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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.