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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File No. 333-72321

BGF Industries, Inc.
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Sections 12(b) or 12(g) of the Act: None

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

There is no established trading market for the Common Stock of the registrant.  All shares of Common Stock are held by an affiliate of the registrant at March 28, 2003.

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 1,000 shares of common stock, $1.00 par value, as of March 28, 2003.

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BGF INDUSTRIES, INC.
ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2002

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PART I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this Annual Report may contain forward-looking statements. These statements include, in particular, statements about our plans, strategies and prospects within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. Such statements are based on our current plans and expectations and are subject to risks and uncertainties that exist in our operations and our business environment that could render actual outcomes and results materially different from those predicted. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statements:

This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in this Annual Report and in other reports and registration statements we file with the Securities and Exchange Commission.  All forward-looking statements attributable to us or persons acting for us are expressly qualified in their entirety by our cautionary statements.

We do not have, and expressly disclaim, any obligation to release publicly any updates or changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.

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Item 1. Business

General

Our business focuses on the production of value-added specialty woven and non-woven fabrics made from glass, carbon and aramid yarns. In both revenue and market share, we believe we are the second largest manufacturer of glass fiber fabrics and a leading producer of other high performance fabrics in North America. Our fabrics are a critical component in the production of a variety of electronic, filtration, composite, insulation, construction and commercial products. Our glass fiber fabrics are used by our customers in printed circuit boards, which are integral to virtually all advanced electronic products, including computers and cellular telephones. Our fabrics are also used by our customers to strengthen, insulate and enhance the dimensional stability of hundreds of products that they make for their own customers in various markets, including aerospace, transportation, construction, power generation and oil refining. In the course of our normal operations, we are engaged in various related party transactions.  See Item 13 for further discussion.

BGF is a Delaware corporation.  Our headquarters are located at 3802 Robert Porcher Way, Greensboro, North Carolina  27410, and our telephone number is (336) 545-0011.  Our website address is http://www.bgf.com.

Limited Number of Domestic Producers. We are one of a limited number of major domestic manufacturers of glass fiber fabrics. Our major competitors in the global glass fabric weaving industry are Hexcel-Schwebel, Nitto Boseki (Japan), Nan Ya Plastics (Taiwan) and Taiwan Glass (Taiwan). We and Hexcel-Schwebel are the primary manufacturers based in the United States.  Although direct imports of glass fiber fabrics into the U.S. have been limited, increasing imports of laminates and rigid printed circuit boards from Asia have been impacting demand for domestically produced heavyweight glass fiber fabrics used in rigid printed circuit boards.

Barriers to Entry. There are a limited number of major global suppliers of glass and carbon yarns to fabric producers such as BGF, and we have experienced supply shortages from time to time. Accordingly, we believe that it would be difficult for new competitors to ensure a constant and adequate supply of glass and carbon yarns. Additionally, the process of producing high quality glass fiber and other high performance fabrics requires extensive technological expertise and research and development capability, both of which require substantial know-how and capital compared to many less complex businesses.

Diversified Markets and Uses. The unique characteristics of our fabrics make them critical components in a variety of products manufactured for sale in the electronics, composites, filtration, commercial, insulation and construction markets. Within each of these markets, our fabrics have a variety of applications, including:

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Lack of Product Substitutes. For many applications of our products, there are a limited number of economical product substitutes, if any. For example, substantially all printed circuit boards for high-end electronics applications use glass fiber fabrics. The unique properties of glass fiber also make it a critical component in high temperature filtration and insulation products. In many composite products, only glass, carbon and aramid fibers can meet the requisite strength-to-weight ratios.

Glass fiber fabrics offer an excellent combination of properties, from high strength to fire resistance. Wide ranges of yarn sizes and weave patterns provide broad design potential, enabling customers to choose the best combination of material performance, economics and product flexibility. Carbon fiber fabrics possess many of the same characteristics of glass fiber fabrics and provide higher strength and lighter weight in the products in which they are incorporated. Aramid fiber fabrics also share many of the same characteristics as glass fiber fabrics and are lighter in weight and provide greater impact resistance in the products in which they are incorporated.

Business Strategy

Our goal is to be the preferred supplier to markets that require a technically complex application of fabrics made of glass, carbon and aramid yarns.  To achieve this goal, we intend to pursue the following long-term strategies:

Continue to Focus on Lightweight Fabrics for the Multi-Layer Printed Circuit Board Market.  We seek to continue to expand our sales of lightweight glass fiber fabrics to meet the long-term growing demand for multi-layer printed circuit boards.  Our investment in the South Hill, Virginia, lightweight fabrics facility is an important part of this strategy.  In addition, we have leased a portion of this facility to Advanced Glassfiber Yarns to manufacture glass yarns exclusively for our production of lightweight glass fiber fabrics.  We believe that this arrangement strengthens the compatibility between our weaving process and the glass yarns we use in our weaving process, thereby enabling us to produce the highest quality lightweight glass fiber fabrics.  We also believe that the quality of the products we manufacture at the South Hill facility will enable us to enhance and expand our relationships with customers in the multi-layer printed circuit board market. 

Capitalize on the Growth in the Filtration and Composites Markets.  We believe substantial opportunities exist to increase our sales and market share in both the filtration and composites markets. We intend to leverage our already strong position in the high temperature filtration market by developing new woven and non-woven high performance fabrics for environmental applications in power generation, steel mills and other industries that are subject to strict environmental regulations.  In addition, we believe that there may be increased opportunities internationally in this market as lesser developed countries adopt stricter environmental regulations.

We also believe that we have substantial opportunities to increase our sales in the composites market for applications in the transportation industry.  In the composites market, we are pursuing strategic relationships with key suppliers to the aerospace and automobile industries for the design and manufacture of new products.

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Develop New Applications for Fabrics.  We plan to continue to leverage the technical expertise and experience of our research and development and sales and marketing staff to develop new applications for existing fabrics and to develop new fabrics that meet customer requirements for strength, weight, fire resistance and durability.  We believe that many opportunities exist to continue to develop both woven and non-woven fabrics to replace traditional materials in markets which have historically not utilized the fabrics we produce.  For example, we have begun selling fabrics for use in the reinforcement of metal automobile body parts.

Products and Markets

We sell our products primarily in the United States and focus on the following markets:

Electronics. We produce glass fiber fabrics for multi-layer and rigid printed circuit boards for use in the electronics industry. The demand for multi-layer printed circuit boards, which primarily use lightweight glass fiber fabrics, decreased from 2001 to 2002 primarily as a result of significant inventory adjustments in the electronics industry that began during the first quarter of 2001 as well as reduced demand for electronic products by the end-users. In addition, the decrease in capital spending in the information technology and telecommunications industry led fabricators of printed circuit boards to reduce production which negatively impacted our sales to these customers.  Furthermore, the demand for our heavyweight fabrics has decreased due to competitive pressures from Asian laminate producers. Sales of glass fabrics to the electronics industry were $40.1 million in 2002 and $52.8 million in 2001.  These sales represented 30.6% and 35.9% of our net sales in 2002 and 2001, respectively.

Composites. Our glass, carbon and aramid fiber fabrics are used in various composite materials, which are used in various applications, including structural aircraft parts and interiors, helicopter rotor blades, tooling, brake linings and ducting.   Net sales of fabrics for composites were $41.3 million in 2002, and $50.2 million in 2001.  These sales represented 31.6% and 34.2% of our net sales in 2002 and 2001, respectively. During 2002, we experienced a decline in orders from customers in the aerospace industry due to uncertainty over airline traffic recovery and a lower build rate at aircraft manufacturers generated by the financial difficulties of many airlines in the USA.  At this point, the decrease has not been fully offset by the market for refurbishing existing aircraft or increased purchases by the military.

Filtration. We produce fabrics for high temperature dust filtration used by industrial customers to control emissions into the environment. Our filtration bags are sold to utilities, producers of asphalt and carbon black, cement plants and steel mills.  Sales of our filtration fabrics were $23.1 million in 2002 and $19.6 million in 2001.  These sales represented 17.6% and 13.3% of our net sales in 2002 and 2001, respectively.  The increase in sales of filtration fabrics is due to an increase in demand for replacement filtration bags.

Commercial. Our glass fiber fabrics are used in commercial applications where fire resistance and dimensional stability are critical. Applications for these products include ceiling tile and acoustical facing fabrics, window coverings and movie screens.  Sales in this segment in 2002 were comparable to 2001.

Insulation. We produce materials for high-temperature, fire-resistant insulation. Applications for these products include insulation for joints, pipes, valves, transportation exhaust systems, heat shields and home appliances.  Sales of our insulation fabrics were $10.3 million in 2002 and $8.7 million in 2001.  These sales represented 7.9% and 6.0% of our net sales in 2002 and 2001, respectively.  The increase in sales of insulation fabrics is due to an increase in demand for industrial insulation products as well as the introduction of new products for automotive insulation.

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Construction. The fire resistant qualities of glass fiber fabrics make them a critical component of products used in the construction industry. Applications for these products include smoke and fire barrier curtains, drywall bonding tape, rubber mat backing and fabric structures, such as commercial tents and roofs.  Sales in 2002 were comparable to 2001.

Sales and Marketing

We sell our products through an experienced direct sales force of six sales representatives, four market managers and two telemarketing representatives. Our sales representatives have specific customer groups, while the market managers are responsible for specific product lines. The sales representatives are compensated on a salary and commission basis and the market managers are compensated on a salary and bonus basis. Each sales representative has a technical orientation and the necessary expertise to sell our full line of products. We maintain an internet web site, located at www.bgf.com, which contains extensive product information, as well as a comprehensive B2B capability for our major customers.

We sell our products to over 400 customers, including many leading companies in their respective industry segments, including Cytec Engineered Materials, Polyclad Laminates, Isola USA, BHA, and Saint Gobain. We continually seek to strengthen and expand our relationships with our customers. Due to the stringent quality, delivery and performance standards demanded by many of our customers and the ultimate users of our products in various markets, our customers are increasingly moving toward collaborative agreements among both fabric producers, such as BGF, and their own customers.  We believe that we are well positioned to benefit from this trend because of our strong competitive position within the industry, our investment in technical and manufacturing expertise and our long-term relationships with customers and suppliers.  Our markets remain competitive, however, and this competitiveness is exemplified by continual and rapid technological change.  To effectively compete, we must process and utilize effectively extensive technological and manufacturing capabilities.  We could face even further competition if cost effective alternatives to glass, carbon or aramid fiber fabrics are developed.

One of our customers, Cytec Engineered Materials, accounted for 18.6% and 19.0% of our net sales in 2002 and in 2001 respectively.  Our top ten customers in 2002 and in 2001 accounted for 46.7% and 45.5% of our net sales, respectively. Our customers are not contractually required to purchase any of our products and may terminate their relationship with us at any time.

Industry Segments

We operate in one business segment that manufactures specialty woven and nonwoven fabrics for use in a variety of industrial and commercial applications.  Information related thereto can be found in footnote 13 of the consolidated financial statements under Item 8 of this Report.

Research and Development

We maintain a modern, well-equipped research and development facility, located at our headquarters in Greensboro, North Carolina, that divides its efforts among developing new products and improving current products. The research and development facility is divided into seven state-of-the-art laboratories focusing on the following strategic areas of product development:

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We have several United States patents, patent applications and trademarks.  While we consider our patents to be valuable assets, we do not believe that our competitive position is dependent on patent protection or that our operations are dependent on any individual patent or group of related patents. However, in some instances, patents and patent protection may serve as a barrier to entry in some of our product lines, such as commercial and insulation. Our policy is to obtain patents on our new products and enforce our patent rights.

Raw Materials

The principal materials we use to manufacture our products are glass, aramid and carbon yarns. We purchase glass yarns from AGY, PPG Industries, Dupont Company and Cytec Engineered Materials. Beginning in September 1998, AGY began to supply us with glass yarns produced at the South Hill, Virginia lightweight fiber fabrics facility. The supply agreement expires on December 31, 2008, unless extended by AGY. AGY is experiencing financial difficulties which could result in the risk that obtaining raw materials from sources other than AGY would be more costly and could be disruptive to our business. AGY filed for protection under Chapter 11 of the US Bankruptcy Code, on December 10, 2002.  It is currently operating with a Debtor In Possession (“DIP”) financing.  However, there is no assurance that AGY’s liquidity will remain adequate, in the long run, which may negatively impact AGY’s ability to operate and deliver products to us.  This situation could potentially have a negative short-term effect on our raw material supply and require us to seek alternative sources of our required raw materials, which could be more costly.  Our main suppliers of carbon yarns are Amoco, Toho and Cytec Engineered Materials and our main supplier of aramid yarns is DuPont.

Employees

As of December 31, 2002, we employed approximately 800 full time and part time employees, 629 of which are hourly employees and 171 of which are paid on a salary basis. All of our employees are located in the United States.  None of our employees is represented by a labor union.  As part of our restructuring plan, we closed our South Hill heavyweight fabrics facility, effective October 1, 2002, and consolidated operations into our newly constructed South Hill multilayer facility to reduce excess capacity.  This resulted in a reduction of our wage and salary workforce by approximately 10%.  We incurred a pre-tax restructuring charge of $0.3 million in August 2002 related to severance payments to the employees at this facility.

In response to the downturn in market conditions experienced beginning the second quarter of 2001, we furloughed production employees as well as eliminated several salaried positions thereby reducing our equivalent number of employees by approximately 25%.  This workforce reduction occurred during the third and fourth quarters of 2001.  We incurred a pre-tax restructuring charge of $0.5 million in October 2001 as a result of the elimination of salaried positions.

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Environmental and Health Matters

In the course of a September 1998 Phase I environmental site assessment, we discovered reportable quantities of polychlorinated biphenyls (“PCBs”) in soil at the Altavista facility in and around the former site of a heat transfer oil tank that the previous owner of the facility had removed in 1986, before BGF’s 1988 acquisition. We immediately reported the contamination to the Environmental Protection Agency (“EPA”) and the Virginia Department of Environmental Quality (“VDEQ”). We worked with the EPA and VDEQ to establish a sampling protocol. The assessment revealed that the plant was contaminated with PCBs inside in several rooms, outside in the soil, on the roof, in the sanitary and storm sewers, and in the creeks to which the storm sewers drain.  Sampling also has indicated migration of PCBs into the city’s water treatment plant. A Site Characterization Report (“SCR”), documenting the full extent of the progressive assessment activities, was submitted to the EPA Region 3 in April 2001. The EPA responded to that report in May 2002 with a request for additional assessment.

We responded to the EPA’s request in late June 2002 and proposed actions consistent with EPA’s request.  We completed the additional assessment in January 2003 and expect to file an Addendum to the SCR in the second quarter of 2003.  In cooperation with EPA, we will develop a cleanup plan, which we will submit for EPA approval and begin to implement in appropriate stages upon receiving EPA’s approval of the SCR.   All assessment and cleanup activities have been and will be conducted in compliance with applicable state and federal regulatory requirements.  Cleanup costs remain uncertain, pending EPA’s completion of its review of the SCR. 

In light of these recent developments, we recorded an additional reserve of $2.0 million in the second quarter of 2002, which reflects the estimated remediation costs for the Altavista facility as obtained from an environmental specialist. However, such remediation costs are subject to approval of a remediation plan by the EPA, which has not been obtained at this time. In July 2002, a work plan was submitted to the EPA on behalf of the company.  We are currently working on design options for the Remediation Work Plan.  Once the Remediation Work Plan is completed it will be submitted to the EPA for approval prior to implementation. 

The September 1998 Phase I site assessment also revealed contamination at our Cheraw facility.  A Phase II environmental site assessment revealed low, yet reportable concentrations of RCRA metals and hydrocarbons in soil and groundwater at the former locations of a dismantled wastewater treatment plant and storage tanks, all of which had been removed before BGF’s acquisition of the property.  We immediately reported the finding to South Carolina Department of Health and Environmental Control (SCDHEC”), which requested that we conduct additional assessment and monitoring.  We have complied with all SCDHEC requirements and continues to monitor groundwater at regular intervals.

The estimated loss due to this contamination is $0.4 million, which is also recorded in our reserve for environmental liabilities. These reserves may need to be increased, but we are unable to derive a more reliable estimate at this time as actual costs remain uncertain. We do not anticipate significant cash outflows associated with this liability in the next twelve months as the remediation plan has not been submitted to and approved by the EPA. However, there can be no assurance that we will not be required to respond to its environmental issues on a more immediate basis and that such response, if required, will not result in significant cash outlays.

In November 2002, we obtained a new State Operating Permit governing air emissions for the Altavista facility.  Previously, the facility was considered a candidate for Title V air permitting status, however facility emissions were significantly lower than the Title V threshold and the facility applied for and received the State Operating Permit.  In January 2003 the Multilayer facility, located in South Hill, applied for a new air Operating Permit.  The new permit is pending VDEQ review.  This facility’s air emissions are

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very low and qualify the facility as either a Synthetic or True Minor air emission source.  We anticipate receipt of the new air permit by April 2003.

Like all weavers of glass, carbon and aramid fibers, we are subject to laws and regulations designed to reduce solid wastes by requiring, among other things, regulated wastes to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees and limits on the use of our products. In addition, various consumer and special interest groups have lobbied from time to time for the implementation of additional environmental protection measures. We do not believe that the legislation promulgated to date and currently pending initiatives will have a material adverse effect on our business, financial condition and results of operations. We cannot assure you, however, that any future legislation or regulatory efforts will not have a material adverse effect on our business, financial condition and results of operations.

Item 2. Properties

We own and/or lease four manufacturing facilities and a research and development facility, together occupying over 786,000 square feet. We believe that these facilities are suitable for manufacturing the products we offer and have capacities appropriate to meet existing production requirements. The following table sets forth a description of our facilities as of December 31, 2002.

In November 2002, we sold our Greensboro, North Carolina facility and are leasing it back from the new owner under a capital lease agreement.

In October 2002, we closed our South Hill, Virginia heavyweight fiber fabrics facility and consolidated operations with our South Hill, Virginia lightweight fiber fabrics facility. The completion of our lightweight fiber fabrics facility that is under construction has been delayed until market conditions improve.

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Item 3. Legal Proceedings

From time to time, we may become involved in various legal proceedings arising in the ordinary course of business. We believe that such ordinary course of business matters will not have a material adverse effect on our business, financial condition, liquidity or results of operations. See also “Item 1. Business - Environmental and Safety and Health Matters.”

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

None

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters 

There is no established trading market for BGF’s common stock.  All shares of BGF’s issued and outstanding common stock are held by Glass Holdings.

We did not declare any dividends or make any distributions on our common stock in 2002.  Further, we have no commitment or current plans to make dividends or other distributions in 2003 and our financing obligations restrict our ability to pay dividends or other distributions.

We have no equity compensation plans.

Item 6. Selected Financial Data

The following table sets forth certain selected financial information derived from our audited consolidated financial statements for the five-year period ended December 31, 2002.  The table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes and other financial information included elsewhere in this Report.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with our consolidated financial statements and related notes contained in this Report.  The forward-looking statements under this section are subject to risks and uncertainties that exist in our operations and business environment.  See Item 1, “Disclosure Regarding Forward-Looking Statements”.

Overview

Our business focuses on the production of value-added specialty woven and non-woven fabrics made from glass, carbon and aramid yarns. Our fabrics are a critical component in the production of a variety of electronic, filtration, composite, insulation, construction and commercial products. Our glass fiber fabrics are used by our customers in printed circuit boards, which are integral to virtually all advanced electronic products, including computers and cellular telephones. Our fabrics are also used by our customers to strengthen, insulate and enhance the dimensional stability of hundreds of products that they make for their own customers in various markets, including aerospace, transportation, construction, power generation and oil refining.

The economic downturn that began during 2001 caused most companies in the electronics industry (a significant market segment of our business) to re-evaluate their expectations with respect to how they believed they would perform through 2002. We did not immediately experience the effects of changing conditions in the economy or the electronics industry and believed that the downturn in the electronics industry (based on historically high levels of demand) was likely to be temporary. Accordingly, we proceeded to maintain our normal levels of production through mid 2001 based on our belief that the economy would recover, demand would increase and that we would be largely unaffected by a decline in the electronics industry.  During the second half of 2001, when management determined that the electronics industry would not improve during the remainder of the year, we engaged in an aggressive inventory and cost reduction program that has continued through 2002.  Sales of electronics fabrics increased by $2.1 million, or 22.3%, for the three months ended March 31, 2002 as compared to the three months ended

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December 31, 2001. However, additional electronic sales increases forecasted for the three months ended June 30, 2002 did not materialize.  Electronic sales decreased by $2.1 million, or 18.1%, for the three months ended June 30, 2002 as compared to the three months ended March 31, 2002.  Electronic sales further decreased $1.1 million, or 11.1%, for the three months ended September 30, 2002 as compared to the three months ended June 30, 2002 and $1.6 million or 17.0%, for the three months ended December 31, 2002 as compared to the three months ended September 30, 2002.

Recent conditions in the aerospace industry, which is a large component of our composite fabrics market, have negatively impacted sales of our composite fabrics.  We believe that the airline industry may continue to experience losses throughout 2003.  Accordingly, airlines are seeking to conserve cash by deferring or canceling aircraft purchases and reducing fleet sizes.  Sales of composite fabrics increased $1.6 million, or 16.5%, for the three months ended March 31, 2002 as compared to December 31, 2001.  Sales in this market remained flat from the first quarter 2002 through the second quarter 2002.  However, composite fabric sales decreased $1.7 million, or 14.5%, for the three months ended September 30, 2002 as compared to June 30, 2002, and another $1.3 million, or 13.0%, for the three months ended December 31, 2002, as compared to the three months ended September 30, 2002. 

On July 10, 2002, we received notice from Wachovia Bank National Association, as agent for the lenders under the credit agreement dated September 30, 1998 (the “Senior Credit Facility”), that, as a result of our failure to maintain the minimum interest coverage and senior leverage ratios required under the credit agreement, we were in default of the Senior Credit Facility. Further, as permitted under the terms of the Senior Credit Facility, the lenders issued a payment blockage notice which prohibited us from making a required interest payment on our 10 1/4% Series B Senior Subordinated Notes due 2009 (the “Senior Subordinated Notes”) on July 15, 2002. As a result, we were restricted from making the required interest payment on July 15, 2002, to the holders of the Senior Subordinated Notes.

On August 13, 2002, we and our senior lenders executed a forbearance agreement with respect to breaches of these financial covenants and, accordingly, on August 14, 2002, we made the interest payment on the Senior Subordinated Notes that was previously required on July 15, 2002.

On February 14, 2003, we entered into a new senior credit facility with CIT Business Credit (the “CIT Facility”).  This allowed us to reimburse all senior lenders under the Senior Credit Agreement dated September 30, 1998 and its subsequent amendments including the forbearance agreement described above.  Also, we were able to make the interest payment originally due on January 15, 2003 on our Senior Subordinated Notes within the 30 day grace period.  The CIT Facility provides for the following:  (1) a maturity date of June 30, 2003, (2) a borrowing base with advance rates on eligible accounts receivable and eligible finished goods inventories of 85% and 15% respectively with a $10 million cap, (3) a $250,000 weekly reduction of the uncapped collateral, (4) borrowing rates of LIBOR + 325 basis points or Chase Bank prime rate + 150 basis points, and (5) certain financial covenants including a minimum fixed charge coverage ratio and a cap on capital expenditures.

We are currently pursuing longer term financing prior to the expiration of the CIT Facility.  However, there can be no assurance that we will find the financing on satisfactory terms, if at all, or that we will be able to comply with the terms of the CIT Facility that would otherwise avoid an acceleration of debt under this facility.

We are continuing to operate the business based on our belief that current economic conditions and the decline in the electronics industry, which had an adverse affect on our operations, is temporary.

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Accordingly, we have taken certain steps during 2002 to restructure our operations aimed at strengthening the business including, but not limited to, (i) maintaining an aggressive cost cutting program, (ii) closing of our South Hill heavyweight fabrics facility and consolidating  the operations into our newly constructed South Hill multilayer facility to reduce excess capacity and (iii) engaging the crisis management consulting firm of Realization Services, Inc. to assist in formulating and implementing a plan to restructure operations and explore other strategic alternatives including a possible capital restructuring. The plan is essentially focused on maximizing our asset utilization, reducing inventory levels and costs, and the sale/leaseback of certain real property.  For the twelve months ended December 31, 2002, we reduced inventories by $16.4 million and reduced outstanding debt under our Senior Credit Facility by $13.0 million.   We also entered into a sale-leaseback agreement on our corporate headquarters in December 2002 which resulted in net proceeds of $2.5 million which were used to reduce outstanding debt.

There can be no assurance that we will be successful in our efforts to restructure our operations or that a restructuring of our operations will actually improve our operating results or financial condition. There also can be no assurance that we will obtain on satisfactory terms, if at all, the financing we need to sustain our business operations or that we will be able to comply with the terms of the CIT Facility. These matters raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies

We have selected accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial position, and we apply those accounting policies in a consistent manner.  The significant accounting policies are summarized in Note 1 to the consolidated financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances.  We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants, engineers, lawyers and actuaries to assist in our evaluation.  We believe the following accounting policies are the most critical because they involve the most significant judgments and estimates used in preparation of our consolidated financial statements:

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Results of Operations

The following table summarizes our historical results of operations as a percentage of net sales for the years ended December 31, 2002, 2001 and 2000:

Fiscal Year 2002 Compared to Fiscal Year 2001

        Net Sales – Net sales decreased $15.9 million, or 10.8%, to $130.9 million in 2002 from $146.8 million in 2001.  This decrease was due primarily to lower sales of electronics fabrics used in the multilayer and rigid printed circuit boards which decreased $12.7 million, or 24.1%, and lower sales of glass, carbon and aramid fiber fabrics used in various composite materials which decreased $8.8 million, or 17.5%.  These decreases were partially offset by an increase in sales of filtration fabrics of $3.5 million, or 18.5%, over the comparable period in 2001.  The decrease in sales of electronics fabrics was primarily a result of a

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continued downturn in the electronics industry that began in the first quarter of 2001.  In addition, the decrease in capital spending in the information technology and telecommunications industries had led fabricators of printed circuit boards to reduce production, thus negatively impacting our sales to these customers.  The decrease in sales of glass, carbon and aramid fibers was primarily the result of a decrease in the aerospace markets. The increase in sales of filtration fabrics was due to an increase in demand for replacement filtration bags.

        Gross Profit Margins.   Gross profit margins decreased to 1.9% in 2002, from 10.4% in 2001, due primarily to lower capacity utilization and selling price reductions, charges to cost of goods sold for inventory reserves of $5.6 million, as well as a settlement charge for the retirement plan of $1.0 million, of which $0.8 million was allocated to cost of goods sold.

     Selling, General and Administrative Expenses.   Selling, general and administrative expenses increased $6.7 million to $13.8 million in 2002, from $7.1 million in 2001. This was primarily due to an increase in legal and professional fees of $3.8 million associated with negotiating the forbearance agreement relating to our Senior Credit Facility and restructuring operations, an increase of $2.0 million in the environmental reserve for estimated remediation costs at out Altavista, Virginia facility, a settlement charge for the retirement plan of $1.4 million, of which $0.5 million was allocated to selling, general and administrative expenses, and a charge of $0.5 million related to severance costs.

     Restructuring Charge.   We incurred a restructuring charge of $0.3 million related to severance payments to the employees of our South Hill heavyweight fabrics facility during 2002.

     Asset Impairment Charge.   During the second quarter of 2002, we recorded     a $1.0 million impairment charge on the sale of equipment to an affiliate and a $4.8 million impairment charge on machinery and equipment at our South Hill heavyweight fabric manufacturing plant.

     Operating Income (Loss).   As a result of the aforementioned factors, operating income (loss) decreased $25.0 million to $(17.4) million, or (13.2)% of net sales, in 2002, from $7.6 million, or 5.3% of net sales, in 2001.

     Interest Expense.   Interest expense remained flat in 2002 as compared to 2001.  This was due to a decrease in borrowings and interest on borrowings, offset by an increase in amortization of debt issuance costs.

     Other Income (Loss), Net.   Other income (loss) decreased $99.1 million in 2002 from income of $1.4 million in 2001, to a loss of $97.7 million.  As a result of AGY’s bankruptcy filing, and consequently the financial condition of AGY Holdings, evaluations of the potential impairment of the loan from Glass Holdings to AGY Holdings and the similar loan from BGF to Glass Holdings were performed.  Based on the current tax positions of the three companies and the insolvency of AGY Holdings, it was determined that a reserve should be recorded against BGF’s loan to Glass Holdings.  Accordingly, BGF recorded a reserve of $97.7 million during 2002.

     Income Tax Expense (Benefit).   The effective tax rates in 2002 and 2001 were 5.3% and (37.8)%, respectively. The rate increase is primarily the result of recording a valuation allowance on certain deferred tax assets in 2002.

     Cumulative Effect of Change in Accounting Principle.  We adopted SFAS No. 142 effective January 1, 2002 and recorded a charge of $4.7 million for impairment of goodwill.

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Net Income (Loss).   As a result of the aforementioned factors, our net loss increased $137.5 million to a net loss of $140.6 million in 2002, from a net loss of $3.1 million in 2001.

Fiscal Year 2001 Compared to Fiscal Year 2000

Net sales.  Net sales decreased $54.6 million, or 27.1%, to $146.8 million in 2001 from $201.4 million in 2000.  Sales of glass, carbon and aramid fibers used in various composite materials increased $4.0 million during 2001 as compared to 2000.  However, for the same period, our sales of electronics fabrics used in multi-layer and rigid printed circuit boards decreased $47.6 million, or 47.5%, and sales of fabrics used in filtration products decreased $9.4 million, or 32.5%.  The decrease in sales of electronics fabrics was primarily a result of significant inventory adjustments in the electronics industry that began during the first quarter of 2001. In addition, the decrease in capital spending in the information technology and telecommunications industry has led fabricators of printed circuit boards to reduce production, thus negatively impacting our sales to these customers.  The decrease in sales of filtration fabrics was due to fewer large utility projects that have replaced filter bags as well as a downturn in the steel and foundry industries. 

Gross profit.  Gross profit margins decreased to 10.4% in 2001 from 17.7% in 2000, due primarily to the shifts in product mix, discussed above as well as lower sales and production volumes resulting in less absorption of fixed costs.

Selling, general and administrative expenses.  Selling, general and administrative expenses increased to 4.8% of net sales in 2001 from 4.6% of net sales in 2000.  This was primarily due to lower sales volumes for 2001, offset by decreased accruals for profit sharing, management fees and bonuses.

Operating income.  As a result of the aforementioned factors and charges of $502,000 incurred in 2001 due to the restructuring charge associated with the salaried workforce reduction, operating income decreased $18.7 million to $7.6 million, or 5.3% of net sales, in 2001 from $26.3 million, or 13.1% of net sales, in 2000.

Interest expense.  Interest expense decreased $0.2 million to $14.0 million, or 9.5% of net sales, in 2001 from $14.2 million, or 7.0% of net sales, in 2000, due to lower interest rates offset by a write-off of $0.6 million of deferred financing fees relating to our Senior Credit Facility. 

Other income, net. Other income decreased $0.4 million to $1.4 million, or 1.0% of net sales, in 2001 from $1.8 million, or 0.9% of net sales, in 2000.  During 2001 and 2000, we received payments from Glass Holdings totaling $11.0 million and $11.7 million, respectively, on the loan held by us.  We and Glass Holdings have agreed that any payments made on the loan balance will be allocated approximately 90% to principal and 10% to interest.  Accordingly, we reflected $1.1 million and $1.3 million  as interest income recorded in other income on the consolidated statement of operations in 2001 and 2000, respectively.

Income tax expense (benefit).  The effective tax rate in 2001 and 2000 of 37.8% and 40.2%, respectively, was higher than the federal statutory rate of 35.0% primarily due to the effect of state income taxes.

Net income (loss).  As a result of the aforementioned factors, net income decreased $11.5 million to a loss of $(3.1) million in 2001 from $8.4 million in 2000.

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Balance Sheets

Accounts receivable.  Accounts receivable declined $2.1 million, or 17.3%, from December 31, 2001 to December 31, 2002.  This decline was a result of lower sales in 2002 than in 2001.

Inventory.  Inventory decreased $16.4 million, or 42.0%, from December 31, 2001 to December 31, 2002.  This was mainly due to the implementation of an aggressive plan aimed at maximizing our asset utilization.

Net property, plant and equipment.  Net property, plant and equipment decreased $14.2 million, or 22.9%, from December 31, 2001 to December 31, 2002.  The net decrease is primarily the result of depreciation expense of $8.2 million and the net value of assets written down due to asset impairment charges of $5.8 million.

There were no significant  capital expenditures during 2002. The principal capital expenditures during 2001 included:

Accounts payable and accrued liabilities.  Accounts payable and accrued liabilities increased $3.3 million, or 28.9%, from December 31, 2001 to December 31, 2002.  This increase was primarily the result of the increase in the environmental reserve of $2.3 million and an increase in trade accounts payable of $1.6 million, offset by a decrease in the restructuring reserve of $0.4 million.

Other Current Assets.    Other current assets increased $5.0 million from December 31, 2001 to December 31, 2002.  This increase was primarily the result of an increase in income tax refundable of $4.5 million, an increase in security deposits of $0.9 million, partially offset by a decrease in deferred income taxes of $0.3 million.

Current Portion of Long Term Debt.  As a result of the short term nature of the Senior Credit Facility, amounts outstanding under the Senior Credit Facility as of December 31, 2002 have been classified as a current liability.  The Senior Subordinated Notes have also been classified as a current liability because payment of interest due on the Senior Subordinated Notes in 2003 is contingent upon our ability to improve cash flows from operations and liquidity in 2003. 

Capital Lease Obligations.    During 2002, we sold our Greensboro office facility to a third party for net proceeds of $2.5 million and are leasing it back under a capital lease agreement.  The capital lease obligation balance at December 31, 2002 was $2.5 million.

Post Retirement and Pension Obligations.    Post retirement and pension obligations increased $3.3 million, or 61.1%.  This increase was due to an increase in the pension liability of $2.7 million due to a settlement charge of

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$1.4 million and a $1.5 million increase due to a minimum pension liability adjustment as well as normal pension expense of $1.0 million, an increase in post retirement liability of $0.2 million, and an increase in deferred compensation liability of $0.4 million.  These increases were partially offset by the required minimum contribution to the pension plan of $1.2 million. 

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations and borrowings under our financing arrangements.  Our future need for liquidity will arise primarily from interest payments on our Senior Subordinated Notes ($100.0 million outstanding at December 31, 2002 net of unamortized discount of $1.2 million), principal and interest payments on the CIT Facility, and the funding of capital expenditures and working capital requirements.  There are no mandatory payments of principal on the Senior Subordinated Notes scheduled prior to their maturity.

As previously discussed, we experienced a rapid deterioration in liquidity and financial condition beginning in the second quarter of 2002 which has continued into the fourth quarter of 2002, as a result of worsening industry and economic conditions that had a material adverse affect on our ability to generate revenue and sufficient liquidity to fund our operations. We incurred a net loss of approximately $140.6 million for the year ended December 31, 2002, and have a $82.7 million working capital deficiency and a $46.1 million stockholder’s deficit as of December 31, 2002.

As of June 30, 2002, we were in violation of certain financial covenants under the Senior Credit Facility. On July 10, 2002, we received a default notice from our senior lenders that we were in default of the Senior Credit Facility as a result of our failure to maintain the minimum interest coverage and senior leverage ratios required under the Senior Credit Facility. Further, as permitted under the terms of the Senior Credit Facility, the lenders issued a payment blockage notice that prohibited us from making a required interest payment on our Senior Subordinated Notes on July 15, 2002.

On August 13, 2002, we and our senior lenders executed a forbearance agreement with respect to breaches of these financial covenants. As a result, the senior lenders rescinded the payment blockage notice. Accordingly, on August 14, 2002, we made the interest payment on the notes that was previously required on July 15, 2002, which was within the thirty-day grace period provided for in the indenture covering the Senior Subordinated Notes.

On February 14, 2003 we entered into the CIT Facility.  This allowed us to reimburse all senior lenders under the Senior Credit Agreement dated September 30, 1998 and its subsequent amendments including the forbearance agreement described above.  Also, we were able to make the interest payment originally due on January 15, 2003 on our Senior Subordinated Notes within the 30 day grace period.  The CIT Facility provides for the following:  (1) a maturity date of June 30, 2003, (2) a borrowing base with advance rates on eligible accounts receivable and eligible finished goods inventories of 85% and 15% respectively with a $10 million cap, (3) a $250,000 weekly reduction of the uncapped collateral, (4) borrowing rates of LIBOR + 325 basis points or Chase Bank prime rate + 150 basis points, and (5) certain financial covenants including minimum EBITDA fixed charge coverage ratio and a cap on capital expenditures.

We are currently pursuing longer term financing prior to the expiration of the CIT Facility.  However, there can be no assurance that we will find the financing on satisfactory terms, if at all, or that we will be able to

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comply with the terms of the CIT Facility that would otherwise avoid an acceleration of debt under this facility.

The Senior Subordinated Notes have been classified as a current liability as of December 31, 2002 due to the fact that payment of interest due in 2003 is contingent upon our ability to improve our liquidity in 2003.  The fair value of the Senior Subordinated Notes as of March 26, 2003 and December 31, 2002 was approximately $40.1 million and $48.0 million, respectively.

One of our affiliates, AGY is also a major supplier.  AGY filed for protection under Chapter 11 of  the US Bankruptcy Code on December 10, 2002 and is now operating with Debtor In Possession (“DIP”) financing.  However, there can be no assurance that liquidity will remain adequate in the long run, which may negatively impact AGY’s ability to operate and to deliver products to us.

During the second quarter of 2002, our parent, Glass Holdings, received a $6.9 million income tax refund related to the filing of the 2001 consolidated return. On August 13, 2002, this amount was remitted to us, which reduced our loan receivable from Glass Holdings. The entire amount of the refund was applied to the principal due to the financial condition of Glass Holdings.  We anticipate receiving approximately $15.6 million in tax refunds from our parent in 2003 related to the filing of the 2002 consolidated return.

On August 13, 2002, we received $5.0 million from Glass Holdings under a loan agreement whereby the loan matures on June 30, 2003. Interest on the loan is 3.25% and is payable quarterly in arrears beginning December 2002 or may be added to the principal amount of the loan.

Net cash provided by operating activities.  Net cash provided by operating activities was $9.6 million for 2002, compared with $1.1 million in 2001 and was primarily the result of a net loss of $140.6 million, adjusted for non-cash charges to net income for depreciation of $8.2 million, amortization of $1.6 million, deferred income taxes of $12.0 million, goodwill impairment of $4.7 million, asset impairment charge of $5.8 million, reserve on loan to parent of $97.7 million, a decrease in inventory of $16.4 million, an increase in accounts payable and accrued expenses of $4.7 million and a decrease in trade accounts receivable of $2.1 million.

Net cash used in investing activities.  Net cash used in investing activities was $1.1 million and $15.7 million in 2002 and 2001, respectively, and in 2002 was the result primarily of purchases of property, plant and equipment of $1.7 million offset by cash proceeds of $0.6 million from the sale of a property and equipment.

Net cash provided by (used in) financing activities.  Net cash used in financing activities was $(7.4) million for 2002, compared with net cash provided by financing activities of $14.6 million for 2001, and was primarily the result in 2002 of net payments on the Senior Credit Facility of $(19.4) million, proceeds from loan from parent of $5.0 million, payments received on loan to parent of $7.7 million and net proceeds from capital lease agreement of $2.5 million.

On January 21, 1999, BGF issued $100.0 million of 10 1/4% Senior Subordinated Notes ($98 million net of discount) due 2009. The net proceeds to us from the sale of these notes were approximately $94.9 million, after deducting the initial purchaser’s discount and expenses. We used the net proceeds from the offering to repay all $65.0 million of indebtedness under the senior subordinated credit facility and $29.9 million of indebtedness under the revolver under our Senior Credit Facility, which was incurred on September 30, 1998 to fund the purchase by AGY Holdings of a 51% interest in AGY. Upon the repayment of the $65.0 million of indebtedness under the senior subordinated credit facility, the facility was terminated.  On July

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23, 1999, we exchanged the old notes for substantially identical new notes that have been registered under the Securities Act.  There are no cross-default provisions for these Senior Subordinated Notes in conjunction with the covenants discussed above for the Senior Credit Facility.

On September 30, 1998, AGY Holdings, an affiliate of BGF, purchased a 51% ownership interest in AGY. In connection with the acquisition, BGF loaned Glass Holdings approximately $138.6 million to provide Glass Holdings a portion of the capital necessary to fund the acquisition. The loan from BGF to Glass Holdings is evidenced by promissory notes that bear interest at the Cost of Funds Rate for BGF for the calendar year immediately preceding the date on which any interest is due. With respect to any period of determination, the Cost of Funds Rate means a rate per annum equal to the blended interest rate, as reasonably calculated by BGF, applicable to borrowings of BGF during such period in respect of indebtedness incurred by BGF, to fund the loan to Glass Holdings. Accrued interest is due and payable on the first business day of February of each year commencing on February 1, 1999 and on any date on which any principal is due. The promissory notes are payable on October 31, 2008 or such later date as may be agreed to by BGF and Glass Holdings.  During the term of the loan, we have not recorded interest income earned under the terms of the loan agreement due to the fact that full repayment of the loan and related interest by Glass Holdings is contingent on Glass Holdings’ receipt of dividends and other distributions from its two subsidiaries, BGF and AGY, which are currently restricted from paying dividends and other distributions under their debt agreements.  Interest in arrears as of December 31, 2002 and 2001 totaled $49.7 million and $38.1 million, respectively.  We received payments from Glass Holdings totaling $7.7 million and $11.0 million in 2002 and 2001, respectively.  BGF and Glass Holdings agreed that while there are interest amounts in arrears, any payments made on the loan balance will be allocated approximately 90% to principal and 10% to interest.  However, due to the uncertainty of the ultimate collectibility of the loan which arose during 2002, all payments are now recorded as principal payments.  Accordingly, we reflected $7.7 million and $9.9 million of the cash payments received in 2002 and 2001, respectively, as a reduction of principal and $1.1 million was recognized as interest income in 2001 (recorded in other income on the consolidated statement of operations). 

Following is a summary of our fixed obligations at the end of 2002 and will require the use of funds:

(1) The $100.0 million Senior Subordinated Notes are scheduled to mature in 2009.  However, all such amounts have been classified as a short-term liability on our balance sheet.  Amounts due in 2003 consist of a revolver balance of $7.6 million due 2003, and loan payable to parent of $5.0 million due 2003.

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Outlook for 2003

The following section contains forward-looking statements about our plans, strategies and prospects during 2003.  Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved.  Such statements are based on our current plans and expectations and are subject to risks and uncertainties that exist in our operations and our business environment that could render actual outcomes and results materially different from those predicted.  When considering such forward-looking statements, you should keep in mind the important factors that could cause our actual results to differ materially from those contained in any forward-looking statements set forth under Part I, “Cautionary Statement Regarding Forward-Looking Statements.”

Looking ahead to 2003:

Related Party Transactions

See Item 13, “Certain Relationships and Related Transactions”  for a discussion of related party transactions.

Impact of Inflation

We generally attempt to pass cost increases on to our customers.  Costs are affected by, among other things, inflation, and we may experience the effects of inflation in future periods.  We believe, however, that inflation has not had a material impact on us during the past three years.

Recently Issued Accounting Standards

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement No. 145,  “Rescission of FASB Statements Nos. 4, 44 and 64 and Amendment of FASB Statement No. 13”.  The Statement modifies or amends several other authoritative pronouncements, including those covering gains and losses

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from extinguishment of debt.  Management does not believe this statement will have a material impact on BGF.

In June 2002, the FASB issued Statement No. 146, “Accounting for Exit and Disposal Activities”, which is required to be adopted for disposal activities initiated after December 31, 2002.  Management does not believe this statement will have a material impact on BGF.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.”  This Interpretation clarifies the requirements of FASB Statement No. 5, “Accounting for Contingencies,” relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees.  Management does not believe this Interpretation will have a material impact on the Company.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.”  The primary objective of the Interpretation is to provide guidance on the identification of entities for which control is achieved through means other than voting rights and how to determine when and which business enterprise should consolidate the variable interest entity.  Management does not believe this Interpretation will have a material impact on the Company.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

The effects of potential changes in currency exchange rates and interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value that would occur assuming hypothetical future movements in interest and currency exchange rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Disclosure Regarding Forward-Looking Statements.”

Our credit facilities are subject to market risks, including interest rate risk. Our financial instruments are not currently subject to commodity price risk. We are exposed to market risk related to changes in interest rates on borrowings under our credit facilities. The credit facilities bear interest based on LIBOR or prime. Our risk management strategy is to use derivative financial instruments, such as swaps, to hedge interest rate exposures. We do not enter into derivatives for trading or speculative purposes.

We entered into an interest rate swap agreement to manage our exposure to interest rate changes under the Senior Credit Facility. The swap involved the exchange of fixed and variable interest rate payments based on a contractual principal amount and time period. Payments or receipts on the agreement were recorded as adjustments to interest expense.  In June 2002, we terminated our interest rate swap agreement and paid $0.4 million to the counter party.

The fair value of the Senior Subordinated Notes as of March 26, 2003 and December 31, 2002 was approximately $40.1 million and $48.0 million, respectively.

Item 8. Financial Statements and Supplementary Data

See Page F-1 of the financial reports included herein.

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

None

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PART III

Item 10. Directors and Executive Officers of the Registrant 

The names, ages and positions of our directors and executive officers as of March 26, 2003 are set forth below.  Our director is also a director of Glass Holdings.  The director is elected annually and holds office until his successor is elected and qualified or until his earlier removal or resignation.

Philippe Porcher has been our Chairman and Chief Executive Officer since July 26, 2002. Previous to that, he served as Vice Chairman since April 1998.  He has also served as Vice President of Porcher Industries since March 1993. Before becoming Vice President of Porcher Industries, Mr. Porcher served as Director of Porcher Industries’ industrial division. Since December 9, 1998, Mr. Porcher has served as President of the Executive Board of Porcher Industries.  

James R. Henderson was named President of BGF in May 2002.  Prior to that he was Executive Vice President Sales and Merchandising since 1989. Before joining BGF, Mr. Henderson was employed for 31 years with United Merchants and Manufacturers, Inc., a company engaged in the textile business. Mr. Henderson served as the Senior Vice President of United Merchants and Manufacturers, President of their Uniglass Division, and as Chairman of the Board of United’s Marglass subsidiary in England.  Mr. Henderson was appointed to the Executive Board of Porcher Industries in May 2002.

Philippe R. Dorier has been our Senior Vice President, Chief Financial Officer, Secretary and Treasurer since 1993. From 1988 to 1993, he served as our Vice President International Audit. From 1984 until 1988, Mr. Dorier served as the Vice President of Finance of Babolat VS, S.A., and from 1980 until 1983, as the Administration and Finance Manager of Syva-Biomerieux S.A. Since December 9, 1998, Mr. Dorier has served as a member of the Executive Board of Porcher Industries.

Item 11. Executive Compensation

The following table shows, for the fiscal years ended December 31, 2002, 2001, and 2000, the compensation paid to or earned by all persons who served as our chief executive officer and our one other most highly compensated executive officer who was serving at the end of 2002.

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Retirement Plans

Retirement System. The Retirement System of BGF Industries, Inc. covers substantially all employees of BGF after they have completed one year of service. Employees with five or more years of service are entitled to benefits beginning at normal retirement age. This plan also provides reduced benefits to participants electing to retire early, beginning at age 55. Participants are required to contribute three percent of covered compensation per year and interest is credited on employee contributions. In general, the normal retirement benefit is payable as an annuity. Participants may also elect a lump-sum distribution of their accrued benefit.

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Normal retirement benefits are determined by reference to an employee’s “accumulated contributions.” Accumulated contributions are the sum of all required employee contributions plus interest credited on the contributions, compounded annually at the rate of 120% of the federal mid-term rate in effect under section 1274 of the Internal Revenue Code for the first month of the plan year. In general, the annual normal retirement benefit is equal to 50% of the accumulated employee contributions, plus 3/4% of employee plan compensation up to $6,600 for the plan year 1989.

The estimated annual benefits payable upon retirement at normal retirement age for the executive officers listed in the “Executive Compensation” table above is as follows: Mr. Henderson-$26,558 and Mr. Dorier-- $64,855 . These calculations are based on 2002 compensation, assume benefits are payable as a straight-life annuity, and assume that each individual will work until age 65.  Mr. Philippe Porcher does not participate in the Retirement System.

401(k) Plan. The Employees’ Profit Sharing and Tax Savings Plan of BGF Industries, Inc. covers most employees of BGF. After completing one hour of service, employees may defer up to 15% of their plan compensation each year, subject to Internal Revenue Code limitations. We may, in our discretion, match employees’ elective deferrals up to a specified limitation each year and may make a discretionary employer contribution for employees that have completed one year of service. All contributions are 100% vested and nonforfeitable at all times. Benefits are payable after separation from service in a lump sum in cash.  

Compensation of Directors 

Our director did not receive separate compensation for his services as a director in 2002.

Compensation Committee Interlocks and Insider Participation

Mr. Philippe Porcher, who serves as both an executive officer and as a member of the board of directors of BGF, serves as the President of the Executive Board of Porcher Industries.  Mr. Philippe Porcher also serves as an executive officer of Glass Holdings, AGY Holdings and BGF Services, Inc., all of which are affiliates of BGF.  He is the Chairman of the Board of Directors for Glass Holdings, AGY Holdings, BGF Services, and AGY.

Mr. Dorier serves as a member of the Executive Board of Porcher Industries, whose members are equivalent to executive officers.  Mr. Dorier also serves as an executive officer of Glass Holdings, AGY Holdings, BGF Services and as a director of Glass Holdings, AGY Holdings, BGF Services and AGY. 

These positions effectively create interlocks between BGF and Glass Holdings, AGY Holdings, BGF Services,  and AGY.  See also “Item 13. Certain Relationships and Related Party Transactions.”

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Deferred Compensation Agreements

We have entered into Deferred Compensation Agreements with our executives and we are the guarantor of Mr. Dorier’s Deferred Compensation Agreement with BGF Services. The agreements provide for both pre-retirement survivor benefits, as well as post-retirement benefits to the executive. The agreements also contain a non-competition provision. Generally, under each of the agreements, if the executive dies before the age of 65, his beneficiary or, if none, his estate will receive monthly payments for a 10-year period of an amount equal to 50% of the greater of:

This amount is decreased progressively if the executive dies after the age of 60 but before 65. The agreements also provide for post-retirement benefits in the form of:

In 1998, we entered into an agreement with a previous director and president with regard to his executive life insurance policies.  In accordance with this agreement, we transferred ownership of the life insurance to him in March 2001.  The cash surrender value of these policies was $155,788 at that time.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth the beneficial ownership of BGF’s outstanding common stock as of December 31, 2002 for each person or group known to our management to be holding more than 5% of the common stock and for each director and executive officer named in the “Executive Compensation” table and all of our directors and executive officers as a group.

An asterisk in the percent of class column indicates beneficial ownership of less than 1% of the outstanding common stock.

As noted in the table, Porcher Industries indirectly owns 100% of the outstanding common stock of BGF. The address of Porcher Industries is Porcher Industries S.A., Badinières, 38300 Bourgoin-Jallieu, France.

As reflected in the graphic below the table, Mr. Robert Porcher may be deemed to beneficially own 56.05% of the outstanding capital stock of Porcher Industries, and thus Glass Holdings and BGF, through (1) his 7.22% direct ownership interest in Porcher Industries and (2) his ownership interest in Société Civile des Terres Froides. Mr. Robert Porcher’s address is c/o Porcher Industries S.A., Badinières, 38300 Bourgoin-Jallieu, France.

Mr. Robert Porcher’s 56.05% interest includes a 0.7% interest of his son, Philippe Porcher, an executive officer of BGF, in Société Civile des Terres Froides. Mr. Robert Porcher controls the voting and investment of these shares. The asterisk aside the name of Philippe Porcher represents this interest.

BGF does not have any equity compensation plans.

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Item 13. Certain Relationships and Related Transactions

We are wholly owned by Porcher Industries through its U.S. holding company, Glass Holdings. We have ongoing financial, managerial and commercial agreements and arrangements with Porcher Industries, Glass Holdings and other wholly-owned subsidiaries of Glass Holdings, as well as other affiliates of Porcher Industries. Mr. Robert Porcher, our former Chairman of the Board and Chief Executive Officer, beneficially owns a controlling interest in Porcher Industries and Mr. Philippe Porcher, our current Chairman of the Board and Chief Executive Officer also owns an interest in Porcher Industries. See “Item 12. Security Ownership of Certain Beneficial Owners and Management.”

We pay management fees to BGF Services, Inc., a wholly owned subsidiary of Glass Holdings, that cover the periodic management services of Robert Porcher, Philippe Porcher, one other Porcher Industries employee, and the full time services of Philippe Dorier, our Chief Financial Officer. We also reimburse BGF Services for the costs associated with automobiles provided to Messrs. Philippe Porcher and Dorier.  Prior to November 2002, we also reimbursed BGF Services for the maintenance and upkeep of Robert Porcher’s Greensboro, North Carolina residence, which was owned by BGF Services.  The residence was sold by BGF Services to Robert Porcher in November 2002. In connection with these arrangements, we incurred expenses of $1.0 million in 2002. BGF Services does not derive a profit from this arrangement and therefore these terms cannot be considered comparable to those that would be provided to third parties.

Porcher Industries and its French parent company provide general management and strategic planning advice to us in exchange for management fees that reimburse these companies for a portion of the compensation of Robert Porcher, Philippe Porcher and other employees who allocate their time among us and other Porcher Industries affiliates. In 2002, we were not billed by the parent company for management expenses.  These terms cannot be considered comparable to those that would be provided to a third party.

We purchase carbon fibers and finished products from Porcher Industries. We purchased $0.9 million of these products in 2002. We sell finished goods and occasionally unfinished goods directly to Porcher and its affiliates. In 2002, we billed Porcher Industries and its affiliates $0.5 million for these goods. Porcher Industries billed us for commissions for sales of its products in Asia, Europe, and Australia of $0.1 million in 2002. We believe that prices and commissions paid or received by us for these transactions are comparable to those paid to third parties.

We collect and deposit customer payments on behalf of two wholly owned subsidiaries of Porcher Industries in exchange for fees equal to 2% of amounts collected. We billed $0.01 million in fees for these services incurred in 2002. We believe that these fees are comparable to those that would be paid to third parties.    

In 2002 we sold certain manufacturing equipment to Shanghai-Porcher Industries, a subsidiary of Glass Holdings. Proceeds on the sale were $0.6 million.

We have a loan due from Glass Holdings which was entered into in 1998 in the amount of $138.6 million.  Additionally, we have a non-interest bearing loan payable to Glass Holdings from 1998 of $1.8 million, resulting in an original net loan balance of $136.8 million.  Our loan to Glass Holdings is evidenced in part by promissory notes.  Cumulative principal repayments from Glass Holdings have totalled $28.1 million, of which 2002 payments of $7.7 million in principal are included.  As a result of AGY’s bankruptcy filing, and consequently the financial condition of AGY Holdings, evaluations of the potential impairment of the loan from Glass Holdings to AGY Holdings and the similar loan from BGF to Glass Holdings were performed.  Based on the current tax positions of the three companies, the insolvency of AGY Holdings, and our liquidity situation, it was determined that a reserve should be established against our loan to Glass Holdings.  Accordingly, BGF recorded a reserve of $97.7 million during 2002 to properly reflect the estimated realizability of our loan to Glass Holdings.

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In 2002, we borrowed $5.0 million from Glass Holdings under a loan agreement whereby the loan matures in June, 2003.  Interest on the loan is at 3.25%.  We recorded interest expense of $0.1 million during 2002 related to this note.  We believe that these transactions were on terms no more favorable than if Glass Holdings had borrowed the funds directly from a third party.

Currently, AGY leases approximately 27,200 square feet of segregated space at our South Hill, Virginia lightweight fiber fabric facility for the purpose of manufacturing glass yarns for exclusive supply to us under a supply contract, extendible at the option of AGY, that expires on December 31, 2008. We also provide AGY with leased employees and administrative and technical support services. We billed AGY approximately $1.1 million pursuant to this agreement in 2002. We also purchased approximately $19.1 million of raw materials from AGY in the twelve months ended December 31, 2002. We believe that each of these arrangements are on terms no more favorable than those that would be provided to third parties.  While AGY is currently in Chapter 11 under the Bankruptcy Code, we do not expect our operations to be significantly impacted.

See also note 15 to the consolidated financial statements filed as part of this Annual Report in Item 14.

Item 14. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  These disclosure controls and procedures are further designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Based on the most recent evaluation, which was completed within 90 days of the filing report, our president and chief financial officer believe that our disclosure controls are effective.  There have been no significant changes in our internal controls or in any other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

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PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

EXHIBITS

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          (b)     Reports on Form 8-K  - None

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BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

F-1

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Index to Financial Statements

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholder
of BGF Industries, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(1) on page 33 present fairly, in all material respects, the financial position of BGF Industries, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(2) on page 33 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net working capital deficiency that raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also discussed in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

As discussed in Note 6 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets” on January 1, 2002.

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Index to Financial Statements

BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)