electron tube manufacturing industry. As a consequence, certain of its manufacturing activities became uneconomic and were divested or discontinued. Covimag is the entity formed to acquire the Company's former Brive, France manufacturing operation. Formal transfer of ownership occurred in January 1995. Under an evergreen agreement, the Company and Covimag negotiate a purchase commitment on an annual basis. Covimag is managed by the same individuals previously employed by the Company at this facility. Covimag is highly dependent on Richardson, which is its primary customer. Settlement of purchases under the contract are at standard terms. Except for the supply contract, Richardson has no other financial commitment to or from Covimag. Relationships under the supply contract are believed by the Company to be satisfactory. In addition to the agreement with Covimag, the Company has marketing dis- tribution agreements with various manufacturers in the electron tube, semiconductor and CCTV industries. The most significant distributor agreement is with CPI under which the Company is the exclusive distributor of power grid tubes throughout the world, with the exception of the United States and certain Eastern European countries. In these areas, however, the Company remains the only CPI stocking distributor. Customer orders are taken by the regional sales offices and generally di- rected to one of Richardson's principal distribution facilities in LaFox, Illinois; Houston, Texas; Vancouver, British Columbia; or Lincoln, England. There are 28 additional stocking locations throughout the world. The Company utilizes a sophisticated data processing network which provides on-line, real- time interconnection of all sales offices and central distribution operations. Information on stock availability, cross-reference information, customers and competitive market analyses are instantly obtainable throughout the entire distribution network. Manufacturing The Company distributes its proprietary products principally under the trade names "National," "Cetron," "RF Gain", 'Amperex." and "MONORAY". Approxi- mately 22% of the Company's sales are from products it manufactures or modifies through value-added services. The Company also sells products under these brand names made by independent manufacturers to the Company's specifications. 10 The products currently manufactured by the Company, or subcontracted on a proprietary basis for the Company, include thyratrons and rectifiers, power tubes, ignitrons, microwave generators, solar collector power tubes, electronic display tubes, phototubes, SCR assemblies, spark gap tubes, RF amplifiers, transmitters and pallet assemblies. Richardson reloads and remanufactures medical x-ray tubes. The materials used in the manufacturing process consist of glass bulbs and tubing, nickel, stainless steel and other metals, plastic and metal bases, ceramics and a wide variety of fabricated metal components. Employees As of May 31, 1998, the Company employed 792 individuals on a full-time ba- sis. Of these, 470 are located in the United States, including 60 employed in administrative and clerical positions, 313 in sales and distribution and 97 in value-added and product manufacturing. The Company's international subsidiaries employ an additional 322 individuals engaged in administration, sales, distribu tion and value-added operations. All of Richardson's employees are non-union. The Company's relationship with its employees is considered to be good. Competition Richardson believes that, on a global basis, it is a significant distribu- tor of electron tubes, RF and power semiconductors and subassemblies, CRTs and security systems. For many of its product offerings, the Company competes against the OEM for sales of replacement parts and system upgrades to service existing installed equipment. In addition, the Company competes worldwide with other general line distributors and other distributors of electronic components. Patents and Trademarks The Company holds or licenses certain manufacturing patents and trademark rights, including the trademarks "National," "Cetron" and "Amperex." The Company believes that although its patents and trademarks have value, they will not determine the Company's success, which depends principally upon its core engineering capability, marketing technical support, product delivery and the quality and economic value of its products. Item 2. Properties The Company's corporate facility and largest distribution center is owned by the Company and is located on approximately 300 acres in LaFox, Illinois, consisting of approximately 255,000 square feet of manufacturing, warehouse and office space. Richardson also owns a building containing approximately 45,000 square feet of warehouse space on 1.5 acres in Geneva, Illinois. Owned facilities outside of the United States are located in England, Spain and Italy. The Company also maintains branch sales offices in or near major cities throughout the world, including 35 locations in North America, 13 in Europe, 9 in the Far East / Pacific Rim and 3 in Latin America. The Company leases production facilities in Texas, Virginia and the Netherlands for its medical 11 tube reloading operations. The Company also leased facilities in Franklin Park, Illinois, from a trust, of which Edward J. Richardson, Chairman of the Board of the Company, is the principal beneficiary, for a term which expired June 30, 1998. Under the terms of this net lease, the Company made rental payments of $68,705 per year. In the opinion of management, the lease was on terms no less favorable to the Company than similar leases which would have been available from unrelated third parties. Item 3. Legal Proceedings The Company is a defendant in Panache Broadcasting of Pennsylvania v. Richardson Electronics, Ltd. in United States District Court, Northern District of Illinois, filed in 1990. The complaint purports to be a class action on behalf of all persons and businesses in the United States who purchased electron power tubes from one or more of the defendant corporations at any time since February 26, 1986. The complaint alleges antitrust violations and seeks treble damages, injunctive relief and attorneys fees. The Company has denied the material allegations. The case remains primarily in the preliminary discovery stage. The Company is also a defendant in Arius, Inc. v. Richardson Electronics, Ltd. pending in state court in Orlando, Florida. The complaint, filed in 1995, alleges a breach of a confidentiality agreement between Richardson and Arius and other causes of action against Richardson and three employees. The court entered an order prohibiting, among other things, contact by Richardson and one of its employees with Arius customers, except in the ordinary course of business. Shortly after entry of this order, Arius filed a Chapter 7 bankruptcy petition and ceased to be a going concern. In early 1998, Arius' bankruptcy trustee filed a motion seeking to penalize Richardson for having made sales to alleged Arius customers subsequent to the date Arius filed its bankruptcy petition. The motion was denied by the court on July 14, 1998. From time to time the Company is involved in other litigation arising in the normal course of its business which is not expected to have a material adverse effect on the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of stockholders, through the solicita- tion of proxies or otherwise, during the fourth quarter of the fiscal year ended May 31, 1998. 12 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Incorporated herein by reference to pages 8 (for dividend payments) and 17 (for market data) of the Annual Report. Item 6. Selected Financial Data Incorporated herein by reference to page 3 of the Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Incorporated herein by reference to pages 4 to 6 of the Annual Report. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable until Report on Form 10-K for fiscal year ended May 31, 1999. Item 8. Financial Statements and Supplementary Data Incorporated herein by reference to pages 7 through 16 of the Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. No event has occurred within the 24 month period prior to the date of the Company's most recent financial statements, which would require disclosure under Item 9 of this Report. 13 PART III Item 10. Directors and Executive Officers of the Registrant Information concerning Directors and Executive Officers of the Company is contained in the Company's Proxy Statement to be used in connection with its Annual Meeting of Stockholders scheduled to be held October 6, 1998, under the captions "ELECTION OF DIRECTORS - Information Relating to Directors, Nominees and Executive Officers", "ELECTION OF DIRECTORS - Affiliations" and "SECTION 16 FILINGS", which information is incorporated herein by reference. Item 11. Executive Compensation Incorporated herein by reference is information concerning executive compensation contained in the Company's Proxy Statement to be used in connection with its Annual Meeting of Stockholders scheduled to be held October 6, 1998, under the captions "ELECTION OF DIRECTORS - Directors Compensation" and "EXECUTIVE COMPENSATION", except for captions "REPORT ON EXECUTIVE COMPENSATION" and "PERFORMANCE GRAPH". Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and management is contained in the Company's Proxy Statement to be used in connection with its Annual Meeting of Stockholders scheduled to be held October 6, 1998, under the caption "ELECTION OF DIRECTORS - Information Relating to Directors, Nominees and Executive Officers" and "PRINCIPAL STOCKHOLDERS", which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Information concerning certain relationships and related transactions is contained in the Company's Proxy Statement to be used in connection with its Annual Meeting of Stockholders scheduled to be held October 6, 1998, under the caption "EXECUTIVE COMPENSATION - Compensation Committee Interlocks and Insider Participation", which information is incorporated herein by reference. 14 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following consolidated financial statements of the registrant and its subsidiaries included on pages 7 through 16 of the Annual Report are incorporated herein by reference: Filing Method Report of Independent Accountants E 1. FINANCIAL STATEMENTS: Consolidated Balance Sheets - May 31, 1998 and 1997 E Consolidated Statements of Operations - Years ended May 31, 1998, 1997 and 1996 E Consolidated Statements of Cash Flows - Years ended May 31, 1998, 1997 and 1996 E Consolidated Statements of Stockholders' Equity - Years ended May 31, 1998, 1997 and 1996 E Notes to Consolidated Financial Statements E The following consolidated financial information for the fiscal years 1998, 1997 and 1996 is submitted herewith: 2. FINANCIAL STATEMENT SCHEDULES: II. Valuation and Qualifying Accounts E All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. (b) REPORTS ON FORM 8-K. None. 15 (c) EXHIBITS Filing Method 3(b) By-laws of the Company, as amended, incorporated by NA reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997. 4(a) Restated Certificate of Incorporation of the Com- NA pany, incorporated by reference to Appendix B to the Proxy Statement / Prospectus dated November 13, 1986, incorporated by reference to the Company's Registration Statement on Form S-4, Commission File No. 33-8696. 4(b) Specimen forms of Common Stock and Class B Common NA Stock certificates of the Company incorporated by reference to Exhibit 4(a) to the Company's Regis- tration Statement on Form S-1, Commission File No. 33-10834. 4(c) Indenture between the Company and Continental NA Illinois National Bank and Trust Company of Chicago (including form of 7 1/4% Convertible Subordinated Debentures due December 15, 2006) incorporated by reference to Exhibit 4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1987. 4(c)(1) First Amendment to the Indenture between the Com- NA pany and First Trust of Illinois, a National Asso- ciation, as successor to Continental Illinois National Bank and Trust Company of Chicago, dated February 18, 1997, incorporated by reference to Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997. 4(d) Indenture between the Company and American National NA Bank and Trust Company, as Trustee, for 8 1/4% Con- vertible Senior Subordinated Debentures due June 15, 2006 (including form of 8 1/4% Convertible Senior Subordinated Debentures due June 15, 2006) incorpo- rated by reference to Exhibit 10 of the Company's Schedule 13E-4, filed February 18, 1997. 10(a) Loan Agreement dated as of March 1, 1998 among NA Richardson Electronics, Ltd., various lending institutions and American National Bank and Trust Company of Chicago as Agent, establishing a $50,000,000 Credit Facility, incorporated by refer- ence to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998. 16 10(b) Industrial Building Lease, dated April 10, 1996 NA between the Company and the American National Bank and Trust Company, as trustee under Trust No. 56120 dated 2-23-83 incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996. 10(c) Amended and Restated Credit Agreement made as of NA March 1, 1998 between Burtek Systems, Inc. as Borrower and First Chicago NBD Bank, Canada as Lender Richardson Electronics, Ltd. as Guarantor, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998. 10(d) The Corporate Plan for Retirement NA The Profit Sharing / 401(k) Plan Fidelity Basic Plan Document No. 07 dated June 1, 1996, incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996. 10(e) The Company's Amended and Restated Incentive Stock NA Option Plan effective April 8, 1987 incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1987. 10(e)(1)First Amendment to the Company's Amended and Re- NA stated Incentive Stock Option Plan effective April 11, 1989 incorporated by reference to Exhibit 10(l)(1) to the Company's Annual Report on Form 10- K for the fiscal year ended May 31, 1989. 10(e)(2)Second Amendment to the Company's Amended and NA Restated Incentive Stock Option Plan effective April 11, 1989 incorporated by reference to Exhibit 10(l)(2) to the Company's Annual Report on Form 10- K for the fiscal year ended May 31, 1991. 10(e)(3)Third Amendment to the Company's Amended and Re- NA stated Incentive Stock Option Plan effective April 11, 1989 dated August 15, 1996, incorporated by reference to the Company's Proxy Statement used in connection with its Annual Meeting of Stockholders held October 1, 1996. 17 10(f) Richardson Electronics, Ltd. Employees 1996 Stock NA Purchase Plan incorporated by reference to Appendix A of the Company's Proxy Statement dated September 3, 1996 for its Annual Meeting of Stockholders held on October 1, 1996. 10(g) Employees Stock Ownership Plan and Trust Agreement, NA effective as of June 1, 1987, dated July 14, 1994, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1994. 10(g)(1)First Amendment to Employees Stock Ownership Plan NA and Trust Agreement, dated July 12, 1995, incorpo- rated by reference to Exhibit 10(g)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1995. 10(g)(2)Second Amendment to Employees Stock Ownership Plan NA and Trust Agreement, dated July 12, 1995, dated April 10, 1996, incorporated by reference to the Company's Proxy Statement used in connection with its Annual Meeting of Stockholders held October 1, 1996. 10(g)(3)Third Amendment to Employees Stock Ownership Plan E and Trust Agreement, dated July 12, 1995, dated April 9, 1997. 10(h) Stock Option Plan for Non-Employee Directors incor- NA porated by reference to Appendix A to the Company's Proxy Statement dated August 30, 1989 for its Annual Meeting of Stockholders held on October 18, 1989. 10(i) Richardson Electronics, Ltd. 1996 Stock Option Plan NA for Non-Employee Directors, incorporated by refer- ence to Appendix C of the Company's Proxy Statement dated September 3, 1996 for its Annual Meeting of Stockholders held on October 1, 1996. 10(j) The Company's Employees' Incentive Compensation NA Plan incorporated by reference to Appendix A to the Company's Proxy Statement dated August 31, 1990 for its Annual Meeting of Stockholders held on October 9, 1990. 10(j)(1)First Amendment to Employees Incentive Compensation NA Plan incorporated by reference to Exhibit 10(p)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991. 18 10(j)(2)Second Amendment to Employees Incentive Compensa- NA tion Plan dated August 15, 1996, incorporated by reference to the Company's Proxy Statement used in connection with its Annual Meeting of Stockholders held October 1, 1996. 10(k) Richardson Electronics, Ltd. Employees' 1994 Incen- NA tive Compensation Plan incorporated by reference to Exhibit A to the Company's Proxy Statement dated August 31, 1994 for its Annual Meeting of Stock- holders held on October 11, 1994. 10(k)(1)First Amendment to the Richardson Electronics, Ltd. NA Employees' 1994 Incentive Compensation Plan dated August 15, 1996, incorporated by reference to the Company's Proxy Statement used in connection with its Annual Meeting of Stockholders held October 1, 1996. 10(l) Richardson Electronics, Ltd. 1996 Incentive Compen- E sation Plan incorporated by reference to Appendix B of the Company's Proxy Statement dated September 3, 1996 for its Annual Meeting of Stockholders held on October 1, 1996. 10(m) Richardson Electronics, Ltd. 1998 Incentive Compen- NA sation Plan incorporated by reference to Appendix A of the Company's Proxy Statement dated September 3, 1998 for its Annual Meeting of Stockholders held on October 6, 1998. 10(n) Correspondence outlining Agreement between the NA Company and Arnold R. Allen with respect to Mr. Allen's employment by the Company, incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K, for the fiscal year ended May 31, 1985. 10(n)(1)Letter dated February 3, 1992 between the Company NA and Arnold R. Allen outlining Mr. Allen's engage- ment as a consultant by the Company, incorporated by reference to Exhibit 10 (r)(1) to the Company's Annual Report on Form 10-K, for the fiscal year ended May 31, 1992. 10(n)(2)Letter dated April 1, 1993 between the Company and NA Arnold R. Allen regarding Mr. Allen's engagement as consultant by the Company, incorporated by refer- ence to Exhibit 10(i)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1994. 19 10(o) Letter dated January 14, 1992 between the Company NA and Jacques Bouyer setting forth the terms of Mr. Bouyer's engagement as a management consultant by the Company for Europe, incorporated by reference to Exhibit 10(t)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended on May 31, 1992. 10(o)(1)Letter dated January 15, 1992 between the Company NA and Jacques Bouyer setting forth the terms of Mr. Bouyer's engagement as a management consultant by the Company for the United States, incorporated by reference to Exhibit 10(t)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended on May 31, 1992. 10(p) Letter dated January 13, 1994 between the Company NA and Samuel Rubinovitz setting forth the terms of Mr. Rubinovitz' engagement as management consultant by the Company incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended on May 31, 1994. 10(q) Letter dated April 4, 1994 between the Company and NA Bart F. Petrini setting forth the terms of Mr. Petrini's employment by the Company, incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended on May 31, 1994. 10(r) Letter dated May 20, 1994 between the Company and NA William J. Garry setting forth the terms of Mr. Garry's employment by the Company, incorporated by reference to Exhibit 10(p) to the Company's Annual Report on Form 10-K for the fiscal year ended on May 31, 1994. 10(s) Employment, Nondisclosure and Non-Compete Agreement E dated June 1, 1998 between the Company and Flint Cooper setting forth the terms of Mr. Cooper's employment by the Company. 10(t) Agreement dated January 16, 1997 between the Com- NA pany and Dennis Gandy setting forth the terms of Mr. Gandy's employment by the Company, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997. 20 10(u) Agreement dated March 21, 1997 between the Company NA and David Gilden setting forth the terms of Mr. Gilden's employment by the Company, incorporated by reference to Exhibit 10(c) to the Company's Quar- terly Report on Form 10-Q for the quarter ended February 28, 1997. 10(v) Employment agreement dated as of November 7, 1996 NA between the Company and Bruce W. Johnson incorpo- rated by reference to Exhibit (c)(4) of the Com- pany's Schedule 13 E-4, filed December 18, 1996. 10(w) Employment agreement dated as of January 26, 1998 NA between the Company and Norman Hilgendorf, incorpo- rated by reference to Exhibit 10(c) of the Com- pany's Quarterly Report on Form 10-Q for the quar- ter ended February 28, 1998. 10(x) Employment agreement dated as of May 10, 1993 as NA amended March 23, 1998 between the Company and Pierluigi Calderone incorporated by reference to Exhibit 10(d) of the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998. 10(y) The Company's Directors and Officers Liability NA Insurance Policy issued by Chubb Group of Insurance Companies Policy Number 8125-64-60A, incorporated by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991. 10(y)(1)The Company's Directors and Officers Executive E Liability and Indemnification Insurance Policy renewal issued by Chubb Group of Insurance Compa- nies - Policy Number 8125-64-60E. 10(y)(2)The Company's Excess Directors and Officers Liabil- E ity and Corporate Indemnification Policy issued by St. Paul Mercury Insurance Company - Policy Number 900DX0414. 10(y)(3)The Company's Directors and Officers Liability E Insurance Policy issued by CNA Insurance Companies - Policy Number DOX600028634. 10(z) Distributor Agreement, executed August 8, 1991, NA between Registrant and Varian Associates, Inc., incorporated by reference to Exhibit 10(d) of the Company's Current Report on Form 8-K for September 30, 1991. 21 10(z)(1)Amendment, dated as of September 30, 1991, between NA Registrant and Varian Associates, Inc., incorpo- rated by reference to Exhibit 10(e) of the Com- pany's Current Report on Form 8-K for September 30, 1991. 10(z)(2)First Amendment to Distributor Agreement between NA Varian Associates, Inc. and the Company as of April 10, 1992, incorporated by reference to Exhibit 10(v)(5) of the Company's Annual Report on Form 10- K for the fiscal year ended May 31, 1992. 10(z)(3)Consent to Assignment and Assignment dated August NA 4, 1995 between Registrant and Varian Associates Inc., incorporated by reference to Exhibit 10(s)(4) of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1995. 10(z)(4)Final Judgment, dated April 1, 1992, in the matter NA of United States of America v. Richardson Electron- ics, Ltd., filed in the United States District Court for the Northern District of Illinois, East- ern Division, as Docket No. 91 C 6211 incorporated by reference to Exhibit 10(v)(7) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1992. 10(aa) Trade Mark License Agreement dated as of May 1, NA 1991 between North American Philips Corporation and the Company incorporated by reference to Exhibit 10(w)(3) of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991. 10(bb) Agreement among Richardson Electronics, Ltd., NA Richardson Electronique S.A., Covelec S.A. (now known as Covimag S.A.), and Messrs. Denis Dumont and Patrick Pertzborn, delivered February 23, 1995, translated from French, incorporated by reference to Exhibit 10(b) to the Company's Report on Form 8-K dated February 23, 1995. 10(cc) Settlement Agreement by and between the United States NA of America and Richardson Electronics, Ltd. dated May 31, 1995 incorporated by reference to Exhibit 10(a) to the Company's Report on Form 8-K dated May 31, 1995. 13 Annual Report to Stockholders for fiscal year E ending May 31, 1998 (except for the pages and information thereof expressly incorporated by reference in this Form 10-K, the Annual Report to Stockholders is provided solely for the information of the Securities and Exchange Commission and is not deemed "filed" as part of this Form 10-K). 22 21 Subsidiaries of the Company. E 23 Consent of Independent Auditors. E 27 Financial Data Schedule. E 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RICHARDSON ELECTRONICS, LTD. By:/s/ By:/s/ Edward J. Richardson, Bruce W. Johnson, Chairman of the Board and President and Chief Operating Chief Executive Officer Officer By:/s/ William J. Garry Senior Vice President Date: August 24, 1998 Chief Financial 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 regis- trant and in the capacities and on the dates indicated. /s/ /s/ Edward J. Richardson, Chairman Bruce W. Johnson, President, of the Board, Chief Executive Chief Operating Officer, and Director Officer (principal executive officer) August 24, 1998 and Director August 24, 1998 /s/ /s/ William J. Garry, Senior Vice Ad Ketelaars, Director President and Chief Financial August 24, 1998 Officer (principal financial and accounting officer) and Director August 24, 1998 /s/ /s/ Scott Hodes, Director Samuel Rubinovitz, Director August 24, 1998 August 24, 1998 /s/ /s/ Arnold R. Allen, Director Kenneth J. Douglas, Director August 24, 1998 August 24, 1998 /s/ /s/ Jacques Bouyer, Director Harold L. Purkey, Director August 24, 1998 August 24, 1998 24 The following portions of the Company's Annual Report to Stockholders for the Year Ended May 31, 1998 are incorporated by reference. The page numbers as indicated are the same as he printed copy which was distributed to the shareholders. Five-Year Financial Review
(in thousands, except per share amounts) Statement of Operations Data Year Ended May 31 ------------------------------------------------ 1998 1997 (1) 1996 1995 (2) 1994 (3) -------- -------- -------- -------- -------- Net sales $304,172 $255,139 $239,667 $208,118 $172,094 Cost of products sold 217,509 187,675 169,123 152,785 151,203 Selling, general and administrative Expenses 65,393 62,333 52,974 48,674 41,226 Other expense, net 7,334 7,856 5,559 4,028 5,874 -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item 13,936 (2,725) 12,011 2,631 (26,209) Income tax provision (benefit) 4,200 (1,720) 3,900 150 (6,400) -------- -------- -------- -------- -------- Income (loss) before extraordinary item 9,736 (1,005) 8,111 2,481 (19,809) Extraordinary gain (loss), net of tax -- (488) -- 527 -- -------- -------- -------- -------- -------- Net income (loss) $ 9,736 $ (1,493) $ 8,111 $ 3,008 $(19,809) ======== ======== ======== ======== ======== Income (loss) per share - basic: Before extraordinary item $ .79 $ (.08) $ .70 $ .22 $ (1.76) Extraordinary gain (loss), net of tax -- (.04) -- .05 -- -------- -------- -------- -------- -------- Net income (loss) per share $ .79 $ (.12) $ .70 $ .27 $ (1.76) ======== ======== ======== ======== ======== Income (loss) per share - diluted: Before extraordinary item $ .77 $ (.08) $ .68 $ .21 $ (1.76) Extraordinary gain (loss), net of tax -- (.04) -- .05 -- -------- -------- -------- -------- -------- Net income (loss) per share $ .77 $ (.12) $ .68 $ .26 $ (1.76) ======== ======== ======== ======== ======== Dividends per common share $ .16 $ .16 $ .16 $ .16 $ .16 ======== ======== ======== ======== ======== Net Sales by Strategic Business Unit Year Ended May 31 ------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Net Sales by Strategic Business Unit: Electron Device Group (EDG) $119,157 $113,700 $109,925 $105,454 $ 91,736 Solid State & Components (SSC) 88,014 74,209 67,976 52,409 42,274 Display Products Group (DPG) 30,639 29,377 36,154 36,502 27,150 Security Systems Division (SSD) 66,362 37,853 25,612 13,753 10,934 -------- -------- -------- -------- -------- Consolidated $304,172 $255,139 $239,667 $208,118 $172,094 ======== ======== ======== ======== ======== Balance Sheet Data As of May 31 ------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Receivables $ 63,431 $ 53,333 $ 48,232 $ 42,768 $ 34,901 Inventories 96,443 92,194 94,327 81,267 73,863 Working capital, net 149,577 140,821 133,151 106,235 96,494 Property, plant and equipment, net 18,477 17,526 16,054 16,388 16,932 Total assets 209,700 192,514 180,158 173,514 179,467 Long-term debt 87,427 107,275 92,025 79,647 86,421 Stockholders' equity 91,585 59,590 62,792 56,154 52,573
(1)In 1997, the Company recorded special charges for severance and other costs related to a corporate reorganization and a re-evaluation of reserve estimates which increased cost of products sold by $7,200 and selling, general and administrative expenses by $3,800. Net of tax, these charges reduced income by $6,712, or $.56 per share. The Company also recorded an extraordinary loss of $800, less a related tax benefit of $312, or $.04 per share, on the exchange of certain of the Company's debentures. (See Note B to the Consolidated Financial Statements.) (2)In 1995, the Company recorded a charge which reduced gross margin by $4,700 and net income by $2,300, or $.25 per share, for the settlement of a claim related to a 1989 contract. (3)In 1994, cost of products sold included a $26,500 provision, of which $21,400 was for the disposition of the Company's manufacturing operations in Brive, France, and $5,100 for incremental costs related to a provision for the phase-down of domestic manufacturing operations established in 1991. Net of tax, these charges reduced results of operations by $19,500, or $1.72 per share. 3 Management's Discussion and Analysis Results of Operations Sales and Gross Margin Analysis Richardson Electronics, Ltd. is a specialized international distributor of electronic components, equipment and assemblies primarily for niche industrial applications. The marketing and sales structure of the Company is organized in four strategic business units (SBUs): Electron Device Group (EDG), Solid State and Components (SSC), Display Products Group (DPG) and Security Systems Division (SSD). Consolidated sales in fiscal 1998 were a record $304.2 million. Sales by SBU and percent of consolidated sales are presented in the following table (in thousands): Sales 1998 % 1997 % 1996 % -------- ----- -------- ----- -------- ----- EDG $119,157 39.2 $113,700 44.6 $109,925 45.8 SSC 88,014 28.9 74,209 29.1 67,976 28.4 DPG 30,639 10.1 29,377 11.5 36,154 15.1 SSD 66,362 21.8 37,853 14.8 25,612 10.7 -------- ----- -------- ----- -------- ----- Consolidated $304,172 100.0 $255,139 100.0 $239,667 100.0 ======== ===== ======== ===== ======== ===== Gross margin for each SBU and margin as a percent of sales are shown in the following table. Gross margin reflects the distribution product margin less overstock, customer returns and other provisions. In 1997, gross margin was reduced by a $7.2 million charge - see Note B to the Consolidated Financial Statements. Manufacturing variances, warranty provisions, LIFO provisions and miscellaneous costs are included under the caption "other" (in thousands): Gross Margins 1998 % 1997 % 1996 % -------- ----- -------- ----- -------- ----- EDG $37,219 31.2 $32,220 28.3 $33,416 30.4 SSC 25,160 28.6 19,923 26.8 20,840 30.7 DPG 10,464 34.2 8,465 28.8 13,156 36.4 SSD 15,335 23.1 8,267 21.8 5,425 21.2 -------- -------- -------- Total 88,178 29.0 68,875 27.0 72,837 30.4 Other (1,515) (1,411) (2,293) -------- -------- -------- Consolidated $86,663 28.5 $67,464 26.4 $70,544 29.4 ======== ======== ======== On a geographic basis, the Company categorizes its sales by destination: North America, Europe and Rest of World (ROW). Sales and gross margin by geographic area are as follows (in thousands): Sales 1998 % 1997 % 1996 % -------- ----- -------- ----- -------- ----- North America $189,221 62.2 $153,221 60.1 $139,743 58.3 Europe 65,996 21.7 55,881 21.9 57,219 23.9 Rest of World 48,955 16.1 46,037 18.0 42,705 17.8 -------- ----- -------- ----- -------- ----- Consolidated $304,172 100.0 $255,139 100.0 $239,667 100.0 ======== ===== ======== ===== ======== ===== Gross Margins 1998 % 1997 % 1996 % -------- ----- -------- ----- -------- ----- North America $ 53,421 28.2 $ 40,514 26.4 $ 41,257 29.5 Europe 20,456 31.0 16,194 29.0 19,186 33.5 Rest of World 14,301 29.2 12,167 26.4 12,394 29.0 -------- -------- -------- Total 88,178 29.0 68,875 27.0 72,837 30.4 Other (1,515) (1,411) (2,293) -------- -------- -------- Consolidated $ 86,663 28.5 $ 67,464 26.4 $ 70,544 29.4 ======== ======== ======== North American sales increased 23.5% in 1998, following a 9.6% increase in 1997. In both years, the sales gains were primarily attributable to SSD, and, to a lesser extent, SSC and EDG. Sales in Europe increased 18.1% in 1998, after a 2.3% decrease in 1997. In 1998, European sales increased in each SBU, with SSC up 37.7%, SSD up 35.2%, DPG up 19.2% and EDG up 6.4%. In 1997, significant sales gains by SSD and SSC were more than offset by a 32.6% decline in DPG European sales from the loss of a customer. ROW sales increased 6.3% in 1998, following a 7.8% gain in 1997. In both years, the largest ROW sales gains were achieved by SSD and SSC. Sales denominated in currencies other than U. S. dollars were 39%, 34%,and 32% of total sales in 1998, 1997 and 1996, respectively. Foreign currency exchange rate changes reduced foreign sales by an average of 5.9% in 1998 and increased foreign sales by 2.9% in 1997. Average selling prices, excluding the effects of exchange rate changes, declined 0.3% in 1998, were unchanged in 1997 and increased 2.4% in 1996. Sales and gross margin trends are analyzed for each strategic business unit in the following sections. Electron Device Group EDG serves the vacuum tube industry, which is characterized by mature products, the emergence of tube rebuilders, and vigorous price competition. The Company estimates that overall industry sales are modestly contracting. EDG's sales gains of 4.8% in 1998 and 3.4% in 1997 result from an increase in market share and emphasis on medical x-ray imaging. Foreign sales as a percent of total sales for EDG were 54.8% in 1998 and 56.5% in 1997 and 1996. The medical electronics replacement business is a growth segment of the vacuum tube industry. Demand for the replacement of x-ray, computed tomography (CT), medical resonance imaging (MRI) and radiation therapy components is expected to continue to grow in response to the cost effectiveness of purchasing rebuilt components as opposed to purchasing new or rebuilt products directly from original equipment manufacturers. The Company has invested in expanding its medical sales force and has acquired x-ray tube and image intensifier reloading facilities in the United States and established a similar facility in the Netherlands. Sales in this EDG product line increased 21.9% to $21.4 million in 1998, following a 56.5% increase in 1997. Other growth areas in EDG include microwave generators, pulse power tubes, industrial magnetrons and broadcast transmitters. Gross margin as a percent of sales increased to 31.2% in 1998, compared to 30.6% in 1997 and 30.4% in 1996. For this comparison, the 1997 gross margin has been adjusted to exclude the effect of the special charge for re-evaluation of overstock provisions, which is described below. Gross margin improvement in 1998, 1997, and 1996 resulted from additional focus on pricing policies, emphasis on proprietary product lines and value-added services. 4 Management's Discussion and Analysis Solid State and Components SSC operates in several markets, including the rapidly growing wireless telecommunications industry. Sales increased 18.6% in 1998 to $88.0 million, following a 9.2% increase in 1997. Sales outside of the United States represented 39.8%, 37.6% and 36.3% of SSC's sales in 1998, 1997 and 1996, respectively. Gross margin as a percent of sales was 28.6% in 1998, compared to 30.1% in 1997 and 30.7% in 1996. For this comparison, the 1997 gross margin has been adjusted to exclude the effect of the special charge. The gradual decline in margin reflects competitive pricing pressures and changes in product mix. Display Products Group DPG sales increased 4.3% in 1998 and declined 18.7% in 1997. The 1997 sales decline is largely attributable to the loss of a major customer in Europe. Sales in 1997 were hampered by product shortages, primarily for color CRTs, as glass manufacturers were unable to meet demand. Sales outside the United States represented 48.8%, 46.1% and 51.4% of DPG's sales in 1998, 1997 and 1996, respectively. Gross margin as a percent of sales was 34.2% in 1998, compared to 35.1% in 1997 and 36.4% in 1996. For this comparison, the 1997 gross margin has been adjusted to exclude the effect of the special charge. The margin trend reflects competitive pressure, a shift in product mix from CRT's to monitors and other display products and industry shortages. Security Systems Division SSD operates in the rapidly expanding security systems market. In August 1997, the Company acquired Security Service International, Inc. (SSI), a Canadian security systems distributor, with annual sales of $20.0 million. The acquisition follows the acquisition in February 1997 of Burtek Systems Inc. (Burtek), a Canadian security systems distributor, with annual sales of $18 million. These acquisitions contributed to the 75.3% growth in sales in 1998 and the 47.8% sales growth in 1997. Sales outside of the United States represented 63.5% of SSD's sales in 1998, 47.7% in 1997, and 38.8% in 1996. Gross margin was 23.1%, 21.8% and 21.2% of sales in 1998, 1997 and 1996. The improvement in gross margin rates reflects proprietary product lines and franchises obtained with the SSI and Burtek acquisitions. Inventory turnover rates achieved by SSD are significantly higher than the Company's other SBU's, which mitigates the effect of lower gross margin rates. Cost of Sales and Gross Margins The following table reconciles product margins on distribution activities to gross margins reported in the Consolidated Statements of Operations: (% of sales) 1998 1997 1996 -------- -------- -------- Distribution product margin 29.6 % 29.9 % 31.0 % Overstock provisions 0.1 % (3.0)% (0.1)% Customer returns and scrap (0.6)% (0.3)% (0.7)% Manufacturing and warranty costs 0.0 % (0.1)% (0.3)% Other costs (0.6)% (0.1)% (0.5)% -------- -------- -------- Gross margin 28.5 % 26.4 % 29.4 % ======== ======== ======== Fluctuations in distribution margins primarily reflect the shift in product mix as SSD sales have increased as a percent of consolidated sales. Distribution margins are also affected by changes in selling prices, product costs, and foreign exchange rate variations. In the third quarter of 1997, in conjunction with a corporate reorganization and review of operations, and in response to changed market conditions, the Company re-evaluated its reserves for overstock inventory. As a result of this review, the Company provided a $7.2 million charge to cost of sales. Selling, General and Administrative Expenses Selling, general and administrative expenses represented 21.5% of sales in 1998, 24.4% in 1997 and 22.1% in 1996. The 1998 improvement reflects policy and procedural changes initiated by the Company to reduce these costs. In 1997, selling, general and administrative expenses included a $3.8 million special charge for severance and other costs related to a corporate reorganization. Excluding the special charge, 1997 expenses were 22.9% of sales and increased $5.6 million over 1996, reflecting business acquisitions and the expansion of the EDG medical and SSC sales forces. Other (Income) Expense Interest expense increased 6.0% in 1998, reflecting higher borrowing levels during the year. Investment income includes realized capital gains of $506,000 in 1998 and $1.1 million in 1996. Foreign exchange and other expenses primarily reflect changes in the value of the U. S. dollar relative to foreign currencies. A general strengthening of the dollar in fiscal 1997 and, to a lesser extent in 1998 and 1996, resulted in net foreign exchange losses. Income Tax Provision The effective tax rates were 30.1% in fiscal 1998, 63.1% in 1997 and 32.5% in 1996. The 1998 and 1996 rates differ from the statutory rate of 34.0% primarily due to the Company's foreign sales corporation benefit on export sales. The 1997 rate reflects the realization of tax benefits on prior years' foreign losses, foreign sales corporation benefits on export sales and state taxes. Net Income (Loss) and per Share Data The comparability of net income (loss) and net income (loss) per share for 1998, 1997 and 1996 is affected by certain events in 1997. A special charge was recorded in 1997 for severance and other costs related to a corporate reorganization and the re-evaluation of certain reserves which reduced net income before extraordinary loss by $6.7 million, or $.56 per share. Also in 1997, an extraordinary loss reduced net income by $488,000, or $.04 per share. 5 Management's Discussion and Analysis Financial Condition Liquidity The Company offers engineered solutions, including prototype design and assembly, in niche product areas to its customers. Additionally, many of these products represent trailing-edge technology which may not be available from other sources, and may not be currently manufactured. Also, in many cases, the products are components of production equipment for which immediate availability is critical to the customer. Accordingly, the Company enjoys higher gross margins, but necessarily has larger investments in inventory than those of a commodity electronics distributor. Liquidity is provided by the operating activities of the Company, adjusted for non-cash items, and is reduced by working capital requirements, debt service, capital expenditures, dividends and business acquisitions. Cash provided by (used in) operations was $6.3 million in fiscal 1998, $3.6 million in 1997 and $(7.9) million in 1996. Additional investments in working capital to support sales growth were $10.6 million, $7.3 million and $22.0 million in 1998, 1997 and 1996, respectively. At May 31, 1998, the Company had net operating loss carryforwards of $7.9 million for U. S. federal and state income tax purposes, which are available to offset future tax liabilities. Current earnings levels are sufficient to realize these carryforwards before they expire. The Company has proposed a plan to the Illinois Environmental Protection Agency to monitor and process soil and groundwater at the LaFox facility. Contamination is believed to have resulted from practices previously employed at the site. The present value of the estimated future remediation costs was $600,000 and is included in accrued liabilities at May 31, 1998. Financing On February 15, 1997, the Company exchanged $40.0 million of new 8 1/4% convertible debentures for an equivalent face value of its outstanding 7 1/4% convertible debentures (See Note E to the Consolidated Financial Statements). The principal purpose of the exchange was to improve the Company's future liquidity and capital position by refinancing a sufficient number of the debentures to eliminate sinking fund requirements until December 15, 2004. To complete the acquisition of Burtek, a subsidiary of the Company entered into a revolving credit agreement and term loan aggregating $6.0 million with an affiliate of the Company's primary bank. An additional $5.5 million was borrowed under this agreement in August 1997 to finance the acquisition of the assets of Security Services International, Inc. At May 31, 1998, $9.4 million remained outstanding under this agreement. The loan is guaranteed by the Company, bears interest at the Canadian prime rate and matures March 1, 2001. In March 1998, the Company replaced its existing senior revolving credit note agreement with a new $50.0 million floating-rate revolving credit agreement which expires March 1, 2001. Loans under the agreement bear interest at prime or 125 basis points over the London Inter-Bank Offered Rate (LIBOR), at the Company's option. The premium over LIBOR varies with certain performance benchmarks. At May 31, 1998, $43.4 million was available under this line. In May 1998, the Company sold 2,070,000 shares of its common stock in a public offering at a price of $12.50 per share. The net proceeds to the Company, after deducting an underwriting discount of 6% and issuance costs of $253,000, were $24.1 million. The proceeds were used to reduce borrowings under the Company's revolving debt agreement. Annual dividend payments approximate $2.3 million. The policy regarding payment of dividends is reviewed periodically by the Board of Directors in light of the Company's operating needs and capital structure. Currency Fluctuations The Company's foreign denominated assets and liabilities are cash, accounts receivable, inventory and accounts payable, primarily in Canada and member countries of the European community and, to a lesser extent, in Asia / Pacific and Latin America. The Company monitors its foreign exchange exposures and may enter into forward contracts to hedge significant transactions. Other tools which may be used to manage foreign exchange exposures include the use of currency clauses in sales contracts and the use of local debt to offset asset exposures. Impact of Year 2000 The year 2000 issue is the result of computer programs which are written using two digits rather than four to define the applicable year. The Company's current computer database correctly stores date stamps which include four digit years. Based on a recent assessment, the Company anticipates its systems will function properly with respect to dates in the year 2000 and thereafter. In addition, the Company does not anticipate significant year 2000 issues relating to interface systems with third parties. Based upon the foregoing, the Company does not currently expect that the year 2000 issue will have a material impact on its financial condition or results of operations. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 Except for the historical information contained herein, the matters discussed in this Annual Report (including the Annual Report on Form 10-K) are forward- looking statements relating to future events which involve certain risks and uncertainties, including those identified herein and in the Annual Report on Form 10-K. 6 Consolidated Balance Sheets May 31 -------------------- (in thousands) 1998 1997 --------- --------- Assets Current assets Cash and equivalents $ 8,031 $ 10,012 Receivables, less allowance of $2,230 and $2,102 63,431 53,333 Inventories 96,443 92,194 Other 9,681 10,497 --------- --------- Total current assets 177,586 166,036 Property, plant and equipment, net 18,477 17,526 Other assets 13,637 8,952 --------- --------- Total assets $ 209,700 $ 192,514 ========= ========= Liabilities and stockholders' equity Current liabilities Accounts payable $ 17,320 $ 12,766 Accrued liabilities 10,689 12,449 --------- --------- Total current liabilities 28,009 25,215 Long-term debt 87,427 107,275 Deferred income taxes 2,679 434 --------- --------- Total liabilities 118,115 132,924 Stockholders' equity Common Stock, $.05 par value 561 437 Class B Common Stock, convertible, $.05 par value 162 162 Preferred Stock, $1.00 par value -- -- Additional paid-in capital 80,606 53,512 Retained earnings 16,842 9,082 Foreign currency translation adjustment (6,586) (3,603) --------- --------- Total stockholders' equity 91,585 59,590 --------- --------- Total liabilities and stockholders' equity $ 209,700 $ 192,514 ========= ========= See notes to consolidated financial statements. 7 Consolidated Statements of Operations Year Ended May 31 --------------------------------- (in thousands, except per share amounts) 1998 1997 1996 --------- --------- --------- Net sales $ 304,172 $ 255,139 $ 239,667 Costs and expenses: Cost of products sold 217,509 187,675 169,123 Selling, general and administrative expenses 65,393 62,333 52,974 --------- --------- --------- 282,902 250,008 222,097 --------- --------- --------- Operating income 21,270 5,131 17,570 Other (income) expense: Interest expense 8,084 7,622 6,624 Investment income (1,005) (392) (1,238) Foreign exchange and other 255 626 173 --------- --------- --------- 7,334 7,856 5,559 --------- --------- --------- Income (loss) before income taxes and extraordinary item 13,936 (2,725) 12,011 Income tax provision (benefit) 4,200 (1,720) 3,900 --------- --------- --------- Income (loss) before extraordinary item 9,736 (1,005) 8,111 Extraordinary loss, net of tax benefit -- (488) -- --------- --------- --------- Net income (loss) $ 9,736 $ (1,493) $ 8,111 ========= ========= ========= Income (loss) per share - basic: Before extraordinary item $ .79 $ (.08) $ .70 Extraordinary loss, net of tax benefit -- (.04) -- --------- --------- --------- Net income (loss) per share $ .79 $ (.12) $ .70 ========= ========= ========= Average shares outstanding 12,264 11,892 11,659 Income (loss) per share - diluted: Before extraordinary item $ .77 $ (.08) $ .68 Extraordinary loss, net of tax benefit -- (.04) -- --------- --------- --------- Net income (loss) per share $ .77 $ (.12) $ .68 ========= ========= ========= Average shares outstanding 12,689 11,892 12,002 Dividends per common share $ .16 $ .16 $ .16 ========= ========= ========= Comprehensive income (loss): Net income (loss) $ 9,736 $ (1,493) $ 8,111 Foreign currency translation adjustment (2,983) (1,190) (1,864) --------- --------- --------- Comprehensive income (loss) $ 6,753 $ (2,683) $ 6,247 ========= ========= ========= See notes to consolidated financial statements. 8 Consolidated Statements of Cash Flows (in thousands) Year Ended May 31 ---------------------------- 1998 1997 1996 -------- -------- -------- Operating Activities: Net income (loss) $ 9,736 $(1,493) $ 8,111 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation 3,477 2,627 2,709 Amortization of intangibles and financing costs 632 1,318 360 Deferred income taxes 2,779 (3,305) 2,338 Stock contribution to employee ownership plan 285 800 500 Special charges -- 11,000 -- -------- -------- -------- Net adjustments 7,173 12,440 5,907 -------- -------- -------- Changes in working capital, net of currency translation effects and business acquisitions: Receivables (9,170) (4,277) (5,310) Inventories (3,658) 406 (12,920) Other current assets 186 253 1,567 Accounts payable 4,366 (3,719) (3,448) Accrued liabilities (2,350) 28 (1,843) -------- -------- -------- Net changes in working capital (10,626) (7,309) (21,954) -------- -------- -------- Net cash provided by (used in) operating activities 6,283 3,638 (7,936) -------- -------- -------- Financing activities: Proceeds from borrowings 16,731 57,890 22,200 Payments on debt (35,642) (42,640) (19,679) Proceeds from sale of common stock 26,933 536 1,713 Cash dividends (1,976) (1,855) (1,822) -------- -------- -------- Net cash provided by financing activities 6,046 13,931 2,412 -------- -------- -------- Investing activities: Business acquisitions (6,798) (9,902) (1,450) Capital expenditures (4,116) (4,004) (2,352) Other (3,396) (435) 4,959 -------- -------- -------- Net cash (used in) provided by investing activities (14,310) (14,341) 1,157 -------- -------- -------- (Decrease) increase in cash and equivalents (1,981) 3,228 (4,367) Cash and equivalents at beginning of year 10,012 6,784 11,151 -------- -------- -------- Cash and equivalents at end of year $ 8,031 $10,012 $ 6,784 ======== ======== ======== See notes to consolidated financial statements. 9 Consolidated Statements of Stockholder's Equity
Consolidated Statements of Stockholders' Equity Shares Issued Accumulated --------------- Additional Other (shares and dollars Class B Par Paid-in Retained Comprehensive in thousands) Common Common Value Capital Earnings Income(Loss) Total ------ ------ ------ --------- -------- ------------ -------- Balance June 1, 1995 8,225 3,247 $ 573 $ 49,989 $ 6,141 $ (549) $ 56,154 Shares contributed to ESOP 69 -- 3 497 -- -- 500 Shares issued under ESPP and stock option plans 265 -- 14 1,699 -- -- 1,713 Conversion of Class B Shares to common shares 3 (3) -- -- -- -- -- Dividends -- -- -- -- (1,822) -- (1,822) Currency translation -- -- -- -- -- (1,864) (1,864) Net income -- -- -- -- 8,111 -- 8,111 ------ ----- ------ ------ -------- ------------ ------ Balance May 31, 1996 8,562 3,244 590 52,185 12,430 (2,413) 62,792 Shares contributed to ESOP 84 -- 5 795 -- -- 800 Shares issued under ESPP and stock option plan 74 -- 4 532 -- -- 536 Conversion of Class B Shares to common shares 1 (1) -- -- -- -- -- Dividends -- -- -- -- (1,855) -- (1,855) Currency translation -- -- -- -- -- (1,190) (1,190) Net loss -- -- -- -- (1,493) -- (1,493) ------ ----- ------ ------ -------- ------------ ------ Balance May 31, 1997 8,721 3,243 599 53,512 9,082 (3,603) 59,590 Shares contributed to ESOP 34 -- 2 283 -- -- 285 Shares issued under ESPP And stock option plan 354 -- 19 2,845 -- -- 2,864 Public stock offering 2,070 -- 103 23,966 -- -- 24,069 Conversion of Class B 4 (4) -- -- -- -- -- Dividends -- -- -- -- (1,976) -- (1,976) Currency translation -- -- -- -- -- (2,983) (2,983) Net income -- -- -- -- 9,736 -- 9,736 ------ ----- ------ -------- -------- ------------ ------- Balance May 31, 1998 11,183 3,239 $ 723 $ 80,606 $ 16,842 $ (6,586) $91,585 ====== ===== ====== ======== ======== ============ =======
See notes to consolidated financial statements 10 Notes to Consolidated Financial Statements (in thousands, except per share amounts) Note A -- Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All significant intercompany transactions are eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's 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 reporting period. Actual results could differ from those estimates. Cash Equivalents: The Company considers short-term investments that have a maturity of three months or less, when purchased, to be cash equivalents. The carrying amounts reported in the balance sheet for cash and equivalents approximate the fair market value of these assets. Inventories: Inventories are stated at the lower of cost or market. Inventory costs determined using the last-in, first-out (LIFO) method represent 80% of total inventories at May 31, 1998 and 78% at May 31, 1997. For the remaining inventories, cost is determined on the first-in, first-out (FIFO) method. If the FIFO method had been used for all inventories, the total amount of inventories would have been increased by $3,569 and $4,742 at May 31, 1998 and 1997, respectively. As a result of the increase in overstock reserves recorded in 1997, the LIFO carrying value of all inventories approximated market value at May 31, 1998 and 1997. Substantially all inventories represent finished goods held for sale. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Provisions for depreciation are computed principally using the straight- line method over the estimated useful life of the asset. Property, plant and equipment consist of the following: May 31 ------------------------ 1998 1997 -------- -------- Land and improvements $ 2,721 $ 2,620 Buildings and improvements 18,479 18,251 Machinery and equipment 28,595 25,098 -------- -------- Property at cost 49,795 45,969 Accumulated depreciation (31,318) (28,443) -------- -------- Property, net $ 18,477 $ 17,526 ======== ======== Other Assets: Deferred financing costs, goodwill and other deferred charges are amortized using the straight-line method. Other assets consist of the following: May 31 ------------------------ 1998 1997 -------- -------- Investments (at market) $ 2,931 $ 2,152 Notes receivable 3,158 86 Deferred financing costs, net 502 511 Goodwill, net 5,558 4,831 Other deferred charges, net 1,488 1,372 -------- -------- Other assets, net $ 13,637 $ 8,952 ======== ======== Accrued Liabilities: Accrued liabilities consist of the following: May 31 ------------------------ 1998 1997 -------- -------- Compensation and payroll taxes $ 5,072 $ 4,320 Interest 2,546 2,849 Income taxes 362 712 Other accrued expenses 2,306 4,568 Notes and current portion of debt 403 - -------- -------- Accrued liabilities $ 10,689 $ 12,449 ======== ======== Foreign Currency Translation: Foreign currency balances and financial statements are translated into U. S. dollars at end-of-period rates, except that revenues, costs and expenses are translated at the current rate on the date of the transaction. Gains and losses resulting from foreign currency transactions are included in income currently. Foreign currency transaction losses reflected in operations were $299, $563, and $228 in 1998, 1997, and 1996, respectively. Gains and losses resulting from translation of foreign subsidiary financial statements are credited or charged directly to a separate component of stockholders' equity. Revenue Recognition: Revenues are recorded upon shipment. Income Taxes: Deferred tax assets and liabilities are established for differences between financial reporting and tax accounting of assets and liabilities and are measured using the marginal tax rates. Stock-Based Compensation: The Company accounts for its stock option plans in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation", requires estimation of the fair value of options granted to employees. As permitted by SFAS No. 123, the Company presents this estimated fair value information in Note G, and continues to apply APB Opinion No. 25 for the determination of compensation expense. Comprehensive Income: SFAS No. 130, "Reporting Comprehensive Income" requires the presentation of comprehensive income in the financial statements for fiscal years beginning after December 15, 1997. The Company has elected early adoption of this statement, and has included the calculation of comprehensive income in the Consolidated Statement of Operations. Earnings per Share: Net income (loss) per share amounts and average shares outstanding for all periods presented have been restated in accordance with SFAS No. 128 "Earnings per Share", which became effective December 1997. The restatement of primary earnings per share to basic earnings per share resulted in an increase in net income per share of $.02 in 1996 and no change in 1997. Under SFAS No. 128, net income per share is reported by two amounts: basic earnings per share and diluted earnings per share. Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of 11 Notes to Consolidated Financial Statements (in thousands, except per share amounts) Common and Class B Common shares outstanding. Diluted earnings per share is calculated by dividing net income (loss) by the basic shares outstanding and share equivalents that would arise from the exercise of stock options. The per share amounts presented in the Consolidated Statement of Operations were based on the following amounts: 1998 1997 1996 ------- ------- ------- Numerator for basic and diluted EPS: Net income (loss) before extraordinary item $ 9,736 $(1,005) $ 8,111 Extraordinary loss, net of tax benefit - (488) - ------- ------- ------- Net income (loss) $ 9,736 $(1,493) $ 8,111 ======= ======= ======= Denominator for basic EPS: Shares outstanding at beginning of period 11,964 11,806 11,472 Additional shares for stock issued 300 86 187 ------- ------- ------- Weighted average shares outstanding 12,264 11,892 11,659 ======= ======= ======= Denominator for diluted EPS: Weighted average shares outstanding 12,264 11,892 11,659 Effect of dilutive stock options 425 - 343 ------- ------- ------- Adjusted average shares outstanding 12,689 11,892 12,002 ======= ======= ======= Out-of-the-money (exercise price higher than market price) stock options and the Company's 8 1/4% and 7 1/4% convertible debentures were excluded from the calculation because they were anti-dilutive. In-the-money stock options were excluded from the calculation in 1997 because the Company reported a net loss. Reclassifications: Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. Note B -- Special Charges and Extraordinary Item In the third quarter of fiscal 1997, the Company re-evaluated its reserve estimates in light of changed market conditions and provided for severance and other costs associated with a corporate reorganization. Inventory reserve adjustments of $7,200 were included in cost of sales, and provisions for accounts receivable, severance and other costs of $3,800 were included in selling, general and administrative expense. Collectively, these charges amounted to $11,000 pre-tax, or $6,712, net of tax, reducing earnings per share by $.56. Also in the third quarter of fiscal 1997, the Company recorded an $800 extraordinary charge for the write-off of unamortized debt issuance costs associated with the Company's 7 1/4% convertible subordinated debentures, which were exchanged for a new issue (See Note E). Net of tax, the charge was $488, or $.04 per share. Note C -- Acquisitions In August 1997 the Company's SSD unit acquired the assets of Security Service International, Inc. (SSI), a Canadian distributor of security systems with annual sales of $20.0 million. In February 1997, the SSD unit acquired Burtek Systems, Inc., (Burtek) a security systems distributor operating in Canada with annual sales of $18.0 million. In October 1996, the SSC business unit acquired Compucon Distributors, Inc., a distributor of interconnect devices operating in the northeastern United States with annual sales of $8.0 million. Each of the acquisitions was accounted for by the purchase method, and accordingly, their results of operations are included in the consolidated statements of operations from the respective dates of acquisition. The impact of these acquisitions on results of operations was not significant and would not have been significant if they had been included for the entire year. Note D -- Marketing Agreements The Company is party to several marketing distribution agreements with various manufacturers in the electron tube and semiconductor businesses. The most significant is a distribution agreement with Communications and Power Industries, Inc., formerly the Electron Device Group of Varian Associates, Inc. Product sales under this distribution agreement accounted for 10%, 13%, and 15%, of net sales in fiscal 1998, 1997 and 1996, respectively. Note E -- Debt Financing Long-term debt consists of the following: May 31 ------------------------ 1998 1997 --------- --------- 8 1/4% Convertible debentures, due June 2006 $ 40,000 $ 40,000 7 1/4% Convertible debentures, due December 2006 30,825 30,825 Floating-rate revolving credit facility, due March 2001 (6.92% at May 31, 1998) 6,582 30,332 Revolving credit and term loan due March 2001 (6.46% at May 31, 1998) 9,365 5,704 Other 1,010 414 --------- --------- Long-term debt 87,782 107,275 Less current portion (355) -- --------- --------- Long-term debt $ 87,427 $ 107,275 ========= ========= On February 15, 1997, the Company exchanged $40.0 million of new 8 1/4% convertible debentures for an equivalent face value of its outstanding 7 1/4% convertible debentures. The new debentures are payable at maturity in June 2006, and are convertible to common stock at $18.00 per share. The principal purpose of the exchange was to improve the Company's future liquidity and capital position by refinancing a sufficient number of the 7 1/4% convertible debentures to eliminate sinking fund requirements until December 15, 2004. The 8 1/4% convertible debentures are subordinated to senior debt. The 7 1/4% convertible debentures are unsecured and subordinated to other long-term debt, including the 8 1/4% convertible debentures. Each $1,000 debenture is convertible into the Company's Common Stock at any time prior to maturity at $21.14 per share. The Company is required to make sinking fund payments of $3,850 in 2004 and $6,225 in 2005. Effective March 1998, the Company replaced its existing senior revolving credit note agreement with a new $50.0 million floating-rate revolving credit facility which expires March 1, 2001. Loans under the agreement bear interest at prime or 125 basis points over LIBOR, at the Company's option. The premium over LIBOR varies with certain performance benchmarks. To complete the acquisition of Burtek, a subsidiary of the Company entered into a revolving credit and term loan agreement aggregating $6.0 million with a 12 Notes to Consolidated Financial Statements (in thousands, except per share amounts) Canadian affiliate of the Company's primary bank. The loan is guaranteed by the Company and bears interest at the Canadian prime rate. The amount of this agreement was increased to $12.1 million in August 1997 to facilitate the acquisition of SSI and matures March 1, 2001. The debt agreements contain financial covenants with which the Company was in full compliance at May 31, 1998. The most restrictive covenants set benchmark levels for tangible net worth, debt to tangible net worth ratio, cash flow to senior funded debt and annual debt service coverage. Aggregate maturities of debt during the next five years are: $355 in 1999, $328 in 2000 and $16,274 in 2001. Cash payments for interest were $8,387, $7,463 and $6,445 in 1998, 1997 and 1996, respectively. In the following table, the fair values of the Company's 7 1/4% and 8 1/4% convertible debentures are based on quoted market prices. The fair values of the bank term loans are based on carrying value, adjusted for market interest rate changes. 1998 1997 --------------------- --------------------- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- 8 1/4% Convertible debentures $ 40,000 $ 38,000 $ 40,000 $ 31,800 7 1/4% Convertible debentures 30,825 27,126 30,825 24,044 Floating-rate revolving credit facility 6,582 6,582 30,332 30,330 Revolving credit and term loan 9,365 9,365 5,704 5,704 Other 1,010 1,010 414 414 -------- -------- -------- -------- Total 87,782 82,083 107,275 92,292 Less current portion (355) (355) -- -- -------- -------- -------- -------- Total $ 87,427 $ 81,728 $107,275 $ 92,292 ======== ======== ======== ======== Note F -- Income Taxes The components of income (loss) before income taxes and extraordinary item are: 1998 1997 1996 --------- --------- --------- United States $ 11,070 $ (4,558) $ 9,954 Foreign 2,866 1,833 2,057 --------- --------- --------- Income (loss) before taxes and extraordinary item $ 13,936 $ (2,725) $ 12,011 ========= ========= ========= The provision (benefit) for income taxes differs from income taxes computed at the federal statutory tax rate of 34% as a result of the following items: 1998 1997 1996 --------- --------- --------- Federal statutory rate 34.0 % 34.0 % 34.0 % Effect of: State income taxes, net of federal tax benefit 3.5 11.3 3.5 FSC benefit on export sales (6.2) 12.3 (3.2) Realization of tax benefit on prior years' foreign losses - 14.7 (2.5) Foreign taxes at other rates (0.3) (7.5) - Other (0.9) (1.7) 0.7 --------- --------- --------- Effective tax rate 30.1 % 63.1 % 32.5 % ========= ========= ========= In 1995, due to the timing and nature of a claim settlement, the Company utilized a ten-year carryback provision permitted by the Internal Revenue Service. The Company's U. S. federal tax returns have been examined through 1995. As part of this examination, in December 1997, the Internal Revenue Service contested the Company's carryback of the aforementioned claim settlement. The Company is appealing the IRS position. However, if the Company were ultimately unsuccessful, the claim would be available for carryforward at the then current statutory rate and the impact on the Company's financial position and results of operations would not be material. The provisions (benefits) for income taxes before extraordinary item consist of the following: 1998 1997 1996 --------- --------- --------- Currently payable: Federal $ 973 $ 299 $ 1,158 State 155 -- 139 Foreign 293 609 274 --------- --------- --------- Total currently payable 1,421 908 1,571 --------- --------- --------- Deferred: Federal 1,867 (2,626) 1,806 State 275 (441) 498 Foreign 637 439 25 --------- --------- --------- Total deferred 2,779 (2,628) 2,329 --------- --------- --------- Income tax provision (benefit) $ 4,200 $ (1,720) $ 3,900 ========= ========= ========= Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Non-current deferred tax assets and liabilities are offset on the balance sheet within tax jurisdictions. Significant components of the Company's deferred tax assets and liabilities as of May 31, 1998 and 1997 are as follows: Balance Sheet Presentation -------------------------- Current Noncurrent Asset (1) Liability ---------- ---------- At May 31, 1998: Deferred tax assets: Operating loss carryforward $ -- $ 180 Intercompany profit in inventory 1,372 -- Inventory valuation 5,748 -- Environmental and other reserves -- 955 Other, net 15 -- ---------- ---------- Deferred tax assets 7,135 1,135 Deferred tax liabilities: Accelerated depreciation -- (3,633) Other, net -- (181) ---------- ---------- Net deferred tax $ 7,135 $ (2,679) At May 31, 1997: Deferred tax assets: Operating loss carryforward $ -- $ 1,778 Intercompany profit in inventory 1,422 -- Inventory valuation 6,312 -- Environmental and other reserves -- 1,368 Other, net 14 -- ---------- ---------- Deferred tax assets 7,748 3,146 Deferred tax liabilities: Accelerated depreciation -- (3,516) Other, net -- (64) ---------- ---------- Net deferred tax $ 7,748 $ (434) ========== ========== (1) Included in other current assets on the balance sheet Operating loss carryforwards of $7.9 million for U. S. tax purposes expire in 2009 and 2010. Net income taxes paid (refunded) were $850, $523, and $(1,112) in 1998, 1997 and 1996, respectively. 13 Notes to Consolidated Financial Statements (in thousands, except per share amounts) Note G -- Stockholders' Equity The Company has authorized 30.0 million shares of Common Stock, 10.0 million shares of Class B Common Stock, and 5.0 million shares of Preferred Stock. The Class B Common Stock has ten votes per share and generally votes together with the Common Stock. The Class B Common Stock has transferability restrictions; however, it may be converted into Common Stock on a share-for- share basis at any time. With respect to dividends and distributions, shares of common stock and Class B common stock rank equally and have the same rights, except that Class B common stock is limited to 90% of the amount of common stock cash dividends. In May 1998, the Company sold 2,070 shares of its common stock through a public offering at a price of $12.50 per share. The net proceeds to the Company, after deducting an underwriting discount of 6% and issuance costs of $253 were $24,069. Proceeds were used to pay down the revolving credit facility. Total common stock issued and outstanding at May 31, 1998 was 11,183 shares. An additional 9,791 shares of common stock have been reserved for future issuance under the Employee Stock Purchase and Option Plans and potential conversion of the convertible debentures and Class B Common Stock. The Employee Stock Purchase Plan (ESPP) provides substantially all employees an opportunity to purchase common stock of the Company at 85% of the stock price at the beginning of the year or the end of the year, whichever is lower. The plan has reserved 71 shares for future issuance. On July 14, 1998, the Board of Directors approved the Employees 1998 Incentive Compensation Plan. The plan is subject to stockholders' approval, which will be voted at the annual meeting on October 6, 1998. The information in this footnote assumes stockholders' approval. The Employees' 1998 Incentive Compensation Plan authorizes the issuance of up to 800 shares as incentive stock options, non-qualified stock options or stock awards. Under this plan and predecessor plans, 2,394 shares are reserved for future issuance. The Plan authorizes the granting of incentive stock options at the fair market value at the date of grant. Generally, these options become exercisable over staggered periods and expire up to ten years from the date of grant. Under the 1996 Stock Option Plan for Non-Employee Directors and a predecessor plan, 400 shares have been reserved for future issuance relating to stock options exercisable based on the passage of time. Each option is exercisable over a period from its date of grant at the market value on the grant date and expires after ten years. The Company applies APB Opinion No. 25 and related interpretations in accounting for its option plans. Accordingly, no compensation expense has been recognized for the Company's option plans in the accompanying Consolidated Statement of Operations. SFAS No. 123 requires the calculation of the fair value of each option granted. This fair value is estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions indicated below. Had compensation cost for the Company's option plans and stock purchase plan been determined consistent with SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been as follows: 1998 1997 1996 ------- ------- ------- Net income (loss), as reported $ 9,736 $(1,493) $ 8,111 Effect of options (475) (307) (134) ------- ------- ------- Adjusted net income (loss) $ 9,261 $(1,800) $ 7,977 ======= ======= ======= Net income (loss) per share - diluted: As reported $ .77 $ (.12) $ .68 Effect of options (.04) (.03) (.02) ------- ------- ------- Adjusted net income (loss) $ .73 $ (.15) $ .66 ======= ======= ======= Assumptions used: Risk-free interest rate 5.5% 5.2% 5.6% Annual standard deviation of stock price 40% 40% 40% Weighted average expected life (years) 5.6 6.0 6.0 Annual dividend rate $ .16 $ .16 $ .16 Weighted average fair value per option $ 3.49 $ 3.07 $ 2.95 Option value of ESPP per share $ 1.19 $ 1.50 $ 1.14 Fair value of options granted during the year $ 948 $ 940 $ 776 The effect of applying SFAS No. 123 in this pro forma disclosure is not indicative of the effects on future years, because SFAS No. 123 does not apply to grants issued prior to fiscal 1996. A summary of the share activity and weighted average exercise prices for the Company's option plans is as follows: Outstanding Exercisable ------------------- -------------------- Shares Price Shares Price -------- -------- -------- -------- At June 1, 1995 1,333 $ 6.99 1,055 $ 7.02 Granted 263 7.40 Exercised (245) 5.71 Cancelled (99) 9.91 -------- At May 31, 1996 1,252 7.10 855 7.16 Granted 286 8.00 Exercised (33) 4.82 Cancelled (16) 7.72 -------- At May 31, 1997 1,489 7.31 936 7.21 Granted 291 8.70 Exercised (308) 6.57 Cancelled (99) 7.26 -------- At May 31, 1998 1,373 7.74 697 7.52 ======== The following table summarizes information about stock options outstanding as of May 31, 1998: Outstanding Exercisable Exercise ------------------------ ---------------------- Price Range Shares Price Life Shares Price Life - ----------------- ------- ----- ---- ------- ----- ---- $3.75 to $5.25 131 $4.32 6.1 102 $4.27 6.1 $6.00 to $7.50 458 6.88 6.3 272 6.72 5.3 $8.00 to $8.50 671 8.19 7.1 241 8.04 3.9 $10.813 to $12.95 113 12.46 5.8 82 12.69 4.4 ------- ------- Total 1,373 7.74 6.6 697 7.52 4.8 ======= ===== ==== ======= ===== ==== Note H -- Employee Retirement Plans The Company's domestic employee retirement plans consist of a profit sharing plan and a stock ownership plan (ESOP). Annual contributions in cash or Company stock are made at the discretion of the Board of Directors. In addition, the profit sharing plan has a 401(k) provision whereby the Company matches 50% of employee contributions up to 4% of base pay. Charges to expense for 14 Notes to Consolidated Financial Statements (in thousands, except per share amounts) discretionary and matching contributions to these plans were $1,341, $995 and $1,075 in 1998, 1997 and 1996. Stock contributions to the ESOP were $285, $800 and $500 in 1998, 1997 and 1996, respectively, based on the stock price at the date contributed. Shares are included in the calculation of earnings per share and dividends are paid to the ESOP from the date the shares are contributed. Foreign employees are covered by a variety of primarily government mandated programs. Note I -- Industry and Market Information The Company operates in one industry as a distributor of electronic components, including vacuum tubes, semiconductors and other products. The Company invoices its customers and ships from two primary geographic locations: North America (which services the U. S., Canada, Latin America and the Far East) and Europe. 1998 1997 1996 -------- -------- -------- Sales: North America $265,984 $223,277 $211,912 Less intersegment transfers 21,366 18,728 21,778 -------- -------- -------- To unaffiliated customers 244,618 204,549 190,134 -------- -------- -------- Europe 65,092 54,946 51,987 Less intersegment transfers 5,538 4,356 2,454 -------- -------- -------- To unaffiliated customers 59,554 50,590 49,533 -------- -------- -------- Consolidated $304,172 $255,139 $239,667 ======== ======== ======== Operating income: North America $ 16,060 $ 1,999 $ 13,040 Europe 6,689 4,949 6,263 Corporate expenses (1,479) (1,817) (1,733) -------- -------- -------- Consolidated $ 21,270 $ 5,131 $ 17,570 ======== ======== ======== Identifiable assets: North America $163,624 $148,026 $143,536 Europe 39,910 34,905 32,794 Corporate assets 6,166 9,583 3,828 -------- -------- -------- Consolidated $209,700 $192,514 $180,158 ======== ======== ======== Intersegment transfers originate mainly from the United States or Europe and are accounted for on an "arm's length" basis with profits eliminated in consolidation. Export sales shipped directly from the United States were $39,814, $36,325 and $37,913 in 1998, 1997 and 1996. Operating income was reduced by $11.0 million in North America in 1997 for valuation reserve adjustments, severance and other costs. The Company sells its products to companies in diversified industries and performs periodic credit evaluations of its customers' financial condition. Terms are generally on open account, payable net 30 days in North America and Latin America, and vary throughout Europe and the Far East. Estimates of credit losses are recorded in the financial statements based on periodic reviews of outstanding accounts and actual losses have been consistently within management's estimates. Sales by product line and by geographic destination are summarized in Management's Discussion and Analysis. The Financial Accounting Standards Board has issued Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" effective for years beginning after December 15, 1997. The Company is currently reviewing its internal cost allocations and reporting procedures in light of the Statement's requirements. Note J -- Litigation On June 19, 1990, the Company was served with a complaint in Panache Broadcasting of Pennsylvania, Inc. v. Richardson Electronics, Ltd.; Varian Associates, Inc.; and Varian Supply Company (VASCO - a joint venture between the Company and Varian Associates, Inc.), in U. S. District Court for the Eastern Division of Pennsylvania alleging violations of Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act. This action purports to be a class action on behalf of all persons and businesses in the U. S. "who purchased electron power tubes from one or more of the defendant corporations at any time" since the formation of VASCO. The suit seeks treble damages alleged to be in excess of $100,000, injunctive relief and attorneys' fees. The litigation has been transferred to the U. S. District Court for the Northern District of Illinois, Eastern Division as cause No. 90C6400, and is in the discovery stage. The Court has not determined whether the action may be maintained on behalf of a class. The Company is defending itself against this action. It is not possible at this time to predict the outcome of this legal action. Note K -- Selected Quarterly Financial Data (Unaudited) Summarized quarterly financial data for 1998 and 1997 follow. There were no material fourth quarter adjustments in 1998 or 1997. Third quarter 1997 results include valuation reserve adjustments and severance and other costs which reduced gross margin by $7,200 and net income before extraordinary item by $6,712 or $.56 per share, as described in Note B. First Second Third Fourth ------- ------- ------- ------- 1998: Net sales $71,600 $78,646 $73,196 $80,730 Gross margin 20,638 22,348 20,860 22,817 Net income 1,808 2,740 2,182 3,006 Net income per share - basic $ .15 $ .23 $ .18 $ .23 Net income per share - diluted $ .15 $ .22 $ .17 $ .23 1997: Net sales $57,544 $62,167 $64,163 $71,265 Gross margin 16,783 18,738 11,171 20,772 Net income (loss) before extraordinary item 1,293 1,932 (6,053) 1,823 Extraordinary loss, net of tax - - (488) - ------- ------- ------- ------- Net income (loss) 1,293 1,932 (6,541) 1,823 Net income (loss) per share - basic and diluted, before extraordinary loss $ .11 $ .16 $ (.51) $ .15 Net income (loss) per share - basic and diluted $ .11 $ . 16 $ (.55) $ .15 15 Report of Independent Auditors Stockholders and Directors Richardson Electronics, Ltd. LaFox, Illinois We have audited the accompanying consolidated balance sheets of Richardson Electronics, Ltd. and subsidiaries as of May 31, 1998 and 1997, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended May 31, 1998. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Richardson Electronics, Ltd. and subsidiaries at May 31, 1998 and 1997, and the consolidated results of their operations and cash flows for each of the three years in the period ended May 31, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP Chicago, Illinois July 14, 1998 Corporate Officers and Board of Directors Corporate Officers Edward J. Richardson Chairman of the Board and Chief Executive Officer Bruce W. Johnson President and Chief Operating Officer Charles J. Acurio Executive Vice President and General Manager, Display Products Group Pierluigi Calderone Vice President and Manager of European Operations Page Y. Chiang Vice President and Operations Manager, Security Systems Division Kevin M. Connor Vice President of Sales, Solid State and Components Group Flint Cooper Executive Vice President and General Manager, Security Systems Division William J. Garry Senior Vice President, Finance and Chief Financial Officer Joseph C. Grill Vice President, Human Resources Norman A. Hilgendorf Vice President and General Manager, Solid State and Components Group Kathleen M. McNally Vice President, Marketing Operations Bart Petrini Executive Vice President and General Manager, Electron Device Group Robert Prince Executive Vice President, Worldwide Sales Kevin F. Reilly Vice President and Chief Information Officer William G. Seils Senior Vice President, General Counsel and Corporate Secretary Ronald G. Ware Treasurer and Assistant Secretary Board of Directors Edward J. Richardson (1) Arnold R. Allen Consultant Jacques Bouyer (6) Consultant Kenneth J. Douglas (2,3,4) Chairman of the Board, West Suburban Hospital Medical Center William J. Garry Scott Hodes (2,3,5) Partner, Law Firm of Ross & Hardies Bruce W. Johnson (1) Ad Ketelaars (6) Consultant Harold L. Purkey (2) President, Forum Capital Markets Samuel Rubinovitz (1,3,4,5,6) Consultant and Chairman, LTX Corporation (1) Executive Committee (2) Audit Committee (3) Compensation Committee (4) Stock Option Committee (5) Executive Oversight Committee (6) Strategic Planning Committee 17 Stockholder Information Corporate Office Richardson Electronics, Ltd. 40W267 Keslinger Road PO BOX 393 LaFox, Illinois 60147-0393 (630) 208-2200 Internet:www.rell.com E-mail: info@rell.com Annual Meeting We encourage stockholders to attend the annual meeting scheduled for Tuesday, October 6, 1998 at 3:15 p.m. at the Company's corporate office. Further details are available in your proxy materials. Transfer Agent and Registrar Continental Stock Transfer Company 2 Broadway, 19th Floor New York, NY 10004 Auditors Ernst & Young LLP 233 S. Wacker Drive Chicago, Illinois 60606 Brokerage Reports Barrington Research Cleary Gull Reiland & McDevitt Inc. McDonald & Company Securities, Inc. Pauli & Company Market Makers Barrington Research William Blair & Co. Cleary Gull Reiland & McDevitt Inc. C. L. King & Associates McDonald & Company Securities, Inc. Pauli & Company Smith Barney Shearson Wechsler & Krumholz, Inc. Form 10K and Other Information A copy of the Company's Annual Report on Form 10K, filed with the Securities and Exchange Commission is available without charge upon request. All inquiries should be addressed to the Investor Relations Department, Richardson Electronics, Ltd., 40W267 Keslinger Road, PO BOX 393, LaFox, Illinois 60147- 0393. Press releases and other information can be found on the Internet at the Company's home page at http://www.rell.com. Market Price of Common Stock The common stock is traded on the NASDAQ National Market System under the symbol "RELL".The number of stockholders of record of Common Stock and Class B Common Stock at May 31, 1998 was 645 and 32, respectively. The Company believes there are approximately an additional 1,300 holders who own shares of the Company's Common Stock in street name. The quarterly market price ranges of the Company's common stock were as follows: 1998 1997 ------------------- -------------------- Fiscal Quarters High Low High Low -------- -------- -------- -------- First 8 3/4 8 10 1/2 9 Second 13 3/4 8 3/8 10 7 Third 12 5/8 9 3/4 10 1/4 8 Fourth 14 1/2 10 1/4 8 1/4 6 3/4 17 Richardson Electronics, Ltd. and Subsidiaries Schedule II - Valuation and Qualifying Accounts (in thousands) COL. A COL. B COL. C COL. D COL. E ADDITIONS - ------------------------- --------- ------------------- ----------- ------- (1) (2) Balance Charged Charged to Balance at to Costs Other at Beginning and Accounts- Deductions- End of DESCRIPTION of Period Expenses Describe Describe Period - ------------------------- --------- -------- --------- ----------- ------- Year ended May 31, 1998: Allowance for sales returns and doubtful accounts $ 2,102 $ 431 $ - $ 303(1) $2,230 Other reserves $ 1,956 $ 41(2)$ - $ 635(3) $1,362 Year ended May 31, 1997: Allowance for sales returns and doubtful accounts $ 1,461 $1,749 $ - $ 1,108(1) $2,102 Other reserves $ 1,539 $ 900(4)$ - $ 483(3) $1,956 Year ended May 31, 1996: Allowance for sales returns and doubtful accounts $ 1,385 $ (42) $ - $ (118)(1) $1,461 Other reserves $ 1,728 $ 400(2)$ - $ 589 (3) $1,539 (1) Uncollectible amounts written off, net of recoveries and foreign currency translation. (2) Provision to increase EPA groundwater remediation reserve (3) Expenditures made for reserved items (4) Provision for corporate reorganization and increase in EPA groundwater remediation reserve. EX-10.G3 2 Exhibit 10(g)(3) Third Amendment to Restated Richardson Electronics, Ltd. Employees Stock Ownership Plan RICHARDSON ELECTRONICS, LTD., a Delaware corporation, hereby amends the Richardson Electronics, Ltd. Employees Stock Ownership Plan, as amended and restated on July 14, 1994, effective June 1, 1989, and as further amended (the "Plan"), as follows: 1. The following sentence is added to Section 2.1 of the Plan effective June 1, 1996: There shall also be maintained, in the case of a Participant who incurs a Break in Service, a Forfeiture Suspense Account in accordance with Section 18.3(d). 2. Section 7.4 of the Plan is deleted and the following is substituted in its place effective June 1, 1996: 7.4 Crediting of Forfeitures Forfeitures, if any, occurring during the Plan Year pursuant to Section 18.3(d) and allocated from the Forfeiture Suspense Accounts shall be allocated among the Employer Contribution Accounts of all Participants eligible to receive an allocation of the Employer's contribution under Section 6.1(a) in the proportion that the Compensation paid or accrued to each such Participant during such Plan Year bears to the Compensation paid or accrued to all such Participants during such Plan Year. 3. Section 14.3 of the Plan is deleted and the following is substituted in its place effective May 31, 1997: 14.3 Diversification Elections. (a) Each Qualified Participant may make an election (the "Election") within 90 days after each Anniversary Date during the Qualified Election Period to direct the Plan to distribute to him or on his behalf, a portion of his Account Balance equal to his Diversification Amount. An Election shall be made in, in writing, on a form to be supplied by the Administrator for such purpose. A Participant shall become a "Qualified Participant: on the first day on or after which he has both attained age 55 and completed 10 years of participation in the Plan. The "Qualified Election Period" shall be the 6-year period commencing with the Plan Year in which the Participant first becomes a Qualified Participant. During any one of the first 5 Plan Years of the Qualified Election Period, the "Diversification Amount" shall be an amount equal to the excess, if any, of 25% of: (1) the number of shares of Stock credited to the Qualified Participant's Account on or before the last Anniversary Date preceding the Plan Year for which such Election is made, less (2) the number of shares of Stock previously distributed to such Qualified Participant (or, where he had requested a distribution in cash, the number of shares of Stock in connection with such a cash distribution to him). In the last Plan Year of the Qualified Election Period, the preceding sentence shall be applied by substituting "50%" for "25%." In applying either such percentage, any resultant fractional share under .5 shall be disregarded and any resultant fractional share of .5 or more shall be considered as an additional full share. (b) Not later than 90 days after the close of each 90-day period described in Section 14.3(a), the Administrator shall implement such Qualified Participant's Election by distributing to him Stock equal to the Diversification Amount, or, if so directed by him, the Administrator shall cause such Stock to be sold on the open market and the net proceeds distributed to him, or on his behalf, subject to Section 9.10. (c) The Administrator shall have the sole responsibility for and complete discretion in establishing and, if it deems it necessary, amending the rules and procedures governing the time and manner in which Qualified Participants may make, modify or revoke any Election pursuant to this Section 14.3. The discretion of the Administrator in this regard shall only be limited by the general requirement that such discretion be exercised in a non-discriminatory manner and in compliance with the requirements of Code Section 401(a)(28) and any regulations promulgated thereunder. (d) The purpose of this Section 14.3 is to conform to the requirements of Code Section 401(a)(28). To the extent that this Section 14.3 is inconsistent with Section 401(a)(28), the provisions of Section 401(a)(28) shall control. 4. Article XVIII, in the form attached hereto as Exhibit A, is added to the Plan effective June 1, 1996. IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed as of this 9th day of April, 1997. RICHARDSON ELECTRONICS, LTD. By /s/ William G. Seils As Its Senior Vice President EXHIBIT A ARTICLE XVIII REVISED VESTING PROVISIONS 18.1 Scope and Effective Date. As to each Employee who is actively employed by the Employer on or after June 1, 1996, the vested interest of such Employee in his Account shall be determined in accordance with this Article XVIII notwithstanding any other provision of the Plan to the contrary; provided, however, Sections 8.1, 8.2, 8.3, 8.4, 8.7 and 8.8 of the Plan shall continue to apply. 18.2 Definitions. For purposes of this Article XVIII, the following terms shall have the meanings set forth, notwithstanding any definition of any such term elsewhere in the Plan: (a) "Break in Service" A Period of Severance of at least 12 consecutive months. In the case of an individual who is absent from work for maternity or paternity reasons, the 12-consecutive month period beginning on the first anniversary of the first date of such absence shall n to constitute a Break in Service. An "absence from work for maternity or paternity reasons" shall mean an absence (1) by reason of the pregnancy of the individual, (2) by reason of the birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. (b) "Hour of Service" Each hour for which an Employee is paid or entitled to payment for the performance of duties for the Employer or a Related Employer. (c) "Period of Service" An Employee's period of service commencing on the date he first completes an Hour of Service, and ending on the date a Break in Service begins; provided, however, that for purposes of Section 18.2(c), any Employee to whom Section 18.4 applies shall be deemed to have a hire date of May 31, 1997. (d) "Period of Severance" A continuous period of time during which an Employee is not employed by the Employer. Such period begins on the date such Employee retires, quits or is discharged, or if earlier, the 12- month anniversary of the date on which such Employee was otherwise first absent from service. (e) "Years of Service" The number of whole years of an Employee's Period of Service with the Employer or a Related Employer. 18.3 General Vesting Rules. (a) For purposes of determining his Years of Service, an Employee shall receive credit for any Period of Severance of less than 12 consecutive months. Nonconsecutive Periods of Service shall be aggregated. Additionally, fractional periods of a year shall be expressed in terms of days, and less-than-whole-year Periods of Service shall be aggregated on the basis that 365 days of service shall equal a whole Year of Service. (b) In the case of a Participant who has 5 consecutive Breaks in Service, all Years of Service after such Breaks in Service shall be disregarded for the purpose of determining his vesting in his Account balance which accrued before such breaks, but both pre-break and post-break service shall count for the purposes of vesting the Employer-derived Account balance that accrues after such breaks. Both such balances shall share in the earnings and losses of the Trust. (c) In the case of a Participant who does not have 5 consecutive Breaks in Service, both the pre-break and post-break service shall count in vesting both the pre- break and post-break Employer-derived Account balances. (d) The excess of a Participant's Account Balance over his Vested Account Balance shall be transferred from such Participant's Employer Contribution Account to his Forfeiture Suspense Account as of the date on which such Participant incurs a Break in Service, and shall be forfeited on the date on which such Participant incurs 5 consecutive Breaks in Service. If such a Participant returns to the employment of the Employer or any Related Employer before incurring 5 consecutive Breaks in Service, any amount transferred to his Forfeiture Suspense Account from such his Employer Contribution Account pursuant to the preceding sentence shall be restored to his Employer Contribution Account. (e) If a Participant receives a distribution of all or a portion of his Employer Contribution Account Balance at a time when it is possible for him to increase the vested percentage of his Employer Contribution Account (including a Participant who received a distribution upon incurring a Termination of Employment and who returns to the employment of the Employer or any Related Employer before incurring at least 5 consecutive Breaks in Service), then such Participant's Vested Account Balance at any time after he is re- employed shall be determined by (1) increasing the Participant's Employer Contribution Account Balance at such time by the Adjusted Distribution (as hereafter defined), (2) then multiplying the Employer Contribution Account Balance (as so increased) by the relevant vesting percentage under Section 8.4, and (3) then subtracting the Adjusted Distribution from the product obtained. The "Adjusted Distribution" shall be equal to the amount of the distribution multiplied by a fraction, the numerator of which is the Participant's Account Balance at the time the formula is applied and the denominator of which is the Account Balance immediately following the distribution (without regard to forfeitures). (f) If a Participant returns to the employment of the Employer or any Related Employer after incurring at least 5 Breaks in Service, and such Participant did not receive payment of the full amount of his Vested Account Balance, his Vested Account Balance remaining unpaid shall be placed in a separate Pre-Break Account for the Participant. The Pre-Break Account shall be treated in the same manner as the Employer Contribution Account of the Participant, except that it shall not be credited with the Employer's contributions and the Participant shall be 100% vested in such Pre-Break Account. 18.4 Transitional Rules Each Employee described in Section 18.1 who was actively employed by the Employer on May 31, 1996 shall receive credit for a Period of Service equal to the sum of: (a) A number of years equal to the number of Years of Service credited to him under the Plan (determined without regard to this Article XVIII) as of the Computation Period ended May 31, 1996; and (b) The greater of (1) the Period of Service which would be credited to him under this Article XVIII during the Computation Period ending May 30, 1997 or (2) the service which would be taken into account under the Plan (determined without regard to this Article XVIII) during the Computation Period ended May 30, 1997. In addition, each such Employee shall receive credit for service determined under this Article XVIII commencing on May 31, 1997. EX-10.S 3 Exhibit 10(s) EMPLOYMENT, NONDISCLOSURE AND NON-COMPETE AGREEMENT EMPLOYMENT, NONDISCLOSURE AND NON-COMPETE AGREEMENT ("Agreement") made and entered into as of this 1st day of June, 1998 by and between RICHARDSON ELECTRONICS, LTD., a Delaware corporation with its principal place of business located at P.O. Box 393, 40W267 Keslinger Road, LaFox, IL 60147-0393 (the "Company"), and FLINT COOPER of 12543 Still Harbour Drive, Houston TX 77041 (hereinafter called "Executive"). RECITALS WHEREAS, the Company desires to continue to employ Executive as its Executive Vice President and General Manager, Security Systems Division upon the terms and conditions stated herein; and WHEREAS, Executive desires to continue to be so employed by the Company at the salary and benefits provided for herein; and WHEREAS, Executive acknowledges and understands that during the course of his employment, Executive has and will become familiar with certain confidential information of the Company which provides Company with a competitive advantage in the marketplace in which it competes, is exceptionally valuable to the Company, and is vital to the success of the Company's business; and WHEREAS, the Company and Executive desire to protect such confidential information from disclosure to third parties or its use to the detriment of the Company; and WHEREAS, the Executive acknowledges that the likelihood of disclosure of such confidential information would be substantially reduced, and that legitimate business interests of the Company would be protected, if Executive refrains from competing with the Company and from soliciting its customers and employees during and following the term of the Agreement, and Executive is willing to covenant that he will refrain from such actions. NOW THEREFORE, in consideration of the promises and of the mutual covenants and agreements hereinafter set forth, the parties hereto acknowledge and agree as follows: ARTICLE ONE NATURE AND TERM OF EMPLOYMENT 1.01 Employment. The Company hereby agrees to continue to employ Executive and Executive hereby accepts continued employment as the Company's Executive Vice President and General Manager, Security Systems Division. 1.02 Term of Employment. Executive's employment pursuant to this Agreement shall commence on June 1, 1998 and, subject to the other provisions of this Agreement, the term of such employment (the "Employment Term") shall continue indefinitely. This Agreement and Executive's employment may be terminated without reason or cause by not less than one (1) year written notice given by one party to the other. In the event of such termination the Company may assign such duties or no duties to Executive as it, in its discretion, desires during such notice period. The Company may terminate the Employment Term earlier so long as it pays compensation in lieu of notice for the required balance of notice period. This Agreement and Executive's employment may also be terminated in the circumstances and manner provided in Article Five below. 1.03 Duties. Executive shall perform such managerial duties and responsibilities in connection with the Company's Security Systems Division or its successor, and/or such other duties and responsibilities as may be assigned by the President/COO, or such other person as the Company may designate from time to time. 1.04 Compliance With Company Policy. Executive will adhere to the policies and procedures of the Company, including, without limitation, its Code of Conduct, and will follow the supervision and direction of Company's President/COO or such other person as the Company may designate from time to time in the performance of his duties. Executive agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder and to developing and improving the business and best interests of the Company. Executive agrees to perform such duties and responsibilities to the satisfaction of the President of the Company. Executive shall not engage in any other business activity, whether or not such business activity is pursued for gain or any other pecuniary advantage, without the prior written consent of the Company. The Company hereby consents to Executive's engaging in a tropical plant business so long as his activity in connection therewith does not interfere with his performance of his duties and obligations as an employee of the Company. Executive will use all reasonable efforts to promote and protect the good name of the Company and will comply with all of his obligations, undertakings, promises, covenants and agreements as set forth in this Agreement. Executive will not, during the Employment Term or during any period during which Executive is receiving payments pursuant to Section 1.02, Article 2 and/or Section 5.06, engage in any activity which would have, or reasonably be expected to have, an adverse affect on the Company's reputation, goodwill or business relationships or which would result, or reasonably be expected to result, in economic harm to the Company. ARTICLE TWO COMPENSATION AND BENEFITS For all services to be rendered by Executive in any capacity hereunder (including as an officer, director, committee member or otherwise of the Company or any parent or subsidiary thereof or any division of any thereof) on behalf of the Company, the Company agrees to pay Executive so long as he is employed hereunder, and the Executive agrees to accept, the compensation set forth below. 2.01 Salary. During the term of Executive's employment hereunder, the Company shall pay to Executive an annual salary ("Salary") of One Hundred Forty Thousand and 00/100 Dollars ($140,000.00), payable in installments as are customary under the Company's payroll practices from time to time. The Company at its sole discretion may, but is not required to, review and adjust the Executive's Salary from year to year; provided, however, that, except as may be expressly consented otherwise in writing by Executive, Company may not decrease Executive's Salary. No additional compensation shall be payable to Executive by reason of the number of hours worked or by reason of hours worked on Saturdays, Sundays, holidays or otherwise. 2.02 Bonus Plan. During the term of the Executive's employment hereunder, the Executive shall be a participant in the Strategic Business Unit Manager Incentive Plan, as modified from time to time (the "Annual Incentive Plan"). The Executive's "target bonus percentage" for purposes of the Annual Incentive Plan shall be fifty percent (50%) of base Salary for fiscal year 1999. Such bonus shall be determined and paid strictly in accordance with the Annual Incentive Plan as modified or reduced by Company from time to time at its discretion, and for any partial fiscal year the bonus shall be computed and paid only for the portion of the fiscal year Executive is employed hereunder, i.e. until the end of the Employment Term. 2.03 Special Bonus. The Company shall pay Executive a special bonus in the amount of One Hundred Eighty Seven Thousand Five Hundred Dollars ($187,500), of which amount Forty Six Thousand Eight Hundred Seventy Five Dollars will be paid in the form of a Restricted Stock Award under the Company's 1996 Incentive Compensation Plan on June 1, 1998 and the balance of One Hundred Forty Thousand Six Hundred Twenty Five Dollars will be paid in cash in three equal annual installments of Forty Six Thousand Eight Hundred Seventy Five Dollars each on December 1, 1998, December 1, 1999 and December 1, 2000. 2.03 Other Benefits. Company will provide Executive such benefits (other than bonus, severance and incentive compensation benefits) as are generally provided by the Company to its other Executives, including but not limited to, health/major medical insurance, dental insurance, disability insurance, life insurance, sick days and other Executive benefits (collectively "Other Benefits"), all in accordance with the terms and conditions of the applicable Other Benefits Plan. Nothing in this Agreement shall require the Company to maintain any benefit plan nor prohibit the Company from modifying any such plan as it sees fit from time to time. It is only intended that Executive shall be entitled to participate in any such plan offered for which he may qualify under the terms of any such plan as it may from time to time exist, in accordance with the terms thereof. 2.04 Disability. Any compensation Executive receives under any disability benefit plan provided by Company during any period of disability, injury or illness shall be in lieu of the compensation which Executive would otherwise receive under Article Two during such period of disability, injury or sickness. 2.05 Withholding. All salary, bonus and other payments described in this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable benefit policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise. ARTICLE THREE CONFIDENTIAL INFORMATION RECORDS AND REPUTATION 3.01 Definition of Confidential Information. For purposes of this Agreement, the term "Confidential Information" shall mean all of the following materials and information (whether or not reduced to writing and whether or not patentable) to which Executive receives or has received access or develops or has developed, in whole or in part, as a direct or indirect result of his employment with Company, its predecessors or its subsidiaries or through the use of any of the Company's, its predecessors' or its subsidiaries's facilities or resources: (1) Customer lists, including, but not limited to, customer names, customer contact persons, customer requirements, and customer data; supplier lists, including, but not limited to, supplier names, supplier contact persons, supplier capabilities, and supplier data; marketing techniques; practices; methods; plans; systems; processes; purchasing information; price lists; pricing policies; quoting procedures; product information; operating policies and procedures; financial information; and other materials or information relating to the manner in which the Company, its predecessors or its subsidiar- ies, or its customers and/or suppliers do business; (2) Discoveries, concepts and ideas, whether patentable or not, or copyrightable or not, including without limitation the nature and results of research and development activities, processes, formulas, techniques, "know-how," designs, drawings and specifications; (3) Any other materials or information related to the business or activities of Company which are not generally known to others engaged in similar businesses or activities or which could not be gathered or obtained without expenditure of time, effort and money; and (4) All inventions and ideas which are derived from or relate to Executive's access to or knowledge of any of the above enumerated materials and information. The Confidential Information shall not include any materials or information of the types specified above to the extent that such materials or information are publicly known or generally utilized by others engaged in the same business or activities in the course of which the Company, its predecessors or its subsidiaries utilized, developed or otherwise acquired such information or materials and which Executive has gathered or obtained from such other public sources by his own (other than on behalf of the Company, its predecessors or subsidiaries) expenditure of time, effort and money. Failure to mark any of the Confidential Informa- tion as confidential shall not affect its status as part of the Confidential Information under the terms of this Agreement. 3.02 Ownership of Confidential Information. Executive agrees that the Confidential Information is and shall at all times remain the sole and exclusive property of Company. Executive agrees to disclose immediately to Company all Confidential Information developed in whole or part by him during the term of his employment with Company under this Agreement or any prior or subsequent agreement (oral or written) and to assign to Company any right, title or interest he may have in such Confidential Information. Without limiting the generality of the foregoing, every invention, improvement, product, process, apparatus, or design which Executive may take, make, devise or conceive, individually or jointly with others, during the period of his employment by the Company under this Agreement or any prior or subsequent agreement (oral or written), whether during business hours or otherwise, which relates in any manner to the business of the Company either now or at any time during the period of his employment), or which may be related to the Company in connection with its business (hereinafter collectively referred to as "Invention") shall belong to and be the exclusive property of the Company and Executive will make full and prompt disclosure to the Company of every Invention. Executive will assign to the Company, or its nominee, every Invention and Executive will execute all assignments and other instruments or documents and do all other things necessary and proper to confirm the Company's right and title in and to every Invention; and Executive will perform all proper acts within his power necessary or desired by the Company to obtain letters patent or copyright or other registration in the name of the Company (at the Company's expense) for every Invention in whatever countries the Company may desire, without payment by the Company to Executive of any royalty, license fee, price or additional compensation. 3.03. Non Disclosure of Confidential Information. Except as required in the faithful performance of Executive's duties hereunder (or as required by law), during the term of his employment with Company under this Agreement or any prior or subsequent agreement (oral or written) and for a period after the termination of such employment until the Confidential Information no longer meets the definition set forth above of Confidential Information with respect to Executive, Executive agrees not to directly or indirectly reveal, report, publish, disseminate, disclose or transfer any of the Confidential Information to any person or entity, or utilize for himself or any other person or entity any of the Confidential Information for any purpose (including, without limitation, in the solicitation of existing Company customers or suppliers), except in the course of performing duties assigned to him by Company. Executive further agrees to use his best endeavors to prevent the use for himself or others, or dissemination, publication, revealing, reporting or disclosure of, any Confidential Information. 3.04 Protection of Reputation. Executive agrees that he will at no time, either during his employment with the Company under this Agreement or any prior or subsequent agreement (oral or written) or at any time after termination of such employment, engage in conduct which injures, harms, corrupts, demeans, defames, disparages, libels, slanders, destroys or diminishes in any way the reputation or goodwill of the Company, its subsidiaries, or their respective shareholders, directors, officers, employees, or agents, or the services provided by the Company or the products sold by the Company, or its other properties or assets, including, without limitation, its computer systems hardware and software and its data or the integrity and accuracy thereof. 3.05 Records and Use of Company Facilities. All notes, data, reference materials, memoranda and records, including, without limitation, data on the Company's computer system, computer reports, products, customers and suppliers lists and copies of invoices, in any way relating to any of the Confidential Information or Company's business, all records relating to the Company's or any subsidiary's operations, investigations, and business, and any notes with respect to such records, made or received by Executive in connection with his employment under this Agreement or any prior or subsequent agreement (oral or written) , and all copies of such records or notes made by, for, or with the consent of Executive, are and shall be the Company's property exclusively, and Executive agrees to maintain them in a manner so as to secure their confidentiality and to turn over to Company all copies of such materials (in whole or in part) in his possession or control at the request of Company or, in the absence of such a request, upon the termination of Executive's employment with Company. Upon termination of Executive's employment with Company, Executive shall immediately refrain from seeking access to Company's (a) telephonic voice mail, E-mail or message systems, (b) computer system and (c) computer data bases and software. The foregoing shall not prohibit Executive from using Company's public Internet (not Intranet) site. ARTICLE FOUR NON-COMPETE AND NON-SOLICITATION COVENANTS 4.01 Non-Competition and Non-Solicitation. Executive acknowledges that it may be very difficult for him to avoid using or disclosing the Confidential Information in violation of Article Three above in the event that he is employed by any person or entity other than the Company in a capacity similar or related to the capacity in which he is employed by the Company. Accordingly for that reason, as well as independently thereof, Executive agrees that he will not, during the term of employment with Company under this or any subsequent agreement (oral or written) and for a period of two (2) years after the termination of such employment, irrespective of the time, manner or cause of such termination (except that if Executive's termination of employment is involuntary then the period of restriction shall be for one year after the end of the period for which the Company has paid compensation to Executive, or if Executive's termination of employment is by Executive because, and Company has not, provided the capital investment called for by the agreed to annual Business Plan, then the restriction shall terminate on the date of termination of employment), directly or indirectly (whether or not for compensation or profit): (1) Engage in any business or enterprise the nature of which is directly competitive with that of the Company, including, without limitation, a business or enterprise engaged primarily in the business of distributing closed circuit television security systems and fire or burglar alarm systems, and parts, components or services for such systems in the territories served by the Company's Security Systems Division and in the channels and to the customers served by such Division, or manufacturing of such products if also engaged in distribution thereof such as, Ultrak, any Pittway company and any DSC/Tried company, (a "Prohibited Business"); or (2) Participate as an officer, director, creditor, promoter, proprietor, associate, agent, employee, partner, consultant, sales representative or otherwise, or promote or assist, financially or otherwise, or directly or indirectly own any interest in any person or entity involved in any Prohibited Business; or (3) Canvas, call upon, solicit, entice, persuade, induce, respond to, or otherwise deal with, directly or indirectly, any individual or entity which, during Executive's term of employment with the Company under this or any subsequent agreement (oral or written), was or is a customer or supplier, or proposed customer or supplier, of the Company, for the following: (a) to purchase (with respect to customers) or sell (with respect to suppliers) products of the types or kinds sold by the Company or which could be substituted for (including, but not limited to, rebuilt products), or which serve the same purpose or function as, products sold by the Company (all of which products are herein sometimes referred to, jointly and severally, as "Prohibited Products"), or (b) to request or advise any such customer or supplier to withdraw, curtail or cancel its business with the Company; or (4) For himself or for or through any other individual or entity call upon, solicit, entice, persuade, induce or offer any individual who, during Executive's term of employment with the Company under this or any subsequent agreement (oral or written), was an employee or sales representative or distributor of the Company, employment by, or representation as sales agent or distributor for, any one other than the Company, or request or advise any such employee or sales agent or distributor to cease employment with or representation of the Company, and Executive shall not approach, respond to, or otherwise deal with any such employee or sales representative or distributor of Company for any such purpose, or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity. Notwithstanding the foregoing, Executive may hire former employees of the Company, subject to any confidentiality and non-competition or other obligations any such employee may have to the Company, at any time after that date which is (i) one (1) year after the date of such former employee's date of termination of employment with the Company if the termination was voluntary on the part of the employee, or (ii) the date of such former employee's date of termination of employment with the Company if the termination was involuntary on the part of the employee. 4.02 Obligation independent Each obligation of each subparagraph and provision of Section 4.01 shall be independent of any obligation under any other subparagraph or provision hereof or thereof. 4.03 Public Stock Nothing in Section 4.01, however, shall prohibit Executive from owning (directly or indirectly through a parent, spouse, child or other relative or person living in the same household with Executive or any of the foregoing), as a passive investment, up to 1% of the issued and outstanding shares of any class of stock of any publicly traded company. 4.04 Business Limitation If, at the termination of Executive's employment under this or any subsequent agreement (oral or written) and for the entire period of twelve (12) months prior thereto his duties and responsibilities are limited by the Company so that he is specifically assigned to, or responsible for, one or more divisions, subsidiaries or business units of the Company, then subparagraphs (1) through (3) of Section 4.01 shall apply only to any business or products which compete with the business or products of such divisions, subsidiaries or business units. 4.05 Area Limitation If at the termination of Executive's employment under this or any subsequent agreement (oral or written) and for the entire period of twelve (12) months prior thereto he has responsibility for only a designated geographic area, then subparagraphs (1) through (3) of Section 4.01 shall apply only within such area. 4.06 Permitted Activity For purpose of further clarification it is agreed that Executive may be employed by an entity who or which is (a) only a manufacturer of a Prohibited Product so long as such manufacturer does not also act as a distributor, such as, Ultrak, any Pittway company or any DSC/Tried company, or (b) a dealer in Prohibited Products so long as such dealer does not also act as a distributor; provided that in such activity Executive does not violate the other provisions of this Article Four in his activities for such an employer except that in his activities on behalf of a security dealer he may contact and purchase product from the Company's suppliers. ARTICLE FIVE TERMINATION 5.01 Termination of Executive for Cause. The Company shall have the right to terminate Executive's employment at any time for "cause." Prior to such termination, the Company shall provide Executive with written notification of any and all allegations constituting "cause" and the Executive shall be given five (5) working days after receipt of such written notification to respond to those allegations in writing. Upon receipt of the Executive's response, the Company shall meet with the Executive to discuss the allegations, but, thereafter, Company may take such action as it deems appropriate, including, termination of employment. For purposes hereof, "cause" shall mean (i) an act or acts of personal dishonesty taken by the Executive and intended to result in personal enrichment of the Executive, (ii) material violations by the Executive of the Executive's obligations or duties under, or any terms of, this Agreement, which are not remedied in a reasonable period (not to exceed ten (10) days) after receipt of written notice thereof from the Company, (iii) any violation by the Executive of any of the provisions of Articles Three, or Four, (iv) Executive commits or is arrested for, charged with, indicted for or convicted (by trial, guilty or no contest plea or otherwise) of (a) a felony, (b) any other crime involving moral turpitude, (c) any violation of law which would impair the ability of the Company or any affiliate to obtain any license or authority to do any business deemed necessary or desirable for the conduct of its actual or proposed business, or (d) any other criminal activity or conduct in violation of the Company's Code of Conduct which, in the good faith opinion of the Company, would impair the Executive's ability to perform his duties hereunder or would impair the business or reputation of the Company, (v) the Security Systems Division of the Company (or the successor entity to such business) fails in any fiscal year to meet the earnings goal therefor as set forth in the Business Plan for such fiscal year, or (vi) Executive commits an act, or omits to take action, in bad faith or in detriment of the Company. 5.02 Termination of Executive Because of Executive's Disability, Injury or Illness. The Company shall have the right to terminate Executive's employment if Executive is unable to perform the duties assigned to him by the Company because of Executive's disability, injury or illness, provided however, such inability must have existed for a total of one hundred eighty (180) consecutive days before such termination can be made effective. Any compensation Executive receives under any disability benefit plan provided by Company during any period of disability, injury or illness shall be in lieu of the compensation which Executive would otherwise receive under Article Two during such period of disability, injury or sickness. 5.03 Termination as a Result of Executive's Death. The obligations of the Company to Executive pursuant to this Agreement shall automatically terminate upon Executive's death. 5.04 Termination of Executive for any Other Reason. The Company shall have the right to terminate Executive's employment at any time at will without cause or reason as specified in Section 1.02 above on prior written notice to Executive as therein specified. 5.05 Termination by Executive. Executive may terminate his employment by the Company at any time by written notice to Company as specified in Section 1.02 above. 5.06 Compensation on Termination. If Executive's employment is terminated by the Company for any reason set forth in Sections 5.01, 5.02 or 5.03 above, the Company's obligation to pay Executive's Salary and bonus pursuant to the Annual Incentive Plan for the year in which such termination occurs shall cease on the date on which the termination of employment occurs and shall be prorated and accrued to the date of termination. In such case Executive shall not be entitled to receive, unless otherwise required by law, any subsequent Other Benefits. If Executive's employment is terminated as set forth in Sections 5.04 or 5.05, subject to its rights as specified in Section 1.02, the Company shall be obligated to continue to pay to Executive his then current Salary and Other Benefits accrued up to and including the date on which Executive's employment is so terminated. The Special Bonus provided for in Section 2.03 will be payable on the dates provided in Section 2.03 regardless if termination occurs through Section 5.01. 5.02, 5.03, 5.04 or 5.05. ARTICLE SIX REMEDIES 6.01 Executive acknowledges that the restrictions contained in this Agreement will not prevent him from obtaining such other gainful employment he may desire to obtain or cause him any undue hardship and are reasonable and necessary in order to protect the legitimate interests of Company and that violation thereof would result in irreparable injury to Company. Executive therefor acknowledges and agrees that in the event of a breach or threatened breach by Executive of the provisions of Article Three or Article Four or Section 1.04, Company shall be entitled to an injunction restraining Executive from such breach or threatened breach and Executive shall lose all rights to receive any payments under Section 5.06. Nothing herein shall be construed as prohibiting or limiting Company from pursuing any other remedies available to Company for such breach or threatened breach, the rights hereinabove mentioned being in addition to and not in substitution of such other rights and remedies. The period of restriction specified in Article Four shall abate during the time of any violation thereof, and the portion of such period remaining at the commencement of the violation shall not begin to run until the violation is cured. 6.02 Survival. The provisions of this Article Six and of Articles Three and Four shall survive the termination or expiration of this Agreement. ARTICLE SEVEN MISCELLANEOUS 7.01 Assignment. Executive and Company acknowledge and agree that the covenants, terms and provisions contained in this Agreement constitute a personal employment contract and the rights and obligations of the parties thereunder cannot be transferred, sold, assigned, pledged or hypothecated, excepting that the rights and obligations of the Company under this Agreement may be assigned or transferred pursuant to a sale of the business of the Company's Security Systems Division, merger, consolidation, share exchange, sale of substantially all of the Company's assets of its Security Systems Division, or other reorganization described in Section 368 of the Code, or through liquidation, dissolution or otherwise, whether or not the Company is the continuing entity, provided that the assignee, or transferee is the successor to all or substantially all of the assets of the Company's Security Systems Division and such assignee or transferee assumes the rights and duties of the Company, if any, as contained in this Agreement, either contractually or as a matter of law. 7.02 Severability. Should any of Executive's obligations under this Agreement or the application of the terms or provisions of this Agreement to any person or circumstances, to any extent, be found illegal, invalid or unenforceable in any respect, such illegality, invalidity or unenforceability shall not affect the other provisions of this Agreement, all of which shall remain enforceable in accordance with their terms, or the application of such terms or provisions to persons or circumstances other than those to which it is held illegal, invalid or unenforceable. Despite the preceding sentence, should any of Executive's obligations under this Agreement be found illegal, invalid or unenforceable because it is too broad with respect to duration, geographical or other scope, or subject matter, such obligation shall be deemed and construed to be reduced to the maximum duration, geographical or other scope, and subject matter allowable under applicable law. The covenants of Executive in Articles Three and Four and each subparagraph of Section 4.01 are of the essence of this Agreement; they shall be construed as independent of any other provision of this Agreement; and the existence of any claim or cause of action of Executive against the Company, whether predicated on the Agreement or otherwise shall not constitute a defense to enforcement by the Company of any of these covenants. The covenants of Executive shall be applicable irrespective of whether termination of employment hereunder shall be by the Company or by Executive, whether voluntary or involuntary, or whether for cause or without cause. 7.03 Notices. Any notice, request or other communication required to be given pursuant to the provisions hereof shall be in writing and shall be deemed to have been given when delivered in person or three (3) days after being deposited in the United States mail, certified or registered, postage prepaid, return receipt requested and addressed to the party at its or his last known addresses. The address of any party may be changed by notice in writing to the other parties duly served in accordance herewith. 7.04 Waiver. The waiver by the Company or Executive of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition hereof. Failure by any party to claim any breach or violation of any provision of this Agreement shall not constitute a precedent or be construed as a waiver of any subsequent breaches hereof. 7.05 Continuing Obligation. The obligations, duties and liabilities of Executive pursuant to Articles Three and Four of this Agreement are continuing, absolute and unconditional and shall remain in full force and effect as provided herein and survive the termination of this Agreement. 7.06 Intentionally Blank 7.07 Attorneys Fees. In the event that Executive or Company has been found to have violated any of the terms of Articles Three or Four of this Agreement either after a preliminary injunction hearing or a trial on the merits or otherwise, the losing party shall pay the prevailing party's costs and expenses, including attorneys fees, in enforcing the terms of Articles Three or Four of this Agreement. 7.08 Advise New Companies. During Executive's employment with the Company and for two (2) years thereafter, Executive will communicate the contents of Articles Three and Four to any individual or entity which Executive intends to be employed by, associated with, or represent which is engaged in a business which is competitive to the business of Company. 7.09 Captions. The captions of Articles and Sections this Agreement are inserted for convenience only and are not to be construed as forming a part of this Agreement. 7.10 Entire Agreement. This Agreement supersedes any and all other agreements, written or oral, between the parties hereto with respect to the employment of Executive by the Company and contains all of the covenants and agreements between the parties with respect to such employment. Each party acknowledges that no representations, inducements, promises, or agreements, written, oral or otherwise, have been made by any party, or anyone acting or purporting to act on behalf of any party, which are not embodied herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid and binding. 7.11 Modifications. This Agreement shall not be subject to change, modification, or discharge, in whole or in part, except by written instrument signed by the parties; provided, however, that if any of the terms, provisions or restrictions of Articles Three or Four are held to be in any respect unreasonable restrictions upon Executive, then the court so holding shall reduce the territory to which it pertains and/or the period of time in which it operates or effect any other change to the extent necessary to render any of said terms, provisions or restrictions enforceable. EXECUTIVE ACKNOWLEDGES THAT HE OR SHE HAS READ AND FULLY UNDERSTANDS EACH AND EVERY PROVISION OF THE FOREGOING AND DOES HEREBY ACCEPT AND AGREE TO THE SAME. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. Executive Company /s/ Flint Cooper /s/ Edward J. Richardson Title: Chairman EX-10.Y1 4 EXHIBIT 10(y)(1) CHUBB Executive Protection Policy Endorsement Coverage Section: General Terms Company: Federal Insurance Company Effective date of this endorsement: May 31, 1997 Endorsement No. 2 To be attached to and form part of Policy Number 8125-64-60E Issued to: Richardson Electronics, Ltd. It is agreed that coverage is continued under this policy and that Item 2 of the Declarations is amended in its entirety to read as follows: Policy Period: From 12:01 A.M. on MAY 31, 1997 To 12:01 A.M. MAY 31, 1998 Local time at the address shown in Item 1. All other terms and conditions remain unchanged. /s/ John S. Bain Authorized Representative Date: July 8, 1997 Coverage Section: Executive Liability Company: Federal Insurance Company Effective date of this endorsement: May 31, 1997 Endorsement No. 8 To be attached to and form part of Policy No. 8125-64-60E Issued to: Richardson Electronics, Ltd. It is agreed that: 1. The following is added to this coverage section: Investigative Costs Coverage Insuring Clause 4 The Company shall pay on behalf of the Insured Organization all Investigation Costs which such Insured Organization becomes legally obligated to pay on account of any Shareholder Derivative Demand first made during the Policy Period or, if exercised, the Extended Reporting Period, for Wrongful Act committed or attempted, by an Insured Person before or during the Policy Period. 2. Subsection 5 Exclusions Applicable to Insuring Clauses 1 and 2, is amended by deleting the subsection heading in its entirety and inserting the following: Exclusions Applicable to Insuring Clauses 1, 2 and 4 3. Subsection 8, Limit of Liability, Deductible and Coinsurance, is amended as follows: a. The following is added to paragraph two: The Company's maximum liability for all Investigative Costs covered under Insuring Clause 4 on account of all Shareholder Derivative Demands first made during the same Policy Period shall be $250,000. This is a sublimit which further limits and does not increase the Company's maximum liability under this coverage section as set forth in Item 2(B) of the Declarations for this coverage section. b. The following is added to paragraph three: No deductible account shall apply to Investigative Costs covered under Insuring Clause 4. 4. Subsection 11, Defense and Settlement, is amended for purposes of coverage under Insuring Clause 4 by deleting the first paragraph in its entirety and inserting the following: Subject to this subsection, it shall be the duty of the Insured Organization and not the duty of the Company to investigate and evaluate any Shareholder Derivative Demand. 5. Subsection 18, Definitions, is amended by adding the following: Investigation Costs means reasonable costs, charges, fees (including but not limited to attorneys' fees and experts' fees) and expenses (other than regular or overtime wages, salaries or fees of the directors, officers or employee of the Insured Organization) incurred by the Insured Organization (including its board of directors) in connection with the investigation or evaluation of any Shareholder Derivative Demand. Shareholder Derivative Demand means any written demand, by one or more shareholders of an Insured Organization, upon the board of the directors of such Insured Organization, to bring a civil proceeding in a court of law against any Insured Person for a Wrongful Act committed attempted or allegedly committed or attempted by an Insured Person before or during the Policy Period. 6. For purposes of coverage under Insuring Clause 4 only, a. all references in this coverage section to Loss or Defense Costs shall only mean Investigative Costs; and b. all references in this coverage section to Claim or to Claim against any Insured Person shall only mean any Shareholder Derivative Demand. All other terms and conditions remain unchanged. /s/ John S. Bain Authorized Representative Date: July 8, 1997 Coverage Section: Executive Liability Company: Federal Insurance Company Effective date of this endorsement: May 31, 1997 Endorsement No. 9 To be attached to and form part of Policy No. 8125-64-60E Issued to: Richardson Electronics, Ltd. It is agreed that the Deductible Amount specified in Item 4 of the Declarations is decreased as follows: Insuring Clause 2 From: $500,000 To: $250,000 Provided, however, that the decreased deductible shall apply only to Claims first made against the Insured on or after the effective date of this endorsement. All other terms and conditions remain unchanged: /s/ John S. Bain Authorized Representative Date: July 8, 1997 EX-10.Y2 5 EXHIBIT 10(y)(2) IMPORTANT NOTE: THIS IS CLAIMS MADE COVERAGE. PLEASE READ THIS POLICY CAREFULLY. THIS POLICY, SUBJECT TO THE DECLARATIONS, INSURING AGREEMENTS, TERMS, CONDITIONS, LIMITATIONS AND AMENDMENTS, APPLIES ONLY TO CLAIM OR CLAIMS THAT ARE FIRST MADE AGAINST THE INSURED(S) AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR DISCOVERY PERIOD (IF APPLICABLE). THE LIMIT OF LIABILITY AVAILABLE TO PAY JUDGMENTS OR SETTLEMENTS SHALL BE REDUCED AND MAY BE EXHAUSTED BY AMOUNTS INCURRED FOR DEFENSE COSTS, CHARGES AND EXPENSES. THE RETENTION(S) APPLY(IES) TO DEFENSE COSTS, CHARGES AND EXPENSES. ST. PAUL MERCURY INSURANCE COMPANY St. Paul, Minnesota 55102 A Capital Stock Company Herein Called the Insurer EXCESS DIRECTORS AND OFFICERS LIABILITY AND CORPORATE INDEMNIFICATION POLICY DECLARATIONS Item 1. Named Insured: The Directors and Officers of Richardson Electronics, Ltd. Item 2. Address (No., Street, City, State and Zip Code) 40W267 Keslinger Road LaFox, IL 60147 Item 3. Policy Period From 5/31/97 To 05-31-98 (12:01 A.M. Standard Time at the address stated in Item 2.) Item 4. Limit of Liability $15,000,000. each Policy Period and this shall be the combined Limit of Liability for both Insuring Agreements A and B. The Limit of Liability available to pay judgments or settlements shall be reduced and may be exhausted by amounts incurred for Defense Costs, Charges and Expenses. Item 5. Retentions (Applicable to Section 2(B)(2)) $250,000. Corporate Indemnification Each Loss $ 0 Each Insured Each Loss $ 0 Aggregate All Insureds Each Loss Item 6. Premium $ 72,000 Item 7. Schedule of Underlying Insurer(s) (A) 1. Underlying Insurer: Federal Insurance Company 2. Policy Number: 8125-64-60 3. Policy Period: From: 05-31-97 To: 05-31-98 4. Limit of Liability: $15,000,000. 5. Retentions: $250,000 Corporate Indemnification Each Loss $ 0 Each Insured Each Loss $ 0 Aggregate All Insureds Each Loss (B) 1. Underlying Insurer: Not Applicable 2. Policy Number: 3. Policy Period: From: To: 4. Limit of Liability: $ (C) 1. Underlying Insurer: Not Applicable 2. Policy Number: 3. Policy Period: From: To: 4. Limit of Liability: $ (D) 1. Underlying Insurer: Not Applicable 2. Policy Number: 3. Policy Period: From: To: 4. Limit of Liability: $ (E) Total amount of Underlying Limit of Liability $15,000,000 and any retentions or deductibles as applicable under the policy(ies) as stated in this Item 7. Item 8. Subject to the Terms, Conditions and Limitations of this policy as hereinafter provided, this policy follows the form of: Insurer's Name: Federal Insurance Company Policy Number: 8125-64-60 Item 9. Forms Attached 1) St. Paul Mercury Insurance Company Policy, Form #50408. 2) Endorsements one through four. 3) St.Paul Mercury Insurance Company Application, Form # 50264. James C. Styer Authorized Representative Countersignature Date 9/26/97 Countersigned At Chicago, IL INSURING CLAUSE In consideration of the payment of the premium, in reliance upon the statements made to the Insurer by application including its attachments, a copy of which is attached to and forms a part of this policy, and any material submitted therewith (which shall be retained on file by the Insurer and be deemed attached hereto), and except as hereinafter otherwise provided or amended, this policy is subject to the same Insuring Agreement(s), Terms, Conditions and Limitations as provided by the policy stated in Item 8 of the Declarations and any amendments thereto, provided: A. 1. the Insurer has received prior written notice from the Insured(s) of any amendments to the policy stated in Item 8 of the Declarations, and 2. the Insurer has given to the Insured(s) its written consent to any amendments to the policy stated in Item 8 of the Declarations. and 3. the Insured has paid any required additional premium. B. This policy is not subject to the same premium or the amount and Limit of Liability of the policy stated in Item 8 of the Declarations. TERMS, CONDITIONS AND LIMITATIONS Section 1. UNDERLYING INSURANCE A. It is a condition precedent to the Insured(s) rights under this policy that the Insured(s) notify the Insurer, as soon as practicable in writing, of a failure to maintain in full force and effect, except as provided for under Section 2(B), and without alteration of any Terms, Conditions, Limit of Liability or Retentions, any of the underlying insurance policies as stated in Item 7 of the Declarations. B. Failure to maintain, as set forth above, any of the underlying insurance policies as stated in Item 7 of the Declarations, except as provided for under Section 2(B), shall not invalidate this policy, but the liability of the Insurer for loss under this policy shall apply only to the same extent it would have been liable had the underlying insurance policies been maintained as set forth above. In no event shall the Insurer be liable to pay loss under this policy until the total amount of the Underlying Limit of Liability, as stated in Item 7(E) of the Declarations, has been paid solely by reason of the payment of loss. Section 2. LIMIT OF LIABILITY A. The Insurer shall only be liable to make payment under this policy after the total amount of the Underlying Limit of Liability as stated in Item 7(E) of the Declarations has been paid solely by reason of the payment of loss. B. In the event of the reduction or exhaustion of the total amount of the Underlying Limit of Liability as stated in Item 7(E) of the Declarations solely by reason of the payment of loss, this policy shall: 1. in the event of such reduction pay excess of the reduced amount of the Underlying Limit of Liability but not to exceed the amount stated in Item 4 of the Declarations, or 2. in the event of exhaustion continue in force provided always that this policy shall only pay the excess over the Retention amount stated in Item 5 of the Declarations as respects each and every loss hereunder, but not to exceed the amount stated in Item 4 of the Declarations. C. The Insurers' liability for loss subject to paragraphs (A) and (B) above shall be the amount stated in Item 4 of the Declarations which shall be the maximum liability of the Insurer in the Policy Period stated in Item 3 of the Declarations. The Limit of Liability of the Insurer for the Discovery Period, if elected, shall be part of, and not in addition to, the Limit of Liability as stated in Item 4 of the Declarations. Section 3. LOSS PROVISIONS The Insured(s) shall as a condition precedent to the right to be indemnified under this policy give to the Insurer notice in writing, as soon as practicable and during the Policy Period or during the Discovery Period, if effective, of any claim made against the Insured(s). Section 4. NOTICE Notice hereunder shall be given to St. Paul Mercury Insurance Company, 385 Washington Street, St. Paul, MN 55102. Section 5. CANCELLATION This policy may be cancelled by the Corporation at any time by mailing written notice to the Insurer at the address shown in Section 4 stating when thereafter such cancellation shall be effective or by surrender of this policy to the Insurer or its authorized agent. This policy may also be cancelled by or on behalf of the Insurer by delivering to the Corporation or by mailing to the Corporation by registered, certified, or other first class mail, at the Corporation's address as shown in Item 2 of the Declarations, written notice stating when, not less than sixty (60) days thereafter, the cancellation shall be effective. The mailing of such notice as aforesaid shall be sufficient proof of notice. The Policy Period terminates at the date and hour specified in such notice, or at the date and time of surrender. If the period of limitation relating to the giving of notice is prohibited or made void by any law controlling the construction thereof, such period shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law. Section 6. DISCOVERY PERIOD If the Insurer shall cancel or refuse to renew (refusal to renew is hereafter referred to as non-renewal) this policy, the Corporation or the Insureds shall have the right, upon payment of the additional premium of 75% of the premium hereunder, to an extension of the cover granted by this policy to report any claim or claims in accordance with Section 3, which claim or claims are made against the Insureds during the period of twelve (12) months after the effective date of cancellation or non-renewal, herein called the Discovery Period, but only for any Wrongful Act committed before the effective date of such cancellation or non-renewal and otherwise covered by this policy. This right shall terminate, however, unless the Corporation or the Insureds provide written notice of such election together with the payment of the additional premium due and this is received by the Insurer at the address shown in Section 4 within ten (10) days after the effective date of cancellation or non-renewal. Discovery Period wherever used in this policy shall also mean optional extension period or extended reporting period as defined by the policy stated in Item 8 of the Declarations. The offer by the Insurer of renewal terms, conditions, limits of liability and/or premiums different from those of the expiring policy shall not constitute non-renewal. The provisions of this Section 6 and the rights granted herein to the Corporation or the Insureds shall not apply to any cancellation resulting from non-payment of premium. Section 7. NUCLEAR ENERGY LIABILITY EXCLUSION It is agreed that: A. This policy does not apply: 1. Under any Liability Coverage, to bodily injury or property damage a. with respect to which an Insured under this policy is also an Insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability; or b. resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the Insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or an agency thereof, under any agreement entered into by the United States of America, or any agency thereof with any person or organization. 2. Under any Medical Payments coverage, or under any Supplementary Payments provision relating to first aid, to expenses incurred with respects to bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. 3. Under any Liability Coverage, to bodily injury or property damage resulting from the hazardous properties of nuclear material, if a. the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of an Insured or (2) has been discharged or dispersed therefrom; b. the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an Insured, or c. the bodily injury or property damage arises out of the furnishing by an Insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to property damage to such nuclear facility and any property thereat. B. As used in this exclusion: "hazardous properties" include radioactive, toxic or explosive properties; "nuclear material" means source material, special nuclear material or by-product material; "source material," "special nuclear material," and by-product material have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "spent fuel" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "waste" means any waste material (1) containing by-product material and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (1) or (2) thereof; "nuclear facility" means (1) any nuclear reactor, (2) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (3) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the Insured and the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (4) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, and operations conducted on such site and all premises used for such operations; "nuclear reactor" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain critical mass of fissionable material, "property damage" includes all forms of radioactive contamination of property. Section 8. ACTION AGAINST THE INSURER No action shall lie against the Insurer unless, as a condition precedent thereto, there shall have been full compliance with all of the terms of this policy, nor until the amount of the Corporation's obligation to pay and/or the Insureds' obligation to pay have been finally determined either by judgment against the Insureds after actual trial or by written agreement of the Corporation and/or the Insureds, the claimant and the Insurer. Any person or organization or the legal representative thereof who has secured such judgment or written agreement shall thereafter be entitled to recover under this policy to the extent of the insurance afforded by this policy. No person or organization shall have any right under this policy to join the Insurer as a party to any action against the Corporation and/or Insureds to determine the Insureds' liability, nor shall the Insurer be impleaded by the Corporation and/or Insureds or their legal representatives. Bankruptcy or insolvency of the Corporation or the Corporation's estate, or bankruptcy or insolvency of the Insureds or the Insureds' estate shall not relieve the Insurer of any of its obligations hereunder. IN WITNESS WHEREOF, the Insurer designated on the Declarations page has caused this policy to be signed by its President and Secretary and countersigned on the Declarations page by a duly authorized representative of the Insurer. /s/ Paul D. Ziccarelli /s/ D. Leatherdale Secretary President ENDORSEMENT #1 ATTACHED TO AND FORMING PART OF POLICY NO. 900DX0414 ILLINOIS AMENDATORY ENDORSEMENT M1137 Ed. 6-90 In Consideration of the premium charged, it is hereby understood and agreed that: 1. The first paragraph under Section 5. CANCELLATION is hereby deleted in its entirety and substituted with the following: This policy may be cancelled by the Corporation at any time by mailing written notice to the Insurer at the address shown in Section 4 stating when thereafter such cancellation shall be effective or by surrender of this policy to the Insurer or its authorized agent. This policy may also be cancelled by or on behalf of the Insurer by mailing to the Corporation, by registered, certified or other first class mail, at the last mailing address known to the Insurer, written notice stating when, not less than sixty (60) days thereafter, the cancellation shall be effective. All such notices shall contain the specific reason(s) for cancellation. If this policy has been in effect for more than sixty (60) days, the cancellation must be for one of the following reasons: A. Nonpayment of premium; B. Misrepresentation or fraud made by or with the knowledge of the Corporation or the Insureds in obtaining the policy or in pursuing a claim under the policy; C. A violation by any Insured of any of the terms and conditions of the policy; D. A substantial increase in the risk originally assumed; E. Loss of reinsurance by the Insurer which provided coverage to the Insurer for a significant amount of the underlying risk insured. Certification of the loss of reinsurance must be given to the Director of Insurance. F. A determination by the Director of Insurance that the continuation of the policy would place the Insurer in violation of the insurance laws of the State of Illinois. It is further agreed that this policy may be non renewed by or on behalf of the Insurer by mailing written notice to the Corporation, by registered, certified, or other first class mail, at the last mailing address known to the Insurer. All such notices shall contain the specific reason(s) for non renewal. It is further agreed that non renewal of this policy will be effective sixty (60) days after receipt of the Insured of written notice from the Insurer of its desire to non renew this policy, or at the time and date set forth in the notice of non renewal, provided sixty (60) days notice has been given the Corporation prior to said date. 2. It is further understood and agreed that Section 6. DISCOVERY PERIOD is hereby deleted in its entirety and replaced with the following: If the Insurer or the Insured(s) shall cancel or refuse to renew (refusal to renew is hereafter referred to as non-renewal) this policy, the Corporation or the Insured(s) shall have the right, upon payment of the additional premium of seventy five percent (75%) of the expiring annual premium hereunder, to report any claim or claims in accordance with Section 3, which claim or claims are made against the Insured(s) during the period of twelve (12) months after the effective date of cancellation or non-renewal, herein called the Discovery Period, but only for any Wrongful Act committed before the effective date of such cancellation or non-renewal and otherwise covered by this policy. This right shall terminate, however, unless the Corporation or the Insured(s) provide written notice of such election together with the payment of the additional premium due and this is received by the Insurer at the address shown in Section 4 within thirty (30) days after the effective date of cancellation or non-renewal. The additional premium for the Discovery Period shall be fully earned at the inception of the Discovery Period. The Discovery Period is not cancelable. Nothing herein contained shall be held to vary, alter, waive or extend any of the terms, conditions, provisions, agreements or limitations of the above mentioned policy, other than as above stated. In Witness Whereof, the Company has caused this endorsement to be signed by a duly authorized representative of the Company. Authorized Representative ENDORSEMENT #2 ATTACHED TO AND FORMING PART OF POLICY NO. 900DX0414 PRIOR AND PENDING LITIGATION EXCLUSION M1150 Ed. 3-90 In consideration of the premium charged, it is hereby understood and agreed that the Insurer shall not be liable to make any payment for loss in connection with any claim or claims made against the Insured(s) arising from any prior or pending litigation as of 05-31-90, as well as all future claims or litigation based upon the pending or prior litigation or derived from the same or essentially the same facts (actual or alleged) that gave rise to the prior or pending litigation. Nothing herein contained shall be held to vary, alter, waive or extend any of the terms, conditions, provisions, agreements or limitations of the above mentioned policy, other than as above stated. In Witness Whereof, the Company has caused this endorsement to be signed by a duly authorized representative of the Company. Authorized Representative ENDORSEMENT #3 ATTACHED TO AND FORMING PART OF POLICY NO. 900DX0414 Specific Event Exclusion M1316 Ed. 12/92 In consideration of the premium charged, it is understood and agreed that the Insurer shall not be liable to make any payment for Loss in connection with any claim or claims made against the Insureds, based upon, arising out of, attributable to or in any way involving the following: 1. Panache Broadcasting of Pennsylvania, Inc. v. Richardson Electronics, Ltd.; Varian Associates, Inc.; and Varian Supply Company (Case No. 90 C 6400); or 2. A contract to supply tubes to the United States Government which was completed in 1989 as described in Note K - Litigation on page 23 of the Richardson Electronics, Ltd. 1994 Annual Report; or 3. Arius, Inc. v. Richardson Electronics, Ltd., Flint Cooper, William Alexander, Kevin Dutton (case number CI. 95-202 in the Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida) Nothing herein contained shall be held to vary, alter, waive or extend any of the terms, conditions, provisions, agreements or limitations of the above mentioned policy, other than as above stated. In Witness Whereof, the Company has caused this endorsement to be signed by a duly authorized representative of the Company. Authorized Representative ENDORSEMENT #4 ATTACHED TO AND FORMING PART OF POLICY NO. 900DX0414 REPORTED INCIDENTS EXCLUSION M1117 Ed. 3-90 In consideration of the premium charged, it is hereby understood and agreed that under this policy the Insurer shall not be liable to make any payment for Loss in connection with any claim or claims made against the Insured(s) arising from any circumstances of which notice has been given under any insurance in force prior to the inception date of this policy including any applicable discovery period. Nothing herein contained shall be held to vary, alter, waive or extend any of the terms, conditions, provisions, agreements or limitations of the above mentioned policy, other than as above stated. In Witness Whereof, the Company has caused this endorsement to be signed by a duly authorized representative of the Company. Authorized Representative EX-10.Y3 6 EXHIBIT 10(y)(3) CNA INSURANCE COMPANIES CNA Plaza. Chicago, IL 60685 DECLARATIONS EXCESS INSURANCE POLICY NOTICE THIS IS A "CLAIMS-MADE" POLICY AND, SUBJECT TO ITS PROVISIONS, APPLIES ONLY TO ANY CLAIM FIRST MADE AGAINST THE INSUREDS DURING THE POLICY PERIOD. NO COVERAGE EXISTS FOR ANY CLAIM FIRST MADE AFTER THE END OF THE POLICY PERIOD UNLESS, AND TO THE EXTENT, THE EXTENDED REPORTING PERIOD APPLIES. THE LIMIT OF LIABILITY SHALL BE REDUCED BY AMOUNTS INCURRED AS DEFENSE COSTS. ACCOUNT NUMBER 45386 COVERAGE PROVIDED BY CONTINENTAL CASUALTY COMPANY POLICY NUMBER DOX 600028634 AGENCY 910 701862 NAMED ENTITY AND PRINCIPAL ADDRESS Item 1. RICHARDSON ELECTRONICS, LTD. 40W267 KESLINGER RD. LAFOX, IL 60147 Attn: William J. Garry AGENT Mesirow Insurance Services, Inc. Ms. Robina K. Fisher 600 Central Ave., Ste. #390 Highland Park, IL 60035 Item 2. Policy Period: May 31, 1997 to May 31, 1998 12:01 a.m. Standard Time at the Principal Address stated in Item 1. Item 3. Limit of Liability (Inclusive of Defense Costs): $5,000,000 Maximum aggregate Limit of Liability for the Policy Period. Item 4. Schedule of Underlying Insurance: A. Primary Policy: Name of Carrier Federal Insurance Company Policy No. 8125-64-60E Limits $15,000,000 Deductible/Retention Amount 0/0/$250,000 B. Underlying Excess Policy(ies): Name of Carrier St. Paul Mercury Insurance Company Policy No. 900DX0414 Limits $15,000,000 Deductible/Retention Amount N/A Item 5. Policy Premium: $18,000 Item 6. Forms and Endorsements forming a part of this policy at inception: G-11713-A12, FIG-1005-A, FIG-1006-A, FIG-1014-A These Declarations along with the completed and signed Application and the Excess Insurance Policy, shall constitute the contract between the Insureds, the Named Entity, and the Insurer. Authorized Representative /s/ Juli Antoya Date: 2/23/98 Excess Insurance Policy In consideration of the payment of the premium and in reliance on all statements made and information furnished to Continental Casualty Company (hereinafter called the "Insurer"), and/or to the insurers of the Underlying Insurance, including the statements made in the Application made a part hereof and subject to all of the provisions of this Policy, the Insurer and the Insured agree as follows: I. INSURING AGREEMENT The Insurer shall provide the Insureds with excess coverage over the Underlying Insurance as set forth in Item 4 of the Declarations during the Policy Period set forth in Item 2 of the Declarations. Coverage hereunder shall attach only after all such Underlying Insurance has been exhausted by payments for losses and shall then apply in conformance with the same provisions of the Primary Policy at its inception, except for premium, limit of liability and as otherwise specifically set forth in the provisions of this Policy. II. POLICY DEFINITIONS Application shall mean the written application for this Policy, including any materials submitted therewith, which together shall be on file with the Insurer and deemed a part of and attached hereto as if physically attached to this Policy. Named Entity means the organization named in Item 1 of the Declarations. Insureds means those persons or organization(s) insured under the Primary Policy, at its inception. Policy Period means the period from the effective date and hour of this Policy as set forth in Item 2. of the Declarations, to the Policy expiration date and hour set forth in Item 2. of the Declarations, or its earlier cancellation date or termination date, if any. Primary Policy means the Policy scheduled in Item 4(a) of the Declarations. Underlying Insurance means all those Policies scheduled in Item 4 of the Declarations and any Policies replacing them. III. MAINTENANCE OF UNDERLYING INSURANCE All of the Underlying Insurance scheduled in Item 4 of the Declarations shall be maintained during the Policy Period in full effect, except for any reduction of the aggregate limit(s) of liability available under the Underlying Insurance solely by reason of payment of losses thereunder. Failure to comply with the foregoing shall not invalidate this Policy but the Insurer shall not be liable to a greater extent than if this condition had been complied with. To the extent that any Underlying Insurance is not maintained in full effect during the currency of this Policy Period, then the Insureds shall be deemed to have retained any loss for the amount of the limit of liability of any Underlying Insurance which is not maintained as set forth above. In the event of any actual or alleged (a) failure by the Insureds to give notice or to exercise any extensions under any Underlying Insurance or (b) misrepresentation or breach of warranties by any of the Insureds with respect to any Underlying Insurance, the Insurer shall not be liable hereunder to a greater extent than it would have been in the absence of such actual or alleged failure, misrepresentation or breach. It is further a condition of this Policy that the Insurer shall be notified in writing, as soon as practicable of cancellation and/or alteration of any provisions of any of the policies of Underlying Insurance. IV. LIMIT OF LIABILITY The amount set forth in Item 3 of the Declarations shall be the maximum aggregate Limit of Liability of the Insurer for the Policy Period. Costs of defense shall be part of and not in addition to the Limit of Liability in Item 3 of the Declarations, and such costs of defense shall reduce the Limit of Liability stated in Item 3 of the Declarations. V. DEPLETION OF UNDERLYING LIMIT(S) In the event of the depletion of the limit(s) of liability of the Underlying Insurance solely as the result of actual payment of losses thereunder by the applicable insurers, this Policy shall, subject to the Insurer's Limit of Liability and to the other terms of this Policy, continue to apply to losses as Excess Insurance over the amount of insurance remaining under such Underlying Insurance. In the event of the exhaustion of all of the limit(s) of liability of such Underlying Insurance solely as a result of payment of losses thereunder, the remaining limits available under this Policy shall, subject to the Insurer's Limit of Liability and to the other provisions of this Policy, continue for subsequent losses as primary insurance and any retention specified in the Primary Policy shall be imposed under this Policy as to each claim made; otherwise no retention shall be imposed under this Policy. This Policy only provides coverage excess of the Underlying Insurance. This Policy does not provide coverage for any loss not covered by the Underlying Insurance except and to the extent that such loss is not paid under the Underlying Insurance solely by reason of the reduction or exhaustion of the available Underlying Insurance through payments of loss thereunder. In the event the insurer of one or more of the Underlying Insurance policies fails to pay loss in connection with any claim covered under the Underlying Insurance as a result of the insolvency, bankruptcy, or liquidation of said insurer, then the Insureds hereunder shall be deemed to have retained any loss for the amount of the limit of liability of said insurer which is not paid as a result of such insolvency, bankruptcy or liquidation. If any Underlying Insurance bears an effective date which is prior to the effective date of this Policy and if any such insurance becomes exhausted or impaired by payment of loss with respect to any claim which, shall be deemed to be made prior to the effective date of this Policy, then with respect to any claim made after the effective date of this Policy, the Insureds shall be deemed to have retained any loss for the amount of any such Underlying Insurance which is exhausted or impaired by payment of loss with respect to such claim made prior to the effective date of this Policy. VI. CLAIM PARTICIPATION The Insured shall not admit liability, consent to any judgment against them, or agree to any settlement which is reasonably likely to involve the Limit of Liability of this Policy without the Insurer's consent, such consent not to be unreasonably withheld. The Insurer may, at its sole discretion, elect to participate in the investigation, settlement or defense of any claim against any of the Insureds for matters covered by this Policy even if the Underlying Insurance has not been exhausted. All provisions of the Underlying Insurance are considered as part of this Policy except that it shall be the duty of the Insureds and not the duty of the Insurer to defend any claims against any of the Insureds. VII. SUBROGATION - RECOVERIES In that this Policy is "Excess Coverage", the Insureds and the Insurer's right of recovery against any person or other entity may not be exclusively subrogated. Despite the foregoing, in the event of any payment under this Policy, the Insurer shall be subrogated to all the Insured's rights of recovery against any person or organization, and the Insureds shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. Any amounts recovered after payment of loss hereunder shall be apportioned in the inverse order of payment to the extent of actual payment. The expenses of all such recovery proceedings shall be apportioned in the ratio of respective recoveries. VIII. NOTICE The Insurer shall be given notice in writing as soon as is practicable in the event of (a) the cancellation of any Underlying Insurance and (b) any additional or return premiums charged or allowed in connection with any Underlying Insurance. Notice regarding (a) and (b) above shall be given to Manager, Directors and Officers Liability Underwriting, CNA Insurance Companies, CNA Plaza, Chicago, Illinois 60685. The Insurer shall be given notice as soon as practicable of any notice of claim or any situation that could give rise to a claim under any Underlying Insurance. Notice of any claim to the Insurer shall be given in writing to Manager, Professional Liability Claims, CNA Insurance Companies, CNA Plaza, Chicago, Illinois 60685. IX. COMPANY AUTHORIZATION CLAUSE By acceptance of this Policy, the Named Entity named in Item 1 of the Declarations agrees to act on behalf of all the Insureds with respect to the giving and receiving of notice of claim or cancellations, the payment of premiums and the receiving of any return premiums that may become due under this Policy and the Insureds agree that the Named Entity shall in all cases be authorized to act on their behalf. X. ALTERATION No change in or modification of this Policy shall be effective except when made by endorsement signed by an authorized employee of the Insurer or any of its agents relating to this Policy. XI. POLICY CANCELLATION This Policy may be cancelled by the Named Entity at any time by written notice or by surrender of this Policy to the Insurer. This Policy may also be cancelled by or on behalf of the Insurer by delivery to the Named Entity or by mailing to the Named Entity, by registered, certified or other first class mail, at the address shown in Item 1 of the Declarations, written notice stating when, not less than thirty (30) days thereafter, the cancellation shall become effective. The mailing of such notice as aforesaid shall be sufficient proof of notice and this Policy shall cancel at the date and hour specified in such notice. If the period of limitation relating to the giving of notice is prohibited or made void by any law controlling the construction thereof, such period shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law. The Insurer shall refund the unearned premium computed at less than pro-rata if the Policy is cancelled in its entirety by the Named Entity. Under any other circumstances the refund shall be computed pro rata. XII. EXCLUSIONS Notwithstanding any provisions of the Underlying Insurance, the Insurer shall not be liable to make payment for loss in connection with any claim based upon, arising out of, relating to, directly or indirectly resulting from, or in consequence of, or in any way involving: 1. nuclear reaction, radiation or contamination regardless of causes; 2. pollutants, including but not limited to loss arising out of any: a. request, demand or order that any of the Insureds or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants, or b. claim by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing or in any way responding to or assessing the effects of pollutants; Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed . XIII. CONDITIONS No action shall be taken against the Insurer unless, as a condition precedent, there shall have been full compliance with all the provisions of this Policy, nor until the amount of the Insureds obligation to pay shall have been finally determined either by final and nonappealable judgement against the Insureds after trial, or by written agreement of the Insureds, the claimant and the Insurer. D.W. Lowry, Secretary D.H. Chookasigian, Chairman of the Board State Provisions - Illinois Any cancellation or non-renewal provisions contained in the policy to which this endorsement is attached are deleted and replaced by the following: 1. Cancellation A. This policy can be cancelled by either the first named insured or the insurer. 1. The named insured can cancel this policy at any time by mailing advance written notice to the insurer stating when the cancellation is to be effective. 2. The insurer can cancel this policy by giving written notice to the named insured at least: a. 10 days, if cancellation is for non-payment of premium. However, the named insured may continue the coverage by payment in full at any time prior to the effective date of cancellation; b. 30 days, if cancellation is for any other reason provided that the policy has been in effect for 60 days or less; or c. 60 days, if the policy has been in effect for more than 60 days and cancellation is for any other reason as set forth below; before the effective date of cancellation. B. The insurer will mail notice to the named insured at the last mailing address known to the insurer, and a copy shall also be mailed to the named insured's agent. C. Notice of cancellation will state the effective date of cancellation. The policy will end on that date. The specific reason for such cancellation shall also be stated. D. Proof of mailing will be sufficient proof of notice. E. If this policy is cancelled, the insurer will send the first named insured any premium refund due. If the insurer cancels, the refund will be pro-rata. If the named insured cancels, the refund may be less than pro-rata. The cancellation will be effective even if the insurer has not made or offered a refund. If this policy has been in effect for more than 60 days, the insurer shall not terminate this policy except for one or more of the following conditions: 1. Non-payment of premium; 2. Material misrepresentation; 3. A material increase in the hazard insured against; 4. Violation of any terms or conditions of the policy by the named insured; 5. Substantial loss of reinsurance by the insurer affecting this particular type of insurance, certified to the insurance regulatory authority; 6. A determination by the insurance regulatory authority that continuation of the policy will place the insurer in violation of the insurance laws of the state. II. Non-Renewal If the insurer decides not to renew this policy, 60 days advance written notice shall be mailed to the named insured as the last known address. The notice shall include the specific reason for such non-renewal. If the insurer offers to renew this policy at terms which involve an increase in premium of 30% or more or changes in deductibles or coverage that materially alter the policy, such terms will take effect on the renewal date if the insurer has notified the named insured of the terms at least 60 days prior to the expiration date of this policy. This notice is to advice the named insured that should any complaints arise regarding this insurance, the named insured may contact the following: CNA Insurance Companies Attn: Consumer Affairs Department - 13S CNA Plaza Chicago, IL 60685 and/or Illinois Department of Insurance Consumer Division or Public Service Section Springfield, IL 62767 This endorsement, which forms a part of and is for attachment to the following described Policy issued by the designated Insurers takes effect on the effective date of said Policy, unless another effective date is shown below, at the hour stated in said Policy and expires concurrently with said Policy. Endt. No. 01 Policy No. 600028634 CNA Authorized Representative Prior Notice Exclusion In consideration of the premium paid for this policy, it is agreed that Section XII, Exclusions, is amended with the addition of the following: Any fact, circumstance, situation, transaction or event which constitutes the basis of notice of claim to the Insurer or any insurance carriers designated in Item 4 of the Declarations, prior to the inception date of this policy. All other provisions of the policy remain unchanged. This endorsement, which forms a part of and is for attachment to the following described Policy issued by the designated Insurers takes effect on the effective date of said Policy, unless another effective date is shown below, at the hour stated in said Policy and expires concurrently with said Policy. Endt. No. 02 Policy No. 600028634 CNA Authorized Representative Prior or Pending Litigation Exclusion In consideration of the premium paid for this policy, it is agreed that Section XII, is amended with the addition of the following: 3. Any fact, circumstance, situation, transaction or event underlying or alleged in any prior and/or pending litigation as of 5/31/91, regardless of the legal theory upon which such litigation is predicated. All other provisions of the policy remain unchanged. This endorsement, which forms a part of and is for attachment to the following described Policy issued by the designated Insurers takes effect on the effective date of said Policy, unless another effective date is shown below, at the hour stated in said Policy and expires concurrently with said Policy. Endt. No. 03 Policy No. 600028634 CNA Authorized Representative Inapplicability of Primary Policy Endorsement In consideration of the premium paid for this policy, it is agreed that for the coverage afforded under this policy endorsement number 8 to the Primary Policy shall not apply to this Policy. All other provisions of the policy remain unchanged. This endorsement, which forms a part of and is for attachment to the following described Policy issued by the designated Insurers takes effect on the effective date of said Policy, unless another effective date is shown below, at the hour stated in said Policy and expires concurrently with said Policy. Endt. No. 04 Policy No. 600028634 CNA Authorized Representative EX-21 7 Exhibit 21 SUBSIDIARIES OF RICHARDSON ELECTRONICS, LTD. Richardson Electronics Canada, Ltd. Canada Richardson Electronics (Europe) Ltd. United Kingdom RESA, SNC France Richardson Electronique SNC France Richardson Electronics Italy SRL Italy Richardson Electronics Iberica, S.A. Spain Richardson Electronics GmbH Germany Richardson Electronics Japan K.K. Japan Richardson Electronics Pte Ltd. Singapore Richardson Electronics S.A. de C.V. Mexico Richardson Electronics Benelux B.V. The Netherlands Richardson Electronics do Brasil Ltda. Brasil Richardson Electronics Pty Limited Australia Tubemaster, Inc. United States Richardson Electronics Korea Limited Korea Richardson Electronics (Thailand) Ltd. Thailand Burtek Systems Inc. Canada Richardson Electronics Argentina S.A. Argentina Eternal Graphics, Inc. United States EX-23 8 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Annual Report on Form 10-K for the year ended May 31, 1998 of Richardson Electronics, Ltd. of our report dated July 14, 1998, included in the 1998 Annual Report to Shareholders of Richardson Electronics, ltd. Our audit also included the financial statement schedule of Richardson Electronics, Ltd. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Post Effective Amendment Number 1 to Registration Statement Number 2- 89888 on Form S-8, Registration Statement Number 33-36475 on Form S-8, Registration Statement Number 33-54745 on Form S-8, Registration Statement Number 333-02865 on Form S-8, Registration Statement Number 333-03965 on Form S-8, Registration Statement Number 333-04071 on Form S-8, Registration Statement Number 333- 04457 on Form S-8, Registration Statement Number 333-04767 on Form S-8, Registration Statement Number 333-49005 on Form S-2 and Registration Statement Number 333-51513 on Form S-2, of our report dated July 14, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in the Annual Report on Form 10-K for the year ended May 31, 1998 of Richardson Electronics, Ltd. /s/ Ernst & Young Chicago, Illinois August 24, 1998 EX-27 9
5 1000 12-MOS MAY-31-1998 MAY-31-1998 8031 0 65661 2230 96443 177586 49795 (31318) 209700 28009 87427 0 0 561 91024 209700 304172 304172 217509 217509 0 431 8084 13936 4200 9736 0 0 0 9736 .79 .77
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