-----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, MqnkUzCKrRIkzzbgZq9m9Pc/ji0pIaVGaOGioie2+EoDTVK8aNGOSTgtdl/JBDZy mdGShJzoGg/blwZBadfdyA== 0000355948-99-000013.txt : 19990831 0000355948-99-000013.hdr.sgml : 19990831 ACCESSION NUMBER: 0000355948-99-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990830 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: 99702371 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, 1999 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 or organization) (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 26, 1999, there were outstanding 9,392,024 shares of Common Stock, $.05 par value, and 3,233,009 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 $64,100,000. (1) (Cover page continued) Portions of the 1999 Annual Report to Stockholders of registrant for fiscal year ended May 31, 1999 are incorporated in Parts I, II, and IV of this Report. Portions of the registrant's Proxy Statement dated September 3, 1999 for the Annual Meeting of Stockholders scheduled to be held October 12, 1999, 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. (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, security and medical imaging 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. Richardson uses this expertise to identify engineered solutions for customers' applications, not only in electron tube technology but in each product area 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 customers from electron tubes to newer technologies, primarily semiconductors. Sales of products other than electron tubes represented 62.6% of sales in the year ended May 31, 1999, compared to 46.7% five years ago. Maintain Superior Customer Service. The Company maintains more than 300,000 part numbers in its inventory database. 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, related parts, service and technical assistance. Today, the Company's operations are worldwide in scope through 69 sales offices, including 39 located outside of the United States. In fiscal 1999, 49.4% 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, market analysis, stock availability and quotation activity. Customers have on-line access to product information and purchasing capability via Richardson's web site. The Company offers electronic data interchange to those customers requiring this service. Growth Strategy Richardson's long range plan for growth and profit maximization is defined in three broad categories, 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 continue to 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 tripled the number of sales offices to 69 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 recently generated significant sales gains: microwave generators; medical imaging components; amplifiers, transmitters and pallets for wireless communication, flat panel displays, monitors; and CCTV security systems. Continuous Operational Improvement. During the last four 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 22.1% in 1999. Inventory turns improved from 1.7 to 2.2 over the same period. Additional programs are ongoing, including a significant investment in a full suite of enterprise resource planning modules scheduled for installation over the next two years. 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, the Company has acquired 28 companies or significant product lines. 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 four years, the Company's acquisition pace has accelerated with the purchases of twelve businesses including, most significantly, Tubemaster (medical imaging-EDG), Compucon (interconnect devices for RF applications-SSC) and Burtek, Security Service International and Adler Video (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's support organization 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, oscillate 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, communications, marine, plastics, rubber, steel and textile. Several major applications 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 increased emphasis on containment of medical costs offers significant opportunities to supply replacement tubes and system upgrades to 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 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 participates 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 four 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. Applications include 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 oscillator 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 voltage switching. They are used to control the power in laser and radar equipment and in linear accelerators for cancer treatment. 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, manufacturing, 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 interconnect devices operating in the northeastern United States. This acquisition brought to the Company a new complimentary 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. In 1999, the company acquired TRL Technologies, an engineering design firm and manufacturer of amplifier circuits. In August 1999, the Company expanded its product offering, signing a global distribution agreement with Motorola . The following is a description of SSC's major product groups: RF and Microwave Devices include a wide variety of components, such as mixers, switches, amplifiers, oscillators and RF diodes, which are used in telecommunications and other related markets, such as broadcast, cable TV, cellular and PCS, satellite, wireless LANs and various other wireless applications. 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. This business unit 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 TelePrompTers(r), 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 Company acquired Eternal Graphics Inc. and Pixelink in fiscal 1998 and 1999, respectively, expanding DPG's expertise to include monitors, flat panel displays and related systems integration for financial institutions and medical imaging applications. The following is a description of DPG's major product groups: Cathode Ray Tubes are vacuum tubes that 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 large user groups share electronic data visually. The product line includes both monochrome and color tubes. 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 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 industry. 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 1997 and 1998 and more modestly in 1999. Acquisitions and a significant increase in SSD's field sales force were principally responsible for these 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 approximately $38.0 million. In December, 1998 the Company acquired Adler Video Systems, a southern California based distributor of CCTV systems with annual sales of approximately $8.4 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 background 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, Ad-Tech Industries, Burle Industries, Clinton Electronics, Communication and Power Industries ("CPI"), Covimag, Dunlee, Ericsson, FIMI, Fujitsu, Gasser & Sons, General Electric, Hi Sharp, Huber & Suhner, Jennings, KDI Electronics, Litton, M/A- COM, MPD, New Japan Radio, Orion/Daewoo, NEC Tecnologies, Panasonic, Paradox, Pelco, Philips, Powerex, QMI, RF Prime, Samsung, Samtell, Sanyo, SCT Societe des Ceramiques, Semtech, Sensormatic, Sony, Stanford Microdevices, Stellex Microwave Systems, Teletube, THOMSON, Toshiba, Triton Services, United Monolithic Semiconductor, Varian Associates and Watkins Johnson. 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 10.3% of purchases in fiscal 1997. In August 1999, the Company entered into a non-exclusive distributor agreement with Motorola. This agreement reinstates Richardson as an authorized distributor, reversing an almost three-year old decision to reduce their number of stocking distributors. The new relationship expands upon the former agreement in two ways. It extends the previous North American franchise to a global level. Also, it encompasses a wider array of components to include wireless RF / IF product in addition to the previous offering of RF power transistors. Under the prior agreement in its last full year before termination in fiscal 1996, the Company sold approximately $17.0 million of Motorola products. Future revenues under the new agreement cannot be predicted with any level of certainty. However, because of the significant amount of engineering required to design-in the product, recovery and expansion of the Motorola line will be gradual. 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, including the sale of the Company's former Brive, France manufacturing operation to local management. 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 is 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 distribution 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 directed to one of Richardson's principal distribution facilities in LaFox, Illinois; Houston, Texas; Vancouver, British Columbia; or Lincoln, England. There are 32 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 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". Approximately 21% 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. 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, 1999, the Company employed 884 individuals on a full-time basis. Of these, 528 are located in the United States, including 74 employed in administrative and clerical positions, 361 in sales and distribution and 93 in value-added and product manufacturing. The Company's international subsidiaries employ an additional 356 individuals engaged in administration, sales, distribution 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 distributor 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 42 locations in North America, 13 in Europe, 10 in the Far East / Pacific Rim and 4 in Latin America. The Company leases production facilities in Texas, Virginia and the Netherlands for its medical tube reloading operations. 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 is a class action for purposes of liability determination 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. 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 solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended May 31, 1999. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Incorporated herein by reference to pages 12 (for dividend payments) and 23 (for market data) of the Annual Report. Item 6. Selected Financial Data Incorporated herein by reference to page 6 of the Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Incorporated herein by reference to pages 7 to 10 of the Annual Report. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Incorporated herein by reference to page 10 of the Annual Report.. Item 8. Financial Statements and Supplementary Data Incorporated herein by reference to pages 11 through 22 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. 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 12, 1999, 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 12, 1999, 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 12, 1999, 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 12, 1999, under the caption "EXECUTIVE COMPENSATION - Compensation Committee Interlocks and Insider Participation", which information is incorporated herein by reference. 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 11 through 22 of the Annual Report are incorporated herein by reference: Filing Method Report of Independent Accountants E 1. FINANCIAL STATEMENTS: Consolidated Balance Sheets - May 31, 1999 and 1998 E Consolidated Statements of Operations - Years ended May 31, 1999, 1998 and 1997 E Consolidated Statements of Cash Flows - Years ended May 31, 1999, 1998 and 1997 E Consolidated Statements of Stockholders' Equity - Years ended May 31, 1999, 1998 and 1997 E Notes to Consolidated Financial Statements E The following consolidated financial information for the fiscal years 1999, 1998 and 1997 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. (c) EXHIBITS Filing Method 3(b) By-laws of the Company, as amended, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997. NA 4(a) Restated Certificate of Incorporation of the Company, 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. NA 4(b) Specimen forms of Common Stock and Class B Common Stock certificates of the Company incorporated by reference to Exhibit 4(a) to the Company's Registration Statement on Form S-1, Commission File No. 33-10834. NA 4(c) Indenture between the Company and Continental Illinois National Bank and Trust Company of Chicago (including form of 71/4% 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. NA 4(c)(1) First Amendment to the Indenture between the Company and First Trust of Illinois, a National Association, 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. NA 4(d) Indenture between the Company and American National Bank and Trust Company, as Trustee, for 81/4% Convertible Senior Subordinated Debentures due June 15, 2006 (including form of 81/4% Convertible Senior Subordinated Debentures due June 15, 2006) incorporated by reference to Exhibit 10 of the Company's Schedule 13E-4, filed February 18, 1997. NA 10(a) Loan Agreement dated as of March 1, 1998 among 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 reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998. NA 10(b) Industrial Building Lease, dated April 10, 1996 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. NA 10(c) Amended and Restated Credit Agreement made as of 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. NA 10(d) The Corporate Plan for Retirement 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. NA 10(e) The Company's Amended and Restated Incentive Stock 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. NA 10(e)(1) First Amendment to the Company's Amended and Restated 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. NA 10(e)(2) Second Amendment to the Company's Amended and 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. NA 10(e)(3) Third Amendment to the Company's Amended and Restated 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. NA 10(f) Richardson Electronics, Ltd. Employees 1996 Stock 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. NA 10(g) Employees Stock Ownership Plan and Trust Agreement, 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. NA 10(g)(1) First Amendment to Employees Stock Ownership Plan and Trust Agreement, dated July 12, 1995, incorporated 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. NA 10(g)(2) Second Amendment to Employees Stock Ownership Plan 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. NA 10(g)(3) Third Amendment to Employees Stock Ownership Plan and Trust Agreement, dated July 12, 1995, dated April 9, 1997 incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1998. NA 10(h) Richardson Electronics, Ltd. Employees 1999 Stock Purchase Plan. E 10(i) Stock Option Plan for Non-Employee Directors incorporated 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. NA 10(j) Richardson Electronics, Ltd. 1996 Stock Option Plan for Non-Employee Directors, incorporated by reference to Appendix C of the Company's Proxy Statement dated September 3, 1996 for its Annual Meeting of Stockholders held on October 1, 1996. NA 10(k) The Company's Employees' Incentive Compensation 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. NA 10(k)(1) First Amendment to Employees Incentive Compensation 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. NA 10(k)(2) Second Amendment to Employees 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. NA 10(l) Richardson Electronics, Ltd. Employees' 1994 Incentive Compensation Plan incorporated by reference to Exhibit A to the Company's Proxy Statement dated August 31, 1994 for its Annual Meeting of Stockholders held on October 11, 1994. NA 10(l)(1) First Amendment to the Richardson Electronics, Ltd. 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. NA 10(m) Richardson Electronics, Ltd. 1996 Incentive Compensation 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. NA 10(n) Richardson Electronics, Ltd. 1998 Incentive Compensation 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. NA 10(o) Correspondence outlining Agreement between the 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. NA 10(o)(1) Letter dated February 3, 1992 between the Company and Arnold R. Allen outlining Mr. Allen's engagement 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. NA 10(o)(2) Letter dated April 1, 1993 between the Company and Arnold R. Allen regarding Mr. Allen's engagement as consultant by the Company, incorporated by reference to Exhibit 10(i)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1994. NA 10(p) Letter dated January 14, 1992 between the Company 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. NA 10(p)(1) Letter dated January 15, 1992 between the Company 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. NA 10(q) Letter dated January 13, 1994 between the Company 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. NA 10(r) Letter dated April 4, 1994 between the Company and 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. NA 10(s) Letter dated May 20, 1994 between the Company and 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. NA 10(t) Employment, Nondisclosure and Non-Compete Agreement dated June 1, 1998 between the Company and Flint Cooper setting forth the terms of Mr. Cooper'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, 1998. NA 10(u) Agreement dated January 16, 1997 between the Company 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. NA 10(v) Agreement dated March 21, 1997 between the Company 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 Quarterly Report on Form 10-Q for the quarter ended February 28, 1997. NA 10(w) Employment agreement dated as of November 7, 1996 between the Company and Bruce W. Johnson incorporated by reference to Exhibit (c)(4) of the Company's Schedule 13 E-4, filed December 18, 1996. NA 10(x) Employment agreement dated as of January 26, 1998 between the Company and Norman Hilgendorf, incorporated by reference to Exhibit 10(c) of the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998. NA 10(y) Employment agreement dated as of May 10, 1993 as 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. NA 10(z) The Company's Directors and Officers Liability 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. NA 10(z)(1) The Company's Directors and Officers Executive Liability and Indemnification Insurance Policy renewal issued by Chubb Group of Insurance Companies - Policy Number 8125-64-60F. E 10(z)(2) The Company's Excess Directors and Officers Liability and Corporate Indemnification Policy issued by St. Paul Mercury Insurance Company - Policy Number 900DX0414. E 10(z)(3) The Company's Directors and Officers Liability Insurance Policy issued by CNA Insurance Companies - Policy Number DOX600028634. E 10(aa) Distributor Agreement, executed August 8, 1991, 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. NA 10(aa)(1) Amendment, dated as of September 30, 1991, between Registrant and Varian Associates, Inc., incorporated by reference to Exhibit 10(e) of the Company's Current Report on Form 8-K for September 30, 1991. NA 10(aa)(2) First Amendment to Distributor Agreement between 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. NA 10(aa)(3) Consent to Assignment and Assignment dated August 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. NA 10(aa)(4) Final Judgment, dated April 1, 1992, in the matter of United States of America v. Richardson Electronics, Ltd., filed in the United States District Court for the Northern District of Illinois, Eastern 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. NA 10(bb) Trade Mark License Agreement dated as of May 1, 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. NA 10(cc) Agreement among Richardson Electronics, Ltd., 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. NA 10(dd) Settlement Agreement by and between the United States 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. NA 13 Annual Report to Stockholders for fiscal year ending May 31, 1999 (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). E 21 Subsidiaries of the Company. E 23 Consent of Independent Auditors. E 27 Financial Data Schedule. E 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/Edward J. Richardson By:/s/Bruce W, Johnson Edward J. Richardson, Bruce W. Johnson, Chairman of the Board and President and Chief Operating Chief Executive Officer Officer By:/s/William J. Garry William J. Garry Senior Vice President and Date: August 27, 1999 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 registrant and in the capacities and on the dates indicated. /s/ Edward J. Richardson /s/ Bruce W. Johnson Edward J. Richardson, Chairman Bruce W. Johnson, President, of the Board, Chief Executive Chief Operating Officer, and Director Officer (principal executive officer) August 27, 1999 and Director August 27, 1999 /s/ William J. Garry /s/ Ad Ketelaars William J. Garry, Senior Vice Ad Ketelaars, Director President and Chief Financial August 27, 1999 Officer (principal financial and accounting officer) and Director August 27, 1999 /s/ Scott Hodes /s/ Samuel Rubinovitz Scott Hodes, Director Samuel Rubinovitz, Director August 27, 1999 August 27, 1999 /s/ Arnold R. Allen /s/ Ken Douglas Arnold R. Allen, Director Ken Douglas, Director August 27, 1999 August 27, 1999 /s/ Jacques Bouyer /s/ Harold L. Purkey Jacques Bouyer, Director Harold L. Purkey, Director August 27, 1999 August 27, 1999 EX-10 2 EXHIBIT 10(h) RICHARDSON ELECTRONICS, LTD. EMPLOYEES 1999 STOCK PURCHASE PLAN Richardson Electronics, Ltd. (the "Company") hereby establishes the Richardson Electronics, Ltd. Employees 1999 Stock Purchase Plan (the "Plan"), an employee stock purchase plan as defined in Section 423(b) of the Internal Revenue Code of 1954. Article I Purpose The purpose of the Plan is to provide Employees with an opportunity to acquire a proprietary interest in the Company through the exercise of options to purchase shares of the Common stock of the Company. It is the judgment of the Board that the acquisition of a proprietary interest in the Company by its Employees will increase their personal interest in its growth and progress and encourage them to remain in the Company's employ, thereby promoting the interests of the Company and all its stockholders. The Company intends that the Plan shall qualify as an "employee stock purchase plan" within the meaning of Section 423(b) of the Code. Article II Definitions The following words and terms, as used in the Plan, shall have the respective meanings hereinafter set forth unless a different meaning is clearly required by the context. Whenever appropriate, words used in the singular shall be deemed to include the plural, and the masculine gender shall be deemed to include the feminine gender. 2.1 Board. The Board of Directors of the Company. 2.2 Code. The Internal Revenue Code of 1954, as now in effect or as hereafter amended. 2.3 Committee. The Stock Option Committee or such other committee appointed by the Board in accordance with the provisions of Article IV to administer the Plan. 2.4 Common Stock. The common stock, $.05 per share par value, of the Company. 2.5 Company. Richardson Electronics, Ltd., a corporation organized and existing under the laws of the State of Delaware, and any successor to it. 2.6 Employee. Any individual employed by and receiving compensation from the Company or a Related Company. 2.7 Exercise Date. The last business day prior to the expiration of the term of an Option, or, if an Option expires on a pay day, the day of expiration of the term of such Option. 2.8 Grant Date. The date on which the Company makes an Offering under the Plan. 2.9 Offering. A grant of Options under the Plan to all Participants. 2.10 Option. An option to purchase shares of the Common Stock granted by the Company pursuant to an Offering under the Plan . 2.11 Option Price. The purchase price of the Common Stock subject to an Option, as set forth in Article XII. 2.12 Optionee. A Participant who elects to participate in an Offering under the Plan in accordance with the provisions of Article VII. 2.13 Participant. An Employee who satisfies the eligibility requirements set forth in Article V. 2.14 Plan. The Richardson Electronics, Ltd. Employees 1999 Stock Purchase Plan, as set forth herein, as may be amended from time to time hereafter. 2.15 Related Company. As of any Grant Date, the term "Related Company" shall include all "parents" and "subsidiaries" (as hereinafter defined) of the Company. A "parent" shall be any corporation that owns stock possessing at least 50% of the total combined voting power of all stock of the Company or of another parent. A "subsidiary" shall be any corporation if stock possessing at least 50% of the total combined voting power of all stock of such corporation is owned by the Company or by another subsidiary. Article III Shares Subject to Plan 3.1 The total number of shares of the Common Stock which are available for purchase upon the exercise of Options under the Plan shall be One Hundred Fifty Thousand (150,000) shares, subject to appropriate adjustment as provided in Article XIX 3.2 The shares of the Common Stock issued to an Optionee upon the exercise of an Option shall be made available, in the discretion of the Board, either from the authorized but unissued Common Stock or from any Common Stock reacquired by the Company, including Common Stock purchased in the open market by the Company. 3.3 If an Offering shall terminate and all shares of the Common Stock available for purchase thereunder are not purchased by the Optionees, the unpurchased shares of the Common Stock subject to the Offering shall become available for the granting of Options in other Offerings. 3.4 Anything to the contrary notwithstanding, if at any time during the term of the Plan the available shares of the Common Stock in connection with any Offering are oversubscribed for by the Optionees, the Committee may, in its sole discretion, either: (a) increase the number of shares of the Common Stock in the Offering, provided that the Committee shall not have the authority to increase the total number of shares of the Common Stock which are available for purchase under the Plan, as set forth in Section 3.1 above, or the maximum number of shares of Common Stock which an Optionee may purchase in the Offering, as set forth in Sections 10.1 and 10.2 below; or (b) make a pro rata allocation of the available shares of the Common Stock allocated to such Offering in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable. 3.5 In the event that the Committee elects to make a pro rata allocation (as described in Section 3.4(b) above), the payroll deductions elected by the Optionees shall be appropriately reduced to properly effectuate such allocation and the Committee shall give written notice of such reduction to each Optionee. Article IV Administration 4.1 The authority to control and manage the operations and administration of the Plan shall be vested exclusively in the Committee. 4.2 The Committee shall be appointed by the Board and shall consist of not fewer than two (2) members of the Board. All members of the Committee shall be persons who are "Non-Employee Directors" as that term is defined by Rule 16b-3 of the Securities and Exchange Commission as in effect and interpreted from time to time. In the event of any vacancy in the membership of the Committee, a successor member shall be appointed by the Board to fill such vacancy as promptly as practical. 4.3 The Committee shall fix the Grant Dates and shall give written notice to the Participants of each Offering, specifying the number of shares of the Common Stock available for purchase in such Offering. 4.4 The Committee shall be authorized to interpret the Plan and may from time to time adopt such rules and regulations for carrying out the purpose of the Plan as it deems appropriate in its sole discretion. Any such interpretations shall be final and binding unless otherwise determined by the Board. 4.5 No member of the Committee or the Board shall be liable for any action or determination made in good faith with respect to the Plan. 4.6 The Committee may in its discretion from time to time determine the method and timing of fixing the applicable exchange rates for Optionees whose compensation is not paid in United States currency. Article V Eligibility 5.1 Each Employee who is employed by the Company or a Related Company who the Committee has designated as a Related Company whose employees may participate shall be eligible to participate in, and be granted an Option under, the Plan. For purposes of this Plan, an Employee shall not include any individual whose customary employment with the Company or a Related Company is for twenty (20) hours or less per week or is for not more than five (5) months in any calendar year. 5.2 Anything to the contrary notwithstanding, no Employee may participate in, and be granted an Option under, the Plan if, immediately after the Option is granted, such Employee would own stock possessing 5% or more of the total voting power of all classes of stock of the Company or of any Related Company. For purposes of determining the ownership of the Common Stock by an Employee, the stock attribution rules of Section 425(d) of the Code shall apply and the maximum number of shares of the Common Stock which the Employee could purchase under such Option pursuant to Section 10.1, and the maximum number of shares of stock which the Employee could purchase under all other outstanding options (whether or not issued under this Plan) granted by the Company or by any Related Company, shall be treated as then owned by such Employee. Article VI Common Stock Offerings 6.1 The Committee shall, from time to time, fix a Grant Date on which the Company shall grant Options to purchase such aggregate number of shares of the Common Stock as the Company, in its sole discretion, shall determine. The Committee shall, at least thirty (30) days prior to any Grant Date fixed by it, give written notice of the Offering to all Participants. 6.2 No Grant Date shall precede or coincide with the Expiration Date of a previously granted Option. Article VII Participation in Plan 7.1 Participants may become Optionees by completing and delivering to the Personnel Department of the Company such election and other forms as may be required by the Committee, including a payroll deduction form, no later than ten (10) days prior to a Grant Date or such earlier date as the Committee may require in its written notice of the Offering. Such payroll deduction form shall become effective as of the Grant Date. An Optionee may not have more than one payroll deduction form in effect simultaneously. 7.2 Payroll deductions for an Optionee shall commence on the first pay day on or after the Grant Date and shall end on the last pay day prior to the expiration of the Option (as set forth in Article XI below) or, if the Option expires on a pay day, on that day, unless sooner terminated by the Optionee as provided in Article XV below. Article VIII Payroll Deductions 8.1 Each payroll deduction form delivered by an Optionee shall (a) state the percentage of the Optionee's base compensation which shall be deducted from his regular paycheck on each pay day during the term of the Option, (b) authorize the purchase of shares of the Common Stock for the Optionee on the Exercise Date and (c) specify the exact name (or names, subject to Section 16.3 below) in which the shares of the Common Stock purchased for the Optionee are to be issued by the Company. 8.2 An Optionee may authorize payroll deductions in any full percentage of his base compensation (before withholding and any other deductions), up to but not more than ten percent (10%), in effect on the Grant Date; provided, however, that for purposes of determining base compensation hereunder, an Optionee's annual base compensation in excess of Two Hundred Fifty Thousand Dollars ($250,000) shall be excluded. Notwithstanding the preceding, if amounts withheld are in excess of the amount necessary to acquire the maximum number of shares of Common Stock set forth in Section 10.1 or 10.2, no further amounts shall be withheld, and any excess shall be refunded to such Optionee. 8.3 An Optionee shall not be entitled to increase or decrease the amount of his payroll deduction during the term of an Option. 8.4 Whenever an adjustment in an Optionee's base compensation occurs during the term of an Option, the amount of such Optionee's payroll deduction shall be automatically adjusted to reflect such change, unless the Optionee indicates otherwise. Notwithstanding the preceding sentence, if increases in an Optionee's base compensation during the term of an Option would result in amounts being withheld in excess of the amount necessary to acquire the maximum number of shares of Common Stock set forth in Section 10.1 or 10.2, no further amounts shall be withheld, and any excess shall be refunded to such Optionee. 8.5 All payroll deductions made on behalf of an Optionee shall be credited to his separate account maintained under the Plan, as set forth in Article XVIII below. 8.6 An Optionee may discontinue his participation in an Offering as provided in Article XV below, but no other change can be made by the Optionee during the term of an Option. Article IX Conditions to Options All Options granted in an Offering under this Plan shall be evidenced by agreements in such form as the Committee shall from time to time recommend and the Board shall approve; provided, however, that all Optionees shall have the same rights and privileges (except in connection with the number of shares of the Common Stock which may be purchased by an Optionee on the basis of his annual base compensation). Article X Granting of Options 10.1 As of each Grant Date, the Optionees shall be granted Options for as many full shares of the Common Stock as they shall be able to purchase with the amount of payroll deductions previously authorized by them and credited to their respective separate accounts during the term of the Option; provided, however, that the maximum number of full shares of Common Stock which may be purchased by an Optionee under the Option granted on any Grant Date shall not exceed the amount which could be purchased by the amount of payroll deductions authorized by such Optionee if his base compensation during the period of the Option were equal to 150% of the amount of his base compensation on such Grant Date. The Committee may set a different uniform percentage of base compensation for any Offering by written notice included in the notice specified in Section 6.1, but may not thereafter alter such percentage for such Offering. 10.2 Anything to the contrary notwithstanding, no Optionee shall be granted an Option which would permit his right to purchase shares of the Common Stock or any other class of stock under the Plan or any other employee stock purchase plan (as defined in Section 423(b) of the Code) maintained by the Company or by a Related Company to accrue at a rate which exceeds Twenty- Five Thousand Dollars ($25,000) of fair market value of such stock (determined on the Grant Date) for each calendar year in which such Option is outstanding. For purposes of this Section 10.2, (a) the right to purchase stock under an option accrues when the option (or any portion thereof) first becomes exercisable during the calendar year, (b) the right to purchase stock under an option accrues at the rate provided in the option but in no case may such rate exceed Twenty-Five Thousand Dollars ($25,000) of fair market value of such stock (determined on the Grant Date) for any one calendar year, and (c) a right to purchase Common Stock which has accrued under an Option granted pursuant to the Plan may not be carried over to any other Option. Article XI Term of Options The term of each Option shall expire on the last business day of the eleventh calendar month commencing after the calendar month which includes the Grant Date. Article XII Option Price The Option Price shall be equal to the lesser of: (i) an amount equal to eighty-five percent (85%) of the Fair Market Value (as that term is defined below) of the Common Stock at the time such Option is granted; or (ii) an amount equal to eighty-five percent (85%) of the Fair Market Value of the Common Stock at the time of the exercise of the Option. For purposes of this Article XII, the term "Fair Market Value" of the Common Stock shall be defined as an amount equal to either (a) the mean of the closing bid and asked quotations in the over-the-counter market on such date (rounded up to the nearest cent), as reported by the National Association of Securities Dealers Automated Quotation System, or (b) in the event the Common Stock is listed on any exchange, the last sale price on such exchange on such date or, if there are no sales on such date, the mean of the bid and asked prices (founded up to the nearest cent) for the Common Stock on such exchange at the close of business on such date. Article XIII Exercise of Options Unless an Optionee gives written notice of termination to the Company as provided in Article XV below, Options shall be exercised automatically for him on the Exercise Date for the purchase of the number of full shares of the Common Stock which the balance of the payroll deductions credited to such Optionee's separate account during the term of the Option shall purchase at the Option Price. Article XIV Delivery of Certificates The Company shall deliver to an Optionee certificates representing the shares of the Common Stock purchased by him upon the exercise of an Option as soon as practical after the end of an Offering. At the expiration of the term of an Option the Company shall make a cash payment equal to the balance of any payroll deductions previously credited to such Optionee's separate account during the term of the Option which have not been used for the purchase of shares of the Common Stock. Article XV Termination of Options An Optionee may terminate an Option by giving written notice of termination to the Committee prior to the Exercise Date, in such manner as the Committee may require. Such written notice shall terminate the Optionee's participation in an Offering and his payroll deductions shall terminate effective as of the end of the next pay period in the fiscal quarter of the Company in which the written notice of termination is received by the Committee. After the termination of an Option the Company shall make a cash payment equal to the balance of any amount held in the Optionee's separate account. An Optionee's termination of employment with the Company or a Related Company for any reason (including death or disability) while an Offering is outstanding shall be deemed the equivalent of the written notice of termination described above and shall be effective as of the date of the Optionee's termination of employment. Article XVI Rights as Stockholder 16.1 An Optionee shall not have any interest in shares of the Common Stock subject to an Option until such Option is exercised by him. 16.2 An Optionee who has exercised an Option shall not be entitled to any of the rights or privileges of a stockholder of the Company, including but not limited to the right to vote the shares and the right to receive any dividends which may be declared by the Company with respect to the shares, until such time as stock certificates representing the shares are issued to him. 16.3 Certificates for shares of the Common Stock shall be issued to an Optionee as soon as practical after the end of the Offering and, when issued, shall be registered in the name of the Optionee or, if the Optionee so directs in his payroll deduction form, in the names of the Optionee and such other person as may be designated by the Optionee, as joint tenants with right of survivorship, to the extent permitted by applicable law. Article XVII Non-Transferability of Options An Optionee's rights with regard to the exercise of an Option are exercisable only by him during his lifetime and such rights may not be assigned, transferred, pledged or otherwise disposed of in any way by the Optionee other than by his last will and testament or by the laws of descent and distribution. Any such attempted assignment, transfer, pledge or other disposition by the Optionee shall be without effect, except that the Company may treat such act as an election to terminate an Option in accordance with Article XV above. Article XVIII Accounts of Optionees Payroll deductions received or held by the Company under this Plan shall not be used by the Company for any corporate purpose and the Company shall segregate such payroll deductions in separate accounts. On the Exercise Date, payroll deductions shall be withdrawn in accordance with Article XIII above. No interest shall be paid to an Optionee in connection with any payroll deductions held in such separate accounts by the Company. Article XIX Anti-Dilution In the event that the number of outstanding shares of the Common Stock shall be changed by reason of split-ups or combinations of shares or recapitalizations or by reason of stock dividends, the number of shares of the Common Stock subject to the Plan not yet granted as Options, the number of shares of the Common Stock then subject to Options granted under an Offering and the Option Price payable upon the exercise of an Option by an Optionee shall be appropriately adjusted, as determined by the Board, so as to give proper effect to such changes. Anything to the contrary notwithstanding, no adjustment shall be made hereunder which would result in a modification of the Options in a manner which would disqualify the Plan as an "employee stock purchase plan" under the provisions of Section 423(b) of the Code or which would cause the Options to be considered new options under Section 425(b) of the Code. Article XX Amendment 20.1 The Company shall have the right at any time to amend the Plan by action of its Board without obtaining the approval of the stockholders of the Company. Any amendment to the Plan shall be set forth in writing. 20.2 Anything to the contrary notwithstanding, the Company shall not amend the Plan without obtaining the approval of the stockholders of the Company if such amendment: (a) increases the number of shares of the Common Stock that are reserved for issuance under the Plan; (b) alters the classification of Employees eligible to be Participants; (c) increases the Option Price; (d) impairs the rights of any Optionee without his consent; or (e) would cause the Plan to fail to qualify as an "employee stock purchase plan" as defined in Section 423(b) of the Code. Article XXI Termination 21.1 The Company shall have the right at any time to terminate the Plan by action of its Board without obtaining the approval of the stockholders of the Company. 21.2 Upon the termination of the Plan, shares of the Common Stock purchased by Optionees shall be issued to them as if it were the end of an Offering. Any termination of the Plan shall be effected so that the then existing rights of all Optionees shall not be adversely affected. Article XXII Application of Funds Any proceeds received by the Company from the sale of shares of Common Stock may be used for any corporate purpose. Article XXIII Notice Any notice to the Company required under this Plan shall be in writing and shall either be delivered in person or sent by registered or certified mail, return receipt requested, postage prepaid, to the Company at its offices at 40W267 Keslinger Road, P.O. Box 393, LaFox, Illinois 60147-0393, Attention: Stock Option Committee. Article XXIV Effective Date The Plan is effective April 13, 1999. The Plan shall be submitted to the stockholders for approval not later than April 12, 2000. If the Plan has not been approved, it shall terminate on such date in accordance with Article XXI, and all Options outstanding on such date shall be exercised as provided in Section 21.2. EX-10 3 EXHIBIT 10(z)(1) EXECUTIVE PROTECTION POLICY DECLARATIONS EXECUTIVE LIABILITY AND INDEMNIFICATION COVERAGE SECTION Item 1. Parent Organization: RICHARDSON ELECTRONICS, LTD. Item 2. Limits of Liability: (A) Each Loss $15,000,000. (B) Each Policy Period $15,000,000. Note that the limits of liability and any deductible or retention are reduced or exhausted by Defense Costs. Item 3. Coinsurance Percent: NONE Item 4. Deductible Amount: Insuring Clause 2 $100,000. Item 5. Insured Organization: RICHARDSON ELECTRONICS, LTD. AND ITS SUBSIDIARIES. Item 6. Insured Persons: ANY PERSON WHO HAS BEEN NOW IS, OR SHALL BECOME A DULY ELECTED DIRECTOR OR A DULY ELECTED OR APPOINTED OFFICER OF THE INSURED ORGANIZATION AND WITH RESPECT TO ANY SUBSIDIARY INCORPORATED OUTSIDE THE UNITED STATES OF AMERICA, ITS FUNCTIONAL EQUIVALENT. Item 7. Extended Reporting Period: (A) Additional Premium: 75% OF THE ANNUAL PREMIUM (B) Additional Period: ONE YEAR Item 8. Pending or Prior Date: OCTOBER 12, 1983 Item 9. Continuity Date: OCTOBER 12, 1983 EXECUTIVE PROTECTION POLICY ENDORSEMENT Coverage Section: EXECUTIVE LIABILITY Effective date of this endorsement: MAY 31, 1998 Issued to: RICHARDSON ELECTRONICS, LTD. Company: FEDERAL INSURANCE COMPANY Endorsement No. 1 To be attached to and form part of Policy No. 8125-64-60F ILLINOIS AMENDATORY ENDORSEMENT It is agreed that: Subsection 4, "Extended Reporting Period", shall be deleted and replaced by the following: EXTENDED REPORTING PERIOD 4. If the Company or the Insured terminates or refuses to renew this coverage section, the Parent Organization and the Insured Persons shall have the right, upon payment of the additional premium set forth in Item 7(A) of the Declarations for this coverage section, to an extension of the coverage granted by the coverage section for a period of one year as set forth in Item 7(B) of the Declarations for this coverage section (Extended Reporting Period) following the effective date of termination or nonrenewal, but only for any Wrongful Act committed, attempted, or allegedly committed or attempted, prior to the effective date of termination or nonrenewal. This right of extension shall lapse unless written notice of such election, together with payment of the additional premium due, is received by the Company within 30 days following the effective date of termination or nonrenewal. Any Claim made during the Extended Reporting Period shall be deemed to have been made during the immediately preceding Policy Period. It is further agreed that Subsection 18, "Definitions", shall be amended by deleting Defense Costs and replacing it with the following: Defense Costs means that part of Loss consisting of 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 employees of the Insured Organization or the salaries of the employees, officers or staff attorneys of the Company) incurred in defending or investigating Claims and the premium for appeal, attachment or similar bonds. ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED Robert Hamburger Authorized Representative May 28, 1998 Date EXECUTIVE PROTECTION POLICY ENDORSEMENT Coverage Section: EXECUTIVE LIABILITY Effective date of this endorsement: MAY 31, 1998 Issued to: RICHARDSON ELECTRONICS, LTD. Company: FEDERAL INSURANCE COMPANY Endorsement No. 2 To be attached to and form part of Policy No. 8125-64-60F OPTIONAL GUARANTEED DEFENSE COSTS ALLOCATION In consideration of the premium paid, it is agreed that subsection 12, Allocation, is deleted in its entirety and the following is inserted: Allocation 12. If both Loss covered by this coverage section and loss not covered by this coverage section are incurred, either because a Claim against an Insured Person includes both covered and uncovered matters or because a Claim is made against both an Insured Person and others, including the Insured Organization, the Insureds and the Company shall allocate such amount as follows: (a) with respect to Defense Costs, to create certainty in determining a fair and proper allocation of Defense Costs, 80% of all Defense Costs which must otherwise be allocated as described above shall be allocated to covered Loss and shall be advanced by the Company on a current basis; provided, however, that no Defense Costs shall be allocated to the Insured Organization to the extent the Insured Organization is unable to pay by reason of Financial Impairment. This Defense Cost allocation shall be the final and binding allocation of such Defense Costs and shall not apply to or create any presumption with respect to the allocation of any other Loss; (b) with respect to Loss other than Defense Costs: (i) the Insureds and the Company shall allocate such amount between covered Loss and uncovered loss based upon the relative legal exposures of the parties to such matters; and (ii) If the Insureds and the Company cannot agree on any allocation, no presumption as to allocation shall exist in any arbitration, suit or other proceeding. The Company, if requested by shall submit the allocation dispute to binding arbitration. The rules of the American Arbitration Association shall apply except with respect to the selection of the arbitration panel, which shall consist of one arbitrator selected by the Insureds, one arbitrator selected by the Company third independent arbitrator selected by the first two arbitrators. ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED. Robert Hamburger Authorized Representative May 28, 1998 Date EXECUTIVE PROTECTION POLICY ENDORSEMENT Coverage Section: EXECUTIVE LIABILITY Effective date of this endorsement: MAY 31, 1998 Issued to: RICHARDSON ELECTRONICS, LTD. Company: FEDERAL INSURANCE COMPANY Endorsement No. 3 To be attached to and form part of Policy No.8125-64-60F It is agreed that Item 6, Insured Persons of the Declarations page is amended to include the following: Any Employee of the Insured Organization with the title, Manager. ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED. Robert Hamburger Authorized Representative May 28, 1998 Date EXECUTIVE PROTECTION POLICY ENDORSEMENT Coverage Section: EXECUTIVE LIABILITY Effective date of this endorsement: MAY 31, 1998 Issued to: RICHARDSON ELECTRONICS, LTD. Company: FEDERAL INSURANCE COMPANY Endorsement No. 4 To be attached to and form part of Policy No.8125-64-60F It is agreed that subsection 5, EXCLUSIONS: EXCLUSIONS APPLICABLE TO INSURING CLAUSES 1 AND 2, is amended by deleting para graph (f) in its entirety with respect to a CLAIM brought and maintained: 1. Solely and entirely in a jurisdiction other than the United States of America, its territories and possessions; and 2. Subject to the substantive and prodedural laws of a jurisdiction other than the United States of America, its territories and possessions. ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED. Robert Hamburger Authorized Representative May 28, 1998 Date EXECUTIVE PROTECTION POLICY ENDORSEMENT Coverage Section: EXECUTIVE LIABILITY Effective date of this endorsement: MAY 31, 1998 Issued to: RICHARDSON ELECTRONICS, LTD. Company: FEDERAL INSURANCE COMPANY Endorsement No. 5 To be attached to and form part of Policy No.8125-64-60F It is agreed that with respect to each loss on account any claim, which in whole or in part, is based upon, arising from or in consequence of any securities transaction, the deductible amount specified in Item 4 of the Declarations is increased as follows: FROM TO INSURING CLAUSE 2 AND/OR 3: $100,000. $250,000. ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED. Robert Hamburger Authorized Representative May 28, 1999 Date EXECUTIVE PROTECTION POLICY ENDORSEMENT Coverage Section: EXECUTIVE LIABILITY Effective date of this endorsement: MAY 31, 1998 Issued to: RICHARDSON ELECTRONICS, LTD. Company: FEDERAL INSURANCE COMPANY Endorsement No. 6 To be attached to and form part of Policy No. 8125-64-60F It is agreed that: 1. This coverage section is amended by adding the following: Insured Organization Coverage insuring Clause 3 The Company shall pay on behalf of any Insured Organization all Loss for which it becomes legally obligated to pay on account of any Claim first made against it during the Policy Period or, if exercised, during the Extended Reporting Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted, by any Insured before or during the Policy Period. 2. Subsection 18, Definitions, is amended as follows: a. The definitions of Claim and Wrongful Act are deleted in their entirety and the following is inserted: Claim means: (a) For purposes of coverage under Insuring Clauses 1 or 2: (i) a written demand for monetary or non-monetary damages; (ii) a civil proceeding commenced by the service of a complaint or similar pleading; (iii) a criminal proceeding commenced by the return of an indictment; or (iv) a formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document, against any Insured Person for a Wrongful Act, including any appeal therefrom; (b) For purposes of coverage under Insuring Clause 3: (i) a written demand for monetary or non-monetary damages; (ii) a civil proceeding commenced by the service of a complaint or similar pleading; or (iii) a criminal proceeding commenced by the return of an indictment; against any Insured Organization for a Wrongful Act, including any appeal therefrom. Wrongful Act means: (a) For purposes of coverage under Insuring Clauses 1 or 2, any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted, by any Insured Person, individually or otherwise, in his Insured Capacity, or matter claimed against him solely by reason of serving in such Insured Capacity; (b) For purposes of coverage under Insuring Clause 3, any error, misstatement, misleading state act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by any Insured based upon, arising from, or in consequence of any Securities Transaction. b. The following definition is added: Securities Transaction means the purchase or sale of, or offer to purchase or sell, any securities issued by any Insured Organization. c. The definitions of Insured Person and Loss are amended by adding the following: Insured Person also means: (i) For purposes of coverage under Insuring Clause 1 or 2, any past, present or future employee of the Insured Organization, but only for Wrongful Acts based upon, arising from or in consequence of any Securities Transaction; and (ii) For purposes of coverage under Insuring Clause 3, the Insured Organization Loss does not include any amount allocated to uncovered loss pursuant to subsection 12, Allocation. For purposes of coverage under Insuring Clause 3, Loss includes punitive or exemplary damages which any Insured Organization becomes legally obligated to pay, provided the punitive or exemplary damages are other wise covered under Insuring Clause 3 and are insurable under the law pursuant to which this coverage section is construed. 3. The heading for subsection 5 is deleted in its entirety and the following is inserted: Exclusions Applicable to all Insuring Clauses 4. Subsection 5, Exclusions: Exclusions Applicable to all Insuring Clauses, is amended by adding the following to paragraph (c): (iv) a Claim that is brought by any Insured Person identified in section 2c(i) of this endorsement for any Wrongful Act based upon, arising from or in consequence of any Securities Transaction. 5. Exclusions is amended by adding the following subsections: Exclusions Applicable to Insuring Clause 3 Only 6.1 The Company shall not be liable under Insuring Clause 3 for Loss on account of any Claim made against any Insured Organization based upon, arising from, or in consequence of any deliberately fraudulent act or omission or any willful violation of any statute or regulation by any past. present or future chief financial officer, President or Chairman if a judgment or other final adjudication adverse to the Insured Organization establishes such a deliberately fraudulent act or omission or willful violation. 6.2 The Company shall not be liable under Insuring Clause 3 for that part of Loss, other than Defense Costs: (a) which is based upon, arises from, or is in consequence of the actual or proposed payment by any Insured Organization of allegedly inadequate or excessive consideration in connection with its purchase of securities issued by any Insured Organization; or (b) which is based upon, arises from, or is in consequence of any Insured Organization having gained in fact any profit or advantage to which it was not legally entitled. 6. The second, third and fourth paragraphs of subsection 8, Limit of Liability, Deductible and Coinsurance, are deleted in their entirety and the following is inserted: The Company's maximum liability for each Loss, whether covered under one or more Insuring Clauses, shall be the Limit of Liability for each Loss set forth in Item 2(a) of the Declarations for this coverage section. The Company's maximum aggregate liability for all Loss on account of all Claims first made during the same Policy Period, whether covered under one or more Insuring Clauses, shall be the Limit of Liability for each Policy Period set forth in Item 2(B) of the Declarations for this coverage section. The Company's liability under Insuring Clause 2 or Insuring Clause 3 shall apply only to that part of each Loss which is excess of the Deductible Amount set forth in Item 4 of the Declarations for this coverage section, and such Deductible Amount shall be borne by the Insureds uninsured and at their own risk. However, the Deductible Amount applicable to each Loss on account of any Claim for any Wrongful Acts based upon, arising from or in consequence of any Securities Transaction shall: (a) apply to that part of Loss which constitutes Defense Costs; and (b) not apply if: (i) a final adjudication with prejudice pursuant to a trial, motion to dismiss or motion for summary judgment in such Claim, or (ii) a complete and final settlement of such Claim with prejudice, establishes that no Insured in such Claim is liable for any Loss, other than Defense Costs. The Company shall reimburse any Insured which has funded a Deductible Amount if such amount subsequently becomes inapplicable based upon (i) or (ii) above. The maximum Deductible Amount applicable to a single Loss which is covered under more than one Insuring Clause shall be the amount set forth in Item 4 of the Declarations for this coverage section. 7. The first paragraph of subsection 12, Allocation, is deleted in its entirety and the following is inserted: (a) If a Claim based on, arising from or in consequence of a Securities Transaction covered, in whole or in part, under Insuring Clauses 2 or 3 results in any Insured Person under Insuring Clause 2 or any Insured Organization under Insuring Clause 3 incurring both Loss covered by this coverage section and loss not covered by this coverage section, because such Claim includes both covered and uncovered matters or is made against both covered and uncovered parties, the Insureds and the Company shall allocate such amount to Loss as follows: (i) 100% of such amount constituting defense costs shall be allocated to covered Loss; and (ii) 100 % of such amount other than defense costs shall be allocated to covered Loss. (b) If any other Claim results in both Loss covered by this coverage section and loss not covered by this coverage section, because such Claim includes both covered and uncovered matters or is made against both covered and such uncovered parites, the Insureds and the Company shall allocate amount between covered Loss and uncovered loss based upon the relative legal exposures of the parties to such matters. 8. For purposes of coverage under Insuring Clause 3 only, the second paragraph of subsection 17, Representations and Severability, is deleted in its entirety and the following is inserted: With respect to the declarations and statements contained in the written application(s) for coverage, all declarations and statements contained in such application and knowledge possessed by any Insured Person identified in Item 6 of the Declarations shall be imputed to any Insured Organization for the purpose of determining if coverage is available. 9. For purposes of coverage under Insuring Clause 3 only, subsection 7, Severability of Exclusions, is deleted in its entirety and the following is inserted: With respect to the exclusions in subsections 5, 6.1 and 6.2, only facts pertaining to and knowledge possessed by any past, present or future chief financial officer, President or Chairman of any Insured Organization shall be imputed to any Insured Organization to determine if coverage is available for such Insured Organization. 10. For purposes of coverage for employees who are Insured Persons pursuant to paragraph 2c(i) of this endorsement, subsection 9 Presumptive Indemnification, is amended as follows: a. Paragraph (b) is deleted in its entirety and the following is inserted: (b) is permitted or required to indemnify the Insured Person for such Loss pursuant to common or statutory law, b. The final paragraph in the subsection is deleted in its entirety and the following is inserted: For purposes of this subsection 9, the shareholder and board of director resolutions of the Insured Organization shall be deemed to provided indemnification for such Loss to the fullest extent permitted by common or statutory law. ALL OTHER TERMS REMAIN UNCHANGED. Robert Hamburger Authorized Representative May 28, 1998 Date EXECUTIVE PROTECTION POLICY ENDORSEMENT Coverage Section: EXECUTIVE LIABILITY Effective date of this endorsement: MAY 31, 1998 Issued to: RICHARDSON ELECTRONICS, LTD. Company: FEDERAL INSURANCE COMPANY Endorsement No. 7 To be attached to and form part of Policy No. 8125-64-60F 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 a Wrongful Act committed, attempted, or allegedly 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 amount shall apply to Investigation 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 employees of the Insured Organization) incurred by the Insured Organization (including its board of directors or any committee of the 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 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 Investigation Costs; (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 Robert Hamburger Authorized Representative May 28, 1998 Date EXECUTIVE PROTECTION POLICY ENDORSEMENT Coverage Section: EXECUTIVE LIABILITY Effective date of this endorsement: MAY 31, 1998 Issued to: RICHARDSON ELECTRONICS, LTD. Company: FEDERAL INSURANCE COMPANY Endorsement No 8 To be attached to and form part of Policy No. 8125-64-60F It is agreed that: 1. Item 6 of the Declarations, Insured Persons, is amended by adding the following: ... and any elected or appointed officer of the Insured Organization in an Outside Directorship. 2. Subsection 18, "Definitions", is amended by adding the following: Outside Directorship means the position of director, officer, trustee, governor, or equivalent executive position with an Outside Entity if service by an Insured Person in such position was at the specific request of the Insured Organization or was part of the duties regularly assigned to the Insured Person by the Insured Organization. Outside Entity means any non-profit corporation, community chest, fund organization or foundation exempt from federal income tax as an organization described in Section 501 (c)(3), Internal Revenue Code of 1986, as amended. 3. The following subsection is added to this coverage section: OUTSIDE DIRECTORSHIPS 19. Coverage provided to any Insured Person in an Outside Directorship shall: (a) not extend to the Outside Entity or to any director, officer, trustee, governor or any other equivalent executive or employee of the Outside Entity, other than the Insured Person serving in the Outside Directorship; (b) be specifically excess of any indemnity (other than any indemnity provided by the Insured Organization) or insurance available to such Insured Person by reason of serving in the Outside Directorship, including any indemnity or insurance available from or provided by the Outside Entity; (c) not extend to Loss on account of any Claim made against any Insured Person for a Wrongful Act committed, attempted, or allegedly committed or attempted by such Insured Person while serving in the Outside Directorship if such Wrongful Act is committed, attempted, or allegedly committed or attempted, after the date (i) such Insured Person ceases to be an officer of the Insured Organization, or (ii) service by such Insured Person in the Outside Directorship ceases to be at the specific request of the Insured Organization or a part of the duties regularly assigned to the Insured Person by the Insured Organization; (d) not extend to Loss on account of any Claim made against any Insured Person for a Wrongful Act committed, attempted or allegedly committed or attempted by such Insured Person while serving in the Outside Directorship where such Claim is (i) by the Outside Entity, or (ii) on behalf of the Outside Entity and a director, officer, trustee, governor or equivalent executive of the Outside Entity instigates such Claim, or (iii) by any director, officer, trustee, governor or equivalent executive of the Outside Entity. 4. The Company's maximum liability to pay Loss under this coverage section, including this endorsement, shall not exceed the amount set forth in Item 2 of the Declarations. This endorsement does not increase the Company's maximum liability beyond the Limits of Liability set forth in Item 2 of the Declarations. 5. Payment by the Company or any of its subsidiaries or affiliated companies under another policy on account of a Claim also covered pursuant to this endorsement shall reduce by the amount of the payment the Company's Limits of Liability under this coverage section with respect to such Claim. ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED. Robert Hamburger Authorized Representative May 28, 1998 Date EXECUTIVE PROTECTION POLICY ENDORSEMENT Coverage Section: EXECUTIVE LIABILITY Effective date of this endorsement: MAY 31, 1998 Issued to: RICHARDSON ELECTRONICS, LTD. Company: FEDERAL INSURANCE COMPANY Endorsement No. 9 To be attached to and form part of Policy No. 8125-64-60F It is agreed that if a Claim against an Insured Person includes a claim against the Insured Person's lawful spouse solely by reason of (i) such spouse's status as a spouse of the Insured Person, or (ii) such spouse's ownership interest in property which the claimant seeks as recovery for alleged Wrongful Acts of the Insured Person, all loss which such spouse becomes legally obligated to pay on account of such Claim shall be treated for purposes of this coverage section as Loss which the Insured Person becomes legally obligated to pay on account of the Claim made against the Insured Person. All limitations, conditions, provisions and other terms of coverage (including the deductible) applicable to the Insured Person's Loss shall also be applicable to such spousal loss. The coverage extension afforded by this Endorsement does not apply to any Claim alleging any wrongful act or omission by the Insured Person's spouse. ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED. Robert Hamburger Authorized Representative May 28, 1998 Date EX-10 4 Exhibit 10(z)(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 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 EXCESS DIRECTORS AND OFFICERS LIABILITY AND CORPORATE INDEMNIFICATION POLICY DECLARATIONS St. Paul, Minnesota 55102 A Capital Stock Company Herein Called the Insurer Policy No.: 0512CM0014 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: 5/31/98 To: 5/31/99(12:01 A.M. Standard time at the address stated in Item 2). Item 4.Limit of Liability: $15,000,000 each Policy Period in excess of Item 7(E). The limit of liability available to pay judgments or settlements shall be reduced and may be exhausted by amounts incurred for legal defense costs, charges and expense. 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: $ 61,000 Item 7. Schedule of Underlying Insurer(s): 1.Underlying Insurer: Federated Insurance Company 2.Policy Number: 8125-64-60F 3.Policy Period: From: 5/31/98 To: 5/31/99 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 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: Federated Insurance Company Policy Number: 8125-64-60F Item 9. Forms Attached 1) St. Paul Mercury Insurance Company Policy, Form #50408 2) Endorsements one through four 3) St. Paul Mercury Insurance Company Renewal Application, Form #50264 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 to 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 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 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 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 to 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 of 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 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 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-pro duct 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, not until the amount of the Corporation's obligation to pay and/or the Insured's 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 of their legal representatives. Bankruptcy or insolvency of the Corporation or the Corporation's estate, or bankruptcy or insolvency of 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. Secretary President Paul D. Zicarelli Deufetherdale ENDORSEMENT OR RIDER NO. 4 The following spaces preceded by an (*)need not be completed if this endorsement or rider and the Bond or Policy have the same inception date. ATTACHED TO AND FORMING PART DATE ENDORSEMENT OR EFFECTIVE DATE OF BOND OR POLICY NO.: 512CM0014 DATE ENDORSEMENT OR RIDER EXECUTED: 5/31/98 * EFFECTIVE DATE OF ENDORSEMENT OR RIDER: 12:01 A.M. STANDARD TIME AS SPECIFIED IN THE BOND OR POLICY 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. (If this box is x'd, the signature requested below is required.) ACCEPTED BY INSURED By: Title: 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 Bond or Policy, other than as above stated. ST. PAUL MERCURY INSURANCE COMPANY In Witness Hereof the company has caused this endorsement to be signed by a duly authorized representative of the Company. By: COPY Authorized Representative AGENT ENDORSEMENT OR RIDER NO. 3 The following spaces preceded by an (*)need not be completed if this endorsement or rider and the Bond or Policy have the same inception date. ATTACHED TO AND FORMING PART DATE ENDORSEMENT OR EFFECTIVE DATE OF BOND OR POLICY NO.: 512CM0014 DATE ENDORSEMENT OR RIDER EXECUTED: 5/31/98 * EFFECTIVE DATE OF ENDORSEMENT OR RIDER: 12:01 A.M. STANDARD TIME AS SPECIFIED IN THE BOND OR POLICY SPECIFIC EVENT EXCLUSION M1316 Ed. 12/92 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) based upon, arising out of or attributable to or in any way involving the 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 Cl. 95-202 in the Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida) (If this box is x'd, the signature requested below is required.) ACCEPTED BY INSURED By: Title: 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 Bond or Policy, other than as above stated. ST. PAUL MERCURY INSURANCE COMPANY In Witness Hereof the company has caused this endorsement to be signed by a duly authorized representative of the Company. By: COPY Authorized Representative AGENT ENDORSEMENT OR RIDER NO. 2 The following spaces preceded by an (*) need not be completed if this endorsement or rider and the Bond or Policy have the same inception date. ATTACHED TO AND FORMING PART DATE ENDORSEMENT OR EFFECTIVE DATE OF BOND OR POLICY NO.: 512CM0014 DATE ENDORSEMENT OR RIDER EXECUTED: 5/31/98 * EFFECTIVE DATE OF ENDORSEMENT OR RIDER: 12:01 A.M. STANDARD TIME AS SPECIFIED IN THE BOND OR POLICY 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 5-31-90, 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. (If this box is x'd, the signature requested below is required.) ACCEPTED BY INSURED By: Title: 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 Bond or Policy, other than as above stated. ST. PAUL MERCURY INSURANCE COMPANY In Witness Hereof the company has caused this endorsement to be signed by a duly authorized representative of the Company. By: COPY Authorized Representative AGENT ENDORSEMENT I The following spaces preceded by an asterisk (*) need not be completed if this endorsement and the policy have the same inception date. ATTACHED TO AND FORMING PART OF POLICY NO.: 512CM0014 * EFFECTIVE DATE OF ENDORSEMENT OR RIDER: 5/31/98 * ISSUED TO: RICHARDSON ELECTRONICS ILLINOIS AMENDATORY ENDORSEMENT M 1137 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 and substituted with the following: This policy may be cancelled by the Corporation at any time by mailing written notice 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 adress 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 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 law of the State of Illinois. Nothing herein contained shall be hold 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 *Agency Name and Address be signed by a duly authorized representative of the Company COPY Authorized Representative AGENT ENDORSEMENT 1 The following spaces preceded by an asterisk (*) need not be completed if this endorsement and the policy have the same inception date. ATTACHED TO AND FORMING PART OF POLICY NO.: 512CM0014 * EFFECTIVE DATE OF ENDORSEMENT OR RIDER: 5/31/98 * ISSUED TO: RICHARDSON ELECTRONICS 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) day 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 a 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 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 cancellable. Nothing herein contained shall be hold 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 by *Agency Name and Address a duly be signed authorized representative of the Company COPY Authorized Representative AGENT EX-10 5 Exhibit 10(z)(3) CNA INSURANCE COMPANIES CNA Plaza Chicago, IL 60685 NOTICE DECLARATIONS EXCESS INSURANCE POLICY THIS 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 POLICY NUMBER: DOX 600028634 COVERAGE PROVIDED BY: Continental Casualty Company AGENCY: 910 701862 AGENT: Mesirow Insurance Services, Inc. Robina Fisher 0610 Central Ave. Suite 200 Highland Park, IL, 6003 5 Item 1. NAMED, ENTITY AND PRINCIPAL: Richardson Electronics Ltd 140W267 Keslinger Road Lafox, IL, 60147 Attn. William J. Garry Item 2. Policy Period: 5/31/98 To 5/31/99 12:01 A.M. Standard Time at the Principal Address stated in item Item 3. Limit of Liability (Inclusive of Defense Costs): $5,000,000 Maximum aggregate Limit of Liability each Policy Period. Item 4. Schedule of Underlying Insurance: A. Primary Policy Name of Carrier Policy No.Limits Ded/Ret. Amount Federal Insurance Co. 8125-64-60F $15,000,000 0/0/$250,000 B. Underlying Excess Policy(ies): SEE ATTACHED SCHEDULE Item 5. Policy Premium $ 15,300 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, FIG-0787-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: Lisa Fenell Date: 10/20/98 D.H. Chookaszian D. W. Lowry Chairman of the Board Secretary UNDERLYING EXCESS POLICY SCHEDULE Name of Carrier St. Paul Mercury insurance Company Policy No. 0512CM0014 Limits $15,000,000 Ded/Ret. Amount $0/$0/$0 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 Insureds 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 the Policy expiration date and hour set forth in Item 2 of the Declarations, or its earliest cancellation 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 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 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, land such costs of defense shall reduce the Limit 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 insolvency, bankruptcy, or as liquidation of said insurer, then the Insureds hereunder shall be deemed to have retained any loss for the amount of 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 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 reasonable 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 Insured's 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 and (b) any additional or return premiums charged or allowed in connection 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 employee of the Insurer or any of its agents relating to this Policy. XI. POLICY CANCELLATION This Policy may be canceled by the Named Entity at any time by written notice or by surrender of this Policy to the Insurer. This Policy may also be canceled 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 of 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 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 canceled 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.H. Chookaszian D. W. Lowry Chairman of the Board Secretary 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 canceled by either the first named insured or the insurer. 1. The named insured can cancel this policy at any time by mailing advanced 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 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 canceled, 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. 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. Must be Completed: ENDT. NO.: I POLICY NO.: 600028634 Complete Only When This Endorsement Is Not Prepared with the Policy or is Not to be Effective with the Policy ISSUED TO: Richardson Electronics Ltd EFFECTIVE DATE OF THIS ENDORSEMENT: 06/01/1998 Countersigned by: Lisa Fenell, Authorized Representative 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 if 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 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. Must be completed: ENDT. NO.: I POLICY NO.: 600028634 Complete Only When This Endorsement Is Not Prepared with the Policy or is Not to be Effective with the Policy ISSUED TO: Richardson Electronics Ltd EFFECTIVE DATE OF THIS ENDORSEMENT 06/01/1998 Countersigned by: Lisa Fennell, Authorized Representative This notice is to advise 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 at 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. Must be completed: ENDT. NO.: 1 POLICY NO.: 600028634 Complete Only When This Endorsement Is Not Prepared with the Policy or is Not to be Effective with the Policy: ISSUED TO: Richardson Electronics Ltd EFFECTIVE DATE OF THIS ENDORSEMENT: 06/01/1998 Countersigned by: Lisa Fenell, 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. Must be Completed: ENDT. NO.: 2 POLICY NO.: 600028634 Complete Only When This Endorsement Is Not Prepared with the Policy or is Not to be Effective with the Policy: ISSUED TO: Richardson Electronics Ltd EFFECTIVE DATE OF THIS ENDORSEMENT: 06/01/1998 Countersigned by: Lisa Fenell, 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: 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 to the designated Insurers takes effect on the effective date of said Policy, unless another effective date said Policy and expires concurrently with said Policy. Must be Completed: ENDT. NO.: 3 POLICY NO.: 600028634 Complete Only When This Endorsement Is Not Prepared with the Policy or is Not to be Effective with the Policy ISSUED TO: Richardson Electronics Ltd EFFECTIVE DATE OF THIS ENDORSEMENT: 06/01/1998 Countersigned by: Lisa Fenell, 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. Must be Completed: ENDT. NO.: 4 POLICY NO.: 600028634 Complete Only When This Endorsement Is Not Prepared with the Policy or is Not to be Effective with the Policy ISSUED TO: Richardson Electronics Ltd EFFECTIVE DATE OF THIS ENDORSEMENT: 06/01/1998 Countersigned by: Lisa Fenell, Authorized Representative AMENDMENT OF PRIMARY POLICY DEFINITION TO FOLLOW CHUBB D&O COVERAGE In consideration of the premium paid for this Policy, it is agreed that: 1. Item 4.A. of the Declarations is deleted and the following is substituted: A. Primary Policy Name of Carrier: Federal Insurance Company Policy No.8125-64-60F Applicable Coverage Section: Executive Liability and Indemnification Coverage Section (Form 14-02-0943) and any applicable endorsements and General Terms and Conditions (Form 14- 02-0941) pertaining thereto Limit of Liability of Primary Policy Applicable to Executive Liability and Indemnification Coverage Section (a) each Loss: $15,000,000 (b) each Policy Period: $15,000,000 Deductible of Primary Policy Applicable to Executive Liability and Idemnification Coverage Section: $100,000, 2. II. POLICY DEFINITIONS is amended by deleting "Primary Policy means the Policy scheduled in Item 4.A of the Declarations" and substituting the following: "Primary Policy" means only the Executive Liability and Indemnification Coverage Section (Form 14-02-0943), and any applicable endorsements and General Terms and Conditions (Form 14-02-0941)pertaining thereto of the Executive Protection Policy issued by Federal Insurance Company, as such policy is identified in Item 4.A. of the Declarations, and shall not include any other coverage section contained in such 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 of said Policy unless another effective date is shown below, at the hour stated in said Policy and expires concurrently with said Policy. Must be Completed: ENDT NO.: 5 POLICY NO.: 600028634 Complete Only When This Endorsement Is Not Prepared with the Policy or is Not to be Effective with the Policy: ISSUED TO: Richardson Electronics Ltd EFFECTIVE DATE OF THIS ENDORSEMENT 06/01/1998 Countersigned by: Lisa Fenell, Authorized Representative EX-13 6 Five-Year Financial Review
(in thousands, except per share amounts) Year Ended May 31 Statement of Operations Data 1999 1998 1997(1) 1996 1995(2) --------- --------- --------- --------- --------- Net sales $320,941 $304,172 $255,139 $239,667 $208,118 Cost of products sold 231,328 217,509 187,675 169,123 152,785 Selling, general and administrative expenses 70,870 65,393 62,333 52,974 48,674 Other expense, net 6,886 7,334 7,856 5,559 4,028 --------- --------- --------- --------- --------- Income (loss) before income taxes and extraordinary item 11,857 13,936 (2,725) 12,011 2,631 Income tax provision (benefit) 3,505 4,200 (1,720) 3,900 150 --------- --------- --------- --------- --------- Income (loss) before extraordinary item 8,352 9,736 (1,005) 8,111 2,481 Extraordinary gain (loss), net of tax -- -- (488) -- 527 --------- --------- --------- --------- --------- Net income (loss) $ 8,352 $ 9,736 $ (1,493) $ 8,111 $ 3,008 ========= ========= ========= ========= ========= Income (loss) per share - basic: Before extraordinary item $ .60 $ .79 $ (.08) $ .70 $ .22 Extraordinary gain (loss), net of tax -- -- (.04) -- .05 --------- --------- --------- --------- --------- Net income (loss) per share $ .60 $ .79 $ (.12) $ .70 $ .27 ========= ========= ========= ========= ========= Income (loss) per share - diluted: Before extraordinary item $ .60 $ .77 $ (.08) $ .68 $ .21 Extraordinary gain (loss), net of tax -- -- (.04) -- .05 --------- --------- --------- --------- --------- Net income (loss) per share $ .60 $ .77 $ (.12) $ .68 $ .26 ========= ========= ========= ========= ========= Dividends per common share $ .16 $ .16 $ .16 $ .16 $ .16 ========= ========= ========= ========= ========= Year Ended May 31 Net Sales by Strategic Business Unit 1999 1998 1997 1996 1995 --------- -------- -------- -------- -------- Electron Device Group (EDG) $119,882 $119,157 $113,700 $109,925 $105,454 Solid State & Components (SSC) 93,463 88,014 74,209 67,976 52,409 Display Products Group (DPG) 37,416 30,639 29,377 36,154 36,502 Security Systems Division (SSD) 70,180 66,362 37,853 25,612 13,753 --------- -------- --------- --------- --------- Consolidated $320,941 $304,172 $255,139 $239,667 $208,118 ========= ======== ========= ========= ========= As of May 31 Balance Sheet Data 1999 1998 1997 1996 1995 --------- --------- --------- --------- -------- Receivables $ 62,448 $ 63,431 $ 53,333 $ 48,232 $ 42,768 Inventories 107,724 96,443 92,194 94,327 81,267 Working capital, net 161,640 149,577 140,821 133,151 106,235 Property, plant and equipment, net 23,047 18,477 17,526 16,054 16,388 Total assets 235,678 209,700 192,514 180,158 173,514 Long-term debt 113,658 87,427 107,275 92,025 79,647 Stockholders' equity 84,304 91,585 59,590 62,792 56,154
(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 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. The Company also recorded an extraordinary gain of $864, less tax of $337, or $.05 per share, on the repurchase of certain of the Company's debentures. Page 6 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 1999 were a record $320.9 million. Sales by SBU and percent of consolidated sales are presented in the following table (in thousands): Sales 1999 % 1998 % 1997 % -------- ----- -------- ----- -------- ----- EDG $119,882 37.3 $119,157 39.2 $113,700 44.6 SSC 93,463 29.1 88,014 28.9 74,209 29.1 DPG 37,416 11.7 30,639 10.1 29,377 11.5 SSD 70,180 21.9 66,362 21.8 37,853 14.8 -------- ----- -------- ----- -------- ----- Total $320,941 100.0 $304,172 100.0 $255,139 100.0 ======== ===== ======== ===== ======== ===== Sales growth of 5.5% in 1999 and 19.2% in 1998 benefited from several business acquisitions. Excluding the effect of these acquisitions, internally generated sales growth was 1.6% in 1999 and 11.8% in 1998. 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 "Corporate" (in thousands): Gross Margins 1999 % 1998 % 1997 % -------- ----- -------- ----- -------- ----- EDG $ 36,828 30.7 $ 37,219 31.2 $ 32,220 28.3 SSC 26,590 28.4 25,160 28.6 19,923 26.8 DPG 11,474 30.7 10,464 34.2 8,465 28.8 SSD 16,184 23.1 15,335 23.1 8,267 21.8 -------- -------- -------- Total 91,076 28.4 88,178 29.0 68,875 27.0 Corporate (1,463) (1,515) (1,411) -------- -------- -------- Consolidated $ 89,613 27.9 $ 86,663 28.5 $ 67,464 26.4 ======== ======== ======== 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 net sales gain of 0.6% in 1999 reflects a 7.0% contraction of the core business offset by growth in medical x-ray imaging and the sale of logistics services. The core business was adversely affected by economic difficulties in Latin America and weak demand for microwave products used in the manufacture of semiconductors. The 4.8% sales growth in 1998 resulted from an increase in market share and emphasis on medical x-ray imaging. Foreign sales as a percent of total sales for EDG were 50.9%, 54.8% and 56.5% in 1999, 1998 and 1997, respectively. The medical electronics replacement business is a growth segment of the vacuum tube industry. Demand for rebuilt 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 expanded its medical sales force and acquired existing x-ray tube and image intensifier reloading facilities in the United States and built a similar facility in the Netherlands. Sales in this EDG product line increased 9.5% to $22.3 million in 1999, following a 21.9% increase in 1998. Other growth areas in EDG, include microwave generators, pulse power tubes, industrial magnetrons and broadcast transmitters. Gross margin as a percent of sales was 30.7% in 1999, compared to 31.2% in 1998 and 30.6% (adjusted to exclude the special charge) in 1997. The gross margin change in 1999 reflects a change in product mix as lower-margin medical sales comprise a larger portion of total sales. The margin improvement in 1998 resulted from additional focus on pricing policies, emphasis on proprietary product lines and value-added services. Solid State and Components SSC operates in several markets, including the rapidly growing wireless telecommunications industry. Sales increased 6.2% in 1999 to $93.5 million, following an 18.6% increase in 1998. Sales growth in 1999 slowed due to a general weakness in the semiconductor industry. Sales outside of the United States represented 43.7%, 39.8% and 37.6% of SSC's sales in 1999, 1998 and 1997, respectively. The largest sales gains in 1999 outside the United States were in Asia/Pacific, up 55.9%, and Europe, up 17.2%. During fiscal 1999, the Company acquired TRL Technologies, Inc. Although the acquisition added only $800,000 to fiscal 1999 sales, their design and manufacturing capabilities in the wireless telecommunications market are projected to generate significant sales in future years, including a $4.5 million contract to be delivered in fiscal 2000. Gross margin as a percent of sales was 28.4% in 1999, compared to 28.6% in 1998 and 30.1% (adjusted to exclude the special charge) in 1997. The decline in margin in 1999 reflects competitive pricing pressures and changes in product mix. Page 7 Management's Discussion and Analysis Display Products Group DPG sales increased 22.1% in 1999 and 4.3% in 1998. The sales growth in 1999 reflects the expansion of the DPG product line into monitors and related systems integration. Sales outside the United States represented 39.9%, 48.8% and 46.1% of DPG's sales in 1999, 1998 and 1997, respectively. Sales growth also benefited from the acquisitions of Eternal Graphics in March 1998 and PixeLink in March 1999. Excluding the effect of acquisitions, DPG's sales growth was 10.4% in 1999 and 0.7% in 1998. Gross margin as a percent of sales was 30.7% in 1999, compared to 34.2% in 1998 and 35.1% (adjusted to exclude the special charge) in 1997. 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 provides security systems and related design services with an emphasis on closed circuit television (CCTV). In December 1998, the Company acquired Adler Video Systems, a distributor in southern California with annual sales of approximately $8.4 million. This purchase follows the acquisition of two Canadian distributors, Security Service International, Inc. (SSI) in August 1997 and Burtek Systems Inc. (Burtek) in February 1997, with annual sales of approximately $20.0 million and $18.0 million, respectively. These acquisitions contributed to the 5.8% growth in sales in 1999 and the 75.3% sales growth in 1998. Excluding the effect of acquisitions, sales declined 4.4% in 1999 and increased 27.7% in 1998. SSD's sales in 1999 were adversely affected by a soft Canadian economy and by foreign exchange, as a 7.0% decline in the value of the Canadian dollar generated a 3.4% reduction in reported sales. Sales outside of the United States represented 59.4% of SSD's sales in 1999, 63.5% in 1998, and 47.7% in 1997. Gross margin was 23.1% of sales in 1999 and 1998 and 21.8% of sales in 1997. The improvement in gross margin in 1998 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, mitigating the effect of lower gross margin rates. Sales by Geographic Area On a geographic basis, the Company categorizes its sales by destination: North America, Europe, Latin America, Asia/Pacific and Other. Prior year data has been restated to reflect this categorization. Other includes sales to export distributors and to countries where the Company does not have offices, including Eastern Europe and the Middle East. Sales and gross margin by geographic area are as follows (in thousands): Sales 1999 % 1998 % 1997 % -------- ----- -------- ----- -------- ----- North America $205,013 63.8 $189,116 62.2 $153,205 60.0 Europe 65,365 20.4 62,706 20.6 51,681 20.3 Latin America 16,734 5.2 20,755 6.8 17,861 7.0 Asia/Pacific 23,390 7.3 21,155 7.0 20,261 7.9 Other 10,439 3.3 10,440 3.4 12,131 4.8 -------- ----- -------- ----- -------- ----- Consolidated $320,941 100.0 $304,172 100.0 $255,139 100.0 ======== ===== ======== ===== ======== ===== Gross Margins 1999 % 1998 % 1997 % -------- ----- -------- ----- -------- ----- North America $ 55,569 27.1 $ 53,372 28.2 $ 40,596 26.5 Europe 20,607 31.5 19,449 31.0 15,016 29.1 Latin America 4,729 28.3 5,763 27.8 4,313 24.1 Asia/Pacific 7,169 30.6 6,427 30.4 5,682 28.0 Other 3,002 28.8 3,167 30.3 3,268 26.9 -------- -------- -------- Total 91,076 28.4 88,178 29.0 68,875 27.0 Corporate (1,463) (1,515) (1,411) -------- -------- -------- Consolidated $ 89,613 27.9 $ 86,663 28.5 $ 67,464 26.4 ======== ======== ======== North American sales increased 8.4% in 1999, following a 23.5% increase in 1998. The 1999 increase reflects growth in SSC, DPG monitor sales and acquisitions. The 1998 increase reflects growth in SSC, EDG, SSD and acquisitions. Sales in Europe increased 4.2% in 1999 and 21.3% in 1998. The crash in Asian markets affected sales for the latter half of fiscal 1998 and the first half of fiscal 1999. Performance improved significantly in the second half of 1999. Overall, Asia/Pacific sales grew 4.4% in 1998 and 10.6% in 1999. Shortly after the Asian crisis, the Brazilian market declined. Latin American sales did not recover throughout 1999, as sales declined 19.4% in 1999 after a 16.2% increase in 1998. Sales denominated in currencies other than U.S. dollars were 40.2%, 39.0% and 34.0% of total sales in 1999, 1998 and 1997, respectively. Foreign currency exchange rate changes reduced foreign sales by an average of 3.0% in 1999 and 5.9% in 1998. Average selling prices, excluding the effects of exchange rate changes declined 0.4% in 1999 and 0.3% in 1998 and were unchanged in 1997. The following table reconciles product margins on distribution activities to gross margins reported in the Consolidated Statements of Operations: (% of sales) 1999 1998 1997 -------- -------- -------- Distribution product margin 29.0 % 29.6 % 29.9 % Customer returns and scrap (0.4) (0.6) (0.3) Freight costs not inventoried (0.3) (0.3) (0.3) Overstock provisions - 0.1 (3.0) Other costs (0.4) (0.3) 0.1 -------- -------- -------- Gross margin 27.9 % 28.5 % 26.4 % ======== ======== ======== Page 8 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 1997, in conjunction with a 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 22.1% of sales in 1999, 21.5% in 1998 and 24.4% in 1997. In the third quarter of 1999, the Company adjusted staffing in light of current sales levels, resulting in a reduction in annual operating costs of approximately $2.5 million, beginning in the fourth quarter. Related severance costs were $340,000. In the fourth quarter of 1999, the Company recorded a $500,000 provision for potential losses on certain Latin American accounts receivable. The 1998 improvement reflects policy and procedural changes initiated by the Company to reduce 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. Other (Income) Expense Interest expense decreased 4.9% in 1999, reflecting lower borrowing levels during the year. Investment income includes realized capital gains of $39,000 in 1999 and $506,000 in 1998. Foreign exchange and other expenses primarily reflect changes in the value of the U.S. dollar relative to foreign currencies. Income Tax Provision The effective tax rates were 29.6% in fiscal 1999, 30.1% in 1998 and 63.1% in 1997. The 1999 and 1998 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 Net income declined 14.2% in 1999, to $8.4 million, or $.60 per share, from $9.7 million, or $.77 per share in 1998. 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 income before extraordinary loss by $6.7 million, or $.56 per share. Also in 1997, an extraordinary loss reduced income by $488,000, or $.04 per share. Financial Condition Liquidity The Company provides engineered solutions, including prototype design and assembly, in niche product areas to its customers. Additionally, the Company specializes in certain products representing trailing-edge technology that may not be available from other sources, and may not be currently manufactured. In many cases, the Company's 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, business acquisitions and, in 1999, purchases of treasury stock. Cash provided by operations was $4.1 million in fiscal 1999, $6.3 million in 1998 and $3.6 million in 1997. Additional investments in working capital to support sales growth were $10.2 million, $10.6 million and $7.3 million in 1999, 1998 and 1997, respectively. At May 31, 1999, the Company had net operating loss carryforwards of $7.3 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 proposed a plan, which has been accepted by 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 charged to operations in 1996. The balance of the reserve is $544,000 and is included in accrued liabilities at May 31, 1999. Financing In March 1998, the Company replaced its existing senior revolving credit note agreement with a new $50.0 million floating-rate revolving credit agreement expiring 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 can be reduced if the Company meets certain performance benchmarks. At May 31, 1999, $16.4 million was available under this line. In fiscal 1999, the Company purchased a suite of enterprise resource planning software utilizing state-of-the-art client-server technology. The Company entered into a financing arrangement with quarterly payments through March 2001 and an implicit interest rate of 7.5%. Page 9 Management's Discussion and Analysis In May 1998, the Company sold 2.1 million 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. In fiscal 1999, the Company purchased 2.0 million shares of its Common Stock at an average cost of $5.76 per share. Based on shares outstanding at May 31, 1999, annual dividend payments approximate $2.0 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, while historically has not, in the future may enter into forward contracts to hedge significant transactions. Other tools that 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. There are no outstanding forward exchange contracts at May 31, 1999. Impact of Year 2000 The year 2000 issue is the result of computer programs written using two digits rather than four to define the applicable year. The Company's current computer database correctly stores date stamps that include four digit years. The Company sets standard configuration guidelines for personal computer systems used within the Company, which are year 2000 compliant. Based on a recent assessment, the Company anticipates its systems will function properly with respect to dates in the year 2000 and thereafter. Future operating results may also be affected by the readiness of the Company's trading partners to meet year 2000 requirements. The Company is in the process of surveying its vendors of products with embedded chips or date- sensitive systems concerning their year 2000 readiness. The use of electronic data interchanges by the Company is limited to a few vendors and customers and the Company does not anticipate significant year 2000 issues relating to interface systems with these parties. The Company has no single customer that accounts for more than 2% of its sales or any vendor that accounts for more than 9% of its purchases. Based upon the foregoing, the Company believes that its risk of significant financial impact resulting from the inability of its trading partners to meet year 2000 requirements is minimal. Conversion to the Euro On January 1, 1999, eleven member countries of the European Union began conversion to a common currency, the Euro. From January 1, 1999 until January 1, 2002, companies operating in Europe must be able to process business transactions either in legacy currencies or in Euros. After January 1, 2002, all transactions will be processed only in Euros. These changes could have significant impacts on transaction processing costs, pricing policies and foreign currency exchange risk management. The Company has verified that its transaction processing systems can accommodate the Euro and dual currency processing requirements without significant additional costs. While the exact impact on pricing is indeterminable, the Company believes that since most of its pricing is based on U.S. dollar costs, the effect of conversion to the Euro will not be significant. The Company expects to adopt the Euro as the functional currency for each of its subsidiaries within the European Union. While it is possible that this change may result in reduced volatility of foreign exchange results, these benefits cannot be quantified at this time. Risk Management and Market Sensitive Financial Instruments As discussed above, the Company's debt financing, in part, varies with market rates and certain of its operations and assets and liabilities are denominated in foreign currencies that subject the Company to foreign exchange risk. In order to provide the user of these financial statements guidance regarding the magnitude of these risks, the Securities and Exchange Commission requires the Company to provide certain disclosures based upon hypothetical assumptions. Specifically, these disclosures require the calculation of the effect a 10% increase in market interest rates and a uniform 10% strengthening of the U. S. dollar against foreign currencies would have on the reported net earnings of the Company. Under these assumptions in 1999, additional interest expense, tax effected, would have reduced net income by $150,000 and foreign currency exchange rates would have decreased net income by $140,000. The interpretation and analysis of these disclosures should not be considered in isolation since such variances in interest rates and foreign currency exchange rates would likely influence other economic factors. Such factors, which are not readily quantifiable, would likely also affect the Company's 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. Page 10 Consolidated Balance Sheets As of May 31 (in thousands) 1999 1998 -------- -------- Assets Current assets Cash and equivalents $ 12,569 $ 8,031 Receivables, less allowance of $2,584 and $2,230 62,448 63,431 Inventories 107,724 96,443 Other 12,817 9,681 -------- -------- Total current assets 195,558 177,586 Property, plant and equipment, net 23,047 18,477 Other assets 17,073 13,637 -------- -------- Total assets $235,678 $209,700 ======== ======== Liabilities and stockholders' equity Current liabilities Accounts payable $ 21,829 $ 17,320 Accrued liabilities 10,259 10,286 Notes and current portion of long-term debt 1,830 403 -------- -------- Total current liabilities 33,918 28,009 Long-term debt 113,658 87,427 Deferred income taxes 3,798 2,679 -------- -------- Total liabilities 151,374 118,115 Stockholders' equity Common Stock, $.05 par value 570 561 Class B Common Stock, convertible, $.05 par value 162 162 Preferred Stock, $1.00 par value - - Additional paid-in capital 82,309 80,606 Treasury stock (11,532) - Retained earnings 23,044 16,842 Foreign currency translation adjustment (10,249) (6,586) -------- -------- Total stockholders' equity 84,304 91,585 -------- -------- Total liabilities and stockholders' equity $235,678 $209,700 ======== ======== See notes to consolidated financial statements. Page 11 Consolidated Statements of Operations Year Ended May 31 (in thousands, except per share amounts) 1999 1998 1997 -------- -------- -------- Net sales $320,941 $304,172 $255,139 Cost of products sold 231,328 217,509 187,675 -------- -------- -------- Gross margin 89,613 86,663 67,464 Selling, general and administrative expenses 70,870 65,393 62,333 -------- -------- -------- Operating income 18,743 21,270 5,131 Other (income) expense: Interest expense 7,689 8,084 7,622 Investment income (636) (1,005) (392) Foreign exchange and other (167) 255 626 -------- -------- -------- 6,886 7,334 7,856 -------- -------- -------- Income (loss) before income taxes and extraordinary item 11,857 13,936 (2,725) Income tax provision (benefit) 3,505 4,200 (1,720) -------- -------- -------- Income (loss) before extraordinary item 8,352 9,736 (1,005) Extraordinary loss, net of tax benefit - - (488) -------- -------- -------- Net income (loss) $ 8,352 $ 9,736 $ (1,493) ======== ======== ======== Income (loss) per share - basic: Before extraordinary item $ .60 $ .79 $ (.08) Extraordinary loss, net of tax benefit - - (.04) -------- -------- -------- Net income (loss) per share $ .60 $ .79 $ (.12) ======== ======== ======== Average shares outstanding 13,822 12,264 11,892 Income (loss) per share - diluted: Before extraordinary item $ .60 $ .77 $ (.08) Extraordinary loss, net of tax benefit - - (.04) -------- -------- -------- Net income (loss) per share $ .60 $ .77 $ (.12) ======== ======== ======== Average shares outstanding 14,026 12,689 11,892 Dividends per common share $ .16 $ .16 $ .16 Comprehensive income (loss): Net income (loss) $ 8,352 $ 9,736 $ (1,493) Foreign currency translation adjustment (3,663) (2,983) (1,190) -------- -------- -------- Comprehensive income (loss) $ 4,689 $ 6,753 $ (2,683) ======== ======== ======== See notes to consolidated financial statements. Page 12 Consolidated Statements of Cash Flows Year Ended May 31 (in thousands) 1999 1998 1997 ------- ------- ------- Operating activities: Net income (loss) $ 8,352 $ 9,736 $(1,493) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation 3,605 3,477 2,627 Amortization of intangibles and financing costs 633 632 1,318 Deferred income taxes 1,237 2,779 (3,305) Stock contribution to employee ownership plan 485 285 800 Special charges -- -- 11,000 ------- ------- ------- Net adjustments 5,960 7,173 12,440 ------- ------- ------- Changes in working capital, net of currency translation effects and business acquisitions: Receivables 1,108 (9,170) (4,277) Inventories (10,985) (3,658) 406 Other current assets (3,015) 186 253 Accounts payable 3,172 4,366 (3,719) Accrued liabilities (509) (2,350) 28 ------- ------- ------- Net changes in working capital (10,229) (10,626) (7,309) ------- ------- ------- Net cash provided by operating activities 4,083 6,283 3,638 ------- ------- ------- Financing activities: Proceeds from borrowings 31,528 16,731 57,890 Payments on debt (3,743) (35,642) (42,640) Proceeds from sale of common stock 385 26,933 536 Purchases of treasury stock (11,527) -- -- Cash dividends (2,150) (1,976) (1,855) ------- ------- ------- Net cash provided by financing activities 14,493 6,046 13,931 ------- ------- ------- Investing activities: Business acquisitions (3,795) (6,798) (9,902) Capital expenditures (7,647) (4,116) (4,004) Other (2,596) (3,396) (435) ------- ------ ------- Net cash used in investing activities (14,038) (14,310) (14,341) ------- ------- ------- Increase (decrease) in cash and equivalents 4,538 (1,981) 3,228 Cash and equivalents at beginning of year 8,031 10,012 6,784 ------- ------- ------- Cash and equivalents at end of year $12,569 $ 8,031 $10,012 ======= ======= ======= See notes to consolidated financial statements. Page 13 Consolidated Statements of Stockholders' Equity
Shares Issued Accumulated --------------- Additional Other (shares and dollars Class B Par Paid-in Treasury Retained Comprehensive in thousands) Common Common Value Capital Stock Earnings Income(Loss) Total ------ ------- ----- ---------- -------- -------- ------------- ------- Balance June 1, 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 shares to common shares 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 Shares contributed to ESOP 12 -- 1 484 -- -- -- 485 Shares issued under ESPP and stock option plan 189 -- 8 1,219 (5) -- -- 1,222 Purchase of 2,000 shares of Common Stock -- -- -- -- (11,527) -- -- (11,527) Conversion of Class B shares to common shares 6 (6) -- -- -- -- -- -- Dividends -- -- -- -- -- (2,150) -- (2,150) Currency translation -- -- -- -- -- -- (3,663) (3,663) Net income -- -- -- -- -- 8,352 -- 8,352 ------ ------- ----- ---------- --------- -------- ------------ ------- Balance May 31, 1999 11,390 3,233 $ 732 $ 82,309 $(11,532) $ 23,044 $ (10,249) $84,304 ====== ======= ===== ========== ========= ======== ============ =======
See notes to consolidated financial statements. Page 14 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. Reclassifications: Certain amounts in the 1998 and 1997 financial statements are reclassified to conform to the 1999 presentation. 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 78% of total inventories at May 31, 1999 and 80% at May 31, 1998. 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 $2,058 and $3,569 at May 31, 1999 and 1998, 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, 1999 and 1998. 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 1999 1998 -------- -------- Land and improvements $ 2,764 $ 2,721 Buildings and improvements 18,776 18,479 Machinery and equipment 36,003 28,595 -------- -------- Property at cost 57,543 49,795 Accumulated depreciation (34,496) (31,318) -------- -------- Property, net $ 23,047 $ 18,477 ======== ======== Other Assets: Deferred financing costs, goodwill and other deferred charges are amortized using the straight-line method. Goodwill is generally amortised over a period of 20 to 40 years. However, the Company continually evaluates the carrying value of goodwill based upon its recoverability from related projected undiscounted cash flows. Other assets consist of the following: May 31 1999 1998 -------- -------- Investments (at market) $ 2,603 $ 2,931 Notes receivable 5,680 3,158 Deferred financing costs, net 436 502 Goodwill, net 7,126 5,558 Other deferred charges, net 1,228 1,488 -------- -------- Other assets, net $ 17,073 $ 13,637 ======== ======== Accrued Liabilities: Accrued liabilities consist of the following: May 31 1999 1998 -------- -------- Compensation and payroll taxes $ 4,048 $ 5,072 Interest 2,758 2,546 Income taxes 1,042 362 Other accrued expenses 2,411 2,306 -------- -------- Accrued liabilities $ 10,259 $ 10,286 ======== ======== Foreign Currency Translation: Foreign currency balances and financial statements are translated into U.S. dollars at end-of-period rates, except that revenues 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 gains (losses) reflected in operations are $77, $(299), and $(563) in 1999, 1998, and 1997, 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. Page15 Notes to Consolidated Financial Statements (In thousands, except per share amounts) Earnings per Share: Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of Common and Class B Common shares outstanding. Diluted earnings per share is calculated by dividing net income (loss) by the actual 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 are based on the following amounts: 1999 1998 1997 ------- ------- ------- Numerator for EPS: Income (loss) before extraordinary item $ 8,352 $ 9,736 $(1,005) Extraordinary loss, net of tax - - (488) ------- ------- ------- Net income (loss) $ 8,352 $ 9,736 $(1,493) ======= ======= ======= Denominator for basic EPS: Beginning shares outstanding 14,422 11,964 11,806 Additional shares issued 106 300 86 Reduction for shares acquired (706) - - ------- ------- ------- Average shares outstanding 13,822 12,264 11,892 ======= ======= ======= Denominator for diluted EPS: Average shares outstanding 13,822 12,264 11,892 Effect of dilutive stock options 204 425 - ------- ------- ------- Average shares outstanding 14,026 12,689 11,892 ======= ======= ======= 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 are excluded from the calculation because they are anti-dilutive. In-the-money stock options are excluded from the calculation in 1997 because the Company reported a net loss. Note B -- Special Charges and Extraordinary Item In 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 are included in cost of sales, and provisions for accounts receivable, severance and other costs of $3,800 are included in selling, general and administrative expense. Collectively, these charges amount to $11,000, or $6,712, net of tax, reducing earnings per share by $.56. Also in fiscal 1997, the Company recorded an $800 extraordinary charge for the write-off of unamortized debt issuance costs associated with a portion of the Company's 7 1/4% convertible subordinated debentures, which were exchanged for a new 8 1/4% debenture. Net of tax, the charge was $488, or $.04 per share. Note C -- Acquisitions Fiscal 1999: In December 1998, the Company's SSD unit acquired Adler Video Systems, a southern California based distributor of closed circuit television (CCTV) systems with annual sales of approximately $8,400. The Company also made three smaller acquisitions with annual sales of about $2,000 each. These acquisitions included TRL Technologies, a manufacturer of amplifier circuits for the SSC business unit's wireless communications operations; Sahab S.A., a Mexican distributer of broadcast transmitters for the EDG Business unit; and PixeLink, a systems integrator specializing in medical monitors for the DPG business unit. The aggregate cash outlay for business acquisitions in 1999 was $3,795. Additional non-cash payments of $1,113 were made in the form of the Company's Common Stock and the foregiveness of an account receivable. Fiscal 1998: 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 approximately $20,000. In March 1998, the Company acquired Eternal Graphics, a systems integrator specializing in financial applications for the DPG business unit with annual sales of approximately $4,200. Fiscal 1997: In February 1997, the SSD unit acquired Burtek Systems, Inc., (Burtek) a security systems distributor operating in Canada with annual sales of approximately $18,000. 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 approximately $8,000. 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. If each of these acquisitions had occurred at the beginning of the year, consolidated sales would have increased by approximately $6,900, $6,000 and $12,000 in 1999, 1998 and 1997, respectively. The terms of certain of the Company's acquisition agreements provide for additional consideration to be paid if the acquired entity's results of operations exceed certain targeted levels. Such amounts are paid in cash and recorded when earned as additional consideration, and in 1999, amounted to $927. Assuming the goals established in all agreements outstanding at May 31, 1999 were met, additional consideration aggregating approximately $4,500 would be payable through 2003. 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 7.9%, 9.6%, and 13.0%, of net sales in fiscal 1999, 1998 and 1997, respectively. Page 16 Note E -- Debt Financing Long-term debt consists of the following: May 31 1999 1998 -------- -------- 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 (6.07% at May 31, 1999) 33,582 6,582 Revolving credit and term loan due March 2001 (5.63% at May 31, 1999) 7,694 9,365 Software financing arrangement 2,673 - Other 714 1,058 -------- -------- Long-term debt 115,488 87,830 Less current portion (1,830) (403) -------- -------- Long-term debt $113,658 $ 87,427 ======== ======== 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 of the 7 1/4% debenture is convertible into the Company's Common Stock at any time prior to maturity at $21.14 per share and the 8 1/4% debentures are convertible at $18.00 per share. The Company is required to make sinking fund payments of $3,850 in 2004 and $6,225 in 2005. The Company has a $50,000 floating-rate revolving credit facility which expires March 1, 2001. At May 31, 1999, $33,582 was outstanding under this agreement. Loans under the agreement bear interest at the Company's option at prime or at a premium over LIBOR. The premium over LIBOR varies with certain performance benchmarks. At May 31, 1999, the premium was 125 basis points and $16,400 was available for future borrowing. To complete the acquisition of Burtek in 1997, a subsidiary of the Company entered into a revolving credit and term loan agreement aggregating $6,000 with a 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 $12,100 in August 1997 to facilitate the acquisition of SSI and matures March 1, 2001. At May 31, 1999, $7,694 was outstanding and an additional $948 was available under the agreement. In fiscal 1999, the Company purchased a suite of enterprise resource planning software utilizing state-of the-art client-server technology. The Company entered into a financing arrangement with quarterly payments through March 2001 with an average implicit interest rate of 7.5%. The loan and debenture agreements contain financial covenants with which the Company was in full compliance at May 31, 1999. 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: $1,830 in 2000, $42,833 in 2001 and $3,850 in 2004. Cash payments for interest were $7,477, $8,387 and $7,463 in 1999, 1998 and 1997, 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. 1999 1998 -------------------- -------------------- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- 8 1/4% Convertible debentures $ 40,000 $ 33,800 $ 40,000 $ 38,000 7 1/4% Convertible debentures 30,825 22,965 30,825 27,126 Floating-rate revolving credit facility 33,582 33,582 6,582 6,582 Revolving credit and term loan 7,694 7,694 9,365 9,365 Software financing arrangement 2,673 3,036 - - Other 714 714 1,058 1,058 -------- -------- -------- -------- Total 115,488 101,791 87,830 82,131 Less current portion (1,830) (1,830) (403) (403) -------- -------- -------- -------- Total $113,658 $ 99,961 $ 87,475 $ 81,728 ======== ======== ======== ======== Note F -- Income Taxes The components of income (loss) before income taxes and extraordinary item are: 1999 1998 1997 ---------- ---------- ---------- United States $ 9,531 $ 11,070 $ (4,558) Foreign 2,326 2,866 1,833 ---------- ---------- ---------- Income (loss) before taxes and extraordinary item $ 11,857 $ 13,936 $ (2,725) ========== ========== ========== Page 17 Notes to Consolidated Financial Statements (In thousands, except per share amounts) The provision (benefit) for income taxes differs from income taxes computed at the federal statutory tax rate of 34.0% as a result of the following items: 1999 1998 1997 ---------- ---------- ---------- Federal statutory rate 34.0 % 34.0 % 34.0 % Effect of: State income taxes, net of federal tax benefit 2.8 3.5 11.3 FSC benefit on export sales (7.2) (6.2) 12.3 Realization of tax benefit on prior years' foreign losses - - 14.7 Foreign taxes at other rates 0.5 (0.3) (7.5) Other (0.5) (0.9) (1.7) ---------- ---------- ---------- Effective tax rate 29.6 % 30.1 % 63.1 % ========== ========== ========== The provision (benefit) for income taxes before extraordinary item consist of the following: 1999 1998 1997 ---------- ---------- ---------- Currently payable: Federal $ 1,294 $ 973 $ 299 State (44) 155 - Foreign 1,018 293 609 ---------- ---------- ---------- Total currently payable 2,268 1,421 908 Deferred: Federal 730 1,867 (2,626) State 545 275 (441) Foreign (38) 637 439 ---------- ---------- ---------- Total deferred 1,237 2,779 (2,628) ---------- ---------- ---------- Income tax provision (benefit) $ 3,505 $ 4,200 $ (1,720) ========== ========== ========== 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. Operating loss carryforwards of $7,300 for U.S. tax purposes expire in 2009 and 2010. Net income taxes paid were $1,758, $850, and $523 in 1999, 1998 and 1997, respectively. 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, 1999 and 1998 are as follows: Balance Sheet Presentation -------------------------- Current Noncurrent Asset (1) Liability ----------- ----------- At May 31, 1999: Deferred tax assets: Intercompany profit in inventory $ 1,492 $ - Inventory valuation 5,674 - Environmental and other reserves - 756 Other, net 11 - ---------- ----------- Deferred tax assets 7,177 756 Deferred tax liabilities: Accelerated depreciation - (3,834) Other, net - (720) ---------- ----------- Net deferred tax $ 7,177 $ (3,798) ========== =========== At May 31, 1998: Deferred tax assets: Intercompany profit in inventory $ 1,372 $ - Inventory valuation 5,748 - Environmental and other reserves - 955 Other, net 15 180 --------- ----------- Deferred tax assets 7,135 1,135 Deferred tax liabilities: Accelerated depreciation - (3,633) Other, net - (181) ---------- ----------- Net deferred tax $ 7,135 $ (2,679) ========== =========== (1) Included in other current assets on the balance sheet Note G -- Stockholders' Equity The Company has authorized 30,000 shares of Common Stock, 10,000 shares of Class B Common Stock, and 5,000 shares of Preferred Stock. The Class B Common Stock has ten votes per share. 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. In fiscal 1999, the Company purchased 2,000 shares of Common Stock at an average cost of $5.76 per share. Page 18 Total Common Stock issued and outstanding at May 31, 1999 was 9,390 shares. An additional 9,621 shares of Common Stock have been reserved for future issuance under the Employee Stock 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. At May 31, 1999, the plan had no shares reserved for future issuance. On July 13, 1999, the Board of Directors approved the 1999 Employee Stock Purchase Plan, authorizing an additional 150 shares for future issuance. The plan is subject to stockholders' approval, which will be voted upon at the annual meeting on October 12, 1999. 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, 2,304 shares are reserved at May 31, 1999 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, at May 31, 1999, 400 shares of Common Stock 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 and, accordingly, has not recorded compensation expense for such plans. 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 the plans and stock purchase plan been treated as compensatory under the provisions of SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been affected as follows: 1999 1998 1997 ------- ------- ------- Net income (loss), as reported $ 8,352 $ 9,736 $(1,493) Proforma net income (loss) 7,629 9,261 (1,800) Proforma net income (loss) per share Basic $ .55 $ .76 $ (.15) Diluted .54 .73 (.15) Assumptions used: Risk-free interest rate 5.4% 5.5% 5.2% Annual standard deviation of stock price 50% 40% 40% Average expected life (years) 6.1 5.6 6.0 Annual dividend rate $ .16 $ .16 $ .16 Average fair value per option $ 3.31 $ 3.49 $ 3.07 Option value of ESPP per share $ 1.13 $ 1.19 $ 1.50 Fair value of options granted during the year $ 1,115 $ 948 $ 940 The effect of applying SFAS No. 123 in this proforma 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, 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 Granted 338 7.19 Exercised (20) 4.68 Cancelled (5) 7.86 -------- At May 31, 1999 1,686 $7.66 855 $7.62 The following table summarizes information about stock options outstanding as of May 31, 1999: Outstanding Exercisable Exercise ----------------------- ----------------------- Price Range Shares Price Life Shares Price Life ------ ------ ----- ------ ------ ----- $3.75 to $5.375 136 $ 4.54 5.8 104 $ 4.40 5.1 $6.00 to $7.50 750 6.93 6.9 324 6.79 4.7 $8.00 to $8.50 666 8.19 6.1 337 8.10 4.3 $10.813 to $12.95 134 12.35 5.6 90 12.60 4.1 ------ ------ Total 1,686 $ 7.66 6.4 855 $ 7.62 4.5 ====== ====== Page 19 Notes to Consolidated Financial Statements (In thousands, except per share amounts) 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 discretionary and matching contributions to these plans were $1,370, $1,341 and $995 in 1999, 1998 and 1997, respectively. Such amounts included contributions in stock of $285 in 1998 and $800 in 1997, 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 government mandated programs. Note I -- Industry and Market Information The following disclosures are made in accordance with the SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". The marketing and sales structure of the Company is organized into four strategic business units (SBU's): Electron Device Group (EDG), Solid State and Components (SSC), Display Products Group (DPG) and Security Systems Division (SSD). EDG's principal products, electron tubes, are used to control, switch, oscillate or amplify electrical power. This technology has been used for more than 80 years throughout the industrialized world. EDG serves a multitude of industries including automotive, avionics, communications, marine, plastics, rubber, steel, textile, medical imaging and wafer fabrication for semiconductors. EDG's products are largely for replacement applications. SSC's products include radio frequency and microwave components and power semiconductors. These products are used in wireless communication and industrial applications, serving many of the same customers and industries as EDG. SSC's products are in most cases used in original equipment applications. DPG's products include cathode ray tubes, monitors and related systems integration. Large computer systems using multiple data display terminals represent the largest market served by DPG. Typical users include hospitals, airports, brokerage offices, financial institutions, television studios, utilities and assembly lines. DPG's products are largely for replacement applications and system upgrades. SSD serves the commercial security and surveillance industry, with emphasis on closed circuit television systems, components and related design and integration services. SSD's customer base includes industrial end-users and system installers. Each SBU is directed by a Vice President and General Manager who reports to the President and Chief Operating Officer. The President evaluates performance and allocates resources, in part, based on the direct operating contribution of each SBU. Direct operating contribution is defined as gross margin less product management and direct selling expenses. In North America and Europe, the sales force is organized by SBU and, accordingly, these costs are included in direct expenses. In Latin America, Asia/Pacific and the rest of the world, the regional sales force is shared and, accordingly, is not included in direct expenses. Inter-segment sales are not significant. Accounts receivable, inventory, goodwill and certain notes receivable are identified by SBU. Cash, net property and other assets are not identifiable by SBU. Accordingly, depreciation, amortization expense and financing costs are not identifiable by SBU. Operating results for each SBU are summarized in the following table: EDG SSC DPG SSD Total --------- --------- --------- --------- --------- Fiscal 1999 Sales $ 119,882 $ 93,463 $ 37,416 $ 70,180 $ 320,941 Gross Margin 36,828 26,590 11,474 16,184 91,076 Contribution 27,491 15,754 7,647 7,201 58,093 Assets 75,112 48,493 19,207 30,341 173,153 Fiscal 1998 Sales $ 119,157 $ 88,014 $ 30,639 $ 66,362 $ 304,172 Gross Margin 37,219 25,160 10,464 15,335 88,178 Contribution 27,968 15,703 7,828 7,088 58,587 Assets 70,633 43,007 15,350 28,684 157,674 Fiscal 1997 Sales $ 113,700 $ 74,209 $ 29,377 $ 37,853 $ 255,139 Gross Margin 32,220 19,923 8,465 8,267 68,875 Contribution 24,436 11,545 6,333 4,381 46,695 Assets 68,770 39,134 16,721 14,265 138,890 Page 20 A reconciliation of gross margin, direct operating contribution and assets to the relevant consolidated amounts is as follows. (Other assets not identified includes miscellaneous receivables, manufacturing inventories and other assets.) 1999 1998 1997 --------- --------- --------- Gross margin - segments total $ 91,076 $ 88,178 $ 68,875 Manufacturing variances and other costs (1,463) (1,515) (1,411) --------- --------- --------- Gross margin $ 89,613 $ 86,663 $ 67,464 ========= ========= ========= Segment profit contribution $ 58,093 $ 58,587 $ 46,695 Manufacturing variances and other costs (1,463) (1,515) (1,411) Regional selling expenses (13,062) (12,360) (16,293) Administrative expenses (24,825) (23,442) (23,860) --------- --------- --------- Operating income $ 18,743 $ 21,270 $ 5,131 ========= ========= ========= Segment assets $ 173,153 $ 157,674 $ 138,890 Cash and equivalents 12,569 8,031 10,012 Other current assets 12,817 9,681 10,497 Net property 23,047 18,477 17,526 Other assets not identified 14,092 15,837 15,589 --------- --------- --------- Total assets $ 235,678 $ 209,700 $ 192,514 ========= ========= ========= Geographic sales information is grouped by customer destination into five areas: North America, Europe, Latin America, Asia/Pacific and Other. Sales to Mexico are included as part of Latin America. Other includes sales to export distributors and to countries where the Company does not have sales offices, including Eastern Europe and the Middle East. The United States and Canada are the only countries for which sales disclosure under SFAS No. 131 is required. Fiscal 1999 sales and long-lived assets (net property and other assets) were as follows: Sales Assets --------- --------- United States $ 162,388 $ 30,937 Canada 42,625 2,773 --------- --------- North America 205,013 33,710 Europe 65,365 2,967 Latin America 16,734 300 Asia / Pacific 23,390 540 Other 10,439 0 --------- --------- Total $ 320,941 $ 37,517 ========= ========= 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. 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 is a class action for the purpose of determining liability only 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, 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 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 1999 and 1998 follow. The fourth quarter of fiscal 1999 includes a $500 provision for bad debts in Latin America which reduced net income by $305 or $.02 per share. There were no material fourth quarter adjustments in 1998. First Second Third Fourth -------- -------- -------- -------- 1999: Net sales $ 76,038 $ 82,232 $ 77,092 $ 85,579 Gross margin 21,712 23,262 21,388 23,251 Net income 2,501 3,279 693 1,879 Net income per share - basic .17 .23 .05 .15 Net income per share - diluted .17 .23 .05 .15 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 Page 21 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, 1999 and 1998, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended May 31, 1999. 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, 1999 and 1998, and the consolidated results of their operations and cash flows for each of the three years in the period ended May 31, 1999, in conformity with generally accepted accounting principles. Ernst & Young LLP Chicago, Illinois July 13, 1999 Officers and 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 Managing Director of European Operations Kevin M. Connor Vice President of Sales, Solid State and Components Group Flint Cooper Executive Vice President and General Manager, Security Systems Division Lawrence T. Duneske Vice President, Worldwide Logistics 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 (2,3,4,7) William J. Garry Scott Hodes (2,3,5) Partner, Law Firm of Ross & Hardies Bruce W. Johnson (1) Ad Ketelaars (6) CEO Comsys Holding B.V. Harold L. Purkey (2) President, Forum Capital Markets Samuel Rubinovitz (1,3,4,5,6) Consultant & Chairman of the Board, LTX Corporation (1) Executive Committee (2) Audit Committee (3) Compensation Committee (4) Stock Option Committee (5) Executive Oversight Committee (6) Strategic Planning Committee (7) Retiring Director Page 22 Stockholder Information Corporate Office Richardson Electronics, Ltd. 40W267 Keslinger Road P.O. 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 12, 1999 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 McDonald & Company Securities, Inc. Stifel, Nicolaus & Company, Inc. Tucker Anthony Cleary Gull Market Makers Barrington Research William Blair & Co. Forum Capital Markets McDonald & Company Securities, Inc. Smith Barney Shearson Stifel, Nicolaus & Company, Inc. Tucker Anthony Cleary Gull 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, P.O. 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, 1999 was 663 and 24, 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: 1999 1998 --------------------- ---------------------- Fiscal Quarters High Low High Low --------- --------- ---------- -------- First $ 14 $ 7 1/2 $ 8 3/4 $ 8 Second 8 3/4 6 7/16 13 3/4 8 3/8 Third 10 5 1/4 12 5/8 9 3/4 Fourth 6 7/8 4 7/8 14 1/2 10 1/4 Page 23 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, 1999: Allowance for sales returns and doubtful accounts $ 2,230 $ 934 $ - $ 580 $ 2,584 Other reserves $ 1,362 $ 46 $ - $ 172 $ 1,236 Year ended May 31, 1998: Allowance for sales returns and doubtful accounts $ 2,102 $ 431 $ - $ 303 $ 2,230 Other reserves $ 1,956 $ 41 $ - $ 635 $ 1,362 Year ended May 31, 1997: Allowance for sales returns and doubtful accounts $ 1,461 $ 1,749 $ - $ 1,108 $ 2,102 Other reserves $ 1,539 $ 900 $ - $ 483 $ 1,956 Uncollectible amounts written off, net of recoveries and foreign currency translation. Provision to increase EPA groundwater remediation reserve Expenditures made for reserved items Provision for corporate reorganization and increase in EPA groundwater remediation reserve.
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 Richardson Electronics Colombia S.A. Colombia Ingenium S.R.L. Italy Richardson Electronics Trading (Shanghai) Co., Ltd. China 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, 1999 of Richardson Electronics, Ltd. of our report dated July 13, 1999, included in the 1999 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 I 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, Registration Statement Number 333-51513 on Form S-2, Registration Statement Number 333-66215 on Form S-8 and Registration Statement Number 333-76897 on Form S-8 of our report dated July 13, 1999, 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 I 10-K for the year ended May 31, 1999 of Richardson Electronics, Ltd. /s/Ernst & Young Chicago, Illinois August 25, 1999 EX-27 9
5 1,000 YEAR MAY-31-1999 MAY-31-1999 12,569 0 65,032 2,584 107,724 195,558 57,543 (34,496) 235,678 33,918 113,658 0 0 570 83,734 235,678 320,941 320,941 231,328 231,328 0 934 7,689 11,857 3,505 8,352 0 0 0 8,352 .60 .60
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