UNITEDSTATES

SECURITIESAND EXCHANGE COMMISSION    

Washington, D.C. 20549

 

FORM 10-K

(Mark one)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF 

        THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal yearended December 31, 2002

                       OR

[ ]      TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF 

THE SECURITIES EXCHANGEACT OF 1934

 

For the transitionperiod from ___________ to _____________

Commission FileNo.: 1-8467    

 

**BMC INDUSTRIES, INC.**

(Exact name ofregistrant as specified in its charter)

#                                  

| Minnesota                                                     | 41-0169210                                                                                                  |
|---------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------|
| (State or otherjurisdiction of incorporation or organization) |             (I.R.S.Employer Identification No.) |
|                                                          |
| OneMeridian Crossings, Suite 850, Minneapolis, MN        | 55423                                                                                                       |
| (Address of principalexecutive offices)                  | (Zip Code)                                                                                                  |

 

Registrant's telephone number, including area code:  (952)851-6000

 

Securities registeredpursuant to Section 12(b) of the Act:
|                          |
|-------------------------------|
| Title of each class** ** | **  **Nameof each exchange on which registered |
| CommonStock              |  New York Stock Exchange       |
|                          |

Securities registeredpursuant to Section 12(g) of the Act:

**None**

(Title of class)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes  X   No __ 

 

Indicate by check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the registrant'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10‐K. [  ]

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct). Yes __ No X

 

The aggregate market valueof the registrant's common stock (its only voting stock) held by non-affiliatesof the registrant, based on the closing sale price for the registrant's commonstock as reported on the New York Stock Exchange on June 28, 2002, theregistrant's most recently completed second quarter, was approximately $24.8million.  As of March 21, 2003, there were 27,079,385 shares of commonstock of the registrant outstanding.

 

DOCUMENTS INCORPORATEDBY REFERENCE

 

Part III of this report on Form 10-K incorporates byreference information, to the extent specific sections are referred to herein,from the registrant's proxy statement for its annual meeting of stockholders tobe held on May 13, 2003, which proxy statement will be filed no later than 120days after the close of the registrant's fiscal year ended December 31, 2002.

 

TABLEOF CONTENTS

 
|         |
|--------------|
| PARTI.       |   |
| Item1.       | Business | 1 |
| Item2.       | Properties | 11 |
| Item3.       | Legal Proceedings | 12 |
| Item4.       | Submission of Matters to a Vote of SecurityHolders | 12 |
|         |
| PARTII.      |   |
| Item5.       | Market for Registrant'sCommon Equity and Related Stockholder Matters | 12 |
| Item6.  | Selected Financial Data | 13 |
| Item 7.      | Management's Discussion and Analysis of FinancialCondition and Results of Operations | 14
Item7A.

Quantitative and Qualitative Disclosures AboutMarket Risk

23

Item8.

Financial Statements and Supplementary Data

24

Item 9.

 Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure46
 

 

 

PARTIII.

 

Item10.

Directors and Executive Officers of the Registrant

46

Item11.

Executive Compensation

47

Item12.

Security Ownership of Certain Beneficial Ownersand Management

47

Item13.

Certain Relationships and Related Transactions.

47

Item14.

Controls and Procedures

47

 

PARTIV.

 

Item15.

Exhibits, Financial Statement Schedules andReports on Form 8-K

48

             

Signatures

51

             

Certifications

52

 
 Cautionary Statement
 

      This Annual Report on Form 10-K contains and incorporatesby reference statements relating to future results of BMC Industries, Inc. thatare considered "forward-looking" within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, and are subject to the Safe Harbor provisionscreated by the statutes. Thesestatements relate to our current views with respect to non-historicalinformation and include, without limitation, any statement that may predict,forecast, indicate or imply future results, performance or achievements. They include words such as "anticipate,""estimate," "project," "forecast," "may,""will," "should," "expect" and words of similarmeaning. These statements are notguarantees of future performance and are subject to certain known and unknownrisks, uncertainties and contingencies, many of which are beyond our control,that may cause, and in certain instances have caused, actual results,performance or achievements to differ materially from those expressed orforecasted. Certain of these risks anduncertainties are discussed in this Form 10-K in the section entitled "FactorsThat May Affect Future Results." These risks should not be considered an exhaustive list. You should not rely on any forward-lookingstatements, which reflect only our belief as of the date of this Form10-K. We do not undertake theresponsibility to update any forward-looking statement to reflect events orcircumstances after the date of this report. 

 

**PART I**

 
Item 1. Business
** **
AVAILABILITY OF SEC REPORTS
** **

BMC Industries, Inc. maintains an Internet website at *www.bmcind.com*.    BMC makes available free of charge through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC.  These reports may be accessed through the website's investor information page.

 
**(a)     General Development of Business.**
 

BMC Industries, Inc. ("BMC,"the "Company," "we," "our" or "us") wasestablished in 1907 as a Minnesota corporation and has developed into amultinational manufacturer and distributor of high volume precision products intwo reportable segments: Buckbee-Mears and Optical Products. The Buckbee-Mears group is comprised of MaskOperations and Non-Mask Operations. Mask Operations produces aperture masks, which are a key component ofcolor television picture tubes. Non-Mask Operations, formerly "Micro-Technology Operations,"is a leading producer of photochemically machined precision parts for medicalproducts, electronics, filtration and automotive applications. Buckbee-Mears operates in a highly pricecompetitive industry, particularly the market for aperture masks, which hasimpacted the business for several years. As a result, the group is focused on cost reductions while investing strategicallyinto new product development. During2002, the Buckbee-Mears group shutdown its Non-Mask Operations facility locatedin St. Paul, Minnesota and sold a portion of the non-mask sheet etchingbusiness. The remaining operations wereconsolidated into the Mask Operations facilities in Cortland, New York andMullheim, Germany. Mask Operations alsoresponded during 2002 to dramatically falling prices for computer monitor masksby converting all mask production lines to television aperture masks and exitingthe monitor mask market, except for occasional production on a tactical basis.

 

Optical Products, throughVision-Ease Lens, Inc. and other operating subsidiaries, designs, manufacturesand distributes polycarbonate, glass and hard-resin plastic eyeglass lenses forthe global optical industry. Vision-Ease is one of the top global manufacturers of polycarbonate andglass lenses. Polycarbonate is thefastest growing lens material in the optical industry and the Optical Productsgroup is a leader in the design and development of premium polycarbonateproducts, including progressive, photochromic and polarizing lenses. Similar to the actions taken byBuckbee-Mears, the Optical Products group reduced operating costs in 2002 byclosing its Azusa, California production facility and consolidated productioninto its two remaining manufacturing facilities in Jakarta, Indonesia andRamsey, Minnesota.*** ***

 

**(b)    FinancialInformation About Industry Segments.**

 

Financial information aboutour operating segments for the three most recent fiscal years appear on pages41-42.

 

**(c)    NarrativeDescription of Business.**

 

Buckbee-Mears

 

*Products and Marketing.*  The Buckbee-Mears facilities in Cortland andMullheim both are ISO 9002 certified, which is a critical prerequisite tosupplying products to a broad base of customers. Mask Operations manufactures aperture masks at the Cortland andMullheim facilities and operates a low-cost mask inspection facility inTatabanya, Hungary. Non-Mask Operationsconducts research, development and specialty manufacturing of precisionphoto-etched metal parts, in both Cortland and Mullheim.

 

Two customers ofBuckbee-Mears each accounted for more than 10% of our total Company revenuesfor 2002. Thomson, S.A. of France,including its U.S. based operations, accounted for approximately 19% of our2002 total Company revenues. SamsungDisplay Co., Ltd., of South Korea accounted for approximately 13% of our 2002total Company revenues. Thomsonproduces televisions in North America and Europe under various trademarks,including RCA and GE.  Samsung producestelevisions in the Americas, Europe and Asia and computer monitors in SouthAmerica and Asia under the Samsung trade name.

 

Aperture masks arephoto-chemically etched fine screen grids found in color television andcomputer monitor picture tubes and consist of thousands of precise, conicallyshaped holes designed to focus the electron beam on the proper phosphor colorstripe 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. Buckbee-Mears manufactures aperture masksranging from 14-inch to 36-inch diagonal dimensions. Our facilities employ an automated, continuous photochemicaletching process that we originally developed in the 1950s and licensed toothers in subsequent years. We sellaperture masks directly to color television tube manufacturers in NorthAmerica, Europe and Asia through an in-house sales organization. Sales of aperture masks comprised 52%, 52%and 55% of our consolidated total revenues in 2002, 2001 and 2000,respectively.

 

Mask Operations is engagedin ongoing efforts to develop future manufacturing and technical expertise inhigher margin, television masks for high definition television ("HDTV"),flat, wide screen (16 x 9) and digital applications. We have made significant process capability gains on theseadvanced mask products, particularly in the flat, widescreen and HDTVcategories. The Buckbee-Mears groupalso achieved substantial growth in sales of aperture masks to new customers inChina and other parts of Asia. At thesame time, sales of masks were down in North America and Europe. Buckbee-Mears was able to increase its shareof mask sales in Asia by redirecting sales efforts to Asia last year when demandfor television masks began declining in NAFTA. Buckbee-Mears is increasing its efforts to grow sales outside NorthAmerica and Europe in order to offset lower demand in our home markets. The North American and European markets areexperiencing declining mask demand due to imports of television sets from Chinaand plant shutdowns by tube and set manufacturers in the US and Europe.   

 

Non-Mask Operations marketsits development capabilities and sells products through in-house salesrepresentatives, independent manufacturer representatives and distributors tocustomers in the medical, electronics, automotive and filtration applications,including ignition components, medical device components and reusablefiltration devices. Over the past fewyears, Non-Mask Operations has pursued a strategy of leveraging its high-volumeprecision technologies and production capabilities to attract large end-productmanufacturers for joint research and product development projects. These efforts have resulted in thedevelopment of new technology and new customers who offer the potential forsignificant future revenues. In March2001, Buckbee-Mears signed an agreement with Cordis Corporation, a wholly-ownedunit of Johnson & Johnson, for the development and supply of stents. Following two years of development efforts,Buckbee-Mears is working with Cordis to obtain approval of our manufacturingoperations in Cortland from the Food and Drug Administration ("FDA"). The group is seeking to expand itsdevelopment and production of medical products beyond stents by obtaining FDAcertification at the Cortland facility. 

 

*Raw Materials.*  Buckbee-Mears procures raw materials from multiple suppliers. Steel and invar are the main raw materialsused by Buckbee-Mears. Our Cortlandfacility imports all of its steel and invar from suppliers in Japan andGermany. Our Mullheim facility obtainsa majority of its steel and invar raw material from a supplier within Germanyand the remaining portion from a vendor in Japan. Importation of steel into the United States is subject to certainrestrictions imposed by U.S. trade legislation and regulations. In addition, steel imports are the subjectof occasional domestic trade disputes and investigations that have resulted inthe imposition of tariffs by the U.S. government. We have successfully obtained exclusions from these tariffs todate, most recently as March 2002, based on our inability to source aperturemask steel in the U.S. We do notanticipate difficulty in obtaining steel or any other raw materials. As we increase sales in Asia, however, weare required to use different types of steel than we currently use in our homemarkets. We do not anticipate that thiswill cause any production problems or that the steel will not be available butthere can be no assurance that shortages or other problems will not occur giventhe recency of our sales efforts into Asia. Our inability to obtain these materials would have a material adverseeffect on production and results of operations.

* *

*Intellectual Property.*  We have anumber of patents and license rights that are important to the success of ourBuckbee-Mears operations. These patentsrange in their expiration dates from 2003 to 2022***.*** We believe that the loss of any singlepatent would not have a material adverse effect on our business as awhole. We believe that improvement ofexisting products and processes and a reliance on trade secrets and unpatentedproprietary know-how are as important as patent protection in establishing andmaintaining our competitive position. At the same time, we continue to seek patent protection for our productsand processes on a selective basis. There can be no assurance, however, that any issued patents will providesubstantial protection or commercial value. We require our consultants and employees to agree in writing to maintainthe confidentiality of our information and, within certain limits, to assign tous any inventions, and any patent or other intellectual property rights,relating to our business. Technicalemployees also are required to sign non-compete agreements, which BMCrigorously enforces. In addition, wehave an Intellectual Property program that enhances our ability to identify andprotect intellectual property from the development stage through the life ofour products and processes. Employeesfrom operations, research and development and legal meet on a regular basis toreview existing Intellectual Property and strategies for protecting and practicingthese assets.

 

*Seasonality.*  Buckbee-Mears' revenues andearnings are generally lower in the first and third quarters due to maintenanceshutdowns at the Cortland and Mullheim facilities. The seasonality of end products in the television market alsoaffects our annual earnings pattern. 

 

*Competition.*  The precision etched metal and electroformedparts business is intensely competitive, with no one competitor dominating themarket. We are one of five independentmask manufacturers in the world and the only independent mask manufacturer withproduction facilities in the United States. Our primary mask competitors operate in Japan, China and Korea. Independent mask manufacturers supplyapproximately 86%of the global maskmarket, with BMC among the largest at an estimated 19% of the television maskmarket share. We supplied approximately16% of the worldwide demand for television masks in 2002.

 

In addition tocompetition from other mask manufacturers, Mask Operations competes againstrival technologies such as LCD and plasma televisions and projectiontelevisions. Sales of LCD andprojection televisions in the U.S. have grown over the last year due to rapidlydropping prices, contributing in the decline in sales of jumbo CRT televisions. Further, many consumers identify HDTV withprojection televisions, further contributing to the growth in sales ofprojection televisions. Nevertheless,rival product technologies such as plasma and LCD are still very expensivecompared to CRT technology and therefore we believe they are not a practical substituteto CRT technology for much of the global consumer television market for atleast the next 3 to 5 years.

 

Many producers competein the market for specialty precision photo-etched and electroformed metalparts that are produced by Non-Mask Operations, including some that alsomanufacture aperture masks. There is noclear market share leader in this fragmented industry. We compete principally on the basis ofprice, product quality, product availability and customer service. We also attempt to build preferred supplierand research and development arrangements with customers to best meet theircurrent and new product requirements. In order to find new products and technology while remaining competitiveon existing products, we engage in ongoing cost reduction measures, includingthe development of automated processes. 

 

*Backlog.*  As of December 31, 2002, thefirm backlog of Buckbee-Mears sales orders was $7.7 million, compared with$14.9 million as of December 31, 2001. We expect that all of the December 31, 2002 backlog orders will befilled within the current fiscal year. 

 

*Employees* . As of March 21, 2003,Buckbee-Mears had approximately 819 employees in the United States andEurope. The majority of U.S. employeesare not represented by labor unions. In compliance with local laws, productionemployees in Europe are represented by labor unions. Labor relations generally are considered to be good and therehave been no significant labor disputes in the past ten years.

 

 

Optical Products

 

*Products and Marketing.*  OpticalProducts, operating under the Vision-Ease Lens trade name, designs,manufactures and distributes a full line of optical lenses. The Optical Products group shares itsheadquarters with the corporate office of BMC in Richfield, Minnesota. Vision-Ease has a polycarbonate processinglaboratory in France, two distribution centers in the U.S. and distributioncenters in Canada and England. Optical Products consolidated its manufacturingoperations in early 2002 through the closure of its production and distributionfacility in Azusa, California and the transfer of those operations to our tworemaining production facilities in Ramsey and Jakarta. 

 

Vision-Ease manufactureslenses in two principal materials, polycarbonate and glass, and sourceshigh-index and hard-resin plastic lenses from third party suppliers. The group purchases most of its hard-resinand high-index plastic lenses from a single source. Within each of these lens materials, we offer single-visionlenses, which have a constant corrective power at all points; multi-focallenses, which have two or more distinct areas of different corrective power;progressive lenses, which are a type of multi-focal lens with a continuousgradient of different corrective power without the line or "jump"generally associated with other multi-focal lenses; and prescription lensesthat are used primarily for sunwear. Wealso produce lenses with features such as anti-reflective and varying levels ofscratch-resistant coatings to meet increasing demand for products fromcustomers.

 

We sell predominantlysemi-finished lenses to wholesale optical laboratories or retail outlets withon-site laboratories across the U.S. and Europe. The labs then finish the lens by grinding and polishing the insidesurface of the lens according to the prescription provided by the optometristor ophthalmologist. After processing,the lens is edged and inserted into a frame by either the wholesale laboratoryor a retail optical dispenser. We alsosell finished single-vision lenses to wholesale laboratories and retailoutlets. These finished lenses are ready to be edged and inserted into frameswithout laboratory surfacing. We also sell semi-finished and finished lenses toa number of OEM customers. We sellprescription polarizing lenses to manufacturers of sunglasses as well as ourwholesale and retail customer base. Vision-Ease generally sells its products to wholesale laboratoriesthrough independent sales representatives and to retail outlets through anin-house sales staff.

*** ***

The Optical Products groupestablished a lens laboratory in France to pursue growth of polycarbonate inthe European market. This operation consists of administration/customer servicein Noiseau, France and a processing facility in Brou, France. The Brou laboratory specializes in grinding,and applying hard-coatings as well as anti-reflective coatings to polycarbonatelenses for sale in the European market. Over the course of 2000 to 2002, we qualified our polycarbonate productsand laboratory processing capabilities with retailers and OEM partners inEurope.  

 

We produce semi-finishedglass, multi-focal and finished and semi-finished single-vision glass lenses atour Jakarta facility. In 2001, wetransferred the production of specialty glass lens products from our former St.Cloud, Minnesota production facility to the Jakarta facility. We complete our product offerings throughlow cost OEM sourcing arrangements for hard-resin and high-index plastic lenses,most of which are produced under a contract with a single manufacturer inSoutheast Asia. These sourcingarrangements allow Vision-Ease to focus manufacturing capabilities onhigher-margin products while offering a complete line of lens products at costcompetitive prices. 

 

*Intellectual Property.*  Vision-Ease holds a growing portfolio of patents protecting certainproducts and manufacturing processes. These patents have expiration dates ranging from 2003 to 2022. Vision-Ease has built a strong patentposition in certain product categories, including polycarbonate polarizing andphotochromic lenses, dyes and production processes. We believe the loss of any single patent would not have amaterial 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 andunpatented proprietary know-how are as important as patent protection inestablishing and maintaining our competitive position. At the same time, we continue to seek patentprotection for our products and processes on a selective basis. There can be no assurance, however, that anyissued patents will provide substantial protection or commercial value. We require our consultants and employees toagree in writing to maintain the confidentiality of our information and, withincertain limits, to assign to us any inventions, and any patent or otherintellectual property rights, relating to our business. We also require technical employees to signnon-compete agreements, which we rigorously enforce. The Optical Products group owns several trademarks, includingSunRx®, Tegra®, Diamonex®, VividTM, OutlookTM, Continua® and SunSport®. Aspart of our marketing strategy to build sales of branded products, Vision-Easehas increased the use of trademarks during the past few years. Although there are no assurances as to thestrength or scope of our trademarks, we believe that these trademarks have beenand will be useful in developing and protecting market recognition for ourproducts. In addition, we have anIntellectual Property program that enhances our ability to identify and protectintellectual property from the development stage through the life of ourproducts and processes. Employees fromoperations, research and development and legal meet on a regular basis toreview existing Intellectual Property and strategies for protecting andpracticing these assets.

 

The Optical Products grouphas dedicated the significant portion of its research and development time andresources during the past several years to premium, higher-margin polycarbonatelens products. With the guidance ofpatent counsel, we developed significant proprietary technology and know-how,which we sought to protect through patent claims when appropriate. During 2002, the Optical Products groupreceived several returns on these investments. In addition to our ability to use the technology for production oflenses, several outside parties signed license agreements with Vision-Ease andagreed to pay a royalty in return for the right to practice certain patentclaims issued to Vision-Ease. Vision-Ease also signed a license agreement with Younger Optics in March2003, which resulted in a settlement of a lawsuit brought by Vision-Easeagainst Younger Optics in May 2002. Weexpect to make continued investments in product and process design anddevelopment for all lens materials as well as leverage our core technologies todiversify into new and non-optical products.

 

*Competition.*  The ophthalmic lens industryis highly competitive. We competeprincipally on the basis of product offerings, product quality, customerservice and pricing. Vision-Ease is thethird largest ophthalmic lens manufacturer and distributor in North America,with a substantially smaller share of the global lens market. Our largest competitors are EssilorInternational and Sola International Inc., who have a combined share ofapproximately 60% of the ophthalmic lens sales in North America and 50% of theworld-wide lens market. Many of ourcompetitors, particularly Essilor and Sola, have greater financial resourcesthan Vision-Ease with which to fund research and development, marketing andcapital expenditures. These competitorsalso own and operate a substantial number of domestic vertically integratedwholesale laboratories. 

 

 Inaddition to direct competition with other manufacturers of eyeglass lenses, wecompete indirectly with manufacturers of contact lenses and providers ofmedical procedures for the correction of visual impairment. Contact lenses are not, however, perfectsubstitutes for lenses because of the difficulty of developing progressive orbifocal contact lenses for presbyopia. In addition, contact lens wearers also tend to own eyeglasses or sunwear. A number of companies have developed,or are developing, surgical equipment or implants used to correct refractiveerror, including myopia, hyperopia and astigmatism. These procedures are ineffective at correcting presbyopia, whichaffects the vast majority of people above the age of 45, and is a major causeof demand for Vision-Ease's progressive and other multi-focal lenses. There can be no assurance, however, thatcurrent medical procedures, or ones developed in the future, will notmaterially impact demand for our lenses.

 

*Raw Materials.*  Vision-Ease procures rawmaterials from multiple suppliers. There are multiple domestic and foreign sources of high-quality, opticalgrade polycarbonate resin. We obtainmost of our hard-resin plastic lenses from a single source in Southeast Asia. In addition, we source film used in theproduction of polarizing lenses from a single source in Japan. The importation of raw materials andproducts into and out of foreign territories is subject to certain traderestrictions imposed by foreign and United States trade regulations that couldresult in the disruption of supply. Although we do not anticipate any disruption to our supply of rawmaterials or lenses produced or sourced outside the U.S., the inability toobtain these supplies could have a material adverse effect on Vision-Ease'sresults of operations.

* *

*Backlog and Inventory.*  Due to theimportance in the ophthalmic lens industry of rapid turnaround time from orderto shipment, the backlog of sales orders is not material. We maintain a significant amount ofinventory, however, in order to satisfy the rapid response time and completeproduct offerings in glass, hard resin plastic and polycarbonate demanded byour customers.

 

*Seasonality.*  Earnings are generally lowerin the first and fourth quarter due to the seasonality of retail eyewear sales,the end product of our lenses.

* *

*Employees.*  As of March 21, 2003,Vision-Ease had approximately 1,586 employees in the United States, Europe andIndonesia. None of the employees in theUnited States are represented by labor unions. In compliance with local laws, production employees in Europe andIndonesia are represented by labor unions. Labor relations are considered to be good at all operations and therehave been no significant labor disputes in this group's history of operations.

** **

** **

Environmental

 

As part of our manufacturingprocesses in both the Buckbee-Mears and Optical Products groups, we usechemical substances that must be handled in accordance with federal, state,local and foreign environmental and safety laws and regulations. These processes also generate wastewater andwastes, some of which are classified as hazardous under applicableenvironmental laws and regulations. Thewastewater is treated using on-site wastewater treatment systems. We employ systems for either disposing ofwastes in accordance with applicable laws or regulations or recycling thechemicals we use through the manufacturing process. Environmental and other government agencies monitor the wastesand the wastewater treatment systems to ensure compliance with applicablestandards. Although we attempt tooperate within all applicable laws and follow sound environmental procedures,environmental regulations place responsibility for waste on the generator evenafter proper disposal. There can be noassurance, therefore, that we will not incur future liability for wastedisposal despite our best efforts. Asof March 21, 2003, we were involved in a total of seven (7) environmentalinvestigations and/or remedial actions in which final settlement had not beenreached, of which one (1) relates to a discontinued operation, four (4) relateto Buckbee-Mears operations and two (2) relate to Optical Products operations.

 

To the extent possible withthe amount of information available at this time, we have evaluated ourresponsibility for costs and related liability with respect to theseinvestigations/remedial actions, have recorded accruals for our estimatedliability in accordance with generally accepted accounting principles, and areof the opinion that our liability with respect to these matters should not havea material adverse effect on our financial position or the results of ouroperations. In arriving at thisconclusion, we have considered, among other things, historical costs to addressthese matters; the factors, such as volume and relative toxicity, ordinarilyapplied to allocated defense and remedial costs; the probable costs to be paidby the other potentially responsible parties; total projected remedial costs,if known; existing technology; and currently applicable laws andregulations. A portion of the costs andrelated liability for certain matters has been or will be covered by insuranceor third parties.

 

We estimate thatBuckbee-Mears incurred approximately $2.9 million in 2002, $5.3 million in 2001and $5.4 million in 2002 on expenditures, including capital expenditures,related to efforts to comply with applicable laws and regulations regulatingthe discharge of materials into the environment or otherwise relating to theprotection of the environment. Weanticipate that Buckbee-Mears will spend approximately $2.5 million in 2003 and$0.6 million in 2004 on capital expenditures for environmental controlfacilities and response costs. Vision-Ease incurred approximately $0.1 million in 2002, $0.2 million in2001 and $0.1 million in 2000 on expenditures, including capital expenditures,related to efforts to comply with applicable laws and regulations regulatingthe discharge of materials into the environment or otherwise relating to theprotection of the environment. Weestimate that Vision-Ease will make approximately $0.1 million in capitalexpenditures for environmental control facilities during each of 2003 and 2004.

** **

**(d)    *FinancialInformation About Geographic Areas.***

 

Financial information aboutour operations in different geographic areas for the three most recent fiscalyears appears on page 43.

 

**(e)   * Risk Factors***

 

*Potential Pension Contribution Obligation.*  OurGerman subsidiary has a noncontributory defined benefit pension plancovering substantially all of its employees. As allowed under German law, this plan is not funded. We pay benefits under this plan from revenuegenerated from the current operations of the German subsidiary. The accrued liability for this plancurrently is approximately $12 million. Given the strong competition in the aperture mask industry, there is arisk that current operations of the German subsidiary cannot cover the ongoingpension payments to retirees. If therewere an immediate funding obligation, the German subsidiary would not havesufficient funds to meet the funding requirement. This would have a material adverse impact on the subsidiary aswell as financial condition and results of operations of BMC on a consolidatedbasis.

 

 TheCompany also has a defined benefit pension plan remaining from our formerVision-Ease Ft. Lauderdale, Florida facility and another plan covering formerunion employees of our former Buckbee-Mears facility in St. Paul. Both of these plans currently are underfunded due to poor performance of the financial markets during the pastfew years. Assuming current marketconditions, we anticipate that we will be required to make a fundingcontribution to these plans in 2004. Ifthe value of the assets in these plans continues to decline, we may be requiredto make a contribution to the plans in 2003. If that occurs, we may not have sufficient cash on hand or availablefunds under our credit facility to make the contribution. A current year funding obligation likelyalso would result in a violation of the covenants under our creditfacility. Although we would attempt toobtain a waiver of a covenant violation and obtain additional financing ifnecessary, there can be no assurance that these efforts would be successful.

* *

*Loss of Home MarketAdvantage* . Buckbee-Mears is the only aperture maskmanufacturer in North America and one of only two independent maskmanufacturers in Europe. As a result,we have maintained a home market advantage over our Asian-based competitorsthrough advantages such as lower transportation costs, faster response times,availability on short notice to meet with our customers and lower costs throughthe avoidance of importation duties. This advantage has slowly diminished during the past few years as ourcustomers have closed plants in the U.S. and Europe and moved production toMexico, China and other countries with a lower cost base. During 2002, our customers closed two plantsin the U.S. and one again in 2003. Wehave developed a strategy to replace this lost business in our home markets,including efforts to grow sales in Asia, particularly in China. We have succeeded in developing new sales inAsia but not at the same rate as our sales have declined in our homemarkets. The rapid departure of ourremaining customers from our home markets or financial difficulties of one ofthese customers would have an adverse impact on our Buckbee-Mears group if weare not able to successfully replace that business with profitable business inother areas of the world.  

 

*Pricing and Margins.*  Many marketand economic factors, as well as internal operating performance, have adverselyaffected, and could continue to affect, our financial performance and projectedfuture results. Since both of our business groups supply components tomanufacturers of end products, imbalances in supplies and demand at all levelsof product distribution could have, and in some instances have had, asignificant impact on our pricing, and margins and inventory levels. Capacity expansions by aperture maskmanufacturers helped create this type of imbalance in the mask market a fewyears ago, which resulted in pricing pressures that continue to impact theBuckbee-Mears group's performance. Inaddition, margins are affected by the need to develop new technology. Ourability to meet the market demand for new products in a timely fashion requiresthe investment of resources, which, coupled with pricing pressures, decreaseour margins. To offset these pressures and costs, we have implemented severalcost reduction measures and are pursuing sales of higher margin products andhave taken major steps to reduce our fixed and variable costs in all of ouroperations, including the transfer of additional lens manufacturing to ourJakarta facility and yield improvement initiatives. These efforts may not be enough to improve revenues, operatingperformance or margins while remaining competitive in our markets. 

 

*Reliance on key customers.*  BothOptical Products and Buckbee-Mears rely on sales to key customers for a largeshare of sales. Although we strive todifferentiate our products and services from those of the competition, we maylose customers due to a number of reasons, including vertical integration ofcustomers into the operations of our competitors, our inability to meet pricingrequirements or performance standards and bankruptcy or insolvency of one ofthese customers. The loss of any ofthese key customers could have a material adverse effect on the results of ouroperating groups as well as our consolidated financial condition and results ofoperations. 

 

*Competition/New Product Development and Introduction.* Each of our operations faces competition from other companies inthe same technology as well as competition with alternative technologies. As a result, both Vision-Ease andBuckbee-Mears invest significantly in new product development. Vision-Ease has invested substantialresources towards new lens offerings, particularly in polycarbonate. These efforts have resulted in many newproducts that have experienced success to date, including our Tegra®  high-performance polycarbonate product line,Outlook&trdmk; progressive lenses, andSunRx® polarizing sunwear. Buckbee-Mears continues its efforts to develop new high-volume productopportunities such as its development efforts in stents. In addition, Buckbee-Mears will continue todedicate resources towards development of HDTV and multimedia masks. Our long-term success depends on our abilityto develop and bring to market these and other new products and technologies atcompetitive prices and quality in order to compete in each of the markets weserve. There are no assurances,however, that we will succeed in these efforts, that the products of acompetitor, for example Trivex, which competes with polycarbonate as a lensmaterial, will not become widely accepted in the industry at the cost ofpolycarbonate, or that alternative technologies, such as laser eye surgery andLCD televisions, will not replace our products entirely.  

* *

*Litigation.*  We are subject to the normalrisks of litigation and other proceedings 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 anyclaims will result in liability that could have a materially adverse effect onour financial condition and results of operations, there are no assurances thatwe will not incur such liability in the future given the uncertainty oflitigation.

 

*Sources of Supply.*  The primary raw material usedto produce masks is steel. The primaryraw materials used to manufacture optical products are polycarbonate resin,glass blanks, including photochromic glass, polarizing film and plasticresins. Significant changes in themarkets for these materials, including pricing and availability, could have amaterial adverse impact on our financial results. The main ingredient in plastic resins is petroleum. It is unknown what effect, if any, the warin Iraq will have on the availability and price of oil. A prolonged military engagement or damage tooil reserves could put upward pressure on petroleum prices as well as affectsupply. In addition, Vision-Ease relieson a single source manufacturer for its polarizing film and photochromicglass. We have negotiated agreementsfor these materials, including an agreement for ongoing supply of polarizingfilm with the manufacturer, as well a backup supply of the film through rights tofilm of another customer of the manufacturer. There is no assurance, however, that these agreements will providesufficient film availability to meet future production requirements or that themanufacturer will not experience production problems that stop the flow offilm. In addition, Optical Productsobtains the majority of its hard-resin plastic lenses from a foreign supplyarrangement and all of its glass lenses and a portion of its polycarbonatelenses from its Jakarta operations. Factors affecting the supply of these products, in particular politicalinstability in Indonesia, as well as any interruption of the supply of rawmaterials to our other operations, could have a material adverse impact on ourresults of operations. 

 

*Foreign Currency.*  We transact business incurrencies other than U.S. dollars. Theprimary currencies used include the euro, Japanese yen, British pound, Canadiandollar, Hungarian forint, Indonesian rupiah and South Korean won. Our primary competitors in the mask marketare located in Asia. Changes in thecurrency exchange rates between the U.S. dollar and the euro compared to Asiancurrencies affect Mask Operations' pricing competitiveness. Although we take steps to reduce this riskthrough cross-currency swaps and other hedging transactions, we are subject tothe risk of adverse fluctuations in currency exchange rates, which may result,and have resulted, in pricing pressures and reductions in profitability due tocurrency conversion or translation.

 

*International Markets.*  Buckbee-Mears has a manufacturing facility locatedin Mullheim, Germany and an aperture mask inspection facility in Tatabanya,Hungary. Vision-Ease has optical lens laboratory operations in France, a supplyarrangement with hard-resin plastic lens manufacturer in Southeast Asia, and ajoint venture in Indonesia for glass and polycarbonate lens manufacturing. In addition, we have many internationalcustomers and are dedicating significant resources to increase business withinternational customers at all of our operations. Our international operations and sales could be adverselyaffected by the war in Iraq, governmental regulations, political instability,economic changes or instability and competitive conditions in other countriesin which, and with which, we conduct business. Economic difficulty has been experienced in Asia during the recent pastand globally during the past few years, which serves as an example ofinternational conditions that can adversely affect financial performance. Future downturns in the global economy or incertain areas of the world could affect our operations without advancewarning. Further, there are noassurances that our efforts to grow our business in international markets, suchas our efforts to penetrate sales of polycarbonate lenses in Europe throughlaboratory operations, will be successful.

 

*NYSE Continued Listing*. In August 2002, we received a notice offailure to comply with the continued listing requirements of the New York StockExchange relating to the price of BMC common stock dropping below $1.00 for 30consecutive trading days. We broughtthe stock in compliance with the $1.00 minimum share price requirement withinthe required six-month period. There isno assurance, however, that we will remain within all of the listingrequirements. There are a number ofongoing requirements, including minimum total shareholder equity and minimumaggregate market value requirements that could be triggered if our performanceslips or the economy fails to improve. These listing requirements are more difficult to correct, which couldthen result in the delisting of BMC common stock from the NYSE. A delisting could impact the market for andvalue of shares of BMC common stock.

 

*Manufacturing Yields/Customer Service Levels/Fill Rates. * During thefirst half of 2002, Vision-Ease experienced production problems at its Ramseyfacility that coincided with the shutdown of its Azusa production facility andthe transfer of production from the Azusa plant to Vision-Ease's facilities inRamsey and Jakarta. Customer service,fill rates and sales suffered as a result. Vision-Ease was able to improve its performance and return to historicfill rates. Sales are increasing inresponse to Vision-Ease's efforts to improve customer service and due tolimited ability to source certain products from other manufacturers. If Vision-Ease were to experience a similarsituation again, the impact could have a material impact on the long-termperformance of the group as customers would be less likely to view Vision-Easeas a reliable source of products.

 

*Bank Covenant Compliance.* Our senior credit facility requirescompliance with a number of financial and non-financial covenants, including,but not limited to, a maximum debt to EBITDA ratio, a minimum EBITDA tointerest expense ratio, a minimum amount of net worth, and a maximum level ofcapital expenditures. In addition,there are provisions in the current credit agreement that require significantstep-downs of certain of these covenant during fiscal year 2003. Given recent financial performance anddepending on future business conditions, there is no assurance that we willsuccessfully maintain these covenants in the future. In the event of a covenant default, we would make every effort tosecure a waiver from the bank group and/or seek to amend and restate the creditfacility to modify the existing covenant levels. A covenant default, if not cured, would have a material impact onour ability to borrow additional funds.

 

*Liquidity.*  In September 2002, thecompany, with its lenders, amended and restated its senior credit facilitiesand extended the termination date of the facilities to May 2004. The amendment and restatement of the creditfacilities also included a monthly borrowing base calculation (which haslimited, and may limit in the future, the Company's ability to borrow the fullamount of the revolving portion of the facilities) and scheduled quarterly termloan amortization payments of $2.5 million in September and December 2002, and$3.5 million payable quarterly beginning in March 2003. Althoughwe have made significant reductions in debt levels, the outstanding debt canfluctuate significantly during a quarter. As aresult, the Company's liquidity position has been constrained and it ispossible that our future funding requirements may exceed the credit availableunder the revolving facilities. Although we implement working capital initiatives as necessary to managecash flow tightly, and are in the process of evaluating alternative longer-termfinancing sources, there is no assurance that these efforts will be sufficientto meet ongoing needs, or that we will be successful in obtaining alternativefinancing arrangements. Continuedweakness in the economy or the markets for our products could intensify thestrain on current liquidity.

 

**Item 2. Properties**

 

The following table setsforth certain information regarding our principal production facilities:

 

 

Location

 

 

Principal  Use

Approximate Square

Feet  of Space

  Owned:

 

 

 

  Mullheim, Germany

   Buckbee-Mears

   - Manufacturing of aperture masks and precision photo-etched metal  and electroformed products

 

         170,000

 

  Cortland, NY

   Buckbee-Mears

   - Manufacturing of aperture masks and precision photo-etched metal  and electroformed products

 

         363,000

 

  Tatabanya, Hungary

   Buckbee-Mears

   -  Inspection of aperture masks

 

          45,000

 

  Ramsey, MN

  Optical Products

   - Manufacturing of polycarbonate lenses, centralized distribution and  research and development

 

         150,000

 

  Jakarta, Indonesia

   Optical  Products

   -  Manufacturing of glass and polycarbonate lenses

 

          66,000

 

  Azusa, CA

   Optical  Products

   -  Former Manufacturing Facility (to be sold)

 

         120,000

  Leased:

 

 

 

  St. Paul, MN

   Buckbee-Mears

  - Manufacturing of precision photo-etched metal and electroformed parts

    

          118,405

 

 

 

 

We lease approximately14,000 square feet in suburban Minneapolis, Minnesota for the corporateheadquarters of both BMC and the Optical Products group. We lease approximately 82,000 square feetfor customer service, administration and distribution in St. Cloud, Minnesotapursuant to a lease that expires in 2005. The plant lease in St. Paul expires in February 2004. We are negotiating with the landlord of theSt. Paul building to obtain an early release. During 2002, Vision-Ease exercised an option to purchase the property atits former operations in Azusa for $1.00. We have listed the property for sale and have retained a broker toassist with the sale. The facility inJakarta is owned by P.T. Vision-Ease Asia, of which Vision-Ease Lens, Inc. owns85% and our local partner owns 15%. Webelieve our existing facilities are sufficient to meet our current andforeseeable production and other needs.

 

In addition to theproperties listed above, we lease space for a distribution center outsideLondon, England, a lens processing laboratory in Brou, France and other smallerdomestic and international administrative offices. For additional information concerning our leased properties, seeNote 8 to Notes to Consolidated Financial Statements on page 35.

** **

**Item 3. Legal Proceedings**

 

With regard to certainenvironmental and other legal matters, see Item 1(c) "NarrativeDescription of Business - "Buckbee-Mears - Environmental" and "OpticalProducts - Environmental" and Item 7 "Management's Discussion andAnalysis of Financial Condition and Results of Operations."

 

Other than as disclosed inthe other referenced sections of this report, there are no material pending orthreatened legal, governmental, administrative or other proceedings to which weare a party or of which any of our property is subject.

 

**Item 4. Submission of Mattersto a Vote of Security Holders**

 

No matter was submitted to avote of security holders during the fourth quarter of the fiscal year coveredby the report.

 

**Part II**

** **

**Item 5. Market for Registrant'sCommon Stock and Related Stockholder Matters**

 

BMC's common stock is listedon the New York Stock Exchange under the ticker symbol "BMM". The table below sets forth the high and lowreported sales prices of BMC stock by quarter for the years 2002 and 2001. At March 21, 2003, there were approximately976 stockholders of record.

 

 

 

 

 

  Price

 

 

  Dividends

  Per Share

 

   

  High

 

   

  Low

**2002**

 

 

 

 

 

 

 

 

**First Quarter**

 

**$**

**.0025**

**$**

 

**2.68**

**$**

 

**1.44**

**Second Quarter**

 

**.0025**

 

 

**1.81**

 

 

**0.96**

**Third Quarter**

 

**.0000**

 

 

**1.30**

 

 

**0.41**

**Fourth Quarter**

 

 

**.0000**

 

 

**1.90**

 

 

**1.00**

  2001

 

 

 

 

 

 

 

 

  First Quarter

 

  $

  .0150

  $

 

  5.85

  $

 

  5.00

  Second Quarter

 

  .0150

 

 

  6.28

 

 

  4.40

  Third Quarter

 

  .0150

 

 

  5.25

 

 

  2.00

  Fourth Quarter

 

  .0025

 

 

  3.05

 

 

  1.69

 

BMC suspended dividends inthe third quarter of 2002.

** **

****

**Item 6. Selected Financial Data**

  

 Thefollowing selected financial data is derived from the consolidated financialstatements of the Company and should be read in conjunction with theconsolidated financial statements, related notes, and other financialinformation included herein.

 

***HISTORICAL FINANCIAL SUMM*ARY**

*(inthousands, except per share amounts, percentages and ratios)*

 
Years Ended  December 31
 

**2002**

 

 

  2001

 

 

  2000

 

 

  1999

 

 

  1998

 
S*ummary of Operations*
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Revenues

**$**

**248,098**

 

  $

  302,296

 

  $

  354,485

 

  $

  353,854

 

  $

  335,138

 

  Cost of products sold

 

**226,414**

 

 

  276,999

 

 

  300,795

 

 

  305,592

 

 

  297,995

 

  Gross margin

 

**21,684**

 

 

  25,297

 

 

  53,690

 

 

  48,262

 

 

  37,143

 

  Selling and administrative expenses

 

**19,048**

 

 

  21,948

 

 

  22,552

 

 

  23,352

 

 

  20,675

 

  Non-recurring charges

 

**2,800**

 

 

  6,218

 

 

  --

 

 

  --

 

 

  --

 

  Impairment of long-lived assets

 

**--**

 

 

  --

 

 

  --

 

 

  --

 

 

  42,800

 

  Acquired in-process research and development

 

** **

**--**

 

 

   

  --

 

 

   

  --

 

 

   

  --

 

 

   

  9,500

 

  Earnings (loss) before interest, other income  and income taxes

 

** **

**(164**

** **

**)**

 

   

  (2,869

   

  )

 

   

  31,138

   

 

 

   

  24,910

   

 

 

   

  (35,832

   

  )

  Interest expense, net

 

**(10,347**

**)**

 

  (11,244

  )

 

  (12,833

  )

 

  (13,099

  )

 

  (13,374

   )

  Other income  

 

**1,712**

 

 

  883

 

 

  2,838

 

 

  1,036

 

 

  522

 

  Earnings (loss) before income taxes

 

**(8,799**

**)**

 

  (13,230

  )

 

  21,143

 

 

  12,847

 

 

  (48,684

  )

  Income tax expense (benefit)

 

**384**

 

 

  9,370

 

 

  6,243

 

 

  5,023

 

 

  (18,049

  )

  Change in accounting principle

 

**(52,704**

**)**

 

  --

 

 

  --

 

 

  --

 

 

  --

 

  Net earnings (loss)

**$**

**(61,887**

**)**

  $

  (22,600

  )

  $

  14,900

 

  $

  7,824

 

  $

  (30,635

  )
 *Earnings (Loss) Per Share*
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

**$**

**(2.30**

**)**

  $

  (0.83

  )

  $

  0.54

 

  $

  0.29

 

  $

  (1.13

  )

  Diluted

 

**(2.30**

**)**

 

  (0.83

  )

 

  0.54

 

 

  0.28

 

 

  (1.13

  )

***Number of shares  included in per share computation***

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

**26,963**

 

 

  27,205

 

 

  27,396

 

 

  27,299

 

 

  27,014

 

  Diluted

 

**26,963**

 

 

  27,205

 

 

  27,623

 

 

  27,710

 

 

  27,014

 
 *Cash Flow*
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cash dividends declared per share

**$**

**0.005**

 

  $

  0.0475

 

  $

  0.06

 

  $

  0.06

 

  $

  0.06

 

  Depreciation and amortization expense

 

**20,808**

 

 

  23,807

 

 

  23,990

 

 

  23,280

 

 

  21,014

 

  Net cash provided by operating activities

 

**31,663**

 

 

  17,429

 

 

  36,785

 

 

  33,485

 

 

  26,948

 

  Capital expenditures

 

**8,213**

 

 

  14,134

 

 

  11,929

 

 

  13,157

 

 

  21,427

 
Financial Position
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Working capital

**$**

**44,140**

 

  $

  70,741

 

  $

  95,322

 

  $

  88,833

 

  $

  94,971

 

  Property, plant and equipment, net

 

**121,334**

 

 

  131,541

 

 

  139,499

 

 

  151,238

 

 

  162,594

 

  Total assets

 

**247,359**

 

 

  331,746

 

 

  373,804

 

 

  383,553

 

 

  399,465

 

  Total debt

 

**112,286**

 

 

  142,168

 

 

  145,016

 

 

  168,262

 

 

  189,195

 

  Stockholders' equity

 

**59,479**

 

 

  116,511

 

 

  146,798

 

 

  136,422

 

 

  133,257

 
S*tatistics and Ratios*
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Current ratio

 

**1.7**

 

 

  2.4

 

 

  2.5

 

 

  2.5

 

 

  2.7

 

  Total debt to equity ratio

 

**1.9**

 

 

  1.2

 

 

  1.0

 

 

  1.2

 

 

  1.4

 

  Earnings (loss) before interest, other

  income and income taxes, as a percentage of  revenues

 

** **

** **

**(0.1**

** **

** **

**)%**

 

   

   

  (0.9

   

   

  )%

 

   

   

  8.8

   

   

  %

 

   

   

  7.0

   

   

  %

 

   

   

  (10.7

   

   

  )%

  Return on average equity

 

**(70.3**

**)%**

 

  (17.2

  )%

 

  10.5

  %

 

  5.8

  %

 

  (19.6

  )%

  Book value per share

**$**

**2.20**

 

  $

  4.33

 

  $

  5.36

 

  $

  4.98

 

  $

  4.90

 

** **

 

****

**  SelectedQuarterly Data**

 (Unaudited, in thousands, except per share amounts)

 

 

 

  First  Quarter

 

 

  Second  Quarter

 

 

  Third  Quarter

 

 

  Fourth  Quarter

 

 

  Total  Year

 

***2002***

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Revenues

  $

  68,626

 

  $

  67,164

 

  $

  57,390

 

  $

  54,918

 

  $

  248,098

 

  Gross margin

 

  5,293

 

 

  5,589

 

 

  5,214

 

 

  5,588

 

 

  21,684

 

  Net loss

 

  (54,885

  )

 

  (2,302

  )

 

  (4,185

  )

 

  (515

  )

 

  (61,887

  )

  Loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Before accounting change

 

  (0.08

  )

 

  (0.09

  )

 

  (0.16

  )

 

  (0.02

  )

 

  (0.34

  )

    Basic  and diluted loss per share

 

  (2.04

  )

 

  (0.09

  )

 

  (0.16

  )

 

  (0.02

  )

 

  (2.30

  )

  Number of shares included in computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Basic  and Diluted

 

  26,912

 

 

  26,920

 

 

  26,951

 

 

  26,981

 

 

  26,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

***2001***

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Revenues

  $

  85,760

 

  $

  78,720

 

  $

  73,339

 

  $

  64,477

 

  $

  302,296

 

  Gross margin

 

  11,456

 

 

  11,957

 

 

  2,553

 

 

  (669

  )

 

  25,297

 

  Net earnings (loss)

 

  2,046

 

 

  (7,451

  )

 

  (4,146

  )

 

  (13,049

  )

 

  (22,600

  )

  Earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Basic

 

  0.07

 

 

  (0.27

  )

 

  (0.15

  )

 

  (0.48

  )

 

  (0.83

  )

     Diluted

 

  0.07

 

 

  (0.27

  )

 

  (0.15

  )

 

  (0.48

  )

 

  (0.83

  )

  Number of shares included in computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Basic

 

  27,398

 

 

  27,393

 

 

  27,101

 

 

  26,933

 

 

  27,205

 

     Diluted

 

  27,633

 

 

  27,393

 

 

  27,101

 

 

  26,933

 

 

  27,205

 

 

 

**Item 7. Management's Discussionand Analysis of Financial Condition and Results of Operations**

 

This discussion and analysisshould be read in conjunction with the Consolidated Financial Statements andrelated footnotes included elsewhere in this report.

 

**Summary**

** **

 BMC Industries, Inc. has two business segments;Buckbee-Mears, comprised of Mask Operations and Non-Mask Operations, andOptical Products (operating under the Vision-Ease Lens trade name). Buckbee-Mears is a leading manufacturer ofhigh-volume precision products for the entertainment, high-tech, medical andfiltration industries. Optical Productsis a leading designer, manufacturer and distributor of polycarbonate, glass andplastic eyewear lenses. 

  

 Net revenues of $248.1 million for 2002 represent adecrease of 18% from the $302.3 million in 2001. The decline in revenue during 2002 was attributable to decreasesin both divisions. Buckbee-Mears groupsales decreased 19% in 2002 due principally to the Company's decision to exitthe monitor mask business and the sale of the Company's non-mask sheet etchingbusiness. Optical Products revenuesdecreased 16% due principally to manufacturing difficulties experienced earlyin the year, which impacted the Company's ability to fill customer's orders andconsequently negatively impacted sales as well as discontinuation of itspurchased non-prescription sun lens sales.

  

 Net loss and diluted loss per share for 2002 was$61.9 million and $2.30, respectively, compared to net loss and diluted lossper share of $22.6 million and $0.83, respectively, for 2001. 

**CriticalAccounting Policies and Estimates**

** **

 The preparation of financial statements inaccordance with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. On an on-going basis,management evaluates its estimates and adjustments, including those related tomerchandise returns, bad debts, inventories, intangible assets, income taxes,restructuring costs, retirement benefits, and contingencies andlitigation. Management bases itsestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual results may differ from theseestimates.

  

 Management believes the following criticalaccounting policies, among others, affect its more significant judgments andestimates used in the preparation of its consolidated financialstatements. Management has discussedthe development and selection of these critical accounting policies with theaudit committee of the board of directors.

  

***Allowance for Doubtful Accounts***

* *

 The Company maintains an allowance for doubtfulaccounts for estimated losses resulting from the inability of its customers tomake required payments. If thefinancial condition of the Company's customers were to deteriorate, resultingin an impairment of their ability to make payments, additional allowances maybe required. The allowance for doubtfulaccounts was $2.1 million and $2.4 million at December 31, 2002 and 2001,respectively. 

  

***Inventory***

  

 The Company reduces the stated value of itsinventory for estimated obsolescence or impairment in an amount equal to thedifference between the cost of inventory and the estimated market value basedupon assumptions about future demand, selling prices and marketconditions. If actual future demand ormarket conditions are less favorable than those projected by management,additional reductions in stated value may be required. Significant unanticipated changes in demandor technological development could have a significant impact on the futurevalue of inventory and reported operating results.

  

***Goodwill and Intangible Impairment***

  

 In assessing the recoverability of the Company'sgoodwill and other intangible assets the Company must make assumptionsregarding estimated future cash flows and other factors to determine the fairvalue of the respective assets. Ifthese estimates or their related assumptions change in the future, the Companymay be required to record impairment charges for these assets not previouslyrecorded. Effective January 1, 2002,the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,*Goodwill and Other Intangible Assets*. During the first quarter 2002, the Company completed its transitionalimpairment test using a discounted cash flow model required by SFAS No. 142 anddetermined that the goodwill in its Optical Products segment was impaired. As such, the Company recorded as acumulative effect of change in accounting principle a write-off of its goodwillbalance in the amount of $52,704 on which the Company recognized no taxbenefit.  Additional discussion isincluded in note 3 of the consolidated financial statements.

 

***Income Taxes***

  

 In determining the carrying value of the Company'snet deferred tax assets, the Company must assess the likelihood of sufficientfuture taxable income in certain tax jurisdictions, based on estimates andassumptions to realize the benefit of these assets. If these estimates and related assumptions change in the future,the Company may be required to record additional valuation allowances againstits deferred tax assets, resulting in additional income tax expense in the Company's consolidated statement of operations. Management evaluates the realizability of the deferred tax assetsquarterly and assesses the need for additional valuation allowances orreduction of existing allowances quarterly. 

** **

***Retirement Benefits***

 

 Employee pension costs and obligations are dependenton assumptions used by actuaries in calculating estimated future benefits to bepaid. These assumptions may includediscount rates, long-term return on plan assets, mortality rates and otherfactors. Actual results that may differfrom the assumptions used are accumulated and amortized over future periodsand, therefore can affect our recognized expense and recorded obligation inthose future periods. While managementbelieves the assumptions used are appropriate, significant differences inactual experience or significant changes in assumptions would affect pensioncosts and obligations. Additionaldiscussion on employee benefit plans is included in note 10 of the consolidatedfinancial statements.

  

***Contingent Liabilities***

 

 Reserves are established for estimated losscontingencies when it is determined that a loss is probable and the amount ofthe loss can be reasonably estimated. Reserves for contingent liabilities are based upon management'sassumptions and estimates, as well as advice of legal counsel or other thirdparties regarding the probable outcome of the matter.  If circumstances change, different facts orinformation become known or the actual outcome differs from the assumptions,revision to the estimated reserves would be recorded and reflected in thestatement of operations in the period in which these changes occur. 

** **

**Restructuring Initiatives**

  

 Beginning in the fourth quarter 2001 and continuinginto 2002, the Company executed significant restructuring initiatives in boththe Buckbee-Mears and Optical Products business groups. 

  

 The Buckbee-Mears group's Mask Operations exited thecomputer monitor segment of the aperture mask business and a portion ofNon-mask Operations was sold to a third party. The remaining non-mask operations in St. Paul, Minnesota were consolidatedinto its other facilities in Cortland, New York and Mullheim, Germany. These actions have resulted in staffingreductions at all of the group's manufacturing sites with the ceasing ofoperations at the St. Paul facility in January 2003. The Company is currently undergoing decommissioning and siterestoration at that facility, which should be completed by the end of 2003.

  

 During 2002, the Optical Products group discontinuedcertain Vision-Ease product development activities, discontinued or phased-outcertain product categories and closed its production facility in Azusa,California and consolidated the Optical Products group's operations into itstwo remaining facilities. Additionalpolycarbonate lens manufacturing capacity was transferred to the Jakarta,Indonesia plant and polarized lens manufacturing was consolidated in theRamsey, Minnesota facility. In firstquarter 2002, the Company recorded additional restructuring expenses of $2.8million related to the closure of the Azusa facility.

  

 

**Results ofOperations**

  

 The following discussion and analysis examines theoperating results of the Company's two business segments. As used herein, "operating income"refers to operating income before non-recurring charges, administrative expenseand interest, as shown in Note 12 to the Consolidated Financial Statements -Segment Information.

  

  

**Revenues andOperating Profit**

  

***Buckbee-Mears***

*** ***

*Comparison of 2002 and 2001.*  Buckbee-Mears group revenues were $138.0 million for 2002, a decreaseof $32.9 million or 19% from 2001. Sales of monitor masks decreased $28.2million from 2001 due to the Company's exit of this segment of the businessduring 2002. Sales of entertainmentmasks were $1.1 million lower than 2001 due to declining prices in this marketwhich were partially offset by increased volume. The remainder of the sales decline was due to the sale of theCompany's non-mask sheet etching business in the first half of 2002.

  

 Operating income for Buckbee-Mears was $9.1 millionin 2002, an increase of approximately $4.0 million from the prior year. The 2001 operating income was reduced byrestructuring related inventory write-offs of $2.4 million and other assetwrite-downs of $1.4 million. Excludingthese restructuring related charges, operating income for 2002 was consistentwith 2001. Operating margin in 2002 was7% of revenues compared to 3% in 2001. Excluding the restructuring related charges in 2001, operating marginwas 5% of revenues. The increase inmargin in 2002 is a reflection of the Company's restructuring and costreduction efforts at the end of 2001 and during 2002.

** **

*Comparison of 2001 and 2000.*  Buckbee-Mears group revenues were $170.9 million for 2001, a decreaseof $44.0 million or 20% from 2000. Sales of entertainment masks decreased 15%from sales in 2000 and computer monitor mask sales decreased 30% compared to2000. Sales of entertainment masks wereimpacted by a decline in demand beginning in the first half of the year,especially in the NAFTA market, as well as price reductions during the lastpart of 2001. Sales of monitor maskswere negatively impacted by year-over-year price reductions and contraction indemand for computer products. Non-MaskOperations revenue declined 34% from 2000 as the Company's customers reacted toslow demand in the semiconductor, automotive and telecommunications segments.

  

 Operating profit for Buckbee-Mears was $5.1 millionfor 2001, before non-recurring charges of $5.0 million, a decrease of $20.0million from 2000. The operating marginwas 3% of revenues for 2001 compared to 12% for 2000. The decrease in operating profit was primarily due to reduceddemand for television products, which accelerated in the second quarter of theyear. Pricing pressures in both thecomputer mask and television mask markets and low plant utilization also hadnegative impacts on operating profits and margins. The Company began taking action in the second quarter of 2001 toreduce costs, first by bringing down one line in Cortland, N.Y. during secondquarter and then by extending the annual third quarter plant shutdown by a fewweeks. Operating profit was alsoimpacted by costs incurred as a result of restructuring initiatives commencingin the fourth quarter. Inventorywrite-offs of $2.6 million and other asset write-downs of $1.4 million wererecorded as a result of the decision to exit the computer monitor mask businessand to sell or consolidate into other facilities operations currently locatedin St. Paul, Minnesota. The effect offoreign currency translation had a nominal impact on the group's operating profit.

  

*** ***

*** ***

***Optical Products***

*** ***

*Comparison of2002 and 2001. *Optical Products grouprevenues were $110.1 million in 2002, a decrease of $21.3 million or 16% from2001. Sales in 2002 were affected byexiting some low margin business, manufacturing difficulties experienced in thefirst part of the year and greater than expected service disruption from thetransfer of production from Azusa to the manufacturing facilities in Ramsey,Minnesota and Jakarta, Indonesia. Thesemanufacturing issues hampered the Company's ability to fully meet customerdemand. Sales in all product categoriesdecreased from 2001 levels. Polycarbonate sales decreased 7%, plastic sales decreased 35% and glasssales decreased 14% from 2001 sales levels.

  

 Operating loss for Optical Products was $0.3 millionfor 2002, excluding non-recurring charges of $2.8 million, compared to anoperating profit of $3.3 million in 2001. Operating income in 2001 was impacted by costs incurred as a result ofrestructuring initiatives commencing in the fourth quarter of 2001. Inventory write-offs of $1.0 million andother asset write-downs of $1.0 million were recorded in 2001 for discounted orphased-out product categories. The decreasein operating income in 2002 was due to the decrease in sales of the highermargin polycarbonate products and due to manufacturing difficulties experiencedin the early part of the year. Theoperating income was also negatively impacted by the transfer of and initialramp up of production from the Azusa, California facility to Ramsey, Minnesotaand Jakarta, Indonesia. The Companystopped production at the Azusa plant in second quarter 2002, closed itsresidual marketing and distribution functions in fourth quarter and iscurrently in the process of marketing these facilities for sale.

*** ***

*Comparison of 2001 and 2000. *Optical Products grouprevenues were $131.4 million in 2001, a decrease of $8.2 million or 6% from2000. The decrease was due to softretail demand and capacity constraints in premium product categories in thefirst part of the year and declines in sales in the last part of the yearfollowing the events of September 11, 2001. Sales of high end products decreased 5% from 2000. Much of the decrease was attributable todeclines in sales of mainline polycarbonate lenses, SunSport® non-ophthalmiclenses and Tegra®-coated polycarbonatelenses. Strong sales in the SunRx®premium polarized lenses (increasing 15% over 2000) offset some of the salesreductions in other product lines. Sales of glass lenses continue to decline year over year.

  

 Operating profit of Optical Products was $3.3million for 2001, excluding non-recurring charges of $1.2 million, a decreaseof $8.1 million or 71% from 2000. Thedecrease in margin was due in part to reductions in sales of higher marginpremium products and higher production costs related to low plant utilization. Operating profit was also impacted by costsincurred as a result of restructuring initiatives commencing in the fourthquarter of 2001. Inventory write-offsof $1.0 million and other asset write-downs of $1.0 million were recorded in2001 for discounted or phased-out product categories. 

** **

**SellingExpenses**

  

 Selling expenses were $12.9 million, $16.9 millionand $17.2 million or 5.2%, 5.6% and 4.8% of revenues for 2002, 2001 and 2000,respectively. The decrease in 2002 is due to lower sales in the Optical Groupwhich reduced costs which are directly linked to sales volumes. Selling expenses in Buckbee-Mears Group'snon-mask operations were also lower due to the restructuring initiatives andsale of the sheet etching business in 2002. The decrease in 2001 was due primarily to lower expenses in theBuckbee-Mears segment as a result of cost reduction efforts, includingpersonnel reductions, initiated mid-year when sales demand began todecline. The Optical Products group'sselling expenses for 2001 were even with 2000 expenses.

** **

**Administrative Expenses**

** **

Administrative expenses were$6.1 million, $5.0 million and $5.4 million or 2.5%, 1.7% and 1.5% of revenuesfor 2002, 2001 and 2000, respectively. The increase in administrative expenses in 2002 is due to costsassociated with the recruiting and hiring of a new CEO, costs related to thesearch for new board members and increased legal and consulting expensesrelated primarily to amendment of the Company's credit agreement. The increase in expenses as a percentage ofsales in 2002 is primarily due to the decrease in sales from the previousyears. The decrease in administrativeexpenses from 2000 to 2001 was due to performance-based employee incentivebenefits tied to the Company's earnings, which were incurred in 2000 but not in2001.

  

**InterestExpense (Income)**

** **

 Interest expense was $10.6 million, $11.8 millionand $13.1 million for 2002, 2001 and 2000, respectively. Interest income was $0.2 million, $0.5million and $0.3 million for 2002, 2001 and 2000, respectively. Interest expense decreased in both 2002 andin 2001 due to lower overall debt levels and LIBOR rates in those years. The impact from lower debt levels and lowerLIBOR rates was offset during 2002 by increased credit spreads and fees as aresult of amendments to the Company's senior credit agreement.

** **

**Income Taxes**

  

 The Company's effective tax rate, exclusive ofdeferred tax asset valuation reserve adjustments, was 23%, 39% and 30% in 2002,2001 and 2000, respectively. The changein the tax rates was primarily due to the Company's domestic and foreignearnings mix.

  

 Realization of the Company's net deferred tax assetis dependent on future taxable income. During 2002, the Company increased its deferred tax asset valuationreserve from $14.5 million to $28.9 million, the effect of which increasedincome tax expense by $14.4 million. The need for the valuation reserve was driven by projections for futureU.S. taxable income, which impacts the potential for realizing the benefits ofthe Company's carryovers. The statutorytime period for using the carryovers on its income tax returns extends beyondthe period the Company used to assess impairment for accounting purposes. If, at some time in the future, it isdetermined that all or a portion of the existing carryovers may be realized,the valuation reserve will be reduced accordingly.

** **

**Seasonality**

  

 The Company's earnings have been generally lower inthe first and third quarters due to maintenance shutdowns at the Company's maskproduction facilities during those periods. Also, the seasonality of end products in several markets (televisions,computer monitors and ophthalmic lenses) affects the Company's annual earningspattern.

** **

**Dividends**

  

 In August 2002, the Company suspended payment ofcash dividends on its common stock. Cash dividends of one-quarter cent per share were declared in the firstand second quarters of 2002. 

  

**Environmental**

 

The Company's operations aresubject to federal, state, local and foreign environmental laws andregulations. Under the ComprehensiveEnvironmental Response Compensation and Liability Act of 1980, as amended(CERCLA or Superfund), the Company has been designated as a potentiallyresponsible party (PRP) by the United States Environmental Protection Agencywith respect to certain waste sites at which the Company may have had direct orindirect involvement. Similardesignations have been made by some state environmental agencies under applicablestate environmental laws. Suchdesignations are made regardless of the extent of the Company'sinvolvement. Such designations havebeen made by the filing of a complaint, the issuance of an administrativedirective or order, or the issuance of a notice or demand letter. These actions are in various stages ofadministrative or judicial proceedings. They include demands for recovery of past governmental costs and/or for futureinvestigative or remedial actions. Inmany cases, the dollar amount of site costs or the Company's portion of sitecosts is not specified. In most cases,however, the Company has been designated a de minimis party and claims havebeen asserted against a number of other entities for the same recovery or otherrelief as was asserted against the Company. The Company is currently participating in eight environmental and/orremedial actions in which final settlement has not been reached.

  

 To the extent possible, and with the amount ofinformation available at this time, the Company has evaluated itsresponsibility for costs and related liability with respect to the aboveinvestigations and/or remedial actions, and has recorded reserves for suchliability in accordance with generally accepted accounting principles. It is the Company's opinion that the Company'sliability with respect to these matters should not have a material adverseeffect on the financial position or the results of operations of theCompany. In arriving at thisconclusion, the Company has considered, among other things, the payments thathave been made in the past; the factors, such as volume and relative toxicity,ordinarily applied to allocated defense and remedial costs; the probable coststo be paid by the other potentially responsible parties; total projectedremedial costs, to the extent known; existing technology; and currently enactedlaws and regulations. A portion of thecosts and related liability for these matters has been or will be covered byinsurance or third parties.

  

 In September 2002, the Company reached an agreementwith the Environmental Protection Agency regarding the Resource ConservationRecovery Act. The settlement relatesprimarily to past housekeeping practices at the Company's St. Paulfacility. Under the settlementagreement, the Company will make four equal payments totaling $0.3 million overthe next two years. The settlement wasexpensed in third quarter 2002 and the first installment was made in fourthquarter. An accrued liability of $0.2million is included in accrued expenses on the Company's consolidated balancesheet at December 31, 2002.

  

**FinancialPosition and Liquidity**

** **

Working capital was $44.1million and the current ratio was 1.7 at December 31, 2002, compared to $70.7million and a current ratio of 2.4 at December 31, 2001. Accounts receivable balances decreased $7.4million compared to 2001 due primarily to lower sales in both segments from theexit of the computer monitor mask business, the sale of the Company's non-masksheet etching business and the discontinuation of its purchasednon-prescription sun lens sales. Inventory levels were lower than 2001 due to initiatives to manage rawmaterials purchases reducing the inventory balances on hand. Finished goods balances were also lower inthe Buckbee-Mears segment.  Accountspayable and other liabilities increased primarily due to extended payment termswith certain vendors in 2002.

  

 At December 31, 2002, the Company had $112.3 millionin debt and the ratio of total debt to total equity was 1.9. The $29.9 million reduction in debt was dueprimarily to management of and reduction in the Company's working capital in2002. At December 31, 2001, the Companyhad $142.2 million in debt and the ratio of total debt to total equity was 1.2.

  

In 2002, the Companygenerated $31.7 million of cash flow from operating activities and $6.3 millionfrom sales of assets, including certain property and equipment. The cash generated from operating activitiesand asset sales was used primarily for debt reduction of $29.9 million and property,plant and equipment additions totaling $8.2 million. In 2001, the Company generated $17.4 million of cash flow fromoperating activities. The cashgenerated from operating activities was used primarily for debt reductiontotaling $2.8 million and property, plant and equipment additions totaling$14.1 million. In 2000, the Companygenerated $36.8 million of cash flow from operating activities. The cash generated from operating activitieswas used primarily for debt reduction totaling $23.3 million and property,plant and equipment additions totaling $11.9 million.

  

 Capital spending in 2003 is planned to beapproximately $11.4 million. It iscurrently anticipated that 2003 capital expenditures will be financed primarilywith funds from operations.

  

In September 2002, theCompany amended and restated its domestic credit agreement (the Agreement) andextended the termination date of the credit Agreement from May 2003 to May2004. The amendment and restatement ofthe Agreement reduced the aggregate commitment from $185 million to $145million ($110 million of term loans and $35 million of revolving commitment)and converted certain previously outstanding revolving loans to termloans. This Agreement is secured by apledge of certain shares of common stock of the Company's subsidiaries, an intercompany note from one of theCompany's European holding companies;security interests in certain assets, including but not limited to, all depositaccounts, receivables, inventories, machinery and equipment and intangibleassets, as well as mortgages on its real property located in Ramsey, Minnesotaand Cortland, New York. The agreementincorporates scheduled term loan amortization payments of $2.5 million perquarter, which were made in the third and fourth quarters of 2002; and $3.5million per quarter payable beginning in 2003 through the terminationdate. The Agreement also includes amonthly borrowing base calculation, which may impact the ability of the Companyto utilize its total revolving commitment. The Company's borrowing base under the revolver commitment as ofDecember 31, 2002 was $31.3 million.

 

As of December 31,2002, there was $111.5 million outstanding under the Agreement with availablecredit of $22.5 million. The Companybelieves that internally generated funds and unused financing sources will beadequate to meet the its financing requirements for 2003. The Company was in compliance with allcovenants under the Agreement at December 31, 2002.

 

The Company'sBuckbee-Mears Europe subsidiary maintains a short-term credit facility inGermany for German and Hungarian operations with total credit of approximately$8.1 million. As of December 31, 2002,$0.7 million was outstanding under this facility and approximately $7.3 millionof available credit reserved.

 

The Company iscurrently assessing alternative financing arrangements in anticipation of theMay 2004 expiration date of its current domestic credit agreement. There is no assurance that new creditarrangements or alternative financing terms will be available, or if availablewith be on terms comparable to those in the current agreement.

  

  

**Market Risk**

 

***Foreign Currency***

*** ***

A portion of the Company'soperations consists of manufacturing and sales activities in foreignjurisdictions. The Company manufacturesits products in the United States, Germany, Hungary and Indonesia and purchasesproducts from Asian, as well as other foreign suppliers. The Company sells its products in the UnitedStates and into various foreign markets. The Company's sales are typically denominated in either the U.S. dollaror the European Euro. Buckbee-Mearsalso has an indirect exposure to the Japanese yen and the Korean won becauseits most significant competitors are Japanese and Korean. As a result, theCompany's financial resultscould be significantly affected by factors such as changes in foreign currencyexchange rates or weak economic conditions in foreign markets. In addition, sales of products overseas areaffected by the value of the U.S. dollar relative to other currencies. Long-term strengthening of the U.S. dollarmay have an adverse effect on these sales and competitive conditions in theCompany's markets and may limit the Company's ability to increase productpricing in times of adverse currency movements.

  

 To manage the volatility relating to its directexposures, the Company from time to time will utilize various derivativeinstruments, including foreign currency forward-exchange contracts andcross-currency swaps. Thecross-currency swaps are accounted for under mark-to-market accounting. At December 31, 2002 and 2001, the Companyhad no outstanding foreign currency forward-exchange contracts.

  

 The Company experiences foreign currency gains andlosses, which are reflected on the Company's Statements of Operations, due tothe strengthening and weakening of the U.S. dollar against the currencies ofthe Company's foreign subsidiaries and the resulting effect on the valuation ofinter-company and other accounts. Thenet exchange gain (loss) was $(0.9) million in 2002, $0.2 million in 2001 and$(0.3) million in 2000. The Companyanticipates that it will continue to incur exchange gains and losses fromforeign operations in the future.

  

 The Company's net investment in foreign subsidiarieswith non-U.S. dollar functional currency was $27.9 million and $26.1 million atDecember 31, 2002 and 2001, respectively, translated into U.S. dollars atyear-end exchange rates. The potentialloss in value resulting from a hypothetical 10% reduction in foreign currency exchangerates is $2.5 million and $2.4 million in 2002 and 2001, respectively. The loss, if incurred, would be recorded asa charge to Accumulated Other Comprehensive Income (Loss).

  

 During 2002, the U.S. dollar weakened against theEuro. During 2001 and 2000, the U.S.dollar strengthened against the German mark (DM). A stronger dollar generally has a negative impact on overseasresults because foreign currency-denominated earnings translate into less U.S.dollars; a weaker dollar generally has a positive translation effect. However, a significant component of ouroverseas revenue is U.S. dollar based, somewhat mitigating this effect. As a result, the effect of the change inexchange rates for 2002, 2001 and 2000 did not have a material impact on net earnings.

  

***Interest***

*** ***

 Substantially all of the Company's debt andassociated interest expense is sensitive to changes in the level of interestrates. To mitigate the impact offluctuations in interest rates, the Company from time to time enters intointerest rate swaps to hedge the exposure of a portion of its floating-ratedebt. The Company's primary interestrate exposure is U.S., and to a lesser extent Euro and yen-based interestrates. 

  

 At various dates during 1999 and 2000, the Companyentered into multiple interest rate swap agreements to provide for the Companyto swap a variable interest rate for fixed interest rates ranging from 6.7% to7.1%. At December 31, 2002, $50 millionof these swaps remained outstanding with the swaps expiring in equal amounts inMay 2003 and June 2003.

  

 A hypothetical 100 basis point increase in interestrates would result in a $0.6 million and $0.9 million adverse impact oninterest expense in 2002 and 2001, respectively.

  

  

**Euro CurrencyConversion**

** **

On January 1, 1999, 11 ofthe 15 member countries of the European Union, including Germany, adopted theeuro as their common legal currency. The euro trades on currency exchanges and is available for non-cashtransactions. From January 1, 1999through January 1, 2002, each of the participating countries was scheduled tomaintain its national (legacy) currency as legal tender for goods andservices. Beginning January 1, 2002,new euro-denominated bills and coins have been issued, and legacy currencieswere withdrawn from circulation by July 1, 2002. The Company's foreign operating subsidiaries that were affectedby the euro conversion had established plans to address the business issuesraised, including the competitive impact of cross-border pricetransparency. There were no near-termbusiness ramifications of the conversion to Euro; however, the long-termimplications, including any changes or modifications that will need to be madeto business and financial strategies, are still being reviewed. From an accounting, treasury and computersystem standpoint, the impact from the euro currency conversion did not have amaterial impact on the financial position or results of operations of theCompany.

  

**Cautionary Statements**

  

Certain statements includedin this Management's Discussion and Analysis, as well as other communications,including its filings with the SEC, reports to shareholders, news releases andpresentations to securities analysts or investors, contain forward-lookingstatements made in good faith by the Company pursuant to the "Safe Harbor"provisions of the *Private SecuritiesLitigation Reform Act of 1995.* These statements relate to non-historical information and include,without limitation, any statement that may predict, forecast, indicate or implyfuture results, performance or achievements. We wish to caution the reader notto place undue reliance on any such forward-looking statements. These statements are not guarantees offuture performance and are subject to a number of risks and uncertaintiesdetailed from time to time in reports filed by BMC with the SEC, including thedisclosure in the Form 10-K under "Risk Factors" and elsewhere inForms 10-Q and 10-K, that could cause actual results or outcomes to differmaterially from those presently anticipated or projected and include, amongothers, ability to manage working capital and align costs with marketconditions; continued imbalance in supply and demand for computer monitormasks; further aperture mask price declines; slowdown in growth of high-endlens products; rising raw material costs; ability to improve manufacturingyields and operating efficiencies; ability to qualify new products withcustomers; consumer demand for direct-view high-definition television anddigital receivers; competition with alternative technologies and products,including laser surgery for the correction of visual impairment and LCD,plasma, projection and other types of visual displays; ability to sourceplastic lens product requirement from third parties; ability to gain market shareof polycarbonate products both domestically and abroad, including growth inEuropean sales through the operation of processing laboratories; higher thanexpected restructuring related costs; ability to restructure the Non-MaskOperations and diversify its customer and product base; the effect of regionalor global economic slowdowns; the impact of domestic or global terrorism onconsumer spending choices; adjustments to inventory valuations; liability andother claims asserted against BMC; negative foreign currency fluctuations; andability to recruit and retain key personnel. These factors should not, however, be considered an exhaustivelist. We do not undertake the responsibilityto update any forward-looking statement that may be made from time to time byor on behalf of BMC.

** **

**Item 7A. Quantitative andQualitative Disclosures About Market Risk**

 

Disclosures about marketrisks appear on pages 21-22 of the "Management's Discussion and Analysis"for the year ended December 31, 2002.

 

**Item 8.  Financial Statementsand Supplementary Data**

  

***CONSOLIDATED STATEMENTS OF OPERATIONS***

(in thousands, except per share amounts)

 

Years Ended December 31

 

**2002**

 

 

  2001

 

 

  2000

 

Revenues

**$**

**248,098**

 

  $

  302,296

 

  $

  354,485

 

Cost of products sold

 

**226,414**

 

 

  276,999

 

 

  300,795

 

Gross margin

 

**21,684**

 

 

  25,297

 

 

  53,690

 

Selling expense

 

**12,924**

 

 

  16,910

 

 

  17,163

 

Administrative expense

 

**6,124**

 

 

  5,038

 

 

  5,389

 

Non-recurring charges

 

**2,800**

 

 

  6,218

 

 

  --

 

Income (loss) from operations

 

**(164**

**)**

 

  (2,869

)

 

  31,138

 

Other income and (expense)

 

 

 

 

 

 

 

 

 

  Interest expense

 

**(10,588**

**)**

 

  (11,752

)

 

  (13,115

)

  Interest income

 

**241**

 

 

  508

 

 

  282

 

  Other income 

 

**1,712**

 

 

  883

 

 

  2,838

 

Earnings (loss) before income taxes and

 

 

 

 

 

 

 

 

 

   cumulative effect of change in accounting principle

 

**(8,799**

**)**

 

  (13,230

)

 

  21,143

 

Income tax expense

 

**384**

 

 

  9,370

 

 

  6,243

 

Earnings (loss) before accounting change

 

**(9,183**

**)**

 

  (22,600

)

 

  14,900

 

Cumulative effect of change in accounting  principle

 

**(52,704**

**)**

 

  --

 

 

  --

 

Net earnings (loss)

**$**

**(61,887**

**)**

  $

  (22,600

)

  $

  14,900

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

  Before cumulative  effect of accounting change

**$**

**(0.34**

**)**

  $

  (0.83

)

  $

  0.54

 

  Cumulative effect of  accounting change

 

**(1.96**

**)**

 

  --

 

 

  --

 

  Net earnings (loss)  per share

**$**

**(2.30**

**)**

  $

  (0.83

)

  $

  0.54

 

 

 

 

 

 

 

 

 

 

 

Number of shares included in per share  computation

 

 

 

 

 

 

 

 

 

  Basic

 

**26,963**

 

 

  27,205

 

 

  27,396

 

  Diluted

 

**26,963**

 

 

  27,205

 

 

  27,623

 

* *See Notes to Consolidated Financial Statements.

 

***CONSOLIDATED BALANCE SHEETS***

(in thousands)

 

December 31

 

**2002**

 

 

  2001

 
Assets
 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

  Cash and cash  equivalents

**$**

**1,635**

 

$

  1,941

 

  Trade accounts  receivable, less allowances of $2,137 and $2,368

 

**27,660**

 

 

  35,024

 

  Inventories

 

**59,736**

 

 

  71,634

 

  Deferred income  taxes

 

**9,492**

 

 

  10,250

 

  Other current assets

 

**6,350**

 

 

  4,197

 

  Total current assets

 

**104,873**

 

 

  123,046

 

Property, plant and equipment, net

 

**121,334**

 

 

  131,541

 

Deferred income taxes

 

**3,083**

 

 

  7,166

 

Intangible assets, net

 

**12,141**

 

 

  62,069

 

Other assets, net

 

**5,928**

 

 

  7,924

 
Total assets
**$**

**247,359**

 

$

  331,746

 

 

 

 

 

 

 

 
Liabilities and Stockholders' Equity
 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

  Short-term  borrowings

 

**747**

 

 

  546

 

  Current portion of  long-term debt

 

**14,010**

 

 

  308

 

  Accounts payable

 

**25,113**

 

 

  19,707

 

  Accrued compensation  and benefits

 

**7,616**

 

 

  9,695

 

  Income taxes payable

 

**3,416**

 

 

  7,532

 

  Deferred income  taxes

 

**88**

 

 

  --

 

  Accrued  restructuring expenses

 

**2,265**

 

 

  5,038

 

  Accrued liability  for derivative instruments

 

**1,154**

 

 

  2,794

 

  Other current  liabilities

 

**6,324**

 

 

  6,685

 

  Total current  liabilities

 

**60,733**

 

 

  52,305

 

Long-term debt

 

**97,529**

 

 

  141,314

 

Pension and other employee retirement  obligations

 

**23,758**

 

 

  15,843

 

Other liabilities

 

**4,705**

 

 

  4,171

 

Deferred income taxes

 

**1,155**

 

 

  1,602

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

  Common stock (shares  issued of 27,066 and 26,910)

 

**46,949**

 

 

  46,786

 

  Retained earnings

 

**19,957**

 

 

  81,979

 

  Accumulated other  comprehensive loss

 

**(7,358**

**)**

 

  (12,180

)

  Other

 

**(69**

**)**

 

  (74

)

  Total stockholders'  equity

 

**59,479**

 

 

  116,511

 
Total liabilities and stockholders' equity
**$**

**247,359**

 

$

  331,746

 

See Notes to Consolidated Financial Statements.

***CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY***

(in thousands, except per share amounts)

 

 Years Ended December 31, 2002, 2001 and 2000

 

   

   

  Common Stock

 

 

   

   

  Retained Earnings

 

  Accumulated

   Other Comprehensive Loss 

 

   

   

   

  Other

 

 

   

   

   

  Total

 
Balance at December 31, 1999
  $

  49,077

 

  $

  92,620

 

  $

  (3,495

)

  $

  (1,780

)

  $

  136,422

 

  Comprehensive  income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net earnings

 

  --

 

 

  14,900

 

 

  --

 

 

  --

 

 

  14,900

 

  Foreign currency translation  adjustments

 

  --

 

 

  --

 

 

  (2,027

)

 

  --

 

 

  (2,027

)

  Loss on derivative  instruments

 

  --

 

 

  --

 

 

  (1,147

)

 

  --

 

 

  (1,147

)

  Total comprehensive  income

 

 

 

 

 

 

 

 

 

 

 

 

 

  11,726

 

Exercise of options, including tax benefit

 

  15

 

 

  --

 

 

  --

 

 

  --

 

 

  15

 

Restricted stock grants, net of forfeitures  and including tax benefits

 

   

  148

 

 

   

  --

 

 

   

  --

 

 

   

  --

 

 

   

  148

 

Repayments of stock option loans

 

  --

 

 

  --

 

 

  --

 

 

  131

 

 

  131

 

Cash dividends declared-$0.06 per share

 

  --

 

 

  (1,644

)

 

  --

 

 

  --

 

 

  (1,644

)
Balance at December 31, 2000
 

  49,240

 

 

  105,876

 

 

  (6,669

)

 

  (1,649

)

 

  146,798

 

  Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net loss

 

  --

 

 

  (22,600

)

 

  --

 

 

  --

 

 

  (22,600

)

  Foreign currency  translation adjustments

 

  --

 

 

  --

 

 

  (1,500

)

 

  --

 

 

  (1,500

)

  Loss on derivative  instruments

 

  --

 

 

  --

 

 

  (1,676

)

 

  --

 

 

  (1,676

)

  Minimum pension  liability

 

  --

 

 

  --

 

 

  (2,335

)

 

  --

 

 

  (2,335

)

  Total comprehensive  loss

 

 

 

 

 

 

 

 

 

 

 

 

 

  (28,111

)

Exercise of options, including tax benefit

 

  736

 

 

  --

 

 

  --

 

 

  --

 

 

  736

 

Restricted stock grants, net of forfeitures  and including tax benefits

 

   

  171

 

 

   

  --

 

 

   

  --

 

 

   

  --

 

 

   

  171

 

Exchange of common stock as repayment of stock  option loans

 

   

  (3,361

** **

)

 

   

  --

 

 

   

  --

 

 

   

  1,575

 

 

   

  (1,786

 

)

Cash dividends declared-$0.0475 per share

 

  --

 

 

  (1,297

)

 

  --

 

 

  --

 

 

  (1,297

)

**Balance  at December 31, 2001**

 

  46,786

 

 

  81,979

 

 

  (12,180

)

 

  (74

)

 

  116,511

 

  Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net loss

 

  --

 

 

  (61,887

)

 

  --

 

 

  --

 

 

  (61,887

)

  Foreign currency  translation adjustments

 

  --

 

 

  --

 

 

  4,625

 

 

  --

 

 

  4,625

 

  Gain on derivative  instruments

 

  --

 

 

  --

 

 

  1,700

 

 

  --

 

 

  1,700

 

  Minimum pension  liability

 

  --

 

 

  --

 

 

  (1,503

)

 

  --

 

 

  (1,503

)

  Total comprehensive  loss

 

 

 

 

 

 

 

 

 

 

 

 

 

  (57,065

)

Stock grants

 

  50

 

 

  --

 

 

  --

 

 

  --

 

 

  50

 

Restricted stock grants, net of forfeitures  and including tax benefits

 

   

  113

 

 

   

  --

 

 

   

  --

 

 

   

  --

 

 

   

  113

 

Repayment of stock option loans

 

  --

 

 

  --

 

 

  --

 

 

  5

 

 

  5

 

Cash dividends declared-$0.005 per share

 

  --

 

 

  (135

)

 

  --

 

 

  --

 

 

  (135

)

**Balance  at December 31, 2002**

**$**

**46,949**

 

**$**

**19,957**

 

**$**

**(7,358**

**)**

**$**

**(69**

**)**

**$**

**59,479**

 

Common Stock: 99,000 shares of voting common stock without par value authorized;27,066, 26,910, 27,399 shares issued and outstanding at December 31, 2002, 2001and 2000, respectively. 

Undesignated Stock:  500 shares authorized, of which 200 shares were designated asSeries A Junior Participating Preferred Shares on June 30, 1998 in connectionwith the Company's adoption of a Share Rights Plan.  The Board of Directors is authorized to designate the name ofeach 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.

***CONSOLIDATED STATEMENTS OF CASH FLOW***

(in thousands)

 

Years Ended December 31

 

**2002**

 

 

  2001

 

 

  2000

 
Cash Flows from Operating Activities
 

 

 

 

 

 

 

 

 

Net earnings (loss)

**$**

**(61,887**

**)**

  $

  (22,600

)

  $

  14,900

 

**Adjustments  to reconcile net (loss) earnings to net cash provided by operating activities**

 

 

 

 

 

 

 

 

 

  Depreciation and  amortization

 

**20,808**

 

 

  23,807

 

 

  23,990

 

  Write-off of  goodwill

 

**52,704**

 

 

  --

 

 

  --

 

  Gain on sale of  property and equipment

 

**(3,429**

**)**

 

  (74

)

 

  (443

)

  Deferred income  taxes

 

**4,451**

 

 

  5,571

 

 

  (983

)

  Other non-cash  income and expense items

 

**163**

 

 

  173

 

 

  148

 
Decrease (increase) in assets
 

 

 

 

 

 

 

 

 

  Trade accounts  receivable

 

**8,198**

 

 

  9,877

 

 

  (4,235

)

  Inventories

 

**13,723**

 

 

  9,500

 

 

  (1,084

)

  Other current assets

 

**(2,098**

**)**

 

  6,059

 

 

  1,106

 

  Other non-current  assets

 

**(2,321**

**)**

 

  (3,002

)

 

  (835

)
Increase (decrease) in liabilities
 

 

 

 

 

 

 

 

 

  Accounts payable

 

**4,489**

 

 

  (13,891

)

 

  4,033

 

  Income taxes payable

 

**(4,307**

**)**

 

  1,406

 

 

  (1,387

)

  Accrued expenses and  other current liabilities

 

**(7,460**

**)**

 

  2,188

 

 

  2,767

 

  Other non-current  liabilities

 

**8,629**

 

 

  (1,585

)

 

  (1,192

)
Net cash provided by operating activities
 

**31,663**

 

 

  17,429

 

 

  36,785

 
Cash Flows from Investing Activities
 

 

 

 

 

 

 

 

 

  Additions to  property, plant and equipment

 

**(8,213**

**)**

 

  (14,134

)

 

  (11,929

)

  Business  acquisitions, net of cash acquired

 

**--**

 

 

  --

 

 

  (1,219

)

  Proceeds from sales  of assets, including property and equipment

 

**6,349**

 

 

  743

 

 

  2,493

 
Net cash used in investing activities
 

**(1,864**

**)**

 

  (13,391

)

 

  (10,655

)
Cash Flows from Financing Activities
 

 

 

 

 

 

 

 

 

  Increase (decrease)  in short-term borrowings

 

**13,777**

 

 

  (328

)

 

  (959

)

  Decrease in  long-term debt

 

**(43,785**

**)**

 

  (2,496

)

 

  (22,149

)

  Common stock issued,  including tax benefit

 

**--**

 

 

  --

 

 

  15

 

  Cash dividends paid

 

**(203**

**)**

 

  (1,640

)

 

  (1,644

)

  Net employee  repayments of stock option loans

 

**5**

 

 

  132

 

 

  131

 
Net cash used in financing activities
 

**(30,206**

**)**

 

  (4,332

)

 

  (24,606

)

  Effect of exchange  rate changes on cash and cash equivalents

 

** **

**101**

 

 

   

  (55

 

)

 

   

  (380

 

)
Net increase (decrease) in cash and cash equivalents
 

**(306**

**)**

 

  (349

)

 

  1,144

 

Cash and cash equivalents at beginning of year

 

**1,941**

 

 

  2,290

 

 

  1,146

 
Cash and cash equivalents at end of year
**$**

**1,635**

 

  $

  1,941

 

  $

  2,290

 

 See Notes to ConsolidatedFinancial Statements.

 

***NOTES TO CONSOLIDATED FINANCIAL STATEMENTS***

(Dollars and shares in thousands, except pershare amounts)

 

**1.     Summary of Significant Accounting Policies**

 

 The Consolidated FinancialStatements include the accounts of the Company and its subsidiaries, all ofwhich are wholly or majority-owned.

 

**Revenue Recognition** --Revenue isrecognized upon shipment of product to the customer, when persuasive evidenceof an arrangement exists, the price to the buyer is fixed and determinable, andcollectibility is reasonably assured.

 

Shipping and handlingcosts are included in cost of products sold.

 

**Cash Equivalents** --Consist of highlyliquid debt instruments with maturities of three months or less at the date ofpurchase. These instruments are carriedat cost, which approximates fair market value.

 

**Inventories** --Stated at the lowerof cost or market. Cost is determinedprincipally on the average cost method.

  

**Provisions for Inventory Reserves,Uncollectible Trade Receivables and Product Returns**--TheCompany determines its provision for obsolete and slow-moving inventory basedon management's analysis of inventory levels and future sales forecasts. However, the factors impacting suchprovisions vary significantly between the Buckbee-Mears and Optical Productssegments. Within the Buckbee-Mears segment,products are manufactured to customer specifications and changes in productdemand from the loss of a customer, a new product offering or modifications tocustomer specifications can significantly impair the value of raw material andfinished goods on hand. As a result,inventory valuation reserve requirements within this segment must beestablished based on specific facts and circumstances that can fluctuatesignificantly and are difficult to predict. We do not anticipate these conditions will change due to the customizednature of the products manufactured by the Buckbee-Mears segment. The Optical Products segment inventoryreserve requirements historically have been more predictable and more readilyestimated by analyzing historic build and sales patterns.

 

 The Company establishes a reserve and records aprovision for doubtful receivable accounts based on historic loss levels aswell as specific provisions considering current facts and circumstances. Both the Buckbee-Mears and Optical Productssegments have several large customers that, if circumstances warrant, cancreate the need for additional, specific, reserves.

 

The provision and reserve for product returns is calculated primarily on apercentage of sales basis, which is established based on trends that havehistorically provided a reasonable estimate.  This reserve is alsocalculated on a specific basis considering current facts and circumstances.

 

**Property, Plant and Equipment**--Statedat cost. Additions, improvements ormajor renewals are capitalized, while expenditures that do not enhance orextend the asset's useful life are charged to operating expense asincurred. Depreciation is provided onthe straight-line method over estimated useful lives of generally 40 years forbuildings, 20 years for building improvements and infrastructure and 8 yearsfor machinery and equipment. Depreciation of assets included in construction in progress does notbegin until the construction is complete and the assets are placed intoservice. Depreciation expense was$19,789, $20,272 and $20,504 in 2002, 2001 and 2000, respectively.

 

The Company evaluateslong-lived assets for impairment whenever changes in circumstances indicatethat the carrying amount of the asset may not be recoverable.

 

**Intangible Assets** --Consist primarily ofcapitalized patent costs and acquisition-related intangible assets, which arestated at fair value as of the date acquired in a business acquisitionaccounted for as a purchase, less accumulated amortization. Amortization is computed on a straight-linebasis over estimated useful lives of 10 to 30 years. Amortization expense was $1,019, $3,535 and $3,486 in 2002, 2001and 2000, respectively. Amortizationexpense is expected to be approximately $1,000 for each of the next five years.

 

The Company adoptedStatement of Financial Accounting Standard (SFAS) No. 142, Goodwill and OtherIntangible Assets, effective January 1, 2002, which resulted in the write-offof its goodwill balance of $52,704. Seefootnote 3 for additional discussion regarding the implementation of SFAS No.142.

 

**Income Taxes** --A deferred tax liabilityis recognized for temporary differences between financial reporting and taxreporting that will result in taxable income in future years. A deferred tax asset is recognized fortemporary differences that will result in tax deductions in future years.

 

**Comprehensive Income (Loss)**--ComprehensiveIncome (Loss) consists of net earnings, foreign currency translationadjustments, gains/losses on derivative instruments and adjustments for minimumpension liability and is presented in the Consolidated Statements ofStockholders' Equity. The accumulatedgain (loss) on derivative instruments was $(1,154), $(2,854) and $(1,178) as ofDecember 31, 2002, 2001 and 2000, respectively.  The accumulated foreign currency translation gain (loss) was$(2,366), $(6,991) and $(5,491) as of December 31, 2002, 2001 and 2000,respectively. The accumulated minimumpension liability was $3,838 and $2,335 as of December 31, 2002 and 2001,respectively.

 

**Earnings Per Share** --The basic earningsper share amounts are determined based on the weighted average common sharesoutstanding, while the diluted earnings per share amounts also give effect tothe common shares dilutive potential. For the Company's earnings per share calculations, the basic and dilutedweighted average outstanding share amounts differ only due to the dilutiveimpact of stock options and non-vested stock awards.

 

**Stock-Based Compensation** --The Companyhas elected to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accountingfor Stock Issued to Employees," and related interpretations in accountingfor its employee stock options and non-vested stock awards. Under APB 25, because the exercise price ofemployee stock options equals the market price of the underlying stock on thedate of grant, no compensation expense is recorded. For non-vested stock awards, compensation cost is recognized forthe fair value of the stock awarded and is charged to expense over therespective vesting periods. The Companyhas adopted the disclosure-only provisions of SFAS No. 123 (SFAS 123), "Accountingfor Stock-Based Compensation."

 

 Proforma information regarding net earnings and earnings per share is required by SFAS 123 and has been determined as if the Company had accounted for itsemployee stock options under the fair value method of that Statement. The fair value for these options wasestimated at the date of grant using a Black-Scholes option pricing model withthe following weighted average assumptions for 2002, 2001 and 2000:

 
 
 

  2002

 

  2001

 

  2000

 

 Risk-free interest rate
 

  4.59

  %

  5.00

  %

  6.02

  %

 
  Dividend yield

 

  0.48

  %

  2.78

  %

  1.23

  %

 
  Volatility factor

 

  1.244

 

  0.85

 

  0.76

 

 
  Weighted average expected life

 

  5  years

  5  years

  5  years

 

 TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options, which have no vesting restrictions and are fullytransferable. In addition, optionvaluation models require the input of highly subjective assumptions, includingthe expected stock price volatility. Because the Company's employee stock options have characteristicssignificantly different from those of traded options, and because changes inthe subjective input assumptions can materially affect the fair value estimate,in management's opinion, the existing models do not necessarily provide areliable single measure of the fair value of its employee stock options.

 

For purposes of proforma disclosures, the estimated fair value of the options using theBlack-Scholes option pricing model is amortized to expense over the options'vesting period. The Company's pro formanet earnings and earnings per share were as follows:

 
 
 

  2002

 

 

  2001

 

 

  2000

 
Net earnings (loss) - as reported
  $

  (61,887

  )

  $

  (22,600

  )

  $

  14,900

 

  Net earnings (loss) -  pro forma

 

  (63,169

  )

 

  (24,226

  )

 

  13,208

 

  Basic and diluted  earnings (loss) per share - as reported

 

  (2.30

  )

 

  (0.83

  )

 

  0.54

 

  Basic and diluted  earnings (loss) per share - pro forma

 

  (2.34

  )

 

  (0.89

  )

 

  0.48

 

  Weighted average  fair value of options granted during the year

 

  1.15

 

 

  3.11

 

 

  3.22

 

 

**Estimates** --The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual results could differ from thoseestimates.

 

**Reclassification** --Certain items in the2001 and 2000 Consolidated Financial Statements have been reclassified toconform to the 2002 presentation. Thesereclassifications had no impact on net income or stockholders' equity aspreviously reported.

** **

**2.     Restructuring**

** **

 In February 2002, the Company announced its plans toclose the Optical Products segment's Azusa, California facility, sell thebuildings and consolidate the operations into the Company's existing plants inRamsey, Minnesota and Jakarta, Indonesia. The total restructuring-related costs recorded were $2,800 of which$2,745 has been utilized during the year. The following table details the restructuring charges and accountbalance as of December 31, 2002:

  
 
 

  Severance and Related  Costs

 

 

  Property, Plant and  Equipment

 

 

  Contractual  Obligations and Other

 

 

   

   

  Total

 
Charged to operations in 2002
  $

  426

 

  $

  1,517

 

  $

  857

 

  $

  2,800

 

  Utilized in 2002

 

  371

 

 

  1,517

 

 

  857

 

 

  2,745

 

  Restructuring liability as of December 31,  2002:

   

  $

   

  55

 

   

  $

   

  --

 

   

  $

   

  --

 

   

  $

   

  55

 

** **

** **

 In fourth quarter 2001, the Company announcedrestructuring initiatives in both of its business groups. The Company will exit the computer monitorsegment of the aperture mask business, will sell or consolidate into its otherfacilities all operations currently located in St. Paul, Minnesota, phase outof certain products and discontinue certain optical products developmentactivities. The total restructuringrelated costs recorded for the year ended December 31, 2001 were $12,165. The charges include restructuring costs of$6,218 and asset write-downs and other restructuring related costs of $5,947,which are recorded as a component of cost of products sold in the ConsolidatedStatement of Operations. 

  

  

 The following table displays the activity andbalances of the 2001 restructuring reserve account for the years ended December31, 2002 and 2001:

  
 
 

  Restructuring Costs

  
 

  Severance and Related  Costs

 

 

  Contractual  Obligations and Other

 

 

   

   

  Total

 
 
 

 

 

 

 

 

 

 

 

  Buckbee-Mears

  $

  3,309

 

  $

  1,729

 

  $

  5,038

 

  Optical Products

 

  295

 

 

  885

 

 

  1,180

 

  Total charged to  operations in 2001

 

  3,604

 

 

  2,614

 

 

  6,218

 

 

 

 

 

 

 

 

 

 

 

  Buckbee-Mears

 

  --

 

 

  --

 

 

  --

 

  Optical Products

 

  (295

  )

 

  (885

  )

 

  (1,180

  )

  Total utilized in  2001

 

  (295

  )

 

  (885

  )

 

  (1,180

  )

 

 

 

 

 

 

 

 

 

 

  Buckbee-Mears

 

  3,309

 

 

  1,729

 

 

  5,038

 

  Optical Products

 

  --

 

 

  --

 

 

  --

 

  Restructuring liability as of December 31,  2001

  $

  3,309

 

  $

  1,729

 

  $

  5,038

 

  Utilized in 2002

 

  (2,547

  )

 

  (242

  )

 

  (2,789

  )

  Change in estimate

 

  (39

  )

 

  --

 

 

  (39

  )

  Restructuring liability as of December 31,  2002

 

  723

 

 

  1,487

 

 

  2,210

 

  
 
 

  Other Restructuring  Related Costs

  
 

   

  Inventory Adjustments

 

 

  Asset  

  Write-downs and Other

 

 

   

   

  Total

 
Charged to operations in 2001:
 

 

 

 

 

 

 

 

 

  Buckbee-Mears

  $

  2,573

 

  $

  1,389

 

  $

  3,962

 

  Optical Products

 

  1,024

 

 

  961

 

 

  1,985

 

  Total

  $

  3,597

 

  $

  2,350

 

  $

  5,947

 

  

  

**3.     Goodwill and Other Intangible Assets**

** **

In July 2001, the FASBissued Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill andOther Intangible Assets, which eliminated the systematic amortization ofgoodwill. The Company adopted SFAS No. 142,effective January 1, 2002 and ceased amortization of its goodwillbalances. However, intangible assetswith finite lives continue to be amortized over their estimated useful lives.

 

SFAS No. 142 requiredthe Company to complete an impairment review of its goodwill assets. During the first quarter 2002, the Companycompleted its transitional impairment test using a discounted cash flow modelrequired by SFAS No. 142 and determined that the goodwill in its OpticalProducts segment was impaired. As such,the Company recorded as a cumulative effect of change in accounting principle awrite-off of its goodwill balance in the amount of $52,704 on which the Companyrecognized no tax benefit.

 

A reconciliation of reported net earnings (loss)adjusted to reflect the adoption of SFAS 142 as if it had been effectiveJanuary 1, 2000 is provided below.

 
 
 

   2002

 

 

   2001

 

 

   2000

 
Reported net earnings (loss)
  $

  (61,887

  )

  $

  (22,600

  )

  $

  14,900

 

  Add:   Adjustment for accounting change

 

  52,704

 

 

  --

 

 

  --

 

         Goodwill amortization, net of tax

 

  --

 

 

  1,217

 

 

  1,286

 

  Adjusted net earnings (loss)

  $

  (9,183

  )

  $

  (21,383

  )

  $

  16,186

 

 

 

 

 

 

 

 

 

 

 

  Reported basic and diluted earnings (loss) per  share

  $

  (2.30

  )

  $

  (0.83

  )

  $

  0.54

 

  Add:   Adjustment for accounting change

 

  1.96

 

 

  --

 

 

  --

 

         Goodwill amortization, net of tax

 

  --

 

 

  0.04

 

 

  0.05

 

  Adjusted earnings (loss) per share

  $

  (0.34)

 

  $

  (0.79

  )

  $

  0.59

 

 

  

 Thefollowing is a summary of intangible assets at December 31:

  

 

 

  2002

 

 

  2001

   Goodwill

  $

  --

 

  $

  61,738

   Intangible  pension asset

 

  3,332

 

 

  --

   Other

 

  13,675

 

 

  13,732

   Total

 

  17,007

 

 

  75,470

   Less  accumulated amortization

 

  4,866

 

 

  13,401

   Total  intangible assets, net

  $

  12,141

 

  $

  62,069

  

  

**4.     Inventories**

** **

 Thefollowing is a summary of inventories at December 31:

  

 

 

  2002

 

 

  2001

 

   Raw  materials

  $

  13,030

 

  $

  16,857

 

   Work  in process

 

  6,156

 

 

  7,445

 

   Finished  goods

 

  40,550

 

 

  47,332

 

   Total  inventories

  $

  59,736

 

  $

  71,634

 

  

 

**5.     Property, Plant and Equipment**

** **

 Thefollowing is a summary of property, plant and equipment at December 31:

  

 

 

  2002

 

 

  2001

 

   Land  and improvements

  $

  6,488

 

  $

  6,279

 

   Buildings  and improvements

 

  92,080

 

 

  91,999

 

   Machinery  and equipment

 

  172,088

 

 

  175,769

 

   Construction  in progress

 

  9,188

 

 

  7,869

 

   Total

 

  279,844

 

 

  281,916

 

   Less  accumulated depreciation and amortization

 

  158,510

 

 

  150,375

 

   Total  property, plant and equipment, net

  $

  121,334

 

  $

  131,541

 

 

 

 

**6.     Derivative Instruments and Hedging Activities**

** **

 Derivative financialinstruments are used by the Company from time to time to reduce foreign exchangeand interest rate risks.  All derivatives are recognized on the balancesheet at their fair value.  On the date a derivative contract is enteredinto the derivative is designated as a fair value hedge, cash flow hedge or aforeign-currency net investment hedge.  The Company hedges some selectedforeign-currency denominated forecasted transactions (cash flow hedges), inwhich changes in the fair value of highly effective derivatives are recorded inAccumulated Other Comprehensive Loss.  The Company also has multipleinterest rate swap agreements (cash flow hedges), which provide for the Companyto swap a variable interest rate for fixed interest rates.

  

The Company formallydocuments all relations between hedging instruments and the hedged items, aswell as its risk-management objectives and strategy for undertaking varioushedge transactions. The Companyformally assesses, both at the hedge's inception and on an ongoing basis,whether the derivatives that are used in hedging transactions are highlyeffective in offsetting changes in cash flows of the hedged items.

  

** **

**Foreign CurrencyForward-Exchange Contracts**

  

The Company will useforeign currency forward-exchange contracts with durations of less than twelvemonths to hedge against the effect of exchange rate fluctuations on certainforeign currency denominated steel purchases and other expenditures, andcertain U.S. dollar denominated sales in a foreign subsidiary.

 

As of December 31,2002, no contracts to purchase German marks (DM) remained outstanding. At December 31, 2001, $60 of deferred netlosses on derivative instruments was included in Accumulated OtherComprehensive Loss. These losses wererecorded into earnings in the first quarter of 2002.

 

During 2000, theCompany entered into forward-exchange contracts to purchase a total of 22.5 billionIndonesian rupiah to hedge certain purchases in our Vision-Ease Indonesianoperations. During 2001, thesecontracts were terminated and the Company recognized a loss of $133, which isincluded in other income in the consolidated statement of operations. As of December 31, 2002 and 2001, nocontracts to purchase rupiah were outstanding.

 

**Interest Rate Swaps**

  

 At various dates during1999 and 2000, the Company entered into multiple interest rate swap agreementsto provide for the Company to swap a variable interest rate for fixed interestrates ranging from 6.7% to 7.1%.  At December 31, 2002, $50,000 of theseswaps remained outstanding with the swaps expiring in May 2003 and June 2003. The notional amount of interest rate swaps is not a measure of the Company'sexposure to credit or market risks and is not included in the ConsolidatedBalance Sheets.  Fixing the interest rate minimizes the Company's exposureto the uncertainty of floating interest rates during this period.

 

 Amounts to be paid orreceived under the interest rate swap agreement are accrued and recorded as anadjustment to Interest Expense during the term of the interest rate swapagreement.  At December 31, 2002, deferred net losses on the interest rateswap agreements in the amount of $1,154 were included in Accumulated OtherComprehensive Loss.

 **7.     Debt**

** **

 Thefollowing is a summary of outstanding debt at December 31:

  

 

 

  2002

 

 

  2001

 

   U.S.  revolving credit facility

   $

  6,500

 

   $

  141,000

 

   U.S.  term loans

 

  105,000

 

 

  --

 

   German  revolving credit facility

 

  747

 

 

  546

 

   Other

 

  39

 

 

  622

 

   Total

 

  112,286

 

 

  142,168

 

   Less  amounts due within one year

 

  14,757

 

 

  854

 

   Total  long-term debt

   $

  97,529

 

   $

  141,314

 

 

In September 2002, theCompany amended and restated its domestic credit agreement (the Agreement) andextended the termination date of the Agreement from May 2003 to May 2004. The amendment and restatement of theAgreement reduced the aggregate commitment from $185,000 to $145,000 ($110,000of term loans and $35,000 of revolving commitment) and converted certainpreviously outstanding revolving loans to term loans. This Agreement is secured by a pledge of certain shares of commonstock of the Company's subsidiaries; an intercompany note from one of theCompany's European holding companies; security interests in certain assets,including but not limited to, all deposit accounts, receivables, inventories,machinery and equipment and intangible assets, as well as mortgages on its realproperty located in Ramsey, Minnesota and Cortland, New York. The Agreement incorporates scheduled termloan amortization payments of $2,500 per quarter, which were made in the thirdand fourth quarters of 2002; and $3,500 per quarter payable beginning in 2003through the termination date. TheAgreement also includes a monthly borrowing base calculation, which may impactthe ability of the Company to utilize its total revolving commitment. TheCompany's borrowing base as of December31, 2002 was $31,307.

 

As of December 31,2002, there was $111,500 of debt outstanding under the Agreement, withavailable credit of $22,507. Borrowingsunder the Agreement bear interest at a Base Rate plus a credit spread rangingfrom 2.25% to 4.75%, or at a Eurodollar Rate plus a credit spread ranging from3.25% to 5.75%. This spread willincrease 50 basis points, respectively, after July 1, 2003. In addition, the Company pays a commitmentfee of 0.75% on undrawn funds. TheCompany's effective interest rate on U.S. floating-rate debt under theAgreement was 5.38% at December 31, 2002. Under terms of the Agreement, the Company must meet certain financialcovenants, including maintaining a specified consolidated net worth, a maximumleverage ratio (total debt to EBITDA), a minimum interest coverage ratio and amaximum level of capital expenditures. The Company was in compliance with all covenants under the Agreement atDecember 31, 2002.

 

The Company'sBuckbee-Mears Europe subsidiary maintains a short-term credit facility inGermany for German and Hungarian operations with total credit approximately$8,052 (7,669 Euro). This facilitybears interest at a floating rate of 8.75% for overnight borrowings, or a baserate plus a credit spread based on current interbank lending rates fornon-overnight borrowings. The facilityis secured by land and buildings with a net book value as of December 31, 2002of $9,098 (8,665 Euro). The lender maywithdraw the credit facility at any time. As of December 31, 2002, there was $747 (712 Euro) debt outstanding withavailable credit remaining of approximately $7,305 (6,957 Euro).

 

On December 31, 2002and 2001, the estimated fair value of the Company's debt described aboveapproximates the recorded amount.

 

Annual maturities ofdebt are $14,757 in 2003, $97,510 in 2004, $10 in 2005 and $9 in 2006.

 

There were $2,300 ofoutstanding domestic letters of credit and $5,905 (5,624 Euro) of outstandingforeign letters of credit at December 31, 2002.

  

Interest expense paid,net of amounts capitalized of $160, $200 and $410, was $10,675, $10,921 and$13,035 in 2002, 2001 and 2000, respectively.

** **

**8.     Commitmentsand Contingencies**

 

The Company leases twomanufacturing facilities, four sales, distribution or administrative facilitiesand the Company headquarters. Inaddition, the Company leases certain data processing and other equipment.

 

At December 31, 2002, the approximate future minimum rental commitments requiredunder non-cancelable operating leases are as follows:

  

   2003

   $

  2,028

   2004

 

  1,110

   2005

 

  760

   2006

 

  146

   2007

 

  39

   Thereafter

 

  585

   Total  minimum lease payments

   $

  4,668

 

Rent expense was$2,373, $2,987 and $2,387 in 2002, 2001 and 2000, respectively.

 

At December 31, 2002,the Company had no commitments related to capital projects.

 

The Company hasentered into a long-term Product Manufacturing and Sales Agreement (the SupplyAgreement) with a plastic lens manufacturer located in Southeast Asia. The Supply Agreement provides for theSoutheast Asian manufacturer to supply, and the Company to purchase, certainminimum levels of plastic lenses. AtDecember 31, 2002, the approximate future purchase commitments under thisSupply Agreement were as follows:

 

   2003

  $

  6,805

   2004

 

  3,179

   Total

  $

  9,984

 

 

**9.     Stock Purchase and Award Plans**

 

 The Restated and Amended1994 Stock Incentive Plan (the 1994 Plan) provides for the granting of eitherincentive stock options or nonqualified stock options to purchase shares of the Company's common stock and for other stock-based awards to officers, directorsand key employees responsible for the direction and management of the Companyand to non-employee consultants and independent contractors.  During 2000,the Company's stockholders approved an amendment to the 1994 Plan authorizing anadditional 2,000 shares of common stock for issuance.  At December 31,2002, 4,444 shares of common stock were reserved for issuance under the 1994Plan and for outstanding options under the 1984 Omnibus Stock Plan, whichterminated on January 10, 1994.  The reserved shares included 1,426 sharesavailable for awards under the 1994 Plan.

 

Information relating to stock options during2002, 2001 and 2000 is as follows:

 

 

 

 

 

 

** **

  Option Price

 

 

 

 

 

   Number

of Shares

 

 

 

 

    Per Share Average

 

 

    Total

    Price

 

 
   Shares under option at December 31, 1999
 

  2,534

 

  $

  9.75

  $

  24,714

 
   2000 Activity:
 

 

 

 

 

 

 

 
   Granted
 

  450

 

 

  5.29

 

  2,379

 
   Exercised
 

  (3

  )

 

  5.00

 

  (15

  )
   Forfeited
 

  (212

  )

 

  9.66

 

  (2,047

  )
   Shares under option at December 31, 2000
 

  2,769

 

 

  9.04

 

  25,031

 
   2001 Activity:
 

 

 

 

 

 

 

 
   Granted
 

  832

 

 

  5.62

 

  4,678

 
   Exercised
 

  (247

  )

 

  1.94

 

  (478

  )
   Forfeited
 

  (578

  )

 

  7.60

 

  (4,393

  )
   Shares under option at December 31, 2001
 

  2,776

 

 

  8.95

 

  24,838

 
   2002 Activity:
 

 

 

 

 

 

 

 
   Granted
 

  1,014

 

 

  1.33

 

  1,348

 
   Expired
 

  (567

  )

 

  15.19

 

  (8,614

  )
   Forfeited
 

  (205

  )

 

  5.23

 

  (1,072

  )
   Shares under option at December 31, 2002
 

  3,018

 

  $

  5.47

  $

  16,500

 
 
 

 

 

 

 

 

 

 
   Shares exercisable at December 31, 2002
 

  1,471

 

  $

  7.57

  $

  11,129

 
   Shares exercisable at December 31, 2001
 

  1,584

 

  $

  10.04

  $

  15,911

 
   Shares exercisable at December 31, 2000
 

  1,591

 

  $

  8.49

  $

  13,502

 

 

 

The following table summarized informationconcerning currently outstanding and exercisable options:

             
 
 

 

   Options  Outstanding

 

   Options  Exercisable

 

  Range of Exercise  Prices

 

Number       Outstanding

 

  Weighted Average  Remaining Contractual Life (Years)

 

   

  Weighted Average  Exercise Price

 

   

   

   

  Number Exercisable

 

  Weighted Average  Exercise Price

  $

  0  - 5

 

  1,313

 

  6.7

  $

  2.10

 

  366

  $

  3.28

 

  5  - 10

 

  1,358

 

  5.1

 

  5.99

 

  824

 

  6.12

 

  10  - 20

 

  241

 

  4.8

 

  12.60

 

  175

 

  13.20

 

  20 - 31

 

  106

 

  3.7

 

  24.19

 

  106

 

  24.19

 

 

 

  3,018

 

  5.7

  $

  5.47

 

  1,471

  $

  7.57

 

 All outstanding optionsare nonqualified options.  No compensation expense related to stock optiongrants was recorded in 2002, 2001 or 2000, as the option exercise prices wereequal to fair market value on the date of grant.

 

**CommonStock Issuance. ** In May 2002, theCompany issued 40 shares to the departing CEO and recognized $50 ofcompensation expense, which is included in administrative expense on theconsolidated statement of operations.

  

**Stock Option Exercise Loan Program**.. During 2000, the Company discontinued theStock Option Exercise Loan Program under which holders of exercisable stockoptions could obtain interest-free and interest-bearing loans from the Companyto facilitate their exercise of stock options. Under provisions of the program, new loans cannot be made, but existingloans will continue to be administered until they are repaid. Such full recourse loans are evidenced bydemand promissory notes and are secured by shares of stock. The portion of such loans directly relatedto the option exercise price is classified as a reduction of stockholders'equity. The remainder is included incurrent assets.

 

 In August 2001, 686,630common shares at a market value of $3,361 were received from officers of theCompany in exchange for the repayment of certain stock option loans and exerciseof certain stock options as follows:

 
Receipt of common shares
  $

  (3,361

  )

  Repayment of stock  option loans

 

  2,627

 

  Option exercise  proceeds

 

  478

 

  Tax benefit  adjustment of stock options

 

  256

 

  Net  cash

  $

  --

 

** **

**Share Rights Plan** . In June 1998, the Company adopted a ShareRights Plan and declared a dividend of one Preferred Share Purchase Right(Right) for each outstanding share of common stock to stockholders of record onJuly 20, 1998. The Rights will becomeexercisable after any person or group acquires or announces a tender orexchange offer resulting in the beneficial ownership of 15% or more of theCompany's common stock. Each Rightentitles shareholders to buy one five-hundredth of a share of a newly createdseries of preferred stock at an exercise price of $75 subject to adjustmentupon certain events. If any person orgroup acquires 15% or more of the Company's common stock, if the Company isacquired in a business combination, or if the Company sells 50% or more of itsassets, each Right entitles its holder, other than the person or groupacquiring the common stock, to purchase at the Right's then current exerciseprice, shares of the Company's common stock having a value of twice the Right'sthen current exercise price. The Rightsare redeemable at $0.001 per Right and will expire on July 20, 2008 unlessextended or redeemed earlier by the Company.

 

**10.    EmployeeBenefit Plans**

 The Company maintainsa savings and profit sharing plan covering substantially all of its domesticsalaried employees and a majority of those domestic hourly employees notcovered by a pension plan or retirement fund described below. Under the profit sharing provision of theplan, the Company makes no annual minimum contribution. Depending upon theCompany's profitability,a discretionary contribution up to 12% of participants' wages may be made. Provisions of the profit sharing portion ofthe plan include 100% vesting after five years of continuous service, andpayment of benefits upon retirement, total disability, death ortermination. Under terms of the savingsprovision of the plan, the Company makes a quarterly contribution equal to 100%of participants' before-tax contributions up to 3% of base salary with anadditional contribution equal to 50% of participants' before-tax contributionsbetween 3% and 5% of base salary. Provisions of the savings portion of the plan include immediate vestingof the Company's contributions, and payment of benefits upon retirement, totaldisability, death or termination. 

 The Company's Germansubsidiary has a noncontributory defined benefit pension plan coveringsubstantially all of its employees.  Benefits payable under the plan arebased upon the participant's base salary prior to retirement and years ofcredited service.  As allowed under German law, this plan is not funded. However, under generally accepted accounting principles, the estimated futureliability is accrued in the Company's Consolidated Financial Statements. The Company also has a defined benefit pension plan under a contract with itsunion employees.

 In addition to the definedbenefit plans discussed above, the Company had two defined benefitpost-retirement plans covering certain domestic employees.  One planprovided medical benefits and the other provides life insurance benefits. During 2000, the Company terminated the medical benefits plan, resulting in atermination gain of $1,678, which is included in Other Income in theConsolidated Statement of Operations.  The life insurance plan providesterm life insurance coverage to all retired full-time hourly employees at oneformer domestic operation.  The Company accrues the expected cost ofproviding benefits under the life insurance benefit plan during the years thateligible employees rendered service.  The life insurance plan is not fundedand the liability under the plan is immaterial.

 The above describeddefined benefit and post-retirement plans included the following components:

 

 

    

   Pension  Benefits

 

 

 

  2002

 

 

  2001

 
Change in Benefit  Obligation:
 

 

 

 

 

 

 Benefit obligation at beginning of year

 $

  32,673

 

 $

  13,486

 

 Service cost

 

  663

 

 

  445

 

 Interest cost

 

  2,224

 

 

  825

 

 Foreign currency  exchange rate changes

 

  1,964

 

 

  (521

 )

 Actuarial (gain)  loss

 

  846

 

 

  393

 

 Benefit payments

 

  (1,745

 )

 

  (474

 )

 Administrative  expenses paid

 

  (18

**)**

 

  --

 

 Benefit obligation at end of year

 

  36,607

 

 

  14,154

 

 

 

 

 

 

 

 

**Change  in Fair Value of Plan Assets:**

 

 

 

 

 

 

 Fair value of plan assets at beginning of year

 

  18,356

 

 

  4,335

 

 Actual return on  plan assets

 

  (1,879

 )

 

  (983

 )

 Employer  contribution

 

  151

 

 

  261

 

 Benefit payments

 

  (1,532

 )

 

  (287

 )

 Administrative  expenses paid

 

  (18

 )

 

  --

 

 Fair value of plan assets at end of year

 

  15,078

 

 

  3,326

 

 

 

 

 

 

 

 

**Funded  Status:**

 

 

 

 

 

 

 Funded status of the plan (underfunded)

 

  (21,529

 )

 

  (10,828

 )

 Unrecognized transitional amount

 

  3,358

 

 

  34

 

 Unrecognized net gain

 

  5,310

 

 

  1,197

 

 Accrued pension cost

 $

  (12,861

 )

 $

  (9,597

 )

 
 
 

  2002

 

 

  2001

 

 

  2000

 
Components of Net  Periodic Pension Cost
 

 

 

 

 

 

 

 

 

 Pension benefits:

 

 

 

 

 

 

 

 

 

 Service cost

**$**

  663

 

  $

  445

 

 

  450

 

 Interest cost

 

  2,224

 

 

  825

 

 

  802

 

 Expected return on  plan assets

 

  (1,463

 )

 

  (268

 )

 

  (350

 )

 Amortization of  transition obligation

 

  169

 

 

  11

 

 

  12

 

 Recognized actuarial  gain

 

  14

 

 

  (7

 )

 

  (11

 )

 Net periodic pension cost

 $

  1,607

 

  $

  1,006

 

  $

  903

 

 

 

 

 

 

 

 

 

 

 

 Post-retirement benefits:

 

 

 

 

 

 

 

 

 

 Service costs

 $

  --

 

  $

  --

 

  $

  47

 

 Interest cost

 

  --

 

 

  --

 

 

  55

 

 Recognized actuarial  (gain) loss

 

  --

 

 

  --

 

 

  3

 

 Settlement/curtailment  gain

 

  --

 

 

  --

 

 

  (1,678

 )

 Net periodic pension cost

 $

  --

 

  $

  --

 

  $

  (1,573

 )

 Assumptionsused in developing the projected benefit obligation and the net periodicpension cost as of December 31 were as follows:  
 
 

  2002

 

 

  2001

 

 

  2000

 
Domestic plans  (including post-retirement plan in 2000):
 

 

 

 

 

 

 

 

 

 Discount rate

 

  6.75

 %

 

  7.50

 %

 

  7.75

 %

 Rate of return on  plan assets

 

  8.75

 %

 

  9.00

 %

 

  9.00

  %

   Foreign plan:

 

 

 

 

 

 

 

 

 

 Discount rate

 

  6.00

 %

 

  6.00

 %

 

  6.00

 %

 Rate of increase in  compensation

 

  2.60

 %

 

  2.50

 %

 

  2.50

 %

At December 31, 2002, the Company was requiredto record a minimum pension liability under its pension plans in the amount of$7,170, net of taxes. An intangibleasset for the union plan transition obligation in the amount of $3,332 was alsorecorded. The charge to accumulatedother comprehensive income was $1,503 and 2,335 in 2002 and 2001, respectively.

 The total cost of allprofit sharing, savings and pension plans, domestic and foreign, was $2,698,$2,754 and $4,591 in 2002, 2001 and 2000, respectively..

**11.    Income Taxes**

The provision for income taxes was based onearnings (loss) before income taxes, as follows: 
Years ended December 31
 

  2002

 

 

  2001

 

 

  2000

 

Domestic
$
(60,281
)
$
(16,806
)
$
6,648
 
 Foreign

 

  (1,222

 )

 

  3,576

 

 

  14,495

 

 Earnings (loss)  before income taxes

 $

  (61,503

 )

  $

  (13,230

 )

  $

  21,143

 

  

 Theprovision for income taxes consisted of:

  
Years ended December  31
 

  2002

 

 

  2001

 

 

  2000

 
Current
  Federal

 $

  (5,705

 )

  $

  (150

 )

  $

  1,102

 

  State

 

  18

 

 

  58

 

 

  (15

 )

  Foreign

 

  1,619

 

 

  3,878

 

 

  6,310

 

**Deferred**

 

 

 

 

 

 

 

 

 

  Federal  and state

 

  4,712

 

 

  6,504

 

 

  (1,292

 )

  Foreign

 

  (260

 )

 

  (920

 )

 

  138

 

 Income tax expense

 $

  384

 

  $

  9,370

 

  $

  6,243

 

  

 Significantcomponents of deferred income tax assets and liabilities were as follows atDecember 31:

 

 

  2002

 

 

  2001

 

**Federal and State Net Deferred  Income Taxes**

 

 

 

 

 

 

 Deferred  tax asset

 

 

 

 

 

 

   Reserves and accruals

 $

  4,757

 

 $

  4,642

 

   Compensation and benefit-related accruals

 

  5,072

 

 

  5,319

 

   Goodwill

 

  14,623

 

 

  --

 

   Other temporary differences

 

  4,364

 

 

  4,278

 

   NOL and tax credit carryovers

 

  17,545

 

 

  23,414

 

   Valuation allowance

 

  (28,853

  )

 

  (14,500

  )

   Total

 

  17,508

 

 

  23,153

 

 Deferred  tax liability

 

 

 

 

 

 

   Goodwill

 

  --

 

 

  (3,072

  )

   Depreciation

 

  (3,700

  )

 

  (2,430

  )

   Capitalized molds and tooling

 

  (1,294

  )

 

  (799

  )

   Total

 

  (4,994

  )

 

  (6,301

  )

 Net  deferred tax asset

 $

  12,514

 

 $

  16,852

 

 

 

 

 

 

 

 

**Foreign Net Deferred  Income Taxes**

 

 

 

 

 

 

 Deferred  tax liability

 

 

 

 

 

 

   Depreciation

 $

  (1,720

  )

 $

  (1,908

  )

   Inventory

 

  (11

  )

 

  (110

  )

   Other temporary differences

 

  (653

  )

 

  (565

  )

   Total

 

  (2,384

  )

 

  (2,583

  )

 Deferred  tax asset

 

 

 

 

 

 

   Retirement benefits

 

  1,093

 

 

  815

 

   Other temporary differences

 

  109

 

 

  730

 

   Total

 

  1,202

 

 

  1,545

 

 Net  deferred tax liability

 

  (1,182

  )

 

  (1,038

  )

The federal and statenet deferred tax asset included a current portion of $9,431 and $10,198 atDecember 31, 2002 and 2001, respectively, and a long-term portion of $3,083 and$6,654 at December 31, 2002 and 2001, respectively. The foreign net deferred tax liability included a currentliability of $27 and a current asset of $52 at December 31, 2002 and 2001,respectively, and a long-term liability of $1,155 and $1,090 at December 31, 2002 and 2001, respectively. 

 Net operating losscarryforwards of $13,243 at December 31, 2002 expire in 2019. General business credit carryforwards of$932 expire in 2016 to 2022. Foreigntax credit carryforwards of $10,280 expire in 2003 through 2005. Alternative minimum tax credits of $981 canbe carried forward indefinitely to offset regular tax liabilities.

The differencesbetween income taxes at the U.S. federal statutory tax rate and the effectivetax rate were asfollows:

 
Years ended December  31
 

  2002

 

 

  2001

 

 

  2000

 
Statutory rate
 

  (35.0

 )%

 

  (35.0

 )%

 

  35.0

 %

 Difference in  taxation of foreign earnings

 

  2.8

 

 

  10.7

 

 

  6.1

 

 Foreign income taxed  in the U.S.

 

  10.2

 

 

  (14.9

 )

 

  (9.5

 )

 State income taxes,  net of federal benefit

 

  (1.6

 )

 

  (1.6

 )

 

  1.0

 

 Change in deferred  tax valuation allowance

 

  23.3

 

 

  109.6

 

 

  --

 

 Other items

 

  0.9

 

 

  2.0

 

 

  (3.1

 )

 Effective tax rate

 

  0.6

 %

 

  70.8

 %

 

  29.5

 %

 

Differences in taxationof foreign earnings relate primarily to taxation of foreign earnings at ratesin excess of the U.S. statutory rate. Undistributed earnings of foreign subsidiaries at December 31, 2002 wereapproximately $12,619. No U.S. taxeshave been provided on these undistributed earnings, because the Company expectsto be able to utilize foreign tax credits to offset any U.S. tax that wouldresult from their distribution.

 

The Company providedfor deferred tax asset valuation reserves of $14,353 in 2002 and $14,500 in2001, the effect of which increased income tax expense. The need for the valuation reserve wasdriven by projections for future U.S. taxable income, which impacts thepotential for realizing the benefits of the Company's carryovers. The statutory time period for using thecarryovers on its income tax returns extends beyond the period the Company usedto assess impairment for accounting purposes. If at some time in the future it is determined that all or a portion ofthe existing carryovers may be realized, the valuation reserve will be reducedaccordingly.

 

Income taxes paid were$586, $612 and $7,888 in 2002, 2001 and 2000, respectively.

 

**12.    SegmentInformation**

 

 The Company has twooperating segments, which manufacture and sell a variety of products: Buckbee-Mears and Optical Products.  Buckbee-Mears manufactures precisionphoto-etched and electroformed parts that require tight tolerances andminiaturization.  Its principal product is aperture masks, a key componentused in the manufacture of color television and computer monitor picture tubes. Optical Products designs, manufactures and distributes optical lenses.  Netsales of aperture masks comprised 93%, 93% and 91% of Buckbee-Mears segmentrevenues in 2002, 2001 and 2000, respectively, and 52%, 52% and 55% of the Company's consolidated total revenues in 2002, 2001 and 2000, respectively.  

 The following is a summary of certain financialinformation relating to the two segments:

 
Years ended December 31
 

  2002

 

 

  2001

 

 

  2000

 
 
 

 

 

 

 

 

 

 

 
Total Revenues by  Segment
 

 

 

 

 

 

 

 

 

  Buckbee-Mears

  $

  137,950

 

  $

  170,862

 

  $

  214,880

 

  Optical  Products

 

  110,148

 

 

  131,434

 

 

  139,605

 

  Total  Revenues

  $

  248,098

 

  $

  302,296

 

  $

  354,485

 

 

 

 

 

 

 

 

 

 

 
Operating Income (Loss)  by Segment
 

 

 

 

 

 

 

 

 

  Buckbee-Mears

 

 

 

 

 

 

 

 

 

  Before  non-recurring charges

  $

  9,050

 

  $

  5,089

 

  $

  25,108

 

  Non-recurring  charges

 

  --

 

 

  (5,038

  )

 

  --

 

  Total

 

  9,050

 

 

  51

 

 

  25,108

 

  Optical  Products

 

 

 

 

 

 

 

 

 

  Before  non-recurring charges

 

  (290

  )

 

  3,298

 

 

  11,419

 

  Non-recurring  charges

 

  (2,800

  )

 

  (1,180

  )

 

  --

 

  Total

 

  (3,090

  )

 

  2,118

 

 

  11,419

 

  Total  segment operating profit

 

  5,960

 

 

  2,169

 

 

  36,527

 

  Administrative  expense

 

  (6,124

  )

 

  (5,038

  )

 

  (5,389

  )

  Interest  expense, net

 

  (10,347

  )

 

  (11,244

  )

 

  (12,833

  )

  Other  income

 

  1,712

 

 

  883

 

 

  2,838

 

  Earnings  (loss) before income taxes and cumulative effect of change in accounting  principle

 

   

  (8,799

   

  )

 

   

  (13,230

   

  )

 

   

  21,143

 

 

 

 

 

 

 

 

 

 

 
Identifiable Assets by  Segment
 

 

 

 

 

 

 

 

 

  Buckbee-Mears

  $

  116,966

 

  $

  132,755

 

  $

  158,453

 

  Optical  Products

 

  109,634

 

 

  180,648

 

 

  191,884

 

  Total  identifiable assets

 

  226,600

 

 

  313,403

 

 

  350,337

 

  Corporate  and other assets

 

  20,759

 

 

  18,343

 

 

  23,467

 

  Total  assets

  $

  247,359

 

  $

  331,746

 

  $

  373,804

 

 

 

 

 

 

 

 

 

 

 
Depreciation and  Amortization by Segment
 

 

 

 

 

 

 

 

 

  Buckbee-Mears

  $

  11,395

 

  $

  12,191

 

  $

  13,492

 

  Optical  Products

 

  9,349

 

 

  11,516

 

 

  10,336

 

  Corporate  and other

 

  64

 

 

  100

 

 

  162

 

  Total  depreciation and amortization

  $

  20,808

 

  $

  23,807

 

  $

  23,990

 

 

 

 

 

 

 

 

 

 

 
Capital Expenditures by  Segment
 

 

 

 

 

 

 

 

 

  Buckbee-Mears

  $

  2,421

 

  $

  5,779

 

  $

  7,703

 

  Optical  Products

 

  5,762

 

 

  8,311

 

 

  4,182

 

  Corporate  and other

 

  30

 

 

  44

 

 

  44

 

  Total  capital expenditures

  $

  8,213

 

  $

  14,134

 

  $

  11,929

 

 

The following is a summary of the Company'soperations in different geographic areas:

 
Years ended December 31
 

  2002

 

 

  2001

 

 

  2000

 
 
 

 

 

 

 

 

 

 

 
Total Revenues from  Unaffiliated Customers
 

 

 

 

 

 

 

 

 

  United  States

  $

  150,092

 

  $

  192,879

 

  $

  232,458

 

  Germany

 

  69,855

 

 

  84,399

 

 

  95,796

 

  Other

 

  28,151

 

 

  25,018

 

 

  26,231

 

  Total

  $

  248,098

 

  $

  302,296

 

  $

  354,485

 

 

 

 

 

 

 

 

 

 

 
Long-Lived Assets
 

 

 

 

 

 

 

 

 

  United  States

  $

  89,212

 

  $

  101,482

 

  $

  107,679

 

  Germany

 

  18,169

 

 

  18,136

 

 

  21,404

 

  Other

 

  13,953

 

 

  11,923

 

 

  10,416

 

  Total

  $

  121,334

 

  $

  131,541

 

  $

  139,499

 

 

 The Company evaluatessegment performance based on profit or loss from operations before interest,other income/expense, taxes and charges for corporate administration. Revenues by geographic area are based upon revenues generated from eachcountry's operations.  Net sales to unaffiliated foreign customers fromdomestic operations (export sales) in 2002, 2001 and 2000 were $36,101, $56,139and $61,686, or 15%, 19% and 17%, respectively, of total revenues. Buckbee-Mears had sales to one customer of $32,894, $42,566 and $62,895 and toanother customer of $45,957, $47,502 and $58,174 in 2002, 2001 and 2000,respectively.  Optical Products did not have sales to any individualcustomer greater than 10% of total revenues.

 

**13.    Concentrations of Credit Risk**

** **

 Approximately 72% of thetrade accounts receivable before allowances (receivables) of Buckbee-Mears atDecember 31, 2002 were represented by four customers.  Approximately 54% ofthe receivables of Optical Products at December 31, 2002 were represented by 20customers.  These 24 customers represented approximately 64% of the Company's consolidated receivables at December 31, 2002, with one customer ofBuckbee-Mears representing approximately 14% and two other customersrepresenting approximately 13% each of consolidated receivables and one customerof Optical Products representing approximately 9% and another customerrepresenting 8% of consolidated receivables.

 

 Buckbee-Mears' customerbase consists of the largest television manufacturers in the world. Accordingly, Buckbee-Mears generally does not require collateral and its tradereceivables are unsecured.  Optical Products' customer base consists of awide range of eyewear retailers and optical laboratories.  Optical Productsperforms detailed credit evaluations of customers and establishes credit limitsas necessary.  Collateral or other security for accounts receivable isobtained as considered necessary for Optical Products' customers.

 

**14.    Legal Matters**

** **

 During 2002, theOptical Products group filed a lawsuit for patent infringement against YoungerMfg. Co., which operates under the name "Younger Optics", in theUnited States Court for the District of Minnesota. We sought an injunction prohibiting the manufacture, use, sale oroffer for sale of polycarbonate polarizing lenses that infringe patent claimsheld by us, as well as damages suffered as a result of Younger's infringementof our patent rights. On March 17,2003, we settled this lawsuit and entered into a license agreement under whichYounger is required to pay a royalty to Vision-Ease for all products producedwithin our patent claims. In addition,Vision-Ease received a royalty-free license to Younger patents covering the useof PET film in the production of optical products. Although we currently do not practice within these patents, wehave the right to use this technology in future applications.

 

 In June 2002, RiccardoNunziati, a shareholder of BMC, filed a shareholder derivative lawsuit inMinnesota District Court for the Fourth District against BMC, Paul B. Burke,our former Chairman of the Board and CEO, and the remaining directors servingon BMC's Board at that time. Mr.Nunziati's complaint asserted breach of fiduciary duty, abuse of control andwaste of corporate assets. Mr. Nunziatisought to unwind a stock transaction between BMC and Mr. Burke, as well aspayment of his attorney fees and other costs of bringing the suit. In July 2002, the case was removed from theMinnesota District Court to the United States District Court for the Districtof Minnesota. The parties reached asettlement in August 2002. Under theterms of the settlement agreement, we agreed to review existing corporategovernance policies and practices and consider enhancements to those policeswhere appropriate. In addition, theBoard agreed to consider up to three nominees from Mr. Nunziati for potentialmembership on the Board of Directors. Although Mr. Nunziati had the right to nominate three candidates forconsideration by the Board, the settlement agreement provided that his nomineeswere required to meet the same qualifications as all other candidates and gothrough the same process as all other director candidates. Of the three nominees presented by Mr.Nunziati, the Board moved forward with the consideration of one candidate,Robert D. Endacott. Following anextensive review process, the Board determined that Mr. Endacott met thequalifications for service on the Board and that he would bring beneficialexperience and knowledge to the Board. Mr. Endacott accepted the Board's offer to serve as a director inOctober 2002.  

  

 In August 2002, theBuckbee-Mears group initiated arbitration proceedings in Stockholm, Swedenagainst China-based China National Electronics Import and Export Corp. ("CEIEC")and Yantai Zhenghai Electronic Shadow Mask Co., Ltd. ("Yantai")seeking monetary damages and injunctive relief for alleged violations by theCEIEC and Yantai of multiple terms of an equipment purchase and technologylicense agreement between CEIEC, Yantai and BMC. The Buckbee-Mears group sold a mask production line to thedefendants under this agreement in 1993. In addition to restrictions on sales of masks by Yantai outside China,the agreement requires the payment of a royalty by Yantai to BMC for all of itsmask sales over a ten-year period. Todate, Yantai has not made any royalty payments to BMC. In addition, Yantai has built additionalmask production lines, which BMC alleges were built in violation of theagreement by copying the original production line sold to Yantai. BMC also alleges that these subsequentproduction lines infringe upon BMC intellectual property rights. The arbitration panel is expected to issueits findings in July 2003.

  

 BMC is also adefendant in various other suits, claims and investigations that arise in thenormal course of business. In theopinion of our management, the ultimate disposition of these matters will nothave a material adverse impact on our consolidated financial position,liquidity or results of operations.

 

 Report of IndependentAuditors

** **

The Board of Directors and Stockholders

BMC Industries, Inc.

 

We have audited theaccompanying consolidated balance sheets of BMC Industries, Inc. as of December31, 2002 and 2001, and the related consolidated statements of operations,stockholders' equity and cash flows for each of the three years in the periodended December 31, 2002. Our auditsalso included the financial statement schedule listed in Item 15. These financial statements and schedule arethe responsibility of the Company's management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of BMC Industries, Inc. atDecember 31, 2002 and 2001, and the consolidated results of its operations andits cash flows for each of the three years in the period ended December 31,2002, in conformity with accounting principles generally accepted in the UnitedStates. Also in our opinion, thefinancial statement schedule referred to above, when considered in relation tothe basic financial statements taken as a whole, presents fairly in allmaterial aspects the information set forth therein.

 

As discussed in Notes1 and 3 to the consolidated financial statements, the Company adopted Statementof Financial Accounting Standards No. 142, *Goodwill and Other IntangibleAssets*, in 2002.

 

Ernst& Young LLP

 

Minneapolis, Minnesota

January 31, 2003

 

 

****

**Item 9. Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

 

 

**Part III**

** **

**Item 10. Directors andExecutive Officers of the Registrant**

** **

(a)    *Directors of theRegistrant*

 

      The information under the caption "Election ofDirectors" on pages 3-5 of our proxy statement for the annual meeting ofstockholders to be held on May 13, 2003 is incorporated herein by reference.

 

(b)    *Executive Officers ofthe Registrant*

 

 Listedbelow is information regarding all of our executive officers as of March 21,2003.

  

 

  Name (Age)

  Date First Elected

  or Appointed as

  an Executive Officer

 

 

  Title

   

  Douglas C. Hepper (53)

   

  June 2002

   

  Chairman of the Board,  President and Chief Executive Officer

 

  Bradley D. Carlson (38)

  September 1999

  Treasurer

 

  Jon A. Dobson (36)

  December 1997

  Vice President, General  Counsel and Secretary

 

  Richard G. Faber (43)

  March 2002

  Controller

 

  Susan J. Linzmeier (57)

  July 2002

  Vice President, Human  Resources

 

  Curtis E. Petersen (50)

  December 2001

  Senior Vice President and  Chief Financial Officer

 

There are no familyrelationships between or among any of the executive officers. Executive officers are elected by the Boardof Directors and serve until their successors have been duly elected andqualified or until their resignation or removal.

 

Except as indicated below,the executive officers have not changed their principal occupations oremployment during the past five years.

 

Mr. Hepper is also adirector of BMC. Mr. Hepper joined BMCas Chairman, President and Chief Executive Officer in June 2002. Prior to joining BMC, Mr. Hepper has heldseveral management positions with PPG Industries, Inc., a global manufacturerand distributor of paints and other coatings, since 1973, most recently as VicePresident of PPG's automotive refinishing divisions.

 

Mr. Carlson joined BMC inSeptember 1999 as Treasurer. From July1992 to September 1999, Mr. Carlson held various positions with NorthwestAirlines, Inc., a commercial air travel carrier, most recently as Director ofCorporate Finance. Prior to this, Mr.Carlson served as an Associate with Kidder Peabody, Inc., an investment bankingfirm, in 1991, and as a Corporate Finance Analyst with Dain RauscherIncorporated, an investment banking firm, from December 1987 to June 1990.

 

Mr. Dobson joined BMC inApril 1995 as Director of Legal Services. In December 1997, he was appointed General Counsel and Secretary. In November 1999, Mr. Dobson was appointedVice President of Human Resources, General Counsel and Secretary. In November 2001, he was appointed VicePresident, 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 securitieslaw.

 

Mr. Faber jointed BMC inMarch 2002 as Controller. From 1998 to2001, Mr. Faber served as Chief Financial Officer, Asia Pacific, at CarlsonCompanies, a travel, marketing and hospitality company. Prior to this, Mr. Faber served in a varietyof controller and project leader assignments with Cargill Incorporated, aprocessing and trading company. 

 

Ms. Linzmeier joined BMC inJuly 2002 as Vice President of Human Resources. Prior to joining the Company, Ms. Linzmeier held severalpositions over the last 15 years with American Standard Corporation, an airconditioning, heating, plumbing and vehicle control products manufacturingcompany, most recently as Corporate Director, Human Resources. 

 

Mr. Petersen joined BMC inAugust 2001 as Executive Vice President, Finance and Administration, of theOptical Products group. In December2001, he was appointed Senior Vice President and Chief Financial Officer ofBMC. Prior to joining BMC, Mr. Petersenserved as Senior Vice President and Chief Financial Officer of RivertownTrading Company, a retail catalog producer, and later of Target.Direct.Inc., aninternet-based retailer, from September 1996 to March 2001. Prior to that, he served in numerousexecutive positions in finance, accounting and operations with Rosemount, Inc.,a division of Emerson Electric Company, a process instrumentation manufacturer,and Diversified Energies, Inc., a holding company with interests in naturalgas, prior to its merger into Arkla, Inc.

  

(c)    *Compliance with Section16(a) of the Exchange Act*

 

      The information under the caption "Section 16(a)Beneficial Ownership Reporting Compliance" on page 23 of our proxystatement for the annual meeting of stockholders to be held on May 13, 2003 isincorporated herein by reference.

** **

** **

**Item 11. Executive Compensation**

 

The information containedunder the caption "Executive Compensation" on pages 13-16 and 17-20,and "Election of Directors - Information About the Board and ItsCommittees" on pages 3-6 of our proxy statement for the annual meeting ofstockholders to be held on May 13, 2003 is incorporated herein by reference.

** **

** **

**Item 12. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

The information containedunder the caption "Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters" on pages 10-12 of our proxystatement for the annual meeting of stockholders to be held on May 13, 2003 isincorporated herein by reference.

 

**  **

**Item 13. Certain Relationshipsand Related Transactions**

 

The information containedunder the caption "Certain Transactions" on page 22 of our proxystatement for the annual meeting of stockholders to be held on May 13, 2003 isincorporated herein by reference.

 

 

**Item 14. Controls andProcedures**
 
***EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES***
  
 Asof December 31, 2002, an evaluation was performed under the supervision andwith the participation of management, including Douglas C. Hepper, ourprincipal executive officer, and Curtis E. Petersen, our principal financialofficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Exchange Act Rules 240.13a-14(c) and15d-14(c)). Based on that evaluation, BMC's management, including Messrs.Hepper and Petersen, concluded that our disclosure controls and procedures wereeffective as of December 31, 2002.
  
***CHANGES IN INTERNAL CONTROLS***

 

 Therehave been no significant changes in our internal controls or in other factorsthat could significantly affect internal controls subsequent to December 31,2002.

 

 

 

**PART IV.**

 

**Item 15. Exhibits, FinancialStatement Schedules, and Reports on Form 8-K**

 

**(a)    1.     Financial Statements**

 

             Thefollowing items are included herein on the pages indicated.

  

            

 

Consolidated Financial Statements: 

Page

 

                        

Consolidated Statements of Operations for the Years Ended

 

                        

   December 31, 2002, 2001 and 2000

24

 

                        

Consolidated Balance Sheets as of December 31, 2002 and 2001

25

 

                        

Consolidated Statements of Stockholders' Equity for the Years

                        

   Ended December 31, 2002, 2001 and 2000

26

 

                        

Consolidated Statements of Cash Flows for the Years Ended

                        

   December 31, 2002, 2001 and 2000 

27

 

                        

Notes to Consolidated Financial Statements 

28

 

                        

Price Range of Common Stock  

12

                        

                         

 Report of Independent Auditors 

 45

 

                        

Selected Quarterly Financial Data (unaudited)

14

**      **

**2.     FinancialStatement Schedule:**

 

Thefollowing financial statement schedule is included herein and should be read inconjunction with the consolidated financial statements referenced above:

 

                                                                                                               Page

 

            II - Valuation and Qualifying Accounts                                                           50

 

 Schedules other than theone listed above are omitted because of the absence of the conditions underwhich they are required or because the information required is included in theconsolidated financial statements or the notes thereto.

 

**      3.     Exhibits:**

 

             Reference is made to theExhibit Index contained on pages 54 of this Form 10-K.

 

Thefollowing exhibits filed as a part of this report are management contracts orcompensatory plans or arrangements:

 
 
 10.1

 Revised Executive Perquisite/Flex Policy (effective as of January 1, 1998 andterminated as of December 31, 2002) (incorporated by reference to Exhibit 10.4to the Company's Annual Report on Form 10-K for the year ended December 31, 1998(File No. 1-8467)).
 
  
 
10.6      

Restated and Amended Directors' DeferredCompensation Plan (incorporated by reference to Exhibit 10.15 to the Company'sAnnual Report on Form 10-K for the year ended December 31, 1996 (File No.1-8467)).
 
 
 
10.27     

Form of Change of Control Agreement enteredinto between the Company and Mr. Burke (incorporated by reference to Exhibit10.31 to the Company's Annual Report on Form 10-K for the year ended December31, 1991 (File No 1-8467)).
 
 
 
10.28    

Form of Change of Control Agreement entered intobetween the Company and Messrs. Carlson, Dobson, Faber, Petersen and Ms.Linzmeier (incorporated by reference to Exhibit 10.29 to the Company's AnnualReport on Form 10-K for the year ended December 31, 1999 (File No. 1-8467)).
 
 
 
 10.30  

 Employment Agreement byand between the Company and Paul B. Burke, dated as of January 1, 1999(incorporated by reference to Exhibit 10.25 of the Company's Annual Report onForm 10-K for the year ended December 31, 1998 (File No. 1-8467)).
 
 
 
 10.29 

 Employment Agreement byand between the Company and Curtis E. Petersen, dated December 3,2001(incorporated by reference to Exhibit 10.23 to the Company's Annual Reporton Form 10-K for the year ended December 31, 2001 (File No. 1-8467)).
 
 
 
10.31

BMC Industries, Inc. Executive Benefit Plan,effective January 1, 1993 (incorporated by reference to Exhibit 10.22 of theCompany's Annual Report on Form 10-K for the year ended December 31, 1998 (FileNo. 1-8467)).
 
 
 
10.10    

First Declaration of Amendment, effectiveSeptember 1, 1998, to the BMC Industries, Inc. Executive Benefit Plan(incorporated by reference to Exhibit 10.12 to the Company's Annual Report onForm 10-K for the year ended December 31, 1998 (File No. 1-8467)).
 
 
 
10.31    

Amendment to Executive Employment Agreementbetween the Company and Paul B. Burke, dated April 10, 2002 (incorporated byreference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q forthe quarter ended March 31, 2002 (File NO. 1-8467)).
 
 
 
10.32    

Employment Agreement by and between theCompany and Douglas Hepper, dated as of May 14, 2002 (incorporated by referenceto Exhibit 10.44 of the Company's Current Report on Form 8-K, dated June 12,2002 and filed with the Commission on June 12, 2002 (File No. 1-8467)).

 

**(b)    Reports on Form 8-K**

 

 The Company filed aCurrent Report on Form 8-K, dated October 12, 2002, that reported thecompletion of a Second Amendment and Restatement Agreement amending theCompany'sAmended and Restated Credit Agreement dated June 25, 1998.

 

**(c)    Exhibits**

 

Theresponse to this portion of Item 15 is submitted as a separate section of thisreport.

 

**(d)    Financial Statement Schedules**

 

Theresponse to this portion of Item 15 is submitted as a separate section of thisreport.

ScheduleII

Valuationand Qualifying Accounts

YearsEnded December 31

(inthousands)

 

   

  Balance  Beginning of Year

  Additions  Charged to Costs and Expenses

   

   

   

  Deductions

   

  Translation  Adjustment and Other

   

  Balance

  End  of

  Year

  2002

 

 

 

 

 

  Allowance for doubtful accounts

  $1,496

  $698

  $1,454

  $0

  $740

  Allowance for merchandise returns

  872

  489

  121

  157

  1,397

   Total

  $2,368

  $1,187

  $1,576

  $157

  $2,137

  Inventory reserves

  $12,580

  $766

  $3,056

  $702

  $10,992

 

 

 

 

 

 

  2001

 

 

 

 

 

  Allowance for doubtful accounts

  $1,433

  $1,452

  $1,389

  $0

  $1,496

  Allowance for merchandise returns

  1,430

  595

  677

  (476)

  872

   Total

  $2,863

  $2,047

  $2,066

  ($476)

  $2,368

  Inventory reserves

  $10,669

  $3,696

  $1,567

  ($218)

  $12,580

 

 

 

 

 

 

  2000

 

 

 

 

 

  Allowance for doubtful accounts

  $1,828

  $1,388

  $1,783

  $0

  $1,433

  Allowance for merchandise returns

  1,546

  583

  483

  (216)

  1,430

   Total

  $3,374

  $1,971

  $2,266

  ($216)

  $2,863

  Inventory reserves

  $15,317

  ($3,021)

  $1,201

  ($426)

  $10,669

 

 

 

 

 

 

 

SIGNATURES

 

 Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on March 31, 2003, on itsbehalf by the undersigned, thereunto duly authorized.

 

                                          BMCINDUSTRIES, INC.

 

                                          By:  /s/Douglas C. Hepper      

                                                 DouglasC. Hepper

                                                                                                                                        Chairman,President and  

                                                                                                                                        ChiefExecutive Officer  

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below on March 31, 2003, by the following persons in the capacitiesand on the dates indicated.

 

           Signature                         Title

 

/s/DouglasC. Hepper                                   Chairman of the Board, President andChief

DouglasC. Hepper                                       ExecutiveOfficer (Principal Executive Officer)

 

/s/CurtisE. Petersen                                      Senior Vice President and ChiefFinancial

CurtisE. Petersen                                         Officer(Principal Financial Officer)

 

/s/RichardG. Faber                                      Controller (Principal AccountingOfficer)

RichardG. Faber

 

/s/JohnW. Castro                                          Director

JohnW. Castro

 

/s/H.Ted Davis                                            Director

H.Ted Davis

 

/s/RobertD. Endacott                                  Director

RobertD. Endacott

 

/s/MorrisGoodwin, Jr.                                 Director

MorrisGoodwin, Jr.

 

/s/HarryA. Hammerly                                 Director

HarryA. Hammerly

 

/s/AlanR. Longstreet                                    Director

AlanR. Longstreet

 

CERTIFICATION OF CHIEFEXECUTIVE OFFICER

 

   I, Douglas C. Hepper, certify that: 

 

       1.  I have reviewed this annual report on  Form 10-K of BMC Industries, Inc.;  

 

       2.  Based on my knowledge, this annual report  does not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this annual report; 

 

       3.  Based on my knowledge, the financial statements,  and other financial information included in this annual report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  annual report;  

 

       4.  The registrant's other certifying officers  and I are responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and have:  

 

        a) Designed such disclosure  controls and procedures to ensure that material information relating to the  registrant, including its consolidated subsidiaries, is made known to us by  others within those entities, particularly during the period in which this  annual report is being prepared; 

        b) Evaluated the effectiveness  of the registrant's disclosure controls and procedures as of a date within  90 days prior to the filing date of this annual report (the "Evaluation  Date"); and 

        c) Presented in this annual  report our conclusions about the effectiveness of the disclosure controls and  procedures based on our evaluation as of the Evaluation Date; 

       5.  The registrant's other certifying officers  and I have disclosed, based on our most recent evaluation, to the registrant's  auditors and the audit committee of registrant's board of directors (or  persons performing the equivalent functions): 

 

        a) All significant deficiencies  in the design or operation of internal controls which could adversely affect  the registrant's ability to record, process, summarize and report financial  data and have identified for the registrant's auditors any material  weaknesses in internal controls; and 

        b) Any fraud,  whether or not material, that involves management or other employees who have  a significant role in the registrant's internal controls; and 

       6.  The registrant's other certifying officers  and I have indicated in this annual report whether there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent evaluation,  including any corrective actions with regard to significant deficiencies and  material weaknesses.

      

 Date:March 26, 2003 

 

 

    

 /s/Douglas C. Hepper          

    

   Douglas  C. Hepper 

    

   Chief  Executive Officer 

 

CERTIFICATION OF CHIEFFINANCIAL OFFICER

 

  I, Curtis E. Petersen, certify that: 

 

       1. I have reviewed this annual report on Form 10-K of  BMC Industries, Inc.;  

 

       2. Based on my knowledge, this annual report does not  contain any untrue statement of a material fact or omit to state a material  fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the  period covered by this annual report; 

 

       3. Based on my knowledge, the financial statements,  and other financial information included in this annual report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  annual report; 

 

       4. The registrant's other certifying officers and I  are responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and have: 

 

        a) Designed such disclosure  controls and procedures to ensure that material information relating to the  registrant, including its consolidated subsidiaries, is made known to us by  others within those entities, particularly during the period in which this  annual report is being prepared; 

       b) Evaluated the effectiveness of the registrant's  disclosure controls and procedures as of a date within 90 days prior to  the filing date of this annual report (the "Evaluation Date"); and  

     c) Presented in this annual report  our conclusions about the effectiveness of the disclosure controls and  procedures based on our evaluation as of the Evaluation Date; 

       5. The registrant's other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant's  auditors and the audit committee of registrant's board of directors (or  persons performing the equivalent functions): 

 

        a) All significant deficiencies  in the design or operation of internal controls which could adversely affect  the registrant's ability to record, process, summarize and report financial  data and have identified for the registrant's auditors any material weaknesses  in internal controls; and 

        b) Any fraud, whether or not  material, that involves management or other employees who have a significant  role in the registrant's internal controls; and 

       6. The registrant's other certifying officers and I  have indicated in this annual report whether there were significant changes in  internal controls or in other factors that could significantly affect internal  controls subsequent to the date of our most recent evaluation, including any  corrective actions with regard to significant deficiencies and material  weaknesses.

  

 Date:March 26, 2003 

 

 

    

 /s/Curtis E. Petersen         

    

   Curtis  E. Petersen 

    

   Chief  Financial Officer 

BMCIndustries, Inc.

ExhibitIndex to Annual Report on Form 10-K

Forthe Year Ended December 31, 2002

 

                                    

   Exhibit No.

   Exhibit   Method of Filing

 

  3.1

  Second Restated Articles

  of Incorporation of the Company, as amended.

  Incorporated by  reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the  year ended December 31, 1994 (File No. 1-8467).

 

  3.2

  Amendment to the Second Restated Articles of  Incorporation, dated May 8, 1995.

  Incorporated by  reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the  year ended December 31, 1994 (File No. 1-8467).

 

  3.3

 

  Amendment to the Second Restated Articles of  Incorporation, dated October 30, 1995.

  Incorporated by  reference to Exhibit 3.1 to the Company's quarterly report on Form 10-Q for  the quarter ended September 30, 1995 (File No. 1-8467).

 

  3.4

  Amendment to the Second Restated Articles of  Incorporation, dated August 7, 1998.

 

  Incorporated by  reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the  year ended December 31, 1998 (File No. 1-8467).

 

  3.5

  Articles of Correction to the Second Restated  Articles of Incorporation, dated November 22, 1999.

 

  Incorporated by  reference to Exhibit 3.5 to the Company's Annual Report on Form 10-K for the  year ended December 31, 1999 (File No. 1-8467).

  3.6

  Restated Bylaws of the Company, as amended.

  Incorporated by  reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the  year ended December 31, 1994 (File No. 1-8467).

 

  3.7

  Amendment to the Restated Bylaws of the  Company.

 

  Incorporated by  reference to Exhibit 3.5 to the Company's Annual Report on Form 10-K for the  year ended December 31, 1997 (File No. 1-8467).

 

  3.8

  Amendment to the Restated Bylaws of the  Company, dated February 20, 1998.

 

  Incorporated by  reference to Exhibit 3.7 to the Company's Annual Report on Form 10-K for the  year ended December 31, 1998 (File No. 1-8467)

  .

  4.1

  Specimen Form of the Company's Common Stock  Certificate.

 

  Incorporated by  reference to Exhibit 4.3 to the Company's Registration Statement on Form S-2  (File No. 2-83809).

 

  4.2

  Form of Share Rights Agreement, dated as of  June 30, 1998, between the Company and Norwest Bank, National Association, as  Rights Agent.

 

  Incorporated by  reference to Exhibit 1 to the Company's Registration Statement on Form 8-A,  dated July 14, 1998.

  10.1

  Revised Executive Perquisite/Flex Policy  (effective as of January 1, 1998 and terminated on December 31, 2002).

 

  Incorporated by  reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the  year ended December 31, 1998 (File No. 1-8467).  

 

  10.2

  BMC Industries, Inc. Savings and Profit Sharing  Plan, 2001 Revision, effective January 1, 2001.

 

  Filed electronically  herewith.

  10.3

  First Declaration of Amendment, effective  December 31, 2001, to the BMC Industries, Inc. Savings and Profit Sharing  Plan, 2001 Revision.

 

  Filed electronically  herewith.

  10.4

  Second Declaration of Amendment, effective  January 1, 2002, to the BMC Industries, Inc. Savings and Profit Sharing Plan,  2001 Revision.

 

  Filed electronically  herewith.

  10.5

  Third Declaration of Amendment, dated December  31, 2002, to the BMC Industries, Inc. Savings Profit Sharing Plan, 2001  Revision.

 

  Filed electronically  herewith.

  10.6

  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).

 

  10.7

  Restated and Amended 1994 Stock Incentive  Plan, effective May 11, 2000.

  Incorporated by  reference to exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for  the quarter ended March 31, 2000 (File No. 1-8467).

 

  10.8

  Amendment No. 1 to the Restated and Amended  1994 Stock Incentive Plan, dated August 3, 2000.

  Incorporated by  reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for  the quarter ended June 30, 2000 (File No. 1-8467).

 

  10.9

  BMC Industries, Inc. Executive Benefit Plan,  effective January 1, 1993.

 

  Incorporated by  reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1998 (File No. 1-8467).

 

  10.10

  First Declaration of Amendment to the BMC  Industries Executive Benefit Plan, effective September 1, 1998.

 

  Incorporated by  reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1998 (File No. 1-8467).

 

  10.11

  Lease Agreement, dated November 20, 1978,  between Control Data Corporation and the Company.

 

  Incorporated by  reference to Exhibit 10.9 to the Company's Registration Statement on Form S-2  (File No. 2-79667).

  10.12

  Amendment to Lease Agreement, dated December  27, 1983, between Control Data Corporation and the Company.

 

  Incorporated by  reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1983 (File No. 1-8467).

 

  10.13

  Amendment to Lease Agreement, dated April 9,  1986, between Control Data Corporation and the Company.

 

  Incorporated by  reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1987 (File No. 1-8467).

 

  10.14

  Amendment to Lease Agreement, dated April 12,  1989, between GMT Corporation (as successor in interest to Control Data  Corporation) and the Company.

 

  Incorporated by  reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1989 (File No. 1-8467).

  10.15

  Amendment to Lease Agreement, dated March 19,  1990, between GMT Corporation and the Company.

 

  Incorporated by  reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1989 (File No. 1-8467).

  10.16

  Amendment to Lease Agreement, dated May 17,  1993, between GMT Corporation and the Company.

 

  Incorporated by  reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1993 (File No. 1-8467).

  10.17

  Amendment of Lease, dated April 6, 1994 by and  between GMT Corporation and the Company.

 

  Incorporated by  reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1994 (File No. 1-8467).

 

  10.18

  Waiver of Condition Precedent, dated July 29,  1994, by and between GMT Corporation and the Company.

 

  Incorporated by  reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1994 (File No. 1-8467).

 

  10.19

  Amendment of Lease, dated September 25, 1997  by and between GMT Corporation and the Company.

 

  Incorporated by  reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1997 (File No. 1-8467).

  10.20

  Amendment of Lease, dated August 1, 1998 by  and between GMT Corporation and the Company.

 

  Incorporated by  reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1999 (File No. 1-8467).

 

  10.21

  Amendment of Lease, dated August 1, 1998 by  and between GMT Corporation and the Company.

 

  Incorporated by  reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1999 (File No. 1-8467).

 

  10.22

  Notice of Reduction of Leased Space, dated  March 8, 1999, from the Company to GMT Corporation.

 

  Incorporated by  reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for  the year ended December 31, 2001 (File No. 1-8467).

 

  10.23

  Notice  of Reduction of Leased Space, dated July 20, 1999, from the Company to GMT  Corporation.

 

  Incorporated  by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for  the year ended December 31, 2001 (file No. 1-8467).

 

  10.24

  Notice of Reduction of Leased Space, dated  June 14, 2000, from the Company to GMT Corporation.

 

  Incorporated by  reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for  the year ended December 31, 2001 (File No. 1-8467).

  10.25

  Notice of Reduction of Leased Space, dated May  4, 2001, from the Company to GMT Corporation.

 

  Incorporated by  reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for  the year ended December 31, 2001 (File No. 1-8467).

 

  10.26

  Notice of Termination of Leased PS-3 Space,  dated January 14, 2003, from the Company to GMT Corporation

   

  Filed electronically  herewith.

  10.27

  Form of Change of Control Agreement entered  into between the Company and Mr. Burke.

 

  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).

 

  10.28

  Form of Change of Control Agreement entered  into between the Company and Messrs. Carlson, Dobson, Faber and Petersen and  Ms. Linzmeier.

 

  Incorporated by  reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1999 (File No. 1-8467).

  10.29

  Employment Agreement by and between the  Company and Curtis E. Petersen, dated December 3, 2001  

 

  Incorporated by  reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for  the year ended December 31, 2001 (File No. 1-8467).

 

  10.30

  Employment Agreement, by and between the  Company and Paul B. Burke, dated as of January 1, 1999.

 

  Incorporated by  reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for  the year ended December 31, 1998 (File No. 1-8467).

 

  10.31

  Amendment to Executive Employment Agreement  between BMC Industries, Inc. and Paul B. Burke, dated April 10, 2002.

 

  Incorporated by  reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for  the quarter ended March 31, 2002 (File No. 1-8467).

 

  10.32

  Employment Agreement, dated as of May 14,  2002, between the Company and Douglas Hepper.

 

  Incorporated by  referenced to Exhibit 10.44 to the Company's Current Report on Form 8-K,  dated June 12, 2002 and filed with the Commission on June 12, 2002 (File No.  1-8467).

 

  10.33

  Second Amendment and Restatement Agreement,  dated as of October 12, 2001, by and among the Company, Bankers Trusty  Company as Administrative Agent, Bank One, NA, as Documentation Agent and  Various Lending Institutions.

 

  Incorporated by reference  to Exhibit 10.46 to the Company's Current Report on Form 8-K dated October  12, 2001 and filed with the Commission on October 24, 2001 (File No. 1-8467).

  10.34

  Security Agreement, dated as of October 12,  2001, between the Company, Bankers Trust Company as Administrative Agent, and  U.S. Bank National Association

 

  Incorporated by  reference to Exhibit 10.47 to the Company's Current Report on Form 8-K dated  October 12, 2001 and filed with the Commission on October 24, 2001 (File No.  1-8467).

  10.35

  Subsidiary Guarantor Security Agreement, dated  as of October 12, 2001, among Vision-Ease Lens, Inc., Vision-Ease Lens Azusa,  Inc., Bankers Trust Company, as Administrative Agent and U.S. Bank National  Association. 

 

  Incorporated by  reference to Exhibit 10.48 to the Company's Current Report on Form 8-K dated  October 12, 2001 and filed with the Commission on October 24, 2001 (File No.  1-8467).

  10.36

  Amended and Restated Subsidiary Guarantee  Agreement, dated as of October 12, 2001, made by Vision-Ease Lens, Inc. and  Vision-Ease Lens Azusa, Inc.

 

  Incorporated by  reference to Exhibit 10.49 to the Company's Current Report on Form 8-K dated  October 12, 2001 and filed with the Commission on October 24, 2001 (File No.  1-8467).

  10.37

  Second Amended and Restated Agreement, dated  as of October 12, 2001, made by the Company to Bankers Trust Company, as  Collateral Agent.

 

  Incorporated by  reference to Exhibit 10.50 to the Company's Current Report on Form 8-K dated  October 12, 2001 and filed with the Commission on October 24, 2001 (File No.  1-8467).

 

  10.38

  Third Amended and Restated Credit Agreement,  dated as of September 27, 2002, among the Company, Deutsche Bank Trust  Company Americas, as Administrative Agent and Bank One, NA, as Documentation  Agent and Various Lending Institutions.

 

  Incorporated by  reference to Exhibit 10.45 to the Company's Current Report on Form 8-K dated  September 27, 2002 and filed with the Commission on    October 12, 2002 (File No. 1-8467).

  10.39

  Amended and Restated Security Agreement, dated  as of September 27, 2002, between the Company, Deutsche Bank trust Company  Americas, as Administrative Agent and U.S. Bank National Association.

 

  Incorporated by  reference to Exhibit 10.46 to the Company's Current Report on Form 8-K dated  September 27, 2002 and filed with the Commission on October 12, 2002 (File  No. 1-8467).

  10.40

  Amended and Restated Subsidiary Guarantor  Security Agreement, dated as of September 27, 2002 between Vision-Ease Lens,  Inc., Vision-Ease Lens, Azusa, Inc. Deutsche Bank Trust Company Americas, as  Administrative Agent and U.S. Bank National Association.

 

  Incorporated by  reference to Exhibit 10.47 to the Company's Current Report on Form 8-K dated  September 27, 2002 and filed with the Commission on October 12, 2002 (File  No. 1-8467).

  10.41

  First Amendment to Mortgage, effective as of  September 27, 2002, by and between Vision-Ease Lens, Inc. and Deutsche Bank  Trust Company Americas, as Administrative Agent. 

   

  Incorporated by  reference to Exhibit 10.50 to the Company's Current Report on Form 8-K dated  September 27, 2002 and filed with the Commission on October 12, 2002 (File  No. 1-8467).

  10.42

  Mortgage, Assignment of Leases and Rents, and  Security Agreement, dated as of September 27, 2002, made by the Company and  Cortland County Industrial Development Agency to Deutsche Bank Trust Company  Americas, in its capacity as Administrative Agent under the Credit Agreement.

 

  Incorporated by  reference to Exhibit 10.51 to the Company's Current Report on Form 8-K dated  September 27, 2002 and filed with the Commission on October 12, 2002 (File  No. 1-8467).

  10.43

  Mortgage Assignment of Leases and Rents and  Fixture Filing, dated as of October 12, 2001, made by Vision-Ease Lens, Inc.  to Bankers Trust Company, as Administrative Agent.

 

  Incorporated by  reference to Exhibit 10.51 to the Company's Current Report on Form 8-K dated  October 12, 2001 and filed with the Commission on October 24, 2001 (File No.  1-8467).

  10.44

  Lease, dated October 29, 1997, by and among  the Company and Meridian Crossings LLC (d/b/a Told Development Company).

 

  Incorporated by  reference to Exhibit 10.3 to the Company's quarterly Report on Form 10-Q for  the quarter ended September 30, 1997 (File No. 1-8467).

 

  10.45

   First Amendment to Lease, dated  March 5, 2002, between OTR, an Ohio general partnership, acting as the duly  authorized nominee of the Board of the State Teachers Retirement System of  Ohio and the Company.

 

  Incorporated by  reference to Exhibit 10.42 to the Company's Quarterly Report on Form 10-K for  the year ended December 31, 2001 (File No. 1-8467).

  10.46

   Commercial  Lease, dated September 26, 2000, between Minnesota Logistics II, LLC and  Vision-Ease Lens, Inc.

 

   Incorporated  by reference to Exhibit 10.43 to the Company's Quarterly Report on Form 10-K  for the year ended December 31, 2001 (File No. 1-8467).

 

  10.47

  The Seventh Restated   Graphic Communications  International Union,  Twin Cities Local 6a -

  Buckbee-Mears Pension Plan, Generally  Effective January 1, 2001.

 

  Filed electronically  herewith.

  10.48
   Amendment One, to the Seventh Restated Graphic Communications International  Union, Twin Cities Local 6a - Buckbee-Mears Pension Plan
 

  Filed electronically  herewith.

  21.1

  Subsidiaries of the Registrant.

 

  Filed electronically  herewith.

  23.1

  Consent of Ernst & Young LLP, Independent  Auditors.

 

  Filed electronically  herewith.
   99.1
   Certification of CEO under Section 906 of the Sarbanes-Oxley Act of 2002

    Filed  Electronically herewith.   99.2   Certification of CFO under Section 906 of the Sarbanes-Oxley Act of 2002.   Filed  Electronically herewith
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