-----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, SMCg6xG7MfG1XZjlCX2/Y9D2suSrf8BXkS6GTsnu4z5JfBff/pC1p38Hrb1n7ECk Qf/D0m+Ra5W/UhSktZC8OQ== 0001047469-98-013150.txt : 19980401 0001047469-98-013150.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-013150 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RICHARDSON ELECTRONICS LTD/DE CENTRAL INDEX KEY: 0000355948 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 362096643 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-2 SEC ACT: SEC FILE NUMBER: 333-49005 FILM NUMBER: 98583562 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 S-2 1 S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998 REGISTRATION NO. ___________ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------------------- RICHARDSON ELECTRONICS, LTD. (Name of registrant as specified in its charter) DELAWARE 36-2096643 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization)
40W267 KESLINGER ROAD LAFOX, IL 60147 (630) 208-2200 (Address, including zip code, and telephone number, including area code of registrant's principal executive office) WILLIAM G. SEILS RICHARDSON ELECTRONICS, LTD. 40W267 KESLINGER ROAD LAFOX, IL 60147 (630) 208-2370 FAX (630) 208-2950 E-MAIL WGS@RELL.COM (Name, address, including zip code, and telephone number, including area code, of agent for service) with copies to SCOTT HODES TIMOTHY R. M. BRYANT DAVID S. GUIN MCDERMOTT, WILL & EMERY ROSS & HARDIES 227 WEST MONROE STREET, SUITE 3100 150 N. MICHIGAN AVENUE CHICAGO, IL 60606-5096 CHICAGO, IL 60601-7567 (312) 372-2000 (312) 558-1000 FAX (312) 984-3669 FAX (312) 750-8600 E-MAIL TBRYANT@MWE.COM E-MAIL SCOTT.HODES@ROSSHARDIES.COM APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement is declared effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities act of 1933, check the following box. / / If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED BE REGISTERED PER UNIT (2) PRICE (2) REGISTRATION FEE 3,450,000 SHARES COMMON STOCK, $.05 PAR VALUE (1) $13 3/8 $46,143,750 $13,612.41
(1) Includes an option to purchase 450,000 shares granted to the Underwriters to cover over-allotments. (2) Based on last sale price of Registrant's Common Stock on March 27, 1998 solely for purposes of calculating the registration fee pursuant to Rule 457(c). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION DATED MARCH 31, 1998 3,000,000 SHARES [LOGO] COMMON STOCK ------------- OF THE 3,000,000 SHARES OF COMMON STOCK OFFERED HEREBY (THE "OFFERING"), 1,500,000 SHARES OF COMMON STOCK ARE BEING SOLD BY RICHARDSON ELECTRONICS, LTD. (THE "COMPANY" OR "RICHARDSON") AND 1,500,000 SHARES ARE BEING SOLD BY A STOCKHOLDER OF THE COMPANY (THE "SELLING STOCKHOLDER"). THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDER. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMMON STOCK IS QUOTED AND TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "RELL." ON MARCH 27, 1998, THE LAST REPORTED SALE PRICE OF THE COMMON STOCK WAS $13 3/8 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK." ------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROCEEDS TO UNDERWRITING PROCEEDS TO SELLING PRICE TO PUBLIC DISCOUNT COMPANY(1) STOCKHOLDER Per Share............................. $ $ $ $ Total (2)............................. $ $ $ $
(1) Before deducting estimated expenses of $400,000, which are payable by the Company. (2) The Company and the Selling Stockholder have granted the Underwriters a 30-day option to purchase from them pro rata up to 450,000 additional shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Stockholder will be $ , $ , $ and $ , respectively. The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholder. See "Underwriting" and "Principal and Selling Stockholders." ------------------------ THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS, SUBJECT TO PRIOR SALE, WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THEM, AND SUBJECT TO CERTAIN OTHER CONDITIONS. IT IS EXPECTED THAT DELIVERY OF THE SHARES OF COMMON STOCK WILL BE MADE ON OR ABOUT , 1998 AT THE OFFICES OF CLEARY GULL REILAND & MCDEVITT INC., MILWAUKEE, WISCONSIN. CLEARY GULL REILAND & MCDEVITT INC. MCDONALD & COMPANY SECURITIES, INC. The date of this Prospectus is , 1998. [PICTURES TO BE INSERTED] Electron tubes for industrial, broadcast, avionics and medical applications. Radio frequency and microwave components for telecommunications and power-semiconductors for industrial power conversion applications. Cathode ray tubes, monitors and flat panel displays for data display, marine, medical, radar and avionics applications. Closed circuit television (CCTV) systems and related security products for industrial and commercial security and surveillance applications. At the top of the page: Engineered Solutions for a Wide Range of Electronic Products [PICTURES TO BE INSERTED] At the bottom of the page: Richardson serves over 80,000 active customers worldwide Over 50% of sales are international. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENTS, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS, AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, (I) THE TERM "COMPANY" OR "RICHARDSON" REFERS TO RICHARDSON ELECTRONICS, LTD. AND ITS SUBSIDIARIES, AND (II) THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. THE COMPANY'S FISCAL YEAR ENDS ON THE FRIDAY CLOSEST TO THE END OF MAY OF EACH YEAR, RESULTING IN EITHER A 52 OR 53 WEEK YEAR. REFERENCES TO FISCAL YEARS REFER TO THE FISCAL YEAR ENDING IN THAT CALENDAR YEAR; FOR EXAMPLE, "FISCAL 1997" REFERS TO THE COMPANY'S FISCAL YEAR ENDING MAY 30, 1997. FOR CONVENIENCE, FISCAL YEARS ARE IDENTIFIED AS IF THE YEAR ENDED ON MAY 31. THE COMPANY Richardson Electronics, Ltd. is a specialized international distributor of electronic components, equipment and assemblies primarily for niche industrial applications. Its product offerings 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. They are used in a wide variety of industrial, communications, medical and scientific applications. The Company derives over 60% of its sales from components used in replacement or repair applications, in contrast to components used in original equipment. 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. In fiscal 1997, the Company derived over 45% of its sales from products that it electronically or physically modified or sold under its own brand names. Richardson serves over 80,000 active customers in 130 countries, including over 40% of the companies in the FORTUNE 500. The Company's salesforce operates from 88 locations throughout the world and services orders from 29 stocking locations. Richardson's commitment is to provide excellent customer service through inventory availability, cost-effective product alternatives and timely delivery. More than 80% of orders received by 6:00 p.m. are shipped complete the same day. In the quarter ended February 28, 1998, 51.7% of the Company's sales were international. The Company sells over 800 vendor lines which encompass more than 300,000 different products. Richardson sells through its technical sales staff and field engineers, telemarketing, product catalogs, the Company's web site and electronic data interchange. The Company was founded in 1947 as an electron tube distributor. As its customers migrated to new technologies, Richardson expanded its product offerings to meet their needs. In the quarter ended February 28, 1998, products other than electron tubes accounted for 61.6% of sales, up from 35.3% five years earlier. The Company has increased its sales at a compound annual growth rate of 15.4%, from $34.2 million in 1983, the year of its initial public offering, to $255.1 million in fiscal 1997, through a combination of internal growth and selected acquisitions. Richardson's growth strategy emphasizes: (i) internal sales growth from geographic and product line expansion, (ii) continuous operational improvement intended to maximize gross margins; reduce selling, general and administrative costs as a percentage of revenue; increase inventory turns; and otherwise improve operating efficiencies and asset utilization and (iii) acquisition of businesses or significant product lines which will expand the Company's product offerings, geographic scope or customer base. During the last two years, the Company completed six acquisitions. Since fiscal 1995, the Company has made key additions to its management team to support growth and execute this strategy. 3 Richardson organizes its marketing, sales, product management and purchasing functions into the following four strategic business units ("SBUs"): - ELECTRON DEVICE GROUP ("EDG"). 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. The Company sells products directly to end users in industries including automotive, communications, marine, plastics, steel and textiles. Common applications include use in broadcasting equipment, motor speed controls, industrial heating systems, radar systems and welding equipment. The Company believes it is one of the few distributors offering a broad range of these products. Certain areas within EDG represent important growth opportunities, especially sales to customers in developing nations; sales of products to medical customers for use in x-ray and other imaging equipment; and sales of microwave generators for a wide variety of industrial and commercial heating applications. For the first nine months of fiscal 1998, EDG represented 38.8% of the Company's overall sales and, compared to the same period in the prior year, sales grew 2.6%, all of which was internally generated. - SOLID STATE AND COMPONENTS ("SSC"). SSC focuses its broad product offerings on two specialized markets. SSC sells (i) RF and microwave components directly to customers in the growing wireless and telecommunications markets, as well as in the broadcast and avionics markets, and (ii) power semiconductors and related components directly to a wide spectrum of industrial customers for use in electric power conversion applications. SSC derives the majority of its sales from products intended for use by original equipment manufacturers in new finished goods, and in particular, base stations and other RF transmission applications for the telecommunications market. For the first nine months of fiscal 1998, SSC represented 28.9% of the Company's overall sales and, compared to the same period in the prior year, sales grew 21.2%. Excluding the effects of an acquisition, SSC's internally generated sales grew 16.3%. - DISPLAY PRODUCTS GROUP ("DPG"). DPG's largest product line is replacement cathode ray tubes ("CRTs") used in data display monitors for applications such as in computer networks, instrumentation displays, broadcast monitors, radar systems, viewfinders and TelePrompTers-Registered Trademark-. From a base of approximately 200 standard CRTs, DPG can provide over 200,000 product offerings with its value-added capabilities to cost-effectively meet its customers' needs. Principal customers include airlines, banks, hospitals, utilities and both independent and original equipment service and repair organizations. In addition to CRTs, the Company markets services such as system integration and engineering. DPG has recently expanded its product breadth to include the distribution of new data display monitors and flat panel display products. For the first nine months of fiscal 1998, DPG represented 10.1% of the Company's overall sales and, compared to the same period in the prior year, sales grew 4.0%, all of which was internally generated. - SECURITY SYSTEMS DIVISION ("SSD"). SSD serves the growing commercial security and surveillance industry with a primary emphasis on closed circuit television ("CCTV") systems and components. SSD's principal value-added service is system design. SSD's products for CCTV applications include cameras, mounts, monitors, recorders, lenses and related accessories. Additionally, SSD provides electronic components for burglar and fire detection systems, access control systems and commercial sound systems. SSD grew significantly due to the February 1997 acquisition of Burtek Systems and the August 1997 acquisition of Security Service International. For the first nine months of fiscal 1998, SSD represented 22.2% of the Company's overall sales and, compared to the same period in the prior year, sales grew 104%. Excluding the effects of the two acquisitions, SSD's internally generated sales grew 26.3%. The Company's executive offices are located at 40W267 Keslinger Road, LaFox, Illinois 60147, its telephone number is (630) 208-2200, and its web site address is http://www.rell.com. 4 THE OFFERING Common Stock offered by the Company....................... 1,500,000 shares Common Stock offered by the Selling Stockholder........... 1,500,000 shares Common Stock and Class B Common Stock outstanding after the Offering (1)........................................ 13,746,221 shares Use of Proceeds........................................... For reduction of indebtedness and general corporate purposes, including working capital and possible acquisitions. See "Use of Proceeds." Nasdaq National Market Symbol............................. RELL
- ------------------------ (1) BASED ON THE NUMBER OF SHARES OUTSTANDING ON MARCH 30, 1998; INCLUDES 3,239,330 SHARES OF OUTSTANDING CLASS B COMMON STOCK, BUT EXCLUDES 3,680,609 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON CONVERSION OF THE COMPANY'S CONVERTIBLE DEBENTURES AT A WEIGHTED AVERAGE CONVERSION PRICE OF $19.24 AND 1,389,699 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON EXERCISE OF OUTSTANDING OPTIONS GRANTED UNDER VARIOUS STOCK OPTION PLANS AT A WEIGHTED AVERAGE EXERCISE PRICE OF $7.68. UPON CONSUMMATION OF THE OFFERING, AN AGGREGATE OF 740,159 OPTIONS GRANTED UNDER SUCH PLANS WILL BE VESTED AND EXERCISABLE. SEE "RISK FACTORS--SHARES ELIGIBLE FOR FUTURE SALE." 5 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED MAY 31, FIRST NINE MONTHS ----------------------------------------------------- ------------------------- 1993 1994(1) 1995(2) 1996 1997(3) 1997(3) 1998 --------- --------- --------- --------- --------- ----------- ------------ STATEMENT OF OPERATIONS DATA: Net sales............................ $ 159,215 $ 172,094 $ 208,118 $ 239,667 $ 255,139 $ 183,874 $ 223,442 Cost of products sold................ 111,620 151,203 152,785 169,123 187,675 137,182 159,596 --------- --------- --------- --------- --------- ----------- ------------ Gross margin....................... 47,595 20,891 55,333 70,544 67,464 46,692 63,846 Selling, general and administrative expenses............................ 38,070 41,226 48,674 52,974 62,333 46,508 48,525 --------- --------- --------- --------- --------- ----------- ------------ Operating income (loss).......... 9,525 (20,335) 6,659 17,570 5,131 184 15,321 Other expense, net................... 5,023 5,874 4,028 5,559 7,856 5,512 5,711 --------- --------- --------- --------- --------- ----------- ------------ Income (loss) before income taxes and extraordinary item........... 4,502 (26,209) 2,631 12,011 (2,725) (5,328) 9,610 Income tax provision (benefit)....... 1,700 (6,400) 150 3,900 (1,720) (2,500) 2,880 --------- --------- --------- --------- --------- ----------- ------------ Income (loss) before extraordinary item............................. 2,802 (19,809) 2,481 8,111 (1,005) (2,828) 6,730 Extraordinary gain (loss), net of tax................................. -- -- 527 -- (488) (488) -- --------- --------- --------- --------- --------- ----------- ------------ Net income (loss)................ $ 2,802 $ (19,809) $ 3,008 $ 8,111 $ (1,493) $ (3,316) $ 6,730 --------- --------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------- --------- ----------- ------------ INCOME (LOSS) PER SHARE--BASIC:(4) Before extraordinary item.......... $ .25 $ (1.76) $ .22 $ .70 $ (.08) $ (.24) $ .56 Extraordinary gain (loss), net of tax.............................. -- -- .05 -- (.04) (.04) -- --------- --------- --------- --------- --------- ----------- ------------ Net income (loss) per share...... $ .25 $ (1.76) $ .27 $ .70 $ (.12) $ (.28) $ .56 --------- --------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------- --------- ----------- ------------ Average shares outstanding......... 11,251 11,285 11,425 11,659 11,892 11,886 12,096 INCOME (LOSS) PER SHARE--DILUTED:(4) Before extraordinary item.......... $ .25 $ (1.76) $ .21 $ .68 $ (.08) $ (.24) $ .54 Extraordinary gain (loss), net of tax.............................. -- -- .05 -- (.04) (.04) -- --------- --------- --------- --------- --------- ----------- ------------ Net income (loss) per share...... $ .25 $ (1.76) $ .26 $ .68 $ (.12) $ (.28) $ .54 --------- --------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------- --------- ----------- ------------ Average shares outstanding......... 11,335 11,285 11,566 12,002 11,892 11,886 12,476 DIVIDENDS PAID PER SHARE OF COMMON STOCK........................ $ .16 $ .16 $ .16 $ .16 $ .16 $ .12 $ .12 NET SALES BY STRATEGIC BUSINESS UNIT: Electron Device Group (EDG)........ $ 97,846 $ 91,736 $ 105,454 $ 109,925 $ 113,700 $ 84,647 $ 86,823 Solid State & Components (SSC)..... 31,619 42,274 52,409 67,976 74,209 53,201 64,484 Display Products Group (DPG)....... 19,076 27,150 36,502 36,154 29,377 21,737 22,617 Security Systems Division (SSD).... 10,674 10,934 13,753 25,612 37,853 24,289 49,518 --------- --------- --------- --------- --------- ----------- ------------ Consolidated..................... $ 159,215 $ 172,094 $ 208,118 $ 239,667 $ 255,139 $ 183,874 $ 223,442 --------- --------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------- --------- ----------- ------------
FEBRUARY 28, 1998 ------------------------ ACTUAL ADJUSTED(5) ----------- ----------- BALANCE SHEET DATA: Working capital, net......................................................................... $ 141,227 $ 141,227 Total assets................................................................................. 199,654 199,654 Long-term debt, including current portion.................................................... 105,623 87,164 Stockholders' equity......................................................................... 64,211 82,670
6 (1) IN SEPTEMBER 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. IN FISCAL 1994, COST OF PRODUCTS SOLD INCLUDED A $26.5 MILLION PROVISION, OF WHICH $21.4 MILLION WAS FOR THE DISPOSITION OF THE COMPANY'S MANUFACTURING OPERATIONS IN BRIVE, FRANCE, AND $5.1 MILLION WAS FOR INCREMENTAL COSTS RELATED TO THE PHASE-DOWN OF CERTAIN DOMESTIC MANUFACTURING OPERATIONS. NET OF TAX, THESE CHARGES INCREASED THE NET LOSS BY $19.5 MILLION, OR $1.73 PER SHARE. (2) IN FISCAL 1995, THE COMPANY RECORDED A CHARGE FOR THE SETTLEMENT OF A MONETARY CLAIM RELATED TO A 1989 CONTRACT WHICH REDUCED GROSS MARGIN BY $4.7 MILLION AND NET INCOME BY $2.3 MILLION, OR $.20 PER SHARE. THE COMPANY ALSO RECORDED AN EXTRAORDINARY GAIN OF $527,000, OR $.05 PER SHARE, NET OF TAX, ON THE REPURCHASE OF CERTAIN OF THE COMPANY'S CONVERTIBLE DEBENTURES. (3) IN THE THIRD QUARTER OF FISCAL 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 $7.2 MILLION AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES BY $3.8 MILLION. NET OF TAX, THESE CHARGES REDUCED NET INCOME BY $6.7 MILLION, OR $.56 PER SHARE. THE COMPANY ALSO RECORDED AN EXTRAORDINARY LOSS OF $488,000, OR $.04 PER SHARE, NET OF TAX, ON THE EXCHANGE OF CERTAIN OF THE COMPANY'S CONVERTIBLE DEBENTURES. (4) THE COMPANY HAS ADOPTED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE," WHICH BECAME EFFECTIVE DECEMBER 1997. THE EARNINGS PER SHARE AMOUNTS FOR 1997 AND PRIOR YEARS HAVE BEEN RESTATED TO COMPLY WITH THIS STATEMENT. (5) ADJUSTED TO GIVE EFFECT TO THE SALE OF 1,500,000 SHARES OF COMMON STOCK OFFERED BY THE COMPANY HEREBY AT AN ASSUMED OFFERING PRICE OF $13 3/8 PER SHARE AND THE APPLICATION OF NET PROCEEDS THEREFROM. SEE "USE OF PROCEEDS." 7 RISK FACTORS PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION INCLUDED AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS, BEFORE DECIDING WHETHER TO INVEST IN THE COMMON STOCK OFFERED HEREBY. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS ARE STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT"). THE WORDS "EXPECT," "ESTIMATE," "ANTICIPATE," "PREDICT," "BELIEVE" AND SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS PROSPECTUS AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY, ITS DIRECTORS OR ITS OFFICERS WITH RESPECT TO, AMONG OTHER THINGS: (I) TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS; (II) THE COMPANY'S FINANCING PLANS; (III) THE COMPANY'S BUSINESS AND GROWTH STRATEGIES, INCLUDING POTENTIAL ACQUISITIONS; (IV) OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS; AND (V) THE USE OF THE NET PROCEEDS FROM THE SALE OF COMMON STOCK BY THE COMPANY IN THIS OFFERING. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PREDICTED IN THE FORWARD-LOOKING STATEMENTS, AS A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING THE INFORMATION SET FORTH UNDER THE HEADINGS "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS INFORMATION CONTAINED IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, IDENTIFY IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES. COMPETITION; INVENTORY RISKS Each of the Company's SBUs faces substantial competition in its respective markets. Many of the Company's competitors have significantly greater resources and broader name recognition than the Company. Richardson faces competition mainly from original equipment manufacturers in the after-market for replacement of parts and from hundreds of electronic component distributors of various sizes, locations and market focuses. Engineering capability, vendor representation and product diversity create segmentation among distributors. Richardson believes that the key competitive factors in its markets are the ability to provide engineered solutions, inventory availability, quality, reliable delivery and price. There can be no assurance that the Company will be able to continue to compete effectively with existing or potential competitors. In addition, gross margins in the businesses in which the Company's SSC strategic business unit competes have declined in recent years due to competitive pressures. Also the size of the available market for certain of the products historically sold by Richardson has declined in recent years due to technological changes. The Company believes these trends will continue. See "Business-Strategic Business Units" and "Business-Competition." Further, because a portion of the business of its EDG strategic business unit is trailing edge technology and manufacturers are exiting the business, Richardson occasionally makes last time inventory purchases. There can be no assurance that the Company will be able to dispose of all of such inventory. DEPENDENCE UPON KEY VENDORS Many kinds of products distributed by the Company are currently produced by a relatively small number of manufacturers. The Company's future success will depend, in large part, on maintaining current vendor relationships and developing new relationships. Richardson believes that vendors supplying products to certain of the product lines of its EDG strategic business unit are consolidating their distribution relationships or exiting the business. Richardson's three largest suppliers are Communications & Power Industries, Inc., Covimag S.A. and M/A-COM, Inc., which accounted for 10.3%, 5.6% and 5.0% of the Company's overall purchases in fiscal 1997, respectively. See "Business-Distribution and Marketing." The loss of, or significant disruptions in the relationship with, several principal vendors could have a material adverse effect on Richardson. The Company has in the past and may in the future experience difficulties 8 obtaining, in a timely manner, certain products. The inability of suppliers to provide the Company with the required quantity or quality of products could have a material adverse effect on the Company's business until such time as an alternate source of supply for such products is found. STRATEGIC BUSINESS UNIT CUSTOMER CONCENTRATION Each of the Company's SBUs has one or several key customers that account for a meaningful share of its sales though no single customer accounted for more than 2% of the Company's sales in fiscal 1997. Generally, the Company does not have long term supply contracts with its customers and they may unilaterally reduce or discontinue their purchases. Product sales by Richardson are typically made on a purchase-order basis. The loss of several of the Company's largest customers, or their substantial reduction in level of purchases, or the failure of several of such customers to pay for their purchases from the Company on a timely basis, could have a material adverse effect on the Company. There can be no assurance that the Company's largest customers will continue to place orders with Richardson or that orders by such customers will continue at their previous levels. CONTROL BY PRINCIPAL STOCKHOLDER Upon completion of this Offering, Edward J. Richardson, Chairman of the Board and Chief Executive Officer, will beneficially own a 31.9% economic share and a 77.2% voting share of the Company. The Company's certificate of incorporation does not provide for cumulative voting. As a result, Mr. Richardson effectively is able to control the Company, including the election of directors, and a sale of the Company could not be effected without his approval. See "Principal and Selling Stockholders." The Company's new $50.0 million revolving credit facility contains provisions which would result in a default thereunder if Mr. Richardson owns fewer shares of the Company's voting stock than is required to elect a majority of the Company's Board of Directors and control any amendment to its by-laws. DEPENDENCE UPON KEY AND TECHNICAL PERSONNEL The recent success of the Company has been largely dependent upon the efforts and abilities of certain key members of its senior management, including Edward J. Richardson, Chairman of the Board and Chief Executive Officer, and Bruce W. Johnson, President and Chief Operating Officer. See "Management." The loss of their services for any reason could have a material adverse effect on the Company. In addition, the Company's success is dependent upon its ability to recruit and retain qualified personnel, including technical and engineering personnel. Competition for such personnel is intense, and there can be no assurance that Richardson will be successful in attracting or retaining such personnel. The failure to attract or retain such persons could have a material adverse effect on the Company. INTERNATIONAL TRADE AND EXCHANGE RATE FLUCTUATIONS In fiscal 1997, 48.5% and 33.4% of the Company's sales and purchases of products, respectively, were made internationally and 7.4% and 13.1%, respectively, were made in Asia. Many Asian countries have recently experienced economic distress, including currency devaluation, bank failures and general contraction of economic output. The Company cannot predict the impact of these recent events on its future business performance. International trade is subject to numerous risks, including labor strikes, shipping costs and delays, political or economic instability, trade restrictions, export controls, customs regulations, tariff and import duties, foreign exchange restrictions which limit the repatriation of investments and earnings therefrom, changes in taxation or international tax treaties, other government regulation, military action and other hostilities and confiscation of property. Such risks could result in substantial increases in costs, the reduction of profit, the inability to do business and other adverse effects. Since the revenues and expenses of Richardson's foreign operations are generally denominated in local currencies, exchange rate fluctuations between local currencies and the U.S. dollar subject the 9 Company to currency exchange risks with respect to the results of its foreign operations to the extent it is unable to denominate its purchases or sales in U.S. dollars or otherwise shift to its customers or suppliers the risk of currency exchange rate fluctuations. The Company currently does not engage in currency hedging transactions but may do so in the future. Fluctuations in exchange rates may affect the results of the Company's international operations reported in U.S. dollars and the value of such operations' net assets reported in U.S. dollars. Additionally, the competitive position of the Company may be affected by the relative strength of the currencies in countries where its products are sold. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS OF BUSINESS ACQUISITIONS Richardson's growth strategy includes expansion through acquisitions. A portion of the net proceeds from this Offering may be used for potential acquisitions. See "Use of Proceeds." There can be no assurance that the Company will be able to successfully negotiate with potential acquisition candidates, secure acquisition financing on acceptable terms, complete acquisitions, integrate acquired operations and management into existing operations or expand into new markets. There can be no assurance that acquisitions will not have an adverse effect on the Company's operating results, particularly in the periods following the completion of such acquisitions while the management and operations of the acquired business are being integrated into Richardson's operations. Once integrated, acquired operations may not achieve levels of profitability or productivity comparable with those of Richardson's existing operations, or otherwise perform as expected. In addition, the Company competes for acquisition and expansion opportunities with companies that have substantially greater resources than those of Richardson. The Company currently has no agreements, arrangements or understandings with respect to any future material acquisition and there can be no assurance that any such acquisition will be consummated. See "Business-Growth Strategy." MANAGEMENT OF GROWTH The Company's ability to sustain its historical growth rate will depend upon several factors, including Richardson's ability to recruit, train and retain a skilled workforce to support its expanding operations. There can be no assurance that the Company will be able to sustain its historical rate of sales growth, continue its profitable operations, develop the required workforce or manage any future growth successfully. MARKET CONDITIONS; POSSIBLE VOLATILITY OF STOCK PRICE From time to time, there may be significant volatility in the market price for the Common Stock. The Company is not able to predict the effect on market prices from the distribution of the shares of Common Stock covered by this Prospectus. Further, factors such as new distribution franchise announcements by the Company, quarterly fluctuations in the Company's operating results and general conditions in the securities markets may have a significant impact on the market price of the Common Stock. These fluctuations may be compounded by the historically low trading volume in the Common Stock. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. CONTINUATION OF DIVIDENDS There can be no assurance that Richardson will continue to pay cash dividends on its Common Stock. The Company may decide that cash otherwise available for dividends needs to be retained for various reasons. Also, the Company's convertible debentures and other borrowing arrangements contain restrictions on the payment of cash dividends. See "Dividend Policy." 10 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 13,746,221 shares of Common Stock and Class B Common Stock outstanding. All of these shares will be freely tradable without restriction under the Securities Act, unless held by affiliates of the Company. In addition to the foregoing, as of March 30, 1998, the Company had outstanding options for 1,389,699 shares of Common Stock, of which 740,159 options were then currently exercisable, and there were 3,680,609 shares of Common Stock issuable upon conversion of the Company's convertible debentures. Furthermore there were an additional 784,622 shares of Common Stock available for shares which may be granted or sold in the future under the Company's various plans. All such shares of Common Stock either have been registered on previously filed and currently effective registration statements or do not require registration and as such will be freely tradable without restriction under the Securities Act upon issuance unless held by affiliates of the Company. Except in specific limited circumstances, the Company, the Selling Stockholder, and the Company's executive officers and directors have agreed not to offer, sell, transfer, pledge, contract to do the same, or otherwise dispose of any of their shares of Common Stock for a period of 120 days after the date of this Prospectus without the prior written consent of Cleary Gull Reiland & McDevitt Inc. The Company makes no prediction as to the effect, if any, that future sales of shares or the availability of shares for future sale will have on the prevailing market price of the Common Stock. Sales of substantial amounts of Common Stock in the public market or the perception that such sales could occur could have an adverse effect on the prevailing market price of the Common Stock. See "Description of Capital Stock and Debentures." IMPACT OF ANTI-TAKEOVER MEASURES Certain provisions of the Company's certificate of incorporation and bylaws and the Delaware General Corporation Law may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of Common Stock. Pursuant to the Company's certificate of incorporation, the Board of Directors is authorized to fix the rights, preferences, privileges and restrictions, including voting rights, of unissued shares of the Company's preferred stock and to issue such stock without any further vote or action by Richardson's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be created and issued in the future. Richardson is subject to Section 203 of the Delaware General Corporation Law which restricts certain transactions and business combinations between a corporation and an "Interested Stockholder" owning 15% or more of the corporation's outstanding voting stock for a period of three years from the date the stockholder becomes an Interested Stockholder. Subject to certain exceptions, unless the transaction is approved in a prescribed manner, such Section 203 prohibits significant business transactions such as a merger with, disposition of assets to, or receipt of disproportionate financial benefits by the Interested Stockholder, or any other transactions that would increase the Interested Stockholder's proportionate ownership of any class or series of the corporation's stock. 11 USE OF PROCEEDS The net proceeds to the Company from the sale of the Common Stock by the Company hereby, after deducting the underwriting discount and the estimated expenses of this Offering and assuming an offering price of $13 3/8 per share, will be $18.5 million ($21.3 million if the Underwriters' over-allotment option is exercised in full). The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholder. The net proceeds will be used to pay down the Company's revolving credit facility. This will increase the availability of funds under such facility which the Company may re-borrow in the future for working capital and general corporate purposes, including sales, marketing and customer support efforts; redemption or purchase of the Company's outstanding securities; expansion of operations; and acquisitions of businesses, products or technologies that present opportunities to expand Richardson's distribution channels, grow its customer base and add to its product line. The Company evaluates acquisition opportunities on an ongoing basis. Although there are no current agreements or understandings with respect to any material acquisitions, the Company desires to be able to respond to opportunities as they arise. There can be no assurances, however, that Richardson will complete any acquisitions. The Company has not determined the amounts it plans to expend on any of these uses or the timing of the expenditures. The amounts actually expended for these uses, if any, are at the discretion of the Company and may vary significantly depending upon a number of factors, including future revenue growth and the amount of cash generated by the Company's operations. 12 CAPITALIZATION (IN THOUSANDS) The following table sets forth the capitalization of the Company as of February 28, 1998 on an actual basis and as adjusted to give effect to the issuance and sale of 1,500,000 shares of Common Stock offered by the Company at an assumed offering price of $13 3/8 per share and the application of the net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in or incorporated by reference into the Prospectus.
FEBRUARY 28, 1998 --------------------------- AS ADJUSTED ACTUAL (1) ----------- -------------- Revolving credit facility due January 1999(2)........................................ $ 26,332 $ 7,873 Revolving credit and term loan due January 1999(3) and other long-term debt.......... 8,466 8,466 8 1/4% Convertible debentures due June 2006(4)....................................... 40,000 40,000 7 1/4% Convertible debentures due December 2006(4)................................... 30,825 30,825 ----------- -------------- Total debt......................................................................... 105,623 87,164 ----------- -------------- Stockholders' equity: Common Stock, $.05 par value, 30,000,000 shares authorized, 8,967,891 shares issued and outstanding(4)............................................................... 449 524 Class B Common Stock, convertible, $.05 par value, 10,000,000 shares authorized, 3,242,240 issued and outstanding................................................. 162 162 Preferred Stock, $1.00 par value, 5,000,000 authorized, none issued................ -- -- Additional paid-in capital......................................................... 55,549 73,933 Retained earnings.................................................................. 14,396 14,396 Foreign currency translation adjustment............................................ (6,345) (6,345) ----------- -------------- Total stockholders' equity....................................................... 64,211 82,670 ----------- -------------- Total capitalization............................................................. $ 169,834 $ 169,834 ----------- -------------- ----------- --------------
- ------------------------ (1) ADJUSTED TO GIVE EFFECT TO THE SALE OF 1,500,000 SHARES OF COMMON STOCK BY THE COMPANY HEREBY AT AN ASSUMED OFFERING PRICE OF $13 3/8 PER SHARE AND THE APPLICATION OF NET PROCEEDS THEREFROM. SEE "USE OF PROCEEDS." (2) THIS AGREEMENT WAS REPLACED ON MARCH 1, 1998 WITH A NEW $50.0 MILLION REVOLVING CREDIT FACILITY WHICH EXPIRES IN MARCH 2001. (3) THIS AGREEMENT WAS AMENDED EFFECTIVE MARCH 1, 1998 TO EXTEND ITS EXPIRATION DATE TO MARCH, 2001. (4) EXCLUDES 1,436,699 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF OUTSTANDING OPTIONS WHICH HAD A WEIGHTED AVERAGE EXERCISE PRICE OF $7.62 PER SHARE. ALSO EXCLUDES 3,380,609 SHARES OF COMMON STOCK RESERVED IN THE EVENT OF CONVERSION FOR THE COMPANY'S 8 1/4% AND 7 1/4% CONVERTIBLE DEBENTURES WHICH HAVE CONVERSION PRICES OF $18.00 AND $21.14, RESPECTIVELY, AND 120,687 SHARES OF COMMON STOCK RESERVED FOR THE COMPANY'S EMPLOYEES STOCK PURCHASE PLAN. SEE "DESCRIPTION OF CAPITAL STOCK AND DEBENTURES." 13 PRICE RANGE OF COMMON STOCK The Common Stock is traded on the Nasdaq National Market under the symbol "RELL." The number of registered stockholders of Common Stock and Class B Common Stock at March 30, 1998 was 652 and 31, respectively. The number of record holders of Common Stock may not be representative of the number of beneficial holders because many shares of Common Stock are held by depositories, brokers or other nominees. The quarterly high and low sales prices of the Common Stock as reported by the Nasdaq National Market were as follows for the periods indicated:
HIGH LOW --------- --------- Fiscal Year Ended May 31, 1996 First Quarter............................................................. $ 8 1/8 $ 7 Second Quarter............................................................ 11 3/4 6 7/8 Third Quarter............................................................. 11 1/4 9 Fourth Quarter............................................................ 11 7/8 9 3/4 Fiscal Year Ended May 31, 1997 First Quarter............................................................. 10 1/2 9 Second Quarter............................................................ 10 7 Third Quarter............................................................. 10 1/4 8 Fourth Quarter............................................................ 8 1/4 6 3/4 Fiscal Year Ending May 31, 1998 First Quarter............................................................. 8 3/4 8 Second Quarter............................................................ 13 3/4 8 3/8 Third Quarter............................................................. 12 5/8 9 3/4 Fourth Quarter (through March 27, 1998)................................... 14 10 1/4
On March 27, 1998, the last sale price of the Common Stock was $13 3/8 per share as reported by the Nasdaq National Market. DIVIDEND POLICY The Company has declared a dividend on its Common Stock of $.04 per share and on its Class B Common Stock of $.036 per share for 39 consecutive quarters. Annual dividend payments approximate $1.9 million currently and, assuming the continuation of payment of dividends at the same rate, will be approximately $2.1 million upon completion of the Offering. 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. Any determination as to the payment of dividends will depend upon future earnings, results of operations, capital requirements, the financial condition of Richardson and such other factors as the Board of Directors of the Company may consider. In addition, the Company's debt agreements contain covenants restricting payments of dividends or distributions on its capital stock or to stockholders (other than stock dividends) and the purchase, redemption, acquisition or retirement of its capital stock for value by the Company. As of March 1, 1998, $10.0 million of retained earnings was free of such restrictions and, subsequent to this Offering, the Company expects such amount to increase to approximately $28.5 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," Note F to Consolidated Financial Statements and "Risk Factors -- Continuation of Dividends." 14 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The selected consolidated financial data presented below has been derived from the Consolidated Financial Statements. The Consolidated Financial Statements as of and for the fiscal years ended May 31, 1993, 1994, 1995, 1996 and 1997 have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data as of and for the first nine month periods of fiscal 1997 and 1998 have been derived from the unaudited interim consolidated financial statements of the Company and reflect, in management's opinion, all adjustments, consisting only of normally recurring adjustments, necessary for a fair presentation of the financial position and results of operations for such periods. Results of operations for interim periods are not necessarily indicative of results for the full year. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and Notes thereto and other information included elsewhere in this Prospectus.
FIRST NINE FISCAL YEAR ENDED MAY 31, MONTHS ----------------------------------------------------- --------- 1993 1994(1) 1995(2) 1996 1997(3) 1997(3) --------- --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Net sales...................................................... $ 159,215 $ 172,094 $ 208,118 $ 239,667 $ 255,139 $ 183,874 Cost of products sold.......................................... 111,620 151,203 152,785 169,123 187,675 137,182 --------- --------- --------- --------- --------- --------- Gross margin................................................. 47,595 20,891 55,333 70,544 67,464 46,692 Selling, general and administrative expenses................... 38,070 41,226 48,674 52,974 62,333 46,508 --------- --------- --------- --------- --------- --------- Operating income (loss).................................... 9,525 (20,335) 6,659 17,570 5,131 184 Other expense, net............................................. 5,023 5,874 4,028 5,559 7,856 5,512 --------- --------- --------- --------- --------- --------- Income (loss) before income taxes and extraordinary item..... 4,502 (26,209) 2,631 12,011 (2,725) (5,328) Income tax provision (benefit)................................. 1,700 (6,400) 150 3,900 (1,720) (2,500) --------- --------- --------- --------- --------- --------- Income (loss) before extraordinary item...................... 2,802 (19,809) 2,481 8,111 (1,005) (2,828) Extraordinary gain (loss), net of tax.......................... -- -- 527 -- (488) (488) --------- --------- --------- --------- --------- --------- Net income (loss).......................................... $ 2,802 $ (19,809) $ 3,008 $ 8,111 $ (1,493) $ (3,316) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- INCOME (LOSS) PER SHARE - BASIC(4): Before extraordinary item.................................... $ .25 $ (1.76) $ .22 $ .70 $ (.08) $ (.24) Extraordinary gain (loss), net of tax........................ -- -- .05 -- (.04) (.04) --------- --------- --------- --------- --------- --------- Net income (loss) per share................................ $ .25 $ (1.76) $ .27 $ .70 $ (.12) $ (.28) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Average shares outstanding................................... 11,251 11,285 11,425 11,659 11,892 11,886 INCOME (LOSS) PER SHARE - DILUTED(4): Before extraordinary item.................................... $ .25 $ (1.76) $ .21 $ .68 $ (.08) $ (.24) Extraordinary gain (loss), net of tax........................ -- -- .05 -- (.04) (.04) --------- --------- --------- --------- --------- --------- Net income (loss) per share................................ $ .25 $ (1.76) $ .26 $ .68 $ (.12) $ (.28) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Average shares outstanding................................... 11,335 11,285 11,566 12,002 11,892 11,886 DIVIDENDS PAID PER SHARE OF COMMON STOCK....................... $ .16 $ .16 $ .16 $ .16 $ .16 $ .12 1998 --------- STATEMENT OF OPERATIONS DATA: Net sales...................................................... $ 223,442 Cost of products sold.......................................... 159,596 --------- Gross margin................................................. 63,846 Selling, general and administrative expenses................... 48,525 --------- Operating income (loss).................................... 15,321 Other expense, net............................................. 5,711 --------- Income (loss) before income taxes and extraordinary item..... 9,610 Income tax provision (benefit)................................. 2,880 --------- Income (loss) before extraordinary item...................... 6,730 Extraordinary gain (loss), net of tax.......................... -- --------- Net income (loss).......................................... $ 6,730 --------- --------- INCOME (LOSS) PER SHARE - BASIC(4): Before extraordinary item.................................... $ .56 Extraordinary gain (loss), net of tax........................ -- --------- Net income (loss) per share................................ $ .56 --------- --------- Average shares outstanding................................... 12,096 INCOME (LOSS) PER SHARE - DILUTED(4): Before extraordinary item.................................... $ .54 Extraordinary gain (loss), net of tax........................ -- --------- Net income (loss) per share................................ $ .54 --------- --------- Average shares outstanding................................... 12,476 DIVIDENDS PAID PER SHARE OF COMMON STOCK....................... $ .12
MAY 31, ----------------------------------------------------- BALANCE SHEET DATA: 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- Working capital, net........................................... $ 103,987 $ 96,494 $ 106,235 $ 133,151 $ 140,821 Total assets................................................... 205,043 179,467 173,514 180,158 192,514 Long-term debt, including current portion...................... 101,989 88,288 81,504 92,025 107,275 Stockholders' equity........................................... 75,417 52,573 56,154 62,792 59,590 FEBRUARY 28, BALANCE SHEET DATA: 1998 ------------- Working capital, net........................................... $ 141,227 Total assets................................................... 199,654 Long-term debt, including current portion...................... 105,623 Stockholders' equity........................................... 64,211
- ------------------------------ (1) IN SEPTEMBER 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. IN FISCAL 1994, COST OF PRODUCTS SOLD INCLUDED A $26.5 MILLION PROVISION, OF WHICH $21.4 MILLION WAS FOR THE DISPOSITION OF THE COMPANY'S MANUFACTURING OPERATIONS IN BRIVE, FRANCE, AND $5.1 MILLION WAS FOR INCREMENTAL COSTS RELATED TO THE PHASE-DOWN OF CERTAIN DOMESTIC MANUFACTURING OPERATIONS. NET OF TAX, THESE CHARGES INCREASED THE NET LOSS BY $19.5 MILLION, OR $1.73 PER SHARE. (2) IN FISCAL 1995, THE COMPANY RECORDED A CHARGE FOR THE SETTLEMENT OF A MONETARY CLAIM RELATED TO A 1989 CONTRACT WHICH REDUCED GROSS MARGIN BY $4.7 MILLION AND NET INCOME BY $2.3 MILLION, OR $.20 PER SHARE. THE COMPANY ALSO RECORDED AN EXTRAORDINARY GAIN OF $527,000, OR $.05 PER SHARE, NET OF TAX, ON THE REPURCHASE OF CERTAIN OF THE COMPANY'S CONVERTIBLE DEBENTURES. 15 (3) IN THE THIRD QUARTER OF FISCAL 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 $7.2 MILLION AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES BY $3.8 MILLION. NET OF TAX, THESE CHARGES REDUCED NET INCOME BY $6.7 MILLION, OR $.56 PER SHARE. THE COMPANY ALSO RECORDED AN EXTRAORDINARY LOSS OF $488,000, OR $.04 PER SHARE, NET OF TAX, ON THE EXCHANGE OF CERTAIN OF THE COMPANY'S CONVERTIBLE DEBENTURES. (4) THE COMPANY HAS ADOPTED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE," WHICH BECAME EFFECTIVE DECEMBER 1997. THE EARNINGS PER SHARE AMOUNTS FOR 1997 AND PRIOR YEARS HAVE BEEN RESTATED TO COMPLY WITH THIS STATEMENT. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, AND THE SECOND PARAGRAPH UNDER THE HEADING "RISK FACTORS" INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE NOTED, REFERENCES TO SPECIFIC YEARS IN THIS SECTION RELATE TO FISCAL YEARS. FOR EXAMPLE, "1997" REFERS TO THE FISCAL YEAR ENDED MAY 31, 1997. Richardson Electronics, Ltd. is a specialized international distributor of electronic components, equipment and assemblies primarily for niche industrial applications. Richardson operates in one industry segment. The marketing and sales structure of the Company is organized into four strategic business units ("SBUs"): Electron Device Group ("EDG"), Solid State and Components ("SSC"), Display Products Group ("DPG") and Security Systems Division ("SSD"). RESULTS OF OPERATIONS--FIRST NINE MONTHS OF FISCAL 1998 COMPARED TO FIRST NINE MONTHS OF FISCAL 1997 Net sales for the first nine months of fiscal 1998 were $223.4 million, a 21.5% increase from $183.9 million in the prior year. Sales gains include the effect of recent acquisitions, which contributed $21.4 million in fiscal 1998. Overall gross margins as a percent of sales in the nine-month period were 28.6%, compared to 29.3% in the prior period, excluding the effect of the special charges. Year-to-date margin comparisons are affected by changes in product mix, with lower margin SSD sales contributing a proportionately greater percentage to total sales. Sales, gross margins and gross margin as a percent of sales by SBU are summarized in the following table. Manufacturing variances, warranty expenses, LIFO provisions and miscellaneous costs are included under the caption "Other" (in thousands):
SALES GROSS MARGINS -------------------------------------------- --------------------------------- FISCAL % OF FISCAL % OF FISCAL % OF FISCAL 1997 TOTAL 1998 TOTAL 1997(1) SALES 1998 ---------- --------- ---------- --------- --------- ----- --------- EDG............................................ $ 84,647 46.1 $ 86,823 38.8 $ 22,585 26.7 $ 27,360 SSC............................................ 53,201 28.9 64,484 28.9 13,835 26.0 18,459 DPG............................................ 21,737 11.8 22,617 10.1 5,875 27.0 7,633 SSD............................................ 24,289 13.2 49,518 22.2 5,151 21.2 11,457 ---------- --------- ---------- --------- --------- --------- Total...................................... $ 183,874 100.0 $ 223,442 100.0 47,446 25.8 64,909 ---------- --------- ---------- --------- ---------- --------- ---------- --------- Other.......................................... (754) (1,063) --------- --------- Consolidated............................... $ 46,692 25.4 $ 63,846 --------- --------- --------- --------- % OF SALES ----- EDG............................................ 31.5 SSC............................................ 28.6 DPG............................................ 33.7 SSD............................................ 23.1 Total...................................... 29.0 Other.......................................... Consolidated............................... 28.6
- ------------------------ (1) IN THE THIRD QUARTER OF FISCAL 1997, THE COMPANY RE-EVALUATED ITS RESERVE ESTIMATES FOR INVENTORY AND ACCOUNTS RECEIVABLE IN LIGHT OF CHANGED MARKET CONDITIONS AND PROVIDED FOR SEVERANCE AND OTHER COSTS ASSOCIATED WITH A CORPORATE REORGANIZATION. THE SPECIAL CHARGE INCLUDED IN COST OF SALES WAS $7.2 MILLION, WHICH REDUCED GROSS MARGINS FOR EDG BY $2.8 MILLION, SSC BY $2.4 MILLION, DPG BY $1.9 MILLION AND SSD BY $100,000. EDG's sales increased 2.6%. Gross margins as a percent of sales were 31.5%, compared to the prior period rate of 30.0%, excluding the special charges. Gross margins improved as a result of changes in pricing policies and higher efficiencies in x-ray tube loading operations. SSC's sales increased 21.2%. SSC's sales growth includes the October 1996 acquisition of Compucon. Without the contribution from this acquisition, SSC's internally generated sales growth was 16.3%. Gross 17 margins as a percent of sales were 28.6%, down from 30.6%, excluding the special charges. The margin change is primarily due to product mix and competitive pressures. DPG's sales increased 4.0%. Gross margins as a percent of sales declined to 33.7% from 35.6%, excluding the special charges. The sales gain and margin change reflect the resumption of sales to a major European customer, partially offset by a decline in sales of monochrome CRTs. SSD's sales increased 104%. SSD's sales growth includes the acquisition of Burtek Systems in February 1997 and Security Service International in August 1997. Without the contribution from these acquisitions, SSD's internally generated sales growth was 26.3%. Gross margins as a percent of sales were 23.1%, compared to the prior year's 21.6%, excluding the special charges. The margin improvement results from higher margins on proprietary and franchise product lines obtained with the acquisitions of Burtek and SSI. On a geographic basis, the Company categorizes its sales by destination: North America, Europe and Rest of World ("ROW"). Sales, gross margins and gross margin as a percent of sales by area are summarized in the following table (in thousands):
SALES GROSS MARGINS -------------------------------------------- --------------------------------- FISCAL % OF FISCAL % OF FISCAL % OF FISCAL 1997 TOTAL 1998 TOTAL 1997(1) SALES 1998 ---------- --------- ---------- --------- --------- ----- --------- North America................................... $ 109,398 59.5 $ 139,128 62.3 $ 27,798 25.4 $ 39,446 Europe.......................................... 40,929 22.3 48,498 21.7 11,568 28.3 14,932 Rest of World................................... 33,547 18.2 35,816 16.0 8,080 24.1 10,531 ---------- --------- ---------- --------- --------- --------- Total....................................... $ 183,874 100.0 $ 223,442 100.0 47,446 25.8 64,909 ---------- --------- ---------- --------- ---------- --------- ---------- --------- Other........................................... (754) (1,063) --------- --------- Consolidated................................ $ 46,692 25.4 $ 63,846 --------- --------- --------- --------- % OF SALES ----- North America................................... 28.4 Europe.......................................... 30.8 Rest of World................................... 29.4 Total....................................... 29.0 Other........................................... Consolidated................................ 28.6
- ------------------------ (1) THE SPECIAL CHARGE IN THE THIRD QUARTER OF FISCAL 1997 INCLUDED IN COST OF SALES REDUCED GROSS MARGINS FOR NORTH AMERICA BY $4.1 MILLION, EUROPE BY $1.7 MILLION AND ROW BY $1.4 MILLION. For the first nine months of fiscal 1998, the Company achieved sales growth of 27.2% in North America, 18.5% in Europe and 6.8% in ROW. Excluding the aforementioned acquisitions, North America achieved internally generated sales growth of 7.6%. North America gross margins as a percent of sales were 28.4%, compared to 29.1% in the prior period, excluding the special charges. Gross margins as a percent of sales for Europe were 30.8% compared to 32.3% in the prior year, excluding the special charges. ROW gross margins as a percent of sales were 29.4% compared to 28.4% in the prior year, excluding the special charges. The margin comparisons reflect the higher contribution from SSD sales, competitive pressures affecting SSC margins and lower margins realized on sales to one European customer. Selling, general and administrative expenses increased to $48.5 million in the first nine months of fiscal 1998 compared with $46.5 million in the prior year. The prior year expenses included special charges of $3.8 million for accounts receivable provisions, severance and other costs associated with a corporate reorganization. As a percentage of sales, selling, general and administrative expenses were reduced to 21.7% compared with 23.2% in the prior year, excluding the special charges. Collectively, special charges affecting net income before extraordinary item in the third quarter of fiscal 1997 amounted to $11.0 million pre-tax or $6.7 million, net of tax, reducing earnings per share by $.56. The Company also recorded an $800,000 extraordinary charge for the write-off of unamortized debt issuance costs attributable to the 7 1/4% convertible debentures, which were exchanged for a new issue. Net of tax, the charge was $488,000, or $.04 per share. 18 RESULTS OF OPERATIONS--FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL 1996 AND FISCAL 1995 SALES AND GROSS MARGIN ANALYSIS Consolidated sales in fiscal 1997 were a record $255.1 million. Sales and gross margin data by SBU are summarized in the following table (in thousands):
SALES GROSS MARGINS ---------------------------------------------------------------- --------------------------------- FISCAL % OF FISCAL % OF FISCAL % OF FISCAL FISCAL 1995 TOTAL 1996 TOTAL 1997 TOTAL 1995 % OF SALES 1996 --------- --------- --------- --------- --------- --------- --------- ----- --------- EDG.................. $ 105,454 50.7 $ 109,925 45.8 $ 113,700 44.6 $ 30,884 29.3 $ 33,416 SSC.................. 52,409 25.2 67,976 28.4 74,209 29.1 16,416 31.3 20,840 DPG.................. 36,502 17.5 36,154 15.1 29,377 11.5 12,463 34.1 13,156 SSD.................. 13,753 6.6 25,612 10.7 37,853 14.8 3,037 22.1 5,425 --------- --------- --------- --------- --------- --------- --------- --------- Total.............. $ 208,118 100.0 $ 239,667 100.0 $ 255,139 100.0 62,800 30.2 72,837 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Other................ (7,467) (2,293) --------- --------- Consolidated....... $ 55,333 26.6 $ 70,544 --------- --------- --------- --------- FISCAL % OF SALES 1997 % OF SALES ----- --------- ----- EDG.................. 30.4 $ 32,220 28.3 SSC.................. 30.7 19,923 26.8 DPG.................. 36.4 8,465 28.8 SSD.................. 21.2 8,267 21.8 --------- Total.............. 30.4 68,875 27.0 Other................ (1,411) --------- Consolidated....... 29.4 $ 67,464 26.4 --------- ---------
Sales and gross margin data by geographic area are summarized in the following table (in thousands):
SALES GROSS MARGINS ---------------------------------------------------------------- --------------------------------- FISCAL % OF FISCAL % OF FISCAL % OF FISCAL FISCAL 1995 TOTAL 1996 TOTAL 1997 TOTAL 1995 % OF SALES 1996 --------- --------- --------- --------- --------- --------- --------- ----- --------- North America........ $ 123,508 59.4 $ 139,743 58.3 $ 153,221 60.1 $ 37,100 30.0 $ 41,257 Europe............... 46,071 22.1 57,219 23.9 55,881 21.9 14,753 32.0 19,186 Rest of World........ 38,539 18.5 42,705 17.8 46,037 18.0 10,947 28.4 12,394 --------- --------- --------- --------- --------- --------- --------- --------- Total.............. $ 208,118 100.0 $ 239,667 100.0 $ 255,139 100.0 62,800 30.2 72,837 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Other................ (7,467) (2,293) --------- --------- Consolidated....... $ 55,333 26.6 $ 70,544 --------- --------- --------- --------- FISCAL % OF SALES 1997 % OF SALES ----- --------- ----- North America........ 29.5 $ 40,514 26.4 Europe............... 33.5 16,194 29.0 Rest of World........ 29.0 12,167 26.4 --------- Total.............. 30.4 68,875 27.0 Other................ (1,411) --------- Consolidated....... 29.4 $ 67,464 26.4 --------- ---------
North American sales increased 9.6% in 1997, following a 13.1% increase in 1996. In both years, the sales gains were primarily attributable to SSD and, to a lesser extent, SSC and EDG. Sales in Europe declined 2.3% in 1997, after a 24.2% increase in 1996. In 1997, sales gains by SSD and SSC were more than offset by a 32.6% decline in DPG European sales from the loss of a single large customer. In 1996, SSD, DPG and SSC all had European sales gains in excess of 50%. ROW sales increased 7.8% in 1997, following a 10.8% gain in 1996. In both years, the largest ROW sales gains were achieved by SSD and SSC. Sales denominated in currencies other than U.S. dollars were 43.1%, 42.3% and 39.2% of total sales in 1997, 1996 and 1995, respectively. Exchange rate changes reduced foreign sales by an average of 2.9% in 1997 and increased foreign sales by 1.0% in 1996. Sales and gross margin trends are analyzed for each strategic business unit in the following sections. ELECTRON DEVICE GROUP. The electron tube industry in which EDG operates is characterized by mature products, the presence of tube rebuilders and vigorous price competition. The Company estimates that overall industry sales are modestly contracting. EDG's sales gains of 3.4% and 4.2% in 1997 and 1996, respectively, result from an increase in market share. International sales accounted for 56.5%, 56.5% and 56.6% of EDG's sales in 1997, 1996 and 1995, respectively. The medical imaging replacement business is a growth segment of the electron tube industry. Demand for the replacement of x-ray, computed tomography (CT), medical resonance imaging (MRI) and radiation therapy components is expected to continue to grow in response to the cost effectiveness of purchasing rebuilt components from the Company as opposed to purchasing new or rebuilt products directly from original equipment manufacturers. Richardson expanded its medical sales force in 1996 and 1997. In addition, the Company acquired x-ray tube and image intensifier reloading facilities in the United States in 1996 and in 1997 established a reloading facility in the Netherlands. Sales in the medical EDG product line 19 increased 56.5% to $17.5 million in 1997, following a 110% increase in 1996. Other product lines within EDG which are growing include microwave generators, pulse power tubes, industrial magnetrons and broadcast transmitters. Gross margins were affected in 1997 by the special charges described below in "--Cost of Sales and Gross Margins." Excluding the special charges, gross margins as a percent of sales increased to 30.6% in 1997, compared to 30.4% and 29.3% in 1996 and 1995, respectively. The gross margin percentage improvements in 1997 and 1996 resulted from heightened focus on pricing policies, 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 9.2% in 1997 to $74.2 million, following a 29.7% increase in 1996. Sales in 1997 were adversely impacted by the loss of a major vendor which resulted in a $9.6 million decline in sales. The Company has been successful in replacing a portion of these sales with products from other vendors and the acquisition of complimentary product lines. In October 1996, the Company purchased Compucon, a distributor of interconnect devices operating in the northeastern United States with annual sales prior to the acquisition of $7.9 million. International sales represented 37.6%, 36.3% and 36.2% of SSC's sales in 1997, 1996 and 1995, respectively. Gross margins were affected in 1997 by the special charges described below in "--Cost of Sales and Gross Margins." Excluding the special charges, gross margins as a percent of sales were 30.1% in 1997, compared to 30.7% and 31.3% in 1996 and 1995, respectively. The decline in gross margins as a percentage of sales reflects competitive pricing pressures and a change in product mix. DISPLAY PRODUCTS GROUP. DPG sales declined 18.7% in 1997 and 1.0% in 1996. The 1997 sales decline is largely attributable to the loss of a single customer in Europe. Sales in both years were hampered by product shortages, primarily for color cathode ray tubes ("CRTs"), as glass manufacturers were unable to meet market demand. DPG's product mix had been shifting from monochrome to higher priced color CRTs for several years. This trend was interrupted in 1997 due to the aforementioned product shortages, as color CRTs represented 15.6% of units sold in 1997, compared to 18.0% and 16.0% in 1996 and 1995, respectively. International sales represented 46.1%, 51.4% and 34.9% of DPG's sales in 1997, 1996 and 1995, respectively. Gross margins were affected in 1997 by the special charges described below in "--Cost of Sales and Gross Margins." Excluding the special charges, gross margins as a percent of sales were 35.1% in 1997 compared to 36.4% and 34.1% in 1996 and 1995, respectively. Industry shortages of color CRTs in 1997 had an unfavorable effect on product mix and gross margins. Improved gross margins, comparing 1996 to 1995, reflect the shift in product mix to higher margin color CRTs. SECURITY SYSTEMS DIVISION. SSD specializes in products for the growing electronic security equipment market, particularly closed circuit television ("CCTV") components and systems. In February 1997, the Company acquired Burtek, a Canadian security systems distributor with annual sales of $18.0 million. This acquisition follows the decision by the Company to significantly increase the SSD sales staff in 1995. These factors contributed to the 47.8% growth in sales in 1997 and the 86.2% sales growth in 1996. International sales represented 47.7%, 38.8% and 39.3% of SSD's sales in 1997, 1996 and 1995, respectively. Gross margins were 21.8%, 21.2% and 22.1% of sales in 1997, 1996 and 1995, respectively. Inventory turnover rates achieved by SSD are higher than the Company's other SBUs, which mitigates the effect of lower gross margin. 20 COST OF SALES AND GROSS MARGINS The following table reconciles product margins to gross margin data (% of sales) reported in the Statements of Operations:
1995 1996 1997 --------- --------- --------- Product margin............................................................. 30.7% 31.0% 29.9% Overstock provisions....................................................... (0.5) (0.1) (3.0)(1) Customer returns and scrap................................................. (0.6) (0.7) (0.3) Manufacturing and warranty costs........................................... (0.5) (0.3) (0.1) Claim settlement........................................................... (2.2 (2) -- -- Other costs................................................................ (0.3) (0.5) (0.1) --------- --------- --------- Gross margin............................................................. 26.6% 29.4% 26.4% --------- --------- --------- --------- --------- ---------
- ------------------------ (1) IN CONJUNCTION WITH A CORPORATE REORGANIZATION AND REVIEW OF OPERATIONS, AND IN RESPONSE TO CHANGED MARKET CONDITIONS, THE COMPANY RE-EVALUATED ITS RESERVES FOR OVERSTOCK INVENTORY IN THE THIRD QUARTER OF FISCAL 1997. AS A RESULT OF THIS REVIEW, THE COMPANY PROVIDED A $7.2 MILLION CHARGE TO COST OF SALES. (2) IN THE FOURTH QUARTER OF FISCAL 1995, THE COMPANY PAID $4.7 MILLION TO SETTLE A MONETARY CLAIM RELATED TO A CONTRACT COMPLETED IN 1989 FOR CERTAIN NIGHT-VISION TUBES. Fluctuations in product margin percentages primarily reflect the shift in product mix. Lower gross margin SSD sales have increased and higher gross margin DPG sales have declined as a percent of consolidated sales. Product margins are also affected by changes in selling prices, product costs and foreign exchange rate variations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses represented 24.4%, 22.1% and 23.4% of sales in 1997, 1996 and 1995, respectively. In 1997, selling, general and administrative expenses includes $3.8 million in special charges for severance and other costs related to a corporate reorganization. Excluding the special charges, 1997 selling, general and administrative expenses were 22.9% of sales and increased $5.6 million over 1996, reflecting business acquisitions and the expansion of the EDG medical and SSC sales forces. Selling, general and administrative expenses in 1996 increased $4.3 million over 1995 as a result of expansion of the SSC and SSD sales forces and incentive payments on higher gross margins. OTHER (INCOME) EXPENSE Interest expense increased to $7.6 million in 1997 compared to $6.6 million and $6.5 million in 1996 and 1995, respectively, primarily due to higher borrowing levels. Investment income declined to $392,000 in 1997 from $1.2 million in 1996 and $1.9 million in 1995 as a result of lower investment levels and lower realized capital gains. Fluctuations in foreign exchange and other expenses primarily reflect changes in the value of the U.S. dollar relative to foreign currencies. A general strengthening of the dollar in fiscal 1997, and to a lesser extent in 1996, resulted in net foreign exchange losses, while the weakening of the dollar in fiscal 1995 generated exchange gains for Richardson. INCOME TAX PROVISION The effective income tax rates for the Company were 63.1%, 32.5% and 5.7% in fiscal 1997, 1996 and 1995, respectively. The effective rate of the 1997 income tax benefit differs from the statutory rate of 34% due to the utilization of foreign operating losses where no tax benefit was recorded in prior years, the Company's foreign sales corporation benefit on export sales and state income taxes. The 1995 rate differs from the U.S. statutory rate of 34% as a result of the carryback of the $4.7 million contract settlement to prior years at a 46% statutory rate. 21 NET INCOME (LOSS) AND PER SHARE AMOUNTS The comparability of net income (loss) and net income (loss) per share for 1997, 1996 and 1995 is affected by several unusual charges. In 1997, the special charge for severance and other costs related to a corporate reorganization and the re-evaluation of certain reserves reduced net income by $6.7 million, or $.56 per share. In addition, the extraordinary loss resulting from the write-off of the original issuance costs on convertible debentures which were exchanged reduced net income by $488,000, or $.04 per share. In 1995, the settlement of a 1989 contract dispute resulted in a reduction in net income of $2.3 million, or $.20 per share. Additionally in 1995, the Company recorded an extraordinary gain, net of tax, of $527,000, or $.05 per share, on the repurchase of certain of its convertible debentures. FINANCIAL CONDITION LIQUIDITY In order to provide rapid response and superior customer service as a distributor of replacement parts, Richardson maintains relatively high levels of electron tube, semiconductor and CRT inventories. Some of these products represent trailing-edge technology which may not be available from other sources, and may not be currently manufactured. Also, in many cases, the products are components of production equipment for which immediate availability is critical to the customer. Liquidity is provided by the operating activities of the Company, adjusted for non-cash items, and is reduced by working capital requirements, debt service, capital expenditures, dividends and capital acquisitions. Comparing fiscal years, cash provided by (used in) operations was $3.6 million in 1997, $(7.9) million in 1996 and $(6.7) million in 1995. Additional investments in working capital to support rising sales were $7.3 million, $22.0 million and $14.6 million in 1997, 1996 and 1995, respectively. Higher accounts receivable balances in each year reflect growth in sales. Inventory levels were held approximately constant in 1997, in spite of higher sales, after increases in 1996 and 1995. Other working capital requirements in 1995 included $6.3 million for severance and other payments related to the phase-down of certain manufacturing operations. Comparing the first nine months of fiscal 1998 to 1997, cash provided by operations was $9.0 million in 1998, compared to $1.6 million in the prior year. Working capital changes reduced cash by $2.5 million compared to $6.9 million the prior year. Accounts payable increased $5.5 million compared to a decline of $1.0 million, reflecting the timing of inventory purchases. Accounts receivable increased $4.8 million in the current year, as a result of sales growth. Business acquisitions, capital expenditures and dividend payments were funded primarily by cash generated by operations or borrowings under the Company's credit facilities. At May 31, 1997, the Company had net operating loss carryforwards of $14.5 million for U.S. federal and state income tax purposes which are available to offset future tax liabilities. Earnings levels are expected to be sufficient to utilize these carryforwards before they expire. The Company has proposed a plan to the Illinois Environmental Protection Agency to monitor and process soil and groundwater at the LaFox facility. Contamination is believed to have resulted from practices previously employed at the site. The present value of the estimated future remediation costs was $631,000 at February 28, 1998 and was included as an accrued liability in the Company's financial statements at that date. After the application of the net proceeds from the sale of Common Stock by the Company in this Offering, the Company believes that cash generated from operations and amounts available under its credit agreements will be sufficient for the Company to meet its working capital and capital expenditure needs for its operations as presently conducted for the foreseeable future. See "Financing." The Company's growth strategy includes growth through acquisitions. The net proceeds from the sale of Common Stock by the Company in this Offering, together with cash generated from operations, may not be 22 adequate to finance such acquisitions and the Company may be required to seek additional financing. Further, there can be no assurance that other financing would be available in amounts and on terms acceptable to the Company. FINANCING In the first quarter of 1997, the Company amended its $25.0 million senior revolving credit note agreement to increase the credit line to $35.0 million and in November 1997 extended its maturity to January 31, 1999. Effective March 1, 1998, this facility was replaced by a new $50.0 million revolving credit agreement which expires March 1, 2001. The loan bears interest at prime or 100 basis points over the London InterBank Offering Rate, at the Company's option. On February 15, 1997, the Company exchanged $40.0 million of new 8 1/4% convertible debentures for an equivalent face value of its outstanding 7 1/4% convertible debentures. See Note F to the Consolidated Financial Statements. The principal purpose of the exchange was to improve the Company's future liquidity and capital position by refinancing a sufficient number of the debentures to eliminate sinking fund requirements until December 15, 2004. To complete the acquisition of Burtek, the Company entered into a revolving credit agreement and term loan aggregating $6.0 million. An additional $5.5 million was borrowed under this agreement in August 1997 to finance the acquisition of Security Services International. At February 28, 1998, $8.5 million remained outstanding under this agreement. The loan bears interest at the Canadian prime rate and expires March 1, 2001. In connection with the Company's debt agreements, certain restrictions exist relating to the purchase of treasury stock and the payment of cash dividends and other distributions on the Company's Common Stock. At March 1, 1998, $10.0 million was free of such restrictions. Annual dividend payments approximate $1.9 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. QUARTERLY RESULTS OF OPERATIONS The following table presents unaudited summarized quarterly operating results for the Company for each of the four quarters in fiscal 1997 and the first three quarters of fiscal 1998. Third quarter 1997 results include valuation reserve adjustments and severance and other costs which reduced gross margin by $7.2 million, operating income by $11.0 million and net income by $6.7 million, as described in Note B to the Consolidated Financial Statements. Such quarterly results of operations are not necessarily indicative of the results of operations for any future period.
FISCAL 1997 FISCAL 1998 ------------------------------------------ ------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 8/31/96 11/30/96 2/28/97 5/31/97 8/31/97 11/30/97 2/28/98 --------- --------- --------- --------- --------- --------- --------- Net sales...................................... $ 57,544 $ 62,167 $ 64,163 $ 71,265 $ 71,600 $ 78,646 $ 73,196 Gross margin................................... 16,783 18,738 11,171 20,772 20,638 22,348 20,860 Operating income (loss)........................ 3,449 4,687 (7,952) 4,947 4,828 5,642 4,851 Net income (loss) before extraordinary item.... 1,293 1,932 (6,053) 1,823 1,808 2,740 2,182 Extraordinary loss, net of tax................. -- -- (488) -- -- -- -- Net income (loss).............................. 1,293 1,932 (6,541) 1,823 1,808 2,740 2,182 Net income (loss) per share before extraordinary item - diluted.................. $ .11 $ .16 $ (.51) $ .15 $ .15 $ .22 $ .17 Net income (loss) per share - diluted.......... $ .11 $ .16 $ (.55) $ .15 $ .15 $ .22 $ .17 Average shares outstanding..................... 12,209 12,121 11,908 12,067 12,228 12,575 12,626
23 CURRENCY FLUCTUATIONS The Company's foreign denominated assets and liabilities are cash, accounts receivable, inventory and accounts payable, primarily in member countries of the European community and, to a lesser extent, in Canada, Asia/Pacific and Latin America. The Company monitors its foreign exchange exposure and may enter into forward contracts to hedge significant transactions. Other tools which may be used to manage foreign exchange exposures include the use of currency clauses in sales contracts and the use of local debt to offset asset exposures. IMPACT OF YEAR 2000 The year 2000 issue is the result of computer programs which are written using two digits rather than four to define the applicable year. Such programs may be incapable of correctly processing information beginning in the year 2000; which could be read as 1900 or 2000. The Company's current computer database correctly stores date stamps which include four digit years. Based on a recent assessment, the Company anticipates its systems will function properly with respect to dates in the year 2000 and thereafter. In addition, the Company does not anticipate significant year 2000 issues relating to interface systems with third parties. Based upon the foregoing, the Company does not currently expect that the year 2000 issue will have a material impact on its financial condition or results of operations. 24 BUSINESS INTRODUCTION AND BUSINESS STRATEGY Richardson Electronics, Ltd. is a specialized international distributor of electronic components, equipment and assemblies primarily for niche industrial applications. Its products include electron tubes, microwave generators, radio frequency ("RF") and microwave components, power semiconductors, data display monitors and electronic security products and systems. These products are used to control, switch or amplify electrical power or signals, or as display, recording or alarm devices in a variety of industrial, communication, medical and scientific applications. Richardson differentiates itself by providing engineered solutions to its customers. Its capabilities extend beyond simple product distribution to include specialty product manufacturing and systems integration and include value-added services such as component assembly, prototype design and manufacture, testing, kitting and logistics. The Company's objective is to be the preeminent international supplier of niche electronic components to industrial and commercial users. To fulfill this objective, the Company employs the following basic strategies: CAPITALIZE ON ENGINEERING AND MANUFACTURING EXPERTISE. Richardson believes that its success is largely attributable to its core engineering and manufacturing competency and skill in identifying cost competitive solutions for its customers. Historically, the Company's primary business was the distribution and manufacture of electron tubes and it continues to be a major distributor of these products. Today, the Company out-sources manufacturing requirements for products sold in volume, but retains its engineering and manufacturing expertise, leveraging this knowledge in finding engineered solutions for the customers' applications, not only in electron tube technology but in each of the product areas in which it specializes. Approximately 45% of the Company's sales are derived from products the Company electronically or physically modifies or sells under its own brand names. SPECIALIZE IN SELECTED NICHE MARKETS. The Company specializes in selected niche markets which demand technical service and where price is not the primary competitive factor. Richardson seldom competes against commodity distributors. In many parts of its business, the Company's principal competitors are not other distributors but rather original equipment manufacturers ("OEMs"). The Company offers engineered solutions to its customers including the design, prototype manufacturing and/or electrical or mechanical modification and distribution of approximately 80,000 products ranging in price from $1 to $100,000 each. The Company estimates that over 60% of its sales are attributable to products intended for replacement and repair applications, in contrast to use as components in 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 61.2% of sales in the nine-month period ended February 28, 1998, compared to 35.3% five years ago. MAINTAIN SUPERIOR CUSTOMER SERVICE. The Company maintains more than 300,000 part numbers in its inventory data base. More than 80% of all orders received by 6:00 p.m. are shipped complete the same day. PROVIDE GLOBAL SERVICE. Richardson has kept pace with the globalization of the electronics industry, and addresses the growing demands in lesser developed countries for modern business and industrial equipment, as well as related parts, service and technical assistance. Today, the Company's operations are worldwide in scope through 88 sales offices, including 31 located outside of North America. In fiscal 1997, 48.5% of sales were derived from outside the United States. MAINTAIN STATE-OF-THE-ART INFORMATION SYSTEMS. Through a global, information systems network, all offices have real-time access to the Company's database including customer information, product cross-referencing, competitive market analysis, stock availability and quotation activity. Customers have on-line 25 access to product information via Richardson's web site. The Company offers electronic data interchange to those customers requiring this type of service. GROWTH STRATEGY Richardson's long range plan for growth and profit maximization is defined in three broad categories: internal growth, continuous operational improvement and acquisitions. Each category is discussed in the following paragraphs: INTERNAL GROWTH. The Company believes that, in most circumstances, internal growth provides the best means of expanding its business. Both geographic and product line expansion have and will be employed. In many instances, Richardson's original product line, electron tubes, provides the foundation for establishing new customer relationships, particularly in developing countries where older technologies are still predominately employed. From that base, the Company can identify and capitalize on new market opportunities for its other products. Over the last five years the Company has expanded its sales offices from 22 to 88 to support its new business development efforts. Expansion of the Company's product offerings is an on-going program. Of particular note, the following areas have generated significant recent sales gains: microwave generators; medical imaging components; amplifiers, transmitters and pallets for wireless communication; and CCTV security systems. Additional opportunities currently being explored include flat panel displays, monitors and solar energy power tubes. CONTINUOUS OPERATIONAL IMPROVEMENT. During the last two years, the Company embarked on a vigorous program to improve operating efficiencies and asset utilization. Incentive programs were revised to heighten Richardson managers' commitment to these goals. As a result, selling, general and administrative expenses as a percent of sales were reduced from 23.4% in fiscal 1995 to 21.7% in the first nine months of fiscal 1998. Inventory turns improved from 1.7 to 2.1 over the same period. Additional programs are on-going. The Company believes European logistics and stocking levels may offer additional opportunities for cost savings. ACQUISITIONS. The Company has a successful record of acquiring and integrating businesses. Since 1980, 23 companies or significant product lines have been acquired by the Company. The Company evaluates acquisition opportunities on an ongoing basis. The Company's acquisition criteria require that a target provide either (i) product line growth opportunities permitting Richardson to leverage its existing customer base or (ii) additional geographic coverage of Richardson's existing product offerings. In the last two years, the Company's acquisition pace has accelerated with the purchases of six businesses including, most significantly, Tubemaster (medical imaging--EDG), Compucon (interconnect devices for RF applications--SSC) and Burtek and Security Service International (security systems--SSD). STRATEGIC BUSINESS UNITS The marketing, sales, product management and purchasing functions of Richardson are organized as four strategic business units: Electron Device Group ("EDG"), Solid State and Components ("SSC"), Display Products Group ("DPG") and Security Systems Division ("SSD"). Common logistics, information systems, finance, legal, human resources and general administrative functions support the entire organization. The Company is highly centralized with most corporate functions located at its administrative headquarters and principal stocking facility in LaFox, Illinois. ELECTRON DEVICE GROUP EDG's principal products, electron tubes, are used to control, switch, 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 26 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 the diagnostic medical imaging market, estimated by the Company at $900 million. 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 x-ray tube reloading facilities. 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. Additionally, EDG has broadened its product offerings to include microwave generators used in semiconductor wafer fabrication and other industrial heating applications. 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, the used equipment employing tube technology is being redeployed to lesser developed areas of the world. Richardson's global expansion is, in part, to capitalize on this opportunity. The annual global market for electron tubes served by EDG is estimated by the Company to be more than $3.0 billion. As a result of product line and global expansion, EDG sales increased in each of the last three years. The following is a description of EDG's major product groups: POWER AMPLIFIER / OSCILLATOR TUBES are vacuum or gas-filled tubes used in applications where current or voltage amplification and/or oscillation is required. Some areas of use are induction heating, diathermy equipment, communications and radar systems and power supplies for voltage regulation or amplification. X-RAY TUBES AND X-RAY IMAGE INTENSIFIERS are glass and glass/metal vacuum tubes which generate high-frequency radiation for use in industrial, analytical and medical equipment. Stationary anode x-ray tubes are used primarily for inspection and non-destructive testing of solid materials and in crystallography. Rotating anode x-ray tubes are primarily used in medical applications, including fluoroscopy and computer-aided tomography (CAT-scan). 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. 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, 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. 27 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. 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. SOLID STATE AND COMPONENTS SSC focuses its broad product offerings on two specialized markets. SSC serves many of the same customers and industries as EDG. Because of the Company's expertise in electron tube technology, it developed a strong competency in wireless communications and industrial applications requiring high power. SSC sells (i) Radio Frequency ("RF") and microwave components and (ii) power semiconductors and related components. In addition to the distribution of products, SSC provides design, prototype assembly, kitting, testing and other essential services to these markets. SSC's RF and microwave components are used by the emerging wireless and telecommunications markets as well as Richardson's traditional communications, broadcast and avionics customers. SSC's power semiconductors and related components serve industrial markets in power conversion applications. The majority of SSC's business is with OEMs. Because time-to-market is so critical in today's electronics industry, OEMs are outsourcing engineering design-in of devices and components. Richardson employs its core engineering expertise and distribution competency in wireless and industrial applications to meet customer requirements for design-in and prototype assembly of silicon controlled rectifier assemblies, amplifiers, pallets and transmitters. In October 1996, the Company acquired Compucon, a distributor of inter-connect devices operating in the northeastern United States. The acquisition brought to the Company a new product line and management with the specialized knowledge of its applications. The Company believes that it can achieve significant growth in this line by expanding Compucon's regional specialization through its worldwide sales network. The following is a description of SSC's major product groups: RF POWER TRANSISTORS are solid-state, high-frequency power amplifiers used in broadcast, cellular, aircraft and satellite communications and in many types of electronic instrumentation. The Company designs and provides prototype assemblies of amplifiers and pallets incorporating RF power transistors. In many circumstances, the customer prefers to acquire the complete assembly as opposed to the discrete transistor. 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. 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. INTER-CONNECT DEVICES are passive components used to connect all types of electronic equipment including those employing RF technology. 28 DISPLAY PRODUCTS GROUP DPG sells data display and instrumentation cathode ray tubes ("CRTs") that are used in data display, marine, medical, radar and avionic applications. It recently expanded its product line to include flat panel displays and monitors. DPG's primary market is users of replacement CRTs and related components, principally large manufacturing and service companies. Its customer base also includes both independent and original equipment service organizations. Richardson estimates annual factory sales of CRTs in the global market to be $12 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-Registered Trademark-, radar and instrumentation displays are some of the many product applications. Large mainframe systems, using multiple data display terminals, represent the largest market served by DPG. Typical users include hospitals, airports, airlines, brokerage offices, banks, television studios, utilities and assembly lines. The following is a description of DPG's major product groups: CATHODE RAY TUBES are vacuum tubes which convert an electrical signal into a visual image to display information on computer terminals or televisions. CRTs are used in various environments, including hospitals, financial institutions, airports and numerous other applications wherever electronic data is shared by large user groups. The product line includes both monochrome and color tubes. DATA DISPLAY MONITORS are peripheral components incorporating a color or monochrome CRT capable of displaying an analog or digitally generated video signal. FLAT PANEL DISPLAYS are display monitors incorporating a liquid crystal display or plasma panel, rather than a CRT, typically a few inches in depth and ranging from 10" to 42" measured diagonally. SECURITY SYSTEMS DIVISION SSD serves the commercial security and surveillance industry with a primary emphasis on closed circuit television ("CCTV") systems and components. SSD's strategy is to leverage Richardson's existing customer base of FORTUNE 500 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 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 1996 and 1997. Acquisitions and a significant increase in SSD's field sales force were principally responsible for these significant sales gains. In February 1997, the Company acquired Burtek and in August 1997 acquired Security Services International, both of which are security systems distributors operating in Canada, with combined annual sales of $38 million. The following is a description of SSD's major product groups: 29 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 Burle Industries, Clinton Electronics, Communication and Power Industries ("CPI"), Covimag, Ericsson, General Electric, Huber & Suhner, Jennings, Litton, M/A-COM, MPD, New Japan Radio, Orion/Daewoo, Panasonic, Pelco, Philips, Powerex, Samsung, Samtell, Sanyo, SGS THOMSON, Semtech, Sensormatic, Sony, Teletube, Toshiba, Triton Services, and Varian Associates. No single outside supplier currently accounts for more than 10% of the Company's purchases in any year, other than CPI, which accounted for 10.3%, 12.6% and 16.6% of purchases in fiscal 1997, 1996 and 1995, respectively. In 1991 the Company settled an antitrust suit with the U.S. Department of Justice related to its participation in the electron tube manufacturing industry. As a consequence, certain of its manufacturing activities became uneconomic and were divested or discontinued. Covimag is the entity formed to acquire the Company's former Brive, France manufacturing operation. Formal transfer of ownership occurred in January 1995. Covimag is managed by the same individuals previously employed by the Company at this facility. Under an evergreen agreement, the Company negotiates a purchase commitment on an annual basis. Covimag is highly dependent on Richardson, which is its primary customer. Settlement of purchases under the contract are at standard terms. Except for the supply contract, Richardson has no other financial commitment to or from Covimag. Relationships under the supply contract are believed by the Company to be satisfactory. In addition to the agreement with Covimag, the Company has marketing 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 28 additional stocking locations throughout the world. The Company utilizes a sophisticated data processing network which provides on-line, real-time interconnection of all sales offices and central distribution operations. Information on stock availability, cross-reference information, customers and competitive market analyses are instantly obtainable throughout the entire distribution network. MANUFACTURING The Company distributes its proprietary products principally under the trade names "National," "Cetron," "RF Gain" and "Amperex." Approximately 22% of the Company's sales are from products it manufactures or modifies through value-added services, primarily at its LaFox, Illinois facility. 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 30 power tubes, electronic display tubes, phototubes, SCR assemblies, spark gap tubes, RF amplifiers, transmitters and pallet assemblies. Richardson reloads and remanufactures medical x-ray tube housings. 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 February 28, 1998, the Company employed 798 individuals on a full-time basis. Of these, 471 are located in the United States, including 61 employed in administrative and clerical positions, 312 in sales and distribution and 98 in value-added and product manufacturing. The Company's international subsidiaries employ an additional 327 individuals engaged in administration, sales and distribution. 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 the patents and trademarks obtained 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. 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 62 locations in North America, 12 in Europe, 9 in the Far East / Pacific Rim and 3 in Latin America. The Company leases production facilities in Texas, Virginia and the Netherlands for its medical tube reloading operation. The Company also leases a facility from a trust, of which Edward J. Richardson, Chairman of the Board of the Company, is the principal beneficiary. Such facility is used by SSD as its sales office and warehouse. Under the terms of this lease, the Company is obligated to make rental payments of $68,705 per year, expiring in 1999. The lease is on terms no less favorable to the Company than similar leases which would be available from unrelated third parties. LITIGATION The Company is a defendant in PANACHE BROADCASTING OF PENNSYLVANIA V. RICHARDSON ELECTRONICS, LTD. in United States District Court, Northern District of Illinois, filed in 1990. The complaint purports to be a class action on behalf of all persons and businesses in the United States who purchased electron power tubes from one or more of the defendant corporations at any time since February 26, 1986. The complaint 31 alleges antitrust violations and seeks treble damages, injunctive relief and attorneys fees. The Company has denied the material allegations. The case remains primarily in the preliminary discovery stage. The Company is also a defendant in ARIUS, INC. V. RICHARDSON ELECTRONICS, LTD. pending in state court in Orlando, Florida. The complaint filed in 1995 alleges a breach of a confidentiality agreement between Richardson and Arius and other causes of action against Richardson and three employees. The court entered an order prohibiting, among other things, contact by Richardson and one of its employees with Arius customers, except in the ordinary course of business. Shortly after entry of this order, Arius filed a Chapter 7 bankruptcy petition and ceased to be a going concern. In early 1998, Arius' bankruptcy trustee filed a motion seeking to penalize Richardson for having made sales to alleged Arius customers subsequent to the date Arius filed its bankruptcy petition. Richardson is vigorously contesting this motion and has asserted, among other things, that it had no contact with alleged Arius customers except in the ordinary course of business and that Arius' bankruptcy terminated Arius' customer relationships. 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. 32 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the executive officers and members of the Board of Directors of the Company.
NAME AGE POSITION(S) - ----------------------------------- --- ----------------------------------------------------------------------- Edward J. Richardson............... 56 Chairman of the Board and Chief Executive Officer Bruce W. Johnson................... 57 President, Chief Operating Officer and Director William J. Garry................... 50 Vice President of Finance, Chief Financial Officer and Director Bart F. Petrini.................... 59 Executive Vice President-Electron Device Group Norman A. Hilgendorf............... 37 Vice President-Solid State and Components Charles J. Acurio.................. 38 Executive Vice President-Display Products Group Flint Cooper....................... 36 Executive Vice President-Security Systems Division Robert Prince...................... 36 Executive Vice President of Worldwide Sales Pierluigi Calderone................ 40 Vice President and Managing Director of European Operations William G. Seils................... 62 Senior Vice President, General Counsel and Secretary Joseph C. Grill.................... 53 Vice President-Human Resources Arnold R. Allen.................... 66 Director Jacques Bouyer..................... 69 Director Kenneth J. Douglas................. 75 Director Scott Hodes........................ 60 Director Ad Ketelaars....................... 41 Director Harold L. Purkey................... 53 Director Samuel Rubinovitz.................. 68 Director
Mr. Richardson has been employed by the Company or its predecessor since 1961, holding several positions. He was Chairman of the Board, President and Chief Executive Officer from September 1989 until November 1996, when Mr. Johnson became President. Mr. Richardson continues to hold the offices of Chairman of the Board and Chief Executive Officer. Mr. Johnson has been President, Chief Operating Officer and Director since joining the Company in November 1996. Prior thereto, from January 1992 until January 1996, he was president of Premier Industrial Corporation, a New York Stock Exchange listed company which was acquired by Farnell Ltd. in April 1996. He was executive vice president of Premier from February 1987 until January 1992. Premier is a full service business to business supplier of electronic components for industrial and consumer products, essential maintenance and repair products for industrial, commercial and institutional applications and manufactured high-performance fire-fighting equipment. Mr. Garry has been Vice President of Finance, Chief Financial Officer and Director since joining the Company in June 1994. Prior to joining the Company he was vice president of finance and chief financial officer and a director of GEO International Corporation of Chicago, Illinois from August 1986 until May 1994. GEO International Corporation filed a voluntary petition for bankruptcy protection in October 1993 and emerged from bankruptcy under a plan of reorganization effective May 12, 1995. 33 Mr. Petrini has been Executive Vice President - EDG since February 1998. He was Vice President - EDG from April 1994 until February 1998. From June 1989 until joining Richardson in April 1994, he was a consultant with Petrini, Frank & Co. Mr. Hilgendorf has been Vice President - SSC since January 1998. He joined the Company in May 1994 and has served as Product Manager and Business Unit Manager in SSC from May 1994 until January 1998. From June 1990 until May 1994 he was employed by W. W. Grainger, Inc. Mr. Acurio has been Executive Vice President - DPG since February 1998. He was Vice President - DPG from April 1993 until February 1998 and prior thereto held the titles of CRT Division Manager and DPG Strategic Business Unit Manager since June 1988. Mr. Cooper has been Executive Vice President - SSD since joining the Company in November 1994. He was director of CCTV sales with Arius, Inc. from February 1991 until November 1994 and purchasing agent at ADT Security Systems, a distributor of electronic security equipment, from August 1988 to January 1991. Mr. Prince has been Executive Vice President of Worldwide Sales since February 1998 and was Vice President of Worldwide Sales from November 1996 until February 1998. He was Vice President of Sales from October 1992 until November 1996 and held several other positions since joining the Company in November 1978. Mr. Calderone has been Vice President and Managing Director of European Operations since March 1998. He joined the Company in July 1990 as District Sales Manager for Italy and served as Regional Sales Manager of Italy from February 1991 until March 1998. Mr. Seils has been Senior Vice President since January 1992 and General Counsel and Secretary since May 1986. Prior to joining the Company in 1986, he was a partner in the law firm of Arvey, Hodes, Costello and Burman, Chicago, Illinois. Mr. Grill has been Vice President - Human Resources since October 1993 and was Vice President - Corporate Administration from January 1992 until October 1993. He served in other office capacities of the Company since joining it in October 1987. Mr. Allen has been a Director of the Company since September 1985 when he also joined the Company as its President and Chief Operating Officer. He retired as President of the Company in September 1989. Since his retirement Mr. Allen has been a management consultant and presently provides management consulting services to Richardson. He served as Chairman of the Strategic Planning Committee of the Company's Board of Directors from April 1991 until April 1992. Mr. Bouyer has been a Director of the Company since 1990. He served as chairman of the board of Philips Composants of Paris, France, engaged in the manufacture and sale of electronic components and a subsidiary of N.V. Philips of The Netherlands, from April 1, 1990 until January 1, 1994 when he became honorary chairman of the board and a director until December 31, 1995. Mr. Bouyer also was vice chairman of the BIPE Institute for Economic and Market Research from 1981 until 1997. He has been a consultant in business strategies and management since January 1994. Mr. Bouyer is serving Richardson as an independent management consultant principally with respect to European matters. He is also a director of LTX Corporation. Mr. Douglas has been a Director of the Company since 1987. He was vice chairman of Dean Foods Company for the period from December 1988 to September 1992, when he retired. Prior to becoming vice chairman, he served as chairman of Dean Foods for many years. He is now the chairman of the board of West Suburban Hospital Medical Center. He is also a director of Andrew Corporation. Mr. Hodes has been a Director of the Company since 1983 and is a partner at the law firm of Ross & Hardies, which firm provides legal services to the Company. 34 Mr. Ketelaars has been a Director of the Company since April 1996 and presently serves the Company as an employee of certain foreign subsidiaries. He joined Richardson as Vice President and Managing Director of Europe in May 1993 and resigned from that position effective May 31, 1996 to become chief executive officer of EnerTel, a new telecommunications company established by Dutch electric utility companies and CATV companies. Prior to joining Richardson he was general manager of Philips Printed Circuit Boards since 1988 and product group manager professional tubes of Philips Components since 1987. Mr. Purkey has been a Director of the Company since 1994. He has been president of Forum Capital Markets L.P. since May 1997 and senior managing director of such company since May 1994. From July 1990 until February 1994 he was employed by Smith Barney Shearson, holding the position of senior managing director and manager of the convertible bond department. Mr. Rubinovitz has been a Director of the Company since 1984. He also serves Richardson as a consultant. He was executive vice president of EG&G, Inc., a diversified manufacturer of instruments and components, from April 1989 until his retirement in January 1994. He is also chairman of the board of directors of LTX Corporation, and a director of KLA-Tencor Corporation and Kronos, Inc. 35 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information concerning the beneficial ownership of the Common Stock as of January 31, 1998 and as adjusted to reflect the sale of 1,500,000 shares of Common Stock by the Company and the sale of 1,500,000 shares of Common Stock by the Selling Stockholder, by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii) the Selling Stockholder, (iii) each director of the Company, (iv) each of the executive officers of the Company and (v) all executive officers and directors of the Company as a group. Since Class B Common Stock is convertible into Common Stock the number of shares listed as owned under the Common Stock column in the table also includes the number of shares of Class B Common Stock owned by such person. Edward J. Richardson, Chairman of the Board and Chief Executive Officer is offering to sell 1,500,000 shares of Common Stock (and an additional 225,000 shares if the Underwriters elect to exercise their over-allotment option). No other stockholder of the Company is selling any shares in this Offering.
COMMON STOCK AND CLASS B COMMON STOCK BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING ------------------------------------ ------------------------------------ NUMBER OF TOTAL NUMBER OF TOTAL SHARES OF PERCENT VOTING SHARES OF PERCENT VOTING NAME OF BENEFICIAL OWNER COMMON (1) OF CLASS PERCENT (2) COMMON (1) OF CLASS PERCENT (2) - ------------------------------------- ------------ --------- ----------- ------------ --------- ----------- Edward J. Richardson................. 5,856,521(3) 48.2% 83.6% 4,356,521 31.9% 77.2% Scott Hodes.......................... 43,424(4) * * 43,424 * * Samuel Rubinovitz.................... 40,431(5) * * 40,431 * * Arnold R. Allen...................... 76,223(6) * 1.0% 76,223 * * Kenneth J. Douglas................... 46,344(7) * * 46,344 * * Jacques Bouyer....................... 37,000(8) * * 37,000 * * William J. Garry..................... 32,428(9) * * 32,428 * * Harold L. Purkey..................... 17,000(10) * * 17,000 * * Ad Ketelaars......................... 44,800(11) * * 44,800 * * Bruce W. Johnson..................... 20,250(12) * * 20,250 * * Bart F. Petrini...................... 29,683 * * 29,683 * * Norman A. Hilgendorf................. 1,652 * * 1,652 * * Charles J. Acurio.................... 12,828(13) * * 12,828 * * Flint Cooper......................... 8,885 * * 8,885 * * Robert Prince........................ 36,177 * * 36,177 * * Pierluigi Calderone.................. 5,400(14) * * 5,400 * * William G. Seils..................... 60,276(15) * * 60,276 * * Joseph C. Grill...................... 47,638 * * 47,638 * * Royce & Associates, Inc.............. 1,107,686(16) 12.4% 12.4% 1,107,686 10.6% 10.6% Royce Management Company and Charles M. Royce 1414 Avenue of the Americas New York, New York 10019 T. Rowe Price Associates, Inc........ 743,652(17) 8.3% 8.3% 743,652 7.1% 7.1% 100 East Pratt Street Baltimore, Maryland 21202 Loomis Sayles & Company, L.P. 1,009,240(18) 10.2% 10.2% 1,009,240 8.9% 8.9% One Financial Center Boston, MA 02111
36
COMMON STOCK AND CLASS B COMMON STOCK BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING ------------------------------------ ------------------------------------ NUMBER OF TOTAL NUMBER OF TOTAL SHARES OF PERCENT VOTING SHARES OF PERCENT VOTING NAME OF BENEFICIAL OWNER COMMON (1) OF CLASS PERCENT (2) COMMON (1) OF CLASS PERCENT (2) - ------------------------------------- ------------ --------- ----------- ------------ --------- ----------- Kalmar Investments, Inc. ............ 517,614(19) 5.8% 5.8% 517,614 4.9% 4.9% Barley Mill House 3701 Kenner Pike Greenville, DE 19807 Investment Advisors, Inc. ........... 479,700(20) 5.4% 5.4% 479,700 4.6% 4.6% 3700 First Bank Place, Box 357 Minneapolis, MN 55440 Executive Officers and Directors as a 6,416,960 50.8% 85.8% 4,916,960 34.8% 79.3% group (18 persons)
- ------------------------ (*) Less than 1%. (1) Except as noted, beneficial ownership of each of the shares listed is comprised of either sole investment and sole voting power, or investment power and voting power that is shared with the spouse of the Director or officer, or voting power that is shared with the Trustees of the Company's Employees Stock Ownership Plan ("ESOP") with respect to shares identified as allocated to the individual's ESOP account. (2) Common Stock is entitled to one vote per share and Class B Common Stock is entitled to ten votes per share. Computation assumes that Class B Common Stock held or subject to acquisition pursuant to stock option is not converted into Common Stock. (3) Includes 3,191,421 shares of Common Stock which would be issued upon conversion of Mr. Richardson's Class B Common Stock (which represents 98.4% of such Class), 23,006 shares of Common Stock allocated to the account of Mr. Richardson under the ESOP and 804 shares of Common Stock which would be issued upon conversion of $17,000 principal amount of the Corporation's 7 1/4% Convertible Subordinated Debentures, and 4,611 shares of Common Stock which would be issued upon conversion of $83,000 principal amount of the Corporation's 8 1/4% Convertible Senior Subordinated Debentures owned by a Trust of which Mr. Richardson is a co-trustee and as such shares investment and voting power. Does not include 10,900 shares of Common Stock held by William G. Seils as custodian for Mr. Richardson's sons, Alexander and Nicholas, as to which Mr. Richardson disclaims beneficial ownership. (4) Includes 3,712 shares of Common Stock which would be issued upon conversion of Mr. Hodes' Class B Common Stock. Also includes 35,000 shares of Common Stock to which Mr. Hodes holds stock options exercisable within 60 days. (5) Includes 825 shares of Common Stock which would be issued upon conversion of Mr. Rubinovitz' Class B Common Stock. Also includes 35,000 shares of Common Stock to which Mr. Rubinovitz holds stock options exercisable within 60 days. (6) Includes 37,393 shares of Common Stock to which Mr. Allen holds stock options exercisable within 60 days and an additional 37,393 shares of Common Stock which would be issued upon conversion of 37,393 shares of Class B Common Stock as to which he also holds stock options exercisable within 60 days. (7) Includes 1,347 shares of Common Stock which would be issued upon conversion of Mr. Douglas' Class B Common Stock. Also includes 35,000 shares of Common Stock to which Mr. Douglas holds stock options exercisable within 60 days. 37 (8) Includes 35,000 shares of Common Stock to which Mr. Bouyer holds stock options exercisable within 60 days. (9) Includes 17,000 shares of Common Stock to which Mr. Garry holds stock options exercisable within 60 days. Also includes 1,485 shares of Common Stock allocated to the account of Mr. Garry under the ESOP. (10) Includes 15,000 shares of Common Stock as to which Mr. Purkey holds stock options exercisable within 60 days. (11) Includes 44,800 shares of Common Stock as to which Mr. Ketelaars holds stock options exercisable within 60 days. (12) Includes 250 shares allocated to the account of Mr. Johnson under the ESOP. Does not include an additional 55,000 shares under options which are not yet vested. (13) Includes 7,500 shares of Common Stock as to which Mr. Acurio holds stock options exercisable within 60 days and 5,228 shares of Common Stock allocated to the account of Mr. Acurio under the ESOP. (14) Includes 1,900 shares of Common Stock as to which Mr. Calderone holds stock options exercisable within 60 days. (15) Includes 50,970 shares of Common Stock as to which Mr. Seils holds stock options exercisable within 60 days. Also includes 8,123 shares of Common Stock allocated to the account of Mr. Seils under the ESOP. Does not include 10,900 shares of Common Stock held by Mr. Seils as custodian for Mr. Richardson's sons, Alexander and Nicholas. (16) Charles M. Royce may be deemed a controlling person of Royce & Associates, Inc. ("Royce") and Royce Management Company ("RMC") which own 112,516 shares of Common Stock and as such may be deemed to beneficially own the shares of Common Stock beneficially owned by Royce and RMC. Mr. Royce does not own any shares outside of Royce and RMC, and disclaims beneficial ownership of the shares held by Royce and RMC. Information disclosed in this table was obtained by reviewing Schedule 13G filed jointly by Royce, RMC and Mr. Royce on February 4, 1998. (17) These securities are owned by various individual and institutional investors including T. Rowe Price Small Cap Value Fund, Inc. which owns 743,652 shares, representing 8.1% of the shares outstanding, which T. Rowe Price Associates, Inc. ("Price Associates") serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. Information disclosed in this table was obtained by reviewing Schedule 13G jointly filed by Price Associates and T. Rowe Price Small Cap Value Fund, Inc. on February 12, 1998. (18) Loomis Sayles & Company, L.P. ("Loomis"), an investment advisor, shares the power to dispose of the shares and shares the power to vote 255,434 shares. Clients of Loomis have the economic interest, but no one client has such an interest relating to more than 5% of the class. Loomis indicates that the shares reported for Loomis relate to such party's ownership of the Company's convertible debentures. Information disclosed in this table was obtained by reviewing Schedule 13G filed by Loomis on February 12, 1998. (19) Kalmar Investments, Inc. is an investment advisor having sole power to dispose of these shares. Information disclosed in this table was obtained by reviewing Schedule 13G filed by Kalmer Investments, Inc. on January 20, 1998. (20) Investment Advisors, Inc. is an investment advisor reporting with respect to shares held by various custodian banks for various clients none of which hold more than 5% of the Common Stock, and shared voting and dispositive power with respect to 134,300 of such shares. Information disclosed in this table was obtained by reviewing Schedule 13G filed by Investment Advisors, Inc. on March 10, 1998. 38 DESCRIPTION OF CAPITAL STOCK AND DEBENTURES The Company is presently authorized to issue 30,000,000 shares of Common Stock, par value $.05 per share ("Common Stock"), 10,000,000 shares of Class B Common Stock, par value $.05 per share ("Class B Common Stock") and 5,000,000 shares of Preferred Stock, par value $1.00 per share ("Preferred Stock"). The Preferred Stock may be issued in series at the election of the Board of Directors which may fix the terms of each such series without further stockholder action. No Preferred Stock is presently outstanding. Shares of Class B Common Stock are subject to conversion into shares of Common Stock on a share for share basis as described below. See "--Terms of Common Stock and Class B Common Stock" below. The Company has $40,000,000 principal amount of 8 1/4% Convertible Senior Subordinated Debentures due June 15, 2006 (the "8 1/4% Debentures"), and $30,825,000 principal amount of 7 1/4% Convertible Subordinated Debentures due December 15, 2006 (the "7 1/4% Debentures"), presently outstanding (the 8 1/4% Debentures and the 7 1/4% Debentures are sometimes jointly referred to as the "Debentures"). The statements relating to the Common Stock, Class B Common Stock and Debentures are summaries and do not purport to be complete. Such summaries use terms defined in and are qualified in their entirety by express reference to Article Fourth of the Restated Certificate of Incorporation of the Company and the indentures under which the Debentures are issued. TERMS OF COMMON STOCK AND CLASS B COMMON STOCK Except for voting by class in instances required by law, holders of Common Stock and Class B Common Stock vote with holders of Preferred Stock (if any are issued with voting rights) as a single class on all matters including the election of directors, with each share of Common Stock having one vote and each share of Class B Common Stock having ten votes. There is no cumulative voting in the election of directors and stockholders voting a majority of the votes (including Edward J. Richardson, who presently owns shares having approximately 83.6% of the voting power and 77.2% after completion of this Offering) at any annual meeting will be able to elect all the directors to be elected, and the minority will not be able to elect any directors. Subject to the terms and preferences of the Preferred Stock, if any is issued from time to time and the limitations on cash dividends contained in the indentures under which the 7 1/4% Debentures and 8 1/4% Debentures are issued, the Common Stock and the Class B Common Stock rank equally and have the same rights with respect to dividends and distributions, except that the Class B Common Stock is entitled to receive 90% of the cash dividend declared and paid on the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note F to the Consolidated Financial Statements and "--Terms of Debentures." The Common Stock is freely transferable and shares of Common Stock may be registered as requested by the holder thereof. Pursuant to the terms of the Company's certificate of incorporation, shares of Class B Common Stock generally are not freely transferable except to a family member or entity holding for the benefit of the owner or a family member (a "Permitted Transferee"). A transfer of Class B Common Stock to any person or entity other than a Permitted Transferee results in the automatic conversion of such Class B Common Stock into shares of Common Stock on a share-for-share basis. Shares of Class B Common Stock are convertible into Common Stock on a share-for-share basis at all times at the option of the holder thereof. Shares of Common Stock are not convertible into shares of Class B Common Stock. If at any time the number of issued and outstanding shares of Class B Common Stock falls below 10% of the aggregate number of issued and outstanding shares of Common Stock, Class B Common Stock and Preferred Stock, all the outstanding shares of Class B Common Stock immediately and automatically are converted into shares of Common Stock. 39 Pursuant to the terms of the Company's certificate of incorporation, the Company cannot issue any additional shares of Class B Common Stock, except pursuant to exercise of options already granted prior to December 10, 1986 under Richardson's stock purchase or option plans or in connection with stock splits, stock dividends, reclassifications or other subdivisions, unless such issuance is authorized by the vote of holders of a majority of the outstanding shares of Common Stock and Class B Common Stock voting separately as a class. Stockholders of the Company do not have preemptive or other rights to subscribe for additional shares of either Common Stock or Class B Common Stock. Neither the Common Stock nor the Class B Common Stock is callable or subject to optional or mandatory redemption, except that shares of Class B Common Stock are subject to automatic conversion into shares of Common Stock as described above. TERMS OF DEBENTURES The 8 1/4% Debentures mature June 15, 2006 and bear interest at 8 1/4% per annum, payable on each June 15 and December 15 to holders of record on June 1 and December 1, respectively. They can be converted into Common Stock at $18.00 per share, subject to certain adjustments. They are redeemable at any time at 100% of principal amount plus accrued interest. There are no sinking fund provisions applicable to the 8 1/4% Debentures. They are unsecured obligations of the Company, subordinated to all Senior Indebtedness (as defined in the Indenture under which they are issued) of the Company. The 8 1/4% Debentures rank senior in right of payment to the 7 1/4% Debentures. The 7 1/4% Debentures mature December 15, 2006 and bear interest at 7 1/4% per annum, payable on each June 15 and December 15 to holders of record on June 1 and December 1, respectively. They can be converted into Common Stock at $21.14 per share, subject to certain adjustments. They are redeemable at any time at 100% of principal amount plus accrued interest. There is an annual sinking fund payment of $6,225,000 due on each December 15, however, the Company has acquired sufficient 7 1/4% Debentures to satisfy such requirement in full through December 15, 2003. On December 15, 2004, $275,000 will be due and $6,225,000 will be due on December 15, 2005. The 7 1/4% Debentures are unsecured obligations of the Company, subordinated to all Senior Indebtedness (as defined in the indenture under which they are issued) of Richardson. 40 UNDERWRITING The underwriters named below (the "Underwriters"), acting through their representatives, Cleary Gull Reiland & McDevitt Inc. and McDonald & Company Securities, Inc. (the "Representatives"), have severally agreed, subject to the terms and conditions of the underwriting agreement (the "Underwriting Agreement") by and among the Company, the Selling Stockholder and the Underwriters, to purchase from the Company and the Selling Stockholder the number of shares of Common Stock set forth below opposite their respective names, at the offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
UNDERWRITERS NUMBER OF SHARES - ----------------------------------------------------------------------------------------------- ----------------- Cleary Gull Reiland & McDevitt Inc............................................................. McDonald & Company Securities, Inc............................................................. ----------------- Total.................................................................................... 3,000,000 ----------------- -----------------
The Underwriting Agreement provides that the obligations of the Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to certain conditions precedent and that the Underwriters will purchase all of the Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are purchased. The Company and the Selling Stockholder have been advised by the Representatives that the Underwriters propose to offer the Common Stock to the public at the offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After commencement of the Offering, the offering price and other selling terms may be changed by the Underwriters. Certain of the Underwriters and the selling group members that currently act as market makers for the Common Stock may engage in "passive market making" in the Common Stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103 permits, upon satisfaction of certain conditions, underwriters and selling group members participating in a distribution that are also Nasdaq market makers in the security being distributed to engage in limited market making activity when Rule 101 would otherwise prohibit such activity. Rule 103 prohibits underwriters and selling group members engaged in passive market making generally from entering a bid or effecting a purchase at a price that exceeds the highest bid for those securities displayed on the Nasdaq National Market by a market maker that is not participating in the distribution of the Common Stock. Each underwriter or selling group member engaged in passive market making is subject to a daily net purchase limitation equal to 30% of such entity's average daily trading volume during the two full consecutive calendar months immediately preceding the date of the filing of the Registration Statement of which this Prospectus forms a part. The Company and the Selling Stockholder have granted the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 450,000 additional shares of Common Stock from them pro rata, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the 41 total number of shares offered by the Company and the Selling Stockholder hereunder, and the Company and the Selling Stockholder will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 3,000,000 shares are being offered. The Company and the Selling Stockholder have agreed to indemnify the Underwriters against, and to contribute to losses arising out of, certain civil liabilities in connection with this Offering, including liabilities under the Securities Act. Except in specified circumstances, the Company, the Selling Stockholder, and the Company's executive officers and directors have agreed not to offer, sell, transfer, pledge, contract to do the same, or otherwise dispose of any of their shares of Common Stock or stock equivalents for a period of 120 days after the closing date of this Offering without the prior written consent of Cleary Gull Reiland & McDevitt Inc. The foregoing includes a summary of the principal terms of the Underwriting Agreement and does not purport to be complete. Reference is made to the Underwriting Agreement that is on file as an exhibit to the Registration Statement of which this Prospectus forms a part. LEGAL MATTERS Certain legal matters in connection with the shares of Common Stock offered hereby will be passed upon for the Company by Ross & Hardies, Chicago, Illinois. Scott Hodes, a partner in Ross & Hardies, is also a Director of the Company and beneficially owns 43,424 shares of Common Stock. Certain legal matters related to the Offering will be passed upon for the Underwriters by McDermott, Will & Emery, Chicago, Illinois. EXPERTS The consolidated financial statements of Richardson Electronics, Ltd. at May 31, 1997 and 1996, and for each of the three years in the period ended May 31, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following Regional offices of the Commission: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, electronically filed registration statements, reports, proxy statements and other information regarding the Company may be obtained on the Internet from the Commission's Web site at http://www.sec.gov. The Common Stock is traded on the Nasdaq National Market and certain of the Company's reports, proxy materials and other information may be available for inspection at the offices of the National Association of Securities Dealers, Inc., 1801 K Street, N.W., Washington, D.C. 20006. 42 This Prospectus, which constitutes a part of a registration statement on Form S-2 (the "Registration Statement") filed by the Company with the Commission under the Securities Act, omits certain of the information set forth in the Registration Statement. Reference is hereby made to the Registration Statement and to the exhibits and schedules thereto for further information with respect to the Company and the securities offered hereby. Statements contained herein concerning the provisions of any contract or documents are necessarily summaries of such documents, and each such statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission, although the Company believes such summaries accurately describe all material provisions of such documents. Copies of the Registration Statement and the exhibits and schedules thereto are on file at the offices of the Commission and may be obtained upon payment of the fee prescribed by the Commission, or may be examined without charge at the public reference facilities of the Commission described above. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated by reference in this Prospectus: (i) Annual Report on Form 10-K for the year ended May 31, 1997; (ii) Quarterly Reports on Form 10-Q and Form 10-Q/A for the quarters ended August 31, 1997, November 30, 1997 and February 28, 1998; and (iii) Proxy Statement for the Company's Annual Meeting of Stockholders held on October 7, 1997. The Company will furnish without charge to each person to whom a copy of this Prospectus is delivered, including any beneficial owner, upon written or oral request, a copy of any or all of the documents incorporated by reference as a part of the Registration Statement (other than exhibits to such documents, except such exhibits as are specifically incorporated by reference into the documents that this Prospectus incorporates). Requests should be directed to the principal executive office of Richardson, 40W267 Keslinger Road, LaFox, Illinois 60147; Attention: Investor Relations, telephone number (630) 208-2371, fax (630) 208-2950, E-mail wgs@rell.com. 43
PAGE ----- REPORT OF INDEPENDENT AUDITORS............................................................................. F-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of May 31, 1996 and 1997 and February 28, 1998 (unaudited)................ F-3 Consolidated Statements of Operations for the years ended May 31, 1995, 1996 and 1997 and the nine month periods ended February 28, 1997 and 1998 (unaudited)................................................... F-4 Consolidated Statements of Cash Flows for the years ended May 31, 1995, 1996 and 1997 and the nine month periods ended February 28, 1997 and 1998 (unaudited)................................................... F-5 Consolidated Statements of Stockholders' Equity for the years ended May 31, 1995, 1996 and 1997 and the nine month period ended February 28, 1998 (unaudited).................................................. F-6 Notes to the Consolidated Financial Statements........................................................... F-7
F-1 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES 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, 1997 and 1996, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended May 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and cash flows for each of the three years in the period ended May 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois July 8, 1997, except for "Earnings per Share" in Note A as to which the date is February 28, 1998 F-2 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MAY 31, ------------------------ 1996 1997 ----------- ----------- FEBRUARY 28, 1998 ------------ (UNAUDITED) ASSETS CURRENT ASSETS Cash and equivalents................................................................... $ 6,784 $ 10,012 $ 6,886 Receivables, less allowance of $1,461, $2,102 and $1,775............................... 48,232 53,333 58,786 Inventories............................................................................ 94,327 92,194 93,777 Other.................................................................................. 8,062 10,497 9,998 ----------- ----------- ------------ TOTAL CURRENT ASSETS............................................................... 157,405 166,036 169,447 Investments............................................................................ 2,190 2,152 2,776 Property, plant and equipment, net..................................................... 16,054 17,526 18,140 Other assets........................................................................... 4,509 6,800 9,291 ----------- ----------- ------------ TOTAL ASSETS....................................................................... $ 180,158 $ 192,514 $ 199,654 ----------- ----------- ------------ ----------- ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable....................................................................... $ 14,503 $ 12,766 $ 18,037 Accrued liabilities.................................................................... 9,751 12,449 10,183 ----------- ----------- ------------ TOTAL CURRENT LIABILITIES.......................................................... 24,254 25,215 28,220 Long-term debt......................................................................... 92,025 107,275 105,623 Deferred income taxes.................................................................. 1,087 434 1,600 ----------- ----------- ------------ TOTAL LIABILITIES.................................................................. 117,366 132,924 135,443 STOCKHOLDERS' EQUITY Common Stock, $.05 par value........................................................... 428 437 449 Class B Common Stock, convertible, $.05 par value...................................... 162 162 162 Preferred Stock, $1.00 par value....................................................... -- -- -- Additional paid-in capital............................................................. 52,185 53,512 55,549 Retained earnings...................................................................... 12,430 9,082 14,396 Foreign currency translation adjustment................................................ (2,413) (3,603) (6,345) ----------- ----------- ------------ TOTAL STOCKHOLDERS' EQUITY....................................................... 62,792 59,590 64,211 ----------- ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................... $ 180,158 $ 192,514 $ 199,654 ----------- ----------- ------------ ----------- ----------- ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST NINE FISCAL YEAR ENDED MAY 31, MONTHS(1) ---------------------------- ------------------ 1995 1996 1997 1997 1998 -------- -------- -------- -------- -------- (UNAUDITED) NET SALES....................................................................... $208,118 $239,667 $255,139 $183,874 $223,442 Cost of products sold........................................................... 152,785 169,123 187,675 137,182 159,596 -------- -------- -------- -------- -------- Gross margin.............................................................. 55,333 70,544 67,464 46,692 63,846 Selling, general and administrative expenses.................................... 48,674 52,974 62,333 46,508 48,525 -------- -------- -------- -------- -------- OPERATING INCOME.......................................................... 6,659 17,570 5,131 184 15,321 Other (income) expense: Interest expense............................................................ 6,473 6,624 7,622 5,588 6,218 Investment income........................................................... (1,863) (1,238) (392) (249) (534) Foreign exchange and other.................................................. (582) 173 626 173 27 -------- -------- -------- -------- -------- 4,028 5,559 7,856 5,512 5,711 -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item.................. 2,631 12,011 (2,725) (5,328) 9,610 Income tax provision (benefit).................................................. 150 3,900 (1,720) (2,500) 2,880 -------- -------- -------- -------- -------- Income (loss) before extraordinary item................................... 2,481 8,111 (1,005) (2,828) 6,730 Extraordinary gain (loss), net of tax........................................... 527 -- (488) (488) -- -------- -------- -------- -------- -------- NET INCOME (LOSS)......................................................... $ 3,008 $ 8,111 $ (1,493) $ (3,316) $ 6,730 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- INCOME (LOSS) PER SHARE--BASIC: Before extraordinary item..................................................... $ .22 $ .70 $ (.08) $ (.24) $ .56 Extraordinary gain (loss), net of tax......................................... .05 -- (.04) (.04) -- -------- -------- -------- -------- -------- Net income (loss) per share................................................. $ .27 $ .70 $ (.12) $ (.28) $ .56 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Average shares outstanding.................................................... 11,425 11,659 11,892 11,886 12,096 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- INCOME (LOSS) PER SHARE--DILUTED: Before extraordinary item..................................................... $ .21 $ .68 $ (.08) $ (.24) $ .54 Extraordinary gain (loss), net of tax......................................... .05 -- (.04) (.04) -- -------- -------- -------- -------- -------- Net income (loss) per share................................................. $ .26 $ .68 $ (.12) $ (.28) $ .54 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Average shares outstanding.................................................... 11,566 12,002 11,892 11,886 12,476 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Dividends per common share...................................................... $ .16 $ .16 $ .16 $ .12 $ .12 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
- ------------------------ (1) FOR THE NINE-MONTH PERIODS ENDED FEBRUARY 28, 1997 AND 1998, RESPECTIVELY. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FIRST NINE FISCAL YEAR ENDED MAY 31, MONTHS(1) --------------------------------- --------- 1995 1996 1997 ---------- ---------- --------- 1997 --------- (UNAUDITED) OPERATING ACTIVITIES: Net income (loss).......................................................... $ 3,008 $ 8,111 $ (1,493) $ (3,316) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation......................................................... 2,669 2,709 2,627 1,973 Amortization of intangibles and financing costs...................... 427 360 1,318 1,091 Deferred income taxes................................................ 1,310 2,338 (3,305) (3,026) Stock contribution to employee ownership plan........................ 500 500 800 800 Special charges...................................................... -- -- 11,000 11,000 ---------- ---------- --------- --------- Net adjustments...................................................... 4,906 5,907 12,440 11,838 ---------- ---------- --------- --------- Changes in working capital, net of currency translation effects and business acquisitions: Receivables.......................................................... (7,215) (5,310) (4,277) (3,549) Inventories.......................................................... (5,600) (12,920) 406 (922) Other current assets................................................. (429) 1,567 253 (845) Accounts payable..................................................... 5,079 (3,448) (3,719) (974) Accrued liabilities.................................................. (6,437) (1,843) 28 (600) ---------- ---------- --------- --------- Net changes in working capital....................................... (14,602) (21,954) (7,309) (6,890) ---------- ---------- --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.................. (6,688) (7,936) 3,638 1,632 ---------- ---------- --------- --------- FINANCING ACTIVITIES: Proceeds from borrowings................................................. 8,000 22,200 57,890 56,918 Payments on debt......................................................... (6,784) (19,679) (42,640) (40,123) Proceeds from sale of common stock....................................... 145 1,713 536 218 Cash dividends........................................................... (1,779) (1,822) (1,855) (1,389) ---------- ---------- --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................. (418) 2,412 13,931 15,624 ---------- ---------- --------- --------- INVESTING ACTIVITIES: Business acquisitions.................................................... -- (1,450) (9,902) (9,409) Capital expenditures..................................................... (2,703) (2,352) (4,004) (2,947) Sales of investments..................................................... 22,118 11,425 3,582 3,141 Purchases of investments................................................. (11,335) (6,660) (3,613) (3,181) Other.................................................................... 438 194 (404) (99) ---------- ---------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................. 8,518 1,157 (14,341) (12,495) ---------- ---------- --------- --------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS.......................... 1,412 (4,367) 3,228 4,761 Cash and equivalents at beginning of year.................................. 9,739 11,151 6,784 6,784 ---------- ---------- --------- --------- CASH AND EQUIVALENTS AT END OF PERIOD................................ $ 11,151 $ 6,784 $ 10,012 $ 11,545 ---------- ---------- --------- --------- ---------- ---------- --------- --------- 1998 ---------- OPERATING ACTIVITIES: Net income (loss).......................................................... $ 6,730 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation......................................................... 2,606 Amortization of intangibles and financing costs...................... 366 Deferred income taxes................................................ 1,508 Stock contribution to employee ownership plan........................ 285 Special charges...................................................... -- ---------- Net adjustments...................................................... 4,765 ---------- Changes in working capital, net of currency translation effects and business acquisitions: Receivables.......................................................... (4,758) Inventories.......................................................... (862) Other current assets................................................. 68 Accounts payable..................................................... 5,504 Accrued liabilities.................................................. (2,460) ---------- Net changes in working capital....................................... (2,508) ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.................. 8,987 ---------- FINANCING ACTIVITIES: Proceeds from borrowings................................................. 14,531 Payments on debt......................................................... (15,943) Proceeds from sale of common stock....................................... 1,764 Cash dividends........................................................... (1,416) ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................. (1,064) ---------- INVESTING ACTIVITIES: Business acquisitions.................................................... (6,262) Capital expenditures..................................................... (3,201) Sales of investments..................................................... 3,003 Purchases of investments................................................. (3,432) Other.................................................................... (1,157) ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................. (11,049) ---------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS.......................... (3,126) Cash and equivalents at beginning of year.................................. 10,012 ---------- CASH AND EQUIVALENTS AT END OF PERIOD................................ $ 6,886 ---------- ----------
- ------------------------ (1) FOR THE NINE-MONTH PERIODS ENDED FEBRUARY 28, 1997 AND 1998, RESPECTIVELY. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (SHARES AND DOLLARS IN THOUSANDS)
SHARES ISSUED ------------------------ ADDITIONAL CLASS B PAR PAID-IN COMMON COMMON VALUE CAPITAL ----------- ----------- --------- ----------- BALANCE JUNE 1, 1994.............................................................. 8,056 3,248 $ 565 $ 49,352 Shares contributed to ESOP........................................................ 133 -- 7 493 Shares issued under ESPP and stock option plan.................................... 35 -- 1 144 Conversion of Class B shares to common shares..................................... 1 (1) -- -- Dividends......................................................................... -- -- -- -- Currency translation.............................................................. -- -- -- -- Net income........................................................................ -- -- -- -- ----- ----- --------- ----------- BALANCE MAY 31, 1995.............................................................. 8,225 3,247 573 49,989 Shares contributed to ESOP........................................................ 69 -- 3 497 Shares issued under ESPP and stock option plan.................................... 265 -- 14 1,699 Conversion of Class B shares to common shares..................................... 3 (3) -- -- Dividends......................................................................... -- -- -- -- Currency translation.............................................................. -- -- -- -- Net income........................................................................ -- -- -- -- ----- ----- --------- ----------- BALANCE MAY 31, 1996.............................................................. 8,562 3,244 590 52,185 Shares contributed to ESOP........................................................ 84 -- 5 795 Shares issued under ESPP and stock option plan.................................... 74 -- 4 532 Conversion of Class B shares to common shares..................................... 1 (1) -- -- Dividends......................................................................... -- -- -- -- Currency translation.............................................................. -- -- -- -- Net loss.......................................................................... -- -- -- -- ----- ----- --------- ----------- BALANCE MAY 31, 1997.............................................................. 8,721 3,243 599 53,512 Shares contributed to ESOP........................................................ 34 -- 2 283 Shares issued under stock option plan............................................. 212 -- 10 1,754 Conversion of Class B shares to common shares..................................... 1 (1) -- -- Dividends......................................................................... -- -- -- -- Currency translation.............................................................. -- -- -- -- Net income........................................................................ -- -- -- -- ----- ----- --------- ----------- BALANCE FEBRUARY 28, 1998(1)...................................................... 8,968 3,242 $ 611 $ 55,549 ----- ----- --------- ----------- ----- ----- --------- ----------- RETAINED FOREIGN EARNINGS CURRENCY TOTAL ---------- --------- ---------- BALANCE JUNE 1, 1994.............................................................. $ 4,912 $ (2,256) $ 52,573 Shares contributed to ESOP........................................................ -- -- 500 Shares issued under ESPP and stock option plan.................................... -- -- 145 Conversion of Class B shares to common shares..................................... -- -- -- Dividends......................................................................... (1,779) -- (1,779) Currency translation.............................................................. -- 1,707 1,707 Net income........................................................................ 3,008 -- 3,008 ---------- --------- ---------- BALANCE MAY 31, 1995.............................................................. 6,141 (549) 56,154 Shares contributed to ESOP........................................................ -- -- 500 Shares issued under ESPP and stock option plan.................................... -- -- 1,713 Conversion of Class B shares to common shares..................................... -- -- -- Dividends......................................................................... (1,822) -- (1,822) Currency translation.............................................................. -- (1,864) (1,864) Net income........................................................................ 8,111 -- 8,111 ---------- --------- ---------- BALANCE MAY 31, 1996.............................................................. 12,430 (2,413) 62,792 Shares contributed to ESOP........................................................ -- -- 800 Shares issued under ESPP and stock option plan.................................... -- -- 536 Conversion of Class B shares to common shares..................................... -- -- -- Dividends......................................................................... (1,855) -- (1,855) Currency translation.............................................................. -- (1,190) (1,190) Net loss.......................................................................... (1,493) -- (1,493) ---------- --------- ---------- BALANCE MAY 31, 1997.............................................................. 9,082 (3,603) 59,590 Shares contributed to ESOP........................................................ -- -- 285 Shares issued under stock option plan............................................. -- -- 1,764 Conversion of Class B shares to common shares..................................... -- -- -- Dividends......................................................................... (1,416) -- (1,416) Currency translation.............................................................. -- (2,742) (2,742) Net income........................................................................ 6,730 -- 6,730 ---------- --------- ---------- BALANCE FEBRUARY 28, 1998(1)...................................................... $ 14,396 $ (6,345) $ 64,211 ---------- --------- ---------- ---------- --------- ----------
- ------------------------ (1) ACTIVITY AFTER MAY 31, 1997 AND THE FEBRUARY 28, 1998 BALANCES ARE UNAUDITED. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1998 IS UNAUDITED) 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. INTERIM INFORMATION: The consolidated interim financial statements as of February 28, 1998 and for the nine-month periods ended February 28, 1997 and 1998 included herein are unaudited. Such information reflects all adjustments, consisting solely of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the consolidated balance sheet as of February 28, 1998 and the consolidated results of operations and cash flows for the nine-month periods ended February 28, 1997 and 1998. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS: The Company considers short-term investments that have a maturity of three months or less, when purchased, to be cash equivalents. The carrying amounts reported in the balance sheet for cash and equivalents approximate the fair market value of these assets. INVENTORIES: Inventories are stated at the lower of cost or market. Inventory costs determined using the last-in, first-out ("LIFO") method represent 84.2%, 78.5% and 76.5% of total inventories at May 31, 1996, May 31,1997 and February 28, 1998, respectively. 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 cost of inventories would have been increased by $5.7 million at May 31, 1996, $4.7 million at May 31, 1997 and $4.7 million at February 28, 1998. However, 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, 1997 and at February 28, 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 for financial reporting purposes. Property, plant and equipment consist of the following (in thousands):
MAY 31, -------------------- FEBRUARY 28, 1996 1997 1998 --------- --------- ------------ Land and improvements..................................... $ 2,624 $ 2,620 $ 2,618 Buildings and improvements................................ 18,052 18,251 18,355 Machinery and equipment................................... 22,020 25,098 27,812 --------- --------- ------------ Property at cost........................................ 42,696 45,969 48,785 Accumulated depreciation.................................. (26,642) (28,443) (30,645) --------- --------- ------------ Property, net............................................. $ 16,054 $ 17,526 $ 18,140 --------- --------- ------------ --------- --------- ------------
F-7 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY TRANSLATION: Foreign currency transactions and financial statements are translated into U. S. dollars at current rates, except that revenues, costs and expenses are translated at average rates during each reporting period. Gains and losses resulting from foreign currency transactions are included in income currently. Foreign currency transaction gains (losses) reflected in operations were $316,000, $(228,000) and $(563,000), in 1995, 1996, and 1997, respectively, and were $(269,000) and $(318,000) for the first nine months of fiscal 1997 and 1998. Gains and losses resulting from translation of foreign subsidiary financial statements are credited or charged directly to a separate component of shareholders' 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. On January 1, 1996, the Financial Accounting Standards Board issued Statement ("SFAS") No. 123 "ACCOUNTING FOR STOCK-BASED COMPENSATION", which requires estimation of the fair value of options granted to employees. As permitted by SFAS No. 123, the Company has elected to present this estimated fair value information in Note I, and to continue to apply APB Opinion No. 25 for the determination of compensation expense. EARNINGS PER SHARE: Net income (loss) per share amounts and average shares outstanding for all periods presented have been restated in accordance with SFAS No. 128 "EARNINGS PER SHARE", which became effective December 1997. The restatement of primary earnings per share to basic earnings per share resulted in increases in net income per share of $.01 in 1995 and $.02 in 1996. Under SFAS No. 128, net income per share is reported by two amounts: basic earnings per share and diluted earnings per share. Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of Common and Class B Common shares outstanding. Diluted earnings per share is calculated by dividing net income (loss) by basic shares outstanding and share equivalents that would arise from the exercise of dilutive stock options. The per share amounts presented in the Statement of Operations were based on the following amounts (in thousands):
FISCAL YEAR ENDED MAY 31, FIRST NINE MONTHS ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- NUMERATOR FOR BASIC AND DILUTED EPS: Net income (loss) before extraordinary item......... $ 2,481 $ 8,111 $ (1,005) $ (2,828) $ 6,730 Extraordinary loss, net of income taxes............. 527 -- (488) (488) -- --------- --------- --------- --------- --------- Net income (loss)................................. $ 3,008 $ 8,111 $ (1,493) $ (3,316) $ 6,730 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- DENOMINATOR FOR BASIC EPS: Shares outstanding at beginning of period........... 11,303 11,472 11,806 11,806 11,964 Additonal shares for options exercised.............. 122 187 86 80 132 --------- --------- --------- --------- --------- Weighted average shares outstanding............... 11,425 11,659 11,892 11,886 12,096 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- DENOMINATOR FOR DILUTED EPS: Weighted average shares outstanding................. 11,425 11,659 11,892 11,886 12,096 Effect of dilutive stock options.................... 141 343 -- -- 380 --------- --------- --------- --------- --------- Adjusted average shares outstanding............... 11,566 12,002 11,892 11,886 12,476 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
F-8 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Out-of-the money (exercise price higher than market price) stock options and the Company's 8 1/4% and 7 1/4% convertible debentures were excluded from the calculation because they were anti-dilutive. In-the-money stock options were excluded from the calculation for the fiscal 1997 full year and first nine-month period because the Company had a net loss. RECLASSIFICATIONS: Certain amounts in the 1995 and 1996 financial statements have been reclassified to conform to the 1997 presentation. Certain amounts in the fiscal 1997 nine-month interim financial statements have been reclassified to conform to the fiscal 1998 nine-month interim presentation. NOTE B--SPECIAL CHARGES AND EXTRAORDINARY ITEMS In the third quarter of fiscal 1997, the Company re-evaluated its reserve estimates in light of changed market conditions and provided for severance and other costs associated with a corporate reorganization. Inventory reserve adjustments of $7.2 million were included in cost of sales, and provisions for accounts receivable, severance and other costs of $3.8 million were included in selling, general and administrative expense. Collectively, these charges amounted to $11.0 million pre-tax or $6.7 million, net of tax, reducing earnings per share by $.56. Also in the third quarter of fiscal 1997, the Company recorded an $800,000 extraordinary charge for the write-off of unamortized debt issuance costs associated with the Company's 7 1/4% convertible subordinated debentures, which were exchanged for a new issue (See Note F). Net of tax, the charge was $488,000, or $.04 per share. In 1995 the Company recorded as a charge to cost of sales a $4.7 million payment to the U. S. Government in return for a release of monetary claims in connection with a contract completed in 1989. Also during fiscal 1995, the Company repurchased $4.9 million at face value of its 7 1/4% convertible debentures for $4.0 million. Net of unamortized deferred financing costs of $90,000, and income taxes of $337,000, an extraordinary gain of $527,000 was recorded. NOTE C--ACQUISITIONS Several business acquisitions were made in fiscal 1997. In October 1996, the SSC business unit acquired Compucon Distributors, Inc., a distributor of interconnect devices operating in the northeastern United States. In February 1997, the SSD unit acquired Burtek Systems, Inc., a security systems distributor operating in Canada with annual sales of $18.0 million. The Company also acquired two smaller companies operating in the wireless communications and diagnostic medical imaging markets, respectively. In August 1997, the Company acquired the assets and liabilities of Security Service International, Inc. (SSI), a Canadian distributor of security systems with annual sales of $20.0 million. Each of the acquisitions was accounted for by the purchase method, and accordingly, their results of operations are included in the consolidated statements of operations from the respective dates of acquisition. The impact of these acquisitions on results of operations was not significant and would not have been significant if they had been included for the entire year. F-9 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 17.2%, 14.8%, and 13.0%, of net sales in fiscal 1995, 1996, and 1997, respectively. As part of the divestiture of the Company's Brive, France, manufacturing operations in 1994, the Company entered into a supply agreement with Covimag, S. A., the corporation created by the local management group to continue operating the Brive facility. Under this agreement, the Company must purchase electron tubes valued at approximately $11.0 million per year through calendar 1997. Under a successor agreement, the purchase commitment is negotiated on an annual basis and requires the Company to acquire $8.3 million in calendar 1998. NOTE E--INVESTMENTS SFAS No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES" requires investments to be classified as trading, available-for-sale or held-to-maturity. Management has determined these investments are properly classified as available-for-sale. The investment portfolio at May 31, 1996, May 31, 1997 and February 28, 1998 is stated at fair value based on quoted market prices or dealers' quotes and consists of securities available-for-sale, as follows (in thousands).
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ----------- ----------- ----------- At May 31, 1996: Equity securities................................................. $ 1,571 $ 174 $ (29) $ 1,716 Bonds--one year or less........................................... 510 -- (36) 474 --------- ----- ----------- ----------- Total investments............................................... $ 2,081 $ 174 $ (65) $ 2,190 --------- ----- ----------- ----------- --------- ----- ----------- ----------- At May 31, 1997: Equity securities................................................. $ 1,766 $ 206 $ (190) $ 1,782 Bonds--one year or less........................................... 370 -- -- 370 --------- ----- ----------- ----------- Total investments............................................... $ 2,136 $ 206 $ (190) $ 2,152 --------- ----- ----------- ----------- --------- ----- ----------- ----------- At February 28, 1998: Equity securities................................................. $ 1,861 $ 237 $ (47) $ 2,051 Bonds--six to ten years........................................... 101 12 -- 113 Bonds--one year or less........................................... 612 -- -- 612 --------- ----- ----------- ----------- Total investments............................................... $ 2,574 $ 249 $ (47) $ 2,776 --------- ----- ----------- ----------- --------- ----- ----------- -----------
Interest and dividend income are accrued as earned. Gains and losses on the investment portfolio are recognized in income when securities are sold or to reflect a decline in market value estimated by management to be of a permanent nature. Investment income includes capital gains of $1.2 million, $1.1 million, and $47,000 in fiscal 1995, 1996 and 1997 and $80,000 and $421,000 for the first nine months of fiscal 1997 and 1998. Of these amounts, sales of equity securities generated gains of $1.0 million, $1.1 F-10 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE E--INVESTMENTS (CONTINUED) million, $30,000 in fiscal 1995, 1996 and 1997 and $88,000 and $421,000 for the first nine months of fiscal 1997 and 1998, respectively. NOTE F--DEBT FINANCING Long-term debt consists of the following (in thousands):
MAY 31, --------------------- FEBRUARY 28, 1996 1997 1998 --------- ---------- ------------ 8 1/4% Convertible debentures due June 2006.............. $ -- $ 40,000 $ 40,000 7 1/4% Convertible debentures due December 2006 70,825 30,825 30,825 Floating-rate revolving credit facility due January 1999 (6.6% at May 31, 1997 and 6.9% at February 28, 1998)... 21,200 30,332 26,332 Revolving credit and term loan due January 1999 (4.6% at May 31, 1997 and 5.4% at February 28, 1998)... -- 5,704 8,461 Other.................................................... -- 414 5 --------- ---------- ------------ Long-term debt......................................... $ 92,025 $ 107,275 $ 105,623 --------- ---------- ------------ --------- ---------- ------------
On February 15, 1997, the Company exchanged $40.0 million of new 8 1/4% convertible debentures for an equivalent face value of its outstanding 7 1/4% convertible debentures. The new debentures are payable at maturity in June 2006, and are convertible to common stock at $18.00 per share. The principal purpose of the exchange was to improve the Company's future liquidity and capital position by refinancing a sufficient number of the 7 1/4% convertible debentures to eliminate sinking fund requirements until December 15, 2004. The 8 1/4% convertible debentures are subordinated to senior debt. The 7 1/4% convertible debentures are unsecured and subordinated to other long-term debt, including the 8 1/4% convertible debentures. Each $1,000 debenture is convertible into the Company's Common Stock at any time prior to maturity at $21.14 per share. The Company is required to make sinking fund payments of $3.9 million in 2004 and $6.2 million in 2005. In November 1995, the Company entered into a $25.0 million senior revolving credit note agreement. Subsequent amendments increased this line to $35.0 million and extended the maturity date to January 1999. The Company has replaced this agreement effective March 1, 1998 with a new $50.0 million floating-rate revolving credit facility from its primary lender. The loan bears interest at prime or 100 basis points over LIBOR, at the Company's option, and expires March 1, 2001. To complete the acquisition of Burtek, a subsidiary of the Company entered into a revolving credit and term loan agreement aggregating $6.0 million with a 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 $12.4 million in August 1997 to facilitate the acquisition of Security Services International, Inc. and, in conjunction with the terms of the aforementioned $50.0 million facility, the maturity date was extended to March 1, 2001. Financial covenants under the debt agreements set benchmark levels for tangible net worth, debt to tangible net worth ratio and annual debt service coverage and restrict the use of retained earnings for the F-11 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE F--DEBT FINANCING (CONTINUED) payment of dividends or purchase of treasury stock. As of May 31, 1997 and March 1, 1998, $18.3 million and $10.0 million, respectively, were free of such restrictions. Aggregate maturities of debt under currently effective agreements during the next five fiscal years at May 31, 1997 were $36.5 million in 1999 and at February 28, 1998 were $34.8 million in 2001. Cash payments for interest were $6.5 million, $6.4 million, and $7.5 million in 1995, 1996, and 1997, respectively, and $6.5 million and $7.5 million for the first nine months of fiscal 1997 and 1998. 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. However, trading in the Company's bonds is infrequent and, therefore, quoted market prices may not be indicative of the fair market value of the entire issue. The fair values of the bank term loans are based on carrying value, adjusted for market interest rate changes and are as follows (in thousands):
MAY 31, 1996 MAY 31, 1997 FEBRUARY 28, 1998 -------------------- --------------------- --------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE VALUE VALUE --------- --------- ---------- --------- ---------- --------- 7 3/4% Convertible debentures $ 70,825 $ 59,847 $ 30,825 $ 24,044 $ 30,825 $ 25,585 8 1/4% Convertible debentures -- -- 40,000 31,800 40,000 37,200 Floating-rate revolving loan................. 21,200 21,200 30,332 30,330 26,332 26,332 Revolving credit and term loan............... -- -- 5,704 5,704 8,461 8,461 Other........................................ -- -- 414 414 5 5 --------- --------- ---------- --------- ---------- --------- Total.................................... $ 92,025 $ 81,047 $ 107,275 $ 92,292 $ 105,623 $ 97,583 --------- --------- ---------- --------- ---------- --------- --------- --------- ---------- --------- ---------- ---------
NOTE G--INCOME TAXES The components of income (loss) before income taxes and extraordinary item are (in thousands):
FISCAL YEAR ENDED MAY 31, FIRST NINE MONTHS ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- United States......................................... $ 781 $ 9,954 $ (4,558) $ (7,119) $ 7,530 Foreign............................................... 1,850 2,057 1,833 1,791 2,080 --------- --------- --------- --------- --------- Income (loss) before taxes and extraordinary item..... $ 2,631 $ 12,011 $ (2,725) $ (5,328) $ 9,610 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
F-12 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE G--INCOME TAXES (CONTINUED) The provision (credit) for income taxes differs from income taxes computed at the federal statutory tax rate of 34% as a result of the following items:
FISCAL YEAR ENDED FIRST NINE MONTHS MAY 31, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- Federal statutory rate................................................... 34.0% 34.0% 34.0% 34.0% 34.0% Effect of: State income taxes, net of federal tax benefit......................... (1.4) 3.5 11.3 11.0 2.5 FSC benefit on export sales............................................ (10.4) (3.2) 12.3 7.6 (6.6) Realization of tax benefit on prior years' foreign losses.......................................... -- (2.5) 14.7 1.6 (0.6) Foreign vs. U.S. rates................................................. 6.8 -- (7.5) (2.9) 0.7 Claim settlement taxed at 46% carry back year statutory rate....................................... (22.8) -- -- -- -- Other.................................................................. (0.5) 0.7 (1.7) (4.3) -- --------- --------- --------- --------- --------- Effective tax rate....................................................... 5.7% 32.5% 63.1% 47.0% 30.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
In 1994, the Company recorded a provision of $21.4 million for the disposition of its Brive, France manufacturing facility. Tax benefits of $8.0 million will be realized if the disposition of these French operations is treated as an ordinary loss for U. S. federal tax purposes. A tax benefit of $5.0 million was recorded in 1994 based upon alternative tax strategies. The Company's U. S. federal tax return has been examined for 1994 and submitted to the Congressional Joint Committee on Taxation recommending no change to the Company's ordinary loss position on this issue. In 1995, due to the timing and nature of a claim settlement (see Note B), 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. F-13 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE G--INCOME TAXES (CONTINUED) The provisions (credits) for income taxes before extraordinary item consist of the following (in thousands):
FISCAL YEAR ENDED MAY 31, FIRST NINE MONTHS ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- Currently payable: Federal..................................................... $ (1,930) $ 1,158 $ 299 $ (362) $ 298 State....................................................... (150) 139 -- (65) 100 Foreign..................................................... 1,250 274 609 (93) 974 --------- --------- --------- --------- --------- Total currently payable................................... (830) 1,571 908 (520) 1,372 --------- --------- --------- --------- --------- Deferred: Federal..................................................... 1,386 1,806 (2,626) (2,541) 1,621 State....................................................... 93 498 (441) (420) 238 Foreign..................................................... (499) 25 439 981 (351) --------- --------- --------- --------- --------- Total deferred............................................ 980 2,329 (2,628) (1,980) 1,508 --------- --------- --------- --------- --------- Income tax provision (benefit) before extraordinary item...... $ 150 $ 3,900 $ (1,720) $ (2,500) $ 2,880 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
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 are as follows (in thousands):
AT MAY 31, 1996 AT MAY 31, 1997 AT FEBRUARY 28, 1998 ------------------------ ------------------------ ------------------------ CURRENT NONCURRENT CURRENT NONCURRENT CURRENT NONCURRENT ASSET(1) LIABILITY ASSET(1) LIABILITY ASSET(1) LIABILITY ----------- ----------- ----------- ----------- ----------- ----------- Deferred tax assets: Operating loss carryforward................. $ -- $ 1,440 $ -- $ 1,778 $ -- $ 868 Intercompany profit in inventory............ 1,611 -- 1,422 -- 1,343 -- Inventory valuation......................... 3,462 -- 6,312 -- 5,971 -- Environmental and other reserves............ -- 600 -- 1,368 -- 1,188 Other, net.................................. 17 271 14 -- 14 -- ----------- ----------- ----------- ----------- ----------- ----------- Net deferred tax assets................... 5,090 2,311 7,748 3,146 7,328 2,056 Deferred tax liabilities: Accelerated depreciation.................... -- (3,398) -- (3,516) -- (3,514) Other, net.................................. -- -- -- (64) -- (142) ----------- ----------- ----------- ----------- ----------- ----------- Net deferred tax.......................... $ 5,090 $ (1,087) $ 7,748 $ (434) $ 7,328 $ (1,600) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
- ------------------------ (1) INCLUDED IN OTHER CURRENT ASSETS ON THE BALANCE SHEET F-14 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE G--INCOME TAXES (CONTINUED) Operating loss carryforwards of $14.5 million for U. S. tax purposes expire in 2009 and 2010. Net income taxes paid (refunds received) were $(361,000), $(1.1 million) and $523,000 in 1995, 1996, and 1997, respectively, and $29,000 and $341,000 for the first nine months of fiscal 1997 and 1998. NOTE H--ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
MAY 31, -------------------------- FEBRUARY 28, 1996 1997 1998 ------------ ------------ ------------ Compensation and payroll taxes...................... $ 3,558 $ 4,320 $ 4,944 Interest............................................ 2,690 2,849 1,589 Income taxes........................................ 314 712 742 Other accrued expenses.............................. 3,189 4,568 2,908 ------------ ------------ ------------ Accrued liabilities............................... $ 9,751 $ 12,449 $ 10,183 ------------ ------------ ------------ ------------ ------------ ------------
NOTE I--STOCKHOLDERS' EQUITY The Company has authorized 30,000,000 shares of Common Stock, 10,000,000 shares of Class B Common Stock, and 5,000,000 shares of Preferred Stock. The Class B Common Stock has ten votes per share and generally votes together with the Common Stock. The Class B Common Stock has transferability restrictions; however, it may be converted into Common Stock on a share-for-share basis at any time. With respect to dividends and distributions, shares of common stock and Class B common stock rank equally and have the same rights, except that Class B Common Stock is limited to 90% of the amount of Common Stock cash dividends. Total common stock issued and outstanding was 8,721,315 shares at May 31, 1997 and 8,967,891 shares At February 28, 1998. An additional 9,387,743 shares of common stock at May 31, 1997 and 9,144,170 shares at February 28, 1998 have been reserved for future issuance under the Employee Stock Purchase and Option Plans and potential conversion of the convertible debentures and Class B Common Stock. The Employee Stock Purchase Plan ("ESPP") provides substantially all employees an opportunity to purchase common stock of the Company at 85% of the stock price at the beginning of the year or the end of the year, whichever is lower. The plan has reserved 120,687 shares for future issuance. The Employees' 1996 Incentive Compensation Plan authorizes the issuance of up to 800,000 shares as incentive stock options, non-qualified stock options or stock awards. Under this plan and predecessor plans, 1,939,005 shares at May 31, 1997 and 1,696,879 shares at February 28, 1998 were reserved for future issuance. The Plan authorizes the granting of incentive stock options at the fair market value at the date of grant. Generally, these options become exercisable over staggered periods and expire up to ten years from the date of grant. Under the 1996 Stock Option Plan for Non-Employee Directors and a predecessor plan, 400,000 shares at May 31, 1997 and at February 28, 1998 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. F-15 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I--STOCKHOLDERS' EQUITY (CONTINUED) The Company applies APB Opinion No. 25 and related interpretations in accounting for its option plans. Accordingly, no compensation expense has been recognized for the Company's option plans in the accompanying Consolidated Statement of Operations. Applying SFAS No. 123 requires the calculation of the fair value of options at the date of grant using certain assumptions. The fair value of options granted was $2.81, $3.17 and $3.59 in 1996, 1997 and 1998, respectively. In addition, the option value of shares offered under the ESPP was $1.14, $1.50 and $1.19 in 1996, 1997 and 1998, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants: $.16 annual dividend rate, expected annual standard deviation of stock price of 40%, risk free interest rate of 5.6%, 5.2% and 5.5% in 1996, 1997 and 1998, respectively, and weighted average expected life of 6.0, 6.0 and 6.6 years, in 1996, 1997 and 1998, respectively. Had compensation cost for the Company's option plans and stock purchase plan been determined consistent with SFAS No. 123, the Company's net income (loss) and net income (loss) per share on a diluted basis would have been as follows (in thousands):
AS REPORTED PRO FORMA ------------------------ ------------------------ NET INCOME PER NET INCOME PER (LOSS) SHARE (LOSS) SHARE ----------- ----------- ----------- ----------- Fiscal 1996............................................................. $ 8,111 $ .68 $ 7,977 $ .66 Fiscal 1997............................................................. (1,493) (.12) (1,800) (.15) Fiscal 1997 first nine months........................................... (3,316) (.28) (3,557) (.30) Fiscal 1998 first nine months........................................... 6,730 .54 6,353 .51
The effect of applying SFAS No. 123 in this pro forma disclosure is not indicative of the effects on future years, because SFAS No. 123 does not apply to grants issued prior to fiscal 1996. F-16 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I--STOCKHOLDERS' EQUITY (CONTINUED) 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, 1994....................................................... 1,104,111 $ 8.00 544,137 $ 8.44 Granted............................................................... 296,100 4.02 Exercised............................................................. (9,000) 3.88 Cancelled............................................................. (57,918) 11.45 ---------- At May 31, 1995....................................................... 1,333,293 6.99 1,055,499 7.02 Granted............................................................... 263,450 7.40 Exercised............................................................. (245,141) 5.71 Cancelled............................................................. (99,758) 9.91 ---------- At May 31, 1996....................................................... 1,251,844 7.10 855,404 7.16 Granted............................................................... 285,800 8.00 Exercised............................................................. (33,030) 4.82 Cancelled............................................................. (15,812) 7.72 ---------- At May 31, 1997....................................................... 1,488,802 7.31 936,112 7.21 Granted............................................................... 251,300 8.50 Exercised............................................................. (204,844) 6.40 Cancelled............................................................. (98,559) 7.26 ---------- At February 28, 1998.................................................. 1,436,699 7.62 787,159 7.44 ---------- ----------
The following table summarizes information about stock options outstanding as of May 31, 1997 and February 28, 1998:
OUTSTANDING EXERCISABLE ---------------------------------- ------------------------------- EXERCISE PRICE RANGE SHARES PRICE LIFE SHARES PRICE LIFE - ------------------------------------------------------- ------------ --------- --------- --------- --------- --------- AT MAY 31, 1997: $3.75 to $5.25....................................... 181,826 $ 4.16 7.1 135,826 $ 4.03 7.1 $6.00 to $7.50....................................... 563,360 6.66 6.5 371,080 6.41 5.7 $8.00 to $8.125...................................... 650,053 8.02 6.8 351,643 8.04 4.8 $10.813 to $12.95.................................... 93,563 12.45 5.6 77,563 12.79 4.9 ------------ --------- Total.............................................. 1,488,802 7.31 6.7 936,112 7.21 5.5 ------------ --------- ------------ --------- AT FEBRUARY 28, 1998: $3.75 to $5.25....................................... 142,877 $ 4.27 6.5 108,877 $ 4.16 6.5 $6.00 to $7.50....................................... 468,970 6.80 6.4 299,370 6.64 5.4 $8.00 to $8.50....................................... 731,289 8.18 7.3 301,349 8.03 5.2 $10.813 to $12.95.................................... 93,563 12.45 5.1 77,563 12.79 4.5 ------------ --------- Total.............................................. 1,436,699 7.62 6.7 787,159 7.44 5.4 ------------ --------- ------------ ---------
F-17 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE J--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 $745,000, $1.1 million and $992,000 in 1995, 1996 and 1997, respectively and were $953,000 and $1,050,000 for the first nine months of fiscal 1997 and 1998. Stock contributions to the ESOP were $500,000, $500,000 and $800,000 in 1995, 1996 and 1997, respectively, based on the stock price at the date contributed. Shares are included in the calculation of earnings per share, and dividends are paid to the ESOP from the date the shares are contributed. Foreign employees are covered by a variety of primarily government mandated programs. NOTE K--INDUSTRY AND MARKET INFORMATION The Company operates in one industry as a distributor of electronic components, including vacuum tubes, semiconductors and other products. The Company invoices its customers and ships from two primary geographic locations: North America (which services the U. S., Canada, Latin America, and the Far East) and Europe (in thousands).
FISCAL YEAR ENDED MAY 31, FIRST NINE MONTHS ---------------------------------- ---------------------- 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- SALES: North America...................................... $ 186,103 $ 211,912 $ 223,277 $ 159,619 $ 195,017 Less intersegment transfers........................ 15,316 21,778 18,728 12,485 15,102 ---------- ---------- ---------- ---------- ---------- To unaffiliated customers........................ 170,787 190,134 204,549 147,134 179,915 ---------- ---------- ---------- ---------- ---------- Europe............................................. 49,244 51,987 54,946 40,025 47,563 Less intersegment transfers........................ 11,913 2,454 4,356 3,285 4,036 ---------- ---------- ---------- ---------- ---------- To unaffiliated customers........................ 37,331 49,533 50,590 36,740 43,527 ---------- ---------- ---------- ---------- ---------- Consolidated................................... $ 208,118 $ 239,667 $ 255,139 $ 183,874 $ 223,442 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- OPERATING INCOME: North America...................................... $ 6,187 $ 13,040 $ 1,999 $ (2,809) $ 11,124 Europe............................................. 1,984 6,263 4,949 4,171 5,328 Corporate expenses................................. (1,512) (1,733) (1,817) (1,178) (1,131) ---------- ---------- ---------- ---------- ---------- Consolidated..................................... $ 6,659 $ 17,570 $ 5,131 $ 184 $ 15,321 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- IDENTIFIABLE ASSETS: North America...................................... $ 142,031 $ 143,536 $ 148,026 $ 155,898 $ 157,647 Europe............................................. 21,653 32,794 34,905 33,449 37,330 Corporate assets................................... 9,830 3,828 9,583 6,915 4,677 ---------- ---------- ---------- ---------- ---------- Consolidated..................................... $ 173,514 $ 180,158 $ 192,514 $ 196,262 $ 199,654 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Intersegment transfers originate mainly from the United States or Europe and are accounted for on an "arm's length" basis with profits eliminated in consolidation. Export sales shipped directly from the F-18 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE K--INDUSTRY AND MARKET INFORMATION (CONTINUED) United States were $38.7 million, $37.9 million and $36.3 million in 1995, 1996, and 1997, respectively, and $27.4 million and $29.3 million for the first nine months of fiscal 1997 and 1998. Operating income was reduced by $11.0 million in North America in the third quarter of fiscal 1997 for valuation reserve adjustments, severance and other costs and by $4.7 million in North America in 1995 for the payment of a claim settlement, as described in Note B. Corporate assets consist primarily of cash and investments. The Company sells its products to companies in diversified industries and performs periodic credit evaluations of its customers' financial condition. Terms are generally on open account, payable net 30 days in North America and Latin America, and vary throughout Europe and the Far East. Estimates of credit losses are recorded in the financial statements based on periodic reviews of outstanding accounts and actual losses have been consistently within management's estimates. Sales by product line and by geographic destination are summarized in Management's Discussion and Analysis. NOTE L--LITIGATION On June 19, 1990, the Company was served with a complaint in PANACHE BROADCASTING OF PENNSYLVANIA, INC. V. RICHARDSON ELECTRONICS, LTD.; VARIAN ASSOCIATES, INC.; AND VARIAN SUPPLY COMPANY (VASCO--A JOINT VENTURE BETWEEN THE COMPANY AND VARIAN ASSOCIATES, INC.), in U. S. District Court for the Eastern Division of Pennsylvania alleging violations of Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act. This action purports to be a class action on behalf of all persons and businesses in the U. S. "who purchased electron power tubes from one or more of the defendant corporations at any time" since the formation of VASCO. The suit seeks treble damages alleged to be in excess of $100,000, injunctive relief, and attorneys' fees. The litigation has been transferred to the U. S. District Court for the Northern District of Illinois, Eastern Division as cause No. 90C6400, and is in the discovery stage. The Court has not determined whether the action may be maintained on behalf of a class. The Company is defending itself against this action. It is not possible at this time to predict the outcome of this legal action. NOTE M--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1996, 1997 and the first nine months of fiscal 1998 follow. There were no material fourth quarter adjustments in 1997 or 1996. Third quarter 1997 results include valuation reserve adjustments and severance and other costs which reduced gross margin by $7.2 million F-19 RICHARDSON ELECTRONICS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE M--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED) and net income by $6.7 million, or $.56 per share, as described in Note B (in thousands, except per share amounts).
FIRST SECOND THIRD FOURTH TOTALS --------- --------- --------- ---------- ---------- FISCAL 1996: Net sales............................................. $ 57,201 $ 61,669 $ 56,367 $ 64,430 $ 239,667 Gross margin.......................................... 17,138 17,934 16,816 18,656 70,544 Net income............................................ 1,730 2,240 1,821 2,320 8,111 Net income per share--diluted......................... $ .15 $ .19 $ .15 $ .19 $ .68 FISCAL 1997: Net sales............................................. $ 57,544 $ 62,167 $ 64,163 $ 71,265 $ 255,139 Gross margin.......................................... 16,783 18,738 11,171 20,772 67,464 Net income (loss) before extraordinary item........... 1,293 1,932 (6,053) 1,823 (1,005) Extraordinary loss, net of tax........................ -- -- (488) -- (488) Net income (loss)..................................... 1,293 1,932 (6,541) 1,823 (1,493) Net income (loss) per share before extraordinary item--diluted....................................... $ .11 $ .16 $ (.51) $ .15 $ (.08) Net income (loss) per share--diluted.................. $ .11 $ .16 $ (.55) $ .15 $ (.12) FISCAL 1998: Net sales............................................. $ 71,600 $ 78,646 $ 73,196 $ 223,442 Gross margin.......................................... 20,638 22,348 20,860 63,846 Net income............................................ 1,808 2,740 2,182 6,730 Net income per share--diluted......................... $ .15 $ .22 $ .17 $ .54
The 1996, 1997 and first two quarters of 1998 have been restated to comply with SFAS No. 128. F-20 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER, OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 8 Use of Proceeds........................................................... 12 Capitalization............................................................ 13 Price Range of Common Stock............................................... 14 Dividend Policy........................................................... 14 Selected Consolidated Financial Data...................................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 17 Business.................................................................. 25 Management................................................................ 33 Principal and Selling Stockholders........................................ 36 Description of Capital Stock and Debentures............................... 39 Underwriting.............................................................. 41 Legal Matters............................................................. 42 Experts................................................................... 42 Available Information..................................................... 42 Incorporation of Certain Documents by Reference........................... 43 Index to Consolidated Financial Statements................................ F-1
3,000,000 SHARES [LOGO] COMMON STOCK ----------------- P R O S P E C T U S ----------------- CLEARY GULL REILAND & MCDEVITT INC. MCDONALD & COMPANY SECURITIES, INC. , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
TOTAL EXPENSE ------------- Securities and Exchange Commission Registration Fee............................ $ 13,612.41 NASD Fees...................................................................... 22,614.38 Accounting Fees and Expenses(1)................................................ 50,000.00 Legal Fees and Expenses(1)..................................................... 80,000.00 Printing(1).................................................................... 90,000.00 Miscellaneous(1)............................................................... 143,773.21 ------------- Total.................................................................... $ 400,000.00 ------------- -------------
- ------------------------ (1) Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Provisions relating to indemnification of officers and directors of the Registrant are found in Articles Sixth and Seventh of its Certificate of Incorporation, in Article VII of its by-laws and in Section 145 of the General Corporation Law of the State of Delaware. Section 145 of the General Corporation Law of the State of Delaware provides as follows: Section 145. Indemnification of officers, directors, employees and agents; insurance (a) A corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not actin good faith and in a manner which the person reasonably believes to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such S-1 person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b), or in defense of any claim, issue or matter therein, the person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. (d) Any indemnification under subsections (a) and (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors even though less than a quorum, or (3) if there are no such directors or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate. (f) The indemnification and advancement of expenses provided by or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section. (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. (i) For purpose of this section, references to "other enterprise" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee S-2 benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the corporation" as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any by-law, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation's obligation to advance expenses (including attorneys' fees). Articles Sixth and Seventh of Registrant's Certificate of Incorporation provides as follow: SIXTH: The Corporation shall, to the full extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, indemnify, advance payment of expenses on behalf of and purchase and maintain insurance against liability on behalf of all persons for whom it may take each such respective action pursuant to such Section. SEVENTH: No Director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the Director derived an improper personal benefit. No amendment to or repeal of this Article SEVENTH shall apply to or have any effect on the liability or alleged liability of any Director of the Corporation for or with respect to any acts or omissions of such Director occurring prior to such amendment. Article VII of the Registrant's By-laws contains additional provisions regarding indemnification. The Company maintains a liability insurance policy for its directors and officers and for the Company providing coverage of claims in excess of certain minimum retained limits at an annual expense of approximately $255,000. The Underwriting Agreement contains certain provisions for the indemnification by the Underwriters of the Company, the Selling Stockholder and the Company's directors and officers who signed the Registration Statement against civil liabilities under the Securities Act. ITEM 16. EXHIBITS See Exhibit Index attached hereto on page E-1. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in S-3 connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. S-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of LaFox, State of Illinois, on March 31, 1998. RICHARDSON ELECTRONICS, LTD. By: /s/ EDWARD J. RICHARDSON ----------------------------------------- Edward J. Richardson CHAIRMAN OF THE BOARD By: /s/ WILLIAM J. GARRY ----------------------------------------- William J. Garry VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated. Further, KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Edward J. Richardson, William J. Garry and William G. Seils, and each of them severally, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, and on behalf of registrant, to sign any and all amendments (including post-effective amendments or any abbreviated registration statement, and any amendment thereto, filed pursuant to Rule 462(b)) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ EDWARD J. RICHARDSON Chairman of the Board - ------------------------------ (principal executive March 31, 1998 Edward J. Richardson officer) and Director /s/ BRUCE W. JOHNSON - ------------------------------ President and Director March 31, 1998 Bruce W. Johnson Vice President and Chief /s/ WILLIAM J. GARRY Financial Officer - ------------------------------ (principal financial and March 31, 1998 William J. Garry accounting officer) and Director
S-5
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ SCOTT HODES - ------------------------------ Director March 31, 1998 Scott Hodes /s/ SAMUEL RUBINOVITZ - ------------------------------ Director March 31, 1998 Samuel Rubinovitz /s/ ARNOLD R. ALLEN - ------------------------------ Director March 31, 1998 Arnold R. Allen /s/ KENNETH J. DOUGLAS - ------------------------------ Director March 31, 1998 Kenneth J. Douglas /s/ JACQUES BOUYER - ------------------------------ Director March 31, 1998 Jacques Bouyer /s/ HAROLD L. PURKEY - ------------------------------ Director March 31, 1998 Harold L. Purkey /s/ AD KETELAARS - ------------------------------ Director March 31, 1998 Ad Ketelaars
S-6 EXHIBIT INDEX
EXHIBIT NO DESCRIPTION FILING METHOD - ----------- -------------------------------------------------------------------------------------- ----------------- 1 Form of Underwriting Agreement E 3(b) By-laws of the Company, as amended incorporated by reference to the Company's Annual NA Report on Form 10-K for the fiscal year ended May 31, 1997. 4(a) Restated Certificate of Incorporation of the Company, incorporated by reference to NA Appendix B to the Proxy Statement/ Prospectus dated November 13, 1986, incorporated by reference to the Company's Registration Statement on Form S-4 Commission File No. 33-8696. 4(b) Specimen forms of Common Stock and Class B Common Stock certificates of the Company NA incorporated by reference to Exhibit 4(a) to the Company's Registration Statement on Form S-1, Commission File No. 33-10834. 4(c) Indenture between the Company and Continental Illinois National Bank and Trust Company NA of Chicago (including form of 7 1/4% Convertible Subordinated Debentures due December 15, 2006) incorporated by reference to Exhibit 4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1987. 4(c)(1) First Amendment to the Indenture between the Company and First Trust of Illinois, a NA 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. 4(d) Indenture between the Company and American National Bank and Trust Company, as NA Trustee, for 8 1/4% Convertible Senior Subordinated Debentures due June 15, 2006 (including form of 8 1/4% 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. 5 Opinion of Ross & Hardies regarding legality E 10(a) $35,000,000 Amended and Restated Senior Revolving Credit Note Facility Agreement dated NA August 20, 1996 with American National Bank and Trust Company incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1997. 10(a)(1) Second Amended Agreement regarding $35,000,000 Amended and Restated Senior Revolving NA Credit and Note Facility Agreement made as of November 28, 1997 between Richardson Electronics, Ltd. as Borrower and American National Bank and Trust Company as Lender, incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1997. 10(a)(2) Loan Agreement dated as of March 1, 1998 among Richardson Electronics, Ltd., various NA 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) of the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998.
S-7
EXHIBIT NO DESCRIPTION FILING METHOD - ----------- -------------------------------------------------------------------------------------- ----------------- 10(b) Industrial Building Lease, dated April 10, 1996 between the Company and the American NA National Bank and Trust Company, as trustee under Trust No. 56120 dated 2-23-83 incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996. 10(c) Revolving credit agreement and term loan dated February 18, 1997 between Richardson NA Electronics Acquisition Corporation and First Chicago NBD Bank, Canada, together with guarantee of the Company, incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997. 10(c)(1) Second Amending Agreement made as of August 22, 1997 between Burtek Systems Inc. as NA Borrower and First Chicago NBD Bank, Canada as Lender and Richardson Electronics, Ltd. as Guarantor, incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1997. 10(c)(2) Amended and Restated Credit Agreement made as of March 1, 1998 between Burtek Systems NA Inc. as Borrower and First Chicago NBD Bank, Canada as Lender and Richardson Electronics, Ltd. and Guarantor, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998. 10(d) The Corporate Plan for Retirement NA The Profit Sharing / 401(k) Plan Fidelity Basic Plan Document No. 07 dated June 1, 1996, incorporated by reference to NA Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996 10(e) The Company's Amended and Restated Incentive Stock Option Plan effective April 8, 1987 NA incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1987. 10(e)(1) First Amendment to the Company's Amended and Restated Incentive Stock Option Plan NA effective April 11, 1989 incorporated by reference to Exhibit 10(l)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1989. 10(e)(2) Second Amendment to the Company's Amended and Restated Incentive Stock Option Plan NA effective April 11, 1989 incorporated by reference to Exhibit 10(l)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991. 10(e)(3) Third Amendment to the Company's Amended and Restated Incentive Stock Option Plan NA 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. 10(f) The Company's Amended and Restated Employees Stock Purchase Plan, incorporated by NA reference to the Company's Proxy Statement used in connection with its Annual Meeting of Stockholders held October 2, 1985.
S-8
EXHIBIT NO DESCRIPTION FILING METHOD - ----------- -------------------------------------------------------------------------------------- ----------------- 10(f)(1) First Amendment to Amended and Restated Employees Stock Purchase Plan, incorporated by NA reference to Appendix D to the Company's Proxy Statement/Prospectus dated November 13, 1986 included in its Registration Statement on Form S-4, Commission File No. 33-8696. 10(f)(2) Second Amendment to Amended and Restated Employees Stock Purchase Plan, incorporated NA by reference to Appendix E to the Company's Proxy Statement/Prospectus dated November 13, 1986 included in its Registration Statement on Form S-4, Commission File No. 33-8696. 10(f)(3) Third Amendment to Amended and Restated Employees Stock Purchase Plan incorporated by NA reference to Exhibit 10(m)(3) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1990. 10(f)(4) Fourth Amendment to Amended and Restated Employees Stock Purchase Plan incorporated by NA reference to Exhibit 10(m)(4) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991. 10(f)(5) Fifth Amendment to Amended and Restated Employees Stock Purchase Plan incorporated by NA reference to Exhibit 10(m)(5) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991. 10(f)(6) Sixth Amendment to Amended and Restated Employees Stock Purchase Plan dated August 15, NA 1996, incorporated by reference to the Company's Proxy Statement used in connection with its Annual Meeting of Stockholders held October 1, 1996. 10(g) Richardson Electronics, Ltd. Employees 1996 Stock Purchase Plan incorporated by NA reference to Appendix A of the Company's Proxy Statement dated September 3, 1996 for its Annual Meeting of Stockholders held on October 1, 1996. 10(h) Employees Stock Ownership Plan and Trust Agreement, effective as of June 1, 1987, NA dated July 14, 1994, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1994. 10(h)(1) First Amendment to Employees Stock Ownership Plan and Trust Agreement, dated July 12, NA 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. 10(h)(2) Second Amendment to Employees Stock Ownership Plan and Trust Agreement, dated July 12, NA 1995, dated April 10, 1996, incorporated by reference to the Company's Proxy Statement used in connection with its Annual Meeting of Stockholders held October 1, 1996. 10(i) Stock Option Plan for Non-Employee Directors incorporated by reference to Appendix A NA to the Company's Proxy Statement dated August 30, 1989 for its Annual Meeting of Stockholders held on October 18, 1989. 10(j) Richardson Electronics, Ltd. 1996 Stock Option Plan for Non-Employee Directors, NA 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.
S-9
EXHIBIT NO DESCRIPTION FILING METHOD - ----------- -------------------------------------------------------------------------------------- ----------------- 10(k) The Company's Employees' Incentive Compensation Plan incorporated by reference to NA Appendix A to the Company's Proxy Statement dated August 31, 1990 for its Annual Meeting of Stockholders held on October 9, 1990. 10(k)(1) First Amendment to Employees Incentive Compensation Plan incorporated by reference to NA Exhibit 10(p)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991. 10(k)(2) Second Amendment to Employees Incentive Compensation Plan dated August 15, 1996, NA incorporated by reference to the Company's Proxy Statement used in connection with its Annual Meeting of Stockholders held October 1, 1996. 10(l) Richardson Electronics, Ltd. Employees' 1994 Incentive Compensation Plan incorporated NA 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. 10(l)(1) First Amendment to the Richardson Electronics, Ltd. Employees' 1994 Incentive NA Compensation Plan dated August 15, 1996, incorporated by reference to the Company's Proxy Statement used in connection with its Annual Meeting of Stockholders held October 1, 1996. 10(m) Richardson Electronics, Ltd. 1996 Incentive Compensation Plan incorporated by NA reference to Appendix B of the Company's Proxy Statement dated September 3, 1996 for its Annual Meeting of Stockholders held on October 1, 1996. 10(n) Correspondence outlining Agreement between the Company and Arnold R. Allen with NA respect to Mr. Allen's employment by the Company, incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K, for the fiscal year ended May 31, 1985. 10(n)(1) Letter dated February 3, 1992 between the Company and Arnold R. Allen outlining Mr. NA 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. 10(n)(2) Letter dated April 1, 1993 between the Company and Arnold R. Allen regarding Mr. NA 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. 10(o) Letter dated January 14, 1992 between the Company and Jacques Bouyer setting forth the NA terms of Mr. Bouyer's engagement as a management consultant by the Company for Europe, incorporated by reference to Exhibit 10(t)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended on May 31, 1992. 10(o)(1) Letter dated January 15, 1992 between the Company and Jacques Bouyer setting forth the NA 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.
S-10
EXHIBIT NO DESCRIPTION FILING METHOD - ----------- -------------------------------------------------------------------------------------- ----------------- 10(p) Letter dated January 13, 1994 between the Company and Samuel Rubinovitz setting forth NA the terms of Mr. Rubinovitz' engagement as management consultant by the Company incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended on May 31, 1994. 10(q) Letter dated April 4, 1994 between the Company and Bart F. Petrini setting forth the NA terms of Mr. Petrini's employment by the Company, incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended on May 31, 1994. 10(r) Letter dated May 20, 1994 between the Company and William J. Garry setting forth the NA terms of Mr. Garry's employment by the Company, incorporated by reference to Exhibit 10(p) to the Company's Annual Report on Form 10-K for the fiscal year ended on May 31, 1994. 10(s) Letter dated October 17, 1994 between the Company and Flint Cooper setting forth the NA terms of Mr. Cooper's employment by the Company, incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1994. 10(t) Agreement dated January 16, 1997 between the Company and Dennis Gandy setting forth NA 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. 10(u) Agreement dated March 21, 1997 between the Company and David Gilden setting forth the NA 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. 10(v) Employment agreement dated as of November 7, 1996 between the Company and Bruce W. NA Johnson incorporated by reference to Exhibit (c)(4) of the Company's Schedule 13 E-4, filed December 18, 1996. 10(w) Employment Agreement dated as of January 26, 1998 between the Company and Norman NA 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. 10(x) Employment contract dated May 10, 1993 as amended March 23, 1998 between the Company NA and Pierluigi Calderone incorporated by reference to Exhibit 10(d) of the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998. 10(y) The Company's Directors and Officers Liability Insurance Policy issued by Chubb Group NA of Insurance Companies Policy Number 8125-64-60A, incorporated by reference to Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991. 10(y)(1) The Company's Directors and Officers Liability Insurance Policy renewal issued by NA Chubb Group of Insurance Companies Policy Number 8125-64-60E, incorporated by reference to Exhibit 10(t)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
S-11
EXHIBIT NO DESCRIPTION FILING METHOD - ----------- -------------------------------------------------------------------------------------- ----------------- 10(y)(2) The Company's Excess Directors and Officers Liability and Corporate Indemnification NA Policy issued St. Paul Mercury Insurance Company Policy Number 900DX0216, incorporated by reference to Exhibit 10(t)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996. 10(y)(3) The Company's Directors and Officers Liability Insurance Policy issued by CNA NA Insurance Companies Policy Number DOX600028634, incorporated by reference to Exhibit 10(t)(3) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996. 10(z) Distributor Agreement, executed August 8, 1991, between Registrant and Varian NA Associates, Inc., incorporated by reference to Exhibit 10(d) of the Company's Current Report on Form 8-K for September 30, 1991. 10(z)(1) Amendment, dated as of September 30, 1991, between Registrant and Varian Associates, NA Inc., incorporated by reference to Exhibit 10(e) of the Company's Current Report on Form 8-K for September 30, 1991. 10(z)(2) First Amendment to Distributor Agreement between Varian Associates, Inc. and the NA Company as of April 10, 1992, incorporated by reference to Exhibit 10(v)(5) of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1992. 10(z)(3) Consent to Assignment and Assignment dated August 4, 1995 between Registrant and NA Varian Associates Inc., incorporated by reference to Exhibit 10(s)(4) of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1995. 10(z)(4) Final Judgment, dated April 1, 1992, in the matter of United States of America v. NA 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. 10(aa) Trade Mark License Agreement dated as of May 1, 1991 between North American Philips NA Corporation and the Company incorporated by reference to Exhibit 10(w)(3) of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991. 10(bb) Agreement among Richardson Electronics, Ltd., Richardson Electronique S.A., Covelec NA S.A. (now known as Covimag S.A.), and Messrs. Denis Dumont and Patrick Pertzborn, delivered February 23, 1995, translated from French, incorporated by reference to Exhibit 10(b) to the Company's Report on Form 8-K dated February 23, 1995. 10(cc) Settlement Agreement by and between the United States of America and Richardson NA 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. 23(a) Consent of Independent Auditors. E 23(b) Consent of Ross & Hardies. E+
- ------------------------ NA Previously filed. + Included in Exhibit 5. S-12 EX-1 2 EXHIBIT 1 UNDERWRITING AGREEMENT RICHARDSON ELECTRONICS, LTD. 3,000,000 SHARES OF COMMON STOCK (*) UNDERWRITING AGREEMENT _______________, 1998 CLEARY GULL REILAND & McDEVITT INC. MCDONALD & COMPANY SECURITIES, INC. As Representatives of the Several Underwriters Identified in Schedule II Annexed Hereto c/o Cleary Gull Reiland & McDevitt Inc. 100 East Milwaukee Avenue Milwaukee, WI 53202 Ladies and Gentlemen: SECTION 1. INTRODUCTORY. Richardson Electronics, Ltd., a Delaware corporation (the "Company"), and Edward J. Richardson (the "Selling Stockholder") propose to sell 3,000,000 shares (the "Firm Shares") of common stock, $.05 par value per share (the "Common Stock"), to the several underwriters identified in Schedule II annexed hereto (the "Underwriters"), who are acting severally and not jointly. In addition, the Company and the Selling Stockholder have agreed to grant to the Underwriters an option to purchase up to 450,000 additional shares of Common Stock (the "Optional Shares") as provided in section 6 hereof. The Firm Shares and, to the extent such option is exercised, the Optional Shares are hereinafter collectively referred to as the "Shares." You, as representatives of the Underwriters (the "Representatives"), have advised the Company and the Selling Stockholder that the Underwriters propose to make a public offering of their respective portions of the Shares as soon hereafter as in your judgment is advisable and that the public offering price of the Shares initially will be $_____ per share. The Company and the Selling Stockholder hereby confirm their respective agreements with the Underwriters and each other as follows: - ------------------ (*) PLUS AN OPTION TO ACQUIRE UP TO 450,000 ADDITIONAL SHARES OF COMMON STOCK FROM THE COMPANY AND THE SELLING SHAREHOLDERS TO COVER OVER-ALLOTMENTS. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to, and agrees with, the several Underwriters, and shall be deemed to represent and warrant to the several Underwriters on each Closing Date (as hereinafter defined), that: (a) Each of the Company and the subsidiaries of the Company that are listed on Exhibit 21 of the Company's most recent Annual Report on Form 10-K incorporated by reference into the Registration Statement (as hereinafter defined) (individually, a "Subsidiary" and collectively, the "Subsidiaries") has been duly incorporated and is validly existing as a corporation and in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as presently conducted and described in the Prospectus (as hereinafter defined) and the Registration Statement; each of the Company and the Subsidiaries is duly registered and qualified to do business as a foreign corporation under the laws of, and is in good standing as such in, each jurisdiction in which such registration or qualification is required, except where the failure to so register or qualify would not have a material adverse effect on the condition (financial or other), business, property, net worth, results of operations or prospects of the Company and the Subsidiaries, taken as a whole ("Material Adverse Effect"); and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. Complete and correct copies of the certificate of incorporation, articles of incorporation, or other organizational documents, as amended or restated (the "Articles of Incorporation") and by-laws, as amended or restated ("By-laws"), of the Company and each of the Subsidiaries or the equivalent documents to the Articles of Incorporation and By-laws for those Subsidiaries which have been formed in jurisdictions in which Articles of Incorporation and By-laws are not applicable, as in effect on the date hereof have been delivered to the Representatives, and no changes thereto will be made on or subsequent to the date hereof and prior to each Closing Date. (b) The shares of Common Stock issued and outstanding immediately prior to the issuance and sale of the Shares hereunder as set forth in the Prospectus have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus and the Registration Statement. There are no preemptive, preferential or, except as described in the Prospectus, other rights to subscribe for or purchase any shares of Common Stock (including the Shares), and no shares of Common Stock have been issued in violation of such rights. The Shares to be issued and sold to the Underwriters have been duly authorized and, when issued, delivered and paid for pursuant to this Agreement, will be validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus and the Registration Statement. The delivery of certificates for the Shares to be issued and sold hereunder and payment therefor pursuant to the terms of this Agreement will pass valid title to such Shares to the Underwriters, free and clear of any lien, claim, encumbrance or defect in title. Except as described in the Prospectus, there are no -2- outstanding options, warrants or other rights of any description, contractual or otherwise, entitling any person to be issued any class of security by the Company or any Subsidiary, and there are no holders of Common Stock or other securities of the Company or any Subsidiary, or of securities that are convertible or exchangeable into Common Stock or other securities of the Company or any Subsidiary, that have rights to the registration of such Common Stock or securities under the Securities Act of 1933, as amended, and the regulations thereunder (together, the "Act") or the securities laws or regulations of any of the states (the "Blue Sky Laws"). (c) Except for the Subsidiaries, and as otherwise set forth in the Prospectus or Schedule 2(c) hereto, the Company has no subsidiaries and does not own any equity interest in or control, directly or indirectly, any other corporation, limited liability company, partnership, joint venture, association, trust or other business organization. Except as set forth on Schedule 2(c) hereto, the Company owns directly or indirectly all of the issued and outstanding capital stock of each Subsidiary, free and clear of any and all liens, claims, encumbrances or security interests, and all such capital stock has been duly authorized and validly issued and is fully paid and nonassessable. There are no outstanding options, warrants or other rights of any description, contractual or otherwise, entitling any person to subscribe for or purchase any shares of capital stock of any Subsidiary. (d) The Company has full corporate power and authority to enter into and perform this Agreement, and the execution and delivery by the Company of this Agreement and the performance by the Company of its obligations hereunder and the consummation of the transactions described herein, have been duly authorized with respect to the Company by all necessary corporate action and will not: (i) violate any provisions of the Articles of Incorporation or By-laws of the Company or any Subsidiary; (ii) violate any provisions of, or result in the breach, modification or termination of, or constitute a default under, any provision of any agreement, lease, franchise, license, indenture, permit, mortgage, deed of trust, evidence of indebtedness or other instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary, or any property owned or leased by the Company or any Subsidiary, may be bound or affected; (iii) violate any statute, ordinance, rule or regulation applicable to the Company or any Subsidiary, or order or decree of any court, regulatory or governmental body, arbitrator, administrative agency or instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company or any Subsidiary; or (iv) result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary. No consent, approval, authorization or other order of any court, regulatory or governmental body, arbitrator, administrative agency or instrumentality of the United States or other country or jurisdiction is required for the execution and delivery of this Agreement by the Company, the performance of its obligations hereunder or the consummation of the transactions contemplated hereby, except for compliance with the Act, the Securities Exchange Act of 1934, as amended, and the regulations thereunder (together, the "Exchange Act"), the Blue Sky Laws -3- applicable to the public offering of the Shares by the several Underwriters and the clearance of such offering and the underwriting arrangements evidenced hereby with the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement has been duly executed and delivered by and on behalf of the Company and is a valid and binding agreement of the Company enforceable against the Company in accordance with its terms. (e) A registration statement on Form S-2 (Reg. No. 333-______) with respect to the Shares, including a preliminary form of prospectus, has been carefully prepared by the Company in conformity with the requirements of the Act and has been filed with the Securities and Exchange Commission (the "Commission"). The conditions for use of Form S-2, set forth in the General Instructions thereto, have been satisfied. Such registration statement, as finally amended and revised at the time such registration statement was or is declared effective by the Commission (including the information contained in the form of final prospectus, if any, filed with the Commission pursuant to Rule 424(b) and Rule 430A under the Act and deemed to be part of the registration statement if the registration statement has been declared effective pursuant to Rule 430A(b)) and as thereafter amended by post-effective amendment, if any, is herein referred to as the "Registration Statement." The related final prospectus in the form first filed with the Commission pursuant to Rule 424(b) or, if no such filing is required, as included in the Registration Statement, or any supplement thereto, is herein referred to as the "Prospectus." The prospectus subject to completion in the form included in the Registration Statement at the time of the initial filing of the Registration Statement with the Commission, and each such prospectus as amended from time to time until the date of the Prospectus, is referred to herein as the "Preliminary Prospectus." Reference made herein to each Preliminary Prospectus or the Prospectus, as amended or supplemented, shall include all documents and information incorporated by reference therein under the Exchange Act. The Company has prepared and filed such amendments to the Registration Statement since its initial filing with the Commission, if any, as may have been required to the date hereof, and will file such additional amendments thereto as may hereafter be required. There have been delivered to the Representatives two signed copies of the Registration Statement and each amendment thereto, if any, including one copy of any document filed under the Exchange Act and deemed to be incorporated by reference into the Registration Statement, together with one copy of each exhibit filed therewith or incorporated by reference therein, and such number of conformed copies for each of the Underwriters of the Registration Statement and each amendment thereto, if any (but without exhibits), and of each Preliminary Prospectus and of the Prospectus as the Representatives have requested. (f) Neither the Commission nor any state securities commission has issued any order preventing or suspending the use of any Preliminary Prospectus, nor, to the knowledge of the Company, have any proceedings for that purpose been initiated or threatened, and each Preliminary Prospectus filed with the Commission as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto complied when so filed with the requirements of the Act and, as of its date, did not include any untrue statement of a material fact or omit to state a material fact required -4- to be stated therein or necessary to make the statements therein not misleading. As of the effective date of the Registration Statement, and at all times subsequent thereto up to each Closing Date, the Registration Statement and the Prospectus contained or will contain all statements that are required to be stated therein in accordance with the Act and conformed or will conform in all respects to the requirements of the Act, and neither the Registration Statement nor the Prospectus included or will include any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements, therein not misleading. Neither the Company, nor to the Company's knowledge, any person that controls, is controlled by (including the Subsidiaries) or is under common control with the Company, has distributed or will distribute prior to each Closing Date any offering material in connection with the offering and sale of the Shares other than a Preliminary Prospectus, the Prospectus, the Registration Statement or other materials permitted by the Act and provided to the Representatives. (g) The documents that are incorporated by reference in each Preliminary Prospectus, the Prospectus or the Registration Statement or from which information is so incorporated by reference, when they became effective or were filed with the Commission, as the case may be, compiled with the requirements of the Act or the Exchange Act, as applicable, and when read together with the other information included in such Preliminary Prospectus, the Prospectus or the Registration Statement, as the case may be, do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (h) Ernst & Young LLP, which has expressed its opinion with respect to the audited consolidated financial statements filed with the Commission or incorporated by reference and included as a part of each Preliminary Prospectus, the Prospectus or the Registration Statement are independent accountants as required by the Act. (i) The consolidated financial statements and the related notes thereto included or incorporated by reference in each Preliminary Prospectus, the Prospectus and the Registration Statement present fairly the financial position, results of operations and cash flows of the Company as of their respective dates or for the respective periods covered thereby, all in conformity with generally accepted accounting principles consistently applied throughout the periods involved. The financial statement schedules, if any, included in the Registration Statement present fairly the information required to be stated therein on a basis consistent with the consolidated financial statements of the Company contained therein. The Company had an outstanding capitalization as set forth in the Registration Statement and under "Capitalization" in the Prospectus as of the date indicated therein, and there has been no material change thereto since such date except as disclosed in the Prospectus. The financial and statistical information and data relating to the Company in each Preliminary Prospectus, the Prospectus and the Registration Statement are accurately presented and prepared on a basis consistent with the audited -5- consolidated financial statements and books and records of the Company. The consolidated financial statements and schedules and the related notes thereto included or incorporated by reference in each Preliminary Prospectus, the Prospectus or the Registration Statement are the only such financial statements and schedules required under the Act to be set forth therein. (j) Neither the Company nor any Subsidiary is, nor with the giving of notice or passage of time or both, would be, in violation or in breach of: (i) its respective Articles of Incorporation, or By-laws; (ii) any statute, ordinance, order, rule or regulation applicable to the Company or such Subsidiary; (iii) any order or decree of any court, regulatory body, arbitrator, administrative agency or other instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company or such Subsidiary; or (iv) any provision of any agreement, lease, franchise, license, indenture, permit, mortgage, deed of trust, evidence of indebtedness or other instrument to which the Company or such Subsidiary is a party or by which any property owned or leased by the Company or such Subsidiary is bound or affected, except, in the cases of clauses (ii) and (iv) above, for such violations or breaches that would not have a Material Adverse Effect. Neither the Company nor any Subsidiary has received notice of any violation of any applicable statute, ordinance, order, rule or regulation applicable to the Company or any Subsidiary. The Company and each Subsidiary have obtained and hold, and are in compliance with, all permits, certificates, licenses, approvals, registrations, franchises, consents and authorizations of governmental or regulatory authorities required under all laws, rules and regulations in connection with their businesses (hereinafter "permit" or "permits") except where such failure would not have a Material Adverse Effect, and all of such permits are in full force and effect; and the Company and each Subsidiary have fulfilled and performed all of their respective obligations with respect to each such permit and no event has occurred which would result in, or after notice or lapse of time would result in, revocation or termination of any such permit or result in any other impairment of the rights of the holder of such permit. Neither the Company nor any Subsidiary is or has been (by virtue of any action, omission to act, contract to which it is a party or other occurrence) in violation of any applicable foreign, federal, state, municipal or local statutes, laws, ordinances, rules, regulations or orders (including those relating to environmental protection, occupational safety and health and equal employment practices) heretofore or currently in effect, the violation of which could have a Material Adverse Effect. (k) There are no legal or governmental proceedings or investigations pending or, to the knowledge of the Company, threatened to which the Company or any Subsidiary is or may be a party or to which any property owned or leased by the Company or any Subsidiary is or may be subject, including, without limitation, any such proceedings that are related to environmental or employment discrimination matters, which are required to be described in the Registration Statement or the Prospectus which are not so described, or which question the validity of this Agreement or any action taken or to be taken pursuant hereto. Except as described in the Registration Statement or the Prospectus, -6- neither the Company nor any Subsidiary: (i) is in violation of any statute, ordinance, rule or regulation, or any decision, order or decree of any court, regulatory body, arbitrator, administrative agency or other instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company or such Subsidiary relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environmental or human exposure to hazardous or toxic substances (collectively, "environmental laws"); (ii) owns or operates any real property contaminated with any substance that is subject to any environmental laws; (iii) is liable for any off-site disposal or contamination pursuant to any environmental laws; or (iv) is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim identified in (i) through (iv) above could have a Material Adverse Effect. (l) There is no transaction, relationship, obligation, agreement or other document required to be described in the Registration Statement or the Prospectus or to be filed or deemed to be filed as an exhibit to the Registration Statement by the Act, which has not been described or filed as required. All such contracts or agreements to which the Company or any Subsidiary is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiary, and are enforceable by and against the Company or such Subsidiary, in accordance with the respective terms thereof, subject to bankruptcy, insolvency, and moratorium laws and other principles of equity. (m) The Company or a Subsidiary has good and valid title to all property and assets reflected as owned by the Company or such Subsidiary in the Company's consolidated financial statements included or incorporated by reference in the Registration Statement (or the Prospectus), free and clear of all liens, claims, mortgages, security interests or other encumbrance of any kind or nature whatsoever except those, if any, reflected in such financial statements (or elsewhere in the Registration Statement or the Prospectus). All property (real and personal) held or used by the Company or a Subsidiary under leases, licenses, franchises or other agreements is held by the Company or such Subsidiary under valid, subsisting, binding and enforceable leases, franchises, licenses or other agreements. (n) Neither the Company nor, to the Company's knowledge, any person that controls, is controlled by (including the Subsidiaries) or is under common control with the Company has taken or will take, directly or indirectly, any action designed to cause or result in, or which constituted, or which could cause or result in, stabilization or manipulation, under the Exchange Act or otherwise, of the price of any security of the Company to facilitate the sale or resale of the Common Stock. (o) Except as described in the Registration Statement or the Prospectus, since the respective dates as of which information is given in the Registration Statement or the Prospectus and prior to each Closing Date: (i) neither the Company nor any Subsidiary has or will have incurred any liability or obligation, direct or contingent, or entered into -7- any transaction, that is material to the Company, except in the ordinary course of business; (ii) except for regular quarterly dividends paid in the ordinary course of business, if any, the Company has not and will not have paid or declared any dividend or other distribution with respect to its capital stock and neither the Company nor any Subsidiary is or will be delinquent in the payment of principal or interest on any outstanding debt obligation; and (iii) there has not been and will not have been any change in the capital stock, any material change in the indebtedness of the Company or any Subsidiary, or any change or development involving or which could be expected to involve, a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business. (p) Neither the Company nor any person that controls, is controlled by (including the Subsidiaries) or is under common control with the Company has, directly or indirectly: (i) made any unlawful contribution to any candidate for political office, or failed to disclose fully any contribution in violation of law; or (ii) made any payment to any federal, state or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof or applicable foreign jurisdictions. (q) The Company or a Subsidiary owns or possesses adequate rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights and licenses presently used in or necessary for the conduct of its business or ownership of its properties, and neither the Company nor any Subsidiary has violated or infringed upon the rights of others, or received any notice of conflict with the asserted rights of others, in respect thereof, except where such violation would not have a Material Adverse Effect. (r) The Company or a Subsidiary has in place and effective such policies of insurance, with limits of liability in such amounts, as are normal and prudent in the ordinary course of the business of the Company and its Subsidiaries. (s) No labor dispute with the employees of the Company or any Subsidiary, which dispute could reasonably be expected to result in a Material Adverse Effect, exists or, to the knowledge of the Company, is imminent, and neither the Company nor any Subsidiary is a party to any collective bargaining agreement and, to the knowledge of the Company, no union organizational attempts are pending. There has been no change in the relationship of the Company or any Subsidiary with any of its principal suppliers, manufacturers, contractors or customers resulting in or that could result in a Material Adverse Effect. (t) Neither the Company nor any Subsidiary is an "investment company", an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended. -8- (u) Except for (i) an appeal which the Company will file with respect to an anticipated Notice of Deficiency from the Internal Revenue Service contesting the Company's utilization of a ten-year carryback provision contained in the Internal Revenue Code, which appeal, if unsuccessful, would not have a Material Adverse Effect on the Company, and (ii) a value-added tax assessment by the French government with respect to the disposition of the Brive facility which is being contested by the Company, which assessment, if paid, would not have a Material Adverse Effect on the Compnay, all federal, state and local tax returns required to be filed by or on behalf of the Company or any Subsidiary have been filed (or are the subject of valid extension) with the appropriate federal, state and local authorities, and all such tax returns, as filed, are accurate in all material respects; all federal, state and local taxes (including estimated tax payments) required to be shown on all such tax returns or claimed to be due from or with respect to the business of the Company or such Subsidiary have been paid or reflected as a liability on the financial statements of the Company or such Subsidiary for appropriate periods; all deficiencies asserted as a result of any federal, state or local tax audits have been paid or finally settled, and no issue has been raised in any such audit which, by application of the same or similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so audited; no state of facts exist or has existed which would constitute grounds for the assessment of any tax liability with respect to the periods which have not been audited by appropriate federal, state or local authorities; there are no outstanding agreements or waivers extending the statutory period of limitation applicable to any federal, state or local tax return of any period; and neither the Company nor any Subsidiary has ever been a member of an affiliated group of corporations filing consolidated federal income tax returns, other than a group of which the Company is and has been the common parent. (v) Except for the Company's group health, life, disability or other welfare plan and its contributory or noncontributory defined contribution retirement plan and defined benefit retirement plans listed as Exhibits to the Company's most recent Annual Report on Form 10-K (collectively, the "Plans"), neither the Company nor any Subsidiary is a participating employer or plan sponsor with respect to any employee pension benefit plan as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any employee welfare benefit plan as defined in Section 3(l) of ERISA, including, without limitation, any multiemployer welfare or pension plan. With respect to the Plans, the Company is in substantial compliance with all applicable regulations, including ERISA and the Code. With respect to each defined benefit retirement plan, such plan does not have benefit liabilities (as defined in Section 4001(a)(16) of ERISA) exceeding the assets of the plan. The Company or the administrator of each of the Plans, as the case may be, has timely filed the reports required to be filed by ERISA and the Code in connection with the maintenance of the Plans, and no facts, including, without limitation, any "reportable event" as defined by ERISA and the regulations thereunder, exist in connection with the Plans which, under applicable law, would constitute grounds for the termination of any of the Plans by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United -9- States District Court of a trustee to administer any of the Plans. (w) The Company and each Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of consolidated financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorizations; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (x) None of the Company, any Subsidiary, any officer or director of the Company or any Subsidiary, or, to the Company's knowledge, any person who owns, of record or beneficially, any class of securities issued by the Company is: (i) an officer, director or partner of any brokerage firm, broker or dealer that is a member of the NASD ("NASD Member"); or (ii) directly or indirectly, a "person associated with" an NASD member or an "affiliate", of an NASD member, as such terms are used in the NASD Rules of the Association. (y) The Common Stock has been registered pursuant to Section 12(g) of the Exchange Act. The Company has prepared and filed with the Commission a registration statement for the Common Stock pursuant to Section 12(g) of the Exchange Act. Such registration statement either has been declared effective by the Commission under the Exchange Act or will be declared effective by the Commission prior to or concurrently with the commencement of the public offering of the Shares. The Common Stock has been approved for designation upon notice of issuance as a Nasdaq National Market security on The Nasdaq Stock Market ("Nasdaq") concurrently with the effectiveness of the Registration Statement. (z) All offers and sales of the securities of the Company and each Subsidiary prior to the date hereof were made in compliance with the Act and all other applicable state and federal laws or regulations. (aa) Except with respect to Shares of Common Stock sold to the Company in connection with a "cashless exercise" relating to any of the Company's stock option plans, the Company has obtained for the benefit of the Underwriters the agreement, enforceable by Cleary Gull Reiland & McDevitt Inc. ("Cleary Gull"), of each of the officers and directors of the Company, and each of the stockholders of the Company who are listed on Schedule III hereof, who owns of record the number of shares of Common Stock set forth on Schedule III opposite such stockholder's name, that for a period of 120 days after the date of the Prospectus, such persons will not, without the prior written consent of Cleary Gull, directly or indirectly, offer, sell, transfer, or pledge, contract to sell, transfer or pledge, or cause or in any way permit to be sold, transferred, pledged, or otherwise -10- disposed of, except where shares of Common Stock are required to be pledged by the Selling Stockholder pursuant to an existing line of credit with American National Bank, which line of credit shall not be increased, any: (i) shares of Common Stock; (ii) rights to purchase shares of Common Stock (including, without limitation, shares of Common Stock that may be deemed to be beneficially owned by any such stockholder in accordance with the applicable regulations of the Commission and shares of Common Stock that may be issued upon the exercise of a stock option, warrant or other convertible security); or (iii) securities that are convertible or exchangeable into shares of Common Stock. (bb) A copy of the Custody Agreement executed by the Selling Stockholder and a copy of the Selling Stockholder's Selling Stockholder's Questionnaire have been furnished to counsel for the Underwriters prior to the date hereof, along with such other information as such counsel may reasonably request in connection with their review thereof. A certificate signed by any officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby. A certificate delivered by the Company to its counsel for purposes of enabling such counsel to render the opinion referred to in section 10(d) will also be furnished to the Representatives and counsel for the Underwriters and shall be deemed to be additional representations and warranties to the Underwriters by the Company as to the matters covered thereby. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDER. The Selling Stockholder represents and warrants to and agrees with the several Underwriters and the Company, and shall be deemed to represent and warrant to the several Underwriters and the Company on each Closing Date, that: (a) The Selling Stockholder has duly executed a custody agreement ("Custody Agreement") naming __________________ as custodian ("Custodian") of the Shares of the Selling Stockholder for the purpose of selling such Shares to the Underwriters on each Closing Date and receiving payment therefor. (b) All consents, approvals, authorizations and orders necessary for the execution and delivery by the Selling Stockholder of this Agreement and the Custody Agreement and for the sale and delivery of the Shares to be sold by the Selling Stockholder hereunder, as set forth on Schedule I annexed hereto, have been obtained. The Selling Stockholder has, and at the time of delivery thereof hereunder the Selling Stockholder will have, good and valid title to the Shares proposed to be sold by the Selling Stockholder hereunder, free and clear of all voting trust arrangements, liens, encumbrances, security interests, equities, and claims, other than any created by the Custody Agreement or this Agreement for the benefit of the Underwriters. The Selling Stockholder has full right, power and authority to enter into this Agreement and the Custody Agreement and to sell, -11- assign, transfer and deliver such Shares hereunder, free and clear of all voting trust arrangements, liens, encumbrances, security interests, equities, claims and community or marital property rights, other than any created by the Custody Agreement or this Agreement for the benefit of the Underwriters. Upon delivery of and payment for such Shares hereunder, the Underwriters will acquire good and valid title thereto, free and clear of all voting trust arrangements, liens, encumbrances, security interests, equities, claims and community or marital property rights. (c) The Selling Stockholder has not distributed and will not distribute any Preliminary Prospectus, the Prospectus or any other material in connection with the offering and sale of the Shares. The Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or which could cause or result in, under the Exchange Act or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Stock. (d) The execution, delivery and performance by the Selling Stockholder of this Agreement and the Custody Agreement will not, if applicable, result in the violation of any provisions of the Articles of Incorporation, By-laws or other governing documents of the Selling Stockholder, or constitute a breach, or be in contravention, of any provision of any agreement, franchise, license, indenture, mortgage, deed of trust or other instrument to which the Selling Stockholder is a party or by which the Selling Stockholder or the Selling Stockholder's property may be bound or affected, or any statute, rule or regulation applicable to the Selling Stockholder, or violate any order or decree of any court, regulatory body, administrative agency or other governmental body having jurisdiction over the Selling Stockholder or any of the Selling Stockholder's property. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of, and performance under, this Agreement by the Selling Stockholder or the consummation by the Selling Stockholder of the transactions contemplated by this Agreement, except for compliance with the Act, the Exchange Act, the Blue Sky Laws applicable to the public offering of the Shares by the Underwriters and the clearance of such offering with the NASD. The Selling Stockholder hereby represents and warrants that the Custody Agreement has been duly executed and delivered by or on behalf of the Selling Stockholder to the Representatives. (e) This Agreement and the Custody Agreement are each valid and binding agreements of the Selling Stockholder enforceable in accordance with their respective terms, subject to bankruptcy, insolvency, and moratorium laws and other principles of equity. (f) The Selling Stockholder has deposited in custody, under the Custody Agreement, certificates in negotiable form for the Shares to be sold hereunder by the Selling Stockholder as set forth opposite the Selling Stockholder's name on Schedule I annexed hereto (including the maximum number of Optional Shares set forth on Schedule -12- 1) for the purpose of further delivery pursuant to this Agreement. The Selling Stockholder agrees that the Shares of the Selling Stockholder on deposit with the Custodian are subject to the interests of the Company and the Underwriters, that the arrangements made for such custody, pursuant to the Custody Agreement, are to that extent irrevocable, and that the obligations of the Selling Stockholder hereunder and under the Custody Agreement shall not be terminated, except as provided in this Agreement and the Custody Agreement, by any act of the Selling Stockholder, by operation of law, by the death or incapacity of the Selling Stockholder or, by the occurrence of any other event. If any Selling Stockholder should die or become incapacitated, or if any other event should occur before the delivery of the Shares hereunder, the certificates for Shares then on deposit with the Custodian shall, to the extent such Shares are purchased by the Underwriters, be delivered by the Custodian in accordance with the terms and conditions of this Agreement and the Custody Agreement as if such death, incapacity, or other event had not occurred, regardless of whether or not the Custodian shall have received notice thereof. The Selling Stockholder represents that the Custodian has been authorized to receive and acknowledge receipt of the proceeds of sale of the Shares sold by the Selling Stockholder against delivery thereof and otherwise to act on behalf of the Selling Stockholder. (g) Insofar as it relates to the Selling Stockholder, each Preliminary Prospectus, as of its date, has conformed in all material respects with the requirements of the Act and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to, make the statements therein not misleading; and on the effective date of the Registration Statement and at all times subsequent thereto up to each Closing Date, (i) the Registration Statement and the Prospectus, as they relate to the Selling Stockholder, did or will conform to the requirements of the Act, and (ii) neither the Registration Statement nor the Prospectus as it relates to the Selling Stockholder did or will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (h) To the knowledge of the Selling Stockholder, the representations and warranties of the Company set forth in section 2 hereof are true and correct. (i) The information contained in the Selling Stockholder's Selling Stockholders' Questionnaire completed in connection with the Company's public offering and delivered to the Representatives was, as of the date of such questionnaire, and is, as of the date of this Agreement, true and correct. A certificate signed by or on behalf of the Selling Stockholder as such and delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Selling Stockholder to the Underwriters as to the matters covered thereby. A certificate delivered by or on behalf of the Selling Stockholder to counsel for the Selling Stockholder for purposes of enabling such counsel to render the opinion referred in Section 10(e) will also be furnished to the Representatives and counsel for the Underwriters and shall be -13- deemed to be additional representations and warranties to the Underwriters by the Selling Stockholder as to the matters covered thereby. SECTION 4. REPRESENTATION OF UNDERWRITERS. The Representatives will act as the representatives for the several Underwriters in connection with the public offering of the Shares, and any action under or in respect of this Agreement taken by the Representatives will be binding upon all of the Underwriters. SECTION 5. INFORMATION FURNISHED BY THE UNDERWRITERS. The information set forth in the last paragraph on the outside front cover page of the Prospectus concerning the terms of the offering by the Underwriters, the paragraph on the inside front cover page of the Prospectus relating to stabilization practices and passive market making, and the concession and reallowance amounts appearing under the caption "Underwriting" in the Prospectus constitute all of the information furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and the Prospectus, as such information is referred to in this Agreement. SECTION 6. PURCHASE, SALE AND DELIVERY OF SHARES. (a) On the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters identified in Schedule II annexed hereto 1,500,000 Firm Shares, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company the number of Firm Shares as hereinafter set forth at the price per share of $________. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of full Firm Shares which (as nearly as practicable in full shares as determined by the Representatives) bears the same proportion to the number of Firm Shares to be sold by the Company as the number of shares set forth opposite the name of such Underwriter in Schedule II annexed hereto bears to the total number of Firm Shares to be purchased by all of the Underwriters under this Agreement. (b) On the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the Selling Stockholder agrees, to sell to the Underwriters that number of full Firm Shares set forth opposite the name of the Selling Stockholder in Schedule I annexed hereto (a total of 1,500,000 shares), and each of the Underwriters agrees, severally and not jointly, to purchase from the Selling Stockholder the number of Firm Shares as hereinafter set forth at the same purchase price per share as stated in the preceding paragraph. The obligation of each Underwriter to the Selling Stockholder shall be to purchase from the Selling Stockholder that number of full Firm Shares which (as nearly as practicable in full shares as determined by the Representatives) bears the same proportion to the number of Firm Shares to be sold by the Selling Stockholder as the number of shares set forth opposite the name of such Underwriter in Schedule II annexed hereto bears to the total number of Firm Shares to be purchased by all of the Underwriters under this Agreement. -14- (c) On the First Closing Date (as hereinafter defined), the Company and the Custodian on behalf of the Selling Stockholder will deliver to the Representatives, at the offices of Cleary Gull Reiland & McDevitt Inc., 100 East Milwaukee Avenue, Milwaukee, WI 53202, or through the facilities of The Depository Trust Company, for the accounts of the several Underwriters, certificates representing the Firm Shares to be sold by them against payment of the purchase price therefor by wire transfer of immediately available funds to the accounts specified by the Company and the Selling Stockholder. As referred to in this Agreement, the "First Closing Date" shall be on the third full business day after the date of the Prospectus, at 9:00 a.m., Milwaukee, Wisconsin time, or at such other date or time not later than ten full business days after the date of the Prospectus as the Representatives, the Company and the Selling Stockholder may agree. The certificates for the Firm Shares to be so delivered will be in denominations and registered in such names as the Representatives request by notice to the Company and the Selling Stockholder, or either of them, prior to the First Closing Date, and such certificates will be made available for checking and packaging at 9:00 a.m., Milwaukee, Wisconsin time on the first full business day preceding the First Closing Date at a location to be designated by the Representatives. (d) In addition, on the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the Company and the Selling Stockholder hereby agree to sell to the Underwriters, and the Underwriters, severally and not jointly, shall have the right at any time within thirty days after the date of the Prospectus to purchase up to 225,000 Optional Shares from the Company and up to 225,000 Optional Shares from the Selling Stockholder at the purchase price per share to be paid for the Firm Shares, for use solely in covering any over-allotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised upon notice by the Representatives to the Company and the Selling Stockholder, or either of them, within thirty days after the date of the Prospectus setting forth the aggregate number of Optional Shares to be purchased by the Underwriters and sold by the Company and the Selling Stockholder, the names and denominations in which the certificates for such shares are to be registered and the date and place at which such certificates will be delivered. Such date of delivery (the "Second Closing Date") shall be determined by the Representatives, provided that the Second Closing Date, which may be the same as the First Closing Date, shall not be earlier than the First Closing Date and, if after the First Closing Date, shall not be earlier than three nor later than ten full business days after delivery of such notice to exercise. The number of Optional Shares to be sold by the Company pursuant to such notice shall equal that number of full Optional Shares which (as nearly as practicable in full shares as determined by the Representatives) bears the same proportion to the number of Optional Shares to be purchased by the Underwriters as the number of Firm Shares to be sold by the Company under this Agreement bears to the total number of Firm Shares. The number of Optional Shares to be sold by the Selling Stockholder pursuant to such notice shall equal that number of full Optional Shares which (as nearly as practicable in full shares as determined by the Representatives) bears the same proportion to the number of -15- Optional Shares to be purchased by the Underwriters as the number of Firm Shares to be sold by the Selling Stockholder bears to the total number of Firm Shares. Certificates for the Optional Shares will be made available for checking and packaging at 9:00 a.m., Milwaukee, Wisconsin time, on the first full business day preceding the Second Closing Date at a location to be designated by the Representatives. The manner of payment for and delivery of (including the denominations of and the names in which certificates are to be registered) the Optional Shares shall be the same as for the Firm Shares. (e) The Representatives have advised the Company and the Selling Stockholder that each Underwriter has authorized the Representatives to accept delivery of the Shares and to make payment therefor. It is understood that the Representatives, individually and not as representatives of the Underwriters, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any obligation under this Agreement. As referred to in this Agreement, "Closing Date" shall mean either the First Closing Date or the Second Closing Date. SECTION 7. COVENANTS OF THE COMPANY. The Company covenants and agrees with the several Underwriters that: (a) If the effective time of the Registration Statement is not prior to the execution and delivery of this Agreement, the Company will use its best efforts to cause the Registration Statement to become effective at the earliest possible time and, upon notification from the Commission that the Registration Statement has become effective, will so advise the Representatives and counsel to the Underwriters promptly. If the effective time of the Registration Statement is prior to the execution and delivery of this Agreement and any information shall have been omitted therefrom in reliance upon Rule 430A, the Company, at the earliest possible time, will furnish the Representatives with a copy of the Prospectus to be filed by the Company with the Commission to comply with Rule 424(b) and Rule 430A under the Act and, if the Representatives do not object to the contents thereof, will comply with such Rules. Upon compliance with such Rules, the Company will so advise the Representatives promptly. The Company will advise the Representatives and counsel to the Underwriters and the Selling Stockholder promptly of the issuance by the Commission or any state securities commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose, or of any notification of the suspension of qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceedings for that purpose, and will also advise the Representatives and counsel to the Underwriters and the Selling Stockholder promptly of any request of the Commission for amendment or supplement of the Registration Statement, of any Preliminary Prospectus or of the Prospectus, or for additional information, and the Company will not file any amendment or supplement to the Registration Statement (either before or after it becomes effective), -16- to any Preliminary Prospectus or to the Prospectus (including a prospectus filed pursuant to Rule 424(b)), or file any document under the Exchange Act in the time period from the execution of this Agreement through the First Closing Date with respect to the Firm Shares, or from the time of notice by the Representatives exercising the option to purchase the Optional Shares through the Second Closing Date with respect to the Optional Shares, without first providing the Underwriters with a copy prior to such filing (with a reasonable opportunity to review such amendment or supplement) or if the Representatives object to such filing. (b) If, at any time when a prospectus relating to the Shares is required by law to be delivered in connection with sales by an Underwriter or dealer, any event occurs as a result of which the Prospectus would include an untrue statement of a material fact, or would omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to supplement the Prospectus to comply with the Act, the Company promptly will advise the Representatives and counsel to the Underwriters and the Selling Stockholder thereof and will promptly prepare and file with the Commission, at its expense, an amendment to the Registration Statement which will correct such statement or omission or an amendment which will effect such compliance; and, if any Underwriter is required to deliver a prospectus after the effective date of the Registration Statement, the Company, upon request of the Representatives, will prepare promptly such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. The Company consents to the use, in accordance with the provisions of the Act and with the Blue Sky Laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, of each Preliminary Prospectus. (c) Neither the Company nor any Subsidiary will, prior to the Second Closing Date, if any, incur any liability or obligation, direct or contingent, or enter into any material transaction, other than in the ordinary course of business, or enter into any transaction with an "affiliate," as defined in Rule 405 under the Act, which is required to be described in the Prospectus pursuant to Item 404 of Regulation S-K under the Act, except as described in the Prospectus. (d) Except with respect to Shares of Common Stock acquired in connection with a "cashless exercise" relating to any of the Company's stock option plans, neither the Company nor any Subsidiary will, prior to the Second Closing Date, if any, acquire any of the Common Stock nor, except for the Company's regular quarterly dividend paid int eh ordinary course of business, if any, will the Company declare or pay any dividend or make any other distribution upon its Common Stock payable to stockholders of record on a date prior to such earlier date, except as described in the Prospectus. (e) The Company will make generally available to its security holders and the Representatives an earnings statement as soon as practicable, but in no event later than -17- sixty days after the end of its fiscal quarter in which the first anniversary of the effective date of the Registration Statement occurs, covering a period of twelve consecutive calendar months beginning after the effective date of the Registration Statement, which will satisfy the provisions of the last paragraph of Section 11(a) of the Act and Rule 158 promulgated thereunder. (f) During such period as a prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company will furnish to the Representatives, at the expense of the Company, copies of the Registration Statement, the Prospectus, any Preliminary Prospectus and all amendments and supplements to any such documents, including any document filed under the Exchange Act and deemed to be incorporated by reference in the Registration Statement, in each case as soon as available and in such quantities as the Representatives may reasonably request. (g) The Company will apply the net proceeds from the sale of the Shares to be sold by it hereunder for the purposes set forth in the Prospectus. (h) The Company will cooperate with the Representatives and counsel to the Underwriters in qualifying or registering the Shares for sale under the Blue Sky Laws of such jurisdictions as the Representatives designates, and will continue such qualifications or registrations in effect so long as reasonably requested by the Representatives to effect the distribution of the Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified. In each jurisdiction where any of the Shares shall have been qualified as provided above, the Company will file such reports and statements as may be required to continue such qualification for a period of not less than one year from the date of the Prospectus. The Company shall promptly prepare and file with the Commission, from time to time, such reports as may be required to be filed by the Act and the Exchange Act, and the Company shall comply in all respects with the undertakings given by the Company in connection with the qualification or registration of the Shares for offering and sale under the Blue Sky Laws. (i) During the period of three years from the date of the Prospectus, the Company will furnish to each of the Representatives and to each of the other Underwriters who may so request, as soon as available, each report, statement or other document of the Company or its Board of Directors mailed to its stockholders or filed with the Commission, and such other information concerning the Company as the Representatives may reasonably request. (j) The Company shall deliver the requisite notice of issuance to Nasdaq and shall take all necessary or appropriate action within its power to maintain the authorization for trading of the Common Stock as a Nasdaq National Market security, or take such action to authorize the Common Stock for listing on the New York Stock Exchange or the American Stock Exchange, for a period of at least thirty-six months after the date of the -18- Prospectus. (k) Except for (i) awards pursuant to the Mrs. Richardson Stock Award Program, (ii) the Company's contribution of shares of its Common Stock to the Company's ESOP or profit sharing plans, (iii) the issuance and sale by the Company of Common Stock upon exercise of presently existing outstanding stock options, (iv) the sale of the Shares to be sold by the Company pursuant to this Agreement, (v) the grant of employee stock options pursuant to the Company's stock option plan listed as Exhibits in the Company's most recent Annual Report on Form 10-K, copies of which are filed as exhibits to the Registration Statement or incorporated by reference, and provided that none of such options shall be exercisable during the 120-day period herein described and (vi) shares of Common Stock issued upon conversion of the Company's currently outstanding convertible debt, the Company shall not, for a period of 120 days after the date of the Prospectus, without the prior written consent of Cleary Gull, directly or indirectly, offer, sell or otherwise dispose of, contract to sell or otherwise dispose of, or cause or in any way permit to be sold or otherwise disposed of, any: (i) shares of Common Stock; (ii) rights to purchase shares of Common Stock; or (iii) securities that are convertible or exchangeable into shares of Common Stock. (l) The Company will maintain a transfer agent and, if required by law or the rules of The Nasdaq Stock Market or any national securities exchange on which the Common Stock is listed, a registrar (which, if permitted by applicable laws and rules, may be the same entity as the transfer agent) for its Common Stock. The Company shall, as soon as practicable after the date hereof, use its best efforts to obtain listing in Standard and Poor's Stock Guide, or such other recognized securities manuals for which it may qualify for listing, and the Company shall use its best efforts to maintain such listings for at least five years after the First Closing Date. (m) If at any time when a prospectus relating to the Shares is required to be delivered under the Act, any rumor, publication or event relating to of affecting the Company shall occur as a result of which, in the opinion of Cleary Gull, the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to the Prospectus), the Company will, after written notice from Cleary Gull advising the Company of any of the matters set forth above, promptly consult with Cleary Gull concerning the advisability and substance of, and, if the Company and Cleary Gull jointly determine that it is appropriate, disseminate, a press release or other public statement responding to or commenting on, such rumor, publication or event. (n) The Company will comply or cause to be complied with the conditions to the obligations of the Underwriters in section 10 hereof. SECTION 8. COVENANTS OF THE SELLING STOCKHOLDER. The Selling Stockholder covenants and agrees with the several Underwriters and the Company as follows: -19- (a) If the effective time of the Registration Statement is not prior to the execution and delivery of this Agreement, the Selling Stockholder will cooperate to the extent necessary to cause the Registration Statement to become effective at the earliest possible time; and the Selling Stockholder will do and perform all things to be done and performed by the Selling Stockholder prior to each Closing Date, pursuant to this Agreement or the Custody Agreement. (b) The Selling Stockholder agrees to deliver to the Custodian on or prior to the First Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable substitute form or statement specified by Treasury Department regulations in lieu thereof). (c) The Selling Stockholder will pay all federal and other taxes, if any, on the transfer or sale of the Shares being sold by the Selling Stockholder to the Underwriters. (d) For a period of 120 days after the date of the Prospectus, the Selling Stockholder will not, without the prior written consent of Cleary Gull, directly or indirectly, offer, sell, transfer, or pledge, contract to sell, transfer or pledge or cause or in any way permit to be sold, transferred, pledged or otherwise disposed of any: (i) shares of Common Stock; (ii) rights to purchase shares of Common Stock (including, without limitation, shares of Common Stock that may be deemed to be beneficially owned by the Selling Stockholder in accordance with the rules and regulations of the Commission and shares of Common Stock that may be issued upon exercise of a stock option, warrant or other convertible security); or (iii) securities that are convertible or exchangeable into shares of Common Stock. For a period of one year after the date of the Prospectus, the Selling Stockholder will not, without the prior written consent of Cleary Gull, exercise or cause to be exercised, directly or indirectly, any rights to initiate the registration of Common Stock under the Act or Blue Sky Laws. (e) The Selling Stockholder will furnish any documents, instruments or other information which the Representatives may reasonably request in connection with the sale and transfer of the Shares to the Underwriters. SECTION 9. PAYMENT OF EXPENSES. Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective, or if this Agreement is terminated for any reason, the Company will pay the costs, fees and expenses incurred in connection with the public offering of the Shares. Such costs, fees and expenses to be paid by the Company include, without limitation: (a) All costs, fees and expenses (excluding the expenses incurred by the Underwriters and the legal fees and disbursements of counsel for the Underwriters, but including such fees and disbursements described in subsection (b) of this section 9) incurred in connection with the performance of the Company's obligations hereunder, including without limiting the generality of the foregoing: the registration fees related to -20- the filing of the Registration Statement with the Commission; the fees and expenses related to the quotation of the Shares on Nasdaq or other national securities exchange; the fees and expenses of the Company's counsel, accountants, transfer agent and registrar; the costs and expenses incurred in connection with the preparation, printing,. shipping and delivery of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all agreements and supplements provided for herein, this Agreement and the Custody Agreement, including, without limitation, shipping expenses via overnight delivery and/or courier service to comply with applicable prospectus delivery requirements; and the costs and expenses associated with the production of materials related to, and travel expenses incurred by the management of the Company in connection with, the various meetings to be held between the Company's management and prospective investors. (b) All registration fees and expenses, including legal fees and disbursements of counsel for the Underwriters incurred in connection with qualifying or registering all or any part of the Shares for offer and sale under the Blue Sky Laws and the clearing of the public offering and the underwriting arrangements evidenced hereby with the NASD. (c) All fees and expenses related to printing of the certificates for the Shares, and all transfer taxes, if any, with respect to the sale and delivery of the Shares to the Underwriters. Notwithstanding the foregoing, the Selling Stockholder shall be solely responsible for any transfer or sales tax imposed upon the transfer and sale of the Selling Stockholder's Shares to the Underwriters and for the Selling Stockholder's respective pro rata share of all fees and expenses of the Custodian. All costs and expenses incident to the performance of the Selling Stockholder's obligations hereunder which are not otherwise specifically provided for in this section will be borne and paid solely by the Selling Stockholder. In the event the Selling Stockholder shall fail to pay the Selling Stockholder's pro rata share of the costs, fees and expenses described in this section within five days after demand by the Representatives therefor, the Company shall be obligated to pay such costs, fees and expenses on demand. SECTION 10. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters under this Agreement shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholder herein set forth as of the date hereof and as of each Closing Date, to the accuracy of the statements of the Company's officers and the Selling Stockholder made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholder of their respective obligations hereunder, and to the following additional conditions, unless waived in writing by the Representatives: (a) The Registration Statement shall have been declared effective by the Commission not later than 5:30 p.m., Washington, D.C. time, prior to the date on the date of this Agreement, or such later time as shall have been consented to by the Representatives, which consent shall be deemed to have been given if the Registration -21- Statement shall have been declared effective on or before the date and time requested in the acceleration request submitted on behalf of the Representatives pursuant to Rule 461 under the Act; all filings required by Rules 424(b) and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission or any state securities commission nor, to the knowledge of the Company, shall any proceedings for that purpose have been initiated or threatened; and any request of the Commission or any state securities commission for inclusion of additional information in the Registration Statement, or otherwise, shall have been complied with to the satisfaction of the Representatives. (b) Since the dates as of which information is given in the Registration Statement: (i) there shall not have occurred any change or development involving, or which could be expected to involve, a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business; and (ii) the Company shall not have sustained any loss or interference from any labor dispute, strike, fire, flood, windstorm, accident or other calamity (whether or not insured) or from any court or governmental action, order or decree, the effect of which on the Company, in any such case described in clause (i) or (ii) above, is in the opinion of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Registration Statement and the Prospectus. (c) The Representatives shall not have advised the Company that the Registration Statement or the Prospectus contains an untrue statement of fact that, in the opinion of the Representatives or counsel for the Underwriters, is material, or omits to state a fact that, in the opinion of the Representatives or such counsel, is material and is required to be stated therein or necessary to make the statements therein not misleading. (d) The Representatives shall have received an opinion of Ross & Hardies, counsel for the Company addressed to the Representatives, as the representatives of the Underwriters, and dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation and in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own, lease and operate its properties and conduct its business as presently conducted and as described in the Prospectus and the Registration Statement; the Company is duly registered and qualified to do business as a foreign corporation under the laws of, and is in good -22- standing as such in, each jurisdiction in which such registration or qualification is required, except where the failure to so register or qualify would not have a Material Adverse Effect; (ii) The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, par value $.05 per share, 10,000,000 shares of Class B Common Stock, par value $.05, and 5,000,000 shares of Preferred Stock, par value $1.00 per share, and all such stock conforms as to legal matters to the descriptions thereof in the Prospectus and the Registration Statement; (iii) The issued and outstanding shares of capital stock of the Company immediately prior to the issuance and sale of the Shares to be sold by the Company hereunder have been duly authorized and validly issued, are fully paid and nonassessable, and there are no preemptive, preferential or, except as described in the Prospectus, other rights to subscribe for or purchase any shares of capital stock of the Company, and, to such counsel's knowledge, no shares of capital stock of the Company have been issued in violation of such rights; (iv) To such counsel's knowledge, except for the Subsidiaries, the Company has no subsidiaries, and the Company does not own any equity interest in or control, directly or indirectly, any other corporation, limited liability company, partnership, joint venture, association, trust or other business organization except as described in the Prospectus, the Registration Statement and Schedule 2(c) hereto; each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as presently conducted and as described in the Prospectus and the Registration Statement; each Subsidiary is duly registered or qualified to do business as a foreign corporation under the laws of, and is in good standing as such in, each jurisdiction in which such registration or qualification is required, except where the failure to so register or qualify would not have a Material Adverse Effect; the issued and outstanding shares of the capital stock of each Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and there are no preemptive, preferential or, to such counsel's knowledge, other rights to subscribe for or purchase any shares of capital stock of any Subsidiary, and to such counsel's knowledge, no shares of capital stock of any Subsidiary have been issued in violation of such rights; the Company owns directly and, to such counsel's knowledge, beneficially all of the issued and outstanding capital stock of each Subsidiary, free and clear of any and all liens, claims, encumbrances and security interests; (v) The certificates for the Shares to be delivered hereunder are in due and proper form and conform to the requirements of applicable law; and when duly countersigned by the Company's transfer agent, and delivered to the -23- Representatives or upon the order of the Representatives against payment of the agreed consideration therefor in accordance with the provisions of this Agreement, the Shares to be sold by the Company represented thereby will be duly authorized and validly issued, fully paid and nonassessable, and free of any preemptive, preferential or other rights to subscribe for or purchase shares of Common Stock; (vi) The Registration Statement has become effective under the Act, and to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or are threatened under the Act or any Blue Sky Laws; the Registration Statement and the Prospectus and any amendment or supplement thereto, including any document incorporated by reference in the Registration Statement, (except for the financial statements and other statistical or financial data included therein as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act; the conditions for use of Form S-2, set forth in the General Instructions thereto, have been satisfied; no facts have come to the attention of such counsel which lead it to believe that either the Registration Statement or the Prospectus or any amendment or supplement thereto, including any document incorporated by reference in the Registration Statement, contains any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of the First Closing Date or the Second Closing Date, as the case may be, contained any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made (except for the financial statements and other financial data included therein as to which such counsel need express no opinion); to such counsel's knowledge, there are no legal or governmental proceedings pending or threatened, including, without limitation, any such proceedings that are related to environmental or employment discrimination matters, required to be described in the Registration Statement or the Prospectus which are not so described or which question the validity of this Agreement or any action taken or to be taken pursuant thereto, nor is there any transaction, relationship, agreement, contract or other document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to or incorporated by reference in the Registration Statement by the Act, which is not described, filed or incorporated by reference as required; (vii) The Company has full corporate power and authority to enter into and perform this Agreement; the performance of the Company's obligations hereunder and the consummation of the transactions described herein have been duly authorized by the Company by all necessary corporate action and this Agreement has been duly executed and delivered by and on behalf of the Company, and is a legal, valid and binding agreement of the Company enforceable -24- against the Company in accordance with its terms, except that rights to indemnity or contribution may be limited by applicable law and except as enforceability of this Agreement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by equitable principles limiting the right to specific performance or other equitable relief; no consent, approval, authorization or other order or decree of any court, regulatory or governmental body, arbitrator, administrative agency or other instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement (except for compliance with the Act, the Exchange Act, applicable Blue Sky Laws and the clearance of the underwriting arrangements by the NASD); (viii) The execution, delivery and performance of this Agreement by the Company will not: (A) violate any provisions of the Articles of Incorporation or By-laws of the Company or any Subsidiary; (B) to such counsel's knowledge, violate any provisions of, or result in the breach, modification or termination of, or constitute a default under, any agreement, lease, franchise, license, indenture, permit, mortgage, deed of trust, other evidence of indebtedness or other instrument to which the Company or any Subsidiary is a party or by which the Company or such Subsidiary, or any of their respective owned or leased property is bound, and which is filed or incorporated by reference as an exhibit to the Registration Statement; or (C) violate any statute, ordinance, rule, or regulation of any regulatory or governmental body, or to such counsel's knowledge, any order or decree of any court, arbitrator, administrative agency or other instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company or any Subsidiary (assuming compliance with all applicable federal and state securities laws); (ix) To such counsel's knowledge, except as described in the Prospectus, there are no holders of Common Stock or other securities of the Company, or securities that are convertible or exchangeable into Common Stock or other securities of the Company, that have rights to the registration of such securities under the Act or any Blue Sky Laws; (x) The Common Stock has been designated for inclusion as a National Market security on The Nasdaq Stock Market and is registered under the Exchange Act; (xi) Neither the Company nor any Subsidiary is, nor with the giving of notice or passage of time or both would be, in violation of its respective Articles of Incorporation or By-laws or, to such counsel's knowledge, in default in any material respect in the performance of any agreement, lease, franchise, license, permit, mortgage, deed of trust, evidence of indebtedness or other instrument, or -25- any other document that is filed as an exhibit to or incorporated by reference in the Registration Statement, to which the Company or any Subsidiary is subject or bound; (xii) Neither the Company nor any Subsidiary is an "investment company", an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended, and, upon its receipt of any proceeds from the sale of the Shares, the Company will not become or be deemed to be an "investment company" thereunder; (xiii) The description or incorporation by reference in the Registration Statement and the Prospectus of statutes, law, regulations, legal and governmental proceedings, and contracts and other legal documents described or incorporated by reference therein fairly and correctly present, in all material respects, the information required to be included therein by the Act; and (xiv) All offers and sales by the Company of its capital stock before the date hereof were at all relevant times duly registered under or exempt from the registration requirements of the Act, and were duly registered under or the subject of an available exemption from the registration requirements of any applicable Blue Sky Laws. In rendering such opinion, counsel for the Company may rely, to the extent counsel deems such reliance proper, as to matters of fact upon certificates of officers of the Company and of governmental officials, and copies of all such certificates shall be furnished to the Representatives and for the Underwriters on or before each Closing Date. Such opinion may incorporate reasonable exclusions and qualifications. (e) The Representatives shall have received an opinion from Ross & Hardies, counsel for the Selling Stockholder, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (i) Each of this Agreement and the Custody Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Stockholder and such agreement constitutes the valid and binding agreement of the Selling Stockholder, enforceable in accordance with its respective terms, except that rights to indemnity or contribution thereunder may be limited by applicable law and except as enforceability of such agreement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws generally affecting the rights of creditors and by equitable principles limiting the right to specific performance or other equitable relief; (ii) The execution and delivery of this Agreement and the Custody -26- Agreement and the consummation of the transactions herein and therein contemplated will not, if applicable, result in the violation of any provisions of the Articles of Incorporation, By-laws or other governing documents of the Selling Stockholder, or constitute a breach, or to such counsel's knowledge, be in contravention, of any provision of any agreement, franchise, license, indenture, mortgage, deed of trust or other instrument to which the Selling Stockholder is a party or by which the Selling Stockholder or the Selling Stockholder's property may be bound or affected, or any statute, rule or regulation applicable to the Selling Stockholder, or to such counsel's knowledge, violate any order or decree of any court, regulatory or governmental body, administrative body or instrumentality of the United States or other jurisdiction having jurisdiction over the Selling Stockholder or any of the Selling Stockholder's property, which violation would reasonably be expected to have a material adverse effect on the condition (financial or otherwise), business, properties, net worth or results of operations of the Selling Stockholder; (iii) To such counsel's knowledge, the Selling Stockholder has full legal right, power and authority, and has secured any consent, approval, authorization and order required to enter into and perform this Agreement and the Custody Agreement and to sell, assign, transfer and deliver title to the Shares to be sold by the Selling Stockholder as provided herein; and upon delivery to the Underwriters or upon the order of the Representatives against payment of the agreed consideration therefor in accordance with the provisions of this Agreement, to such counsel's knowledge, the Underwriters will acquire good and marketable title to the Shares to be sold hereunder by the Selling Stockholder, free and clear of all voting trust arrangements, liens, encumbrances, security interests, equities, claims and community or marital property rights; and (iv) To such counsel's knowledge, the information concerning the Selling Stockholders contained in the Prospectus under the caption "Principal and Selling Stockholders" complies in all material respects with the Act. In rendering such opinion, counsel for the Selling Stockholder may rely, to the extent counsel deems such reliance proper, as to matters of fact upon certificates of the Selling Stockholder, and copies of all such certificates shall be furnished to the Representatives and counsel for the Underwriters on or before each Closing Date. Such opinion may incorporate reasonable exclusions and qualifications. (f) The Representatives shall have received an opinion of McDermott, Will & Emery, counsel for the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the issuance and sale of the Shares by the Company, the Registration Statement and other related matters as the Representatives may require, and the Company shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they request for the purpose of -27- enabling them to pass upon such matters. (g) The Representatives shall have received on each Closing Date, a certificate of Edward J. Richardson, Chairman and Chief Executive Officer, and Bruce W. Johnson, President and Chief Operating Officer, of the Company, to the effect that: (i) The representations and warranties of the Company set forth in section 2 hereof are true and correct as of the date of this Agreement and as of the date of such certificate, and the Company has complied with all the agreements and satisfied all the conditions to be performed or satisfied by it at or prior to the date of such certificate; (ii) The Commission has not issued an order preventing or suspending the use of the Prospectus or any Preliminary Prospectus or any amendment or supplement thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the knowledge of the respective signatories, no proceedings for that purpose have been initiated or are pending or contemplated under the Act or under the Blue Sky Laws of any jurisdiction; (iii) Each of the respective signatories has carefully examined the Registration Statement and the Prospectus, and any amendment or supplement thereto, including any documents filed under the Exchange Act and deemed to be incorporated by reference in the Registration Statement, and such documents contain all statements required to be stated therein, and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and since the date on which the Registration Statement was initially filed, no event has occurred that was required to be set forth in an amended or supplemented prospectus or in an amendment to the Registration Statement that has not been so set forth; and (iv) Since the date on which the Registration Statement was initially filed with the Commission, there shall not have occurred any change or development involving, or which could be expected to involve, a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business, except as disclosed in the Prospectus and the Registration Statement as heretofore amended or (but only if the Representatives expressly consent thereto in writing) as disclosed in an amendment or supplement thereto filed with the Commission and delivered to the Representatives after the execution of this Agreement; since such date and except as so disclosed or in the ordinary course of business, the Company has not incurred any liability or obligation, direct or indirect, or entered into any transaction which is material to the Company; since such date and except as so disclosed, there has not been any change in the outstanding capital stock of the Company, or any change that is material to the Company in the short-term debt or long-term debt of the Company; since such date and except as so disclosed -28- or as contemplated in this Agreement, the Company has not acquired any of the Common Stock or other capital stock of the Company nor has the Company declared or paid any dividend, or made any other distribution, upon its outstanding Common Stock payable to stockholders of record on a date prior to such Closing Date; since such date and except as so disclosed, the Company has not incurred any material contingent obligations, and no material litigation is pending or threatened against the Company; and, since such date and except as so disclosed, the Company has not sustained any material loss or interference from any strike, fire, flood, windstorm, accident or other calamity (whether or not insured) or from any court or governmental action, order or decree. The delivery of the certificate provided for in this subsection (g) shall be and constitute a representation and warranty of the Company as to the facts required in the immediately foregoing clauses (i), (ii), (iii) and (iv) to be set forth in said certificate. (h) The Representatives shall have received a certificate from the Selling Stockholder, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (i) the representations and warranties of the Selling Stockholder in Section 3 of this Agreement are true and correct as of the date of this Agreement and as of the date of such certificate, as if again made on and as of such Closing Date, and the Selling Stockholder has complied with all of the agreements and satisfied all of the conditions to be performed or satisfied by the Selling Stockholder at or prior to such Closing Date; and (ii) the Selling Stockholder has no reason to believe that the Registration Statement or any amendment thereto, including any documents filed under the Exchange Act and deemed to be incorporated by reference in the Registration Statement, at the time it was declared effective by the Commission contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as amended or supplemented, including any documents filed under the Exchange Act and deemed to be incorporated by reference in the Registration Statement, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (i) At the time this Agreement is executed and also on each Closing Date, there shall be delivered to the Representatives a letter addressed to the Representatives, as the representatives of the Underwriters, from Ernst & Young LLP, the Company's independent accountants, the first letter to be dated the date of this Agreement, the second letter to be dated the First Closing Date and the third letter (if applicable) to be dated the Second Closing Date, which shall be in form and substance satisfactory to the Representatives and shall contain information as of a date within five days of the date of such letter. There shall not have been any change or decrease set forth in any of the letters referred to in this subsection (i) which makes it impracticable or inadvisable in the judgment of the Representatives to proceed with the public offering or purchase of the -29- Shares as contemplated hereby. (j) The Shares shall have been qualified or registered for sale under the Blue Sky Laws of such jurisdictions as shall have been specified by the Representatives, the underwriting terms and arrangements for the offering shall have been cleared by the NASD, and the Common Stock shall have been designated for inclusion as a Nasdaq National Market security on the Nasdaq Stock Market and shall have been registered under the Exchange Act. (l) Such further certificates and documents as the Representatives may reasonably request (including certificates of officers of the Company). All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory to the Representatives and to McDermott, Will & Emery, counsel for the Underwriters. The Company and the Selling Stockholder shall furnish the Representatives with such manually signed or conformed copies of such opinions, certificates, letters and documents as the Representatives may reasonably request. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at either Closing Date is not so satisfied, this Agreement at the election of the Representatives will terminate upon notification to the Company and the Selling Stockholder, or any one of them, without liability on the part of any Underwriter, including the Representatives, the Company or the Selling Stockholder except for the provisions of section 7(n) hereof, the expenses to be paid by the Company and the Selling Stockholder pursuant to section 9 hereof and except to the extent provided in section 12 hereof. SECTION 11. MAINTAIN EFFECTIVENESS OF REGISTRATION STATEMENT. The Company will use its best efforts and the Selling Stockholder will use his best efforts to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement, and, if such stop order is issued, to obtain as soon as possible the lifting thereof. SECTION 12. INDEMNIFICATION. (a) The Company and the Selling Stockholder, jointly and severally, subject to the last paragraph of this Section 12, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act, from and against any losses, claims, damages, expenses, liabilities or actions in respect thereof ("Claims"), joint or several, to which such Underwriter or each such controlling person may become subject under the Act, the Exchange Act, Blue Sky Laws or other federal or state statutory laws or regulations, at common law or otherwise (including payments made in settlement of any litigation), insofar as such Claims arise out of or are based upon any breach of any representation, warranty or covenant made by the Company in this Agreement, or any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, -30- any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or in any application filed under any Blue Sky Law or other document executed by the Company for that purpose or based upon written information furnished by the Company and filed in any state or other jurisdiction to qualify any or all of the Shares under the securities laws thereof (any such document, application or information being hereinafter called a "Blue Sky Application") or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. The Company and the Selling Stockholder, jointly and severally, subject to the last paragraph of this Section 12, agree to reimburse each Underwriter and each such controlling person for any legal fees or other expenses incurred by such Underwriter or any such controlling person in connection with investigating or defending any such Claim; provided, however, that the Company and the Selling Stockholder will not be liable in any such case to the extent that: (i) any such Claim arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or supplement thereto or in any Blue Sky Application in reliance upon and in conformity with the written information furnished to the Company pursuant to section 5 of this Agreement or (ii) such statement or omission was contained or made in any Preliminary Prospectus and corrected in the Prospectus and (1) any such Claim suffered or incurred by any Underwriter (or any person who controls any Underwriter) resulted from an action, claim or suit by any person who purchased Shares which are the subject thereof from such Underwriter in the offering, and (2) such Underwriter failed to deliver or provide a copy of the Prospectus to such person at or prior to the confirmation of the sale of such Shares, unless such failure was due to failure by the Company to provide copies of the Prospectus to the Underwriters as required by this Agreement. The indemnification obligations of the Company and the Selling Stockholder as provided above are in addition to and in no way limit any liabilities the Company and the Selling Stockholder may otherwise have. (b) The Selling Stockholder, agrees to indemnify and hold harmless each Underwriter and each controlling person from and against any Claims to which such Underwriter or each such controlling person may become subject under the Act, the Exchange Act, Blue Sky laws or other federal or state statutory laws or regulations, at common law or otherwise (including payments made in settlement of any litigation), insofar as such Claims arise out of or are based upon any breach of any representations, warranty or covenant made by the Selling Stockholder in this Agreement. (c) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors and each of its officers who signs the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act and the Selling Stockholder against any Claim to which the Company, or any such director, officer, controlling person or Selling Stockholder may become subject under the Act, the Exchange Act, Blue Sky Laws or other federal or state statutory laws or regulations, at common law or otherwise (including payments made in -31- settlement of any litigation, if such settlement is effected with the written consent of such Underwriter and Cleary Gull), insofar as such Claim arises out of or is based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, in reliance solely upon and in conformity with the written information furnished by the Representatives to the Company pursuant to section 5 of this Agreement. Each Underwriter will severally reimburse any legal fees or other expenses incurred by the Company, or any such director, officer, controlling person or Selling Stockholder in connection with investigating or defending any such Claim, and from any and all Claims solely resulting from failure of an Underwriter to deliver a Prospectus, if the person asserting such Claim purchased Shares from such Underwriter and a copy of the Prospectus (as then amended if the Company shall have furnished any amendments thereto) was not sent or given by or on behalf of such Underwriter to such person, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended) would have cured the defect giving rise to such Claim. The indemnification obligations of each Underwriter as provided above are in addition to any liabilities any such Underwriter may otherwise have. Notwithstanding the provisions of this section, no Underwriter shall be required to indemnify or reimburse the Company, or any officer, director, controlling person or the Selling Stockholder in an aggregate amount in excess of the total price at which the Shares purchased by any such Underwriter hereunder were offered to the public, less the amount of any damages such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. (d) The Selling Stockholder agrees to indemnify and hold harmless the Company, each of its directors and each of its officers who signs the Registration Statement, and each person, if any, controlling the Company within the meaning of the Act or the Exchange Act to the same extent as the foregoing indemnity from the Company to each Underwriter set forth in subsection (a) of this section. In case any Claim shall be brought or asserted against the Company, its directors, such officers or any such controlling person, in respect of which indemnity may be sought against the Selling Stockholder, the Selling Stockholder shall have the rights and duties given to the Company, and the Company, such directors or officers and any such controlling person shall have the rights and duties given to the Underwriters by subsection (a) of this section. (e) Promptly after receipt by an indemnified party under this section of notice of the commencement of any action in respect of a Claim, such indemnified party will, if a Claim in respect thereof is to be made against an indemnifying party under this section, -32- notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve an indemnifying party from any liability it may have to any indemnified party under this section or otherwise, except to the extent that the failure to so notify the indemnifying party causes such party prejudice. In case any such action is brought against any indemnified party, and such indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in and, to the extent that he, she or it may wish, jointly with all other indemnifying parties, similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and any indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to the indemnified party and/or other indemnified parties which are different from or additional to those available to any indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. (f) Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election to assume the defense of such action and upon approval by the indemnified party of counsel selected by the indemnifying party, the indemnifying party will not be liable to such indemnified party under this section for any legal fees or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, unless: (i) the indemnified party shall have employed separate counsel in connection with the assumption of legal defenses in accordance with the proviso to the last sentence of subsection (e) of this section (it being understood, however, that the indemnifying party shall not be liable for the legal fees and expenses of more than one separate counsel, approved by Cleary Gull, if one or more of the Underwriters or their controlling persons are the indemnified parties); (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the indemnified party's notice to the indemnifying party of commencement of the action; or (iii) the indemnifying party has authorized the employment of counsel at the expense of the indemnifying party. (g) If the indemnification provided for in this section is unavailable to an indemnified party under subsection (a), (b), (c) or (d) hereof in respect of any Claim referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall, subject to the limitations hereinafter set forth, contribute to the amount paid or payable by such indemnified party as a result of such Claim: -33- (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Selling Stockholder and the Underwriters from the offering of the Shares; or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above, but also the relative fault of the Company, the Selling Stockholder and the Underwriters in connection with the statements or omissions which resulted in such Claim, as well as any other relevant equitable considerations. The relative benefits received by each of the Company, the Selling Stockholder and the Underwriters shall be deemed to be in such proportion so that the Underwriters are responsible for that portion represented by the percentage that the amount of the underwriting discounts and commissions per share appearing on the cover page of the Prospectus bears to the public offering price per share appearing thereon, and the Company, and the Selling Stockholder, are responsible for the remaining portion. The relative fault of the Company, the Selling Stockholder and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholder, or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the Claims referred to above shall be deemed to include, subject to the limitations set forth in subsections (e) and (f) of this section, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. (h) The Company, the Selling Stockholder and the Underwriters agree that it would not be just and equitable if contribution pursuant to this section were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method or allocation which does not take into account the equitable considerations referred to in subsection (f) of this section. Notwithstanding the other provisions of this section, no Underwriter shall be required to contribute any amount that is greater than the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this section are several in proportion to their respective underwriting commitments and not joint. (i) Notwithstanding any provision of this section 12 to the contrary, the liability of the Selling Stockholder arising under this section 12 shall not exceed the purchase price -34- received by the Selling Stockholder from the Underwriters for the Shares sold by the Selling Stockholder. SECTION 13. DEFAULT OF UNDERWRITERS. It shall be a condition to the obligations of each Underwriter to purchase the Shares in the manner as described herein, that, except as hereinafter provided in this section, each of the Underwriters shall purchase and pay for all the Shares agreed to be purchased by such Underwriter hereunder upon tender to the Representatives of all such Shares in accordance with the terms hereof. If any Underwriter or Underwriters default in their obligations to purchase Shares hereunder on either the First Closing Date or the Second Closing Date and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed ten percent (10%) of the total number of Shares which the Underwriters are obligated to purchase on such Closing Date, the Representatives may make arrangements for the purchase of such Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date the nondefaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Shares which such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of Shares with respect to which such default or defaults occur is greater than ten percent (10%) of the total number of Shares which the Underwriters are obligated to purchase on such Closing Date, and arrangements satisfactory to the Representatives for the purchase of such Shares by other persons are not made within thirty-six hours after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter, the Company, and the Selling Stockholder except to the extent provided in section 12 hereof. In the event that Shares to which a default relates are to be purchased by the nondefaulting Underwriters or by another party or parties, the Representatives shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, for not more than seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 14. EFFECTIVE DATE. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. Such execution and delivery shall include an executed copy of this Agreement sent by telecopier, facsimile transmission or other means of transmitting written documents. SECTION 15. TERMINATION. Without limiting the right to terminate this Agreement pursuant to any other provision hereof, this Agreement may be terminated by the Representatives prior to or on the First Closing Date and the over-allotment option from the Company and the Selling Stockholder referred to in section 6 hereof, if exercised, may be cancelled by the Representatives at any time prior to or on the Second Closing Date, if in the judgment of the Representatives, payment for and delivery of the Shares is rendered impracticable or inadvisable -35- because: (a) additional governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or the American Stock Exchange, or trading in securities generally shall have been suspended or materially limited on either such exchange or on The Nasdaq Stock Market or a general banking moratorium shall have been established by either federal or state authorities in New York, Florida, Illinois or Wisconsin; (b) any event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or which is not reflected in the Registration Statement but should be reflected therein to make the statements or information contained therein not misleading in any material respect; or (c) an outbreak or escalation of hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated to such extent, in the judgment of the Representatives, as to have a material adverse effect on the financial markets of the United States, or to make it impracticable or inadvisable to proceed with completion of the sale of and payment for the Shares as provided in this Agreement. Any termination pursuant to this Section shall be without liability on the part of any Underwriter to the Company or the Selling Stockholder, or on the part of the Company or the Selling Stockholder to any Underwriter, except for expenses to be paid by the Company and the Selling Stockholder pursuant to section 9 hereof or reimbursed by the Company pursuant to section 7(n) hereof and except as to indemnification to the extent provided in section 12 hereof. SECTION 16. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties, covenants and other statements of the Company, of its officers or directors, of the Selling Stockholder, and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, Selling Stockholder or the Company or any of its or their partners, officers, directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder. SECTION 17. NOTICES. All communications hereunder will be in writing and, if sent to the Representatives, will be mailed, delivered, telecopied (with receipt confirmed) or telegraphed and confirmed to Cleary Gull Reiland & McDevitt Inc. at 100 East Milwaukee Avenue, Milwaukee, WI 53202, Attention: John R. Peterson, Managing Director, with a copy to Timothy R.M. Bryant, Esq., McDermott, Will & Emery, 227 W. Monroe Street, Chicago, Illinois 60606 and if sent to the Company, will be mailed, delivered, telecopied (with receipt confirmed) or telegraphed and confirmed to the Company at Richardson Electronics, Attention: Edward J. -36- Richardson with a copy to Ross & Hardies, 150 N. Michigan Avenue, Suite 2500, Chicago, Illinois 60601 and, if sent to the Selling Stockholder, will be mailed, delivered, telecopied (with receipt confirmed) or telegraphed and confirmed, in care of the Company, with copies to Ross & Hardies, 150 N. Michigan Avenue, Suite 2500, Chicago, Illinois 60601;. SECTION 18. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors, personal representatives and assigns, and to the benefit of the officers and directors and controlling persons referred to in section 12 hereof and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 19. PARTIAL UNENFORCEABILITY. If any section, paragraph, clause or provision of this Agreement is for any reason determined to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other section, paragraph clause or provision hereof. SECTION 20. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Wisconsin without reference to conflict of law principles thereunder. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument, and shall be effective when at least one counterpart hereof shall have been executed by or on behalf of each party hereto. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company, the Selling Stockholder and the several Underwriters, including the Representatives, all in accordance with its terms. Very truly yours, RICHARDSON ELECTRONICS, LTD. By: ______________________________ _____________________, President THE SELLING STOCKHOLDER: By: ____________________________ Edward J. Richardson -37- -38- The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CLEARY GULL REILAND & McDEVITT INC. MCDONALD & COMPANY SECURITIES, INC. By: Cleary Gull Reiland & McDevitt Inc. Acting as Representatives of the several Underwriters (including themselves) identified in Schedule II annexed hereto. By: ______________________________________ Authorized Representative -39- RICHARDSON ELECTRONICS, LTD. SCHEDULE I NUMBER OF NUMBER OF FIRM SHARES OPTIONAL SHARES The Company __________________________ ________________________ Edward J. Richardson RICHARDSON ELECTRONICS, LTD. SCHEDULE II NUMBER OF FIRM SHARES NAME OF UNDERWRITER TO BE PURCHASED Cleary Gull Reiland & McDevitt Inc. . . . . . . . . . . . . . . . . . McDonald & Company Securities, Inc. . . . . . . . . . . . . . . . . . RICHARDSON ELECTRONICS, LTD. SCHEDULE III EX-5 3 EXHIBIT 5 Exhibit 5 March 31, 1998 Richardson Electronics, Ltd. 40W267 Keslinger Road LaFox, Illinois 60147 Re: Registration Statement on Form S-2 Ladies and Gentlemen: We refer to the Registration Statement on Form S-2 (the "Registration Statement") being filed by Richardson Electronics, Ltd., a Delaware corporation (the "Company"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), relating to the offer and sale of up to 3,450,000 shares of Common Stock, $0.05 par value per share (the "Common Stock") of the Company (including a 15% underwriter's over-allotment option) of which up to 1,725,000 will be sold by the Company and up to 1,725,000 will be sold by the Selling Stockholder. Each term used herein that is defined in the Registration Statement and not otherwise defined herein shall have the meaning specified in the Registration Statement. We are familiar with the proceedings to date with respect to the proposed offering of the Common Stock and have examined such records, documents and questions of law, and satisfied ourselves as to such matters of procedure, law and fact, as we have considered relevant and necessary as a basis for the opinion expressed in this letter. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to orginals of all documents submitted to us as certified copies or photocopies and the authenticity of the originals of such copied or photocopied documents. Based on the foregoing, and subject to the qualifications set forth hereinafter, we are of the opinion that: 1. The Company is duly incorporated and validly existing under the laws of the State of Delaware. Richardson Electronics, Ltd. March 31, 1998 Page 2 2. The Common Stock has been duly authorized and, when issued and sold by the Company in accordance with the Registration Statement, will be legally issued, fully paid and nonassessable shares of Common Stock of the Company. We express no opinion as to the application of the securities or blue sky laws of the various states to the issuance of the Common Stock. We hereby consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement and the related Prospectus, and to the filing of this opinion as an Exhibit to the Registration Statement. Very truly yours, ROSS & HARDIES By: /s/ David S. Guin ------------------------------ A Partner EX-23.(A) 4 EXHIBIT 23(A) Exhibit 23(a) Consent of Independent Auditors We consent to the reference to our firm under the captions "Selected Consolidated Financial Data" and "Experts" in the Registration Statement on Form S-2 and related Prospectus of Richardson Electronics Ltd. for the registration of 3,450,000 shares of its common stock and to the inclusion of and incorporation by reference therein of our report dated July 8, 1997 (except for "Earnings per Share" in Note A as to which the date is February 28, 1998) with respect to the consolidated financial statements of Richardson Electronics Ltd. incorporated by reference in its Annual Report (Form 10-K) for the year ended May 31, 1997 and the related schedule included therein, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Chicago, Illinois March 30, 1998 -----END PRIVACY-ENHANCED MESSAGE-----