Six Months Ended June 30
	Buckbee-Mears						Optical Products						Consolidated
		2002			2001			2002			2001			2002			2001
Revenues	$	72,930		$	95,297		$	62,860		$	69,183		$	135,790		$	164,480
Cost of products sold		66,776			82,954			58,132			58,113			124,908			141,067
Gross margin		6,154			12,343			4,728			11,070			10,882			23,413
Gross margin %		8.4	%		13.0	%		7.5	%		16.0	%		8.0	%		14.2	%
Selling expense		2,083			3,031			4,915			6,336			6,998			9,367
Non-recurring charges		-			-			2,800			-			2,800			-
Unallocated corporate
administration		-			-			-			-			3,252			2,756
Income (loss) from  operations	$	4,071		$	9,312		$	(2,987	)	$	4,734			(2,168	)		11,290
Operating income  (loss) %		5.6	%		9.8	%		(4.8	)%		6.8	%		(1.6	)%		6.9	%
Interest and other
expense, net														(2,450	)		(4,431	)
Income (loss) before
income taxes													$	(4,618	)	$	6,859

9.        Legal Matters

During 2002, the Company's Optical Products group filed a patent infringement lawsuit against Younger Mfg. Co., which operates under the name "Younger Optics", in the United States Court for the District of Minnesota. We are seeking an injunction prohibiting manufacture, use, sale or offer for sale of polycarbonate polarizing lenses and an unspecified amount of damages.  In June 2002, Ricardo Nunziatti, a shareholder of BMC, filed a shareholder derivative suit against the Company, Paul B. Burke, the Company's former Chairman of the Board and CEO, and the Company's independent directors.  Mr. Nunziatti's complaint asserts breach of fiduciary duty, abuse of control and waste of corporate assets.  In the complaint, Mr. Nunziatti demands the unwinding of a stock transaction between the Company and Mr. Burke, as well as payment of his attorney fees and other costs of bringing the suit.  In July 2002, the Company and the other defendants removed the case from Hennepin County District Court to the United States District Court for the District of Minnesota.  The Company has submitted the case to its insurance carrier for coverage under its Director and Officer Liability Policy.  Although this case is in the early stages of litigation, we do not anticipate that the Company will incur any material liability in connection with the lawsuit.

No other material legal proceedings or environmental matters arose during the quarter and there were no material changes in the status of the legal proceedings or environmental matters described in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

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

 

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

BMC INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Comparison of three months ended June 30, 2002 and 2001

Total revenues for the second quarter of 2002 decreased by $11.6 million or 15% from the second quarter of 2001.  Revenues of the Buckbee-Mears group for the second quarter decreased $6.7 million, or 15%, from $44.1 million in 2001 to $37.4 million in 2002.  Total mask sales were down for the quarter compared to the prior year's quarter due to the Company's exit from the computer monitor mask business segment.  Sales of computer monitor masks decreased $7.2 million year over year.  Sales of entertainment masks increased $0.7 million, or 2%, in second quarter 2002 as compared to second quarter 2001.  The television market appears to have stabilized during the quarter and this trend is expected to continue in the balance of the year.

The Optical Products group reported sales of $29.8 million in the second quarter of 2002, down 14%, or $4.9 million, over the prior year quarter. Optical Products sales were negatively impacted by polycarbonate manufacturing issues, exacerbated by the closing of the Azusa, California facility, which hampered the ability to fully meet customer demand, constraining sales and increasing backorders. Sales of the group's high-end, value-added products (including polycarbonate progressive and polarizing sun lenses) decreased 9% from second quarter 2001 and accounted for 69% of total second quarter 2002 revenues, as compared to 66% of total second quarter revenues in 2001. While overall polycarbonate sales declined, sales growth was experienced in some key premium polycarbonate product categories, such as a 16% increase in Tegra-coated polycarbonate lenses and a 9% increase in sales of photochromic polycarbonate lenses.  In addition, plastic and glass lens sales were down 36% and 21%, respectively in second quarter 2002 as compared to the prior year quarter.  The decrease in plastic lens sales resulted from short-term supply issues with our overseas manufacturing partner. Glass lens sales are expected to continue to decline as the market for this lens material contracts.

Cost of products sold were 92% of net sales for the second quarter of 2002, compared to 85% in the same period of 2001. The Buckbee-Mears margins were impacted by the shutdown of the computer mask lines as the Company implements its strategic decision to exit the computer monitor mask market. The Optical Products gross margin percentage was impacted by the manufacturing issues discussed earlier and the decline in sales of higher margin polycarbonate and glass products.

Selling expenses were $3.4 million or 5% of revenues and $4.5 million or 6% of revenues for the second quarter of 2002 and 2001, respectively. Selling expenses decreased as a result of cost reduction and restructuring efforts in both business segments.

Interest expense in the second quarter of 2002 was slightly lower than second quarter 2001. The favorable impact from decreases in the debt level was offset by increases in the interest rate.

Other income (expense) in the second quarter of 2002 is primarily foreign exchange loss of $1 million. This loss is from foreign exchange adjustments on receivables of U.S. dollar denominated sales in Europe and foreign exchange losses on certain transfers of funds for operating expenses.

The provision for income taxes was 1% and 33% of pre-tax income in the second quarter of 2002 and 2001, respectively, excluding the adjustment to the tax valuation reserve, as discussed further in footnote 7.  The tax rate is a function of the Company's domestic and foreign earnings mix and can fluctuate from quarter to quarter.

Comparison of six months ended June 30, 2002 and 2001

Total revenues for the first six months of 2002 decreased by $28.7 million, or 17%, from the first six months of 2001. Revenues of the Buckbee-Mears group for the six-month period decreased 23% from the prior year period. Sales of computer monitor masks decreased $15.3 million year over year due to the Company's exit from the computer monitor mask business. Sales of entertainment masks declined $6.3 million from 2001 as a result of the economic downturn and a general softening of the television mask market. Non-mask sales were $1.2 million lower year over year because of the decrease in customer base. Revenues of the Optical Products group were down $6.3 million, or 9% due mainly to manufacturing issues constraining sales, which were discussed above. In addition, sales in the SunSport product line declined 62% from 2001 as a result of the Company's decision to exit certain segments of this business.

Cost of products sold were 92% and 86% of net sales for the first six months of 2002 and 2001, respectively. The Buckbee-Mears margins were impacted by the shutdown of the computer mask lines as the Company implements its strategic decision to exit the computer monitor mask market. Optical Products manufacturing issues also increased the cost of products sold percentage.

Selling expenses were $7.0 million, or 5%, of revenues and $9.4 million, or 6%, of revenues for the first six months of 2002 and 2001, respectively. Selling expenses decreased as a result of cost reduction and restructuring efforts in both business segments.

Interest expense in the first six months of 2002 was $5.2 million compared to $5.8 million in the first six months of 2001. This decrease is due to lower debt levels in 2002, offset somewhat by higher interest rates in the second quarter.

Other income for the first six months of 2002 includes a $3.5 million gain related to the sale of the Optical Products segment's Optifacts software unit, partially offset by foreign exchange losses on European receivables and funds transfers and discussed previously.

The provision for income taxes was 79% and 33% of pre-tax income for the first six months of 2002 and 2001, respectively, excluding the adjustment to the tax valuation reserves, as discussed further in footnote 7. The tax rate is a function of the Company's domestic and foreign earnings mix and can fluctuate from quarter to quarter.

RESTRUCTURING

In February 2002, the Company announced its plans to close the Optical Products segment's Azusa, California facility.  As a result, restructuring related costs of $2.8 million were recorded in first quarter 2002.  The restructuring is discussed more fully in footnote 2.

GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142 and ceased amortization of goodwill balances.  The Company also completed its transitional impairment test on goodwill and recorded a write-off of its goodwill balances in the amount of $52.7 million.  The adoption of SFAS No. 142 is discussed more fully in footnote 3.

MARKET RISK

There were no significant changes in market risks from those disclosed in the Company's Form 10-K for the year ended December 31, 2001.

FOREIGN CURRENCY

A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions.  The Company manufactures its products in the United States, Germany, Hungary and Indonesia and purchases products from Asian, as well as other foreign suppliers.  The Company sells its products in the United States and into various foreign markets.  The Company's sales are typically denominated in either the U.S. dollar or the European Union euro.  Buckbee-Mears also has an indirect exposure to the Japanese yen and the Korean won because its most significant competitors are Japanese and Korean.  As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets.  In addition, sales of products overseas are affected by the value of the U.S. dollar relative to other currencies.  Long-term strengthening of the U.S. dollar may have an adverse effect on these sales and competitive conditions in the Company's markets and may limit the Company's ability to increase product pricing in times of adverse currency movements.

To manage the volatility relating to these exposures, the Company utilizes from time to time various derivative instruments, including foreign currency forward-exchange contracts. These derivative instruments are discussed more fully in footnote 3.

INTEREST RATE SWAPS

At various dates during 2001 and 2000, the Company entered into multiple interest rate swap agreements that provide for the Company to swap a variable interest rate for fixed interest rates ranging from 6.7% to 7.1%. At June 30, 2002, $50 million of these swaps remained outstanding with the swaps expiring in May and June 2003. These swaps are discussed more fully in footnote 5.

FINANCIAL POSITION AND LIQUIDITY

Debt decreased $31.1 million from $142.2 million to $111.1 million during the first six months of 2002 from working capital reduction initiatives and sales of non-strategic assets. Working capital was a negative $57.9 million at June 30, 2002 compared to $70.3 million at December 31, 2001. The decrease in working capital is the result of reclassification of $110 million of long-term debt to current liabilities at the end of the quarter. The Company's credit facilities are discussed below. The current ratio was 0.6 and 2.3 at June 30, 2002 and December 31, 2001, respectively. The ratio of debt to capitalization was 64% at June 30, 2002 compared to 55% at December 31, 2001.

At June 30, 2002, the majority of the Company's long-term debt was reclassified to short-term borrowings, as a result of the debt being due within one year's time (May 15, 2003.) The Company is currently in discussions with its lenders on an amendment to extend its existing senior credit facilities. If and when an agreement is finalized, a majority of these short-term borrowings will be reclassified back to long-term debt. The Company was in compliance with all covenants related to credit facilities as of June 30, 2002. The Company expects that its financing requirements will be met for the next 12 months and beyond.  However, management cannot be certain that the Company will be able to amend the existing credit agreement, obtain additional financing on acceptable terms, or at all.  If the Company is unable to obtain sufficient funds on acceptable terms when they are needed, it could have a material adverse effect on our financial condition.

ENVIRONMENTAL

There were no material changes in the status of the legal proceedings and environmental matters described in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

OTHER

As announced on May 15, 2002, Paul B. Burke resigned as Chairman and CEO of BMC Industries, Inc. Mr. Burke will continue employment at the Company in a more limited advisory capacity through December 31, 2002. Salary and benefits for Mr. Burke are expensed as paid each month through December 31, 2002.

CAUTIONARY STATEMENTS

Certain statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-Q by the Company or its representatives, as well as other communications, including reports to shareholders, news releases and presentations to securities analysts or investors, contain forward-looking statements made in good faith by the Company pursuant to the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to non-historical information and include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements. The Company wishes to caution the reader not to place undue reliance on any such forward-looking statements, which reflect our opinion as of the date of this Form 10-Q. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected and include, among others, ability to manage working capital and align costs with market conditions; further aperture mask price declines; slowdown in growth of, or price reductions in, high-end lens products; fluctuations in currency exchange rates; rising raw material costs; ability to improve operating and manufacturing efficiencies through consolidation of facilities. These and other risks and uncertainties are more particularly described in "Item 1 - Business" of the Company's Form 10-K for the year ended December 31, 2001, which in some cases have affected and in the future could adversely affect the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement. These factors should not, however, be considered an exhaustive list. The Company does not undertake the responsibility to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

Item 3.             Quantitative and Qualitative Disclosure About Market Risk.

                        See "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 11.

Part II:  OTHER INFORMATION

Item 1.       Legal Proceedings.

With regard to legal proceedings and certain environmental matters, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" which begins on page 11 and Note 9 of the "Notes to Condensed Consolidated Financial Statements" on page 10.

Item 4.      Submission of Matters to a Vote of Securities Holders.

The Company's 2002 Annual Meeting of Stockholders was held on May 9, 2002. One matter was submitted to a vote of stockholders: Election of certain members of the Company's Board of Directors. 

The nominees for election to the Company's Board of Directors, as listed in the Company's Proxy Statement dated March 29, 2002 were elected for two-year terms at that meeting. Voting for the individual nominees was as follows: