-----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, QDL30QY8zr+MyZueGWTSW6sXSuWQVkrmWHUZUf9Bx+SfJQwnfV68iPSEgh+bYVjT 2/qAN3gwrH97v+HfiM4DqQ== 0001047469-99-012722.txt : 19990402 0001047469-99-012722.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012722 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BMC INDUSTRIES INC/MN/ CENTRAL INDEX KEY: 0000215310 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 410169210 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08467 FILM NUMBER: 99580865 BUSINESS ADDRESS: STREET 1: ONE MERIDIAN CROSSING STREET 2: SUITE 850 CITY: MINNEAPOLIS STATE: MN ZIP: 55423 BUSINESS PHONE: 6128516000 MAIL ADDRESS: STREET 1: ONE MERIDIAN CROSSING STREET 2: SUITE 850 CITY: MINNEAPOLIS STATE: MN ZIP: 55423 FORMER COMPANY: FORMER CONFORMED NAME: BUCKBEE MEARS CO/MN DATE OF NAME CHANGE: 19830517 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________ Commission File No.: 1-8467 BMC INDUSTRIES, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0169210 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) ONE MERIDIAN CROSSINGS, SUITE 850, MINNEAPOLIS, MN 55423 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612) 851-6000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock (its only voting stock) held by non-affiliates of the registrant, based on the closing sales price for the registrant's common stock as reported on the New York Stock Exchange on March 24, 1999, was approximately $119.5 million. As of March 24, 1999, there were 27,226,380 shares of common stock of the registrant outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts I , II and IV of this report on Form 10-K incorporate by reference information, to the extent specific pages are referred to herein, from the registrant's annual report to stockholders for the year ended December 31, 1998. Part III of this report on Form 10-K incorporates by reference information, to the extent specific sections are referred to herein, from the registrant's proxy statement for its annual meeting of stockholders to be held May 12, 1999. TABLE OF CONTENTS PART I. Item 1. Business..................................................... 1 Item 2. Properties................................................... 11 Item 3. Legal Proceedings............................................ 12 Item 4. Submission of Matters to a Vote of Security Holders.......... 12 Item 4A. Executive Officers of the Registrant......................... 12 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................... 13 Item 6. Selected Financial Data...................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 14 Item 8. Financial Statements and Supplementary Data.................. 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 14 PART III. Item 10. Directors and Executive Officers of the Registrant........... 14 Item 11. Executive Compensation....................................... 14 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 14 Item 13. Certain Relationships and Related Transactions............... 15 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................. 15 Signatures................................................... 19
PART I Certain statements contained in this report are forward-looking statements within in the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the Safe Harbor provisions created by the statutes. These statements relate to non-historical information and include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties - such as those discussed in the section entitled "Factors That May Affect Future Results" below - - that could cause actual results to differ materially from those expressed or forecasted. You should not rely on these forward-looking statements, which reflect only our opinion as of the date of this 10-K. These factors also should not be considered an exhaustive list. We do not undertake the responsibility to update any forward-looking statement that may be made from time to time by us or on our behalf. ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS. BMC Industries, Inc., a Minnesota corporation ("BMC", "we" "our", or "us"), has two operating segments that manufacture and sell a variety of products: Precision Imaged Products ("PIP") and Optical Products. PIP is comprised of two units, Mask Operations and Buckbee-Mears St. Paul ("BMSP"), which 1 share process manufacturing technology and one manufacturing facility. Mask Operations, the segment's principal business, produces aperture masks, an integral component of color televisions and computer monitors. BMSP is the leading domestic producer of precision photo-etched metal and electroformed parts. Optical Products, through our Vision-Ease subsidiaries, designs, manufactures and distributes polycarbonate, glass and hard-resin plastic ophthalmic lenses. In May 1998, Vision-Ease acquired the Orcolite polycarbonate and hard-resin plastic lens ophthalmic manufacturing and distribution operations of Monsanto Company. This acquisition solidified Vision-Ease's position as the leading designer, manufacturer and distributor of ophthalmic lenses made from polycarbonate material, which is the world's fastest growing ophthalmic lens material. Following the acquisition, we dedicated substantial resources to the integration of the former Orcolite operations into those of Vision-Ease. We merged technologies, eliminated redundant distribution systems, reorganized sales and marketing and allocated manufacturing responsibilities by product type. We also made significant progress on new product development during the year, particularly in the higher margin premium products category, such as the Tegra-TM- high performance polycarbonate product line. During the fourth quarter of 1998, we installed our new proprietary lamination system with retail customers for testing. This system is designed to produce finished multi-focal polycarbonate lenses on-site through a simple and quick procedure. In addition, we completed the move of our low-cost Jakarta, Indonesia glass manufacturing operations to a new, larger facility and began sourcing hard-resin plastic lenses through a low-cost manufacturer in Mexico. Our Mask Operations experienced difficulties during 1998 due to a combination of market forces and internal shortcomings. The 1997 start-up of two new lines, one for television masks and one for computer monitor masks, at our Cortland, New York facility caused disruptions to existing operations at the facility. These disruptions, which negatively impacted yields on existing lines, continued into 1998. At the same time, we took longer than expected to start up the computer monitor mask production line and we built a significant amount of inventory due to missed customer commitments and internal issues. While we were addressing these internal issues, the aperture mask market experienced an imbalance of mask supply and demand, which resulted in significant price declines in aperture masks, particularly computer monitor masks. The combination of lower prices and lower yields and higher expenses associated with product line start-ups forced us to make major expense reductions. The imbalance of mask supply and demand lead to the shutdown of three manufacturing lines at our Cortland facility, two of which remained idle the entire second half of 1998. We restarted one television mask line in the fourth quarter of 1998. We restarted the computer monitor mask line in the first quarter of 1999. During the shutdown in 1998, we reduced mask inventories by over $16 million and established systems to minimize inventory in the future. We also incurred a one-time charge of $26.7 million for the write-down of certain PIP fixed assets, primarily related to computer monitor masks. Finally, in February 1999, we filed an anti-dumping petition against Japanese and South Korean mask manufacturers for pricing certain masks at levels we believe are below cost. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. Financial information about our operating segments for the three most recent fiscal years is contained on pages 32 - 34 of our annual report to stockholders for the year ended December 31, 1998, and is incorporated herein by reference. (c) NARRATIVE DESCRIPTION OF BUSINESS. PRECISION IMAGED PRODUCTS PRODUCTS AND MARKETING. Mask Operations has manufacturing operations in Cortland, New York and Mullheim, Germany and an inspection facility in Tatabanya, Hungary. BMSP has a manufacturing 2 facility in St. Paul, Minnesota and shares manufacturing operations with Mask Operations at the Mullheim facility. The Cortland and Mullheim facilities primarily manufacture aperture masks. The St. Paul facility primarily manufactures precision photo-etched metal parts, specialty printed circuits, precision electroformed components and precision etched and filled glass products. BMSP uses a continuous precision parts etching line at our Mullheim facility to supply semi-finished precision photo-etched parts, including those used in lead frames. Four customers each accounted for more than 10% of PIP's 1998 total revenues, three of which also contributed more than 10% of our total consolidated revenues for 1998. Thomson, S.A. of France, including its U.S. based operations, accounted for approximately 17% of our 1998 total revenues. Thomson produces televisions in North America and Europe under various trademarks, including RCA and GE. Samsung Display Devices Co., Ltd., of South Korea, accounted for approximately 15% of our 1998 total revenues. Philips Components B.V. of the Netherlands accounted for approximately 10% of our 1998 total revenues. Matsushita of Japan accounted for less than 10% of our 1998 total revenues, but did account for approximately 11% of PIP's 1998 total revenues. Aperture masks are photo-chemically etched fine screen grids found in color televisions and computer monitors and consist of thousands of precise, conically shaped holes designed to focus the electron beam on the proper phosphor color stripe to produce a crisp image. Aperture masks are made from steel or invar, a nickel and iron alloy, and range in size from 6-inch to 40-inch diagonal dimensions. We manufacture aperture masks ranging from 14-inch to 36-inch diagonal dimensions. Our facilities employ an automated continuous photochemical etching process that we originally developed. We sell aperture masks directly to color television and computer monitor tube manufacturers in North America, Europe, India and Asia through an in-house sales staff. Sales of aperture masks comprised 54%, 61% and 60% of our consolidated total revenues in 1998, 1997 and 1996, respectively. In 1997, we established a dedicated, low-cost inspection facility in Tatabanya to inspect computer monitor masks manufactured in Mullheim. This facility allows us to provide quick response to the Mullheim facility's Asian and European customers. During 1998, we began transferring an additional portion of our mask inspection from the Mullheim and Cortland facilities to Tatabanya. We believe these transfers will result in increased cost savings in 1999 and beyond. Since the start-up of our first monitor mask manufacturing line at Mullheim in 1995, we have dedicated significant resources to increasing monitor mask sales and obtaining customer qualifications. Despite the shut-down of our monitor mask line at Cortland during the second half of 1998, our concentrated efforts resulted in monitor masks sales of $36.7 million during 1998, a 79.2% increase over 1997 sales. In addition, we were qualified on several additional 14 inch to 19 inch monitor masks in 1998. We restarted our monitor mask line at Cortland during the first quarter of 1999 and we currently expect to fill this line over the course of 1999 through growth in the monitor mask market and additional product qualifications. We continue to dedicate significant resources to the development of automation systems for the back end of our manufacturing process. We added automated material handling systems to two of Mask Operations' eight production lines during 1998, which followed the implementation of three systems in 1997. We also made substantial progress in developing an automatic inspection system, which we tested in concept during 1998 and have scheduled for implementation in 1999. We are engaged in ongoing efforts to develop the manufacturing and technical expertise to produce a variety of new products, including high definition television ("HDTV"), multimedia and pure flat mask products. We have delivered limited quantities of these masks to customers engaged in these segments. We believe these efforts position us well to realize the future sales and product opportunities that are expected to develop in these segments. 3 BMSP manufactures precision photo-etched metal and electroformed components. We sell these components through in-house sales personnel and manufacturer representatives for use in the electrical, automotive, filtration, medical and semiconductor industries. BMSP's products currently include switch contacts, ignition components, medical device components, reusable filtration devices, precision sorting sieves and etched lead frames. We sell our precision photo-etched metal and electroformed parts to approximately 200 industrial users. During 1998, BMSP continued our strategy of leveraging BMSP's high-volume precision capabilities to attract large end-product manufacturers for joint research and product development projects. We continued to make progress with partners in the automotive and medical industries in 1998. BMSP also achieved ISO 9002 certification in 1998, which is a critical prerequisite for supplying a broad base of customers. INTELLECTUAL PROPERTY. We have a number of patents which are important to the success of our PIP operations. These patents range in their expiration dates from 1999 to 2014. We believe the loss of any single patent would not have a material adverse effect on our business as a whole. We believe that improvement of existing products and processes and a reliance on trade secrets and unpatented proprietary know-how are as important as patent protection in establishing and maintaining our competitive position. At the same time, we continue to seek patent protection for our products and processes on a selective basis. There can be no assurance, however, that any issued patents will provide substantial protection or commercial value. We require our consultants and employees to agree in writing to maintain the confidentiality of our information and, within certain limits, to assign to us any inventions, and any patent or other intellectual property rights, relating to our business. COMPETITION. The aperture mask and precision etched metal and electroformed parts industries are intensely competitive, with no one competitor dominating the market. We compete principally on the basis of price, product quality and product availability. We also attempt to build preferred supplier and research and development arrangements with customers to best meet their current and new product requirements. In order to remain competitive on pricing, we implemented substantial cost reduction measures in 1998. There can be no assurance, however, that these efforts will be successful or that our competitors will not attract our customer base through new products or processes that are more effective or less expensive than our products and processes. In addition, there can be no assurance that customers will not vertically integrate to meet their component requirements through captive supply. We are one of only five independent mask manufacturers in the world and the only independent mask manufacturer with production facilities in the United States. Our primary mask competitors operate in Japan. In addition, several color picture tube manufacturers operate captive mask production facilities and two state directed ventures operate in China. Independent mask manufacturers supply approximately 85% of the global mask market, with BMC among the largest at an estimated 16% of the combined television and monitor mask market share. We supplied approximately 21% of the worldwide demand for television masks and 6% of the demand for monitor masks in 1998. Many producers compete in the market for precision photo-etched and electroformed metal parts. There is no clear market share leader, however, in this fragmented industry. With respect to etched lead frames, we compete against established producers mostly located in Asia. Some of the manufacturers also produce aperture masks. We are working to improve our volume manufacturing capability and to reduce costs further in order to compete against these lead frame manufacturers, many of whom have established customer bases and greater financial resources. There can be no assurance, however, that we will achieve the manufacturing capabilities and cost reductions necessary to compete in this market. SUPPLIES. Each of our PIP operations has available multiple sources of raw materials needed to manufacture our products. Our Cortland facility imports all of its steel and invar requirements from Japan and Germany. Our Mullheim facility obtains a majority of its steel and invar requirements from 4 Germany, but obtains a portion of its requirements from Japan. Importation of steel into the United States is subject to certain restrictions imposed by U.S. federal trade legislation and regulations, but we have successfully challenged these restrictions in the past, including obtaining a separate harmonized tariff classification for the steel used in aperture masks. We do not anticipate difficulty in obtaining steel or any other raw materials. Our inability to obtain these materials, however, could have a material adverse effect on production at certain of our manufacturing locations. BACKLOG. As of December 31, 1998, the firm backlog of PIP sales orders was $20.0 million, compared with $22.4 million as of December 31, 1997. We expect that all of the December 31, 1998 backlog orders will be filled within the current fiscal year. ENVIRONMENTAL. The chemical etching of metals, which is performed by all PIP operations, requires the utilization of chemical substances that must be handled in accordance with federal, state, local and foreign environmental and safety laws and regulations. The etching processes also generate wastewater and wastes, some of which are classified as hazardous under applicable environmental laws and regulations. The wastewater is treated using on-site wastewater treatment systems. We employ systems for either disposing of wastes in accordance with applicable laws or regulations or recycling the chemicals we use through the manufacturing process. Environmental and other government agencies monitor the wastes and the wastewater treatment systems to ensure compliance with applicable standards. Environmental regulations place responsibility for waste on the generator even after proper disposal. There can be no assurance, therefore, that we will not incur future liability for waste disposal despite our best efforts to dispose of all wastes properly. As of March 24, 1999, we were involved in a total of eight (8) sites where environmental investigations were occurring and final settlement had not been reached, of which two (2) relate to discontinued operations, four (4) relate to PIP operations and two (2) relate to Optical Products operations. During 1998, we made significant progress toward resolution of a lawsuit relating to a site in Cortland, New York. In connection with this site, the Environmental Protection Agency ("EPA") initially identified five potentially responsible parties ("PRPs") at the site and ordered these PRPs to address the site. These initial PRPs filed suit in U.S. District Court against BMC and 16 other parties seeking contribution for our alleged share of contamination at the site. During the third quarter of 1998, we signed a Consent Decree with the EPA and the other PRPs for remediation of the site. Upon approval from the U.S. District Court, we anticipate that the Consent Decree will result in the dismissal of the initial PRP's lawsuit and that we will be relieved of liability for past PRP costs. To the extent possible with the amount of information available at this time, we have evaluated our responsibility for costs and related liability with respect to the sites at which an investigation is ongoing or threatened, have recorded accruals for our estimated liability in accordance with generally accepted accounting principles, and are of the opinion that our liability with respect to these sites should not have a material adverse effect on our financial position or the results of our operations. In arriving at this conclusion, we have considered, among other things, the payments that have been made with respect to the sites in the past; the factors, such as volume and relative toxicity, ordinarily applied to allocated defense and remedial costs at such sites; the probable costs to be paid by the other potentially responsible parties; total projected remedial costs for a site, if known; existing technology; and the currently enacted laws and regulations. A portion of the costs and related liability for certain sites has been or will be covered by available insurance. We estimate that PIP incurred approximately $7.2 million in 1998 and $5.8 million in 1997 on expenditures, including capital expenditures, related to efforts to comply with applicable laws and regulations regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. In addition, we estimate that PIP will spend approximately $6.1 million in 1999 and $5.0 million in 2000 on capital expenditures for environmental control facilities. 5 SEASONALITY. Our revenues and earnings from PIP operations are generally lower in the first and third quarters due to maintenance shutdowns at the Cortland and Mullheim facilities. The seasonality of end products in this segment, televisions and computer monitors, also affects our annual earnings pattern. EMPLOYEES. As of December 31, 1998, PIP had approximately 1,648 employees in the United States and Europe. The majority of these employees are not represented by labor unions. Labor relations are considered to be good and there have been no significant labor disputes in the past ten years. OPTICAL PRODUCTS PRODUCTS AND MARKETING. Optical Products, operating under the Vision-Ease trade name, designs, manufactures and distributes ophthalmic lenses. The group's headquarters is located in Brooklyn Park, Minnesota. We have lens manufacturing operations in Azusa, California; Ramsey, Minnesota; St. Cloud, Minnesota; and Jakarta, Indonesia. We also have 15 lens distribution centers in the U.S., Canada and England. We manufacture ophthalmic lenses from three principal materials: polycarbonate, glass and hard-resin plastic. Within each of these lens materials, we offer single-vision lenses, which have a constant corrective power at all points; multi-focal lenses, which have two or more distinct areas of different corrective power; progressive lenses, which are a type of multi-focal lenses with a continuous gradient of different corrective power without the line or "jump" generally associated with other multi-focal lenses; and non-prescription lenses that are used primarily for sunglasses. We also produce these lenses with anti-reflective and scratch-resistant coatings to meet increasing demand for value-added products. We sell semi-finished lenses to independent wholesale optical laboratories or retail outlets with on-site laboratories, which then finish the lens by grinding and polishing the inside surface of the lens according to the prescription provided by the optometrist or ophthalmologist. After processing, the lens is edged and inserted into a frame by either the wholesale laboratory or a retail optical dispenser. We sell finished single-vision lenses to wholesale and retail laboratories. These finished lenses are ready to be edged and inserted into the frame without laboratory surfacing. Polycarbonate is the world's fastest growing lens material. Polycarbonate lenses account for the majority of our lens sales. The polycarbonate lens market in the United States grew at a rate in excess of 20% in 1998 and in excess of 15% on a compound basis for the last 15 years. With the acquisition of the Orcolite division of Monsanto Company in May 1998, we solidified our position as the leading supplier of polycarbonate lenses. During 1998, we also completed the move from our former polycarbonate manufacturing operation in Brooklyn Center, Minnesota to our new $10 million manufacturing facility in Ramsey. We divide manufacturing responsibility for finished and semi-finished single-vision and semi-finished multi-focal polycarbonate lenses, including progressives, between the former Orcolite facility in Azusa and our new Ramsey facility. We also use the Ramsey facility for centralized distribution and research and development. We continue to experience diminishing sales of lenses made from glass as the lens market continues to move toward polycarbonate and hard-resin plastic lenses. We produce semi-finished glass multi-focal and finished and semi-finished single-vision lenses at our St. Cloud and Jakarta operations. During 1998, we completed the move of the Jakarta operations to a new facility outside Jakarta. This facility is operated through a majority-owned joint venture and provides a captive supply of low-cost glass lenses. We manufacture hard-resin plastic lenses in both standard plastic lenses and high-index plastic lenses. We produce a portion of our hard-resin plastic lens requirements at our St. Cloud and Azusa facilities. We obtain the remainder of our hard-resin plastic lens requirements through supply agreements with low cost manufacturers in Mexico and Southeast Asia. We have commitments to buy approximately $17.0 6 million of lenses from the Southeast Asian manufacturer from January 1999 through June 2000. Under our supply agreement with the Mexican manufacturer, we supply the equipment and materials needed to produce our ongoing product requirements. Our Mexican partner supplies the facility and employees. These sourcing arrangements allow us to focus manufacturing capabilities on higher-margin products while offering a complete line of lens products at cost competitive prices. We invest significant resources in process and product research and development, particularly in polycarbonate lens development and other higher margin products. These investments have resulted in the successful introduction of several new products. In 1996 and 1997, we introduced a broad line of VersaLite-Registered Trademark- thin and light lenses; VersaLite-Registered Trademark- SunRx-Registered Trademark-, a premium glare reducing sun lens; a durable, abrasion-resistant OnGuard-Registered Trademark- coating; progressive SunRx-Registered Trademark- lenses; and a premium line of polycarbonate lenses bearing the Tegra-TM- trade name. Tegra-TM- lenses have an advanced aspheric design, super hard scratch-resistant coating and other distinctive features. During 1998, we expanded the Tegra-TM- product line into single-vision products and launched a new progressive bifocal lens, under the Outlook-TM- trade name, which was designed specifically for polycarbonate material. This lens was designed to accommodate a broader range of frame types than any other lens on the market. After several years of development, we also initiated customer testing of our new lamination system during the fourth quarter of 1998. This system uses proprietary technology to produce quality, thin, multi-focal lenses equivalent to those produced by a laboratory. We intend to offer the lamination system to retailers and dispensers who want to produce finished multi-focal polycarbonate lenses on a rapid service and on-site basis. We also acquired in-process research and development through the Orcolite acquisition. We intend to continue making significant investments in product and process design and development for all lens materials. We market our lenses to more than 750 wholesalers and retailers in the United States and to more than 60 wholesalers and retailers internationally. No single customer accounted for more than 10% of our total revenues on a consolidated basis in 1998, but one customer, Precision LensCrafters, accounted for approximately 13% of Vision-Ease's total revenues in 1998 and 10% in 1997. Precision LensCrafters operates retail chain outlets throughout the United States and is headquartered in Cincinnati, Ohio. While assimilating the former Orcolite operations into our Vision-Ease operations, we realigned, and added to, our sales and marketing team. This sales force is organized according to key accounts and market segments. Building on Orcolite's international polycarbonate market penetration, we added resources dedicated solely to international sales and marketing. We also significantly increased marketing efforts toward our branded products, as well as resources dedicated to supporting and building relationships at the dispenser level. We believe that positive relationships with these professionals are necessary to increase sales of our branded products, such as Tegra-TM-. We believe these focused efforts will be successful based on 130% growth in SunRx-Registered Trademark- polarized polycarbonate lens sales. INTELLECTUAL PROPERTY. We have several patents protecting certain of the products and manufacturing processes of our Vision-Ease operations. These patents have expiration dates ranging from 1999 to 2015. We believe the loss of any single patent would not have a material adverse effect on our business as a whole. We believe that improvement of existing products and processes, the development of new lens products and a reliance on trade secrets and unpatented proprietary know-how are as important as patent protection in establishing and maintaining our competitive position. At the same time, we continue to seek patent protection for our products and processes on a selective basis. There can be no assurance, however, that any issued patents will provide substantial protection or commercial value. We require our consultants and employees to agree in writing to maintain the confidentiality of our information and, within certain limits, to assign to us any inventions, and any patent or other intellectual property rights, relating to our business. We also have several trademarks, including trademarks obtained through the Orcolite acquisition. As part of our marketing strategy to build sales of branded products, we have increased our use of trademarks. Although there are no assurances as to the strength or scope of our 7 trademarks, we believe that these trademarks have been and will be useful in developing and protecting market recognition for our products. COMPETITION. The ophthalmic lens industry is highly competitive. We compete principally on the basis of product offerings, pricing, product quality and customer service. Vision-Ease is the third largest ophthalmic lens manufacturer and distributor in the United States, with a substantially smaller share of the global lens market. Our largest competitors are Essilor International and Sola International Inc., who have a combined share of approximately 70% of the ophthalmic lens market in the United States and 50% of the world-wide lens market. Many of our competitors, particularly Essilor and Sola, have greater financial resources than Vision-Ease to fund research, development, capital expenditures. Some competitors also have vertically integrated wholesale laboratories. In order to successfully compete in this market, we employ a strategy of combined marketing, product development, customer service and cost reduction efforts. Through the establishment of low-cost operations and sourcing arrangements in Southeast Asia and Mexico, we have maintained competitiveness on low-margin lens products. At the same time, we have increased the breadth of product offerings, including value-added lenses, to meet the total lens requirements of our customers. Building upon our leadership position in polycarbonate lenses, we have dedicated a substantial portion of our process and product development efforts toward product offerings in this fast growing market. There can be no assurance, however, that we will succeed in developing competitive new products, leveraging our polycarbonate strength into growth in other lens materials and product offerings, maintaining our polycarbonate leadership position or converting brand equity into increased sales. SUPPLIES. Vision-Ease has available multiple sources of the raw materials needed to manufacture all of its products. We obtain the majority of our hard-resin plastic lenses, however, through sourcing arrangements in Southeast Asia and Mexico. Although we have limited in-house manufacturing capabilities for hard-resin plastic lenses, we do not have alternative sources for large volumes of these lenses. In addition, the importation of raw materials and final products into and out of these foreign territories is subject to certain trade restrictions imposed by foreign and United States trade regulations that could result in the disruption of supply. Although we do not anticipate any disruption to our supply of hard-resin plastic lenses, our inability to obtain these or other materials could have a material adverse effect on Vision-Ease's operations. BACKLOG AND INVENTORY. Due to the importance in the ophthalmic lens industry of rapid turnaround time from order to shipment, the backlog of sales orders is not material. We must maintain a significant amount of inventory, however, in order to satisfy the rapid response time and complete product offerings across glass, hard resin plastic and polycarbonate demanded by our customers. ENVIRONMENTAL. As part of our lens manufacturing process, we use hazardous chemical substances that must be handled in accordance with applicable federal, state, local and foreign environmental and safety laws and regulations. The lens manufacturing processes also generate wastewater and wastes, some of which are classified as hazardous under applicable environmental laws and regulations. We employ systems for either disposing of wastes in accordance with applicable laws and regulations or recycling the chemicals we use through the manufacturing process. Environmental and other government agencies monitor the wastes and the wastewater treatment systems to assure compliance with applicable standards. Environmental regulations place responsibility for waste on the generator even after proper disposal. There can be no assurance, therefore, that we will not incur future liability for waste disposal despite our best efforts to dispose of all wastes properly. As of March 24, 1999, we were involved in a total of eight (8) sites where environmental investigations were occurring and final settlement had not been reach, of which two (2) relate to discontinued operations, four (4) relate to PIP operations and two (2) relate to Optical Products operations. 8 Included within the sites listed above is an ongoing investigation at our former Ft. Lauderdale, Florida hard-resin plastic lens manufacturing facility. We are conducting a soil and groundwater contamination assessment at this site under a Consent Order with the Florida Department of Environmental Protection ("DEP"). We have submitted several rounds of test results to the DEP. The DEP has requested additional testing to complete the assessment, but we have been unable to perform these tests due to restricted access by the property owner. The DEP recently issued an order to the property owner requiring his cooperation in granting access for further testing. Although the contamination assessment is not complete, our consultant has indicated that it is reasonably probable that some type of remediation or containment will be required and has provided an approximate cost range for that remediation. Based on the consultant's estimates and in accordance with generally accepted accounting principles, we have accrued our best estimate of potential remediation costs. Our investigation indicates that the source of any contamination predates our ownership and operation of this facility. We, therefore, intend to seek indemnification for site costs from the former owner and operator of the site. To the extent possible with the amount of information available at this time, we have evaluated our responsibility for costs and related liability with respect to the sites at which an investigation is ongoing or threatened, have recorded accruals for our estimated liability in accordance with generally accepted accounting principles, and are of the opinion that our liability with respect to these sites should not have a material adverse effect on the financial position or the results of our operations. In arriving at this conclusion, we have considered, among other things, the payments that have been made with respect to the sites in the past; the factors, such as volume and relative toxicity, ordinarily applied to allocated defense and remedial costs at such sites; the probable costs to be paid by the other potentially responsible parties; total projected remedial costs for a site, if known; existing technology; and the currently enacted laws and regulations. A portion of the costs and related liability for certain sites has been or will be covered by available insurance. We estimate that Vision-Ease incurred approximately $0.4 million in 1998 and $0.2 million in 1997 on expenditures, including capital expenditures, related to efforts to comply with applicable laws and regulations regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. In addition, we estimate that Vision-Ease will make approximately $0.4 million in capital expenditures for environmental control facilities during each of 1999 and 2000. SEASONALITY. Our Optical Products group experiences generally lower earnings in the third quarter due to maintenance shutdowns at our lens manufacturing facilities. Earnings are also lower in the first quarter due to the seasonality of eyewear, the end product of our lenses. EMPLOYEES. As of December 31, 1998, Optical Products had approximately 1,493 employees in the United States, Europe and Indonesia. None of these employees are represented by labor unions. Labor relations are considered to be good. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. Financial information about our foreign and domestic and export sales for the three most recent fiscal years is contained on page 34 of our annual report to stockholders for the year ended December 31, 1998, and is incorporated herein by reference. FACTORS THAT MAY AFFECT FUTURE RESULTS NEW PRODUCT DEVELOPMENT. Each of our operations invest significantly in new product development. Vision-Ease has invested substantial resources toward new lens offerings in all lens materials: polycarbonate, glass and hard-resin plastic. These efforts have resulted in many new products that have experienced success to date, including our Tegra-TM- high-performance polycarbonate product line and 9 progressive no-line lenses. We are also testing our new lamination system, which we expect to launch to retail chains over the course of 1999. Our BMSP operation continues to focus efforts toward building research and development relationships with large, high volume end product manufacturers. In addition, BMSP is continuing efforts to improve lead frame production capabilities and attempts to gain sales within this market. Finally, Mask Operations continues to dedicate resources to new product qualifications, particularly for computer monitor masks. We expect these efforts to facilitate our development of HDTV and multi-media masks. We must develop these and other new products and technologies at competitive prices and quality in order to compete in each of the markets we serve. There are no assurances, however, that we will succeed in these efforts or that competitors will not develop better quality and less expense products. LITIGATION. We are subject to the normal risks of litigation that affect business operations, including environmental liability for past or present environmental practices, product liability, workers' compensation and personal injury. Although we do not anticipate that any existing claims will result in material liability, there are no assurances that we will not incur such liability in the future. START-UP/RAMP-UP OF PRODUCTION LINES. Our expectations for future results are based on assumptions regarding the financial impact of planned operation of our Mask Operations production lines and continued improvement in yields and sales from these lines. During 1998, we shut-down three of these lines at our Cortland facility due in part to an imbalance of supply and demand. Although we have restarted two of these lines, we incurred significant start-up and ramp-up expenses. If we experience further shutdowns at the Cortland facility, or any of our other production facilities, we will incur lower yields and higher costs, thereby adversely affecting our financial results. PRICING AND MARGINS. Many market and economic factors have adversely affected, and could continue to affect, our financial performance and projected future results. Since each of our operations supply components to manufacturers of end products, imbalances in supply and demand at all levels of product distribution could have, and in some instances have had, a significant impact on our pricing and margins. Recent expansions by aperture mask manufacturers helped create this type of imbalance in the mask market, which resulted in extreme pricing pressures. Margins are affected by the need to develop new technology. Our ability to meet the market demand for new products in a timely fashion requires the investment of resources, which, coupled with intense pricing pressures, decreases our margins. Although we have taken major steps to reduce our fixed and variable costs in all of our operations, there can be no assurance that these efforts will be sufficient to offset further pricing pressures. SOURCES OF SUPPLY. The primary component of a mask is steel. The primary raw materials used to manufacture optical products are glass blanks and polycarbonate and plastic resins. Significant changes in the markets for these materials, including pricing and availability, could have a material adverse impact on our financial results. In addition, since Optical Products obtains the majority of its hard-resin plastic and glass lenses from foreign supply arrangements and operations, factors affecting these suppliers' ability to meet our demand for these products could adversely impact our results of operation. FOREIGN CURRENCY. We transact business in currencies other than U.S. dollars. The primary currencies used include the German mark, the Euro, Japanese yen, British pound, Canadian dollar, Hungarian forint and Indonesian rupiah. Our primary competitors in the mask market are located in Japan. Changes in the currency exchange rates between the U.S. dollar and the German mark compared to the Japanese yen affect Mask Operations' pricing competitiveness. Although we take steps to reduce this risk through cross-currency swaps and other hedging transactions, we are subject to the risk of adverse fluctuations in currency exchange rates, which may result, and have resulted, in pricing pressures and reductions in profitability due to currency conversion or translation. 10 INTERNATIONAL MARKETS. Mask Operations has a manufacturing facility located in Mullheim, Germany and an aperture mask inspection facility in Tatabanya, Hungary. Vision-Ease has supply agreements with hard-resin plastic lens manufacturers in Southeast Asia and Mexico and a joint venture in Indonesia for glass lens manufacturing. In addition, we have many international customers and are dedicating significant resources to increase business with international customers at all of our operations. Our international operations and sales could be adversely affected by governmental regulations, political instability, economic changes or instability and competitive conditions in other countries in which, and with which, we conduct business. The economic difficulty experienced in Asia during the past two years is an example of international conditions that could adversely affect financial performance. Similar downturns in other areas of the world, such as South America, could affect our operations without advance warning. YEAR 2000. We have developed a four-phase approach to identify and remediate our information technology and non-information technology systems that could be affected by the technical problems associated with the year 2000. We believe that these efforts will result in a smooth transition to the year 2000 without any significant operational problems for our computer systems. In addition, we are working with third parties, including suppliers, to identify and ensure their year 2000 readiness. There are no assurances, however, that we or any third parties will not incur unforeseen difficulties or the failure of systems in connection with the year 2000 issue. The failure of these systems could have a material adverse affect on our business. ITEM 2. PROPERTIES The following table sets forth certain information regarding our principal production facilities:
APPROXIMATE SQUARE LOCATION PRINCIPAL USE FEET OF SPACE - -------- ------------- ------------- OWNED: Ramsey, MN Optical Products 150,000 - Manufacturing of polycarbonate lenses, centralized distribution and research and development St. Cloud, MN Optical Products 94,500 - Manufacturing of glass and hard- resin plastic lenses Jakarta, Indonesia Optical Products 66,000 - Manufacturing of glass lenses Mullheim, Germany Precision Imaged Products 170,000 - Manufacturing of aperture masks and precision photo-etched metal products Cortland, NY Precision Imaged Products 363,000 - Manufacturing of aperture masks Tatabanya, Hungary Precision Imaged Products 51,000 - Inspection of aperture masks Leased: St. Paul, MN Precision Imaged Products 131,000 - Manufacturing of precision photo- etched metal and electroformed parts Azusa, CA Optical Products 120,000 - Manufacturing of polycarbonate and hard-resin plastic lenses and distribution
11 We lease approximately 11,000 square feet in suburban Minneapolis, Minnesota for our corporate headquarters. We lease approximately 8,000 square feet in Brooklyn Park, Minnesota for our Vision-Ease headquarters. Our lease in St. Paul expires in February 2004. We believe our existing facilities are sufficient to meet our current and foreseeable production and other needs. In addition to the properties listed above, we operate other smaller domestic and foreign warehouse, distribution and administrative offices. For additional information concerning our leased properties, see Note 8 to Notes to Consolidated Financial Statements on page 27 of our annual report to stockholders for the year ended December 31, 1998. ITEM 3. LEGAL PROCEEDINGS With regard to certain environmental and other legal matters, see Item 1(c) "Narrative Description of Business - "Precision Imaged Products - Environmental" and "Optical Products - Environmental" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." Other than as noted above, there are no material pending or threatened legal, governmental, administrative or other proceedings to which we are a party or of which any of our property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by the report. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers, their ages, the year first elected or appointed as an executive officer and the offices held as of March 24, 1999 are as follows:
DATE FIRST ELECTED OR APPOINTED AS NAME (AGE) AN EXECUTIVE OFFICER TITLE - ---------- -------------------- ----- Paul B. Burke (43) August 1985 Chairman of the Board, President and Chief Executive Officer Jon A. Dobson (32) December 1997 General Counsel and Secretary William A. Guernsey (47) November 1997 Senior Vice President, Corporate Development Jeffrey J. Hattara (42) January 1998 Vice President, Finance and Administration and Chief Financial Officer Steven E. Opdahl (35) May 1998 Corporate Controller
There are no family relationships between or among any of the executive officers. Executive officers are elected by the Board of Directors for one-year terms, commencing with their election at the first meeting of the Board of Directors immediately following the annual meeting of stockholders and continuing until the next such meeting of the Board of Directors. 12 Except as indicated below, the executive officers have not changed their principal occupations or employment during the past five years. Mr. Burke is also a director of BMC. Mr. Burke joined BMC as Associated General Counsel in June 1983, and became Vice President, Secretary and General Counsel in August 1985. In November 1987, he was appointed Vice President, Ft. Lauderdale Operations of the Vision-Ease division and in May 1989, he was appointed President of Vision-Ease. In May 1991, Mr. Burke was elected President and Chief Operating Officer of BMC, and in July 1991, he became President and Chief Executive Officer. Mr. Burke was appointed Chairman of the Board in May 1995. Mr. Dobson joined BMC in April 1995 as Director of Legal Services. In December 1997, he was appointed General Counsel and Secretary. Prior to joining BMC, Mr. Dobson was an associate with Lindquist & Vennum PLLP, a Minneapolis law firm, practicing exclusively in corporate and securities law. Mr. Guernsey joined BMC in July 1992 as President, Mask Operations. He was appointed Senior Vice President, Corporate Development in November 1997. Prior to joining BMC, Mr. Guernsey held management positions with several manufacturing companies, most recently as Vice President and General Manager of Allis Mineral Systems, a U.S. division of Swedish based Svedala Industries. Mr. Hattara joined BMC in January 1998 as Vice President, Finance and Administration and Chief Financial Officer. From September 1978 to January 1998, he served in several management positions at USG Corporation, most recently as Director of Finance, USG International, Inc. Mr. Opdahl joined BMC in May 1998 as Corporate Controller. From March 1997 to March 1998, he served as Vice President, Finance and Chief Financial Officer of Famous Dave's of America, Inc. From May 1994 to March 1997, Mr. Opdahl served in a variety of financial management positions with Honeywell, Inc. From June 1986 to April 1994, Mr. Opdahl worked in several audit and business advisory positions with Arthur Andersen LLP. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS "Price Range of Common Stock" on page 35 of our annual report to stockholders for the year ended December 31, 1998 is incorporated herein by reference. The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements, financial condition and subject to certain restrictions in the Company's revolving domestic credit facility. ITEM 6. SELECTED FINANCIAL DATA "Historical Financial Summary" on page 10 of our annual report to stockholders for the year ended December 31, 1998 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis" on Pages 11 - 18 of our annual report to stockholders for the year ended December 31, 1998 is incorporated herein by reference. 13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK "Management's Discussion and Analysis" on pages 15 - 16 of our annual report to stockholders for the year ended December 31, 1998 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements and related notes on pages 19 - 34 and the Report of our Independent Auditors on page 35 of our annual report to stockholders for the year ended December 31, 1998 are incorporated herein by reference, as is the unaudited information under the caption "Selected Quarterly Data" on page 36. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) DIRECTORS OF THE REGISTRANT The information under the caption "Election of Directors" on pages 2-5 of our proxy statement for the annual meeting of stockholders to be held May 12, 1999 is incorporated herein by reference. (b) EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning our executive officers is included in this report under Item 4A, "Executive Officers of the Registrant." (c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on pages 15-16 of our proxy statement for the annual meeting of stockholders to be held May 12, 1999 is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained under the caption "Executive Compensation" on pages 6-8 and 10-14, and "Election of Directors--Information About the Board and Its Committees" on pages 3-4 of our proxy statement for the annual meeting of stockholders to be held May 12, 1999 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" on pages 5-6 of our proxy statement for the annual meeting of stockholders to be held May 12, 1999 is incorporated herein by reference. 14 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the caption "Certain Transactions" on page 15 of our proxy statement for the annual meeting of stockholders to be held May 12, 1999 is incorporated herein by reference. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following items are incorporated herein by reference from the pages indicated in our annual report to stockholders for the year ended December 31, 1998.
CONSOLIDATED FINANCIAL STATEMENTS: PAGE Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996................................................. 19 Consolidated Balance Sheets as of December 31, 1998 and 1997..................... 20 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996........................................... 21 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996................................................. 22 Notes to Consolidated Financial Statements....................................... 23-34 Report of Independent Auditors................................................... 35 Selected Quarterly Financial Data (unaudited).................................... 36
2. FINANCIAL STATEMENT SCHEDULE: The following financial statement schedule is included herein and should be read in conjunction with the consolidated financial statements referenced above:
PAGE: II - Valuation and Qualifying Accounts.......................................... 18
Schedules other than the one listed above are omitted because of the absence of the conditions under which they are required or because the information required is included in the consolidated financial statements or the notes thereto. 3. EXHIBITS: Reference is made to the Exhibit Index contained on pages 20-26 of this Form 10-K. A copy of any of the exhibits listed or referred to herein will be furnished at a reasonable cost to any person who was a BMC stockholder as of March 24, 1999, upon receipt from 15 any such person of a written request for any exhibit. Requests should be sent to Investor Relations Department, BMC Industries, Inc., One Meridian Crossings, Suite 850, Minneapolis, MN 55423. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c): a) 1984 Omnibus Stock Program, as amended effective December 19, 1989 (incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1989 (File No. 1-8467)). b) 1997 Management Incentive Bonus Plan Summary (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1997 (File No. 1-8467)). c) 1999 Management Incentive Bonus Plan Summary (filed herewith as Exhibit 10.3). d) Revised Executive Perquisite/Flex Policy (effective as of January 1, 1998) (filed herewith as Exhibit 10.4). e) Restated and Amended Directors' Deferred Compensation Plan (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-8467)). f) Form of Change of Control Agreement entered into between the Company and Messrs. Burke and Wright (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 1-8467)). g) Form of Change of Control Agreement entered into between the Company and Messrs. Dobson, Guernsey, Hattara and Opdahl (incorporated by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-8467)). h) 1994 Stock Incentive Plan (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 1-8467)). i) Amendment No. 1 to the 1994 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 1-8467)). j) Amendment No. 2 to the 1994 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 1-8467)). k) BMC Stock Option Exercise Loan Program, as amended June 12, 1998 (incorporated herein by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-8467)). 16 l) Employment Severance Agreement by and between the Company and Jeffrey J. Hattara, dated January 26, 1998 (incorporated by reference to Exhibit 10.48 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-8467)). m) Employment Agreement by and between the Company and Paul B. Burke, dated as of January 1, 1999 (filed herewith as Exhibit 10.25). n) BMC Industries, Inc. Executive Benefit Plan, effective January 1, 1993 (filed herewith as Exhibit 10.11). o) First Declaration of Amendment, effective September 1, 1998, to the BMC Industries, Inc. Executive Benefit Plan (filed herewith as Exhibit 10.12). (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the quarter ended December 31, 1998. (c) EXHIBITS The response to this portion of Item 14 is submitted as a separate section of this report. (d) FINANCIAL STATEMENT SCHEDULES The response to this portion of Item 14 is submitted as a separate section of this report. 17 Schedule II Valuation and Qualifying Accounts Years Ended December 31 (in thousands)
Additions Balance Charged to Translation Balance Beginning of Costs and Adjustment and End of Year Expenses Deductions Other Year - ------------------------------------------------------------------------------------------------------------------ 1998 - ------------------------------------------------------------------------------------------------------------------ Allowance for doubtful accounts $891 $438 $69 $6 $1,266 Allowance for merchandise returns 1,227 1,856 1,735 10 1,358 - ------------------------------------------------------------------------------------------------------------------ $2,118 $2,294 $1,804 $16 $2,624 - ------------------------------------------------------------------------------------------------------------------ Inventory reserves $7,421 $9,691 $4,494 $173 $12,791 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ 1997 - ------------------------------------------------------------------------------------------------------------------ Allowance for doubtful accounts $1,513 $321 $933 ($10) $891 Allowance for merchandise returns 817 1,559 1,088 (61) 1,227 - ------------------------------------------------------------------------------------------------------------------ $2,330 $1,880 $2,021 ($71) $2,118 - ------------------------------------------------------------------------------------------------------------------ Inventory reserves $6,949 $1,049 $335 ($242) $7,421 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ 1996 - ------------------------------------------------------------------------------------------------------------------ Allowance for doubtful accounts $1,863 $388 $730 ($8) $1,513 Allowance for merchandise returns 773 930 857 (29) 817 - ------------------------------------------------------------------------------------------------------------------ $2,636 $1,318 $1,587 ($37) $2,330 - ------------------------------------------------------------------------------------------------------------------ Inventory reserves $3,815 $3,040 $161 $255 $6,949 - ------------------------------------------------------------------------------------------------------------------
18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on March 31, 1999, on its behalf by the undersigned, thereunto duly authorized. BMC INDUSTRIES, INC. By: /s/ Jeffrey J. Hattara ---------------------------------- Jeffrey J. Hattara Vice President of Finance and Administration and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 31, 1999, by the following persons on behalf of the registrant and in the capacities indicated. Signature Title /s/ Paul B. Burke - ------------------------------------ Chairman of the Board, President Paul B. Burke and Chief Executive Officer (Principal Executive Officer) /s/ Jeffrey J. Hattara - ------------------------------------ Vice President of Finance and Jeffrey J. Hattara Administration and Chief Financial Officer (Principal Financial Officer) /s/ Steven E. Opdahl - ------------------------------------ Corporate Controller (Principal Steven E. Opdahl Accounting Officer) /s/ Lyle D. Altman - ------------------------------------ Director Lyle D. Altman /s/ John W. Castro - ------------------------------------ Director John W. Castro /s/ H. Ted Davis - ------------------------------------ Director H. Ted Davis /s/ Joe E. Davis - ------------------------------------ Director Joe E. Davis /s/ Harry A. Hammerly - ------------------------------------ Director Harry A. Hammerly /s/ James M. Ramich - ------------------------------------ Director James M. Ramich 19 BMC Industries, Inc. Exhibit Index to Annual Report on Form 10-K For the Year Ended December 31, 1998
Exhibit No. Exhibit Method of Filing - ----------- ------------------------ 2.1 Asset Purchase Agreement, Incorporated by reference to Exhibit dated as of March 25, 1998, 2.1 to the Company's Current Report on between Monsanto Company and Form 8-K dated March 25, 1998 and VIS-ORC, Inc. filed with the Commission on April 3, 1998 (File No. 1-8467). 2.2 Amendment No. 1 to the Asset Incorporated by reference to the Purchase Agreement, dated as Company's Current Report on Form 8-K of May 15, 1998, between dated May 15, 1998 and filed with the Monsanto Company and Commission on May 29, 1998 (File No. Vision-Ease Lens Azusa, Inc., 1-8467). f/k/a VIS-ORC, Inc. 3.1 Second Restated Articles Incorporated by reference to Exhibit of Incorporation of the 3.1 to the Company's Annual Report on Company, as amended. Form 10-K for the year ended December 31, 1994 (File No. 1-8467). 3.2 Amendment to the Second Incorporated by reference to Exhibit Restated Articles of 3.2 to the Company's Annual Report on Incorporation, dated May 8, Form 10-K for the year ended December 1995. 31, 1994 (File No. 1-8467). 3.3 Amendment to the Second Incorporated by reference to Exhibit Restated Articles of 3.1 to the Company's quarterly report Incorporation, dated October on Form 10-Q for the quarter ended 30, 1995. September 30, 1995 (File No. 1-8467). 3.4 Amendment to the Second Filed electronically herewith. Restated Articles of Incorporation, dated August 7, 1998 3.5 Restated Bylaws of the Incorporated by reference to Exhibit Company, as amended. 3.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-8467).
20 3.6 Amendment to the Restated Incorporated by reference to Exhibit Bylaws of the Company. 3.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-8467). 3.7 Amendment to the Restated Filed electronically herewith. Bylaws of the Company, dated February 20, 1998 4.1 Specimen Form of the Incorporated by reference to Exhibit Company's Common Stock 4.3 to the Company's Registration Certificate. Statement on Form S-2 (File No. 2-83809). 4.2 Form of Share Rights Agreement, Incorporated by reference to Exhibit 1 dated as of June 30, 1998, to the Company's Registration Statement between the Company and Norwest on Form 8-A, dated July 14, 1998. Bank, National Association, as Rights Agent. 10.1 1984 Omnibus Stock Program, Incorporated by reference to Exhibit as amended effective December 10.1 to the Company's Annual Report on 19, 1989. Form 10-K for the year ended December 31, 1989 (File No. 1-8467). 10.2 1997 Management Incentive Incorporated by reference to Exhibit Bonus Plan Summary. 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (File No. 1-8467). 10.3 1999 Management Incentive Filed electronically herewith. Bonus Plan Summary. 10.4 Revised Executive Perquisite/Flex Policy Filed electronically herewith. (effective as of January 1, 1998). 10.5 BMC Savings and Profit Filed electronically herewith. Sharing Plan, restated, effective September 1, 1998.
21 10.6 Restated and Amended Incorporated by reference to Exhibit Directors' Deferred 10.15 to the Company's Annual Report Compensation Plan. on Form 10-K for the year ended December 31, 1996 (File No. 1-8467). 10.7 1994 Stock Incentive Plan. Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 1-8467). 10.8 First Declaration of Incorporated by reference to Exhibit Amendment to the BMC 10.3 to the Company's Quarterly Report Industries, Inc. 1994 Stock on Form 10-Q for the quarter ended Incentive Plan. June 30, 1996 (File No. 1-8467). 10.9 Second Declaration of Incorporated by reference to Exhibit Amendment, dated August 8, 10.2 to the Company's Quarterly Report 1997, to the BMC Industries, on Form 10-Q for the quarter ended Inc. 1994 Stock Incentive September 30, 1997 (File No. 1-8467). Plan. 10.10 BMC Stock Option Exercise Incorporated by reference to exhibit Loan Program, as Amended June 10.4 to the Company's Quarterly Report 12, 1998. on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-8467). 10.11 BMC Industries, Inc. Filed electronically herewith. Executive Benefit Plan, effective January 1, 1993. 10.12 First Declaration of Filed electronically herewith. Amendment to the BMC Industries Executive Benefit Plan, effective September 1, 1998. 10.13 Lease Agreement, dated Incorporated by reference to Exhibit November 20, 1978, between 10.9 to the Company's Registration Control Data Corporation and Statement on Form S-2 (File No. the Company. 2-79667).
22 10.14 Amendment to Lease Agreement, Incorporated by reference to Exhibit dated December 27, 1983, 10.24 to the Company's Annual Report between Control Data on Form 10-K for the year ended Corporation and the Company. December 31, 1983 (File No. 1-8467). 10.15 Amendment to Lease Agreement, Incorporated by reference to Exhibit dated April 9, 1986, between 10.15 to the Company's Annual Report Control Data Corporation and on Form 10-K for the year ended the Company. December 31, 1987 (File No. 1-8467). 10.16 Amendment to Lease Agreement, Incorporated by reference to Exhibit dated April 12, 1989, between 10.14 to the Company's Annual Report GMT Corporation (as successor on Form 10-K for the year ended in interest to Control Data December 31, 1989 (File No. 1-8467). Corporation) and the Company. 10.17 Amendment to Lease Agreement, Incorporated by reference to Exhibit dated March 19, 1990, between 10.15 to the Company's Annual Report GMT Corporation and the on Form 10-K for the year ended Company. December 31, 1989 (File No. 1-8467). 10.18 Amendment to Lease Agreement, Incorporated by reference to Exhibit dated May 17, 1993, between 10.20 to the Company's Annual Report GMT Corporation and the on Form 10-K for the year ended Company. December 31, 1993 (File No. 1-8467). 10.19 Amendment of Lease, dated Incorporated by reference to Exhibit April 6, 1994 by and between 10.23 to the Company's Annual Report GMT Corporation and the on Form 10-K for the year ended Company. December 31, 1994 (File No. 1-8467). 10.20 Waiver of Condition Incorporated by reference to Exhibit Precedent, dated July 29, 10.24 to the Company's Annual Report 1994, by and between GMT on Form 10-K for the year ended Corporation and the Company. December 31, 1994 (File No. 1-8467).
23 10.21 Amendment of Lease, dated Incorporated by reference to Exhibit September 25, 1997 by and 10.34 to the Company's Annual Report between GMT Corporation and on Form 10-K for the year ended the Company. December 31, 1997 (File No. 1-8467). 10.22 Form of Change of Control Incorporated by reference to Exhibit Agreement entered into 10.31 to the Company's Annual Report between the Company and on Form 10-K for the year ended Messrs. Burke and December 31, 1991 (File No. 1-8467). Wright. 10.23 Form of Change of Control Incorporated by reference to Exhibit Agreement entered into 10.47 to the Company's Annual Report between the Company and on Form 10-K for the year ended Messrs. Dobson, Guernsey, December 31, 1997 (File No. 1-8467). Hattara and Opdahl. 10.24 Employment Severance Incorporated by reference to Exhibit Agreement by and between the 10.48 to the Company's Annual Report Company and Jeffrey J. on Form 10-K for the year ended Hattara, dated January 26, December 31, 1997 (File No. 1-8467). 1998. 10.25 Employment Agreement by and Filed electronically herewith between the Company and Paul B. Burke, dated as of January 1, 1999. 10.26 Commitment letter, dated Incorporated by reference to Exhibit March 24, 1998, from BT Alex. 10.1 to the Company's Quarterly Report Brown for an unsecured on Form 10-Q for the quarter ended revolving credit facility March 30, 1998 (File No. 1-8467). totaling $275 million. 10.27 Credit Agreement, dated as of Incorporated by reference to Exhibit May 15, 1998, between the 10.1 to the Company's Quarterly Report Company, Bankers Trust on Form 10-Q for the quarter ended Company as Administrative June 30, 1998 (File No. 1-8467). Agent, NBD Bank as Documentation Agent and Various Lending Institutions.
24 10.28 Amended and Restated Credit Incorporated by reference to Exhibit Agreement, dated as of June 10.2 to the Company's Quarterly Report 25, 1998, among the Company, on Form 10-Q for the quarter ended Several Banks, Bankers Trust June 30, 1998 (File No. 1-8467). Company as the Agent and a Lender and NBD Bank as Documentation Agent and a Lender. 10.29 Amendment No. 1 to Amended Incorporated by reference to Exhibit and Restated Credit 10.3 to the Company's Quarterly Report Agreement, dated as of July on Form 10-Q for the quarter ended 23, 1998, among the Company, June 30, 1998 (File No. 1-8467). Several Banks, Bankers Trust Company as Agent and a Lender, NBD Bank as Documentation Agent and a Lender. 10.30 Amendment No. 2 to Amended Filed electronically herewith. and Restated Credit Agreement, dated as of December 30, 1998, among the Company, Several Banks, Bankers Trust Company as Agent and a Lender, NBD Bank as Documentation Agent and a Lender. 10.31 Product Manufacturing and Incorporated by reference to Exhibit Sales Agreement, dated 10.36 to the Company's Annual Report October 17, 1994, between on Form 10-K for the year ended Polycore Optical, PTE. Ltd. December 31, 1994 (File No. 1-8467). and Vision-Ease, a unit of the Company, without exhibits. 10.32 Amendment of the Product Incorporated by reference to Exhibit Manufacturing and Sales 10.1 to the Company's Quarterly Report Agreement, dated August 11, on Form 10-Q for the quarter ended 1997, between Polycore September 30, 1997 (File No. 1-8467). Optical, PTE, Ltd. and Vision-Ease Lens, Inc.
25 10.33 Lease, dated October 29, Incorporated by reference to Exhibit 1997, by and among the 10.3 to the Company's quarterly Report Company and Meridian on Form 10-Q for the quarter ended Crossings LLC (d/b/a Told September 30, 1997 (File No. 1-8467). Development Company). 13.1 Portions of the Company's Filed electronically herewith. 1998 Annual Report to Stockholders incorporated herein by reference in this Annual Report on Form 10-K. 21.1 Subsidiaries of the Filed electronically herewith. Registrant. 23.1 Consent of Ernst & Young LLP, Filed electronically herewith. Independent Auditors. 27.1 Financial Data Schedule Filed electronically herewith. 99.1 Press Release, dated December Filed electronically herewith. 11, 1998, announcing quarterly dividend. 99.2 Press Release, dated February Filed electronically herewith. 1, 1999, announcing fourth quarter 1998 results. 99.3 Press Release, dated February Filed electronically herewith. 24, 1999, announcing filing of antidumping petition against certain aperture masks from Japan and South Korea. 99.4 Press Release, dated March Filed electronically herewith. 11, 1999 announcing quarterly dividend.
26 EX-3.4 2 EXHIBIT 3.4 RESOLUTIONS OF THE BOARD OF DIRECTORS OF BMC INDUSTRIES, INC. AUGUST 7, 1998 RESOLVED, that Article IV of the Second Restated Articles of Incorporation be amended as follows: "The registered office of the Corporation in Minnesota is One Meridian Crossings, Suite 850, Minneapolis, MN 55423." RESOLVED, FURTHER, that the officers of the Company, and each of them, be, and hereby are, authorized, directed and empowered to take any such act and do any such thing as may be required to effect such amendment, including, without limitation, the filing of Articles of Amendment and/or certificates of change of registered office with the Secretary of State of the State of Minnesota. EX-3.7 3 EXHIBIT 3.7 RESOLUTIONS OF THE BOARD OF DIRECTORS OF BMC INDUSTRIES, INC. FEBRUARY 20, 1998 RESOLVED, that the restated Bylaws (the "Bylaws") of BMC Industries, Inc. (the "Company") are hereby amended by striking out Article II, Section 3, reading as follows: " Section 3. SPECIAL MEETINGS. Special meetings of the stockholders may be called by the chief executive officer, the chief financial officer, two or more directors or a stockholder or stockholders holding ten percent or more of the voting power of all shares entitled to vote, except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the board of directors for that purpose, must be called by 25 percent or more of the voting power of all shares entitled to vote. Special meetings shall be held on the date and at the time and place fixed by the chief executive officer or the Board, or in Hennepin County, Minnesota at the place fixed by a stockholder or stockholders lawfully calling a meeting. The business to be transacted at a special meeting shall be limited to the purposes stated in the notice of the meeting." And substituting therefore the following: " Section 3. SPECIAL MEETINGS. Special meetings of the stockholders may be called by the chief executive officer, the chief financial officer, two or more directors or a stockholder or stockholders holding ten percent or more of the voting power of all shares entitled to vote, except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the Board for that purpose, must be called by 25 percent or more of the voting power of all shares entitled to vote. A stockholder or stockholders holding the voting power to lawfully call a meeting, may demand a special meeting of shareholders by written notice of demand given to the chief executive officer or chief financial officer and containing the purpose of the meeting. Within 30 days after receipt of the demand by one of those officers, the Board shall cause a special meeting of stockholders to be called and held no later than 90 days after receipt of the demand, all at the expense of the corporation. If the Board fails to cause a special meeting to be called and held as required herein, a stockholder or stockholders making the demand may call a meeting by giving notice as required by Section 302.A.435, Minnesota Statutes, all at the expense of the corporation. Special meetings shall be held on the date and at the time and place fixed by the chief executive officer, the chief financial officer or the Board, except that a special meeting called by or at the demand of a stockholder or stockholders hereunder shall be held in the county where the principal executive office is located." EX-10.3 4 EXHIBIT 10.3 Revised 2/10/99 BMC INDUSTRIES, INC. 1999 MANAGEMENT INCENTIVE PLAN CORPORATE OBJECTIVE To focus management attention on annual profit performance and balance sheet management. To recognize the extraordinary contributions of individual managers in years when earnings exceed "Par" performance. GLOSSARY OF TERMS "CONSOLIDATED NET EARNINGS" Net earnings per share (Non-Diluted) from continuing operations as reported in BMC's 1999 Annual Report. "MAXIMUM PERFORMANCE" The level of consolidated net earnings justifying a "maximum" incentive award. "125% PERFORMANCE" The level of consolidated net earnings justifying a "125%" incentive award. "PAR PERFORMANCE" The level of consolidated net earnings, as approved by the Board, justifying a "target" incentive award. "50% PERFORMANCE" The level of consolidated net earnings justifying a "50%" incentive award. "25% PERFORMANCE" The level of consolidated net earnings justifying a "25%" incentive award. "CUT-IN PERFORMANCE" The minimum level of consolidated net earnings, defined as 75% of "Par", justifying a "minimum" incentive award. "TARGET/PAR INCENTIVE" The percent (%) of base pay when a "target" incentive award is earned. "25% INCENTIVE" The percent (%) of base pay when a "25%" incentive award is earned. "50% INCENTIVE" The percent (%) of base pay when a "50%" incentive award is earned. "CUT-IN INCENTIVE" The percent (%) of base pay when a "minimum" incentive award is earned. "125% INCENTIVE" The percent (%) of base pay when a "125%" incentive award is earned. "MAXIMUM INCENTIVE" The percent (%) of base pay when a "maximum" incentive award is earned. PARTICIPANTS: Elected officers and key managers. 1999 PERFORMANCE STANDARDS 1999 CORPORATE PERFORMANCE STANDARDS "Maximum" performance is 116.7% of the "Par" consolidated net earnings. "125%" performance is 108.3% of the "Par" consolidated net earnings. "Par" performance is the consolidated net earnings numbers, as approved by the Board. "50%" performance is 91.7% of the "Par" consolidated net earnings. "25%" performance is 83.3% of the "Par" consolidated net earnings. "Cut-in" performance is 75% of the "Par" consolidated net earnings. AWARD LEVELS: "Target" incentive award levels vary as a percentage of base salary, depending on the level of responsibility. ORGANIZATIONAL WEIGHTING: There is no organizational weighting, i.e., Corporate participants earn awards based on Corporate performance. INCENTIVE OPPORTUNITY: Individual incentive awards will be prorated and calculated based on the following, once the applicable "Thresholds" have been exceeded: - The "Maximum" Incentive is earned when reported earnings, as defined above, equal or exceed "Maximum" Performance. - The "125%" Incentive is earned when reported earnings, as defined above, equal or exceed "125%" Performance. - The "Target" incentive is earned when reported earnings per share, as defined above, equal or exceed "Par" Performance. - The "50%" Incentive is earned when reported earnings, as defined above, equal or exceed "50%" Performance. - The "25%" Incentive is earned when reported earnings, as defined above, equal or exceed "25%" Performance. - The "Cut-In" Incentive is earned when reported earnings, as defined above, equal "Cut-In" Performance. - No incentive will be paid when reported earnings, as defined above, fall below "Cut-In" Performance. PAYMENT FORM: Cash. BMC INDUSTRIES, INC. 1999 MANAGEMENT INCENTIVE PLAN GENERAL PROVISIONS 1. "Base salary" in the Plan means the cumulative base salary earned, not paid, by BMC or one of its divisions during the 1999 calendar year, excluding all other forms of compensation. 2. Incentive compensation payments for 1999 will be made as soon as practicable after the review and receipt of the audited financial statements for the year. 3. If a participant becomes ineligible during the year because of a change in position, the participant will be entitled to incentive compensation only for the period of time he/she was participating, and then only if the participant remains in the employ of the Company through the date the incentive payment is made. 4. Payments will be made only to those participants who are in the employment of the Company on the date the incentive payment is made, with the following exceptions: a) If the participant is a member of a division divested during 1999 and remains in the employ of the Company through the closing date of the divestiture, he/she will be eligible for an incentive award based on year-to-date performance versus year-to-date performance standards. The year-to-date proforma performance will be determined by applying the percent that the performance standards are of the approved 1999 budget. b) If a participant dies during 1999, prorated incentive compensation will be paid to the participant's beneficiary, as designated under the Group Life Insurance Plan, or if a beneficiary is not so designated, to the duly appointed personal representative of the participant's estate. c) If a participant retires with the consent of the Company during 1999, he/she will be entitled to receive incentive compensation prorated relative to the duration of the employee's participation in the 1999 Plan. d) If a participant has been given a military leave of absence and is to immediately enter the service of the armed forces, the participant will be paid an amount prorated relative to the duration of his/her participation in the 1999 Plan prior to entering the service. e) If a participant for any reason such as illness, disability, etc., is able to work only part-time, the Chief Executive Officer may determine the extent to which such employee shall participate. Each case is to be handled on the basis of its own merits. 5. The inclusion of a participant in this Plan does not constitute or imply a guarantee of continued employment. 6. The inclusion of a participant in this Plan does not constitute a warranty that he/she will necessarily participate in a future plan, and the fact that a plan has been established for this year is not to be construed as an obligation to establish any such plan in the future. 7. A participant whose general job performance is unsatisfactory, or whose managerial behavior is not in the best interest of the Company, will be terminated from the Management Incentive Plan, effective upon written notice with no rights to a prorated award. 8. The obligation of the Company, as set forth herein, shall be subject to modification in such manner and to such extent as it deems necessary to comply with any law, regulation or governmental order pertaining to employee compensation. EX-10.4 5 EXHIBIT 10.4 EXECUTIVE PERQUISITE/FLEX POLICY EFFECTIVE JANUARY 1, 1999 A. EXECUTIVE PERQUISITES The Company will provide for the direct payment of selected perquisite expenses that are offered because of competitive compensation practice and/or because the service is being expensed in the business interests of the Company. The following outlines the executive perquisites offered: - Physical examination every three years under 40 years of age, every two years over age 40 - Tax preparation fees and financial planning benefit for the Chief Executive Officer up to $5,000/year - Tax preparation fees and financial planning benefit for other Corporate officers and General Managers up to $2,500/year - Tax gross-up on 25% of the imputed income from the IRS "Annual Lease Value Table" and IRS defined fuel costs for personal use or actual expense - Automobile actual operating expenses B. OFFICER FLEX ACCOUNT The Company will reimburse Corporate officers for the reasonable cost of certain services. The maximum allowable reimbursement will be up to 10% of the officers' annual base pay. Expenses eligible for reimbursement are as follows: - Athletic, country and business club memberships - Automobile lease, or, if the automobile is purchased, monthly reimbursement equivalent to the pro-forma lease cost C. INELIGIBLE EXPENSES The following expenses will no longer be eligible for direct payment or reimbursement: - Home security system - Legal advice - Tax assistance in excess of $5,000/year for the Chief Executive Officer and $2500/year for other officers and general managers - Financial counseling - Daycare for children - Season tickets to sporting and cultural events - First class business travel - Spouse travel not required by business needs - Additional personal liability insurance - Additional business liability insurance - Education for children - Additional business travel insurance - Supplemental life insurance - Up to $3,000/per calendar year of health care expenses not covered by Company benefit plans - Personal computer leases EX-10.5 6 EXHIBIT 10.5 BMC INDUSTRIES, INC. SAVINGS AND PROFIT SHARING PLAN As restated Effective Generally as of September 1, 1998 BMC INDUSTRIES, INC. SAVINGS AND PROFIT SHARING PLAN Table of Contents Page ---- Article 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1. Plan Name. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2. Plan Description.. . . . . . . . . . . . . . . . . . . . . . . . 1 1.3. Plan Purposes. . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.4. Plan Background. . . . . . . . . . . . . . . . . . . . . . . . . 1 Article 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.1. Eligibility Requirements.. . . . . . . . . . . . . . . . . . . . 3 2.2. Transfer Among Participating Employers or Business Units.. . . . 4 2.3. Multiple Employment. . . . . . . . . . . . . . . . . . . . . . . 4 2.4. Reentry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.5. Condition of Participation.. . . . . . . . . . . . . . . . . . . 4 2.6. Termination of Participation . . . . . . . . . . . . . . . . . . 4 Article 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.1. Before-Tax Contributions.. . . . . . . . . . . . . . . . . . . . 5 3.2. Matching Contributions.. . . . . . . . . . . . . . . . . . . . . 6 3.3. Profit Sharing Contributions.. . . . . . . . . . . . . . . . . . 8 3.4. After-Tax Contributions. . . . . . . . . . . . . . . . . . . . . 9 3.5. Rollovers and Transfers. . . . . . . . . . . . . . . . . . . . . 11 3.6. Corrective Contributions.. . . . . . . . . . . . . . . . . . . . 11 Article 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1. Establishment of Accounts. . . . . . . . . . . . . . . . . . . . 12 4.2. Valuation and Account Adjustment.. . . . . . . . . . . . . . . . 12 4.3. Allocations Do Not Create Rights.. . . . . . . . . . . . . . . . 13 Article 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.1. Establishment of Investment Funds. . . . . . . . . . . . . . . . 14 5.2. Contribution Investment Directions.. . . . . . . . . . . . . . . 14 5.3. Transfer Among Investment Funds. . . . . . . . . . . . . . . . . 15 5.4. BMC Common Stock Fund. . . . . . . . . . . . . . . . . . . . . . 15 5.5. Investment Direction Responsibility Resides With Participants. . 16 5.6. Beneficiaries and Alternate Payees . . . . . . . . . . . . . . . 16 Article 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.1. Hardship Withdrawals from Before-Tax Contribution Account. . . . 17 6.2. Other Withdrawals from Before-Tax Contribution Account . . . . . 18 6.3. Withdrawals from After-Tax Contribution Account. . . . . . . . . 18 6.4. Withdrawals from Rollover Account. . . . . . . . . . . . . . . . 19 i 6.5. Rules for Withdrawals.. . . . . . . . . . . . . . . . . . . . . 19 6.6. No Withdrawals from Matching Contribution Account, Profit Sharing Contribution Account or Profit Sharing Plan Rollover Account . . . . . . . . . . . . . . . . . . . . . . . 19 6.7. Plan Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Article 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7.1. Vesting.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7.2. Forfeiture Upon Distribution. . . . . . . . . . . . . . . . . . 25 7.3. Other Forfeitures.. . . . . . . . . . . . . . . . . . . . . . . 25 7.4. Application of Forfeitures. . . . . . . . . . . . . . . . . . . 26 Article 8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.1. Form and Time of Distribution.. . . . . . . . . . . . . . . . . 27 8.2. Beneficiary Designation.. . . . . . . . . . . . . . . . . . . . 32 8.3. Assignment, Alienation of Benefits. . . . . . . . . . . . . . . 33 8.4. Payment in Event of Incapacity. . . . . . . . . . . . . . . . . 33 8.5. Payment Satisfies Claims. . . . . . . . . . . . . . . . . . . . 33 8.6. Disposition if Distributee Cannot be Located. . . . . . . . . . 33 8.7. Direct Rollovers and Transfers. . . . . . . . . . . . . . . . . 33 Article 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.1. Before-Tax Contribution Dollar Limitation . . . . . . . . . . . 35 9.2. Actual Deferral Percentage Limitations. . . . . . . . . . . . . 35 9.3. Actual Contribution Percentage Limitations. . . . . . . . . . . 38 9.4. Multiple Use Limitation.. . . . . . . . . . . . . . . . . . . . 40 9.5. Earnings or Losses on Excess Contributions. . . . . . . . . . . 41 9.6. Aggregate Defined Contribution Limitations. . . . . . . . . . . 41 9.7. Aggregate Defined Contribution/Defined Benefit Limitations. . . 43 9.8. Administrator's Discretion. . . . . . . . . . . . . . . . . . . 44 Article 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 10.1. Computation Period. . . . . . . . . . . . . . . . . . . . . . . 45 10.2. Vesting Service . . . . . . . . . . . . . . . . . . . . . . . . 45 10.3. Hour of Service.. . . . . . . . . . . . . . . . . . . . . . . . 45 10.4. One-Year Break in Service . . . . . . . . . . . . . . . . . . . 47 10.5. Loss of Service . . . . . . . . . . . . . . . . . . . . . . . . 48 10.6. Pre-Acquisition Service . . . . . . . . . . . . . . . . . . . . 48 Article 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 11.1. Adoption by Affiliated Organizations. . . . . . . . . . . . . . 49 11.2. Authority to Amend and Procedure. . . . . . . . . . . . . . . . 49 11.3. Authority to Terminate and Procedure. . . . . . . . . . . . . . 49 11.4. Vesting Upon Termination, Partial Termination or Discontinuance of Contributions . . . . . . . . . . . . . . . . . . . . . . . 50 11.5. Distribution Following Termination, Partial Termination or Discontinuance of Contributions. . . . . . . . . . . . . . . . 50 Article 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 12.1. Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 ii 12.2. Active Participant . . . . . . . . . . . . . . . . . . . . . . 51 12.3. Administrator. . . . . . . . . . . . . . . . . . . . . . . . . 51 12.4. Affiliated Organization. . . . . . . . . . . . . . . . . . . . 51 12.5. After-Tax Contribution Account . . . . . . . . . . . . . . . . 51 12.6. After-Tax Contributions. . . . . . . . . . . . . . . . . . . . 51 12.7. Before-Tax Contribution Account. . . . . . . . . . . . . . . . 51 12.8. Before-Tax Contributions . . . . . . . . . . . . . . . . . . . 51 12.9. Beneficiary. . . . . . . . . . . . . . . . . . . . . . . . . . 51 12.10. Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 12.11. Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 12.12. Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . 52 12.13. Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 12.14. Company Stock. . . . . . . . . . . . . . . . . . . . . . . . . 52 12.15. Consent of Spouse. . . . . . . . . . . . . . . . . . . . . . . 52 12.16. Disabled . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 12.17. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . 52 12.18. Eligible Earnings. . . . . . . . . . . . . . . . . . . . . . . 52 12.19. Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 12.20. Excess Eligible Earnings . . . . . . . . . . . . . . . . . . . 53 12.21. Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 12.22. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 53 12.23. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 12.24. Highly Compensated Employee. . . . . . . . . . . . . . . . . . 53 12.25. Matching Contribution Account. . . . . . . . . . . . . . . . . 54 12.26. Matching Contributions . . . . . . . . . . . . . . . . . . . . 54 12.27. Normal Retirement Date . . . . . . . . . . . . . . . . . . . . 54 12.28. Number and Gender. . . . . . . . . . . . . . . . . . . . . . . 54 12.29. Participant. . . . . . . . . . . . . . . . . . . . . . . . . . 54 12.30. Participating Business Unit. . . . . . . . . . . . . . . . . . 54 12.31. Participating Employer . . . . . . . . . . . . . . . . . . . . 54 12.32. Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 12.33. Plan Rule. . . . . . . . . . . . . . . . . . . . . . . . . . . 55 12.34. Plan Year. . . . . . . . . . . . . . . . . . . . . . . . . . . 55 12.35. Profit Sharing Contribution Account. . . . . . . . . . . . . . 55 12.36. Profit Sharing Contributions . . . . . . . . . . . . . . . . . 55 12.37. Profit Sharing Plan Rollover Account . . . . . . . . . . . . . 55 12.38. Qualified Employee.. . . . . . . . . . . . . . . . . . . . . . 55 12.39. Rollover Account . . . . . . . . . . . . . . . . . . . . . . . 55 12.40. Section 415 Wages. . . . . . . . . . . . . . . . . . . . . . . 56 12.41. Termination of Employment. . . . . . . . . . . . . . . . . . . 56 12.42. Testing Wages. . . . . . . . . . . . . . . . . . . . . . . . . 57 12.43. Treasury Regulations . . . . . . . . . . . . . . . . . . . . . 57 12.44. Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 12.45. Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Article 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 13.1. Named Fiduciary. . . . . . . . . . . . . . . . . . . . . . . . 58 13.2. Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . 58 13.3. Administrator. . . . . . . . . . . . . . . . . . . . . . . . . 60 iii 13.4. Compensation and Expenses . . . . . . . . . . . . . . . . . . . 60 13.5. Adoption of Rules . . . . . . . . . . . . . . . . . . . . . . . 60 13.6. Discretion. . . . . . . . . . . . . . . . . . . . . . . . . . . 61 13.7. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 61 13.8. Benefit Claim Procedure . . . . . . . . . . . . . . . . . . . . 61 13.9. Correction of Errors. . . . . . . . . . . . . . . . . . . . . . 61 Article 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 14.1. Merger, Consolidation, Transfer of Assets . . . . . . . . . . . 63 14.2. Limited Reversion of Fund.. . . . . . . . . . . . . . . . . . . 63 14.3. Top-Heavy Provisions. . . . . . . . . . . . . . . . . . . . . . 63 14.4. No Employment Rights Created. . . . . . . . . . . . . . . . . . 67 14.5. Special Provisions. . . . . . . . . . . . . . . . . . . . . . . 67 14.6. Qualified Military Service. . . . . . . . . . . . . . . . . . . 67 14.7. Short Plan Years. . . . . . . . . . . . . . . . . . . . . . . . 69 iv BMC INDUSTRIES, INC. SAVINGS AND PROFIT SHARING PLAN ARTICLE 1. Description and Purpose 1.1. PLAN NAME. The name of the Plan is the "BMC Industries, Inc. Savings and Profit Sharing Plan." 1.2. PLAN DESCRIPTION. The Plan is a profit sharing plan providing for Before-Tax Contributions pursuant to a qualified cash or deferred arrangement, Matching Contributions, Profit Sharing Contributions and After-Tax Contributions. The Plan is intended to qualify under Code section 401(a) and to satisfy the requirements of Code sections 401(k) and 401(m). Notwithstanding the designation of the Plan as a profit sharing plan, a Participating Employer may make contributions to the Plan even though it has no current or accumulated earnings or profits. 1.3. PLAN PURPOSES. The purposes of the Plan are to promote effort and cooperation on the part of Active Participants, to provide a measure of economic security to each Active Participant by accumulating contributions for distribution upon retirement, as a supplement to other resources then available, and to permit Active Participants to share in the profits and growth of their Participating Employers. 1.4. PLAN BACKGROUND. (a) The Company adopted the established Plan effective as of April 1, 1979, as an employee thrift and profit sharing plan with after-tax employee contributions and employer matching contributions made from current or accumulated profits. (b) Effective generally as of July 1, 1984, the Plan was restated in the manner set forth in the 1984 Restatement to provide, among other things, for the investment of employer matching contributions in Company Stock. (c) Effective generally as of July 1, 1985, the Plan was restated in the manner set forth in the 1985 Revision for purposes of incorporating into the Plan a cash or deferred arrangement pursuant to Code section 401(k). (d) Effective generally as of January 1, 1987, the Plan was restated in the manner set forth in the 1987 Revision to satisfy the requirements of the Tax Reform Act of 1986. (e) Effective generally as of January 1, 1994, the Plan was restated in the manner set forth in the 1994 Revision to comply with changes in applicable law and make certain other miscellaneous changes. (f) Effective as of the close of business on August 31, 1998, the BMC Industries, Inc. Profit Sharing Plan was merged into the Plan. To reflect the merger and changes in applicable law, including the Small Business Job Protection Act, the Uruguay Round Agreements Act and the Uniformed Services Employment and Reemployment Rights Act of 1994, 1 and to make other miscellaneous changes to the Plan, the Plan was restated effective generally as of September 1, 1998 and, in connection therewith, the name of the Plan was changed to the BMC Industries, Inc. Savings and Profit Sharing Plan. 2 ARTICLE 2. Eligibility 2.1. ELIGIBILITY REQUIREMENTS. (a) An Employee is eligible to participate in the Plan (i) for the purposes of having Before-Tax Contributions made on his or her behalf, making After-Tax Contributions and having a rollover or transfer made on his or her behalf pursuant to Section 3.5, on the day on which he or she first completes an Hour of Service of the type specified at Section 10.3(a)(i) as a Qualified Employee; (ii) for the purpose of having Matching Contributions made on his or her behalf, on the first day of the calendar quarter that falls on or next follows the last day of the first Computation Period of the type specified in Section 10.1(a) during which he or she completes at least 1000 Hours of Service, if he or she is a Qualified Employee on the date on which he or she would otherwise be eligible to participate; and (iii) for the purpose of having Profit Sharing Contributions made on his or her behalf, as of the January 1 that falls on or last precedes the last day of the first Computation Period of the type specified in Section 10.1(a) during which he or she completes at least 1000 Hours of Service, if he or she is a Qualified Employee on the last day of that Computation Period. (b) If an Employee who terminates employment before the day on which he or she would otherwise be eligible to participate in the Plan pursuant to clause (ii) or (iii) of Subsection (a) again becomes an Employee after that day: (i) if he or she terminated employment before completing at least 1000 Hours of Service during a Computation Period of the type described in Section 10.1(a), he or she will be treated as a new Employee and his or her previous service will be disregarded in determining his or her new Computation Period pursuant to Section 10.1(a); or (ii) if he or she terminated employment after completing at least 1000 Hours of Service during a Computation Period of the type described in Section 10.1(a), he or she will become eligible to participate in the Plan for the purposes specified in clause (ii) and (iii) of Subsection (a) as of the first following date on which he or she completes an Hour of Service of the type specified at Section 10.3(a)(i) as a Qualified Employee. (c) If an Employee is not a Qualified Employee on the day on which he or she would otherwise be eligible to participate in the Plan for a specified purpose, he or she will become eligible to participate in the Plan for that purpose as of the first following date on which he or she completes an Hour of Service of the type specified at Section 10.3(a)(i) as a Qualified Employee. 3 (d) Notwithstanding Subsection (a), in conjunction with an acquisition, the Company's Board may specify a special entry date for those Qualified Employees with respect to whom pre-acquisition service is taken into account pursuant to Section 10.6. 2.2. TRANSFER AMONG PARTICIPATING EMPLOYERS OR BUSINESS UNITS. A Participant who transfers from one Participating Employer or Participating Business Unit to another Participating Employer or Participating Business Unit as a Qualified Employee will participate in the Plan for the Plan Year during which the transfer occurs on the basis of his or her separate Eligible Earnings for the Plan Year from each such Participating Employer or Participating Business Unit, as the case may be. 2.3. MULTIPLE EMPLOYMENT. A Participant who is simultaneously employed as a Qualified Employee with more than one Participating Employer or Participating Business Unit will participate in the Plan as a Qualified Employee of all such Participating Employers or Participating Business Units on the basis of his or her separate Eligible Earnings from each such Participating Employer or Participating Business Unit, as the case may be. 2.4. REENTRY. An Active Participant who ceases to be a Qualified Employee will resume active participation in the Plan as of the first following date on which he or she completes an Hour of Service of the type specified at Section 10.3(a)(i) as a Qualified Employee. 2.5. CONDITION OF PARTICIPATION. Each Qualified Employee, as a condition of participation, is bound by all of the terms and conditions of the Plan and must furnish to the Administrator such pertinent information and execute such instruments as the Administrator may require. 2.6. TERMINATION OF PARTICIPATION. A Participant will cease to be such as of the later of the date on which (a) he or she ceases to be a Qualified Employee or (b) all benefits, if any, to which he or she is entitled under the Plan have been distributed. 4 ARTICLE 3. Contributions 3.1. BEFORE-TAX CONTRIBUTIONS. (a) Subject to the limitations described in Article 9, for each Plan Year an Active Participant's Participating Employer will make Before-Tax Contributions on behalf of the Participant in the amount by which the Participant's Eligible Earnings from the Participating Employer for the Plan Year have been reduced in accordance with the succeeding provisions of this section. Before-Tax Contributions will be paid to the Trustee as soon as administratively practicable after the date on which the Active Participant would have received the Eligible Earnings but for his or her election pursuant to this section but in no case later than the fifteenth business day of the month following the month during which the Participant would have received the Eligible Earnings but for his or her election pursuant to this section. (b) Except as provided in Subsection (c), a Participant's Eligible Earnings will be reduced in accordance with the following rules - (i) An Active Participant may elect to reduce his or her Eligible Earnings by any one percent increment from one percent to a maximum percentage specified in Plan Rules and the elected percentage will automatically apply to the Active Participant's Eligible Earnings as adjusted from time to time. Plan Rules may specify a lower maximum percentage for Active Participants who are Highly Compensated Employees. Neither reductions in Eligible Earnings nor Before-Tax Contributions will be made on behalf of a Participant with respect to a period during which he or she is not an Active Participant. (ii) Reductions to an Active Participant's Eligible Earnings will commence as soon as administratively practicable after the date on which the Administrator or the Administrator's designate receives a complete and accurate election. (iii) An Active Participant may change the percentage rate at which his or her Eligible Earnings will be reduced. The change will be effective as soon as administratively practicable after the date on which the Administrator or the Administrator's designate receives a complete and accurate election of such change. (iv) An Active Participant may suspend Eligible Earnings reductions. The suspension will be effective as soon as administratively practicable after the date on which the Administrator or the Administrator's designate receives a complete and accurate election of such suspension. Eligible Earnings reductions for an Active Participant who makes a hardship withdrawal under Section 6.1 will be automatically suspended for the 12-month period beginning on the date of the withdrawal distribution. 5 (v) An Active Participant whose Eligible Earnings reductions have ceased by reason of automatic or voluntary suspension may, after the end of the suspension period, resume Eligible Earnings reductions in accordance with clause (ii). (c) Elections pursuant to this section and Eligible Earnings reductions must be made in accordance with and are subject to Plan Rules. Only Eligible Earnings payable after an Active Participant's complete and accurate election has been received and become effective will be reduced pursuant to the election. If any election is not processed on a timely basis, or if, for any reason, an Active Participant's Eligible Earnings are not reduced in accordance with the Participant's election, no retroactive adjustments will be made to take into account the effect of any such delay or failure. 3.2. MATCHING CONTRIBUTIONS. (a) Subject to Subsection (d) and the limitations described in Article 9, the Participating Employer of an eligible Participant will make a Matching Contribution on behalf of the Participant for a calendar quarter in an amount, if any, equal to 25 percent of the lesser of (i) the Before-Tax Contributions made by the Participating Employer on the Participant's behalf for the calendar quarter and (ii) six percent of the Participant's Eligible Earnings from the Participating Employer for the calendar quarter. For this purpose, an eligible Participant with respect to a given calendar quarter is a Participant who (i) is a Qualified Employee who is either on active status or paid leave of absence on the last day of the calendar quarter or (ii) terminated employment during the calendar quarter (1) at or after his or her Normal Retirement Date (2) on account of his or her death (3) on account of his or her becoming Disabled or (4) following his or her attainment of age 60 if the sum of his or her age and years of Vesting Service equals or exceeds 65; provided, that this condition will be applied only with respect to a Participant, such sole application being made for the calendar quarter during which this clause (ii) first applies and the condition under clause (i) is not satisfied. (b) Subject to Subsection (d) and the limitations described in Article 9, the Participating Employer of an eligible Participant will make a Matching Contribution on behalf of the Participant for a Plan Year in an amount, if any, equal to a percentage, determined by the Participating Employer's Board, of the lesser of (i) the Before-Tax Contributions made by the Participating Employer on the Participant's behalf for the Plan Year and (ii) six percent of the Participant's Eligible Earnings from the Participating Employer for the Plan Year; provided, that the percentage may be different for eligible Participants employed in different Participating Business Units of the Participating Employer based on the annual profit performance of each Participating Business Unit, as determined by 6 the Participating Employer's Board. For this purpose, an eligible Participant with respect to a given Plan Year is a Participant who (i) is a Qualified Employee who is either on active status or paid leave of absence on the last day of the Plan Year or (ii) terminated employment during the Plan Year (1) at or after his or her Normal Retirement Date (2) on account of his or her death (3) on account of his or her becoming Disabled or (4) following his or her attainment of age 60 if the sum of his or her age and years of Vesting Service equals or exceeds 65; provided, that this condition will be applied only with respect to a Participant, such sole application being made for the calendar quarter during which this clause (ii) first applies and the condition under clause (i) is not satisfied. (c) A Participating Employer's Matching Contributions for a Plan Year will be paid to the Trustee on such date or dates during or following such Plan Year as the Participating Employer may elect but in no case more than 12 months after the end of the Plan Year. (d) No Matching Contribution will be made with respect to any portion of a Participant's Before-Tax Contributions returned to the Participant pursuant to Article 9. For this purpose, Before-Tax Contributions with respect to which no Matching Contributions are made for a Plan Year will be deemed to be the first such contributions returned to the Participant. If the Administrator determines that Matching Contributions that have been added to a Participant's Matching Contribution Account should not have been added by reason of this subsection, the contributions, increased by Fund earnings or decreased by Fund losses attributable to the contributions as determined under Section 9.5, will be subtracted from the Account as soon as administratively practicable after the determination is made and will be applied to satisfy the contribution obligations of the Participating Employer that made the excess contributions for the Plan Year for which the excess contributions were made. If, because of the passage of time, the excess cannot be applied in this way, the excess will be allocated, in the discretion of the Administrator (i) among the Matching Contribution Accounts of all Participants who made Before-Tax Contributions for the Plan Year as Qualified Employees of the Participating Employer in proportion to such Before-Tax Contributions up to six percent of Eligible Earnings, or (ii) as a corrective contribution pursuant to Section 3.6. 7 3.3. PROFIT SHARING CONTRIBUTIONS. (a) Subject to the limitations described in Article 9, for each Plan Year a Participating Employer will make a Profit Sharing Contribution in an amount equal to the sum of: (i) three percent of the aggregate Eligible Earnings for the Plan Year of all Participant's eligible to share in the contribution for the Plan Year plus (ii) an additional amount, if any, separately determined by the Participating Employer's Board for each of its Participating Business Units based on the annual profit performance of each Participating Business Unit. (b) To be eligible to share in a Participating Employer's Profit Sharing Contribution for a particular Plan Year, a Participant must have received Eligible Earnings for the Plan Year from the Participating Employer and either - (i) completed at least 1000 Hours of Service during the Plan Year and been employed as a Qualified Employee who is either on active status or paid leave of absence on the last day of the Plan Year or (ii) terminated employment during the Plan Year (1) at or after his or her Normal Retirement Date (2) on account of his or her death (3) on account of his or her becoming Disabled or (4) following his or her attainment of age 60 if the sum of his or her age and years of Vesting Service equals or exceeds 65; provided, that this condition will be applied only once with respect to a Participant, such sole application being made for the Plan Year during which this clause (ii) first applies and the condition under clause (i) is not satisfied. (c) Subject to the limitations described in Article 9, a Participating Employer's Profit Sharing Contribution for a Plan Year will be allocated among Participants who have satisfied the eligibility conditions under Subsection (b) for the Plan Year as follows: (i) The Participating Employer's contribution described in Subsection (a)(i) will be allocated to each eligible Participant in the same proportion that his or her Eligible Earnings for the Plan Year bears to the aggregate Eligible Earnings for the Plan Year of all Participants eligible to share in the Participating Employer's contribution. (ii) The Participating Employer's contribution described in Subsection (a)(ii) with respect to a given Participating Business Unit will be allocated to each eligible Participant who received Eligible Earnings for the Plan Year with respect to services for the Participating Business Unit (other than administrative services with respect to which he or she is included in the Corporate Participating 8 Business Unit unless the contribution relates to the Corporate Participating Business Unit) as follows: (1) An amount equal to three percent of his or her Excess Eligible Earnings for the Plan Year. If, however, the contribution is less than three percent of the aggregate Excess Eligible Earnings of all Participants eligible to share in the contribution with respect to the Participating Business Unit, the contribution will be allocated to each such eligible Participant in the same proportion that his or her Excess Eligible Earnings for the Plan Year bears to the aggregate Excess Eligible Earnings for the Plan Year of all Participants eligible to share in the contribution with respect to the Participating Business Unit. (2) To the extent the contribution is not exhausted after it has been allocated under clause (1), each eligible Participant's share of the remainder will be an amount equal to two and seven-tenths percent of the sum of his or her Eligible Earnings plus his or her Excess Eligible Earnings for the Plan Year. If, however, the contribution is less than two and seven-tenths percent of the sum of the aggregate Eligible Earnings plus the aggregate Excess Eligible Earnings of all Participants eligible to share in the contribution with respect to the Participating Business Unit, the contribution will be allocated to each such eligible Participant in the same proportion that the sum of his or her Eligible Earnings plus his or her Excess Eligible Earnings for the Plan Year bears to the sum of the aggregate Eligible Earnings plus the aggregate Excess Eligible Earnings for the Plan Year of all such eligible Participants. (3) To the extent the contribution is not exhausted after it has been allocated pursuant to clauses (1) and (2), the balance, if any, will be allocated to each Participant eligible to share in the contribution with respect to the Participating Business Unit in the same proportion that his or her Eligible Earnings for the Plan Year bears to the aggregate Eligible Earnings for the Plan Year of all such eligible Participants. (d) A Participating Employer's Profit Sharing Contribution for a Plan Year, if any, will be paid to the Trustee on such date or dates during or following such Plan Year as the Participating Employer may elect but in no case more than 12 months after the end of the Plan Year. 3.4. AFTER-TAX CONTRIBUTIONS. (a) Subject to the limitations described in Article 9, an Active Participant may make After-Tax Contributions in accordance with the succeeding provisions of this section. An Active Participant is not required to make After-Tax Contributions as a condition of having Before-Tax Contributions, Matching Contributions or Profit Sharing Contributions made on his or her behalf. After-Tax Contributions will be paid to the Trustee as soon as administratively practicable after the date on which the Active Participant would have received the Eligible Earnings but for his or her election pursuant to this section but in no case later than the fifteenth business day of the month following 9 the month during which the Participant would have received the Eligible Earnings but for his or her election pursuant to his section. (b) Except as provided in Subsection (c), After-Tax Contributions will be made in accordance with the following rules - (i) An Active Participant may elect to contribute any one percent increment of his or her Eligible Earnings from one percent to a maximum percentage specified in Plan Rules and the elected percentage will automatically apply to the Active Participant's Eligible Earnings as adjusted from time to time. Plan Rules may specify a lower maximum percentage (which may be zero) for Active Participants who are Highly Compensated Employees. Neither deductions from Eligible Earnings nor After-Tax Contributions will be made on behalf of a Participant with respect to a period during which he or she is not an Active Participant. (ii) An Active Participant's After-Tax Contributions will commence as soon as administratively practicable after the date on which the Administrator or the Administrator's designate receives a complete and accurate election. (iii) An Active Participant may change the percentage rate of his or her After-Tax Contributions. The change will be effective as soon as administratively practicable after the date on which the Administrator or the Administrator's designate receives a complete and accurate election of such change. (iv) An Active Participant may suspend his or her After-Tax Contributions. The suspension will be effective as soon as administratively practicable after the date on which the Administrator or the Administrator's designate receives a complete and accurate election of such suspension. After-Tax Contributions by an Active Participant who makes a hardship withdrawal under Section 6.1 will be automatically suspended for the 12-month period beginning on the date of the withdrawal distribution. (v) An Active Participant whose After-Tax Contributions have ceased by reason of automatic or voluntary suspension may, after the end of the suspension period, resume After-Tax Contributions in accordance with clause (ii). (c) Elections pursuant to this section and After-Tax Contributions must be made in accordance with and are subject to Plan Rules. Only Eligible Earnings payable after an Active Participant's complete and accurate election has been received and become effective will be subject to deduction pursuant to the election. If any election is not processed on a timely basis, or if, for any reason, an Active Participant's After-Tax Contributions are not made in accordance with the Participant's election, no retroactive adjustments will be made to take into account the effect of any such delay or failure. Plan Rules, however, may permit an Active Participant to make After-Tax Contributions during any remaining portion of the Plan Year during which the delay or failure occurred at more than the otherwise applicable maximum percentage to adjust for the effect of the delay or failure so long as the After-Tax Contributions for the Plan Year do not exceed the applicable maximum percentage or the limitations described in Article 9. 10 3.5. ROLLOVERS AND TRANSFERS. (a) With the prior consent of the Administrator, an Active Participant may contribute to the Trust, in a direct rollover pursuant to Code section 401(a)(31) or within 60 days of receipt, (i) an amount paid or distributed out of an individual retirement account to which the only contributions have been one or more eligible rollover distributions, within the meaning of Code section 402(c)(4), from a plan qualified under Code section 401(a), or (ii) an eligible rollover distribution from such a qualified plan. (b) With the prior consent of the Administrator, an Active Participant's accounts under another tax-qualified plan may be transferred directly to the Trust. Other than in connection with an acquisition, such a transfer will not be permitted if, as a result of the transfer, the Plan would be required to provide any option with respect to the form or time of distribution or any other benefit, right or feature not available under the Plan prior to the transfer. (c) Other than in connection with an acquisition, any contribution or transfer to the Trust pursuant to this section must be made in cash and will be added to the Participant's Rollover Account. 3.6. CORRECTIVE CONTRIBUTIONS. For any Plan Year a Participating Employer may, but is not required to, contribute to the Matching Contribution Accounts or Profit Sharing Contribution Accounts, or both, of Active Participants who are not Highly Compensated Employees, or any group of such Participants identified by the Participating Employer's Board, such amounts as it deems advisable to assist the Plan in satisfying the requirements of Section 9.2, 9.3 or 9.4, or any other requirement under the Code or Treasury Regulations, for the Plan Year. Contributions to such Participants' Matching Contribution Accounts will be allocated in proportion to the Before-Tax Contributions made on their behalf for the Plan Year up to six percent of Eligible Earnings. Contributions to such Participants' Profit Sharing Contribution Accounts will be allocated in proportion to their respective Eligible Earnings from the Participating Employer for the Plan Year. Any amount allocated to a Participant's Matching Contribution Account or Profit Sharing Contribution Account pursuant to this section which is used to satisfy the requirements of Section 9.2, 9.3 or 9.4 will be added to a separate subaccount with respect to which gains, losses, withdrawals and other credits or charges are separately allocated on a reasonable and consistent basis pursuant to Section 4.2. 11 ARTICLE 4. Accounts and Valuation 4.1. ESTABLISHMENT OF ACCOUNTS. For each Participant, the following Accounts will be established and maintained: (a) A Before-Tax Contribution Account, to which there will be added any Before-Tax Contributions made on the Participant's behalf; (b) A Matching Contribution Account, which will include the balance of his or her employer contribution account under prior provisions of the Plan and to which there will be added any Matching Contributions made on the Participant's behalf; (c) A Profit Sharing Contribution Account, which will include the balance of his or her profit sharing account under the BMC Industries, Inc. Profit Sharing Plan and to which there will be added any Profit Sharing Contributions made on the Participant's behalf; (d) An After-Tax Contribution Account, which will include the balance of his or her supplemental contribution account and employee basic contribution account under prior provisions of the Plan and to which there will be added any After-Tax Contributions made by the Participant; and (e) A Rollover Account, to which there will be added any rollover or trust-to-trust transfer made on the Participant's behalf pursuant to Section 3.5; and (f) A Profit Sharing Plan Rollover Account which will consist solely of the balance of his or her rollover account under the BMC Industries, Inc. Profit Sharing Plan. One or more additional accounts may be established and maintained for any Participant or group of similarly situated Participants in connection with the merger of another plan into the Plan, in which case provisions of the Plan applicable solely to such accounts will be set forth on an exhibit to the Plan in accordance with Section 14.5. 4.2. VALUATION AND ACCOUNT ADJUSTMENT. As of the close of business on each day on which the New York Stock Exchange is open for regular business, each Participant's Accounts within each investment fund established pursuant to Section 5.1 will be adjusted, in a manner determined by the Administrator to be uniform and equitable, for income, expense, gains and losses of the investment fund, as well as contributions, withdrawals, loans, loan repayments, satisfaction of unpaid indebtedness in accordance with Section 6.7(h)(iv), distributions and similar activity, since the last prior adjustment. 12 4.3. ALLOCATIONS DO NOT CREATE RIGHTS. The fact that allocations are made and credited to the Accounts of a Participant does not vest in the Participant any right, title or interest in or to any portion of the Fund except at the time or times and upon the terms and conditions expressly set forth in the Plan. Notwithstanding any allocation or addition to the Account of any Participant, the issuance of any statement to the Participant or a Beneficiary of a deceased Participant or the distribution of all or a portion of any Account balance, the Administrator may direct the Account to be adjusted to the extent necessary to correct any error in the Account, whether caused by misapplication of any provision of the Plan or otherwise, and may recover from the Participant or Beneficiary the amount of any excess distribution. 13 ARTICLE 5. Participant Investment Direction 5.1. ESTABLISHMENT OF INVESTMENT FUNDS. (a) In order to allow each Participant to determine the manner in which his or her Accounts will be invested, the Trustee will maintain, within the Trust, three or more separate investment funds of such nature and possessing such characteristics as the Committee may specify from time to time. Each Participant's Accounts will be invested in the investment funds in the proportions directed by the Participant in accordance with the procedures set forth in Sections 5.2 and 5.3. (b) In addition to the investment funds maintained pursuant to Subsection (a), the Trustee will maintain, within the Trust, the BMC Common Stock Fund which will be invested in shares of Company Stock except for such amounts of cash as the Trustee determines to be necessary to satisfy short-term liquidity requirements and cash held pending acquisition of shares of Company Stock. Shares of Company stock held in the BMC Common Stock Fund will be voted or, in connection with a public or private tender or exchange offer, tendered and sold or exchanged by the Trustee in its discretion. (c) The Committee may, from time to time, direct the Trustee to establish additional investment funds or to terminate any existing investment fund. (d) Notwithstanding any other provision of the Plan to the contrary, the Committee may direct the Trustee to suspend Participant investment activity (including such activity in connection with the withdrawals, loans and distributions) in any or all investment funds, or impose special rules or restrictions of uniform application, for a period determined by the Committee to be necessary in connection with (i) the establishment or termination of any investment fund, (ii) the receipt by the Trustee from, or transfer by the Trustee to, another trust of account balances pursuant to Section 3.5 or 8.7 in connection with an acquisition or divestiture or otherwise, (iii) a change of Trustee or investment manager or (iv) such other circumstances determined by the Committee as making such suspension or special rules or restrictions necessary or appropriate. 5.2. CONTRIBUTION INVESTMENT DIRECTIONS. (a) Subject to Section 5.4, in conjunction with his or her enrollment in the Plan, a Participant must direct the manner in which contributions to his or her Accounts will be invested among the investment funds maintained pursuant to Section 5.1. Such a direction must be made in accordance with and is subject to Plan Rules. To the extent a Participant fails to direct Account investments, the Accounts will be invested in the manner specified in Plan Rules. 14 (b) Subject to Section 5.4, a Participant may direct a change in the manner in which future contributions credited to his or her Accounts will be invested among the investment funds maintained pursuant to Section 5.1. Such a direction must be made in accordance with and is subject to Plan Rules and will be effective as soon as administratively practicable after it is received by the Administrator or the Administrator's designate. (c) Plan Rules will include procedures pursuant to which Participants are provided with the opportunity to obtain written confirmation of investment directions made pursuant to this section. 5.3. TRANSFER AMONG INVESTMENT FUNDS. (a) Subject to Section 5.4, a Participant may direct the transfer of his or her Accounts among the investment funds maintained pursuant to Section 5.1. Such a direction must be made in accordance with and is subject to Plan Rules and will be effective as soon as administratively practicable after it is received by the Administrator or the Administrator's designate. (b) Plan Rules will include procedures pursuant to which Participants are provided with the opportunity to obtain written confirmation of investment directions made pursuant to this section. (c) Plan Rules may impose uniform limitations and restrictions applicable to transfers into and out of specific investment funds. 5.4. BMC COMMON STOCK FUND. (a) Subject to Subsection (b), all amounts credited to a Participant's Matching Contribution Account will be invested only in the BMC Common Stock Fund and no amounts credited to any of a Participant's other Accounts may be invested in the BMC Common Stock Fund. (b) Notwithstanding Subsection (a) - (i) Not more than once each calendar quarter, a Participant who has attained age 55 may elect to transfer all or any portion of his or her Matching Contribution Account from the BMC Common Stock Fund to one or more of the investment funds maintained pursuant to Section 5.1 other than the BMC Common Stock Fund. The election must be made in accordance with and is subject to Plan Rules and will be effective as soon as administratively practicable after it is received by the Administrator or the Administrator's designate. All Matching Contributions credited to the Participant's Matching Contribution Account after the effective date of the direction will continue to be invested pursuant to Subsection (a). (ii) Not more than once each calendar quarter, a Participant who is an Employee and is not eligible to make directions pursuant to Subsection (b)(i) may elect to transfer up to 25 percent of his or her Matching Contribution Account from the BMC Common Stock Fund to one or more of the investment funds maintained pursuant to Section 5.1 other than the BMC Common Stock Fund. A Participant 15 may only make an election pursuant to this Subsection (c)(ii) if the portion of the Participant's Matching Contribution Account invested in the BMC Common Stock Fund equals or exceeds 20 percent of the balance of the Participant's Matching Contribution Account. The election must be made in accordance with and is subject to Plan Rules and will be effective as soon as administratively practicable after it is received by the Administrator or the Administrator's designate. All Matching Contributions credited to the Participant's Matching Contribution Account after the effective date of such direction will continue to be invested pursuant to Subsection (a). 5.5. INVESTMENT DIRECTION RESPONSIBILITY RESIDES WITH PARTICIPANTS. The Plan is intended to constitute a plan described in section 404(c) of the Employee Retirement Income Security Act of 1974, as amended. Accordingly, neither the Administrator, the Trustee nor the Participating Employers have any authority, discretion, responsibility or liability with respect to a Participant's selection of the investment funds in which his or her Accounts will be invested, the entire authority, discretion and responsibility for, and any results attributable to, the selection being that of the Participant. 5.6. BENEFICIARIES AND ALTERNATE PAYEES. Solely for purposes of this article, the term "Participant" includes the Beneficiary of a deceased Participant and an alternate payee under a qualified domestic relations order within the meaning of Code section 414(p) unless otherwise provided in such order, but only after - (i) the Administrator has determined the identity of the Beneficiary and the amount of the Account balance to which he or she is entitled in the case of a Beneficiary of a deceased Participant, or (ii) the Administrator has, in accordance with Plan Rules, made a final determination that the order is a qualified domestic relations order and all rights to contest such determination in a court of competent jurisdiction within the time prescribed by Plan Rules have expired or been exhausted in the case of an alternate payee. 16 ARTICLE 6. Withdrawals During Employment and Loans 6.1. HARDSHIP WITHDRAWALS FROM BEFORE-TAX CONTRIBUTION ACCOUNT. (a) Subject to the provisions of Section 6.5, a Participant who is an Employee may make a hardship withdrawal from the portion of his or her Before-Tax Contribution Account consisting of Before-Tax Contributions. A hardship withdrawal will be permitted only if the Administrator determines that the withdrawal is made on account of an immediate and heavy financial need of the Participant and is necessary to satisfy such financial need. (b) A withdrawal will be deemed to be made on account of an immediate and heavy financial need only if it is determined by the Administrator to be on account of: (i) expenses for medical care, described in Code section 213(d), incurred or to be incurred by the Participant, the Participant's spouse or the Participant's dependent (as described in Code section 152) that are not otherwise reimbursable; (ii) costs directly related to the purchase (excluding mortgage payments) of a principal residence of the Participant; (iii) payment of tuition, related educational fees and room and board expenses for the next 12 months of post-secondary education for the Participant or his or her spouse, child or other dependent; (iv) payments necessary to prevent the eviction of the Participant from his or her principal residence or foreclosure on the mortgage on the Participant's principal residence; (v) expenses incurred or to be incurred by the Participant that are directly related to the partial or total destruction of a principal residence of the Participant through an act of God that are not otherwise reimbursable; (vi) expenses incurred or to be incurred by the Participant that are directly related to and the principal purpose of which is the legal adoption of a child by the Participant that are not otherwise reimbursable; or (vii) loss of income due to layoff of the Participant or his or her spouse. (c) A withdrawal will be deemed to be necessary to satisfy the immediate and heavy financial need of the Participant only if the Administrator determines that each of the following requirements is satisfied. (i) The distribution is not more than the sum of the amount of the immediate and heavy financial need of the Participant plus the amount necessary to pay any federal, state or local taxes or penalties that the Participant will incur in 17 connection with the distribution, as estimated by the Administrator in accordance with Plan Rules. (ii) The Participant has received all withdrawals and has taken all nontaxable loans available under the Plan and all other qualified plans maintained by any Affiliated Organization. (iii) All Before-Tax Contributions and After-Tax Contributions under the Plan and all elective deferrals and after-tax employee contributions by or on behalf of the Participant under any other qualified or nonqualified plan of deferred compensation maintained by any Affiliated Organization are suspended for a period of 12 months following the date of the distribution. (iv) For the Participant's taxable year following the taxable year during which he or she received the withdrawal distribution, the amount of elective deferrals under all qualified plans maintained by any Affiliated Organization (including Before-Tax Contributions pursuant to the Plan) that may be made on the Participant's behalf under Code section 402(g) is reduced by the amount of such elective deferrals made on the Participant's behalf for the taxable year during which he or she received the distribution. (d) The Administrator's determination of the existence of a Participant's financial hardship and the amount that may be withdrawn to satisfy the need created by such hardship will be made in accordance with Treasury Regulations, and is final and binding on the Participant. The Administrator may require the Participant to make representations and certifications concerning his or her entitlement to a withdrawal pursuant to this section and is entitled to rely on such representations and certifications unless the Administrator has actual knowledge to the contrary. The Administrator is not obligated to supervise or otherwise verify that amounts withdrawn are applied in the manner specified in the Participant's withdrawal application. 6.2. OTHER WITHDRAWALS FROM BEFORE-TAX CONTRIBUTION ACCOUNT. Subject to the provisions of Section 6.5, a Participant who (a) is an Employee, (b) has attained age 59-1/2 and (c) has received all withdrawals available pursuant to Sections 6.3 and 6.4, may withdraw all or any part of his or her Before-Tax Contribution Account balance. 6.3. WITHDRAWALS FROM AFTER-TAX CONTRIBUTION ACCOUNT. (a) Subject to the provisions of Section 6.5, a Participant who is an Employee may withdraw all or any part of his or her After-Tax Contribution Account balance. (b) A Participant's After-Tax Contribution Account will be treated as a separate contract under the Plan for purposes of Code section 72(d). Insofar as the Plan permitted Participants to make in-service withdrawals from their After-Tax Contribution Accounts on May 5, 1986, notwithstanding Subsection (a), all withdrawals pursuant to this section will be deemed to be made first from a Participant's investment in the contract as of December 31, 1986, to the extent thereof, and then from the separate contract pursuant to this subsection. 18 6.4. WITHDRAWALS FROM ROLLOVER ACCOUNT. Subject to the provisions of Section 6.5, a Participant who (a) is an Employee and (b) has received all withdrawals available pursuant to Section 6.3, may withdraw all or any part of his or her Rollover Account balance. 6.5. RULES FOR WITHDRAWALS. (a) Applications for withdrawals must be made in accordance with and are subject to Plan Rules. (b) A withdrawal distribution will be made as soon as administratively practicable after a complete and accurate application form is received by the Administrator or the Administrator's designate. (c) A withdrawal distribution will be made on a substantially pro rata basis from the investment funds in which the Account against which the distribution is charged is then invested. (d) All withdrawal distributions will be made in the form of a lump sum payment by check drawn on the Trust. Withdrawal distributions will be made as soon as administratively practicable after the Administrator's determination that a Participant is entitled to receive the withdrawal distribution and will be based on the balance of the Participant's Account as of the date on which the distribution is processed. (e) A Participant may not withdraw the portion of his or her Accounts consisting of a note evidencing the unpaid balance of any loan made pursuant to the Plan. (f) The provisions of Section 8.7(a) apply to any withdrawal distribution that constitutes an eligible rollover distribution within the meaning of Code section 402(c)(4). 6.6. NO WITHDRAWALS FROM MATCHING CONTRIBUTION ACCOUNT, PROFIT SHARING CONTRIBUTION ACCOUNT OR PROFIT SHARING PLAN ROLLOVER ACCOUNT. Except as otherwise expressly provided in the Plan, a Participant may not receive a distribution from his or her Matching Contribution Account, Profit Sharing Contribution Account or Profit Sharing Plan Rollover Account while he or she is an Employee. 6.7. PLAN LOANS. (a) Each Participant or Beneficiary of a deceased Participant who (i) is an Employee or is otherwise a "party in interest" within the meaning of the Employee Retirement Income Security Act of 1974, as amended, and (ii) has received all withdrawals available pursuant to Section 6.3, may borrow funds from the vested portion of his or her Before-Tax Contribution Account, Matching Contribution Account and Rollover Account, by submitting to the Administrator or the Administrator's designate a complete and accurate loan application, in accordance with and subject to Plan Rules, subject however, to the succeeding provisions of this section. (b) The amount of the loan may not cause the aggregate amount of outstanding loans to the borrower from the Plan to exceed the lesser of: 19 (i) $50,000, reduced by the excess (if any) of (1) the highest outstanding balance of all loans to the borrower from the Plan and all other qualified plans maintained by any Affiliated Organization during the 12-month period ending on the day before the date of the loan over (2) the outstanding balance of such loans on the date of the loan; (ii) 50 percent of the aggregate vested balance of the borrower's Before-Tax Contribution Account, Matching Contribution Account and Rollover Account as of the date on which the loan is made. For purposes of this subsection, the borrower's outstanding loan balance on a given date will include any loan that is deemed distributed pursuant to Code section 72(p) and that has not been repaid to the extent required by Treasury Regulations. (c) No loan will be made from the portion of a borrower's Matching Contribution Account invested in the BMC Common Stock Fund. If a Participant's Matching Contribution Account is not fully vested, the portion of the Account that is not invested in the BMC Common Stock Fund will be allocated ratably among the vested and nonvested portions of the Account. (d) No individual loan will be made in an amount less than $1000. (e) No borrower may have more than one loan outstanding at any time. (f) Each loan will be charged against the vested portion of the borrower's Accounts in the following order: Rollover Account, Before-Tax Contribution Account and Matching Contribution Account. The loan proceeds will be obtained on a substantially pro rata basis from the investment fund or funds in which the Account against which the loan is charged is then invested, except that no proceeds will be obtained from the portion of a borrower's Matching Contribution Account invested in the BMC Common Stock Fund. (g) The annual interest rate on any loan will be the annual prime rate of interest in effect on the date of the loan as determined by Norwest Bank Minnesota, N.A., plus one percent. (h) The borrower must execute a form of promissory note provided by the Administrator, which: (i) Creates in the Trust a valid first lien against the borrower's entire right, title and interest in and to his or her Accounts (excluding his or her Profit Sharing Contribution Account and Profit Sharing Plan Rollover Account) equal to the initial amount borrowed plus accrued interest thereon; (ii) Provides for a maturity date not to exceed five years from the date of the note unless the borrower certifies to the Administrator that the proceeds of the loan will be applied to acquire a dwelling unit that will be the borrower's principal residence or will become his or her principal residence within a reasonable time after the date of the loan in which case the maturity date will not exceed ten years from the date of the note; 20 (iii) Except as otherwise provided in Plan Rules with respect to suspension of repayment during leaves of absence, provides for payments of principal and interest in equal installments of such frequency, not less frequently than quarterly, in such minimum amounts and for such maximum period as Plan Rules prescribe; (iv) Provides that upon default, as defined in Plan Rules, (1) the unpaid indebtedness will be accelerated and, unless the borrower repays the full amount of the outstanding balance of the loan, satisfied from any distribution then due and from the vested balance of the borrower's Accounts that could then be distributed to the borrower or his or her Beneficiary, with a corresponding reduction in the Account balance, and (2) the date on which repayment of any remaining part of such unpaid indebtedness is due will be extended, until the first date on which the borrower or his or her Beneficiary could receive a distribution from the Plan, on which date the unpaid indebtedness will be satisfied in full and the Account will be reduced by the amount of the unpaid indebtedness. (i) In addition to the documents described in Subsection (h), a borrower must execute an appropriate document under which all Affiliated Organizations are authorized to deduct from the borrower's pay the amount of payments due under the terms of any loan, and must provide such other documents as may from time to time be required under Plan Rules. (j) Before making any loan, the Administrator will deliver to the borrower a clear statement of the charges involved in the proposed loan transaction. The statement will include the dollar amount of the loan, the annual rate of the finance charge and the aggregate amount of the finance charge to the date of maturity. (k) Each loan will be a loan by the Trust, but for Trust accounting purposes the loan will be deemed made from the borrower's Account, and the note executed by the borrower will be deemed to be an asset of the Account against which the loan is charged. When a loan is made, the borrower's Account and any investment fund from which the loan proceeds are obtained will be reduced by an amount equal to the principal balance of the loan and a Loan Account will be established for the borrower with an initial balance equal to the principal amount of the loan. The Loan Account will be excluded for purposes of determining and allocating the net earnings (or losses) of the Trust pursuant to Section 4.2. A borrower's repayments of principal and payments of interest will be credited to the Accounts from which the loan proceeds were obtained on a substantially pro rata basis until the amount borrowed from each such Account has been fully replaced by principal repayments. The Loan Account will be reduced by the amount of any principal payment on the loan. Repayments of loan principal and payments of interest will be invested as soon as administratively practicable following receipt by the Trustee in accordance with the borrower's most recent investment directions with respect to new contributions. (l) The Administrator will establish a means pursuant to which a borrower who is an Employee must make loan repayments by payroll deduction and any other borrower must make loan repayments by periodic remittals to the Administrator or the Trustee. 21 (m) The outstanding balance of any loan, including any accrued interest, may be repaid in its entirety at any time prior to maturity without penalty. Partial prepayments will not be permitted. (n) The Administrator may establish Plan Rules which specify other terms and conditions as may be necessary or desirable for the administration of loans under this section. 22 ARTICLE 7. Vesting and Forfeitures 7.1. VESTING. (a) Each Participant always has a fully vested nonforfeitable interest in his or her Before-Tax Contribution Account, After-Tax Contribution Account, Rollover Account and Profit Sharing Plan Rollover Account, in the portion of his or her Matching Contribution Account attributable to his or her employer contribution account under prior provisions of the Plan and in the portion of his or her Matching Contribution Account or Profit Sharing Contribution Account credited to a subaccount described in Section 3.6. (b) A Participant will acquire a fully vested nonforfeitable interest in the portions of his or her Matching Contribution Account and Profit Sharing Contribution Account not described in Subsection (a) upon attaining his or her Normal Retirement Date while he or she is an Employee or upon becoming a Participant after his or her Normal Retirement Date. (c) A Participant will acquire a fully vested nonforfeitable interest in the portions of his or her Matching Contribution Account and Profit Sharing Contribution Account not described in Subsection (a) if he or she dies or becomes Disabled while he or she is an Employee. (d) A Participant will acquire a fully vested nonforfeitable interest in the portion of his or her Profit Sharing Account not described in Subsection (a) upon the Participant's termination of employment following the Participant's attainment of age 60 if the sum of his or her age and full years of Vesting Service is at least 65. (e) A Participant will acquire a fully vested nonforfeitable interest in the portions of his or her Matching Contribution Account and Profit Sharing Contribution Account not described in Subsection (a) if the Affiliated Organization, Participating Business Unit, business unit, location or division at which the Participant is employed, permanently ceases operations or is sold or otherwise transferred through sale of stock or of business and assets, in such manner that it no longer is, or is no longer owned by, an Affiliated Organization. (f) A Participant will acquire a fully vested nonforfeitable interest in the portions of his or her Matching Contribution Account and Profit Sharing Contribution Account not described in Subsection (a) upon a Change in Control with respect to the Company, which for purposes of this subsection means any of the following: (i) The sale, lease, exchange, or other transfer of all or substantially all of the assets of the Company, in one transaction or in a series of related transactions, to any Person; (ii) The approval by the stock holders of the Company of any plan or proposal for the liquidation or dissolution of the Company; 23 (iii) Any Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities and Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of 50 percent or more of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors; (iv) Individuals who constitute the Company's Board of Directors on January 1, 1998 (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to January 1, 1998 whose election, or nomination for election, by the Company's stockholders, was approved by a vote of at least a majority of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) will, for purposes of this clause (iv), be deemed to be a member of the Incumbent Board; or (v) A change in control of a nature that is determined by independent legal counsel to the Company to be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of the Current Report on Form 8-K, as in effect on January 1, 1994, pursuant to section 13 or 15(d) of the Exchange Act, whether or not the Company is then subject to such reporting requirement. For purpose of applying the foregoing, the term "Person" means and includes any individual, corporation, partnership, group, association or other "person," as such term is used in section 14(d) of the Exchange Act, other than the Company, a wholly-owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company or a wholly-owned subsidiary of the Company. (g) A Participant whose Matching Contribution Account is not otherwise fully vested will acquire a vested nonforfeitable interest in the portion of his or her Matching Contribution Account not described in Subsection (a) to the extent provided in the following schedule:
Vested Years of Vesting Service Interest ------------------------ -------- Less Than One Year 0% One Year 25% Two Years 50% Three Years 75% Four or More Years 100%
(h) A Participant whose Profit Sharing Contribution Account is not otherwise fully vested will acquire a vested nonforfeitable interest in the portion of his or her Profit Sharing Contribution Account not described in Subsection (a) to the extent provided in the following schedule: 24
Vested Years of Vesting Service Interest ------------------------ -------- Less Than Five Years 0% Five or More Years 100%
7.2. FORFEITURE UPON DISTRIBUTION. (a) If a Participant receives a distribution of the entire vested balance of his or her Accounts after termination of employment and before he or she incurs five consecutive One-Year Breaks in Service, the nonvested portions of the Participant's Matching Contribution Account and Profit Sharing Contribution Account will, at the time of such distribution, be forfeited. A Participant who has no vested interest in his or her Matching Contribution Account and Profit Sharing Contribution Account when he or she terminates employment will be deemed to have received a distribution of the entire vested balance of the Accounts at the time of his or her termination of employment. (b) If a Participant described in Subsection (a)(i) received a distribution of less than the entire balance of his or her Accounts, (ii) resumes employment as a Qualified Employee and (iii) repays to the Trustee the full amount distributed, other than the portion of the distribution attributable to his or her After-Tax Contribution Account, Rollover Account and Profit Sharing Plan Rollover Account balances, before the earlier of (1) five years following the date of reemployment as a Qualified Employee or (2) the date on which he or she incurs five consecutive One-Year Breaks in Service following the distribution, then, the amount of any forfeitures will be restored to the Participant's Matching Contribution Account and Profit Sharing Contribution, unadjusted for any change in value occurring after the distribution. Such restoration will be made from forfeitures that arise for the Plan Year for which such restoration is to be made. To the extent such forfeitures are insufficient for such purpose, the Participating Employer with whom the Participant was last employed as a Qualified Employee will contribute the amount required to restore the Accounts. A Participant described in the last sentence of Subsection (a) who is reemployed before incurring five consecutive One-Year Breaks in Service following the date of his or her termination of employment will be deemed to have repaid his or her deemed distribution upon his or her reemployment as a Qualified Employee. 7.3. OTHER FORFEITURES. (a) Except as provided in Section 7.2, the nonvested portions of a Participant's Matching Contribution Account and Profit Sharing Contribution Account will continue to be held in separate subaccounts of such Accounts until the Participant incurs five consecutive One-Year Breaks in Service following his or her termination of employment, at which time the subaccount balances will be forfeited. If the Participant resumes employment with an Affiliated Organization prior to incurring five consecutive One-Year Breaks in Service, such subaccounts will be disregarded and their balances will be included in the Matching Contribution Account balance and Profit Sharing Contribution Account balance. 25 (b) A Participant's vested interest in his or her Matching Contribution Account and Profit Sharing Contribution Account balances following a resumption of employment in accordance with Subsection (a) at any given time will not be less than the amount "X" determined by the formula: X = P(AB + (R x D)) - (R x D), where P is the Participant's vested percentage at the time of determination; AB is the Account balance at the time of determination; D is the amount of the distribution; and R is the ratio of the Account balance at the time of determination, to the subaccount balance immediately following the distribution. 7.4. APPLICATION OF FORFEITURES. All forfeitures occurring in a Plan Year will, be applied as follows: (i) Such forfeitures will first be applied to restore the Accounts of Participants as provided in Section 7.2(b); and (ii) Any remaining forfeitures will be applied toward the amount of future contributions by the Participating Employers. 26 ARTICLE 8. Distributions After Termination 8.1. FORM AND TIME OF DISTRIBUTION. (a) Following a Participant's termination of employment, the Trustee will distribute to the Participant or, if the Participant has died, to his or her Beneficiary, the value of the Participant's vested interest in his or her Accounts. Subject to the remaining subsections of this section, distributions will be made in accordance with the following provisions. (i) If the aggregate vested balance of the Participant's Accounts is not more than $5000, distribution to the Participant, or to the Participant's Beneficiary in the case of the Participant's death, will be made, in the form of a lump sum payment, as soon as administratively practicable following the Participant's termination of employment. This clause will not apply, however, if the aggregate vested balance of the Participant's Accounts exceeded $5000 at the time of any previous distribution to the Participant. (ii) Except as provided in clause (i), distribution to the Participant of the vested balance of his or her Before-Tax Contribution Account, Matching Contribution Account, After-Tax Contribution Account and Rollover Account will be made in the form of a lump sum payment or installment payments as elected by the Participant. The distribution will be made or will begin, as the case may be, as soon as administratively practicable after the Participant's complete and accurate distribution request is received by the Administrator or the Administrator's designate, but in no case later than the sixtieth day after the Plan Year during which the Participant terminates employment or attains age 65, whichever is later, unless the Participant elects to defer the distribution pursuant to Subsection (b). If the Participant has not, prior to the deadline for making a deferral election pursuant to Subsection (b), either made an election pursuant to this clause (ii) or made a deferral election pursuant to Subsection (b), then distribution to the Participant will be made in the form of a lump sum payment as soon as administratively practicable after the deadline for making a deferral election pursuant to Subsection (b). (iii) Except as provided in clause (i), distribution to the Participant of the vested balance of his or her Profit Sharing Contribution Account and Profit Sharing Plan Rollover Account will be made in the form provided in Subsection (c). The distribution will be made or will begin, as the case may be, as soon as administratively practicable after the Participant's complete and accurate distribution request is received by the Administrator or the Administrator's designate, but in no case later than the sixtieth day of the Plan Year after the Plan Year during which the Participant terminates employment or attains age 65, whichever is later, unless the Participant elects to defer the distribution pursuant to Subsection (b). An election pursuant to this clause (iii) does not have to be made at the same time as an election pursuant to clause (ii). 27 (iv) Except as provided in clause (i) and subject to Subsection (c), distribution to the Participant's Beneficiary following the Participant's death will be made in the form and at the time elected by the Beneficiary in accordance with Subsection (e). (v) Except as provided in Subsection (c) and Subsection (f), all distributions will be made in the form of a check drawn on the Trust, and, if applicable, a canceled note evidencing any Plan loan; provided, that if the vested portion of the Matching Contribution Account balance of a Participant or Beneficiary of a deceased Participant is credited with the equivalent of at least 10 full shares of Company Stock, at the election of the Participant or Beneficiary, distribution of the vested portion of the Matching Contribution Account balance invested in the BMC Common Stock Fund may be distributed in full shares of Company Stock and cash in lieu of any fractional share. (vi) Any annuity contract distributed pursuant to subsection (c) or (f) will be a single premium, nonparticipating, nontransferable, noncancelable, nonsurrenderable immediate annuity contract that complies with all applicable requirements of the Plan. Distribution of an annuity contract satisfies in full any claims that the distributee or any person claiming on behalf of or through the distributee may have under the Plan. (b) Subject to the provisions of the other subsections of this section, a Participant, other than a Participant whose vested Account balances are distributed pursuant to Subsection (a)(i), may elect to defer commencement of his or her distribution under the Plan by providing the Administrator or the Administrator's designate a written, signed statement indicating in which of the available forms the benefit will be paid and specifying the date on which the payment is to be made or commence; provided that the specified date may not be later than April 1 of the calendar year following the calendar year during which the Participant attains age 70-1/2. The election must be provided to the Administrator not later than the thirtieth day (or such later date as Plan Rules may allow) after the Plan Year during which the Participant terminates employment or attains age 65, whichever is later. Plan Rules may permit a Participant to modify the election in any manner determined by the Administrator to be consistent with Code section 401(a)(14) and corresponding Treasury Regulations and the other provisions of this section. (c) If the aggregate vested balance of a Participant's Profit Sharing Contribution Account and Profit Sharing Plan Rollover Account is not more than $5000, the vested balance of those Accounts will be distributed to the Participant in the form of a lump sum payment. If the aggregate vested balance of a Participant's Profit Sharing Contribution Account and Profit Sharing Plan Rollover Account is more than $5000, unless the Participant otherwise elects in accordance with the provisions of clause (ii), the Administrator will, with the vested balance of those Accounts, and purchase and distribute to the Participant an annuity contract that conforms with the following provisions. (i) The contract will provide for payments for the life of the Participant if the Participant is not married on his or her "annuity starting date," within the meaning of Code section 417(f)(2), or, if the Participant is then married, for payments for the life of the Participant, with not less than 50 percent and not 28 more than 100 percent of the amount of such payments, as specified by the Participant in the manner prescribed by the Administrator, continuing after the Participant's death for the life of such spouse; provided, that (1) each qualified joint and survivor option payable under such annuity contract will be actuarially equivalent to each other option based upon reasonable actuarial assumptions specified in the contract; and (2) if a Participant does not otherwise elect, the benefit payable under the annuity contract with respect to a married Participant will be payments for his or her life with 50 percent of the amount of such payments continuing thereafter for the life of such spouse. (ii) A Participant whose vested Profit Sharing Contribution Account and Profit Sharing Plan Rollover Account balances would otherwise be distributed in the form of an annuity contract pursuant to clause (i) may elect to receive a lump sum payment or installment payments in lieu of such contract. The Participant's election must be in writing, in form prescribed by the Administrator; must be made within the 90-day period ending on the Participant's annuity starting date; and may be revoked and a new election made any number of times during the election period; and will not be effective unless the Participant's spouse consents to the election. (iii) If a Participant dies prior to his or her annuity starting date and is married on the date of his or her death, as soon as administratively practicable after the Administrator receives a properly completed distribution request form from the Participant's surviving spouse but in no case later than the date on which the Participant would have attained age 70-1/2, the Administrator will, with the vested balance of the Participant's Profit Sharing Contribution Account and Profit Sharing Plan Rollover Account, purchase and distribute to the Participant's surviving spouse an annuity contract that provides payments to the surviving spouse for his or her life; provided, that this clause (iii) will not apply if - (1) the Participant's spouse elects, in the manner prescribed by the Administrator and prior to the purchase of the annuity contract, to receive the balance of the Participant's Profit Sharing Contribution Account and Profit Sharing Plan Rollover Account in a lump sum payment or installment payments in accordance with the provisions of Subsection (e), or (2) the Participant elected, in the manner prescribed by the Administrator and within the period commencing on the first day of the Plan Year in which he or she attained age 35 and ending on the date of his or her death, to waive the provisions of this clause (iii), and the Participant's spouse consented to such election; provided that a Participant may, at any time and any number of times, by signed written notice delivered to the Administrator during the Participant's lifetime, revoke any election made under this clause, and may, with the consent of his or her spouse, make a new election following any such revocation. 29 (iv) The provisions of this Subsection (c) apply notwithstanding and supersede any designation by a married Participant of any primary Beneficiary other than his or her spouse which designation is not made either in conjunction with an election pursuant to clause (ii) or (iii) of this Subsection (c), as the case may be, or thereafter with the spouse's consent. (d) If a Participant elects to receive his or her distribution in the form of installment payments pursuant to Subsection (a)(ii) or Subsection (c)(iii), the installments will be substantially equal in amount and will be made on a monthly, quarterly, semi-annual or annual basis, for a period not extending beyond either the Participant's life expectancy or the life expectancy of the Participant and his or her Beneficiary; and, if the Participant's Beneficiary is not his or her spouse, the period over which such payments are to be made must comply with Treasury Regulation section 1.401(a)(9)-2. Prior to the Participant's "required beginning date," within the meaning of Code section 401(a)(9), the Participant may elect, in accordance with and subject to Plan Rules, whether the life expectancies for the Participant and his or her spouse are to be recalculated on an annual basis for purposes of determining the amount of each installment payment. Any such election will become irrevocable as of the required beginning date. If no such election is made, the life expectancies of the Participant and his or her spouse will not be recalculated. Installment payments will be made on a substantially pro rata basis from the investment funds in which the Participant's Accounts are then invested. (e) Subject to Subsections (a)(i) and (c)(iii), if a Participant dies before receiving the full amount to which he or she is entitled, the amount remaining will be distributed to the Participant's Beneficiary at such time or times and in such manner as the Beneficiary elects on a form provided by the Administrator, subject, however, to the following rules: (i) If the Participant dies after the April 1 of the calendar year following the calendar year during which he or she has both attained age 70-1/2 and terminated employment, distribution will be made to the Beneficiary at a rate that would result in the benefit being distributed at least as rapidly as if distribution were made at the same rate as was in effect immediately prior to the Participant's death. (ii) If the Participant dies before April 1 of the calendar year following the calendar year during which he or she has both attained age 70-1/2 and terminated employment, distribution will, at the Beneficiary's election, be made either - (1) in a lump sum payment no later than December 31 of the calendar year which contains the fifth anniversary of the date of the Participant's death, or (2) in installment payments commencing no later than December 31 of the calendar year immediately following the calendar year in which the Participant died (unless the Beneficiary is the Participant's spouse, in which case payments must begin no later than such date specified above or December 31 of the calendar year in which the Participant would have attained age 70-1/2 if he or she had lived). 30 If a Beneficiary elects to receive his or her distribution in the form of installment payments, the payments will be substantially equal in amount and will be made on a monthly, quarterly, semi-annual or annual basis, as elected by the Beneficiary, for a period, elected by the Beneficiary in accordance with and subject to Plan Rules, which may not be longer than the Beneficiary's life expectancy (as determined on the basis of the Beneficiary's age as of the date on which the payments are required to commence and, if the Beneficiary is the Participant's surviving spouse, as redetermined on an annual basis if elected by the Beneficiary in accordance with and subject to Plan Rules). (iii) For purposes of applying clauses (i) and (ii), if the Participant is a "5-percent owner" within the meaning of Code section 416, then he or she will be deemed to have terminated employment upon attaining age 70-1/2. (iv) If the Participant's spouse is the Beneficiary and dies after the Participant's death but before distributions to the spouse have commenced, the foregoing rules will be applied as if the surviving spouse were the Participant, including the substitution of the surviving spouse's date of death for the Participant's date of death; provided, that the alternative commencement date in clause (ii)(2) (relating to the date on which the Participant would have attained age 70-1/2 had he or she lived) will not be available. (f) In lieu of making installment payments to a Participant or Beneficiary directly from the Trust, the Administrator may use the vested balance of the Participant's or Beneficiary's Accounts to purchase an annuity contract from an insurance company and distribute the contract to the Participant or Beneficiary. (g) Notwithstanding Subsection (a), distribution to any Participant who attains age 70-1/2 before January 1, 1999, and distribution to any Participant who is a "5-percent owner," within the meaning of the Code section 416, must begin not later than April 1 of the calendar year after the Participant attains age 70-1/2, whether or not the Participant has terminated employment, as if he or she had terminated employment on the last day of the Plan Year during which he or she attained age 70-1/2. A Participant who attained age 70-1/2 before January 1, 1999, is not a 5-percent owner and is an Employee on September 1, 1998 may elect to stop distributions or to defer commencement of distributions, as the case may be. The election must be made in accordance with and is subject to Plan Rules, must be received by the Administrator not later than a date specified in Plan Rules, and will become effective as soon as administratively practicable after it is received by the Administrator. The election is irrevocable after it is received by the Administrator. If distributions to a Participant are stopped pursuant to this subsection, the Participant will have a new annuity starting date and his or her benefit will recommence in accordance with the other subsections of this Section 8.1 following his or her subsequent termination of employment. (h) Notwithstanding any other provision of the Plan to the contrary, distributions (including payments pursuant to any annuity contract distributed pursuant to this section) will be made in accordance with regulations issued under Code section 401(a)(9), including Treasury Regulation section 401(a)(9)-2, and any provisions of the Plan reflecting Code 31 section 401(a)(9) take precedence over any distribution options in the Plan that are inconsistent with Code section 401(a)(9). 8.2. BENEFICIARY DESIGNATION. (a) Subject to Section 8.1(c)(iv), each Participant may designate, on a form provided by the Administrator, one or more primary Beneficiaries or alternative Beneficiaries for all or a specified fractional part of his or her aggregate Accounts and may change or revoke any such designation from time to time. No such designation, change or revocation is effective unless executed by the Participant and received by the Administrator during the Participant's lifetime. Subject to Subsection (d), no such change or revocation requires the consent of any person. (b) If a Participant (i) fails to designate a Beneficiary, or (ii) revokes a Beneficiary designation without naming another Beneficiary, or (iii) designates one or more Beneficiaries none of whom survives the Participant, for all or any portion of the Accounts, such Accounts or portion are payable to the first class of the following classes of automatic Beneficiaries that includes a member surviving the Participant: Participant's spouse; Participant's issue, per stirpes and not per capita; Representative of Participant's estate. (c) When used in this section and, unless the designation otherwise specifies, when used in a Beneficiary designation, the term "per stirpes" means in equal shares among living children and the issue (taken collectively) of each deceased child, with such issue taking by right of representation; "children" means issue of the first generation; and "issue" means all persons who are descended from the person referred to, either by legitimate birth or legal adoption. The automatic Beneficiaries specified above and, unless the designation otherwise specifies, the Beneficiaries designated by the Participant, become fixed as of the Participant's death so that, if a Beneficiary survives the Participant but dies before the receipt of all payments due such Beneficiary, any remaining payments are payable to the representative of such Beneficiary's estate. Any designation of a Beneficiary by name that is accompanied by a description of relationship or only by statement of relationship to the Participant is effective only to designate the person or persons standing in such relationship to the Participant at the Participant's death. (d) Notwithstanding Subsection (a), no designation of a Beneficiary other than the Participant's spouse is effective unless such spouse consents to the designation. Any such consent is effective only with respect to the Beneficiary or class of Beneficiaries so designated and only with respect to the spouse who so consented. 32 8.3. ASSIGNMENT, ALIENATION OF BENEFITS. (a) Except as required under a qualified domestic relations order or by the terms of any loan from the Trust or to comply with a federal tax levy pursuant to Code section 6331, and except as otherwise provided in Code section 401(a)(13)(C), (i) no benefit under the Plan may in any manner be anticipated, alienated, sold, transferred, assigned, pledged, encumbered or charged, and any attempt to do so is void and (ii) no benefit under the Plan is in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled to such benefit. (b) To the extent provided in a qualified domestic relations order, distribution of benefits assigned to an alternate payee by such order may be distributed to the alternate payee in the form of a lump sum payment prior to the Participant's earliest retirement age. The terms "qualified domestic relations order," "alternate payee" and "earliest retirement age" have the meanings given in Code section 414(p). 8.4. PAYMENT IN EVENT OF INCAPACITY. If any person entitled to receive any payment under the Plan is physically, mentally or legally incapable of receiving or acknowledging receipt of the payment, and no legal representative has been appointed for such person, the Administrator in his or her discretion may (but is not required to) cause any sum otherwise payable to such person to be paid to any one or more of the following as may be chosen by the Administrator: the Beneficiaries, if any, designated by such person; the institution maintaining such person; a custodian for such person under the Uniform Transfers to Minors Act of any state; or such person's spouse, children, parents or other relatives by blood or marriage. Any such payment completely discharges all liability under the Plan to the person with respect to whom the payment is made to the extent of the payment. 8.5. PAYMENT SATISFIES CLAIMS. Any payment to or for the benefit of any Participant, or Beneficiary in accordance with the provisions of the Plan, to the extent of such payment, fully satisfies of all claims against the Trustee, the Administrator and the Participating Employers, any of whom may require the payee to execute a receipted release as a condition precedent to such payment. 8.6. DISPOSITION IF DISTRIBUTEE CANNOT BE LOCATED. If the Administrator is unable to locate a Participant or Beneficiary to whom a distribution is due, the Participant's Accounts will continue to be held in the Fund until such time as the Administrator has located the Participant or Beneficiary or the Participant or Beneficiary makes a proper claim for the benefit, as the case may be; provided, that, any Accounts not claimed within the period prescribed by applicable escheat laws will be paid to such governmental authorities, in such manner, as is specified in such laws. 8.7. DIRECT ROLLOVERS AND TRANSFERS. (a) To the extent a distribution is an "eligible rollover distribution," within the meaning of Code section 402(c)(4), the Administrator will, if so instructed by the distributee in accordance with Plan Rules, direct the Trustee to make the distribution to an "eligible retirement plan," within the meaning of Code section 402(c)(8). The foregoing provision will not apply (i) if the aggregate taxable distributions to be made to the distributee during the calendar year are less than $200, (ii) if less than the entire taxable amount of the distribution is to be distributed to the eligible retirement plan and the 33 amount to be distributed to the eligible retirement plan is less than $500 or (iii) with respect to any portion of an eligible rollover distribution that consists of an offset amount with respect to a Plan loan. (b) The Administrator may direct the Trustee to transfer the balance of any or all of the Accounts of a Participant to the trustee of another plan; provided, that (i) the other plan is a defined contribution plan qualified under Code section 401(a), (ii) the other plan satisfies the requirements set forth in Code sections 401(k) and 411(d)(6) with respect to the transferred Accounts to which such requirements are applicable, and (iii) the trustee of the other plan is willing to accept such transfer. 34 ARTICLE 9. Contribution Limitations 9.1. BEFORE-TAX CONTRIBUTION DOLLAR LIMITATION. The aggregate amount of Before-Tax Contributions and other "elective deferrals" (within the meaning of Code section 402(g)(3)) under any other qualified plan maintained by an Affiliated Organization with respect to a Participant for any taxable year of the Participant may not exceed $7000 (or such larger amount as may be permitted for the taxable year under Code section 402(g)). The limitation for any Participant who received a hardship distribution under Section 6.1 will, for the year following the year in which such distribution was made, be reduced as provided in Section 6.1(c)(iv). If the limitation is exceeded for any taxable year of the Participant, the Participant will be deemed to have notified the Administrator of such excess and the amount of Before-Tax Contributions in excess of the limitation, increased by Fund earnings or decreased by Fund losses attributable to the excess as determined under Section 9.5, will be distributed to the Participant. Such distribution may be made at any time after the excess contributions are received, but not later than April 15 of the taxable year following the taxable year to which the limitation relates. The amount distributed to a Participant who has made elective deferrals for the taxable year other than pursuant to Section 3.1 will, to the extent of such other elective deferrals, be determined in accordance with written allocation instructions received by the Administrator from the Participant not later than March 1 of the taxable year following the taxable year with respect to which the Before-Tax Contributions were made. 9.2. ACTUAL DEFERRAL PERCENTAGE LIMITATIONS. (a) Notwithstanding Section 3.1, for any Plan Year beginning after December 31, 1996, Before-Tax Contributions may be made on behalf of Participants who are Highly Compensated Employees only if the requirements of Code section 401(k)(3), as set forth in Subsection (b), are satisfied. To the extent deemed necessary by the Administrator in order to comply with such requirements, the Administrator may, in accordance with the Plan Rules, prospectively decrease the rate at which a Participant's Eligible Earnings will be reduced. (b) (i) The requirements of Code section 401(k)(3) will be satisfied for any Plan Year if, for that Plan Year, the Plan satisfies the requirements of Code section 410(b)(1) with respect to "eligible employees" and either of the following tests: (1) the "actual deferral percentage" for the Plan Year for eligible employees who are Highly Compensated Employees for the Plan Year is not more than the product of the actual deferral percentage for the preceding Plan Year for all eligible employees for the preceding Plan Year who were not Highly Compensated Employees (subject to any adjustment required by Treasury Regulations to reflect Plan coverage changes during the Plan Year being tested), multiplied by one and one-quarter; or (2) the excess of the actual deferral percentage for the Plan Year for eligible employees who are Highly Compensated Employees for the Plan Year 35 over the actual deferral percentage for the preceding Plan Year for all eligible employees for the preceding Plan Year who were not Highly Compensated Employees is not more than two percentage points and the actual deferral percentage for the Plan Year for eligible employees who are Highly Compensated Employees for the Plan Year is not more than the product of the actual deferral percentage for the preceding Plan Year of all eligible employees for the preceding Plan Year who were not Highly Compensated Employees, multiplied by two. (ii) For purposes of this section and Section 9.4, (1) "eligible employee" means an Active Participant who is eligible to have Before-Tax Contributions made on his or her behalf for the Plan Year in question or would be so eligible but for a suspension imposed under Section 3.1(b)(iv); and (2) "actual deferral percentage," with respect to either of the two groups of eligible employees referenced above, is the average of the ratios, calculated separately for each eligible employee in the particular group, of the amount of Before-Tax Contributions made on the eligible employee's behalf for the Plan Year in question, to the eligible employee's Testing Wages for the Plan Year in question, or the portion of such Plan Year during which he or she was an eligible employee, as specified in Plan Rules. In computing the actual deferral percentage, the following rules apply. (A) Any Before-Tax Contributions made on behalf of an eligible employee who is not a Highly Compensated Employee that are in excess of the limitation described in Section 9.1 will be excluded. (B) Any Before-Tax Contributions made on behalf of an eligible employee that are distributed to the eligible employee pursuant to Section 9.6(c) will be excluded. (C) Except as otherwise provided in Treasury Regulations, Before-Tax Contributions taken into account in determining the actual contribution percentage under Section 9.3(b)(ii) will be excluded. (D) To the extent permitted by Treasury Regulations and determined by the Administrator, all or any portion of the Matching Contribution or Profit Sharing Contribution or both for a Plan Year credited to a subaccount in accordance with Section 3.6 will be included. (E) Elective contributions under any other plan that is aggregated with this Plan to satisfy the requirements of Code section 410(b) will be included. 36 (F) To the extent provided in Treasury Regulations, elective contributions made under any other qualified cash or deferred arrangement of any Affiliated Organization on behalf of any eligible Employee who is a Highly Compensated Employee will be included. (c) If, for any Plan Year, the requirements of Subsection (b) are not satisfied, the Administrator will determine the amount by which Before-Tax Contributions made on behalf of each eligible employee who is a Highly Compensated Employee for the Plan Year exceeds the permissible amount as determined under Subsection (b). The determination will be made by successively decreasing the rate of Eligible Earnings reductions for such Highly Compensated Employees who, during the Plan Year, had the greatest percentage of Eligible Earnings reductions to the next lower percentage, then again decreasing the percentage of such Participants' Eligible Earnings reductions, together with the percentage of Eligible Earnings reductions for such Highly Compensated Employees who were already at such lower percentage, to the next lower percentage, and continuing such procedure for as many percentage decreases as the Administrator deems necessary. The Administrator may make such reductions in any amount. (d) At such time as the Administrator specifies on or following the last day of the Plan Year for which the determination described in Subsection (c) is made, but in no case later than the last day of the following Plan Year, the amount of excess Before-Tax Contributions so determined, increased by Fund earnings or decreased by Fund losses attributable to such excess as determined under Section 9.5, will be distributed to each such Highly Compensated Employee. The amount to be distributed pursuant to the foregoing sentence with respect to any Plan Year will be reduced by the portion of the amount, if any, distributed pursuant to Section 9.1 that is attributable to Before-Tax Contributions that relate to such Plan Year, determined by assuming that Before-Tax Contributions in excess of the limitation described in Section 9.1 for a given taxable year are the first contributions made for a Plan Year falling within such taxable year. Additional amounts to be distributed to each such Highly Compensated Employee will be determined by successively decreasing the amount of Before-Tax Contribution for Highly Compensated Employees who, for the Plan Year, had the largest amount of Before-Tax Contributions made on their behalf to the next lower amount, and continuing this procedure until an amount equal to the aggregate amount of excess Before-Tax Contributions has been removed from the Accounts of the Highly Compensated Employees. (e) To the extent required or permitted by Treasury Regulations, the Administrator will or may, as the case may be, apply the limitation described in this section separately to each group of eligible employees who are included in a unit of Employees covered by a collective bargaining agreement and those who are not included in a different unit. (f) If the Company elects to apply Code section 410(b)(4)(B) in determining whether the Plan satisfies either of the tests described in Section 9.2(b)(i) for a Plan Year beginning after December 31, 1998, the Company may exclude from consideration all eligible employees who are not Highly Compensated Employees and have not met the minimum age and service requirements of Code section 410(a)(1)(A). 37 9.3. ACTUAL CONTRIBUTION PERCENTAGE LIMITATIONS. (a) Notwithstanding Sections 3.2 and 3.4, for any Plan Year beginning after December 31, 1996, Matching Contributions may be made on behalf of and After-Tax Contributions may be made by Participants who are Highly Compensated Employees only if the requirements of Code section 401(m)(2), as set forth in Subsection (b), are satisfied. To the extent deemed necessary by the Administrator in order to comply with such requirements, the Administrator may, in accordance with Plan Rules, prospectively decrease the rate at which a Participant may make After-Tax Contributions. (i) The requirements of Code section 401(m)(2) will be satisfied for any Plan Year if, for that Plan Year, the Plan satisfies either of the following tests: (1) the "actual contribution percentage" for the Plan Year for "eligible employees" who are Highly Compensated Employees for the Plan Year is not more than the product of the actual contribution percentage for the preceding Plan Year for all eligible employees for the preceding Plan Year who were not Highly Compensated Employees (subject to any adjustment required by Treasury Regulations to reflect Plan coverage changes during the Plan Year being tested), multiplied by one and one-quarter; or (2) the excess of the actual contribution percentage for the Plan Year for eligible employees who are Highly Compensated Employees for the Plan Year over the actual contribution percentage for the preceding Plan Year for all eligible employees for the preceding Plan Year who were not Highly Compensated Employees is not more than two percentage points and the actual contribution percentage for the Plan Year for Highly Compensated Employees for the Plan Year is not more than the product of the actual contribution percentage for the preceding Plan Year for all eligible employees for the preceding Plan Year who were not Highly Compensated Employees, multiplied by two. (ii) For purposes of this section and Section 9.4: (1) "eligible employee" means an Active Participant who is eligible to have Matching Contributions made on his or her behalf, or to make After-Tax Contributions, for the Plan Year in question or who would be eligible but for a suspension imposed under Section 3.1(b)(iv) or 3.4(b)(iv). (2) the "actual contribution percentage" with respect to either of the two groups of eligible employees referenced above, is the average of the ratios, calculated separately for each eligible employee in the particular group, of the aggregate amount of Matching Contributions made on behalf of, and After-Tax Contributions made by, the eligible employee for the Plan Year, to the eligible employee's Testing Wages for the Plan Year, or the portion of the Plan Year during which he or she was an eligible employee, as specified in Plan Rules. In computing the actual contribution percentage the following rules apply. 38 (A) Except as otherwise provided in Treasury Regulations, Matching Contributions taken into account in determining the actual deferral percentage under Section 9.2(b)(ii) will be excluded. (B) Matching Contributions taken into account for purposes of the minimum contribution required by Section 14.3(a) will be excluded. (C) Any Matching Contributions forfeited pursuant to Section 9.6(c) will be excluded. (D) To the extent permitted by Treasury Regulations and determined by the Administrator, all or any portion of the Before-Tax Contributions for the Plan Year on behalf of eligible employees will be included. (E) To the extent permitted by Treasury Regulations and determined by the Administrator, all or any portion of the Profit Sharing Contribution for a Plan Year credited to a subaccount in accordance with Section 3.6 will be included. (F) Matching contributions (within the meaning of Code section 401(m)(4)(A)) and after-tax contributions made under any other plan that is aggregated with this Plan to satisfy the requirements of Code section 410(b) will be included. (G) To the extent required by Treasury Regulations, matching contributions (within the meaning of Code section 401(m)(4)(A)) and after-tax contributions made under any other qualified plan of any Affiliated Organization on behalf of or by any eligible employee who is a Highly Compensated Employee will be included. (b) If, for any Plan Year, the requirements of Subsection (a) are not satisfied, the Administrator will determine the amount by which After-Tax Contributions made by each Highly Compensated Employee for the Plan Year and, if necessary, Matching Contributions made on behalf of each Highly Compensated Employee for the Plan Year exceeds the permissible amount as determined under Subsection (a), such determination being made in accordance with the procedure described in Section 9.2(c) with respect to reductions of Eligible Earnings. (c) At such time as the Administrator specifies on or following the last day of the Plan Year for which the determination described in Subsection (c) is made, but in no case later than the last day of the following Plan Year, the amount of excess After-Tax and Matching Contributions so determined with respect to each Highly Compensated Employee, increased by Fund earnings or decreased by Fund losses attributable to such excess as determined under Section 9.5, will be distributed to such Highly Compensated Employee; provided, however, that to the extent the excess Matching Contributions would not be fully vested if retained in the Plan, such excess will be forfeited rather than 39 distributed, and any such forfeitures will be applied as provided in Section 3.2(d). Amounts to be distributed to each such Highly Compensated Employee or forfeited will be determined by successively decreasing the amount of After-Tax Contributions made by and, if necessary, Matching Contributions made on behalf of Highly Compensated Employees who, for the Plan Year, made the largest After-Tax Contributions and had the largest amount of Matching Contributions on their behalf to the next lower amount, and continuing this procedure until an amount equal to the aggregate amount of excess contributions has been removed from the Accounts of the Highly Compensated Employees. (d) To the extent provided in Treasury Regulations, the limitations described in this section do not apply to any group of eligible employees who are included in a unit of Employees covered by a collective bargaining agreement. (e) If the Company elects to apply Code section 410(b)(4)(B) in determining whether the Plan satisfies either of the tests described in Section 9.3(b)(i) for any Plan Year beginning after December 31, 1998, the Company may exclude from consideration all eligible employees who are not Highly Compensated Employees and have not met the minimum age and service requirements of Code section 410(a)(1)(A). 9.4. MULTIPLE USE LIMITATION. (a) This section applies for any Plan Year beginning after December 31, 1996 for which the sum of the actual deferral percentage for eligible employees who are Highly Compensated Employees, plus the actual contribution percentage for eligible employees who are Highly Compensated Employees, exceeds the "aggregate limit." For purposes of this subsection, the aggregate limit is the greater of: (i) The sum of: (1) the product of one and one-quarter, multiplied by the greater of: (A) the actual deferral percentage for the Plan Year for eligible employees who are not Highly Compensated Employees, or (B) the actual contribution percentage for the Plan Year for eligible employees who are not Highly Compensated Employees; plus (2) the sum of two percentage points plus the lesser of the actual deferral percentage determined under item (A) of clause (1) above or the actual contribution percentage determined under item (B) of clause (1) above, with such sum in no case exceeding twice the lesser of such actual deferral percentage or actual contribution percentage; or (ii) The sum of: 40 (1) the product of one and one-quarter, multiplied by the lesser of: (A) the actual deferral percentage for the Plan Year for eligible employees who are not Highly Compensated Employees, or (B) the actual contribution percentage for the Plan Year for eligible employees who are not Highly Compensated Employees; plus (2) the sum of two percentage points plus the greater of the actual deferral percentage determined under item (A) of clause (1) above or the actual contribution percentage determined under item (A) of clause (1) above, with such sum in no case exceeding twice the lesser of such actual deferral percentage or actual contribution percentage. (b) If, for any Plan Year, the calculations under Subsection (a) require that this section be applied, the Administrator will determine the amount by which After-Tax Contributions made by each Highly Compensated Employee for the Plan Year and Matching Contributions made on behalf of each Highly Compensated Employee for the Plan Year causes the excess amount determined under Subsection (a), such determination being made in accordance with the provisions of Section 9.3(c). At such time as the Administrator specifies on or following the last day of the Plan Year for which such determination is made, but in no case later than the last day of the following Plan Year, the excess will be corrected in accordance with Section 9.3(d). (c) To the extent provided in Treasury Regulations, the limitations described in this section do not apply to any group of eligible employees who are included in a unit of employees covered by a collective bargaining agreement. 9.5. EARNINGS OR LOSSES ON EXCESS CONTRIBUTIONS. The amount of Fund earnings or losses with respect to the excess amount of contributions returned to a Highly Compensated Employee pursuant to this article is an amount equal to the product of the total earnings or losses for the Participant's Account to which the excess contributions were credited for the Plan Year with respect to which the determination is being made, multiplied by a fraction, the numerator of which is the excess amount of contributions made on the Participant's behalf to such Account for the Plan Year, and the denominator of which is the closing balance of such Account for the Plan Year, decreased by the amount of earnings added to that Account, or increased by the amount of losses charged to that Account, for the Plan Year. 9.6. AGGREGATE DEFINED CONTRIBUTION LIMITATIONS. (a) Notwithstanding any contrary provisions of the Plan, there will not be allocated to any Participant's Accounts for a Plan Year any amount that would cause the aggregate "annual additions" with respect to the Participant for the Plan Year to exceed the lesser of 41 (i) $30,000 (or such dollar amount, adjusted to reflect increases in the cost of living, as in effect under Code section 415(c)(1)(A) for the calendar year during which the Plan Year in question begins) and (ii) 25 percent of the Participant's Section 415 Wages for the Plan Year. (b) For purposes of Subsection (a), the "annual additions" with respect to a Participant for a Plan Year are the sum of - (i) the aggregate amount of Before-Tax, Matching, Profit Sharing and After-Tax Contributions allocated to the Participant's Accounts under the Plan for the Plan Year (including the amount of any Before-Tax, Matching or After-Tax Contributions distributed to the Participant or forfeited pursuant to Section 9.2(d) or 9.3(d) but excluding any Before-Tax Contributions in excess of the limitation set forth in Section 9.1 that are distributed to the Participant by April 15 of the year following the year to which such contributions relate) and employer contributions, employee contributions and forfeitures allocated to the Participant's accounts under any other qualified defined contribution plan maintained by any Affiliated Organization for the Plan Year; plus (ii) the amount, if any, attributable to post-retirement medical benefits that is allocated to a separate account for the Participant as a "key employee" within the meaning of Code section 416(i), to the extent required under Code section 419A(d)(1). If a Before-Tax, Matching or Profit Sharing Contribution with respect to a Plan Year is made more than 30 days after the due date (including extensions) of the Company's federal income tax return for the taxable year of the Company coinciding with the Plan Year or in which the Plan Year ends, the contribution will be an annual addition for the Plan Year during which the contribution is made. If an After-Tax Contribution with respect to a Plan Year is made more than 30 days after the end of the Plan Year, the contribution will be an annual addition for the Plan Year during which the contribution made. (iii) If the Administrator, in his or her discretion, determines that the limitation under Subsection (a) would otherwise be exceeded for a Plan Year, to the extent necessary to prevent such excess from occurring, the amount of After-Tax Contributions made by or Before-Tax Contributions made on behalf of the Participant, or both, will be prospectively reduced. (iv) If a further reduction of contributions is required, the amount of the Matching Contribution that would otherwise be allocated to the Participants' Matching Contribution Account will be reduced and the aggregate amount of the Contribution for the Plan Year will be reduced by the same amount and then the amount of the Profit Sharing Contribution that would otherwise be allocated to the Participant's Profit Sharing Contribution Account will be reduced and the aggregate amount of the Profit Sharing Contribution for the Plan Year will be reduced by the same amount. 42 (v) If, in spite of such reduction and as a result of the allocation of forfeitures or a reasonable error in estimating the amount of the Participant's Eligible Earnings, Section 415 Wages, Before-Tax Contributions or other elective deferrals within the meaning of Code section 402(g)(3) for the Plan Year, the limitation would otherwise be exceeded, then, to the extent required to prevent such excess, (1) the amount of After-Tax Contributions made by the Participant for the Plan Year, together with earnings on such contributions, will be returned to the Participant, then (2) the amount of Before-Tax Contribution made for the Participant, together with earnings on such contributions, will be distributed to the Participant and any Matching Contributions attributable to the amount so distributed, together with earnings on such contributions, will be forfeited and applied as provided in Section 3.2(d), then (3) if a further excess would otherwise exist, the amount of such excess will be held unallocated in a suspense account and will be allocated to all other eligible Participants for the Plan Year and, to the extent necessary, subsequent Plan Years, before Matching and Profit Sharing Contributions are made for such Plan Year or Years, and will be applied toward the amount of such contributions for such Plan Year or Years. 9.7. AGGREGATE DEFINED CONTRIBUTION/DEFINED BENEFIT LIMITATIONS. (a) In no event will the amount of a Participant's annual additions under the Plan for any Plan Year beginning before January 1, 2000 exceed an amount that would cause the decimal equivalent of the sum of the "defined benefit fraction" plus the "defined contribution fraction" to exceed one. (b) The "defined benefit fraction" is a fraction, the numerator of which is the Participant's aggregate projected annual benefit under all qualified defined benefit pension plans maintained by any Affiliated Organization (determined as of the end of the Plan Year), and the denominator of which is the lesser of: (i) 125 percent of the maximum dollar benefit limitation in effect under Code section 415(b)(1)(A) for the calendar year during which the Plan Year in question begins; and (ii) 140 percent of the average Section 415 Wages of the Participant during the three consecutive Plan Years during which he or she was a participant in any such defined benefit pension plan which produce the highest average. (c) The "defined contribution fraction" is a fraction, the numerator of which is the sum of the annual additions to the Participant's accounts for the Plan Year under this Plan and any other qualified defined contribution plans maintained by any Affiliated Organization, determined in the manner described in Section 9.6, and the denominator of which is the aggregate of the lesser of: 43 (i) 125 percent of the maximum annual addition dollar limitation in effect under Code section 415(c)(1)(A) for the calendar year during which the Plan Year in question begins; and (ii) 140 percent of 25 percent of the Participant's Section 415 Wages for the Plan Year, applied for all years during which the Participant was employed with an Affiliated Organization, without regard to whether there was a defined contribution plan in effect during all such years. (d) If the annual additions that would otherwise be made with respect to a Participant for a Plan Year would cause the limitation of Subsection (a) to be exceeded, the Participant's benefit under one or more defined benefit pension plans maintained by an Affiliated Organization will, to the extent provided in such plans, be reduced to the extent necessary to prevent such excess from occurring, and, if a sufficient reduction cannot be made under such plans, the provisions of Section 9.6(c) will be applied to reduce the amount of the annual additions to the Participant's Accounts under this Plan for such Plan Year to the extent necessary to prevent such excess. 9.8. ADMINISTRATOR'S DISCRETION. Notwithstanding the foregoing provisions of this article, the Administrator may apply the provisions of Sections 9.1 through 9.7 in any manner permitted by Treasury Regulations that will cause the Plan to satisfy the limitations of the Code incorporated in such sections and Treasury Regulations thereunder, and the Administrator's good faith application of Treasury Regulations is binding on all Participants and Beneficiaries. 44 ARTICLE 10. Service Rules 10.1. COMPUTATION PERIOD. The "Computation Period" is - (a) for the purpose of determining whether an Employee has satisfied the eligibility service requirements described in Section 2.1(a), the 12-month period commencing with the date on which he or she first completes an Hour of Service of the type specified at Section 10.3(a)(i) and, thereafter, Plan Years, beginning with the Plan Year that includes the first anniversary of that date; and (b) for the purpose of determining the extent of an Employee's Vesting Service, Plan Years. 10.2. VESTING SERVICE. The term "Vesting Service" with respect to an Employee means, except as otherwise provided in Section 10.5, the aggregate number of Computation Periods of the type specified at clause (b) of Section 10.1 during each of which the Employee completes at least 1000 Hours of Service. 10.3. HOUR OF SERVICE. (a) Subject to the remaining subsections of this section, the term "Hour of Service," with respect to an Employee, includes and is limited to - (i) each hour for which the Employee is paid, or entitled to payment, for the performance of duties for an Affiliated Organization; (ii) each hour for which the Employee is paid, or entitled to payment, by an Affiliated Organization on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness (including disability), layoff, jury duty, military duty or leave of absence; (iii) each hour for which the Employee is not paid or entitled to payment but which is required by federal law to be credited to the Employee on account of his or her military service or similar duties; and (iv) each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by an Affiliated Organization; provided, first, that Hours of Service taken into account under clause (i), (ii) or (iii) will not also be taken into account under this clause (iv); and second, that Hours of Service taken into account under this clause (iv) that relate to periods specified in clause (ii) will be subject to the rules under Subsection (b). (b) The following rules will apply for purposes of determining the Hours of Service completed by an Employee under Subsection (a)(ii): 45 (i) No more than 501 hours will be credited to the Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single Computation Period). (ii) No more than the number of hours regularly scheduled for the performance of duties for the period during which no duties are performed will be credited to the Employee for such period. (iii) The Employee will not be credited with hours for which payments are made solely to reimburse medical or medically related expenses. (iv) A payment will be deemed to be made by or due from an Affiliated Organization, regardless of whether such payment is made by or due from the Affiliated Organization directly or indirectly through a trust fund or insurer to which the Affiliated Organization contributes or pays premiums. (v) If the payment made or due is calculated on the basis of units of time, the number of Hours of Service to be credited will be the number of regularly scheduled working hours included in the units of time on the basis of which the payment is calculated; provided, that, if such a payment is made to an Employee described in Subsection (d)(i), the number of Hours of Service to be credited will be the number of equivalent hours determined under Subsection (d)(i) that are included in the units of time on the basis of which the payment is calculated. (vi) If the payment made or due is not calculated on the basis of units of time, the number of Hours of Service to be credited will be equal to the amount of the payment, divided by the Employee's most recent hourly rate of compensation before the period during which no duties are performed. (c) Hours of Service will be credited - (i) in the case of Hours of Service described in Subsection (a)(i), to the Computation Period in which the duties are performed; (ii) in the case of Hours of Service described in Subsection (a)(ii), to the Computation Period or Periods in which the period during which no duties are performed occurs; provided, that, if the payment is not calculated on the basis of units of time, the Hours of Service will not be allocated between more than the first two Computation Periods of such period; (iii) in the case of Hours of Service described in Subsection (a)(iii), to the Computation Period or Periods determined by the Administrator in accordance with the applicable federal law; and (iv) in the case of Hours of Service described in Subsection (a)(iv), to the Computation Period or Periods to which the award or agreement for back pay pertains. (d) For purposes of determining the number of Hours of Service completed by an Employee during a particular period of time - 46 (i) an Employee who is not subject to the overtime provisions of the Fair Labor Standards Act of 1938, as from time to time amended, will be credited with 45 Hours of Service for each calendar week during which he or she completes at least one Hour of Service; (ii) each other Employee will be credited with the number of Hours of Service that he or she completes during such period. (e) Notwithstanding the foregoing provisions of this section, an individual will be credited with the number of Hours of Service he or she completes, determined in the manner specified in Subsections (a) through (d), (i) while, although not an Employee, he or she is considered to be a "leased employee" of an Affiliated Organization or of a "related person" (within the meaning of Code sections 414(n)(2) and 144(a)(3)), respectively, and (ii) with any other organization to the extent such Hours of Service are required to be taken into account pursuant to Treasury Regulations under Code section 414(o). 10.4. ONE-YEAR BREAK IN SERVICE. An Employee will incur a "One-Year Break in Service" if the Employee fails to complete at least 500 Hours of Service during a Computation Period; provided, that, for purposes only of determining whether an Employee has incurred such a One-Year Break in Service, in addition to Hours of Service credited under Section 10.4, there will be taken into account the number of Hours of Service that otherwise would have been credited to the Employee, or, if the number of such hours of service cannot be determined, eight hours of service for each day on which the Employee would have otherwise performed services for an Affiliated Organization, during an authorized leave of absence, while still employed with the Affiliated Organization, pursuant to any established, nondiscriminatory leave policy of an Affiliated Organization or due to - (a) the Employee's pregnancy, (b) the birth of the Employee's child, (c) the placement of a child with the Employee in connection with the adoption of such child by the Employee, or (d) the Employee's caring for such child for a period beginning immediately following such birth or placement; provided, first, that the total number of such additional Hours of Service taken into account by reason of any such absence will not exceed 501; second, that, if the Employee would be prevented from incurring a One-Year Break in Service for the Computation Period in which such absence commenced solely because the additional Hours of Service are so credited, such Hours of Service will be credited only to such Computation Period or, if a One-Year Break in Service for such Computation Period would not be so prevented, such additional Hours of Service will be credited to the Computation Period following the Computation Period during which such absence commenced; and third, that, notwithstanding the foregoing, no such additional Hours of Service will be credited in connection with an absence for one of the reasons set forth at items 47 (a) through (d) unless the Employee furnishes to the Administrator, on a timely basis, such information as the Administrator reasonably requires in order to establish the number of days during which the Employee was absent for that reason. In addition, an Employee will be credited with Hours of Service for the purpose of determining whether he or she has incurred a One-Year Break in Service to the extent required by the Family and Medical Leave Act of 1993. 10.5. LOSS OF SERVICE. If an Employee terminates employment and experiences at least five consecutive One-Year Breaks in Service with respect to his or her Vesting Service, then: (a) if the Employee had a vested interest in his or her Account prior to the Breaks in Service, (i) Vesting Service completed prior to such Breaks in Service will be taken into account in determining his or her vested interest in his or her Accounts attributable to contributions made for periods after the Breaks in Service but only if the Employee completes one year of Vesting Service following such Breaks in Service, and (ii) the extent of the Employee's vested interest in his or her Accounts as determined under Section 7.1 prior to the Breaks in Service will not be increased by Vesting Service completed following the Breaks in Service; or (b) if the Employee had no vested interest in his or her Account prior to the Breaks in Service, the Employee's Vesting Service completed prior to the Breaks in Service will not be taken into account for any purpose under the Plan. 10.6. PRE-ACQUISITION SERVICE. Service with an Affiliated Organization prior to the date on which it became an Affiliated Organization (or, with another entity prior to the acquisition of such entity's business or assets by an Affiliated Organization) will be taken into account under this Plan only if, to the extent and for the purposes, provided in any agreement pursuant to which it became an Affiliated Organization (or such business or assets were acquired) or as provided by resolution of the Company's Board. If such Hours of Service are to be taken into account, unless otherwise specifically provided in such agreement or resolution, such Hours of Service will be determined in accordance with the provisions of this article. If less than the entire period of employment with an Affiliated Organization prior to its becoming such (or with another entity prior to the acquisition of its business or assets) is to be taken into account, the extent to which such period of employment is to be taken into account will be specified in an exhibit to the Plan. 48 ARTICLE 11. Adoption, Amendment and Termination 11.1. ADOPTION BY AFFILIATED ORGANIZATIONS. An Affiliated Organization may adopt this Plan and become a Participating Employer with the prior approval of the Administrator by furnishing to the Administrator a certified copy of a resolution of its Board adopting the Plan. Any adoption of the Plan by an Affiliated Organization, however, must either be approved in advance or ratified by the Company's Board prior to the end of the fiscal year of such Affiliated Organization in which it adopts the Plan. 11.2. AUTHORITY TO AMEND AND PROCEDURE. (a) The Company reserves the right to amend the Plan at any time, to any extent that it may deem advisable. Each amendment must be stated in a written instrument approved in advance or ratified by the Company's Board and executed in the name of the Company by a duly authorized officer or the Company's Director of Compensation, Benefits & HRIS, and attested by the Secretary or an Assistant Secretary. On and after the effective date of the amendment, the Plan will be deemed to have been amended as set forth in the instrument, and all interested persons will be bound by the amendment; provided, first, that no amendment will increase the duties or liabilities of the Trustee or Administrator without its written consent; and, second, that no amendment will have any retroactive effect so as to deprive any Participant, or any Beneficiary of a deceased Participant, of any benefit already accrued or vested or of any option with respect to the form of such benefit that is protected under Code section 411(d)(6), except that any amendment that is required to conform the Plan with government regulations so as to qualify the Trust for income tax exemption may be made retroactively to the Effective Date of the Plan or to any later date. (b) If the schedule for determining the extent to which benefits under the Plan are vested is changed, whether by amendment or on account of the Plan's becoming or ceasing to be a top-heavy plan, each Participant who has completed at least three years of vesting service may elect to have his or her vested benefits determined without regard to such change by giving written notice of such election to the Administrator within the period beginning on the date such change was adopted (or the Plan's top heavy status changed) and ending 60 days after the latest of (i) the date such change is adopted, (ii) the date such change becomes effective or (iii) the date the Participant is issued notice of such change by the Administrator or the Trustee. Except as otherwise provided in an amendment permitted by Treasury Regulations, if an optional form of benefit payment protected under Code section 411(d)(6) is eliminated, each Participant may elect to have that portion of the value of his or her Accounts that was accrued as of the date of such elimination, distributed in the optional form of benefit payment that was eliminated. (c) The provisions of the Plan in effect at the termination of a Participant's employment will, except as specifically provided otherwise in any subsequent amendment, continue to apply to such Participant. 11.3. AUTHORITY TO TERMINATE AND PROCEDURE. The Company expects to continue the Plan indefinitely but reserves the right to terminate the Plan in its entirety at any time. Each Participating 49 Employer expects to continue its participation in the Plan indefinitely but reserves the right to cease its participation in the Plan at any time. The Plan will terminate in its entirety as of the date specified by the Company in a written notice adopted and executed in the manner of an amendment. The Plan will terminate with respect to a Participating Employer as of a date specified in a written instrument approved in advance or ratified by the Participating Employer's Board and executed in the name of the Participating Employer by a duly authorized officer. 11.4. VESTING UPON TERMINATION, PARTIAL TERMINATION OR DISCONTINUANCE OF CONTRIBUTIONS. Upon the termination of the Plan or upon the complete discontinuance of contributions, the Accounts of each "affected employee" will vest in full. For purposes of this section, "affected employee" means a Participant or former Participant who, as of the effective date of the termination or complete discontinuance of contributions (a) is actively employed with an Affiliated Organization or (b) has terminated employment and has neither received a distribution of his or her Accounts of the type described in Section 7.2 nor experienced at least five consecutive One-Year Breaks in Service. Upon the partial termination of the Plan, the Accounts of each Participant as to whom the Plan has been partially terminated will vest in full. 11.5. DISTRIBUTION FOLLOWING TERMINATION, PARTIAL TERMINATION OR DISCONTINUANCE OF CONTRIBUTIONS. After termination or partial termination of the Plan or the complete discontinuance of contributions under the Plan, the Trustee will continue to hold and distribute the Fund at the times and in the manner provided by Section 8.1 as if such event had not occurred or, if the Administrator so directs in accordance with Treasury Regulations, the Trustee will distribute to each Participant the entire balance of his or her Accounts. 50 ARTICLE 12. Definitions, Construction and Interpretations The definitions and the rules of construction and interpretations set forth in this article apply in construing this instrument unless the context otherwise indicates. 12.1. ACCOUNT. An "Account" with respect to a Participant is any or all of the accounts maintained on his or her behalf pursuant to Section 4.1, as the context requires. 12.2. ACTIVE PARTICIPANT. An "Active Participant" is a Participant who is a Qualified Employee. 12.3. ADMINISTRATOR. The "Administrator" of the Plan is the Company or any individual or committee to whom or to which administrative duties are delegated by the Company with respect to the delegated duties. 12.4. AFFILIATED ORGANIZATION. An "Affiliated Organization" is the Company and any corporation that is a member of a controlled group of corporations (within the meaning of Code section 1563(a) without regard to Code sections 1563(a)(4) and 1563(e)(3)(C)) that includes the Company, any trade or business (whether or not incorporated) that together with the Company is under common control (within the meaning of Code section 414(c)), any member of an "affiliated service group" (within the meaning of Code section 414(m)) of which the Company is a member or any other organization that, together with the Company, is treated as a single employer pursuant to Code section 414(o) and Treasury Regulations thereunder; provided, that, for purposes of applying the limitations set forth at Sections 9.6 and 9.7 of the Plan, such determination under Code section 1563(a) will be made by substituting the phrase "more than 50 percent" for the phrase "at least 80 percent" wherever it appears in such Code section. 12.5. AFTER-TAX CONTRIBUTION ACCOUNT. The "After-Tax Contribution Account" is the account established pursuant to clause (d) of Section 4.1. 12.6. AFTER-TAX CONTRIBUTIONS. "After-Tax Contributions" means contributions made by a Participant pursuant to section 3.4. 12.7. BEFORE-TAX CONTRIBUTION ACCOUNT. The "Before-Tax Contribution Account" is the account established pursuant to clause (a) of Section 4.1. 12.8. BEFORE-TAX CONTRIBUTIONS. "Before-Tax Contributions" means contributions made by the Participating Employers on behalf of Participants pursuant to Section 3.1. 12.9. BENEFICIARY. A "Beneficiary" is a person designated or otherwise determined under the provisions of Section 8.2 as the distributee of benefits payable after the death of a Participant. A person designated as, or otherwise determined to be, a Beneficiary under the terms of the Plan has no interest in or rights under the Plan until the Participant in question has died. A Beneficiary will cease to be such on the day on which all benefits to which he, she or it is entitled under the Plan have been distributed. 12.10. BOARD. The "Board" is the board of directors or comparable governing body of the Affiliated Organization in question. When the Plan provides for an action to be taken by the Board, the 51 action may be taken by any committee or individual authorized to take such action pursuant to a proper delegation by the board of directors or comparable governing body in question. 12.11. CODE. The "Code" is the Internal Revenue Code of 1986, as amended. Any reference to a specific provision of the Code includes a reference to such provision as it may be amended from time to time and to any successor provision. 12.12. COMMITTEE. The "Committee" is the administrative committee described in Article 13. 12.13. COMPANY. The "Company" is BMC Industries, Inc. or any successor thereto. 12.14. COMPANY STOCK. "Company Stock" is common stock of the Company. 12.15. CONSENT OF SPOUSE. Whenever the consent of a Participant's spouse is required with respect to any act of the Participant, such consent will be deemed to have been obtained only if: (a) the Participant's spouse executes a written consent to such act, which consent acknowledges the effect of such act and is witnessed by a Plan representative or a notary public; or (b) the Administrator determines that no such consent can be obtained because the Participant has no spouse, because the Participant's spouse cannot be located, or because of such other circumstances as may, under Treasury Regulations, justify the lack of such consent. Any such consent by the Participant's spouse or such determination by the Administrator that such spouse's consent is not required is effective only with respect to the particular spouse of the Participant who so consented or with respect to whom such determination was made. Any such consent by the Participant's spouse to an act of the Participant under the Plan is irrevocable with respect to that act. 12.16. DISABLED. A Participant will be considered to be "Disabled" only if the Administrator determines that he or she is absent from active employment with all Affiliated Organizations by reason of illness, bodily injury or disease which renders the Participant unable to engage in any gainful occupation and which is likely to be of long and indefinite duration or result in death. 12.17. EFFECTIVE DATE. The "Effective Date" of the Plan is April 1, 1979. 12.18. ELIGIBLE EARNINGS. (a) The "Eligible Earnings" of a Participant from a Participating Employer for any Plan Year for purposes of Before-Tax Contributions. After-Tax Contributions and Matching Contributions is the sum of all remuneration paid to the Participant by the Participating Employer for the portion of a Plan Year in which he or she is an Active Participant that is reportable in the "wages, tips, other compensation" box of Internal Revenue Form W-2, excluding (to the extent otherwise included) the amount of any imputed income of the Participant with respect to such portion of the Plan Year, increased by amounts that are deferred under Section 3.1 as Before-Tax Contributions and amounts by which a Participant's compensation from the Participating Employer for such portion of the Plan Year is reduced under a Code section 125 cafeteria plan. 52 (b) The Eligible Earnings of a Participant from a Participating Employer for any Plan Year for the purpose of Profit Sharing Contributions is, for non-sales personnel, the Participant's annual base salary or wages paid to the Participant by the Participating Employer during the Plan Year, including shift premium, increased by amounts paid to the Participant by the Participating Employer during the Plan Year for time in excess of straight time but disregarding the portion of such amounts, if any, representing a premium over straight time rates, and for sales personnel, the greater of (i) the Participant's annual base salary paid by the Participating Employer during the Plan Year or (ii) the lesser of (1) the Participant's annual base salary plus commission paid by the Participating Employer during the Plan Year or (2) $60,000. In no event will severance pay of any kind or nature, payments made pursuant to the BMC Industries, Inc. Long-Term Incentive Plan or amounts attributable to the exercise of a stock option be taken into account as Eligible Earnings. (c) In no event will a Participant's Eligible Earnings for any Plan Year be taken into account to the extent it exceeds $150,000 (or such larger amount as may be permitted for the calendar year during which such Plan Year begins under Code section 401(a)(17)). 12.19. EMPLOYEE. An "Employee" is any individual who performs services for an Affiliated Organization as a common-law employee of the Affiliated Organization. 12.20. EXCESS ELIGIBLE EARNINGS. The "Excess Eligible Earnings" of a Participant from a Participating Employer for a Plan Year means the portion of his or her Eligible Earnings from the Participating Employer for the Plan Year, if any, in excess of the contribution and benefit base in effect for the calendar year during which the Plan Year begins under section 230 of the Social Security Act. 12.21. FUND. The "Fund" is the total of all of the assets of every kind and nature, both principal and income, held in the Trust at any particular time or, if the context so requires, one or more of the investment funds described in Section 5.1. 12.22. GOVERNING LAW. To the extent that state law is not preempted by provisions of the Employee Retirement Income Security Act of 1974, as amended, or any other laws of the United States, this Plan will be administered, construed, and enforced according to the internal, substantive laws of the State of Minnesota, without regard to its conflict of laws rules. 12.23. HEADINGS. The headings of articles and sections are included solely for convenience. In the case of a conflict between a heading and the text of the Plan, the text controls. 12.24. HIGHLY COMPENSATED EMPLOYEE. (a) A "Highly Compensated Employee" for any Plan Year beginning after December 31, 1996 is any employee who - (i) at any time during such Plan Year or the 12-month period preceding such Plan Year, owns or owned (or is considered as owning or having owned within the meaning of Code section 318) more than five percent of the outstanding stock of an Affiliated Organization or stock possessing more than five percent of the total combined voting power of all outstanding stock of an Affiliated Organization, or 53 (ii) during the 12-month period preceding such Plan Year, received compensation in excess of $80,000 (or such dollar amount, adjusted to reflect increases in the cost of living, as in effect under Code section 414(q)(1)(B) for the calendar year during which the Plan Year in question begins). (b) For purposes of this section, (i) an "employee" is any individual (other than an individual who is a nonresident alien who receives no earned income (within the meaning of Code section 911(d)(2)) from an Affiliated Organization that constitutes income from sources within the United States (within the meaning of Code section 861(a)(3))) who, during the Plan Year for which the determination is being made, performs services for an Affiliated Organization as - (1) a common-law employee, (2) an employee pursuant to Code section 401(c)(1), or (3) a leased employee who is treated as an employee of an Affiliated Organization pursuant to Code section 414(n)(2) or 414(o)(2), and (ii) "compensation" for any period means an employee's Section 415 Wages for the period (increased for Plan Years beginning before January 1, 1998 by the amount of any reductions to the employee's compensation for the period in connection with an election by the employee made pursuant to a plan maintained by an Affiliated Organization under Code section 125 or 401(k)). 12.25. MATCHING CONTRIBUTION ACCOUNT. The "Matching Contribution Account" is the account established pursuant to clause (b) of Section 4.1. 12.26. MATCHING CONTRIBUTIONS. "Matching Contributions" means contributions made by the Participating Employers on behalf of Participants pursuant to Section 3.2 or 3.6. 12.27. NORMAL RETIREMENT DATE. The "Normal Retirement Date" of a Participant is the date on which he or she attains age 65. 12.28. NUMBER AND GENDER. Wherever appropriate, the singular number may be read as the plural, the plural may be read as the singular, and the masculine gender may be read as the feminine gender. 12.29. PARTICIPANT. A "Participant" is a current or former Qualified Employee who has entered the Plan pursuant to the provisions of Article 2 and who has not ceased to be a Participant pursuant to the provisions of Section 2.6. 12.30. PARTICIPATING BUSINESS UNIT. A "Participating Business Unit" is a division, work location or other operational unit of a Participating Employer, the eligible employees of which have been designated by the Participating Employer to participate in the Plan, as communicated in writing to the Company of the Participating Employer Board. 12.31. PARTICIPATING EMPLOYER. A "Participating Employer" is the Company and any other Affiliated Organization that has adopted the Plan, or all of them collectively, as the context requires, and 54 their respective successors. An Affiliated Organization will cease to be a Participating Employer upon a termination of the Plan as to its Qualified Employees or upon its ceasing to be an Affiliated Organization. 12.32. PLAN. The "Plan" is that set forth in this instrument as it may be amended from time to time. 12.33. PLAN RULE. A "Plan Rule" is a rule, policy, practice or procedure adopted by the Administrator. 12.34. PLAN YEAR. A "Plan Year" is the calendar year. 12.35. PROFIT SHARING CONTRIBUTION ACCOUNT. The "Profit Sharing Contribution Account" is the account established pursuant to clause (c) of Section 4.1. 12.36. PROFIT SHARING CONTRIBUTIONS. "Profit Sharing Contributions" means contributions made by the Participating Employers on behalf of Participants pursuant to Section 3.3 or 3.6. 12.37. PROFIT SHARING PLAN ROLLOVER ACCOUNT. The "Profit Sharing Plan Rollover Account" is the account established pursuant to clause (f) of Section 4.1. 12.38. QUALIFIED EMPLOYEE. (a) Except as provided in Subsection (b), a "Qualified Employee" is an Employee who: (i) performs services for a Participating Business Unit as an employee of a Participating Employer (as classified by the Participating Employer at the time the services are performed without regard to any subsequent reclassification); or (ii) is paid by a Participating Employer on a United States payroll while on a temporary foreign assignment as an employee of P.T. Vision-Ease Asia. (b) An Employee who would otherwise be a Qualified Employee is not a Qualified Employee if he or she: (i) is a nonresident alien who receives no earned income (within the meaning of Code section 911(d)(2) from a Participating Employer that constitutes income from sources within the United States (within the meaning of Code section 861(a)(3)); or (ii) is covered by a collective bargaining agreement, for whom retirement benefits were the subject of good faith bargaining between such person's representative and a Participating Employer, and is not, as a result of such bargaining, specifically covered by this Plan; or (iii) is working in the United States on a temporary foreign assignment. 12.39. ROLLOVER ACCOUNT. The "Rollover Account" is the account established pursuant to clause (f) of Section 4.1. 55 12.40. SECTION 415 WAGES. (a) An individual's "Section 415 Wages" for any period is his or her "compensation," within the meaning of Code section 415(c)(3) and Treasury Regulations thereunder, for the period from all Affiliated Organizations. (b) The Administrator may, for any period, determine the items of remuneration that, in accordance with Treasury Regulations, will be included in Section 415 Wages for such period; provided that for each purpose under this Plan, the Administrator's determination will be uniform throughout any period. 12.41. TERMINATION OF EMPLOYMENT. (a) For purposes of determining entitlement to a distribution under this Plan, a Participant will be deemed to have terminated employment only if he or she has completely severed his or her employment relationship with all Affiliated Organizations or become Disabled. Neither transfer of employment among Affiliated Organizations nor absence from active service by reason of disability leave, other than in connection with a Participant becoming Disabled, or any other leave of absence will constitute a termination of employment. (b) With respect to his or her Before-Tax Contribution Account, Matching Contribution Account, After-Tax Contribution Account and Rollover Account - (i) A Participant will be deemed to have terminated employment in conjunction with the disposition of all or any portion of the business operation of an Affiliated Organization which is a disposition of a subsidiary or of substantially all of the assets used in a trade or business of an Affiliated Organization within the meaning of Code section 401(k)(10)(A) with respect to which the requirements of Code section 401(k)(10)(B) and (C) are satisfied. (ii) A Participant who, in conjunction with the disposition of all or any portion of a business operation of an Affiliated Organization which is not described in clause (i), transfers employment to the acquirer of such business operation or to any affiliate of such acquirer will not be considered to have terminated employment. If a Participant is deemed to have continued employment by reason of the preceding sentence, such sentence will continue to apply to such Participant in the event of any subsequent transfer of employment in conjunction with the disposition of all or any portion of a business operation of the initial acquirer or any subsequent acquirers which is not a disposition of a subsidiary of such acquirer or of substantially all of the assets used in a trade or business of such acquirer within the meaning of Code section 401(k)(10)(A) with respect to which the requirements of Code section 401(k)(10)(B) and (C) are satisfied. Except in conjunction with such a disposition of a subsidiary or substantially all of the assets used in a trade or business of the seller, such a Participant will be considered to have terminated employment only when he or she has severed the employment relationship with all such acquirers and their affiliates. 56 12.42. TESTING WAGES. (a) An individual's "Testing Wages" for any Plan Year is his or her Section 415 Wages for the Plan Year. (b) Notwithstanding Subsection (a), in no event will a person's Testing Wages for any Plan Year be taken into account to the extent it exceeds $150,000 (or such other larger amount as may be permitted for the calendar year during which such Plan Year begins under Code section 401(a)(17)). (c) The Administrator may, for any Plan Year, adopt any alternative definition of Testing Wages that complies with Code section 414(s) and Treasury Regulations thereunder; provided, that for each purpose under this Plan, the definition so adopted will be uniform throughout any Plan Year. 12.43. TREASURY REGULATIONS. "Treasury Regulations" mean regulations, rulings, notices and other promulgations issued under the authority of the Secretary of the Treasury that apply to, or may be relied upon in the administration of, this Plan. 12.44. TRUST. The "Trust" is that created for purposes of implementing benefits under the Plan. 12.45. TRUSTEE. The "Trustee" is the corporation and/or individual or individuals who from time to time is or are the duly appointed and acting trustee or trustees of the Trust. 57 ARTICLE 13. Administration of Plan 13.1. NAMED FIDUCIARY. The Company is the "named fiduciary" of the Plan for purposes of the Employee Retirement Income Security Act of 1974, as amended. 13.2. COMMITTEE. (a) The general administration of the Plan on behalf of the Company and the duty to carry out its provisions is vested in a Committee composed of not fewer than three members. One member of the Committee will be the head of the Company's human resources function, a second member of the Committee will be the head of the Company's financial function and a third member of the Committee will be the head of the Company's treasury function. Additional members may be appointed to the Committee by the Company's Board to serve at its pleasure. Each such additional member will file written acceptance of his or her appointment with the Company's Board. A Committee member may resign by delivering his or her written resignation to the Company's Board; and any Committee member, other than the heads of the Company's human resources, financial and treasury functions, may be removed, with or without cause, by resolution of the Company's Board and the delivery of written notice of removal to the removed member. Any resignation or removal will be effective upon delivery of the written resignation or notice of removal, as the case may be, or upon any later date specified therein. Vacancies created by any resignation or removal will be filled by appointment by the Company's Board; provided, that, subject to there being at least three persons serving as Committee members at all times, the Board need not fill any vacancy so created. (b) In addition to its general duties and power and authority in connection with the administration of the Plan, the Committee has the discretionary power and authority with respect to - (i) The selection, designation and removal of the Administrator, the Trustee and any investment managers of the Fund; (ii) The direction of investments of assets comprising the Fund in insurance-company issued deposit administration or similar group annuity contract or contracts; and (iii) In the case of any investment fund maintained pursuant to Section 5.1 the assets of which are primarily invested in one or more insurance company issued deposit administration or group annuity contracts, to determine, from time to time, the portion of such investment fund, if any, that will not be invested in such insurance-company issued contracts and to direct the Trustee as to the specific investments or types of investments with respect to such portion of such investment fund; provided, that nothing contained in this clause (iii) requires the Committee to exercise such power or authority or limits the power or authority 58 of the Committee to delegate any such duties to the Administrator, the Trustee or any investment manager. (c) At least annually, the Committee will determine the Plan's funding policy and short-and long-run financial needs and communicate the same to the Trustee and any investment manager of the Fund. (d) The Committee will perform its duties in accordance with the following procedures: (i) The head of the Company's human resources function will act as the chair of the Committee and will preside over the Committee's meetings; (ii) The Committee will designate the head of the Company's human resources function, or such other person as it may determine, to serve as Administrator pursuant to Section 13.3, and may from time to time revoke such designation and designate another person to serve as Administrator. Each such designation must be in writing, and a copy of the designation must be furnished to the Administrator and the Trustee. The person designated to act as Administrator must file a written acceptance with the Committee. Such person's duty hereunder will terminate upon revocation of such designation by the Committee or upon resignation as Administrator by the person so designated. Such revocation or resignation must be in writing and will be effective upon delivery thereof to the Administrator or the Committee as the case may be, and in either case to the Trustee; (iii) The Committee will appoint a secretary who may, but need not, be a member of the Committee, and who will keep minutes of the Committee's meetings and perform such other duties as may be specified from time to time by the Committee; (iv) The Committee may appoint such subcommittees with such duties and powers as it may specify, and it may delegate administrative powers to one or more of its members or to such other person or entity as it may designate; (v) The Committee will meet at such times and places and upon such notice as its members may determine from time to time. A majority of the current membership of the Committee will constitute a quorum for the transaction of business, and all acts of the Committee at any meeting will require, for their validity, the affirmative vote of a majority of the current membership of the Committee; (vi) The Committee may adopt bylaws for the conduct of its business, provided such bylaws are not inconsistent with the provisions of this article; (vii) No member of the Committee may vote with respect to a decision of the Committee relating solely to his or her own participation under the Plan. 59 13.3. ADMINISTRATOR. (a) The Administrator designated by the Committee will perform the following administrative duties: (i) the determination of initial and continuing eligibility of Employees to participate in the Plan and enrollment of Participants in the Plan; (ii) the determination of Participants' entitlement to, and the amount of contributions under the Plan; (iii) the processing of Participants' Beneficiary designations; (iv) the review of claims made pursuant to the Plan's benefit claim procedure; (v) the computation of the amount of each Participant's Account balances; (vi) the authorization of disbursements from the Fund in the form of withdrawals, loans and distributions; (vii) the preparation, distribution to Participants and filing with appropriate governmental agencies of such reports, disclosures and forms as are required by law, and retention of copies thereof in the Administrator's files; and (viii) such other duties as specified in the Plan or as the Committee may delegate to the Administrator from time to time. (b) The Administrator may delegate some or all of his or her duties to such other person as he or she may designate and may from time to time revoke such authority and delegate it to another person. Each such delegation must be in writing, and a copy thereof must be furnished to the person to whom the duty is delegated. Such person must file a written acceptance with the Administrator. Such person's duty hereunder will terminate upon revocation of such authority by the Administrator or upon withdrawal of such acceptance by the person to whom the duty was delegated. Such revocation or withdrawal must be in writing, and will be effective upon delivery of a copy thereof to the person or entity to whom the duty was delegated or to the Administrator as the case may be. 13.4. COMPENSATION AND EXPENSES. An Employee performing administrative duties in connection with the Plan may not receive compensation from the Fund for such services, but is entitled to reimbursement from the Fund for all sums reasonably and necessarily expended in the performance of such duties. The Committee and the Administrator may retain such independent accounting, legal, clerical and other services as may reasonably be required in the administration of the Plan and may pay reasonable compensation from the Fund for such services or may reimburse the Company from the Fund for reasonable compensation paid by the Company for such services. Any such reimbursement or compensation and all other costs of administering the Plan will be paid by the Trustee from the Fund but if not so paid, will be paid by the Company, in either case upon statements issued by the Committee or the Administrator. 13.5. ADOPTION OF RULES. The Committee and the Administrator each have the discretionary power and authority to make and enforce such Plan Rules as the Committee or the Administrator deems 60 necessary or advisable in connection with the administration of the Plan and to modify or rescind any Plan Rule at any time. Plan Rules will be uniform and nondiscriminatory with respect to persons determined by the Committee or the Administrator to be similarly situated. 13.6. DISCRETION. To the extent applicable to their respective administrative duties, the Committee and the Administrator each have the discretionary power and authority to make all determinations necessary for administration of the Plan, except those determinations that the Plan requires others to make, and to construe, interpret, apply and enforce the Plan whenever necessary to carry out its intent and purpose and to facilitate its administration, including, without limitation, the discretionary power and authority to remedy ambiguities, inconsistencies, omissions and erroneous Account balances. In the exercise of discretionary powers, the Committee or the Administrator will treat all persons determined by the Committee or the Administrator to be similarly situated in a uniform and nondiscriminatory manner. 13.7. INDEMNIFICATION. The Participating Employers jointly and severally agree to indemnify and hold harmless, to the extent permitted by law, each director, officer, and employee of any Affiliated Organization against any and all liabilities, losses, costs and expenses (including legal fees) of every kind and nature that may be imposed on, incurred by, or asserted against such person at any time by reason of his or her services in connection with the Plan but only if he or she did not act dishonestly or in bad faith or in willful violation of the law or regulations under which such liability, loss, costs or expense arises. The Participating Employers have the right, but not the obligation, to select counsel and control the defense and settlement of any action for which a person may be entitled to indemnification under this provision. 13.8. BENEFIT CLAIM PROCEDURE. If a request for a benefit by a Participant or Beneficiary of a deceased Participant is denied in whole or in part, he or she may, within 30 days after receipt of notice of the denial, file with the Administrator a written claim objecting to the denial. Not later than 90 days after receipt of such claim, the Administrator will render a written decision on the claim to the claimant. If the claim is denied in whole or in part, the decision will include: the reasons for the denial; a reference to the Plan provision that is the basis for the denial; a description of any additional material or information necessary for the claimant to perfect the claim; an explanation as to why such information or material is necessary; and an explanation of the Plan's claim procedure. Not later than 60 days after receiving the Administrator's written decision, the claimant may file with the Administrator a written request for review of the Administrator's decision, and the claimant or the representative may thereafter review Plan documents that relate to the claim and submit written comments to the Administrator. Not later than 60 days after receiving such request, the Administrator will afford the claimant or the representative an opportunity to present the claim in person to the Administrator. Not later than 60 days after such presentation or, if there is no such presentation, not later than 60 days after the Administrator's receipt of the request for review, the Administrator will render a written decision on the claim, which decision will include the specific reasons for the decision, including references to specific Plan provisions where appropriate. The 90- and 60-day periods during which the Administrator must respond to the claimant may be extended by up to an additional 90 or 60 days, respectively, if special circumstances beyond the Administrator's control so require and if notice of such extension is given to the claimant. A claimant must exhaust the procedure described in this section before pursuing the claim in any other proceeding. 13.9. CORRECTION OF ERRORS. If the Administrator determines that, by reason of administrative error or other cause attributable to a Participating Employer, the Account of any Participant has incurred 61 a loss, the Administrator may enter into an agreement with the Participating Employer under which the Account is fully restored and may, upon such restoration, release the Participating Employer from further responsibility. 62 ARTICLE 14. Miscellaneous 14.1. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. If this Plan is merged or consolidated with, or its assets or liabilities are transferred to, any other plan, each Participant will be entitled to receive a benefit immediately after such merger, consolidation or transfer (if such other plan were then terminated) that is equal to or greater than the benefit he or she would have been entitled to receive immediately before such merger, consolidation or transfer (if this Plan had then terminated but without regard to Section 11.4). 14.2. LIMITED REVERSION OF FUND. (a) Except as provided in Subsection (b), no corpus or income of the Trust will at any time revert to any Affiliated Organization or be used other than for the exclusive benefit of Participants and their Beneficiaries by paying benefits and administrative expenses of the Plan. (b) Notwithstanding any contrary provision in the Plan, (i) All contributions made by a Participating Employer to the Trustee prior to the initial determination of the Internal Revenue Service as to qualification of the Plan under Code section 401(a) and the tax exempt status of the Trust under Code section 501(a) will be repaid by the Trustee to the Participating Employer, upon the Participating Employer's written request, if the Internal Revenue Service rules that the Plan is not qualified or the Trust is not tax exempt; provided, that the Participating Employer must request such determination within a reasonable time after adoption of the Plan and the repayment by the Trustee to the Participating Employer must be made within one year after the date of denial of qualification of the Plan; and (ii) To the extent a contribution is made by a Participating Employer by a mistake of fact or a deduction is disallowed a Participating Employer under Code section 404, the Trustee will repay the contribution to the Participating Employer upon the Participating Employer's written request; provided, that such repayment must be made within one year after the mistaken payment is made or the deduction is disallowed, as the case may be. Each contribution to the Plan by a Participating Employer is expressly conditioned on such contribution's being fully deductible by the Participating Employer under Code section 404. 14.3. TOP-HEAVY PROVISIONS. (a) The provisions of this subsection will apply for any Plan Year during which the Plan is "top heavy." (i) Notwithstanding the provisions of Article 3, no contributions will be made and allocated on behalf of any "key employee" for any Plan Year during which the Plan is top heavy unless the amount of contributions (excluding Before-Tax Contributions) made and allocated for such Plan Year on behalf of each 63 Participant who is not a key employee and who is employed with an Affiliated Organization on the last day of the Plan Year, expressed as a percentage of the Participant's Testing Wages for the Plan Year, is at least equal to the lesser of (1) three percent, or (2) the largest percentage of such Testing Wages at which contributions (including Before-Tax Contributions) are made and allocated on behalf of any key employee for such Plan Year. (ii) If, in addition to this Plan, an Affiliated Organization maintains another qualified defined contribution plan or one or more qualified defined benefit pension plans during a Plan Year, the provisions of clause (i) will be applied for such Plan Year - (1) by taking into account the employer contributions (other than elective deferrals for a non-key employee) on behalf of the Participant under all such defined contribution plans; (2) without regard to any Participant who is not a key employee and whose accrued benefit, expressed as a single life annuity, under a defined benefit pension plan maintained by the Affiliated Organization for such Plan Year is not less than the product of - (A) the Participant's average Testing Wages for the period of consecutive years not exceeding the period of consecutive years (not exceeding five) when the Participant had the highest aggregate Testing Wages, disregarding years in which the Participant completed less than 1000 Hours of Service, multiplied by (B) the lesser of (I) two percent per year of service, disregarding years of service beginning after the close of the last Plan Year in which such defined benefit plan was a top heavy plan or (II) 20 percent. (iii) Notwithstanding Section 7.1(h), each Participant's vested nonforfeitable interest in the portion of his or her Profit Sharing Contribution Account not described in Section 7.1(a) will be determined in accordance with the following schedule:
Vested Years of Vesting Service Interest ------------------------ -------- Less Than Three Years 0% Three or More Years 100%
If the Plan ceases to be a top heavy plan, the portion of a Participant's Profit Sharing Contribution Account that has vested pursuant to the foregoing schedule will remain nonforfeitable, notwithstanding the subsequent application of the 64 vesting schedule set forth in Section 7.1(h) to amounts subsequently allocated to the Account. (b) For purposes of Subsection (a), (i) (1) The Plan will be a "top-heavy plan" for a particular Plan Year if, as of the last day of the initial Plan Year or, with respect to any other Plan Year, as of the last day of the preceding Plan Year, the aggregate of the Account balances of key employees is greater than 60 percent of the aggregate of the Account balances of all Participants. (2) For purposes of calculating the aggregate Account balances for both key employees and employees who are not key employees: (A) Any distributions made within the five-year period preceding the Plan Year for which the determination is being made, other than a distribution transferred or rolled over to a plan maintained by an Affiliated Organization, will be included; (B) Amounts transferred or rolled over from a plan not maintained by an Affiliated Organization at the initiation of the Participant will be excluded; (C) The Account balances of any key employee and any employee who is not a key employee who has not performed an Hour of Service at any time during the five-year period ending on the date as of which the determination is being made will be excluded; and (D) The terms "key employee" and "employee" include the Beneficiaries of such persons who have died. (ii) (1) Notwithstanding the provisions of clause (i), this Plan will not be a top-heavy plan if it is part of either a "required aggregation group" or a "permissive aggregation group" and such aggregation group is not top-heavy. An aggregation group will be top-heavy if the sum of the present value of accrued benefits and account balances of key employees is more than 60 percent of the sum of the present value of accrued benefits and account balances for all Participants, such accrued benefits and account balances being calculated in each case in the same manner as set forth in clause (i). (2) Each plan in a required aggregation group will be top-heavy if the group is top-heavy. No plan in a required aggregation group will be top-heavy if the group is not top-heavy. 65 (3) If a permissive aggregation group is top-heavy, only those plans that are part of an underlying top-heavy, required aggregation group will be top-heavy. No plan in a permissive aggregation group will be top-heavy if the group is not top-heavy. (iii) The "required aggregation group" consists of (1) each plan of an Affiliated Organization in which a key employee participates and (2) each other plan of an Affiliated Organization that enables a plan in which a key employee participates to meet the nondiscrimination requirements of Code sections 401(a)(4) or 410. (iv) A "permissive aggregation group" consists of those plans that are required to be aggregated and one or more plans (providing comparable benefits or contributions) that are not required to be aggregated, which, when taken together, satisfy the requirements of Code sections 401(a)(4) and 410. (v) For purposes of applying clauses (ii), (iii) and (iv) of this Subsection (b), any qualified defined contribution plan maintained by an Affiliated Organization at any time within the five-year period preceding the Plan Year for which the determination being made which, as of the date of such determination, has been formally terminated, has ceased crediting service for benefit accruals and vesting and has been or is distributing all plan assets to participants or their beneficiaries, will be taken into account to the extent required or permitted under such clauses and under Code section 416. (c) A "key employee" is any individual who is or was employed with an Affiliated Organization and who, at any time during the Plan Year in question or any of the preceding four Plan Years is or was: (i) An officer of the Affiliated Organization (an administrative executive in regular and continued service with the Affiliated Organization) whose Section 415 Wages for such Plan Year exceed 50 percent of the amount in effect under Code section 415(b)(1)(A) for such Plan Year, but in no case will there be taken into account more than the lesser of (a) 50 persons, or (b) the greater of (i) three persons or (ii) ten percent of the number of the Affiliated Organization's employees, excluding for purposes of determining the number of such officers, any employees described in Code section 414(q)(5); (ii) The owner of an interest in the Affiliated Organization that is not less than the interest owned by at least ten other persons employed with the Affiliated Organization; provided, that, such owner will not be a key employee solely by reason of such ownership for a Plan Year if he or she does not own more than one-half of one percent of the value of the outstanding interests of the Affiliated Organization or if the amount of his or her Section 415 Wages for such Plan Year is less than the amount in effect under Code section 415(c)(1)(A) for such Plan Year; (iii) The owner of more than five percent of the Affiliated Organization's outstanding stock or more than five percent of the total combined voting power of the Affiliated Organization's stock; or 66 (iv) The owner of more than one percent of the Affiliated Organization's outstanding stock or more than one percent of the total combined voting power of the Affiliated Organization's stock, whose Section 415 Wages for such Plan Year exceed $150,000. For purposes of this Subsection (c), ownership of an Affiliated Organization's stock will be determined in accordance with Code section 318; provided, that subparagraph 318(a)(2)(C) will be applied by substituting the phrase "5 percent" for the phrase "50 percent" wherever it appears in such Code section. (d) If, for any Plan Year beginning before January 1, 2000, an Affiliated Organization maintains a qualified defined contribution plan and a qualified defined pension plan, the limitation on combined contributions and accrued benefits will be adjusted by substituting "100 percent" for "125 percent" in the definitions of the defined benefit fraction and the defined contribution fraction in Section 9.7; provided, first, that this Subsection (d) will be applied prospectively only to prohibit additional contributions allocated, and forfeitures reallocated, to and defined benefit accruals for, a Participant and will not reduce any allocations or reallocations made to, or benefits accrued for, such Participant prior to the Plan Year for which it first becomes effective; and, second, that if the Plan would not be a top heavy plan if "90 percent" were substituted for "60 percent" in clause (i)(1) of Subsection (b), this Subsection (d) will not apply if - (i) the aggregate employer contributions (other than elective deferrals) under all such qualified defined contribution plans on behalf of each Participant who is not a key employee and who is employed with an Affiliated Organization on the last day of the Plan Year is not less than seven and one-half percent of his or her Testing Wages for the Plan Year, or (ii) the accrued benefit for each Participant under the qualified defined benefit pension plan is not less than the benefit described in Subsection (a)(ii)(2), applied by substituting "3 percent" for "2 percent" in item (I) of clause (B) and "30 percent" for "20 percent" in item (II) of clause (B). 14.4. NO EMPLOYMENT RIGHTS CREATED. The establishment and maintenance of the Plan neither gives any Employee a right to continuing employment nor limits the right of an Affiliated Organization to discharge or otherwise deal with the Employee without regard to the effect such action might have on his or her initial or continued participation in the Plan. 14.5. SPECIAL PROVISIONS. Special provisions of the Plan applicable only to certain Participants will be set forth on an exhibit to the Plan. In the event of a conflict between the terms of the exhibit and the terms of the Plan, the exhibit controls. 14.6. QUALIFIED MILITARY SERVICE. (a) The provisions of this section apply only to an Employee who is reemployed on or after October 13, 1996 and whose reemployment rights are protected under the Uniformed Services Employment and Reemployment Rights Act of 1994 ("USERRA") and are intended to comply with the requirements of Code section 414(u). 67 (b) Notwithstanding any other provisions of the Plan to the contrary, a Qualified Employee who leaves the employ of a Participating Employer for qualified military service and returns to employment with a Participating Employer will be entitled to the restoration of benefits under the Plan which would have accrued but for the Qualified Employee's absence due to qualified military service. (c) A Qualified Employee's Participating Employer will make Before-Tax Contributions on behalf of the Qualified Employee for the Plan Years during which he or she would have been an Active Participant but for his or her qualified military service in the amount by which his or her Eligible Earnings have been reduced in accordance with Section 3.1 and the following additional rules: (i) the Qualified Employee may elect to have his or her Eligible Earnings reduced subject to the maximum amount the Qualified Employee could have reduced his or her Eligible Earnings during the period of qualified military service; (ii) the Qualified Employee may elect to reduce his or her Eligible Earnings under this subsection at any time during the period that begins on his or her date of reemployment and has the same length as the lesser of five years or the period of the Qualified Employee's qualified military service multiplied by three; (iii) the Before-Tax Contributions under this subsection are not subject to the limitations described in Section 9.2 or 9.4. (d) A Qualified Employee's Participating Employer will make Matching Contributions with respect to the Qualified Employee's Before-Tax Contributions pursuant to Subsection (c) in the same amount as if such Before-Tax Contributions had actually been made during the Participant's period of qualified military service. The Matching Contributions made pursuant to this subsection are not subject to the limitations described in Section 9.3 or 9.4. (e) The following additional rules and conditions apply with respect to qualified military service notwithstanding any contrary provision of the Plan: (i) an Employee will not be treated as having incurred a One-Year Break in Service by reason of his or her qualified military service; (ii) any period of qualified military service will be counted as Eligibility Service and Vesting Service; (iii) for purposes of Section 3.3(b), a Qualified Employee will be treated as employed by the Participating Employer and accruing service during any period of qualified military service; (iv) for purposes of determining the Qualified Employee's Eligible Earnings and Section 415 Wages, the Qualified Employee will be treated as receiving compensation from the Participating Employer with whom he or she was employed immediately before the period of qualified military service during the period of qualified military service in an amount equal to the compensation he or she would have received during such period if he or she were not in qualified 68 military service determined based on the rate of pay the Qualified Employee would have received from the Participating Employer but for the absence due to qualified military service; provided, however, if the compensation the Qualified Employee would have received from the Participating Employer is not reasonably certain, then the Qualified Employee's rate of compensation will be equal to his or her average compensation for the 12-month period preceding the qualified military service (or, if shorter, the period of employment immediately preceding the qualified military service); (v) contributions on behalf of the Qualified Employee will be subject to the limitations of Article 9 only with respect to the Plan Years to which such contribution relates; (vi) the Qualified Employee will not be entitled to any crediting of earnings on contributions for any period prior to actual payment to the Trust; and (vii) the Qualified Employee will not be entitled to restoration of any forfeitures which were not allocated to his or her Account as a result of his or her qualified military service. (f) For purposes of this section, "qualified military service" means any service in the uniformed services as defined in USERRA by a Qualified Employee who is entitled to reemployment rights with a Participating Employer under USERRA. 14.7. SHORT PLAN YEARS. To the extent required by and in accordance with Treasury Regulations, for the initial Plan Year and any other Plan Year which is less than 12 months long, the dollar limitations in effect for purposes of Code sections 401(a)(17), 414(q), 415 and 416 will be adjusted to reflect the short Plan Year. 69 EX-10.11 7 EXHIBIT 10.11 BMC INDUSTRIES, INC. EXECUTIVE BENEFIT PLAN AS ADOPTED EFFECTIVE JANUARY 1, 1993 BMC INDUSTRIES, INC. EXECUTIVE BENEFIT PLAN TABLE OF CONTENTS
PAGE ARTICLE 1 DESCRIPTION OF PLAN . . . . . . . . . . . . . . . . . . . . .1 1.1 Plan Name . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.2 Plan Purpose. . . . . . . . . . . . . . . . . . . . . . . . .1 1.3 Plan Type . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.4 Participating Employers . . . . . . . . . . . . . . . . . . .1 ARTICLE 2 DEFINITIONS, CONSTRUCTION AND INTERPRETATION. . . . . . . . .2 2.1 Account . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.2 Administrator . . . . . . . . . . . . . . . . . . . . . . . .2 2.3 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . .2 2.4 Board . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.5 Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.6 Company . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.7 Compensation. . . . . . . . . . . . . . . . . . . . . . . . .2 2.8 Effective Date. . . . . . . . . . . . . . . . . . . . . . . .2 2.9 Employer. . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.10 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . .2 2.12 Participant . . . . . . . . . . . . . . . . . . . . . . . . .2 2.13 Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.14 Qualified Plans . . . . . . . . . . . . . . . . . . . . . . .3 2.15 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.16 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . .3 ARTICLE 3 PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . .4 3.1 Commencement of Participation . . . . . . . . . . . . . . . .4 3.2 Condition of Participation. . . . . . . . . . . . . . . . . .4 3.3 Loss of Eligibility . . . . . . . . . . . . . . . . . . . . .4 ARTICLE 4 BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . .5 4.1 Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . .5 4.2 Excess Matching Contribution Credits. . . . . . . . . . . . .5 4.3 Excess Profit Sharing Contribution Credits. . . . . . . . . .5 4.4 Earnings Credits. . . . . . . . . . . . . . . . . . . . . . .5 4.5 Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . .5 ARTICLE 5 DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . .6 5.1 Distribution of Benefits. . . . . . . . . . . . . . . . . . .6 5.2 Beneficiary Designation . . . . . . . . . . . . . . . . . . .6 5.3 Payment in Event of Incapacity. . . . . . . . . . . . . . . .7 i ARTICLE 6 SOURCE OF PAYMENTS; NATURE OF INTEREST . . . . . . . . . . .8 6.1 Establishment of Trust. . . . . . . . . . . . . . . . . . . .8 6.2 Source of Payments. . . . . . . . . . . . . . . . . . . . . .8 6.3 Status of Plan. . . . . . . . . . . . . . . . . . . . . . . .8 6.4 Non-assignability of Benefits . . . . . . . . . . . . . . . .8 ARTICLE 7 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . .9 7.1 Administration. . . . . . . . . . . . . . . . . . . . . . . .9 7.2 Benefit Claim Procedure . . . . . . . . . . . . . . . . . . .9 7.3 Amendment and Termination . . . . . . . . . . . . . . . . . .9 7.4 No Employment Rights Created. . . . . . . . . . . . . . . . .10 7.5 Withholding and Offsets . . . . . . . . . . . . . . . . . . .10 7.6 Other Benefits. . . . . . . . . . . . . . . . . . . . . . . .10 7.7 Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . .10
ii BMC INDUSTRIES, INC. EXECUTIVE BENEFIT PLAN ARTICLE 1 DESCRIPTION OF PLAN 1.1 PLAN NAME. The name of the Plan is the "BMC Industries, Inc. Executive Benefit Plan." 1.2 PLAN PURPOSE. The Plan provides Participants with additional benefits that would have been provided under the Qualified Plans but for the limitations imposed by Code sections 401(a)(17) and 415. 1.3 PLAN TYPE. The Plan is an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees and, as such, is intended to be exempt from the provisions of Parts 2, 3 and 4 of Subtitle B of Title I of ERISA by operation of sections 201(2), 301(a)(3) and 401(a)(1) thereof, respectively. The Plan will be construed and administered in a manner that is consistent with and gives to such intent. 1.4 PARTICIPATING EMPLOYERS. The Plan applies to each participating employer that has adopted either or both of the Qualified Plans and has not, at the time in question, terminated such participation. 1 ARTICLE 2 DEFINITIONS, CONSTRUCTION AND INTERPRETATION The definitions and rules of construction and interpretation set forth in this article apply in construing the Plan unless the context otherwise requires. 2.1 ACCOUNT. "Account" means any or all of the bookkeeping accounts maintained with respect to a Participant pursuant to Section 4.1, as the context requires. 2.2 ADMINISTRATOR. "Administrator" means the individual or committee appointed by the Company to perform administrative duties pursuant to Section 7.1 2.3 BENEFICIARY. "Beneficiary" with respect to a Participant is the person designated or otherwise determined under the provisions of Section 5.2 of the Plan. A person designated as or otherwise determined to be a Beneficiary under the terms of the Plan has no interest in or right under the Plan until the Participant in question has died. A Beneficiary will cease to be such on the day on which all benefits to which he, she or it is entitled under Plan have been distributed. 2.4 BOARD. "Board" means the Company's Board of Directors or any individual or committee authorized to act on its behalf. 2.5 CODE. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.6 COMPANY. "Company" means BMC Industries, Inc. or any successor thereto. 2.7 COMPENSATION. "Compensation" with respect to a Participant for a Plan Year means his or her compensation for the Plan Year within the meaning of the applicable Qualified Plan determined without regard to the limitation under Code section 401(a)(17). 2.8 EFFECTIVE DATE. "Effective Date" means January 1, 1993. 2.9 EMPLOYER. "Employer" means the Company and each affiliated organization with respect to the Company that has adopted one or both of the Qualified Plans. 2.10 ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.11 GOVERNING LAW. To the extent that state law is not preempted by ERISA, or any other law of the United States, all questions pertaining to the construction, validity, effect and enforcement of the Plan will be determined in accordance with the internal, substantive laws of the State of Minnesota without regard to the conflict of law rules of the State of Minnesota or of any other jurisdiction. 2.12 PARTICIPANT. "Participant" means any participant in one or both Qualified Plans on or after the Effective Date who has been designated by the Administrator as a Participant pursuant to Section 3.1. A Participant will cease to be such on the date on which all benefits to which he or she is entitled under the terms of the Plan have been distributed in full. 2 2.13 PLAN. "Plan" means the BMC Industries, Inc. Executive Benefit Plan, as from time to time amended or restated. 2.14 QUALIFIED PLANS. "Qualified Plans" means the BMC Industries Employee Savings Plan and the BMC Industries Employees Profit Sharing Plan, individually or collectively, as from time to time amended or restated. 2.15 TRUST. "Trust" means any trust or trusts that may be established by the Company for its convenience from which benefits under the Plan may be paid. 2.16 TRUSTEE. "Trustee" means the one or more individuals, banks or trust companies who at the relevant time has or have been appointed by the Company to act as Trustee of the Trust. 3 ARTICLE 3 PARTICIPATION 3.1 COMMENCEMENT OF PARTICIPATION. To be eligible to have credits made to his or her Account pursuant to Section 4.2 or 4.3 for a particular period, an individual must be (a) an employee of an Employer who is eligible to participate in a Qualified Plan for the period. (b) considered to be a member of a select group of management or highly compensated employees as determined by the Administrator, and (c) selected by the Administrator. 3.2 CONDITION OF PARTICIPATION. Each participant is bound by all of the terms and conditions of the Plan, including but not limited to the reserved right of the Company to amend or terminate the Plan, and is required to furnish to the Administrator such pertinent information, and must execute such instruments, as the Administrator may require. 3.3 LOSS OF ELIGIBILITY. A Participant who, during a Plan Year, terminates his or her employment with the Employer or is determined by the Administrator to have otherwise ceased to be eligible to participate in this Plan, is not eligible for further credits for the Plan Year pursuant to Section 4.2 or 4.3 other than such credits relating to the period prior to such termination of employment. 4 ARTICLE 4 BENEFITS 4.1 ACCOUNTS. The Administrator will establish and maintain the following bookkeeping accounts for each Participant - (a) an "Excess Matching Contribution Account," to evidence amounts credited to the Participant pursuant to Sections 4.2 and 4.4; (b) an "Excess Profit Sharing Contribution Account," to evidence amounts credited to the Participant pursuant to Sections 4.3 and 4.4; and If more than one Employer makes contributions to a Qualified Plan on a Participant's behalf, the Administrator may establish and maintain separate Accounts for the Participant with respect to each Employer. 4.2 EXCESS MATCHING CONTRIBUTION CREDITS. As of a date determined by the Administrator but not later than the first day of the fifth month after the end of each plan year under the Qualified Plans, the Administrator will credit a Participant's Excess Matching Contribution Account with an amount, if any, equal to the amount of matching contributions that would have been made on the Participant's behalf for the plan year under the Qualified Plans if the Participant's elective deferrals for the plan year pursuant to the Qualified Plans had been made without regard to the limitations imposed by operation of Code sections 401(a)(17), 401(k)(3), 402(m)(2), 402(g) or 415, minus the amount of total matching contributions actually made on the Participant's behalf under the Qualified Plans for the plan year. 4.3 EXCESS PROFIT SHARING CONTRIBUTION CREDITS. As of a date determined by the Administrator but not later than the first day of the fifth month after the end of each plan year under the Qualified Plans, the Administrator will credit a Participant's Excess Profit Sharing Contribution Account with an amount, if any, equal to the amount of the profit sharing contribution that would have been made on the Participant's behalf for the plan year under the Qualified Plans but for the limitations of Code sections 401(a)(17) and 415, minus the amount of the profit sharing contribution actually made on the Participant's behalf under the Qualified Plans for the plan year. 4.4 EARNINGS CREDITS. As of the last day of each calendar quarter, Participant's Accounts will be credited with earnings at a rate and in a manner determined by the Administrator. 4.5 VESTING. Each Participant's vested interest in each of his or her Accounts at any time will be the same as the Participant's vested interest in his or her corresponding accounts at that time under the Qualified Plans. The nonvested portion of a Participant's Accounts will be permanently forfeited at the time the Accounts are distributed pursuant to Article 5, whether or not his or her accounts under the Qualified Plans have been forfeited or are subsequently restored. 5 ARTICLE 5 DISTRIBUTION 5.1 DISTRIBUTION OF BENEFITS. (A) DISTRIBUTION TO PARTICIPANT. A Participant's Account balances will be distributed to the Participant in the form of a lump sum cash payment on a date determined by the Administrator but not later than the last day of the first calendar year beginning after the Participant's "termination of employment", within the meaning of the BMC Industries Employees Profit Sharing Plan, unless the Participant is reemployed by an Employer on or before the date on which the distribution would otherwise be made. The amount of the Account balances will be determined as of the last day of the calendar quarter immediately preceding the date of the distribution. (B) DISTRIBUTION TO BENEFICIARY. A Participant's Account balances will be distributed to the Participant's Beneficiary in the form of a lump sum cash payment on a date determined by the Administrator but not later than the last day of the first calendar year beginning after the Administrator's receipt of notice of the Participant's death. The amount of the Account balances will be determined as of the last day of the calendar quarter immediately preceding the date of the distribution. 5.2 BENEFICIARY DESIGNATION. (A) Each Participant may designate, on forms furnished by the Administrator, one or more primary Beneficiaries or alternative Beneficiaries to receive all or a specified part of his or her Accounts after his or her death, and the Participant may change or revoke any such designation from time to time. No such designation, change or revocation is effective unless executed by the Participant and received by the Administrator during the Participant's lifetime. No designation of a Beneficiary other than the Participant's spouse is effective unless the spouse consents to the designation or the Administrator determines that the spousal consent cannot be obtained because the spouse cannot reasonably be located or is legally incapable of consenting. The consent must be in writing, must acknowledge the effect of the consent and must be witnessed by a notary public. The consent is effective only with respect to the Beneficiary or class of Beneficiaries designated with respect to the spouse who consented. (B) If a Participant - (1) fails to designate a Beneficiary, or (2) revokes a Beneficiary designation without naming another Beneficiary, or (3) designates one or more Beneficiaries none of whom survives the Participant or exists at the time in question, for all or any portion of his or her Accounts, the accounts will be paid to the Participant's surviving spouse or, if the Participant is not survived by a spouse, to the representative of the Participant's estate. 6 (C) The automatic Beneficiaries specified above and, unless the designation otherwise specifies, the Beneficiaries designated by the Participant, become fixed as of the Participant's death so that, if a Beneficiary survives the Participant but dies before the receipt of the payment due such Beneficiary, the payment will be made to the representative of such Beneficiary's estate. Any designation of a Beneficiary by name that is accompanied by a description of relationship or only by statement of relationship to the Participant is effective only to designate the person or persons standing in such relationship to the Participant at the Participant's death. 5.3 PAYMENT IN EVENT OF INCAPACITY. If any individual entitled to receive any payment under the Plan is, in the judgment of the Administrator, physically, mentally or legally incapable of receiving or acknowledging receipt of the payment, and legal representative has been appointed for the individual, the Administrator may (but is not required to) cause the payment to be made to any one or more of the following as may be chosen by the Administrator: the Beneficiary (in the case of the incapacity of a Participant); the institution maintaining the individual, a custodian for the individual under the Uniform Transfers to Minors Act of any state; or the individual's spouse, children, parents or other relatives by blood or marriage. The Administrator is not required to see to the proper application of any such payment and the payment completely discharges all claims under the Plan against the Employer, the Plan and Trust to the extent of the payment. 7 ARTICLE 6 SOURCE OF PAYMENTS; NATURE OF INTEREST 6.1 ESTABLISHMENT OF TRUST. The Company may establish a Trust with an independent corporate trustee and each Employer will comply with the terms of the Trust. The Employers may from time to time transfer to the Trust cash, marketable securities or other property acceptable to the Trustee in accordance with the terms of the Trust. 6.2 SOURCE OF PAYMENTS. (A) Each employer will pay, from its general assets, the portion of any benefit pursuant to Article 4 attributable to a Participant's Accounts with respect to that Employer, and all costs, charges and expenses relating thereto. (B) The Trustee will make distributions to Participants and Beneficiaries from the Trust in satisfaction of an Employer's obligations under the Plan in accordance with the terms of the Trust. The Participating Employer is responsible for paying any benefits attributable to a Participant's Accounts with respect to that Employer that are not paid by the Trust. 6.3 STATUS OF PLAN. Nothing contained in the Plan or Trust is to be construed as providing for assets to be held for the benefit of any Participant or any other person or persons to whom benefits are to be paid pursuant to the terms of this Plan, the Participant's or other person's only interest under the Plan being the right to receive the benefits set forth herein. The Trust is established only for the convenience of the Employers and the Participants, and no Participant has any interest in the assets of the Trust prior to distribution of such assets pursuant to the Plan. To the extent the Participant or any other person acquires a right to receive benefits under this Plan or the Trust, such right is no greater than the right to any unsecured general creditor of the Employer. 6.4 NON-ASSIGNABILITY OF BENEFITS. The benefits payable under the plan and the right to receive future benefits under the Plan may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, or subjected to any charge or legal process. 8 ARTICLE 7 MISCELLANEOUS 7.1 ADMINISTRATION. The Plan will be administered by an individual or committee selected by the Board. The Administrator has the discretionary power and authority to issue, modify and revoke such rules as the Administrator deems advisable, to construe, interpret, apply and enforce the terms of the Plan and Plan rules and to remedy ambiguities, inconsistencies, omissions and erroneous Account balances. Whenever the Plan requires the Administrator to make a determination, the determination will be made by the Administrator in his, her or its sole discretion and without regard to whether different determinations have been made in the past with respect to other persons, whether or not similarly situated. The Administrator's interpretations, determinations, regulations and calculations are final and binding on all persons and parties concerned. 7.2 BENEFIT CLAIM PROCEDURE. Within a reasonable time following termination of a Participant's employment, the Administrator will notify the Participant or, if he is deceased, his surviving spouse, of the amount of benefits, if any, payable under the Plan. Not later than 30 days after receipt of such notice, the Participant or his or her surviving spouse, as the case may be, may file with the Administrator a written claim objecting to the amount of benefits payable under the Plan. Not later than 90 days after receipt of such claim, the Administrator will render a written decision on the claim to the claimant. If the claim is denied in whole or in part, such decision will include: the reasons for the denial; a reference to the Plan provision that is the basis for the denial; a description of any additional material or information necessary for the claimant to perfect the claim; an explanation as to why such information or material is necessary; and an explanation of the Plan's claim procedure. Not later than 60 days after receiving the Administrator's written decision, the claimant may file with the Administrator a written request for review of the Administrator's decision, and the claimant or his or her representative may thereafter review Plan documents that relate to the claim and submit written comments to the Administrator. No later than 60 days after receiving such request, the Administrator will afford the claimant or his or her representative an opportunity to present his claim in person to the Administrator. Not later than 60 days after such presentation or, if there is no such presentation, no later than 60 days after the Administrator's receipt of the request for review, the Administrator will render a written decision on the claim, which decision will include the specific reasons for the decision, including references to specific Plan provisions where appropriate. The 90- and 60-day periods during which the Administrator must respond to the claimant may be extended by up to an additional 90 or 60 days, respectively, if special circumstances beyond the Administrator's control so require and if notice of such extension is given to the claimant prior to the expiration of the initial 90- or 60-day period. 7.3 AMENDMENT AND TERMINATION. The Company reserves the right to amend or terminate the plan at any time by way of a written instrument approved or ratified by the Board and executed in the name of the Company by a duly authorized officer. No amendment or termination may adversely affect a benefit to which a Participant or Beneficiary is entitled under the Plan prior to the date of such amendment or termination; provided, first that to the extent determined by the Administrator to be necessary to ensure the continued status of the Plan as an unfunded plan maintained for a select group of management or highly compensated employees, the Administrator may cause the Company to make an immediate lump sum distribution to any Participant of his or her Account balances under the Plan at any time; and, second, that in conjunction with the termination of the Plan, the Company may, but is not required to, cause the Account balances of all or any Participants to be distributed at any time after the effective date of the termination and prior to the date on which the Account balances would otherwise be distributed. Any amendment to the Plan 9 applies only to Participants who terminate employment after the effective date of the amendment unless the amendment expressly otherwise provides. 7.4 NO EMPLOYMENT RIGHTS CREATED. Nothing in the Plan gives any Participant a right to continued employment or limits the right of any Employer to discharge, transfer, demote, modify terms and conditions of employment or otherwise deal with the Participant without regard to the effect such action might have on him or her under the Plan. 7.5 WITHHOLDING AND OFFSETS. Each Employer and, if applicable, the Trustee, retains the right to withhold from any benefit payment under the Plan, any and all income, employment, excise and other tax as the Employer or Trustee may, in its sole discretion, deems necessary and the Employer may offset against amounts payable to a Participant or Beneficiary under the Plan any amounts then owing to the Employer by such Participant or Beneficiary. 7.6 OTHER BENEFITS. Neither amounts credited to a Participant's Account pursuant to Article 4 nor amounts distributed pursuant to Article 5 constitute salary or compensation for the purpose of computing benefits under any other benefit plan, practice, policy or procedure of any Employer unless otherwise expressly provided thereunder, to which he or she may be entitled thereunder. 7.7 DISPUTES. In the event of a dispute over whether the Participant or Beneficiary is entitled to a benefit under this Plan, the amount, form or timing of payment of any such benefit or any other provision of this Plan, the Participant or Beneficiary is responsible for paying any costs he or she incurs, including attorneys' fees and legal expenses, and the Company is responsible for paying any costs it incurs, including attorneys' fees and any legal expenses. Any such dispute may be brought only in a court of competent jurisdiction in Minnesota. 10 EX-10.12 8 EXHIBIT 10.12 BMC INDUSTRIES, INC. EXECUTIVE BENEFIT PLAN FIRST DECLARATION OF AMENDMENT Pursuant to the retained power of amendment contained in Section 7.3 of the BMC Industries, Inc. Executive Benefit Plan, the undersigned hereby amends the Plan in the manner described below. 1. Section 1.2 of the Plan is amended to read as follows: 1.2 PLAN PURPOSE. The Plan provides Participants with additional benefits that would have been provided under the Qualified Plan but for the limitations imposed by Code sections 401(a)(17) and 415. 2. Section 1.4 of the Plan is amended to read as follows: 1.4 PARTICIPATING EMPLOYERS. The Plan applies to each participating employer that has adopted the Qualified Plan and has not, at the time in question, terminated such participation. 3. Section 2.7 of the Plan is amended to read as follows: 2.7 COMPENSATION. "Compensation" with respect to a Participant for a Plan Year means his or her compensation for the Plan Year for the purpose in question within the meaning of the Qualified Plan determined without regard to the limitation under Code section 401(a)(17). 4. Section 2.9 of the Plan is amended to read as follows: 2.9 EMPLOYER. "Employer" means the Company and each affiliated organization with respect to the Company that has adopted the Qualified Plan. 5. Section 2.12 of the Plan is amended to read as follows: 2.12 PARTICIPANT. "Participant" means any participant in the Qualified Plan who has been designated by the Administrator as a Participant pursuant to Section 3.1. A Participant will cease to be such on the date on which all benefits to which he or she is entitled under the terms of the Plan have been distributed in full. 6. Section 2.14 of the Plan is amended to read as follows: 2.14 QUALIFIED PLAN. "Qualified Plan" means the BMC Industries, Inc. Savings and Profit Sharing Plan, as from time to time amended or restated. 7. Section 3.1 of the Plan is amended to read as follows: 3.1 COMMENCEMENT OF PARTICIPATION. To be eligible to have credits made to his or her Account pursuant to Section 4.2 or 4.3 for a particular period, an individual must be (a) an employee of an Employer who is eligible to participate in the Qualified Plan for the period, (b) considered to be a member of a select group of management or highly compensated employees as determined by the Administrator, and (c) selected by the Administrator. 8. Section 4.1 of the Plan is amended to read as follows: 4.1 ACCOUNTS. The Administrator will establish and maintain the following bookkeeping accounts for each Participant - (a) An "Excess Matching Contribution Account," to evidence amounts credited to the Participant pursuant to Sections 4.2 and 4.4; and (b) An "Excess Profit Sharing Contribution Account," to evidence amounts credited to the Participant pursuant to Sections 4.3 and 4.4. If more than one Employer makes contributions to the Qualified Plan on a Participant's behalf, the Administrator may establish and maintain separate Accounts for the Participant with respect to each Employer. 9. Section 4.2 of the Plan is amended to read as follows: 4.2 EXCESS MATCHING CONTRIBUTION CREDITS. As of a date determined by the Administrator but not later than the first day of the fifth month after the end of each plan year under the Qualified Plan, the Administrator will credit a Participant's Excess Matching Contribution Account with an amount, if any, equal to the amount of matching contributions that would have been made on the Participant's behalf for the plan year under the Qualified Plan if the Participant's elective deferrals for the plan year pursuant to the Qualified Plan had been made without regard to the limitations imposed by operation of Code sections 401(a)(17), 401(k)(3), 402(m)(2), 402(g) or 415, minus the amount of total matching contributions actually made on the Participant's behalf under the Qualified Plan for the plan year. 2 10. Section 4.3 of the Plan is amended to read as follows: 4.3 EXCESS PROFIT SHARING CONTRIBUTION CREDITS. As of a date determined by the Administrator but not later than the first day of the fifth month after the end of each plan year under the Qualified Plan, the Administrator will credit a Participant's Excess Profit Sharing Contribution Account with an amount, if any, equal to the amount of the profit sharing contribution that would have been made on the Participant's behalf for the plan year under the Qualified Plan but for the limitations of Code sections 401(a)(17) and 415, minus the amount of the profit sharing contribution actually made on the Participant's behalf under the Qualified Plan for the plan year. 11. Section 4.5 of the Plan is amended to read as follows: 4.5 VESTING. Each Participant's vested interest in each of his or her Accounts at any time will be the same as the Participant's vested interest in his or her corresponding accounts at that time under the Qualified Plan. The nonvested portion of a Participant's Accounts will be permanently forfeited at the time the Accounts are distributed pursuant to Article 5, whether or not his or her accounts under the Qualified Plan have then been forfeited or are subsequently restored. 12. Section 5.1(A) of the Plan is amended to read as follows: (A) DISTRIBUTION TO PARTICIPANT. A Participant's Account balances will be distributed to the Participant in the form of a lump sum cash payment on a date determined by the Administrator but not later than the last day of the first calendar year beginning after the Participant's "termination of employment," within the meaning of the Qualified Plan, unless the Participant is reemployed by an Employer on or before the date on which the distribution would otherwise be made. The amount of the Account balances will be determined as of the last day of the calendar quarter immediately preceding the date of the distribution. The foregoing amendment is effective as of September 1, 1998. IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed by its duly authorized officers this 11th day of November, 1998. BMC INDUSTRIES, INC. Attest: /s/ Jon A. Dobson By: /s/ Jeffrey J. Hattara ----------------------------- ------------------------------ Secretary Chief Financial Officer 3 EX-10.25 9 EXHIBIT 10.25 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement, effective as of January 1, 1999, is by and between BMC Industries, Inc., a Minnesota corporation located at One Meridian Crossings, Suite 850, Minneapolis, Minnesota 55423 (the "COMPANY") and Paul B. Burke, an individual residing at 2154 Charlton Road, Sunfish Lake, Minnesota 55118 (the "EXECUTIVE"). A. The Executive has been employed as President and Chief Executive Officer of the Company and has been serving as Chairman of the Board of Directors of the Company (the "Board"). B. The parties wish to provide for the continuation of the existing relationship on the terms hereinafter provided. In consideration of the actual promises hereinafter set forth, the Company and the Executive each intending to be legally bound, agree as follows: 1. DEFINITIONS. Capitalized terms used herein shall have the meanings assigned to them in the Company's 1994 Stock Incentive Plan as in effect on the effective date hereof (the "PLAN"), unless otherwise specifically defined herein. 2. EMPLOYMENT. (a) EMPLOYMENT. Subject to all of the terms and conditions of this Agreement, the Company agrees to employ the Executive as its President, Chief Executive Officer, and Chairman of the Board, and the Executive accepts such employment. (b) DUTIES. The Executive will perform his duties and obligations hereunder on a full-time basis and, make the best use of Executive's energy, knowledge and training in advancing the Company's interests. Executive shall perform those services for the Company normally associated and consistent with the titles and positions specified in Section 2(a) which shall include, but not be limited to, the following: (i) general and active management of the business strategy and affairs of the Company, subject to the direction and supervision of the Board; (ii) participation with other officers and directors of the Company in the establishment of policies of the Company; (iii) presiding at meetings of the Board; (iv) supervision of the tasks and duties of all of the officers of the Company; and (v) supervision of the employment and termination of employment of all of the executive employees of the Company. (c) Notwithstanding anything to the contrary contained in this Agreement, nothing herein shall preclude Executive from devoting reasonable periods of time to: (i) serving as a director or member of a committee of any organization which does not involve a material conflict of interest with the interests of the Company; (ii) engaging in charitable and community activities; or (iii) managing his personal investments; PROVIDED, HOWEVER, that such activities do not materially interfere with the performance of his duties and responsibilities hereunder. 3. COMPENSATION. In consideration for all services to be rendered to the Company, the Company agrees to compensate the Executive as follows: (a) SALARY. The Company agrees to pay Executive a salary at a rate of Four Hundred Thousand U.S. Dollars (U.S.$400,000) per year, increased from time to time as the Board, in its sole discretion, may determine (the "SALARY"). Such Salary will be paid no less often than semi-monthly in accordance with the standard payroll practices of the Company. (b) ANNUAL BONUS. In addition to the Salary, Executive will be entitled to an annual bonus of a percentage of Executive's Deemed Base Salary (as defined below in Section 3(b)(i)) then in effect (the "ANNUAL BONUS") in accordance with the Company's management incentive bonus plan (the "BONUS PLAN") applied in accordance with this Section 3(b). The Bonus Plan shall be maintained during the term of this Agreement. For purposes of this Agreement, the Bonus Plan will be operated consistent with past practice, except that as applied to the Executive under this Agreement: (i) The Executive's base salary, for purposes of determining the Executive's Annual Bonus only, will be deemed to be Four Hundred Twenty Five Thousand U.S. Dollars (U.S.$425,000) (the "DEEMED BASE SALARY"); provided, that, such Deemed Base Salary will be increased by any amount by which the Salary is increased; and (ii) the Bonus Plan will be structured to provide the opportunity to yield an Annual Bonus determined by that formula set forth as Schedule A hereto (as amended each year to reflect annual changes to the corporate performance target earnings requirement). (c) RESTRICTED STOCK AWARD. Executive shall receive a Restricted Stock Award with a Fair Market Value of Fifty Thousand U.S. Dollars (U.S.$50,000) on the date of such Award (the "STOCK AWARD"), effective upon approval thereof by the Board. The Stock Award shall be subject to and represented by an agreement in form and substance customarily entered into upon the making of similar Restricted Stock Awards (the "AWARD AGREEMENT"), which shall contain such restrictions as have customarily applied previously to Restricted Stock Awards, but such restrictions shall lapse on December 31, 2000. The parties agree to promptly enter into any such agreement. (d) STOCK OPTIONS. Executive will receive a Non-Statutory Stock Option (the "OPTION") under the Plan to purchase Three Hundred Thousand (300,000) shares of the 2 Company's Common Stock, effective upon approval thereof by the Board. The Option shall be subject to and represented by an agreement in form and substance customarily entered into upon the making of Non-Statutory Stock Options (the "OPTION AGREEMENT"). The parties agree to promptly enter into any such agreement. Notwithstanding the foregoing, the Option (and correspondingly, the Option Agreement) will have an exercise price equal to 100% of the Fair Market Value of the Common Stock on the date of the grant as determined under the Plan and will provide that it becomes fully vested and exercisable in whole or in part on December 31, 2000, subject to any customarily applicable forfeiture/vesting provisions contained in the Option Agreement and Change of Control Agreement (as defined in Section 4(b)(iv) hereof). (e) EXTENSION OF STOCK OPTION EXERCISE PERIOD. All Non-Statutory Stock Options previously granted to Executive shall be amended to provide, and the Option granted under Section 3(d) shall provide, effective upon approval by the Board, that the period during which the Executive may exercise all such Options shall continue for a period of 365 days from the date of any termination of Executive's employment with the Company, to the extent such Options by their terms are otherwise exercisable and would not otherwise expire or lapse, prior to the end of such period. Any agreement representing such Options shall be revised to reflect such amendment. (f) REIMBURSEMENT OF BUSINESS EXPENSES. The Company agrees to reimburse the Executive for all reasonable out-of-pocket business expenses incurred by the Executive on behalf of the Company, provided that the Executive appropriately accounts to the Company for all such expenses in accordance with the rules and regulations of the Internal Revenue Service under the Internal Revenue Code of 1986, as amended (the "CODE"), if applicable, and in accordance with the standard policies of the Company relating to reimbursement of business expenses. (g) BENEFITS AND VACATION. (i) The Executive is entitled to participate in all benefit plans and policies now in effect or hereafter adopted by the Company to the extent that the terms of such benefit plans permit the Executive to participate therein, including without limitation, the Company's: Executive Perk/Flex Plan, physical examination plan, Stock Option Exercise Loan Program, 401(k) savings plan, profit sharing plan, non-qualified benefit equalization plan, Change of Control Agreement (as defined in Section 4(b)(iv) hereof), and all existing grants or awards to Executive under the Plan. The Executive's benefits under the Perk/Flex Plan will be determined using the Deemed Base Salary. (ii) The Executive is entitled to an amount of paid vacation as is consistent with and does not otherwise interfere with Executive's duties hereunder and to all legal holidays observed by the Company, in each case, in accordance with the Company's policies as in effect from time-to-time. 3 4. TERM AND TERMINATION. (a) TERM. Subject to earlier termination in accordance with Section 4(b) below, this Agreement will become effective as of January 1, 1999 and will have an initial term of two (2) years, concluding on December 31, 2000. This Agreement will be automatically renewed for successive one (1) year periods after such initial term, unless and until terminated by either party effective as of the end of such initial term, or successive one-year renewal period, on not less than sixty (60) days' written notice before the end of such initial term or any such successive one-year renewal period. (b) TERMINATION. (i) The Company may terminate this Agreement immediately on written notice to the Executive "for cause". For purposes of this Agreement, "for cause" means: (A) an act or acts of personal dishonesty taken by Executive and intended to result in substantial personal enrichment of Executive at the expense of the Company; (B) repeated violations by Executive of his obligations under Section 2(b) which are demonstrably willful and deliberate on Executive's part and which are not remedied within a reasonable period after Executive's receipt of notice of such violations from the Company or (C) the willful engaging by Executive in illegal conduct that is materially and demonstrably injurious to the Company. For purposes of this Section 4(b)(i), no act, or failure to act, on Executive's part shall be considered "dishonest," "willful" or "deliberate" unless done, or omitted to be done, by Executive in bad faith and without reasonable belief that Executive's action or omission was in, or not opposed to, the best interest of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company; (ii) This Agreement will terminate upon Executive's death or upon written notice from the Company in the event of Executive's "permanent disability" (defined as the unwillingness or inability of the Executive to perform his duties hereunder because of incapacity due to physical or mental illness, bodily injury or disease for a period of (180) consecutive days); (iii) The parties may at any time terminate this Agreement by mutual agreement in writing; and (iv) The Executive may terminate this Agreement as provided for in the Change of Control Agreement between the Executive and the Company dated as of May 9, 1991 (the "CHANGE OF CONTROL AGREEMENT"). 4 The date this Agreement is terminated is hereinafter referred to as the "TERMINATION DATE." (c) COMPENSATION UPON TERMINATION. (i) If the Company terminates this Agreement "for cause" pursuant to Section 4(b)(i), the Company will be obligated to pay the Executive only the Salary as may be due and owing through the Termination Date, and all other non-contingent compensation earned and accrued up through the Termination Date which will specifically not include any Annual Bonus, or any part thereof. Such Salary and other amounts will be paid in one lump sum within ten (10) business days after the Termination Date. The Executive's rights to the Stock Award, Option and all other benefits available to Executive shall be as provided for in the Plan, and the other agreements, plans and policies governing each such right and benefit. (ii) If this Agreement is terminated in accordance with Section 4(a) or pursuant to Section 4(b)(ii), the Company will be obligated to pay the Employee the Salary which may be due and owing through the Termination Date, and all other non-contingent compensation earned and accrued through the Termination Date. Such Salary and other amounts will be paid in one lump sum within ten (10) business days of the Termination Date. In addition, the Executive shall be entitled to the Annual Bonus, if any, with respect to the fiscal year in which such termination occurs; provided, that, in the case of termination pursuant to Section 4(b)(ii), such Annual Bonus shall be pro-rated in an amount equal to the total amount of the Annual Bonus which would have been payable to the Executive had this Agreement not so terminated, multiplied by a fraction, the numerator of which equals the number of complete or partial calendar months from the beginning of such fiscal year during which this Agreement terminates through the Termination Date, and the denominator of which is twelve (12). Such Annual Bonus (or pro-rata share thereof) shall be paid as and when contemplated under the Bonus Plan notwithstanding that the Termination Date may have previously occurred. The Executive's rights to the Stock Award, Option and all other benefits available to Executive shall be as provided for in the Plan, and the other agreements, plans and policies governing each such right and benefit. (iii) If the Company terminates the Agreement in accordance with Section 4(a), the Company will be obligated to pay the Executive his base salary for one year after the Termination Date. Such salary shall be paid in twelve (12) equal monthly installments, with the first such payment due on the last day of the month containing the Termination Date. This Payment is in addition to the payments required by Section 4(c)(ii). 5 (iv) If this Agreement terminates pursuant to Section 4(b)(iii), the Executive shall be entitled to payments as provided in Section 4(c)(ii) above unless the parties otherwise mutually agree in writing. (v) If this Agreement is terminated in accordance with Section 4(b)(iv), or the Executive's employment with the Company is terminated under circumstances when the Change of Control Agreement is applicable, the Executive shall be compensated solely as provided for in the Change of Control Agreement, and any conflict between this Agreement and the Change of Control Agreement shall in such case be governed by the Change of Control Agreement. 5. NON-COMPETITION; CONFIDENTIALITY. (a) NON-COMPETITION. Executive agrees that during the term of this Agreement and for a period of two (2) years following the Termination Date, Executive will not directly or indirectly, alone or as a partner, officer, director, shareholder, member, employee, independent contractor or in any other capacity of or with respect to any other firm or entity, engage in any commercial activity, in any location where the Company has operations, sales, customers or otherwise does business, in competition with any part of the Company's business as conducted during the term of this Agreement. Such business includes, without limitation, the design, manufacture and distribution of ophthalmic lenses, aperture masks and precision photo-etched metal parts, specialty printed circuits, electroformed components. Notwithstanding the foregoing, the competition restrictions in this Section 5 shall not apply to any part of the Company's business that represented less than five percent (5%) of its consolidated revenues during the most recently completed fiscal year preceding the Termination Date. For purposes of this Section 5(a) "shareholder" shall not include beneficial ownership of five percent (5%) or less of the combined voting power of all issued and outstanding voting securities of a publicly held corporation whose stock is traded on a major stock exchange or quoted on NASDAQ. (b) CONFIDENTIALITY. The Executive agrees not to directly or indirectly disclose or use at any time, either during or subsequent to his employment by the Company and any of its subsidiaries or affiliates (which obligation will survive indefinitely), any technology, trade secrets, know-how, or other information, knowledge, or data possessed or used by the Company or to which the Executive gains access in connection with his employment and which the Company deems confidential or proprietary or which the Executive has reason to believe is confidential or proprietary, except as such disclosure or use may be required in connection with his work for the Company or unless the Executive first secures the written consent of the Company; provided, that the foregoing shall not prohibit the Executive only from retaining and using documents and reports of the Company relating to management, operational or strategic activities of the Company as formats or templates for the creation of other documents or reports for parties other than the Company for whom the Executive is then providing services. The foregoing proviso shall in no event, however, be deemed to permit the Executive (i) to retain any documentation relating to any intellectual property or technological information of the 6 Company or (ii) to disclose or make available to any other party actual (A) identifying information (including name, position, age or gender) with respect to any personnel or human resource information, or (B) detailed information relating to the operational, strategic or financial condition, plans or performance of the Company. Subject to the foregoing, upon termination of his employment with the Company, the Executive will promptly return to the Company all originals and all copies of all property and assets of the Company created or obtained by the Executive as a result of or in the course of or in connection with his employment with the Company which are in the Executive's possession or control, whether confidential or not. The obligations under this Section 5 will not apply to any information that is now or becomes generally available to the public through no fault of Executive or to Executive's disclosure of any information required by law or judicial or administrative process. 6. MISCELLANEOUS. (a) NO ADEQUATE REMEDY. The Executive understands that if the Executive fails to fulfill Executive's obligations under Section 5 of this Agreement, the damages to the Company would be very difficult to determine. Therefore, in addition to any rights or remedies available to the Company at law, in equity, or by statute, the Executive hereby consents to the specific enforcement of Section 5 of this Agreement by the Company through an injunction or restraining order issued by an appropriate court. (b) CONSENT TO USE OF NAME. The Executive consents to the use of Executive's name in appropriate Company materials such as, but not limited to, offering memoranda related to financing activities of the Company. (c) NO CONFLICTS. Each party represents and warrants to the other that neither the entering into of this Agreement nor the performance of any obligations hereunder will conflict with or constitute a breach under any obligation of such party, as the case may be, under any agreement or contract to which such party is a party or any other obligation by which such party is bound. (d) SUCCESSORS AND ASSIGNS. Subject to provisions of the Change of Control Agreement, this Agreement is binding on and inures to the benefit of the Company's successors and assigns. This Agreement is also binding on, and all rights of Executive hereunder shall inure to the benefit of and be enforceable by, the Executive's heirs, successors, assigns and legal representatives. If Executive should die while any amounts would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to Executive's estate. Executive may not assign this Agreement, in whole or in any part, without the prior written consent of the Company. (e) MODIFICATION. This Agreement may be modified or amended only by a writing signed by the Company and the Executive. 7 (f) GOVERNING LAW. The laws of Minnesota will govern the validity, remedies, interpretation, enforcement, construction, and performance of this Agreement. Subject to Section 6(g), any legal proceeding related to this Agreement will be brought in an appropriate Minnesota court or federal court setting in Minnesota, and the Company and the Executive hereby consent to the exclusive jurisdiction of that court for this purpose. (g) DISPUTE RESOLUTION. Except for any proceeding brought pursuant to Section 6(a) herein, the parties agree that any dispute arising out of or relating to this Agreement or the formation, breach, termination or validity thereof (a "DISPUTE"), will be resolved as follows. If the Dispute cannot be settled through direct discussions, the parties will first try to settle the Dispute in an amicable manner by mediation under the Commercial Mediation Rules of the American Arbitration Association, before resorting to arbitration. Any Dispute that has not been resolved within sixty (60) days of the initiation of the mediation procedure (the "MEDIATION DEADLINE") will be settled by binding arbitration by a panel of three arbitrators in accordance with the commercial arbitration rules of the American Arbitration Association. The arbitration and mediation proceedings will be located in Minneapolis, Minnesota. The arbitrators are not empowered to award damages in excess of compensatory damages and each party hereby irrevocably waives any damage in excess of compensatory damages. Judgment upon any arbitration award may be entered into any court having jurisdiction thereof and the parties' consent to the jurisdiction of the courts the state in which the arbitration occurred for this purpose. (h) CONSTRUCTION. Whenever possible, each provision of this Agreement will be interpreted so that it is valid under the applicable law. If any provision of this Agreement is to any extent declared invalid by a court of competent jurisdiction under the applicable law, that provision will remain effective to the extent not declared invalid. The remainder of this Agreement also will continue to be valid, and the entire Agreement will continue to be valid in other jurisdictions. (i) WAIVERS. No failure or delay by the Company or the Executive in exercising any right or remedy under this Agreement will waive any provision of the Agreement. Nor will any single or partial exercise by either the Company or the Executive of any right or remedy under this Agreement preclude either of them from otherwise or further exercising these rights or remedies, or any other rights or remedies granted by any law or any related document. (j) ENTIRE AGREEMENT. This Agreement supersedes all previous and contemporaneous oral negotiations, commitments, writings and understandings between the parties concerning the matters in this Agreement, including without limitation any policy or personnel manuals of the Company, except to the extent this Agreement otherwise provides with respect to the Plan, the Option Agreement, the Award Agreement, the Change of Control Agreement, and the benefits described in Section 3(g). 8 (k) NOTICES. All notices, requests, demands and other communications required or permitted under this Agreement will be in writing and be personally delivered or sent by registered first-class mail, postage prepaid, and will be effective upon delivery, if personally delivered, and five days after mailing to the addresses stated at the beginning of this Agreement, if so mailed. These addresses may be changed at any time by like notice. (l) COUNTERPARTS. This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one (1) and the same instrument. (m) SURVIVAL. The parties expressly acknowledge and agree that the provisions of this Agreement which by their express or implied terms extend beyond the termination of Executive's employment hereunder including, without limitation, the provisions of Section 4(c) (relating to compensation) or beyond the termination of this Agreement (including, without limitation, the provisions of Section 5 (relating to non-competition and confidential information), shall continue in full force and effect notwithstanding Executive's termination of employment hereunder or the termination of this Agreement, respectively. (n) WITHHOLDING. To the extent required by any applicable law, including, without limitation, any federal or state income tax or excise tax law or laws, the Federal Insurance Contributions Act, the Federal Unemployment Tax Act or any comparable federal, state or local laws, the Company retains the right to withhold such required portion of any amount or amounts payable to Executive under this Agreement as the Company (on the written advice of outside counsel that is disclosed to Executive) deems necessary. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first above written. BMC INDUSTRIES, INC. EXECUTIVE By: /s/Jeffrey J. Hattara /s/Paul B. Burke ------------------------- --------------------------- Jeffrey J. Hattara Paul B. Burke Title: Vice President Finance and Administration and CFO 9 EX-10.30 10 EXHIBIT 10.30 SECOND AMENDMENT TO CREDIT AGREEMENT This Second Amendment to Credit Agreement (the "SECOND AMENDMENT") dated as of December 30, 1998 is by and among BMC Industries Inc., a Minnesota corporation (the "BORROWER"), Bankers Trust Company, a New York banking corporation, as administrative agent for the Lenders hereunder (in such capacity individually, the "AGENT") and as a Lender, NBD Bank as documentation agent and as a Lender and the several banks and other financial institutions from time to time party to the Credit Agreement described below (the "LENDERS"). R E C I T A L S: WHEREAS, the Borrower, the Agents and the Lenders are parties to an Amended and Restated Credit Agreement dated as of June 25, 1998 (as hereafter amended, restated, supplemented or otherwise modified, the "CREDIT AGREEMENT"), pursuant to which the Lenders have made and may hereafter make loans, advances and other extensions of credit to the Borrower; WHEREAS, under SECTION 7.11 of the Credit Agreement the Borrower by December 31, 1998 affirmatively agreed to refinance, amend or otherwise modify that certain Credit Offer Letter between Buckbee-Mears Europe GmbH and Deutsche Bank AG (Stuttgart) dated September 30, 1994 such that the facility became an unsecured facility and Agent received such related releases of security interests and Liens; WHEREAS, such refinancing, amendment or modification of such facility will not have occurred as of December 31, 1998; WHEREAS, the Borrower has requested that the Agents and the Lenders amend SECTION 7.11 of the Credit Agreement as set forth herein and the Lenders and the Agents are agreeable to the same, subject to the terms and conditions hereof; WHEREAS, this Second Amendment shall constitute a Loan Document and these Recitals shall be construed as part of this Second Amendment; NOW, THEREFORE, in consideration of the foregoing and the agreements, promises and covenants set forth below, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. Capitalized terms used but not otherwise defined in this Second Amendment shall have the meanings ascribed to them in the Credit Agreement. 2. AMENDMENT TO THE CREDIT AGREEMENT. Subject to the conditions of this Second Amendment, SECTION 7.11 of the Credit Agreement is hereby amended by deleting the text "December 31, 1998" therein and inserting in lieu thereof the text "April 30, 1999". 3. CONDITIONS PRECEDENT. Notwithstanding any other provision contained in this Second Amendment or any other document, the effectiveness of this Second Amendment is expressly conditioned upon the satisfaction of each matter set forth in this SECTION 4, all in form and substance acceptable to the Agent in its sole and absolute discretion: (a) SECOND AMENDMENT. The Agent shall have received a duly executed copy of this Second Amendment signed by the Borrower, the Agent and the Required Lenders. (b) WARRANTIES AND REPRESENTATIONS. All of the warranties and representations of the Borrower contained in the Credit Agreement and in the other Loan Documents (including, without limitation, in this Second Amendment) shall be true and correct in all material respects on and as of the date first written above (except those representations and warranties made expressly as of a different date). The Borrower hereby represents and warrants that the execution, delivery and performance of this Second Amendment and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action and this Second Amendment is a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as the enforcement thereof may be subject to (i) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting creditors' rights generally and (ii) general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law). In furtherance of the foregoing, the Borrower hereby represents and warrants that as of the date first written above each of the conditions precedent contained in this SECTION 4 has been fully satisfied in accordance with the express terms thereof. (c) NO EVENT OF DEFAULT. Except as expressly waived herein, no Event of Default shall have occurred and be continuing as of the date first written above, or, will occur after giving effect to this Second Amendment in accordance with its terms. (d) NO LITIGATION. No litigation, investigation, proceeding, injunction, restraint or other action shall be pending or threatened against the Borrower or any Affiliate of the Borrower, or any officer, director, or executive of any thereof, which restrains, prevents or imposes adverse conditions upon, or which otherwise relates to, the execution, delivery or performance of this Second Amendment. 4. FURTHER ASSURANCES. The Borrower hereby agrees, at its expense, to duly execute, acknowledge and deliver to the Agent all agreements, certificates, instruments, opinions and other documents, and take all such actions, as the Agent may reasonably request in order to further effectuate the purposes of this Second Amendment and to carry out the terms hereof. 5. LIMITATION OF SECOND AMENDMENT. The parties hereto agree and acknowledge that nothing contained in this Second Amendment in any manner or respect limits or terminates any of the provisions of the Credit Agreement or any of the other Loan Documents other than as expressly set forth herein and further agree and acknowledge that the Credit Agreement (as amended hereby) and each of the other Loan Documents remain and continue in full force and effect and are hereby ratified and confirmed. Except to the extent expressly set forth herein, the execution, delivery and effectiveness of this Agreement shall not operate as a waiver of any rights, power or remedy of the Lenders or the Agent under the Credit Agreement or any other Loan Document, nor -2- constitute a waiver of any provision of the Credit Agreement or any other Loan Document. No delay on the part of any Lender or the Agent in exercising any of their respective rights, remedies, powers and privileges under the Credit Agreement or any of the Loan Documents or partial or single exercise thereof, shall constitute a waiver thereof. None of the terms and conditions of this Second Amendment may be changed, waived, modified or varied in any manner, whatsoever, except in accordance with SECTION 11.1 of the Credit Agreement. 6. COSTS, EXPENSES AND TAXES. Pursuant to SECTION 11.4 of the Credit Agreement, the Borrower agrees to pay on demand all costs and expenses of the Lenders and the Agent in connection with the preparation, execution and delivery of this Second Amendment including the reasonable fees and out-of-pocket expenses of counsel to the Agent with respect thereto. 7. EXECUTION IN COUNTERPARTS. This Second Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 8. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE INTERNAL CONFLICTS OF LAWS PROVISIONS THEREOF. 9. HEADINGS. Section headings in this Second Amendment are included herein for convenience of reference only and shall not constitute a part of this Second Amendment for any other purposes. * * * * [Signature pages follow] -3- IN WITNESS WHEREOF, this Second Amendment has been duly executed as of the date first written above. BMC INDUSTRIES INC. NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: /s/ Jeffrey J. Hattara By: /s/ Scott D. Bjelde ---------------------------- ------------------------- Name: Jeffrey J. Hattara Name: Scott D. Bjelde Title: VP Finance & Admn and CFO Title: Vice President BANKERS TRUST COMPANY, in its individual capacity and as Administrative HARRIS TRUST AND SAVINGS BANK Agent By: /s/ Robert R. Telesca By: /s/ Catherine C. Ciolek ----------------------------- -------------------------- Name: Robert R. Telesca Name: Catherine C. Ciolek Title: Assistant Vice President Title: Vice President NBD BANK, in its individual capacity and as WACHOVIA BANK, N.A. Documentation Agent By: /s/ Marguerite C. Gordy By: /s/ Todd J. Eagle ------------------------------- --------------------------- Name: Marguerite C. Gordy Name: Todd J. Eagle Title: Vice President Title: Vice President UNION BANK OF CALIFORNIA By: --------------------------- Name: -------------------------- Title: ------------------------- U.S. BANK NATIONAL ASSOCIATION CREDIT AGRICOLE INDOSUEZ By: /s/ David Shapiro By: /s/ Jean Yves Klein ---------------------------- ---------------------------- Name: David Shapiro Name: Jean Yves Klein Title: Assistant Vice President Title: General Manager, Chicago Branch THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Glenn A. Cue By: /s/ W. Leroy Startz ----------------------------- ---------------------------- Name: Glenn A. Cue Name: W. Leroy Startz Title: Vice President Title: First Vice President
EX-13.1 11 EXHIBIT 13.1 HISTORICAL FINANCIAL SUMMARY (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICS AND RATIOS)
YEARS ENDED DECEMBER 31 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Revenues $ 335,138 $ 312,538 $ 280,487 $ 255,355 $ 219,968 Cost of products sold 297,995 244,468 213,007 202,595 181,024 ---------------------------------------------------------------- Gross margin 37,143 68,070 67,480 52,760 38,944 Selling and administrative 20,675 16,012 15,033 14,137 12,188 Impairment of long-lived assets 42,800 -- -- -- -- Acquired in-process research and development 9,500 -- -- -- -- ---------------------------------------------------------------- Earnings (loss) from continuing operations before interest, other expense and income taxes (35,832) 52,058 52,447 38,623 26,756 Interest income (expense), net (13,374) (1,065) (280) 467 (2,369) Other income (expense) 522 209 236 (146) (57) Income tax (benefit) expense (18,049) 15,481 17,302 14,397 9,326 ---------------------------------------------------------------- Earnings (loss) from continuing operations (30,635) 35,721 35,101 24,547 15,004 Provision for loss related to discontinued operation, net of tax -- -- -- -- (839) ---------------------------------------------------------------- Net earnings (loss) $ (30,635) $ 35,721 $ 35,101 $ 24,547 $ 14,165 ---------------------------------------------------------------- BASIC EARNINGS (LOSS) PER SHARE Number of shares included in per share computation 27,014 27,583 27,268 26,896 25,023 Earnings (loss) from continuing operations $ (1.13) $ 1.30 $ 1.29 $ 0.91 $ 0.60 Loss from discontinued operation -- -- -- -- (0.03) ---------------------------------------------------------------- Basic earnings (loss) per share $ (1.13) $ 1.30 $ 1.29 $ 0.91 $ 0.57 ---------------------------------------------------------------- DILUTED EARNINGS (LOSS) PER SHARE Number of shares included in per share computation 27,014 28,530 28,363 28,234 27,335 Earnings (loss) from continuing operations $ (1.13) $ 1.25 $ 1.24 $ 0.87 $ 0.55 Loss from discontinued operation -- -- -- -- (0.03) ---------------------------------------------------------------- Diluted earnings (loss) per share $ (1.13) $ 1.25 $ 1.24 $ 0.87 $ 0.52 ---------------------------------------------------------------- CASH FLOW Cash dividends per share $ 0.06 $ 0.06 $ 0.0525 $ 0.0425 $ 0.02 Depreciation and amortization expense 21,014 13,349 10,171 8,290 8,250 Net cash provided by operating activities 26,948 14,667 20,786 45,261 36,680 Capital expenditures 21,427 75,110 54,662 39,196 13,537 ---------------------------------------------------------------- FINANCIAL POSITION Working capital $ 94,971 $ 74,914 $ 41,354 $ 32,730 $ 38,769 Property, plant and equipment, net 162,594 182,382 123,845 81,409 49,858 Total assets 399,465 319,407 232,969 182,332 138,686 Total debt 189,195 74,565 17,989 47 66 Stockholders' equity 133,257 178,752 144,108 108,466 81,788 ---------------------------------------------------------------- STATISTICS AND RATIOS Current ratio 2.7 2.6 1.8 1.6 2.0 Total debt to equity ratio 1.4 0.4 0.1 0.0 0.0 Earnings (loss) from continuing operations before interest, other expense and income taxes, as a percentage of revenues (10.7)% 16.7% 18.7% 15.1% 12.2% Return on average equity (19.6)% 22.1% 27.8% 25.8% 20.1% Book value per share $ 4.90 $ 6.43 $ 5.26 $ 4.01 $ 3.05 ----------------------------------------------------------------
THE NUMBER OF SHARES AND PER SHARE AMOUNTS HAVE BEEN ADJUSTED FOR TWO-FOR-ONE STOCK SPLITS IN 1995 AND 1994. 10 / BMC INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS SUMMARY BMC Industries, Inc., through its Vision-Ease subsidiary, is a leading producer of polycarbonate, glass and plastic eyewear lenses. The Company is also one of the world's largest manufacturers of aperture masks for color picture tubes used in televisions and computer monitors and a leading producer of precision photo-etched metal and electroformed parts. The Company segments its business into two business units, Optical Products and Precision Imaged Products (PIP). Net sales of $335.1 million for 1998 represent a 7% increase over the $312.5 million in 1997. The growth during 1998 was provided by the Optical Products group, primarily through the acquisition in May 1998 of Orcolite, a polycarbonate and plastic ophthalmic lens manufacturer. This growth was partially offset by lower revenue from the Precision Imaged Products group. During 1998, the Company incurred charges within its Precision Imaged Products group for the write-down of the value of certain PIP fixed assets ($42.8 million pre-tax, $26.7 million after-tax), for the extended shutdown of three mask production lines at the Company's Cortland, New York, plant, additional aperture mask inventory charges and for moving certain aperture mask inspection operations. Within the Optical Products group, the Company also incurred a charge for acquired in-process research and development (IPR&D) purchased as part of the acquisition of Orcolite ($9.5 million pre-tax, $6.0 million after-tax). Net loss and diluted loss per share for 1998 were ($30.6) million and ($1.13), respectively, compared to net earnings and diluted earnings per share of $35.7 million and $1.25, respectively, for 1997. RESULTS OF OPERATIONS The following discussion and analysis examines the operating results of the Company's two business segments. As used herein, "operating profit" refers to operating profit before charges for the impairment of long-lived assets and acquired IPR&D, corporate allocations, corporate expense and interest, as shown in Note 12 to the Consolidated Financial Statements - Segment Information. OPTICAL PRODUCTS REVENUES AND OPERATING PROFIT COMPARISON OF 1998 AND 1997. Revenues of the Optical Products group were $123.1 million for 1998, an increase of $29.5 million or 32% from 1997. The increase was primarily due to the acquisition of Orcolite in May 1998. Sales of high-end products (polycarbonate, progressive, high-index and polarizing sun lenses) increased 81% from 1997 to 1998 and accounted for 53% of total Optical Products group revenue in 1998 compared to 39% in 1997. On a pro forma basis, Optical Products group revenues, which for 1998 include sales by Orcolite subsequent to the date of acquisition, increased 8% over the combined Vision-Ease and Orcolite 1997 revenues for the same period. Sales of high-end products, on a pro forma basis, increased 25% over the combined Vision-Ease and Orcolite 1997 revenues for the same period and accounted for 53% of total Optical Products group revenue in 1998 compared to 46% in 1997. Sales of mid-range and commodity plastic products increased 33%, due primarily to the acquisition of Orcolite, and increased 8% on a pro forma basis. Glass product sales declined 13% from 1997 to 1998 due to continued contraction in the demand for glass products. Operating profit of the Optical Products group (excluding the charge related to acquired IPR&D) was $19.7 million for 1998, an increase of $4.8 million or 32% over 1997. The rate of operating profit expressed as a percentage of total revenues was 16% for 1998 and 1997. 1998 operating profit growth was in line with revenue growth and reflects higher earnings resulting from the acquisition of Orcolite and the increase in sales of high-end products, offset by weakening earnings on glass products, heightened competition in the plastic product segment, new lens product development and new polycarbonate product promotions. In connection with the purchase of Orcolite, and in accordance with generally accepted accounting principles, the Company allocated $9.5 million of the $101.0 million purchase price to IPR&D. This amount represents the independently appraised value based on risk-adjusted cash flows related to the IPR&D projects and was expensed as of the acquisition date. As of the date of the acquisition, BMC INDUSTRIES, INC. / 11 the development of these projects had not reached technological feasibility, and these projects had no alternative future uses. COMPARISON OF 1997 AND 1996. Revenues of the Optical Products group were $93.5 million for 1997, an increase of $5.6 million or 6% from those for 1996. The increase was primarily due to a 26% increase in sales of high-end products (polycarbonate, progressive, high-index and polarizing sun lenses) as consumer preferences for advanced materials, designs and features increased. Sales of mid-range hard-resin plastic products showed more modest gains as competition continued to grow in this segment of the market and were impacted by Vision-Ease's transition to a new supply agreement with a Southeast Asian lens manufacturer. Glass product sales declined because of contraction of the worldwide market for glass lenses. Overall glass earnings are expected to decline in the future due to continued contraction in the demand for glass products. To partially offset this decline, the Company entered into a majority-owned joint venture in 1997 with a glass lens manufacturer located in Southeast Asia to establish an alternate, low-cost source for glass lenses. Operating profit of the Optical Products group was $14.9 million for 1997, an increase of $0.5 million or 4% over 1996. The rate of operating profit expressed as a percentage of total revenues was 16% for 1997 and 1996. Operating profit growth in 1997 lagged the sales growth due to a number of factors, including the weakening of earnings on glass products, new lens product development, new polycarbonate product promotions, duplicate facility costs associated with polycarbonate manufacturing and costs associated with closing the Ft. Lauderdale, Florida, facility and transitioning production to St. Cloud, Minnesota. The new polycarbonate manufacturing, centralized distribution and research and development facility was completed in the third quarter of 1997, but a full transfer of operations was not completed until 1998 to ensure minimal interruption of polycarbonate lens manufacturing. PRECISION IMAGED PRODUCTS The PIP unit is comprised of two businesses, Mask Operations and Buckbee-Mears St. Paul (BMSP), which share process manufacturing technology and one manufacturing facility. REVENUES AND OPERATING PROFIT COMPARISON OF 1998 AND 1997. Revenues of the Precision Imaged Products group were $212.1 million for 1998, a decrease of $6.9 million or 3% from 1997. The decline was primarily attributable to decreased sales of invar television masks which were offset partially by increased sales of computer monitor masks. Sales of invar television masks were down 40% compared to total year 1997 sales. Total year 1998 computer monitor mask sales were $36.7 million, an increase of 79% over 1997. Over 75% of the computer monitor masks sold in 1998 were produced at the Company's Mullheim, Germany, plant. Sales of large (25-29 inches) AK steel television masks were up 12% while jumbo (30 inches and larger) television mask sales were flat compared to prior year. BMSP, which accounts for less than 15% of total PIP revenues, posted record sales for 1998. Operating profit of the PIP group (excluding the charge for impairment of long-lived assets) was $2.0 million for 1998, a decrease of $39.5 million or 95% from 1997. The rate of operating profit expressed as a percentage of revenues was 1% for 1998 compared to 19% for 1997. The decline in operating profit is primarily due to the decline in invar television mask revenue; pricing pressures in the mask business, particularly pricing for monitor masks (and alleged below-cost pricing of certain AK steel television masks by Japanese and South Korean mask manufacturers); costs associated with the extended shutdown of two entertainment and one monitor mask manufacturing lines at the Company's Cortland plant; mask inventory charges and costs associated with moving certain mask inspection operations. In addition, significant production ramp-up and product qualification costs were incurred during the first half of 1998 related to the monitor mask line at the Cortland plant prior to the shutdown of this line for all of the second half of 1998. The operating profit reductions as described above were offset slightly by record earnings posted by Buckbee-Mears St. Paul for the year. During the third quarter of 1998, in response to difficult market conditions, the Company shut down three manufacturing lines (two entertainment mask and one computer monitor mask) at the Company's Cortland facility for an extended period of time. One entertainment mask line resumed operation in the fourth quarter 1998. The Company restarted the computer monitor mask line in late January 1999. The remaining entertainment mask line continues to be shut down. The impairment of long-lived assets write-down of $42.8 million (pre-tax) reflects the diminished value of 12 / BMC INDUSTRIES, INC. certain PIP operating fixed assets, primarily those related to the production of computer monitor masks. In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets," the Company recorded a charge of $26.7 million after-tax ($42.8 million pre-tax) during the second quarter of 1998 to write-down these fixed assets. After careful assessment of various factors relevant to these assets, including significant declines in sales prices within the computer monitor mask market, management determined it was appropriate to write-down the value of these assets to estimated fair value based on discounted estimated future cash flows in accordance with SFAS No. 121. COMPARISON OF 1997 TO 1996. Revenues of the Precision Imaged Products group were $219.0 million for 1997, an increase of $26.5 million or 14% from those for 1996. The improvement was primarily attributable to increased sales of computer monitor masks. Total year 1997 computer monitor mask sales exceeded $20.0 million, an increase of over $15.0 million compared to 1996. Almost all of the computer monitor masks in 1997 were produced at the Mullheim plant. Sales of large (25-29 inches) television masks were up 16%, while sales of invar television masks were flat compared to total year 1996 sales. Jumbo (30 inches and larger) television mask sales were 16% below the prior year, which is a difficult comparison following a 58% increase in jumbo mask sales over 1995. Sales were reduced almost $11 million in 1997 due to the strengthening of the U.S. dollar versus the German mark. Buckbee-Mears St. Paul posted record total year 1997 sales while generating its first sales of lead frames for semiconductor packages in the fourth quarter of 1997. Operating profit of the Precision Imaged Products group was $41.5 million for 1997, a decrease of $1.6 million or 4% from that realized in 1996. The rate of operating profit expressed as a percentage of revenues was 19% for 1997, compared to 22% for 1996. The decline in operating profit was primarily due to the start-up and de-bugging of the new Cortland monitor mask line. The Company dedicated a large portion of production time to the qualification of parts for customers. In addition, resources were allocated to the new television mask line in Cortland, which continued to ramp up in 1997, including successfully qualifying parts in a multiple-up configuration. Additional contributing factors to the lower operating profits were slower growth in higher-priced television masks and downward pressure on mask prices. These operating profit reductions were offset partially by the record earnings posted by BMSP for the year, as a result of product mix and manufacturing improvements, and profit recognized upon completion of a long-term mask equipment and technology contract. SELLING EXPENSES Selling expenses were $15.5 million, $11.7 million and $10.0 million or 4.6%, 3.7% and 3.6% of revenues for 1998, 1997 and 1996, respectively. The increase in 1998 was primarily due to incremental costs associated with the Orcolite acquisition, expanded sales and marketing efforts and costs related to the launch of the Optical Products group's new polycarbonate progressive lens, Outlook-TM-. The increase in 1997 over 1996 was primarily due to incremental costs to launch the Optical Products group's premium line of polycarbonate lenses bearing the Tegra-TM- trade name. ADMINISTRATIVE EXPENSES Administrative expenses were $5.2 million, $4.3 million and $5.0 million or 1.5%, 1.4% and 1.8% of revenues for 1998, 1997 and 1996, respectively. Administrative expenses as a percent of sales were essentially flat from 1997 to 1998 and decreased from 1996 to 1997, primarily due to a reduction in employee performance-based incentive benefits tied to the Company's earnings. INTEREST EXPENSE (INCOME) Interest expense was $13.5 million, $1.3 million and $0.5 million for 1998, 1997 and 1996, respectively. Interest income was $0.2 million, $0.2 million and $0.3 million for 1998, 1997 and 1996, respectively. Interest expense for 1998 was higher than in 1997 due to increased debt levels to fund the Orcolite acquisition in May 1998, repurchase of outstanding stock in January 1998, and to fund the mask expansion in 1997. Interest expense for 1997 was higher than in 1996 because of increased debt levels to fund expansion projects. In 1998, 1997 and 1996, interest costs of $0.7 million, $2.6 million and $0.3 million, respectively, were capitalized in connection with the Company's expansion projects. INCOME TAXES Expressed as a percentage of earnings (loss) before income taxes, the Company's effective tax rate was (37%), 30% and 33% in 1998, 1997 and 1996, respectively. The BMC INDUSTRIES, INC. / 13 1998 tax rate was higher than the 1997 tax rate due principally to the reduction in the valuation reserve in 1997 not recurring in 1998. The 1997 tax rate was lower than 1996 due principally to a larger reduction in the valuation reserve in 1997 and a reduction in state income taxes. SEASONALITY The Company's earnings are generally lower in the first and third quarters due to maintenance shutdowns at the Company's mask production facilities. Maintenance shutdowns also occur at the Company's lens manufacturing facilities in the third quarter. Also, the seasonality of end products in several markets (televisions, computer monitors and ophthalmic lenses) affects the Company's annual earnings pattern. ACQUISITIONS On May 15, 1998, the Company, through a wholly owned subsidiary, acquired Orcolite, a division of Monsanto Company, which produces polycarbonate and plastic ophthalmic lenses, for $101.0 million in cash. See Note 2 to the Consolidated Financial Statements - Business Acquisition for additional information regarding the acquisition. DIVIDENDS In 1998, the Company continued the payment of cash dividends to shareholders. Cash dividends of one and one-half cents per share were declared in each quarter of 1998. The Company currently expects to continue dividend payments in 1999. SHARE REPURCHASE PLAN In January 1998, the Company repurchased one million shares of its common stock as authorized by the Board of Directors on April 7, 1997. The repurchase occurred between January 6, 1998 and January 13, 1998 on the open market for $16.6 million, an average price of $16.64 per share. ENVIRONMENTAL The Company's operations are subject to federal, state, local and foreign environmental laws and regulations. Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA or Superfund), the Company has been designated as a potentially responsible party (PRP) by the United States Environmental Protection Agency with respect to certain waste sites with which the Company may have had direct or indirect involvement. Similar designations have been made by some state environmental agencies under applicable state superfund laws. Such designations are made regardless of the extent of the Company's involvement. Such designations have been made by the filing of a complaint, the issuance of an administrative directive or order, or the issuance of a notice or demand letter. These actions are in various stages of administrative or judicial proceedings. They include demands for recovery of past governmental costs and/or for future investigative or remedial actions. In many cases, the dollar amount of site costs or the Company's portion of site costs is not specified. In most cases, however, the Company has been designated a de minimis party and claims have been asserted against a number of other entities for the same recovery or other relief as was asserted against the Company. The Company is currently participating in remedial action at eight sites under federal, state and local laws. In connection with one of the investigations described above, the initial PRPs for a site in Cortland brought suit against the Company and 16 other entities for allegedly depositing waste at that site. During the third quarter of 1998, the Company signed a Consent Decree among the United States and other PRPs for remediation of the site. Upon U.S. District Court approval, the Company believes that the Consent Decree will result in the dismissal of the initial PRP's lawsuit and that the Company will not be held responsible for past PRP costs. To the extent possible with the amount of information available at this time, the Company has evaluated its responsibility for costs and related liability with respect to the above sites, has recorded reserves for such liability in accordance with generally accepted accounting principles, and is of the opinion that the Company's liability with respect to these sites should not have a material adverse effect on the financial position or the results of operations of the Company. In arriving at this conclusion, the Company has considered, among other things, the payments that have been made with respect to the sites in the past; the factors, such as volume and relative toxicity, ordinarily applied to allocated defense and remedial costs at such sites; the probable costs to be paid by the other potentially responsible parties; total projected remedial costs for a site, if known; existing technology; and the currently enacted laws and regulations. A portion of the costs and related 14 / BMC INDUSTRIES, INC. liability for these sites has been or will be covered by available insurance. FINANCIAL POSITION AND LIQUIDITY Working capital was $95.0 million and the current ratio was 2.7 at December 31, 1998, compared to $74.9 million and a current ratio of 2.6 at December 31, 1997. Accounts receivable balances increased $9.3 million compared to 1997 due primarily to the Orcolite acquisition. Inventory balances increased $12.7 million compared to 1997. The Optical Products group's inventory levels increased due to the Orcolite acquisition and to support new product introductions for Tegra-TM- finished single-vision polycarbonate and Outlook-TM- progressive polycarbonate. The Precision Imaged Products group's inventory levels declined due to the extended shutdown of the three mask production lines. Accounts payable and other liabilities increased primarily due to the Orcolite acquisition. At December 31, 1998, the Company had $189.2 million in debt and the ratio of total debt to total equity was 1.4. At December 31, 1997, the Company had $74.6 million in debt and the ratio of total debt to total equity was 0.4. The Company incurred incremental debt primarily to fund the acquisition of Orcolite in May 1998 and the repurchase of shares of the Company's outstanding stock in January 1998. The Company generated $26.9 million of cash flow from operating activities and $94.1 million from financing activities in 1998. The cash generated from operating and financing activities was used primarily for the cash acquisition of Orcolite for $101.0 million and property, plant and equipment additions totaling $21.4 million. The Company generated $14.7 million of cash flow from operating activities and $62.1 million from financing activities, primarily through incremental debt, in 1997. The cash generated from operating and financing activities was used primarily for property, plant and equipment additions totaling $75.1 million. The increase in the Company's capital spending in 1997 was primarily due to $49.4 million spent on the two-line expansion of the Company's mask manufacturing facility in Cortland. The Company generated $20.8 million of cash flow from operating activities and $20.6 million from financing activities in 1996 which were used principally for property, plant and equipment additions. Capital spending in 1999 is planned to total $20-25 million. It is currently anticipated that 1999 capital expenditures will be financed primarily with funds from operations. As of December 31, 1998, the Company had a $250 million domestic secured credit facility with a syndicate of banks. There was $178.7 million outstanding under this facility at December 31, 1998. The Company's German subsidiary maintains short-term and long-term credit facilities totaling $24.0 million. There was $7.1 million outstanding under these facilities at December 31, 1998. The Company currently believes that the combination of present capital resources, internally generated funds and unused financing sources will be adequate to meet the Company's financing requirements for 1999. See Note 7 to the Consolidated Financial Statements - Debt for additional discussion of available credit and covenant compliance under the existing credit facility. MARKET RISK FOREIGN CURRENCY A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions. The Company manufactures its products in the United States, Germany, Hungary and Indonesia and purchases products from Asian, as well as other, suppliers. The Company sells its products in the United States and into various foreign markets. The Company's sales are typically denominated in either the U.S. dollar or the German mark (DM/Euro). The Company's Mask Operations also have an indirect exposure to the Japanese yen and the Korean won because its most significant competitors are Japanese and Korean. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. In addition, sales of products overseas are affected by the value of the U.S. dollar relative to other currencies. Long-term strengthening of the U.S. dollar may have an adverse effect on these sales and competitive conditions in the Company's markets may limit the Company's ability to increase product pricing in times of adverse currency movements. To manage the volatility relating to these exposures, the Company enters into various derivative instruments, including forward foreign exchange contracts and cross-currency swaps. The cross-currency swaps are accounted for under mark-to-market accounting. BMC INDUSTRIES, INC. / 15 At December 31, 1998, the Company did not have any forward foreign exchange contracts. At December 31, 1997, the Company had approximately $3.6 million of outstanding foreign currency exchange options to exchange U.S. dollars for German marks at a set exchange rate. In October and November 1998, the Company entered into cross-currency swaps which provided for the Company to swap a total of $20.0 million of notional debt for the equivalent amount of Japanese yen-denominated debt. Under these swaps, the Company also effectively swapped a U.S. dollar-based interest rate of 5.5% for a Japanese yen-based interest rate of 1.1%. These swap contracts were settled in November 1998, resulting in a pre-tax gain of $0.9 million. A hypothetical 10% adverse effect on the foreign exchange rate would have resulted in a pre-tax loss of $2.2 million related to these $20.0 million in swaps. A hypothetical 100 basis point adverse effect on interest rates would have resulted in an additional loss of $1.0 million. In January 1999, the Company entered into a cross-~currency swap which provided for the Company to swap a total of $10.0 million of notional debt for the equivalent amount of Japanese yen-denominated debt. Under this swap, the Company also effectively swapped a U.S. dollar-based interest rate of 5.10% for a Japanese yen-based interest rate of 1.05%. A hypothetical 10% adverse effect on the foreign exchange rate would result in a pre-tax loss of $1.3 million related to this $10.0 million swap. A hypothetical 100 basis point adverse effect on interest rates would result in an additional loss of $0.5 million. The Company experiences foreign currency gains and losses, which are reflected on the Company's Statements of Operations, due to the strengthening and weakening of the U.S. dollar against the currencies of the Company's foreign subsidiaries and the resulting effect on the valuation of the intercompany and other accounts. The net exchange gain or loss arising from this was not material in 1998 or 1997. The Company anticipates that it will continue to incur exchange gains and losses from foreign operations in the future. The Company's net investment in foreign subsidiaries was $26.2 million and $27.9 million at December 31, 1998 and 1997, respectively, translated into U.S. dollars at year-end exchange rates. The potential loss in value resulting from a hypothetical 10% change in foreign currency exchange rates is $2.5 million and $2.4 million in 1998 and 1997, respectively. In the first half of 1998, the U.S. dollar strengthened against the DM and in the second half of 1998, the U.S. dollar weakened against the DM. A weaker dollar generally has a positive impact on overseas results because foreign currency-denominated earnings translate into more U.S. dollars; a stronger dollar generally has a negative translation effect. For 1998, the effect of the change in exchange rates was offsetting and, therefore, did not have a material impact on sales or net earnings. During 1997, the generally stronger U.S. dollar decreased net sales by $11.0 million and had an immaterial impact on net earnings. INTEREST Substantially all of the Company's debt and associated interest expense is sensitive to changes in the level of interest rates. To mitigate the impact of fluctuations in interest rates, the Company principally enters into interest rate swaps to hedge the exposure of a portion of its floating-rate debt. The Company's primary interest rate exposure is U.S., and to a lesser extent DM/Euro and yen-based interest rates. In March 1997, the Company entered into an interest rate swap agreement that allows the Company to swap a variable interest rate for a fixed interest rate of 6.37% on $15.0 million of notional debt during the period ending March 1999. In August 1998, the Company entered into multiple interest rate swap agreements for a total of $100.0 million of notional debt which provide for the Company to swap a variable interest rate for fixed interest rates ranging from 7.12% to 7.14%. These swaps expire at various dates ranging from July 1999 to August 2000. A hypothetical 100 basis point increase in interest rates would result in a $0.7 million and $0.6 million adverse impact on interest expense in 1998 and 1997, respectively. YEAR 2000 COMPLIANCE The Company has computer applications at the corporate level and at each of its operating divisions that require or have required modifications made necessary by the upcoming year 2000. The year 2000 (Y2K) issue is the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. The two-digit programs will be unable to correctly interpret dates beginning in the year 2000 and, as a result, could cause computer system failures or miscalculations. These failures or miscalculations could cause significant disruptions of operations, including among other things, an inability to process trans- 16 / BMC INDUSTRIES, INC. actions or engage in normal business activities. If appropriate modifications are not made, or are not completed in a timely manner, the Y2K issue could have a material adverse impact on the operations of the Company. The Company has been addressing the Y2K issue using essentially the following four-phase approach: -Phase I - Identification of all significant computer systems within the Company with exposure to Y2K issues; -Phase II - For each system, assessment of Y2K issue(s) and required remediation; -Phase III - Remediation and testing of systems to be Y2K compliant; -Phase IV - Assessment of Y2K preparedness of significant third parties. Phase I was formally completed and summarized on a Company-wide basis in early 1998. Phase II is essentially completed for all information technology (IT) systems and is in process and estimated to be completed in the second quarter of 1999 for all non-IT systems. Non-IT systems are generally embedded technology, such as micro-controllers. Phase III is in various stages of completion depending on the systems involved. For IT systems, the most significant efforts of this phase currently involve the accelerated replacement of non-compliant IT systems within the Mask Operations group and the remediation and testing of important mainframe applications and operating systems within the Optical Products group. Y2K-compliant integrated IT systems from SAP are currently scheduled for implementation in the Mask Operations group in various phases beginning in early 1999 and continuing through the third quarter of 1999. Y2K remediation and testing within the Optical Products group is currently estimated to be completed by the third quarter of 1999. For non-IT systems, Phase III is currently scheduled to be completed in conjunction with Phase II by mid-1999. For Phase IV, the Company is in the process of identifying and assessing the Y2K preparedness of significant third parties, including key vendors and service providers, and estimates that this phase will be ongoing during the remainder of 1999. The Company currently estimates that it will cost $3-4 million using both internal and external resources to address the Y2K issue as discussed above, including the cost of replacing the IT systems within the Mask Operations group. Through December 31, 1998, the Company had spent approximately $1 million of this total estimate. Expenditures related to Y2K preparedness are expected to be funded by cash flow from operations and are not currently expected to impact other operating or investment plans. The Company's current most reasonably likely worst case Y2K scenario is the potential inability to obtain raw materials from suppliers in a timely manner or that modification work will not proceed on schedule, causing some increase to the total cost of achieving Y2K compliance. The impact on the Company's results of operations if the Company or its suppliers or customers are not fully Y2K compliant is not reasonably determinable. Since the Company is depending on its ability to execute modification plans and its vendors to continue material supply without interruption, there can be no assurance that unforeseen difficulties will not arise for the Company or its customers and that related costs will not thereby be incurred. Management believes it has planned appropriately to resolve the Y2K issue with respect to all material elements under the Company's direct control. A number of significant risks do exist, however, including the potential inability of the Company to obtain (or retain) the proper internal and external resources to fully address all Y2K exposures in the timeframes required and at the cost estimated, as well as the risk that key suppliers, customers or other significant third parties, including those in utilities, communications, transportation, banking and government are not prepared for the year 2000. The Company has not yet established a contingency plan relative to the Y2K issue but currently anticipates establishing such a plan later in 1999. NEW ACCOUNTING STANDARDS SFAS No. 133 "Accounting for Derivatives and Similar Financial Instruments and for Hedging Activities" is effective for fiscal years beginning after June 15, 1999. See Note 1 to the Consolidated Financial Statements - Summary of Significant Accounting Policies for additional information regarding new accounting standards. EURO CURRENCY CONVERSION On January 1, 1999, 11 of the 15 member countries of the European Union, including Germany, adopted the "euro" as their common legal currency. The euro trades on currency exchanges and is available for non-cash transactions. From January 1, 1999 through January 1, 2002, each of the BMC INDUSTRIES, INC. / 17 participating countries is scheduled to maintain its national ("legacy") currency as legal tender for goods and services. Beginning January 1, 2002, new euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation no later than July 1, 2002. The Company's foreign operating subsidiaries that will be affected by the euro conversion have established plans to address the business issues raised, including the competitive impact of cross-border price transparency. It is not anticipated that there will be any near-term business ramifications; however, the long-term implications, including any changes or modifications that will need to be made to business and financial strategies, are still being reviewed. From an accounting, treasury and computer system standpoint, the impact from the euro currency conversion is not expected to have a material impact on the financial position or results of operations of the Company. CAUTIONARY STATEMENTS Certain statements included in this Discussion and Analysis of Financial Condition and Results of Operations by the Company or its representatives, as well as other communications, including its filings with the Securities and Exchange Commission, reports to shareholders, news releases and presentations to securities analysts or investors contain forward-looking statements made in good faith by the Company pursuant to the "Safe Harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. These statements relate to non-historical information and include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected. The Company wishes to caution the reader not to place undo reliance on any such forward-looking statements. These statements are qualified by potential risks and uncertainties detailed from time to time in reports filed by the Company with the S.E.C., including Forms 10-Q and 10-K, and include, among others, lower demand for televisions and computer monitors; further mask price declines; successful customer part qualifications; liability and other claims asserted against the Company; inability to penetrate the lead frame market; new product development, introduction and acceptance; successful cost reduction and reorganization efforts; potential losses on cross-currency swaps; higher operating expenses and lower yields associated with production start-up; negative foreign currency fluctuations, including adverse fluctuations affecting cross-currency swaps; inability to partner with new BMSP customers; the impact of Y2K information systems issues; the effect of the economic uncertainty in Asia; and a potential economic slowdown in other parts of the world such as South America. These and other factors are more particularly described in "Item 1 - Business" of the Company's Form 10-K and in some cases have affected and in the future could adversely affect the Company's actual results, thereby causing the Company's actual financial performance to differ materially from that expressed in any forward-looking statement. These factors should not, however, be considered an exhaustive list. The Company does not undertake the responsibility to update any forward-looking statement that may be made from time to time by or on behalf of the Company. Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against BMC's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. In addition, BMC does not issue or confirm financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of BMC. 18 / BMC INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Revenues $ 335,138 $ 312,538 $ 280,487 Cost of products sold 297,995 244,468 213,007 ---------------------------------------------- Gross margin 37,143 68,070 67,480 Selling 15,496 11,696 10,028 Administrative 5,179 4,316 5,005 Impairment of long-lived assets 42,800 -- -- Acquired in-process research and development 9,500 -- -- ---------------------------------------------- Income (Loss) from Operations (35,832) 52,058 52,447 ---------------------------------------------- Other Income and (Expense) Interest income 163 233 260 Interest expense (13,537) (1,298) (540) Other income, net 522 209 236 ---------------------------------------------- Earnings (Loss) before Income Taxes (48,684) 51,202 52,403 Income Tax (Benefit) Expense (18,049) 15,481 17,302 ---------------------------------------------- Net Earnings (Loss) $ (30,635) $ 35,721 $ 35,101 ---------------------------------------------- Earnings (Loss) Per Share Basic $ (1.13) $ 1.30 $ 1.29 Diluted (1.13) 1.25 1.24 ---------------------------------------------- Number of Shares Included in Per Share Computation Basic 27,014 27,583 27,268 Diluted 27,014 28,530 28,363 ---------------------------------------------- SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BMC INDUSTRIES, INC. / 19 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 1,028 $ 2,383 Trade accounts receivable, less allowances of $2,624 and $2,118 39,163 29,824 Inventories 82,853 70,111 Deferred income taxes 14,603 5,881 Other current assets 14,347 13,595 ----------------------------- Total Current Assets 151,994 121,794 ----------------------------- Property, Plant and Equipment, Net 162,594 182,382 Deferred Income Taxes 5,431 1,429 Intangible Assets, Net 73,178 2,948 Other Assets, Net 6,268 10,854 ----------------------------- Total Assets $ 399,465 $ 319,407 ----------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term borrowings $ 1,929 $ 1,139 Accounts payable 28,315 25,623 Accrued compensation and benefits 10,939 11,614 Income taxes payable 3,375 2,830 Other current liabilities 12,465 5,674 ----------------------------- Total Current Liabilities 57,023 46,880 ----------------------------- Long-Term Debt 187,266 73,426 Other Liabilities 18,372 17,718 Deferred Income Taxes 3,547 2,631 Stockholders' Equity Common stock (shares issued of 27,173 and 27,811) 47,714 62,263 Retained earnings 86,436 118,693 Accumulated other comprehensive income 1,113 (1,217) Other (2,006) (987) ----------------------------- Total Stockholders' Equity 133,257 178,752 ----------------------------- Total Liabilities and Stockholders' Equity $ 399,465 $ 319,407 ----------------------------- SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20 / BMC INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED OTHER COMMON RETAINED COMPREHENSIVE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 STOCK EARNINGS INCOME OTHER TOTAL - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 $ 52,974 $ 50,962 $ 5,749 $ (1,219) $ 108,466 Comprehensive Income: Net earnings -- 35,101 -- -- 35,101 Translation adjustment -- -- (1,775) -- (1,775) --------- Total comprehensive income 33,326 --------- Exercise of options, 315 shares, including tax benefit 3,593 -- -- -- 3,593 Restricted stock grants, net of forfeitures and including tax benefits (16) -- -- -- (16) Repayments of employee loans for option exercises, net of additional loans -- -- -- 173 173 Cash dividends declared -- $0.0525 per share -- (1,434) -- -- (1,434) --------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 56,551 84,629 3,974 (1,046) 144,108 Comprehensive Income: Net earnings -- 35,721 -- -- 35,721 Translation adjustment -- -- (5,191) -- (5,191) --------- Total comprehensive income 30,530 --------- Exercise of options, 428 shares, including tax benefit 5,697 -- -- -- 5,697 Restricted stock grants, net of forfeitures and including tax benefits 15 -- -- -- 15 Repayments of employee loans for option exercises, net of additional loans -- -- -- 59 59 Cash dividends declared -- $0.06 per share -- (1,657) -- -- (1,657) --------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 62,263 118,693 (1,217) (987) 178,752 Comprehensive Income: Net loss -- (30,635) -- -- (30,635) Translation adjustment -- -- 2,330 -- 2,330 --------- Total comprehensive income (28,305) --------- Repurchase of 1,000 shares of Company stock (16,636) -- -- -- (16,636) Exercise of options, 345 shares, including tax benefit 2,048 -- -- -- 2,048 Restricted stock grants, net of forfeitures and including tax benefits 39 -- -- -- 39 Employee loans for option exercises, net of repayments -- -- -- (1,019) (1,019) Cash dividends declared -- $0.06 per share -- (1,622) -- -- (1,622) --------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 $ 47,714 $ 86,436 $ 1,113 $ (2,006) $ 133,257 ---------------------------------------------------------------------
COMMON STOCK: 99,000 SHARES OF VOTING COMMON STOCK WITHOUT PAR VALUE AUTHORIZED; 27,173, 27,811 AND 27,381 SHARES ISSUED AND OUTSTANDING AT DECEMBER 31, 1998, 1997 AND 1996, RESPECTIVELY. UNDESIGNATED STOCK: 500 SHARES AUTHORIZED, OF WHICH 200 SHARES WERE DESIGNATED AS SERIES A JUNIOR PARTICIPATING PREFERRED SHARES ON JUNE 30, 1998 IN CONNECTION WITH THE COMPANY'S ADOPTION OF A SHARE RIGHTS PLAN. THE BOARD OF DIRECTORS IS AUTHORIZED TO DESIGNATE THE NAME OF EACH CLASS OR SERIES OF THE UNDESIGNATED SHARES AND TO SET THE TERMS THEREOF (INCLUDING, WITHOUT LIMITATION, TERMS WITH RESPECT TO REDEMPTION, DIVIDEND, LIQUIDATION, CONVERSION AND VOTING RIGHTS AND PREFERENCES). SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BMC INDUSTRIES, INC. / 21 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES NET EARNINGS (LOSS) $ (30,635) $ 35,721 $ 35,101 ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES Depreciation and amortization 21,014 13,349 10,171 Impairment of long-lived assets 42,800 -- -- Acquired in-process research and development 9,500 -- -- Provisions for product returns, uncollectable trade receivables and inventory reserves 11,985 2,322 4,358 Deferred income taxes (11,939) 4,347 (460) Other noncash income and expense items (933) (864) (1,489) DECREASE (INCREASE) IN ASSETS Trade accounts receivable (4,915) (7,308) (3,482) Inventories (11,621) (23,066) (19,599) Other current assets (616) (5,296) (3,471) Other noncurrent assets 4,782 (3,051) (217) INCREASE (DECREASE) IN LIABILITIES Accounts payable (560) 6,438 (785) Income taxes payable 581 (4,248) (1,300) Accrued expenses and other current liabilities (1,995) (2,568) 3,585 Other noncurrent liabilities (500) (1,109) (1,626) --------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 26,948 14,667 20,786 --------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (21,427) (75,110) (54,662) Business acquisitions, net of cash acquired (101,000) (1,817) -- Proceeds from sale of property and equipment -- 60 -- --------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (122,427) (76,867) (54,662) --------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term borrowings 723 (130) 1,257 Increase in long-term debt 110,601 58,135 16,950 Common stock issued, including tax benefit 2,087 5,712 3,577 Common stock repurchased (16,636) -- -- Cash dividends paid (1,632) (1,650) (1,361) Employee (loans) for exercise of stock options, net of repayments (1,019) 59 173 --------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 94,124 62,126 20,596 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS -- (87) (50) --------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,355) (161) (13,330) Cash and cash equivalents at beginning of year 2,383 2,544 15,874 --------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,028 $ 2,383 $ 2,544 --------------------------------------------- SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22 / BMC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, all of which are wholly or majority-owned. REVENUE RECOGNITION -- Revenue related to the majority of the Company's products is recognized upon shipment of product to the customer. CASH EQUIVALENTS -- Consist of highly liquid debt instruments with a maturity of three months or less at the date of purchase. These instruments are carried at cost, which approximates fair market value. INVENTORIES -- Stated at the lower of cost or market. Cost is determined principally on the average cost method. Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts. PROPERTY, PLANT AND EQUIPMENT -- Stated at cost. Depreciation is provided on the straight-line method over estimated useful lives of generally 40 years for buildings, 20 years for building improvements and infrastructure, and eight years for machinery and equipment. Depreciation of assets included in construction in progress does not begin until the construction is complete and the assets are placed into service. Depreciation expense for the year ended December 31, 1998 was $18,980. Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets," prescribes that an impairment loss be recognized in the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable, and the estimated future undiscounted cash flows related to the asset are less than the carrying amount of the asset. The Company recorded a charge of $26,700 after-tax ($42,800 pre-tax) during the quarter ended June 30, 1998 for the write-down of certain Precision Imaged Products (PIP) operations fixed assets. See Note 6 for further discussion. INTANGIBLE ASSETS -- Consist primarily of goodwill and other acquisition-related intangible assets which are stated at cost or at fair value as of the date acquired in a business acquisition accounted for as a purchase, less accumulated amortization. Amortization is computed on a straight-line basis over estimated useful lives of seven to 30 years. Amortization expense for the year ended December 31, 1998 was $2,034. INCOME TAXES -- A deferred tax liability is recognized for temporary differences between financial reporting and tax reporting that will result in taxable income in future years. A deferred tax asset is recognized for temporary differences that will result in tax deductions in future years. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS -- The Company accrues the expected cost of providing post-retirement benefits other than pensions during the years that eligible employees render service. EARNINGS PER SHARE -- The basic earnings per share amounts are determined based on the weighted average common shares outstanding while the diluted earnings per share amounts also give effect to the common shares dilutive potential. For the Company's earnings per share calculations, the basic and diluted weighted average outstanding share amounts differ only due to the dilutive impact of stock options. STOCK-BASED COMPENSATION -- The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING STANDARDS -- Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which requires disclosure of comprehensive income and its components in the Company's financial statements. SFAS No. 130 requires foreign currency transla- BMC INDUSTRIES, INC. / 23 tion adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in comprehensive income. Disclosures of comprehensive income and its components in prior year financial statements have been restated, where appropriate, to conform to the requirements of SFAS No. 130. Effective in the year ended December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 superseded SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position. Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement Benefits." The statement supersedes the disclosure requirements in SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions." The overall objective of SFAS No. 132 is to improve and standardize disclosures about pensions and other post-retirement benefits and to make the required information more understandable. The adoption of SFAS No. 132 did not affect results of operations or financial position, but did affect the disclosures for pensions and other post-retirement benefits. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Similar Financial Instruments and for Hedging Activities." The new Statement will significantly change how companies account for derivatives and hedging activities, including the following two key elements: (1) all derivatives will be measured at fair value and recognized in the balance sheet as assets or liabilities and (2) derivatives meeting certain criteria could be specifically designated as a hedge. The Company is currently evaluating the impact of adoption of this Statement which is effective for the Company in the year 2000. RECLASSIFICATION -- Certain items in the 1997 and 1996 Consolidated Financial Statements have been reclassified to conform to the 1998 presentation. These reclassifications had no impact on net income or stockholders' equity as previously reported. 2. BUSINESS ACQUISITION On May 15, 1998, the Company, through a wholly owned subsidiary, acquired the Orcolite business unit of the Monsanto Company (Orcolite) for the cash purchase price of $101,000. For financial statement purposes, the acquisition has been accounted for under the purchase method of accounting with the excess of the purchase price over the fair value of the net tangible assets acquired recorded as intangible assets which are being amortized over periods ranging from seven to 30 years. In addition, in accordance with generally accepted accounting principles, the independently appraised value of acquired in-process research and development purchased in conjunction with the acquisition was written-off as a charge of $9,500 (pre-tax) during the second quarter of 1998. The appraised value represents the estimated fair value of in-process R&D based on risk-adjusted cash flows related to the in-process R&D projects. At the date of the acquisition, the development of these projects had not reached technological feasibility, and these projects had no alternative future uses. There is no assurance that the in-process projects will be completed, or that they will meet either technological or commercial success. The consolidated statements of operations reflect the operations of Orcolite after May 15, 1998. The following unaudited pro forma information presents a summary of consolidated results of operations of the Company and the Orcolite business unit as if the acquisition had occurred at the beginning of fiscal 1997, with pro forma adjustments to give effect to amortization of goodwill and other intangible assets, depreciation expense on the fair value of property, plant and equipment and interest expense on acquisition debt, together with the related income tax effects. The pro forma adjustments do not include the $9,500 write-off of acquired in-process research and development discussed above. 24 / BMC INDUSTRIES, INC.
Unaudited Years Ended December 31 1998 1997 - ------------------------------------------------------------ Revenues $ 349,356 $ 341,911 Net earnings (loss) (32,253) 32,198 Diluted earnings per share (1.19) 1.13 --------------------------
The unaudited pro forma condensed combined financial information above is not necessarily indicative of what actual results would have been had the acquisition occurred at the date indicated. Also, the anticipated financial impact resulting from business synergies has not been reflected in the above pro forma financial information. Such synergies include the following: consolidation of selling, marketing, distribution, customer service and administrative functions; consolidation of research and development and technical services functions; optimization of combined production capacity; and improved purchasing leverage. 3. INVENTORIES The following is a summary of inventories at December 31:
1998 1997 - ------------------------------------------------------------ Raw materials $ 24,845 $ 24,542 Work in process 9,047 15,971 Finished goods 48,961 29,598 ------------------------ Total inventories $ 82,853 $ 70,111 ------------------------
4. OTHER ASSETS AND LIABILITIES The following is a summary of other current assets at December 31:
1998 1997 - ------------------------------------------------------------ Federal income tax refundable $ 5,304 $ 5,628 Molds used to produce eyewear lenses 5,116 4,169 Other 3,927 3,798 ------------------------ Total other current assets $14,347 $13,595 ------------------------
The following is a summary of other current liabilities at December 31:
1998 1997 - --------------------------------------------------------------------- Accrued acquisition-related expenses $ 4,699 $ -- Other 7,766 5,674 ------------------------- Total other current liabilities $ 12,465 $ 5,674 -------------------------
The following is a summary of other long-term liabilities at December 31:
1998 1997 - ------------------------------------------------------------ Accrued foreign pension cost $ 9,573 $ 8,042 Employee retirement obligations 4,660 4,991 Other 4,139 4,685 ------------------------ Total other long-term liabilities $ 18,372 $ 17,718 ------------------------
5. INTANGIBLE ASSETS The following is a summary of intangible assets at December 31:
1998 1997 - ----------------------------------------------------------- Goodwill $ 64,113 $ 3,719 Other 11,877 7 ----------------------- Total 75,990 3,726 Less accumulated amortization (2,812) (778) ----------------------- Total intangible assets $ 73,178 $ 2,948 -----------------------
6. PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant and equipment at December 31:
1998 1997 - ----------------------------------------------------------- Land and improvements $ 5,475 $ 3,523 Buildings and improvements 98,423 114,631 Machinery and equipment 165,486 151,410 Construction in progress 7,246 13,506 ------------------------- Total 276,630 283,070 Less accumulated depreciation and amortization (114,036) (100,688) ------------------------- Total property, plant and equipment, net $ 162,594 $ 182,382 -------------------------
The Company recorded a charge of $26,700 after-tax ($42,800 pre-tax) during the quarter ended June 30, 1998 for the write-down of certain Precision Imaged Products (PIP) operations fixed assets, primarily those related to the production of computer monitor masks. After careful assessment of various factors relevant to these assets, including significant declines in sales prices within the computer monitor mask market, management determined it was BMC INDUSTRIES, INC. / 25 appropriate to write down the value of these assets and, accordingly, such assets were written down to estimated fair value based on estimated discounted future cash flows in accordance with SFAS No. 121. 7. DEBT The following is a summary of long-term debt at December 31:
1998 1997 - ----------------------------------------------------------- U.S. revolving credit facility $ 178,700 $ 64,250 German credit facility 7,056 8,712 Other 3,439 1,603 ------------------------ 189,195 74,565 Less amounts due within one year (1,929) (1,139) ------------------------ Total long-term debt $ 187,266 $ 73,426 ------------------------
During the second quarter of 1998, the Company entered into a new five-year revolving domestic credit agreement, as amended (the Agreement), with a syndicate of banks for secured borrowings totaling up to $250,000. This agreement is secured by a pledge of certain shares of common stock of the Company's subsidiaries. Borrowings under the Agreement bear interest at the Eurodollar Rate plus 0.5% to 1.625% (6.875% at December 31, 1998). The rate spread is dependent upon the Company's ratio of debt to cash flow, as defined. In addition, the Company pays a facility fee on unborrowed funds at rates ranging from 0.225% to 0.475% (0.475% at December 31, 1998), depending on the Company's debt to cash flow ratio. Under terms of the Agreement, the Company must meet certain financial covenants, including maintaining a specified consolidated net worth, leverage ratio (debt to cash flow), interest coverage ratio and level of capital expenditures. The Company was in compliance with all covenants under the Agreement and had borrowings of $178,700 under the Agreement at December 31, 1998. The Company's German subsidiary maintains short-term credit lines of $2,400 and long-term credit lines of $21,600. The short-term credit lines are unsecured and bear interest at either 0.75% over the DM LIBOR rate or approximately 3.0% over the German Bundesbank Discount rate. The short-term credit lines may be withdrawn by the lender at any time. The weighted average interest rate on short-term debt outstanding at December 31, 1998 and 1997 was 5.5% and 7.0%, respectively. A portion of the long-term credit line is secured by land and buildings with a net book value of $13,709 at December 31, 1998. These long-term credit lines bear interest at 0.50% to 0.75% over the DM LIBOR rate. In March 1997, the Company entered into an interest rate swap agreement that allows the Company to swap a variable interest rate for a fixed interest rate of 6.365% on $15,000 of notional debt for a period of two years ending March 1999. In August 1998, the Company entered into additional multiple interest rate swap agreements for a total of $100 million of notional debt which provide for the Company to swap a variable interest rate for fixed interest rates ranging from 5.74% to 5.76% plus a specified spread depending on the swap involved (7.12% to 7.14% including current spread of 1.375%). These swaps expire at various dates ranging from July 1999 to August 2000. The notional amount of debt is not a measure of the Company's exposure to credit or market risks and is not included in the condensed consolidated balance sheet. Fixing the interest rate minimizes the Company's exposure to the uncertainty of floating interest rates during this two-year period. Amounts to be paid or received under the interest rate swap agreement are accrued and recorded as an adjustment to Interest Expense during the term of the interest rate swap agreement. In October and November 1998, the Company entered into cross-currency swaps which provided for the Company to swap $20,000 of notional debt for the equivalent amount of Japanese yen-denominated debt. These swaps were subsequently closed out in November 1998. Under these swaps, the Company also effectively swapped a U.S. dollar-based interest rate of 5.5% for a Japanese yen-based interest rate of 1.1%. These Japanese yen-based debt derivatives were accounted for under mark-to-market accounting. The Company recognized a pre-tax gain of $890 under these swap agreements in 1998. In January 1999, the Company entered into an agreement to swap $10,000 of notional debt for the equivalent amount of Japanese yen-denominated debt. This swap also effectively swapped a U.S. dollar-based interest rate of 5.10% for a Japanese yen-based interest rate of 1.05% and expires in January 2002. On December 31, 1998 and 1997, the estimated fair value of the Company's debt described above approximates the recorded amount. Annual maturities of long-term debt for the next five years are $1,929 in 1999, $7,767 in 2000, $633 in 2001, $126 in 2002 , $178,710 in 2003 and $30 thereafter. 26 / BMC INDUSTRIES, INC. There were $1,000 of outstanding letters of credit at December 31, 1998. Interest expense paid, net of amounts capitalized of $685, $2,609 and $302, was $11,456, $660 and $15 in 1998, 1997 and 1996, respectively. 8. COMMITMENTS The Company leases four manufacturing facilities, 17 sales, distribution or administrative facilities and the Company headquarters. In addition, the Company leases data processing and other equipment. At December 31, 1998, the approximate future minimum rental commitments required under non-cancelable operating leases are as follows: - ----------------------------------------------------------- 1999 $ 973 2000 929 2001 876 2002 864 2003 619 Thereafter 90 ----------- Total minimum lease payments $ 4,351 -----------
Rent expense was $1,079, $1,892, and $2,535 in 1998, 1997 and 1996, respectively. The Company's Vision-Ease subsidiary has entered into a long-term Product Manufacturing and Sales Agreement (the Supply Agreement) with a plastic lens manufacturer located in Southeast Asia. The Supply Agreement provides for the Southeast Asian manufacturer to supply, and Vision-Ease to purchase, certain minimum levels of plastic lenses. At December 31, 1998, the approximate future purchase commitments under this Supply Agreement were as follows: - ----------------------------------------------------------- 1999 $ 8,000 2000 8,900 -----------
The Company's German subsidiary has a significant portion of its sales denominated in U.S. dollars (approximately 31% and 28% in 1998 and 1997, respectively). As most of the German subsidiary's expenses are denominated in the German mark, this represents the most significant element of the Company's direct exposure to currency rate fluctuations. This exposure is generally addressed as needed through the purchase of forward contracts and options. At December 31, 1998, there were no outstanding forward contracts or options. As of December 31, 1997, the Company had approximately $3,600 of outstanding foreign currency exchange options to exchange U.S. dollars for German marks at a set exchange rate. These foreign exchange options do not expose the Company to financial risk as the contracts provide an option to exchange the currencies, but do not obligate the Company to make a foreign currency exchange. Premiums paid for foreign currency exchange options are amortized to Other Expense over the life of the options. Upon exercise of foreign currency exchange options, gains are recorded as a reduction of Cost of Products Sold. At December 31, 1998, the Company had commitments of approximately $3,200 related to capital projects. 9. STOCK OPTIONS/AWARDS AND STOCK REPURCHASES/OTHER The 1994 Stock Incentive Plan (the 1994 Plan) provides for the granting of either incentive stock options or nonqualified stock options to purchase shares of the Company's common stock and for other stock-based awards to officers, directors and key employees responsible for the direction and management of the Company and to non-employee consultants and independent contractors. At December 31, 1998, 2,984 shares of common stock were reserved for issuance under the 1994 Plan and for outstanding options under the 1984 Omnibus Stock Plan, which terminated on January 10, 1994. The reserved shares included 655 shares available for awards under the 1994 Plan. BMC INDUSTRIES, INC. / 27 Information relating to stock options during 1998, 1997 and 1996 is as follows:
OPTION PRICE NUMBER PER SHARE TOTAL OF SHARES AVERAGE PRICE - ----------------------------------------------------------------------------- Shares under option at December 31, 1995 2,363 $ 5.18 $ 12,236 Granted 87 26.99 2,362 Exercised (315) 2.79 (882) Forfeited (15) 8.71 (131) - ----------------------------------------------------------------------------- Shares under option at December 31, 1996 2,120 6.41 13,585 Granted 611 23.75 14,513 Exercised (428) 3.81 (1,631) Forfeited (78) 15.15 (1,182) - ----------------------------------------------------------------------------- Shares under option at December 31, 1997 2,225 11.36 25,285 Granted 902 9.38 8,465 Exercised (345) 4.70 (1,621) Forfeited (201) 13.78 (2,769) Terminated (252) 16.40 (4,134) - ----------------------------------------------------------------------------- Shares under option at December 31, 1998 2,329 $ 10.83 $ 25,226 - ----------------------------------------------------------------------------- Shares exercisable at December 31, 1998 942 $ 7.07 $ 6,660 - ----------------------------------------------------------------------------- Shares exercisable at December 31, 1997 908 $ 4.18 $ 3,797 - ----------------------------------------------------------------------------- Shares exercisable at December 31, 1996 1,035 $ 3.04 $ 3,149 - -----------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - ----------------------------------------------------------- ------------------------- $ 0 - 5 722 3.9 $ 2.86 591 $ 2.59 5 -10 910 7.9 7.15 189 7.51 10 - 20 213 6.8 18.05 50 16.84 20 - 31 484 7.2 26.47 112 25.63 - ----------------------------------------------------------- ------------------------- 2,329 6.4 $ 10.83 942 $ 7.07 - ----------------------------------------------------------- -------------------------
All outstanding options are nonqualified options. No compensation expense related to stock option grants was recorded in 1998, 1997 or 1996 as the option exercise prices were equal to fair market value on the date of grant. At December 31, 1998, there were 23 shares outstanding pursuant to other stock-based awards under the 1994 Plan. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996:
1998 1997 1996 - ------------------------------------------------------------- Risk-free interest rate 5.50% 5.71% 6.21% Dividend yield 0.96% 0.30% 0.19% Volatility factor 0.55 0.47 0.39 Weighted average expected life 5 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options using the Black-Scholes option pricing model is amortized to expense over the options' vesting period. 28 / BMC INDUSTRIES, INC. The Company's pro forma net earnings and earnings per share were as follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------------- Net earnings - as reported $ (30,635) $ 35,721 $ 35,101 Net earnings - pro forma (32,006) 34,926 34,746 Basic earnings per share - as reported (1.13) 1.30 1.29 Basic earnings per share - pro forma (1.18) 1.27 1.23 Diluted earnings per share - as reported (1.13) 1.25 1.24 Diluted earnings per share - pro forma (1.18) 1.22 1.23 Weighted average fair value of options granted during the year 4.52 10.98 11.61 - -------------------------------------------------------------------------------------------------
Because SFAS No. 123 provides for pro forma amounts for options granted beginning in 1995, the pro forma expense will likely increase in future years as the new option grants become subject to the pricing model. STOCK OPTION EXERCISE LOAN PROGRAM. The Company maintains the Stock Option Exercise Loan Program under which holders of exercisable stock options may obtain interest-free and interest-bearing loans from the Company to facilitate their exercise of stock options. Such full recourse loans are evidenced by demand promissory notes and are secured by shares of stock. The portion of such loans directly related to the option exercise price is classified as a reduction of stockholders' equity. The remainder is included in current assets. COMMON STOCK REPURCHASES. In January 1998, the Company repurchased 1,000 common shares at a total cost of approximately $16,600. This share repurchase was financed using the Company's domestic bank credit facility. SHARE RIGHTS PLAN. In June 1998, the Company adopted a Share Rights Plan and declared a dividend of one Preferred Share Purchase Right for each outstanding share of common stock to stockholders of record on July 20, 1998. The Rights will become exercisable after any person or group acquires or announces a tender or exchange offer resulting in the beneficial ownership of 15% or more of the Company's common stock. Each Right entitles shareholders to buy one five-hundredth of a share of a newly created series of preferred stock at an exercise price of $75 subject to adjustment upon certain events. If any person or group acquires 15% or more of the Company's common stock, if the Company is acquired in a business combination, or if the Company sells 50% or more of its assets, each Right entitles its holder, other than the person or group acquiring the common stock, to purchase at the Right's then current exercise price, shares of the Company's common stock having a value of twice the Right's then current exercise price. The Rights are redeemable at $0.001 per Right and will expire on July 20, 2008, unless extended or earlier redeemed by the Company. 10. EMPLOYEE BENEFIT PLANS The Company maintains a savings and profit sharing plan covering substantially all of its domestic salaried employees and a majority of those domestic hourly employees not covered by a pension plan or retirement fund described below. Under the terms of the profit sharing provision of the plan, the Company makes an annual minimum contribution equal to 3% of participants' wages, with the potential for an additional discretionary contribution depending upon the Company's profitability. Provisions of the profit sharing portion of the plan include 100% vesting after five years of continuous service and payment of benefits upon retirement, total disability, death or termination. Under the terms of the savings portion of the plan, the Company makes an annual minimum contribution, which is invested in Company stock, equal to 25% of participants' before-tax contributions up to 6% of base salary, with the potential for an additional discretionary contribution depending upon the Company's profitability. Provisions of the savings portion of the plan include vesting of the Company's contributions at the rate of 25% per year of continuous service and payment of benefits upon retirement, total disability, death or termination. One domestic operation has a noncontributory defined benefit pension plan for its hourly employees. During 1997, the Company curtailed benefits payable under the plan, resulting in a curtailment loss of $141. Benefits payable under the plan are based upon various monthly amounts for each year of credited service. The Company's funding policy meets or exceeds the funding requirements of federal laws and regulations. BMC INDUSTRIES, INC. / 29 In 1989, the Company adopted a supplemental defined benefit retirement plan for corporate and operations management over 45 years of age. In 1992, the Company curtailed benefits payable under the plan. The Company's funding policy is to maintain plan assets approximately equal to the vested benefit obligation. In addition, the Company's German subsidiary has a noncontributory defined benefit pension plan covering substantially all of its employees. Benefits payable under the plan are based upon the participant's base salary prior to retirement and years of credited service. As allowed under German law, this plan is not funded. However, under generally accepted accounting principles, the estimated future liability is accrued in the Company's Consolidated Financial Statements. In addition to the defined benefit plans discussed above, the Company has two defined benefit post-retirement plans covering certain domestic employees. One plan provides medical benefits and the other provides life insurance benefits. Under the medical benefits plan, the Company provides a specific dollar amount to retired salaried employees or their surviving spouses to purchase coverage through the BMC Flexible Benefits Plan. The annual increase in these Company provided amounts is limited to 5%. The life insurance plan provides term life insurance coverage to all retired full-time hourly employees at one domestic operation. The Company accrues the expected cost of providing benefits under these two plans during the years that eligible employees render service. Neither plan is funded. Assumed increases or decreases to health care trend rates do not have an impact on the Company's post-retirement medical plan as the Company has a cap on the maximum cost. The above described defined benefit and post-retirement plans included the following components:
PENSION BENEFITS POST-RETIREMENT BENEFITS -------------------- ------------------------ 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 12,898 $ 12,636 $ 1,542 $ 1,243 Service cost 497 469 87 73 Interest cost 832 824 108 91 Foreign currency exchange rate changes 739 (1,340) -- -- Actuarial (gain) loss (137) 536 -- 210 Benefit payments (508) (368) (75) (75) Curtailments -- 141 -- -- ----------------------------------------------------------- Benefit obligation at end of year 14,321 12,898 1,662 1,542 ----------------------------------------------------------- CHANGE IN FAIR VALUE OF PLAN ASSETS Fair value of plan assets at beginning of year 4,225 3,650 -- -- Actual return on plan assets (334) 783 -- -- Employer contribution -- -- 75 75 Benefit payments (312) (208) (75) (75) ----------------------------------------------------------- Fair value of plan assets at end of year 3,579 4,225 -- -- ----------------------------------------------------------- FUNDED STATUS Funded status of the plan (underfunded) (10,742) (8,673) (1,662) (1,542) Unrecognized transitional amount 90 97 -- -- Unrecognized net loss (gain) 778 150 (147) (147) ----------------------------------------------------------- Accrued pension cost $ (9,874) $ (8,426) $ (1,809) $ (1,689) -----------------------------------------------------------
30 / BMC INDUSTRIES, INC.
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC PENSION COST Pension benefits: Service cost $ 497 $ 469 $ 475 Interest cost 832 824 810 Expected return on plan assets (371) (248) (209) Amortization of transition obligation 15 18 24 Amortization of prior service cost -- 7 12 Recognized actuarial gain (5) (8) -- Curtailment loss -- 141 -- ------------------------------------------ Net periodic pension cost $ 968 $ 1,203 $ 1,112 ------------------------------------------ Post-retirement benefits: Service cost $ 87 $ 73 $ 74 Interest cost 108 91 80 Recognized actuarial gain -- (14) (14) ------------------------------------------ Net periodic pension cost $ 195 $ 150 $ 140 ------------------------------------------
Assumptions used in developing the projected benefit obligation and the net periodic pension cost as of December 31, were as follows:
1998 1997 1996 - -------------------------------------------------------------------- Domestic plans (including post-retirement plan): Discount rate 6.75% 7.50% 7.50% Rate of return on plan assets 9.00% 7.00% 7.00% Foreign plan: Discount rate 6.00% 6.30% 7.00% Rate of increase in compensation 2.50% 3.00% 3.00% ---------------------------------
Under a contract with its union employees, one of the Company's domestic operations makes, on behalf of each active participant, fixed weekly contributions to a retirement fund (aggregating $173, $145 and $150 in 1998, 1997 and 1996, respectively). At December 31, 1998, the market value of this fund's assets of $18,350 exceeded benefit obligations of $16,259 by $2,091. Pursuant to the plan, excess funded amounts are not available to the Company. The total cost of all profit sharing, savings and pension plans, domestic and foreign, was $2,708, $3,118 and $4,523 in 1998, 1997 and 1996, respectively. 11. INCOME TAXES The provision (benefit) for income taxes was based on earnings (loss) before income taxes, as follows:
Years Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------- Domestic $ (50,756) $ 42,605 $ 47,397 Foreign 2,072 8,597 5,006 -------------------------------------------- Earnings (loss) before income taxes $ (48,684) $ 51,202 $ 52,403 --------------------------------------------
The provision (benefit) for income taxes consisted of:
Years Ended December 31 1998 1997 1996 - ------------------------------------------------------------ Current Federal $ (6,223) $ 7,957 $ 13,227 State 75 722 1,931 Foreign 150 2,455 2,604 Deferred Federal and state (12,722) 2,736 (386) Foreign 671 1,611 (74) -------------------------------------- Income tax expense (benefit) $ (18,049) $ 15,481 $ 17,302 --------------------------------------
BMC INDUSTRIES, INC. / 31 Significant components of deferred income tax assets and liabilities were as follows at December 31:
1998 1997 - ----------------------------------------------------------- FEDERAL AND STATE NET DEFERRED INCOME TAXES Deferred tax asset Reserves and accruals $ 6,103 $ 3,583 Depreciation 4,423 -- Compensation and benefit-related accruals 4,151 4,574 Other temporary differences 3,604 2,180 Tax credit carryovers 2,535 -- ------------------------ Total 20,816 10,337 ------------------------ Deferred tax liability Depreciation -- (2,031) Capitalized molds and tooling (782) (996) ------------------------ Total (782) (3,027) ------------------------ Net deferred tax asset $ 20,034 $ 7,310 ------------------------ FOREIGN NET DEFERRED INCOME TAXES Deferred tax liability Depreciation $ (4,522) $ (3,264) Other temporary differences (142) (203) ------------------------ Total (4,664) (3,467) ------------------------ Deferred tax asset Retirement benefits 710 586 Other temporary differences 343 161 ------------------------ Total 1,053 747 ------------------------ Net deferred tax liability $ (3,611) $ (2,720) ------------------------
The federal and state net deferred tax asset included a current portion of $14,603 and $5,881 at December 31, 1998 and 1997, respectively, and a long-term portion of $5,431 and $1,429 at December 31, 1998 and 1997, respectively. The foreign net deferred tax liability included a current liability of $63 and $89 at December 31, 1998 and 1997, respectively, and a long-term liability of $3,547 and $2,631 at December 31, 1998 and 1997, respectively. The differences between income taxes at the U.S. federal statutory tax rate and the effective tax rate were as follows:
Years Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------- Statutory rate (35.0)% 35.0% 35.0% Differences in taxation of foreign earnings 0.1 2.0 1.5 Foreign income taxed in the U.S. (1.9) (0.5) -- State income taxes, net of federal benefit (1.4) 1.3 2.6 Change in deferred tax valuation allowance -- (7.2) (5.4) Other items 1.1 (0.4) (0.7) ---------------------------------------- Effective tax rate (37.1)% 30.2% 33.0% ----------------------------------------
Differences in taxation of foreign earnings relate primarily to taxation of foreign earnings at rates in excess of the U.S. statutory rate. Undistributed earnings of foreign subsidiaries at December 31, 1998 were approximately $14,229. No U.S. taxes have been provided on these undistributed earnings because the Company expects to be able to utilize foreign tax credits to offset any U.S. tax that would result from their distribution. Income taxes (refunded) paid were $(8,571), $17,447 and $17,039 in 1998, 1997 and 1996, respectively. 12. SEGMENT INFORMATION The Company has two operating segments which manufacture and sell a variety of products: Precision Imaged Products and Optical Products. Precision Imaged Products manufactures principally aperture masks, photochemically etched fine mesh grids used in the manufacture of color television tubes and computer monitors. Optical Products manufactures ophthalmic lenses. Net sales of aperture masks comprised 86%, 87% and 88% of Precision Imaged Products segment revenues in 1998, 1997 and 1996, respectively, and 54%, 61% and 60% of the Company's consolidated total revenues in 1998, 1997 and 1996, respectively. 32 / BMC INDUSTRIES, INC. The following is a summary of certain financial information relating to the two segments:
Years Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES BY SEGMENT Precision Imaged Products $ 212,083 $ 219,007 $ 192,552 Optical Products 123,055 93,531 87,935 ----------------------------------------------------- Total Revenues $ 335,138 $ 312,538 $ 280,487 ----------------------------------------------------- OPERATING PROFIT (LOSS) BY SEGMENT Precision Imaged Products Before corporate allocation and impairment charge $ 1,969 $ 41,489 $ 43,087 Impairment of long-lived assets (42,800) -- -- Less corporate allocation(1) (2,522) (2,314) (2,416) ----------------------------------------------------- Total (43,353) 39,175 40,671 ----------------------------------------------------- Optical Products Before corporate allocation and acquired research and development charge 19,678 14,885 14,365 Acquired in-process research and development (9,500) -- -- Less corporate allocation(1) (1,464) (988) (1,104) ----------------------------------------------------- Total 8,714 13,897 13,261 ----------------------------------------------------- TOTAL SEGMENT OPERATING PROFIT (LOSS) (34,639) 53,072 53,932 Corporate expense (1,193) (1,014) (1,485) Interest income (expense), net (13,374) (1,065) (280) Other income (expense) 522 209 236 ----------------------------------------------------- Earnings (loss) before income taxes $ (48,684) $ 51,202 $ 52,403 ----------------------------------------------------- IDENTIFIABLE ASSETS BY SEGMENT Precision Imaged Products $ 168,540 $ 218,988 $ 158,276 Optical Products 206,825 81,834 58,617 ----------------------------------------------------- Total Identifiable Assets 375,365 300,822 216,893 Corporate and other assets 24,100 18,585 16,076 ----------------------------------------------------- Total Assets $ 399,465 $ 319,407 $ 232,969 ----------------------------------------------------- DEPRECIATION AND AMORTIZATION BY SEGMENT Precision Imaged Products $ 13,582 $ 10,457 $ 7,391 Optical Products 7,215 2,670 2,536 Corporate and other 217 222 244 ----------------------------------------------------- Total Depreciation and Amortization $ 21,014 $ 13,349 $ 10,171 ----------------------------------------------------- CAPITAL EXPENDITURES BY SEGMENT Precision Imaged Products $ 9,764 $ 60,605 $ 49,672 Optical Products 11,526 14,397 4,750 Corporate and other 137 108 240 ----------------------------------------------------- Total Capital Expenditures $ 21,427 $ 75,110 $ 54,662 -----------------------------------------------------
(1)CORPORATE ALLOCATIONS CONSIST OF ESTIMATED ADMINISTRATIVE EXPENSES INCURRED AT THE CORPORATE HEADQUARTERS WHICH PROVIDE DIRECT BENEFIT TO THE OPERATING DIVISIONS. BMC INDUSTRIES, INC. / 33 The following is a summary of the Company's operations in different geographic areas:
Years Ended December 31 1998 1997 1996 - ------------------------------------------------------------ TOTAL REVENUES FROM UNAFFILIATED CUSTOMERS United States $ 233,142 $ 199,825 $ 187,430 Germany 94,181 104,384 85,667 Other 7,815 8,329 7,390 -------------------------------------- Total $ 335,138 $ 312,538 $ 280,487 -------------------------------------- LONG-LIVED ASSETS United States $ 124,543 $ 150,576 $ 92,013 Germany 30,052 27,178 31,787 Other 7,999 4,628 45 -------------------------------------- Total $ 162,594 $ 182,382 $ 123,845 --------------------------------------
The Company evaluates segment performance based on profit or loss from operations before interest, other expense, taxes and charges for corporate administration. Revenues by geographic area are based upon revenues generated from each country's operations. Net sales to unaffiliated foreign customers from domestic operations (export sales) in 1998, 1997 and 1996 were $40,820, $47,913 and $43,492, or 12%, 15% and 16%, respectively, of total revenues. Precision Imaged Products had sales to one customer of $56,983, $62,062 and $52,899; to another customer of $51,785, $48,963 and $33,435; to a third customer of $33,801, $33,336 and $32,417; and to a fourth customer of $23,266, $34,101 and $28,600 in 1998, 1997, and 1996, respectively. Optical Products did not have sales to any individual customer greater than 10% of total revenues. 13. CONCENTRATIONS OF CREDIT RISK Approximately 58% of the trade accounts receivable before allowances (receivables) of Precision Imaged Products at December 31, 1998 were represented by four customers. Approximately 33% of the receivables of Optical Products at December 31, 1998 were represented by 20 customers. These 24 customers represented approximately 45% of the Company's consolidated receivables at December 31, 1998, with one customer of Precision Imaged Products representing approximately 20% of consolidated receivables. Mask Operations' customer base consists of the largest television and computer monitor manufacturers in the world. Accordingly, Mask Operations generally does not require collateral and its trade receivables are unsecured. Optical Products' customer base consists of a wide range of eyewear retailers and optical laboratories. Optical Products performs detailed credit evaluations of customers and establishes credit limits as required. Collateral or other security for accounts receivable is obtained as considered necessary for Optical Products' customers. 14. LEGAL MATTERS In January 1995, a U.S. District Court in Miami, Florida, awarded the Company a $5.1 million judgment against Barth Industries ("Barth") of Cleveland, Ohio, and its parent, Nesco Holdings, Inc. ("Nesco"). The judgment relates to an agreement under which Barth and Nesco were to help automate the plastic lens production plant in Fort Lauderdale, Florida. The Company did not record any income relating to this judgment because Barth and Nesco filed an appeal. In November 1998, the U.S. Court of Appeals for the Eleventh Circuit dismissed the claims against Nesco and remanded the case against Barth to the District Court for retrial on a narrow issue. The Company is evaluating all options for pursuing its claims while the case is proceeding to a retrial. During 1998, workers' compensation claims were filed on behalf of approximately 175 former employees of the Vision-Ease Fort Lauderdale facility. These claims all allege that the employees were exposed to toxic chemicals while working in the Fort Lauderdale facility at various dates between 1979 and 1997. All claims for benefits have been denied and the case is in the discovery phase. The Company believes these claims are without merit and intends to vigorously defend each claim. BMC is also a defendant in various other suits, claims and investigations which arise in the normal course of business. In the opinion of the Company's management, the ultimate disposition of these matters, including those matters described above, will not have a material adverse effect on the consolidated financial position, liquidity or results of operations of the Company. 34 / BMC INDUSTRIES, INC. PRICE RANGE OF COMMON STOCK The Company's common stock is traded on the New York Stock Exchange under the ticker symbol "BMC". The table below sets forth the high and low reported sales prices of BMC stock by quarter for the years 1998, 1997 and 1996. At March 24, 1999, there were approximately 1,050 stockholders of record.
DIVIDENDS PRICE 1996 PER SHARE HIGH LOW - ------------------------------------------------------------- First Quarter $ .0125 $25 1/8 $ 19 3/4 Second Quarter .0125 32 3/8 21 Third Quarter .0125 31 3/8 24 3/4 Fourth Quarter .0150 31 1/2 26 5/8 - ------------------------------------------------------------- 1997 First Quarter $ .0150 $34 1/4 $ 27 5/8 Second Quarter .0150 35 3/8 24 Third Quarter .0150 35 3/16 29 3/4 Fourth Quarter .0150 32 15/16 15 15/16 - ------------------------------------------------------------- 1998 First Quarter $ .0150 $21 1/4 $ 15 13/16 Second Quarter .0150 20 3/4 7 5/16 Third Quarter .0150 9 3/16 3 5/16 Fourth Quarter .0150 7 5/16 4 7/16 - -------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders BMC Industries, Inc. We have audited the accompanying consolidated balance sheets of BMC Industries, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BMC Industries, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota January 31, 1999 BMC INDUSTRIES, INC. / 35 SELECTED QUARTERLY DATA (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR - --------------------------------------------------------------------------------------------------------------------------- 1997 Revenues $ 77,127 $ 80,257 $ 79,086 $ 76,068 $ 312,538 Gross margin 15,982 21,859 17,273 12,956 68,070 Net earnings 7,883 11,989 8,875 6,974 35,721 Earnings per Share Basic 0.29 0.44 0.32 0.25 1.30 Diluted 0.28 0.42 0.31 0.24 1.25 Number of shares included in computation Basic 27,410 27,463 27,681 27,776 27,583 Diluted 28,458 28,496 28,619 28,545 28,530 ---------------------------------------------------------------------- 1998 Revenues $ 80,084 $ 84,941 $ 88,584 $ 81,529 $ 335,138 Gross margin 11,629 2,861 6,942 15,711 37,143 Net earnings (loss) 3,809 (37,152)* (1,969) 4,677 (30,635) Earnings (loss) per Share Basic 0.14 (1.38)* (0.07) 0.17 (1.13) Diluted 0.14 (1.38)* (0.07) 0.17 (1.13) Number of shares included in computation Basic 26,994 26,905 26,989 27,169 27,014 Diluted 27,644 26,905 26,989 27,405 27,014 ----------------------------------------------------------------------
*THE FINANCIAL RESULTS FOR THE SECOND QUARTER OF 1998 HAVE BEEN RESTATED TO REFLECT A REVISION OF THE ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE TO $9,500 (PRE-TAX). THE EFFECT OF THE RESTATEMENT DECREASED THE SECOND QUARTER 1998 NET LOSS BY $930 (AFTER-TAX) AND DECREASED THE BASIC AND DILUTED NET LOSS PER SHARE BY $0.04. SHAREHOLDER INFORMATION NYSE LISTING The common shares of BMC Industries, Inc. are traded on the New York Stock Exchange, under the symbol BMC. ANNUAL MEETING The annual meeting of stockholders will be held at 10 a.m. on Wednesday, May 12, 1999, at the Radisson Hotel South and Plaza Tower, 7800 Normandale Boulevard, Minneapolis, Minnesota. Meeting notices and proxy materials were mailed to all stockholders of record as of March 24, 1999. STOCKHOLDERS' REQUESTS FOR INFORMATION Requests to transfer the Company's shares should be addressed to the Company's transfer agent and registrar: Norwest Bank Minnesota, N.A. Stock Transfer P.O. Box 738 161 N. Concord Exchange South St. Paul, MN 55075-0738 Telephone (800) 468-9716 Telefax (651) 450-4078 For other information regarding your stock holdings and a copy of the annual report to the Securities and Exchange Commission on Form 10-K, please write to: BMC Industries, Inc. Investor Relations Department One Meridian Crossings Suite 850 Minneapolis, MN 55423 In addition, these and similar reports can be accessed through our web site at www.bmcind.com. AUDITORS Ernst & Young LLP Minneapolis, Minnesota CORPORATE HEADQUARTERS BMC Industries, Inc. One Meridian Crossings Suite 850 Minneapolis, MN 55423 Telephone (612) 851-6000 Telefax (612) 851-6050 36 / BMC INDUSTRIES, INC. EX-21.1 12 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF BMC INDUSTRIES, INC. 1. Buckbee-Mears Europe GmbH 2. BMC Industries Foreign Sales Corporation 3. Buckbee-Mears Hungary Kft. 4. Vision-Ease Lens, Inc. 5. Vision-Ease Lens Azusa, Inc. 6. Vision-Ease Europe Limited 7. Vision-Ease Canada, Ltd. 8. P. T. Vision-Ease Asia, joint venture with P.T. Astron Lensindo Nusa EX-23.1 13 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of BMC Industries, Inc. of our report dated January 31, 1999, included in the 1998 Annual Report to Stockholders of BMC Industries, Inc. Our audits also included the financial statement schedule of BMC Industries, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8, No. 33-2613, No. 33-32389 and No. 33-60937) pertaining to the BMC Industries, Inc. 1984 Omnibus Stock Program and in the Registration Statement (Form S-8 No. 33-55089) pertaining to the BMC Industries, Inc. 1994 Stock Incentive Plan and the related Prospectuses of our report dated January 31, 1999 with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of BMC Industries, Inc. /s/ Ernst & Young LLP Minneapolis, Minnesota March 29, 1999 EX-27.1 14 EXHIBIT 27.1
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1,021 7 41,787 2,624 82,853 151,994 276,630 114,036 399,465 57,023 0 0 0 47,714 85,543 399,465 335,138 335,138 297,995 72,975 (522) 0 13,537 (48,684) (18,049) (30,635) 0 0 0 (30,635) (1.13) (1.13)
EX-99.1 15 EXHIBIT 99.1 Contact: Jeffrey J. Hattara (NYSE-BMC) (612)851-6030 FOR IMMEDIATE RELEASE BMC ANNOUNCES QUARTERLY DIVIDEND December 11, 1998 -- Minneapolis, Minnesota - BMC Industries, Inc. today announced that its Board of Directors has approved a continuation of its quarterly cash dividend of $.015 per share. Shareholders of record as of December 23, 1998 will receive a dividend of $.015 for each share owned on that date, to be paid on January 6, 1999. BMC Industries, Inc. is one of the world's largest manufacturers of aperture masks for color picture tubes used in televisions and computer monitors. The Company is also a leading producer of polycarbonate, glass and plastic eyewear lenses. BMC's common stock is traded on the New York Stock Exchange under the symbol BMC. -30- EX-99.2 16 EXHIBIT 99.2 [LETTERHEAD] Contact: Jeffrey J. Hattara (NYSE-BMC) (612) 851-6030 FOR IMMEDIATE RELEASE BMC REPORTS FOURTH QUARTER 1998 RESULTS February 1, 1999 -- Minneapolis, Minnesota - BMC Industries, Inc. reported net income of $4.7 million, or $0.17 per diluted share, for the fourth quarter of 1998. Excluding the one-time impact of foreign currency gains and adjustments for certain other non-operating items, fourth quarter net earnings were $0.12 per diluted share. This compares to net earnings of $0.24 per diluted share in the fourth quarter of 1997. Total fourth quarter revenues increased 7% from $76.1 million in 1997 to $81.5 million in 1998. Paul B. Burke, BMC's Chairman and Chief Executive Officer, stated, "During the fourth quarter, BMC continued its focus on assimilating the Orcolite acquisition, reducing costs at the Mask Operations, balance sheet management and generating cash flow. We successfully reduced our debt balance in the fourth quarter by $21.3 million which was in addition to our $9.6 million third quarter debt reduction. We are encouraged by our fourth quarter operating results and the momentum we carry into 1999." BMC's Optical Products operation generated sales of $30.0 million in the fourth quarter, up 34% over the prior year quarter. On a proforma basis, this compares to $30.6 million of revenue in the fourth quarter of 1997. Although this represents a 2% decline in overall revenues compared to the combined Vision-Ease and Orcolite 1997 fourth quarter revenues, sales of polycarbonate and other high-end products (polycarbonate, high-index, progressive and polarizing sun lenses) grew 9% over the prior year quarter on a proforma basis, and 80% in total. High-end sales accounted for 56% of total Optical Products' revenue in the fourth quarter of 1998 compared to 41% in the year earlier period. While total fourth quarter sales levels were lower than anticipated due to year-end inventory adjustments by certain customers and a general slowdown in retail optical sales, sales of high-end products remain strong and are Vision-Ease's focus to drive long-term sales growth. For the full year, Optical Products' sales grew from $93.5 million in 1997 to $123.1 million in 1998, a 32% increase. Proforma high-end sales grew 36% for the total year 1998. - more - Vision-Ease's operating earnings increased 62% during the fourth quarter of 1998 over the prior year quarter. The strong fourth quarter gross margin was driven by the heavy mix of high-end sales. Vision-Ease's selling expense increased $1.0 million over the prior year quarter as it continues to invest in the sales and marketing of its premium products. During the fourth quarter, Vision-Ease released its new progressive lens, Outlook-Registered Trademark-, in the polycarbonate material. Outlook-Registered Trademark- is the first progressive lens designed specifically for polycarbonate. The lens features a super scratch-resistant Tegra-Registered Trademark- coating and a "short corridor" between the distance and reading prescriptions which allows the lens to be edged for today's small frame sizes. Initial orders were received during the fourth quarter and significant sales and margin contributions are anticipated by the middle of 1999. During the fourth quarter, Vision-Ease also began field-testing of the polycarbonate lens lamination system. Field-testing will continue for several months followed by a full roll-out of the system which will offer the Outlook-Registered Trademark- lens and other anti-reflective coated products. Fourth quarter revenues from the Precision Imaged Products division (PIP, including both the Mask Operations and Buckbee-Mears St. Paul) decreased 4% from $53.6 million in 1997 to $51.5 million in 1998. Computer monitor mask sales were up 29% over the prior year period, moving from $8.8 million in the prior year quarter to $11.3 million in the fourth quarter of 1998. Television mask revenues decreased 15% due primarily to lower invar mask sales and commodity product price declines. Sales of invar television masks were down 19% compared to the prior year quarter. Mask Operations' cost reduction and operational improvement efforts are reflected in the PIP division's fourth quarter operating income of $5.5 million (excluding the impact of the non-operating income items). These results were achieved despite the continued shutdown of two mask production lines at the Company's Cortland, New York facility. Mask Operations continue to face price pressures in both the TV and monitor mask segments. As a consequence, one TV mask production line is expected to be idle for the indefinite future. However, due to additional customer qualifications and increasing demand for monitor masks, production on the idle monitor mask line at the Cortland facility resumed in January. The Company anticipates that the costs of starting up this line will have a negative impact on the Mask Operations through the second quarter of 1999. For the full year, PIP sales were $212.1 million in 1998 compared to $219.0 million in 1997, a decrease of 3%. Computer monitor sales increased 79%, moving from $20.5 million in 1997 to $36.7 million in 1998. Buckbee-Mears St. Paul (BMSP) concluded a record year in both sales and profitability for 1998. Due to softening economic conditions, however, BMSP has experienced a reduction in its sales backlog and is expecting sales and profitability in the first, and possibly second, quarter of 1999 to be lower than prior year results for the comparable period. BMSP is continuing its efforts to develop strategic research and development partnerships to help offset these softening economic conditions. - more - As noted earlier, the fourth quarter 1998 results include pre-tax gains of $1.3 million related to settlement of foreign currency transactions and certain foreign currency hedging activities and pre-tax gains of $1.2 million related to adjustments of certain compensation and pension items. For financial reporting purposes, $1.5 million of these non-operating items are included in Other Income while $1.0 million is included in Cost of Products Sold. These non-operating gains represent approximately $0.05 of earnings per diluted share. The Company has also reduced the charge for acquired in-process research and development (R&D) that was recorded as part of the Orcolite acquisition by $1.5 million in order to comply with recent Securities and Exchange Commission interpretations regarding techniques used to value in-process R&D. Accordingly, the Company will amend its Form 10-Q filings for the second and third quarters of 1998 to reduce the second quarter in-process R&D charge from $11 million to $9.5 million. This change has no economic impact on the Company and will not change the cash flows of the Company. However, this change will reduce the Company's previously reported second quarter net loss per share by $0.04. This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are intended to be covered by the safe harbors created thereby. Statements made in this press release which are not strictly historical, including statements regarding future performance, are forward-looking statements and as such are subject to a number of risks and uncertainties, including customer demand for the new Outlook-Registered Trademark- progressive lens and the polycarbonate lens lamination system, lower demand for televisions and computer monitors, further mask price declines, inability to successfully partner with new BMSP customers, foreign currency fluctuations, successful customer part qualifications, the continued effect of the economic slowdown in Asia, and a potential economic slowdown in other parts of the world such as South America. These and other risks and uncertainties are detailed in the Company's Form 10-K for the year ended December 31, 1997 and Form 10-Q filed for the quarter ended September 30, 1998. BMC Industries, Inc. is a leading producer of polycarbonate, glass and plastic eyewear lenses. The Company is also one of the world's largest manufacturers of aperture masks for color picture tubes used in televisions and computer monitors. BMC's common stock is traded on the New York Stock Exchange under the symbol BMC. - more - BMC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (in thousands, except per share amounts)
Three Months Ended Year Ended December 31 December 31 --------------------------------------------------------------------------- 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Revenues $ 81,529 $ 76,068 $ 335,138 $ 312,538 Cost of Products Sold 65,818 63,112 297,995 244,468 - ----------------------------------------------------------------------------------------------------------------------- Gross Margin 15,711 12,956 37,143 68,070 Selling 3,748 3,080 15,496 11,696 Administrative 1,107 682 5,179 4,316 Impairment of long-lived assets - - 42,800 - Acquired research and development - - 9,500 - - ----------------------------------------------------------------------------------------------------------------------- Income from Operations 10,856 9,194 (35,832) 52,058 - ----------------------------------------------------------------------------------------------------------------------- Other Income and (Expense) Interest expense (3,887) (591) (13,537) (1,298) Interest income 64 90 163 233 Other income (expense) 1,454 (91) 522 209 - ----------------------------------------------------------------------------------------------------------------------- Earnings before Income Taxes 8,487 8,602 (48,684) 51,202 Income Taxes 3,810 1,628 (18,049) 15,481 - ----------------------------------------------------------------------------------------------------------------------- Net Earnings $ 4,677 $ 6,974 $ (30,635) $ 35,721 - ----------------------------------------------------------------------------------------------------------------------- Net Earnings Per Share: Basic $ 0.17 $ 0.25 $ (1.13) $ 1.30 Diluted 0.17 0.24 (1.13) 1.25 - ----------------------------------------------------------------------------------------------------------------------- Number of Shares Included in Per Share Computation: Basic Diluted 27,169 27,776 27,014 27,583 27,405 28,545 27,014 28,530 - -----------------------------------------------------------------------------------------------------------------------
- more - BMC INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands)
- --------------------------------------------------------------------------------------- DECEMBER 31 DECEMBER 31 1998 1997 - --------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 1,028 $ 2,383 Trade accounts receivable, net 39,163 29,824 Inventories 82,853 70,111 Deferred income taxes 14,603 5,881 Other current assets 14,347 13,595 - --------------------------------------------------------------------------------------- Total Current Assets 151,994 121,794 - --------------------------------------------------------------------------------------- Property, plant and equipment 276,630 283,070 Less accumulated depreciation 114,036 100,688 - --------------------------------------------------------------------------------------- Property, plant and equipment, net 162,594 182,382 - --------------------------------------------------------------------------------------- Deferred income taxes 5,431 1,429 Intangibles and other assets, net 79,446 13,802 - --------------------------------------------------------------------------------------- TOTAL ASSETS $ 399,465 $ 319,407 ======================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------------- Short-term borrowings $ 1,929 $ 1,139 Accounts payable 28,315 25,623 Income taxes payable 3,375 2,830 Accrued expenses and other current liabilities 23,404 17,288 - --------------------------------------------------------------------------------------- Total Current Liabilities 57,023 46,880 - --------------------------------------------------------------------------------------- Long-term debt 187,266 73,426 Other liabilities 18,372 17,718 Deferred income taxes 3,547 2,631 Stockholders' equity Common stock 47,714 62,263 Retained earnings 86,436 118,693 Cumulative translation adjustment 1,113 (1,217) Other (2,006) (987) - --------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 133,257 178,752 - --------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 399,465 $ 319,407 =======================================================================================
- more - BMC INDUSTRIES, INC. SEGMENT INFORMATION (Unaudited) (in thousands)
Three Months Ended December 31 ------------------------------ Precision Imaged Products Optical Products Consolidated ------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues $51,522 $53,591 $30,007 $22,477 $81,529 $76,068 Cost of Products Sold 44,111 45,943 21,707 17,169 65,818 63,112 - ---------------------------------------------------------------------------------------------------------------------------------- Gross Margin 7,411 7,648 8,300 5,308 15,711 12,956 Gross Margin % 14.4% 14.3% 27.7% 23.6% 19.3% 17.0% Selling 829 1,151 2,919 1,929 3,748 3,080 Unallocated Corporate Administration - - - - 1,107 682 - ---------------------------------------------------------------------------------------------------------------------------------- Income from Operations $ 6,582 $ 6,497 $ 5,381 $ 3,379 $10,856 $ 9,194 ================================================================================================================================== Operating Income % 12.8% 12.1% 17.9% 15.0% 13.3% 12.1% Capital Spending $ 3,225 $ 6,907 Depreciation and Amortization $ 5,249 $ 2,825 EBITDA $17,559* $12,019 EBITDA % 21.5% 15.8%
* Includes $2.5 million of non-operating income items. -30- EX-99.3 17 EXHIBIT 99.3 [LETTERHEAD] Contact: Jeffrey J. Hattara (NYSE-BMC) (612) 851-6030 FOR IMMEDIATE RELEASE BMC INDUSTRIES, INC. ANNOUNCES FILING OF ANTIDUMPING PETITION AGAINST CERTAIN APERTURE MASKS FROM JAPAN AND SOUTH KOREA February 24, 1999 -- Minneapolis, Minnesota - BMC Industries, Inc. announced today that it has filed an antidumping duty petition with the U.S. Department of Commerce and the U.S. International Trade Commission in Washington, D.C. against Japanese and South Korean aperture mask manufacturers. BMC's petition charges certain Japanese and South Korean companies with exporting AK steel aperture masks into the United States at prices below their cost of production. The petition further alleges that these companies have unfairly captured U.S. market share for aperture masks used in color televisions, which has caused material injury to BMC. If successful, BMC's petition could result in the imposition of antidumping duties as high as 40% on imports of AK steel aperture masks from Japan and South Korea. BMC alleges that this illegal dumping activity forced it to lower its prices to a harmful level, which resulted in a layoff of several hundred employees and the shutdown of several manufacturing lines at its Cortland, New York facility. BMC is seeking immediate relief from the U.S. government to prevent further damage to U.S. aperture mask manufacturing caused by below cost imports. Gary W. Nelson, BMC's Vice President of Worldwide Sales and Marketing for Mask Operations commented, "For BMC, its employees and its shareholders, this is a matter of survival. In addition to being forced to lower pricing to compete with below cost imports, we have lost substantial share in our home market and cannot withstand further erosion. Japanese and South Korean mask manufacturers have invested heavily in new plants and equipment resulting in an overcapacity market. Now, driven by weakened home currencies, these manufacturers have been pricing for market share in order to fill their lines and generate cash flow. This unfair pricing strategy does not seek to recover full manufacturing costs and will continue without governmental intervention." - more - This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are intended to be covered by the safe harbors created thereby. Statements made in this press release which are not strictly historical, including statements regarding future performance, are forward-looking statements and as such are subject to a number of risks and uncertainties, including the success of the Company's petition for antidumping duty relief and the potential amount, if any, of any antidumping duty actually imposed on Japanese and South Korean aperture mask imports. Other risks and uncertainties are detailed in the Company's Form 10-K for the year ended December 31, 1997 and Form 10-Q filed for the quarter ended September 30, 1998. BMC Industries, Inc. is one of the world's largest manufacturers of aperture masks for color picture tubes used in televisions and computer monitors. The Company is also a leading producer of polycarbonate, glass and plastic eyewear lenses. BMC's common stock is traded on the New York Stock Exchange under the symbol BMC. - 30 - EX-99.4 18 EXHIBIT 99.4 [LETTERHEAD] Contact: Jeffrey J. Hattara (NYSE-BMC) (612)851-6030 FOR IMMEDIATE RELEASE BMC ANNOUNCES QUARTERLY DIVIDEND March 11, 1999 -- Minneapolis, Minnesota - BMC Industries, Inc. today announced that its Board of Directors has approved a continuation of its quarterly cash dividend of $.015 per share. Shareholders of record as of March 24, 1999 will receive a dividend of $.015 for each share owned on that date, to be paid on April 7, 1999. BMC Industries, Inc. is one of the world's largest manufacturers of aperture masks for color picture tubes used in televisions and computer monitors. The Company is also a leading producer of polycarbonate, glass and plastic eyewear lenses. BMC's common stock is traded on the New York Stock Exchange under the symbol BMC. -30- -----END PRIVACY-ENHANCED MESSAGE-----