##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE
ACT OF 1934



For the quarterly period ended June 30, 2005



Commission File No. 333-72321



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BGF Industries, Inc.

(Exact name of registrant as specified in its charter)



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|                         |  |                                                          |  |                                     
|------------------------ |  | -------------------------------------------------------- |  | ------------------------------------
|Delaware                 |  | 2221                                                     |  | 56-1600845                          
|(State of incorporation) |  | (Primary Standard Industrial Classification Code Number) |  | (I.R.S. Employer Identification No.)



|                                                     |  |           
|---------------------------------------------------- |  | ----------
|3802 Robert Porcher Way, Greensboro, North Carolina  |  | 27410     
|(Address of registrants principal executive office) |  | (Zip Code)



(336) 545-0011

(Registrants telephone number, including area code)



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Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate
by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes ̈No  x



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 August 9,
2005.



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##### Table of Contents

BGF INDUSTRIES, INC.

QUARTERLY REPORT FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005



TABLE OF CONTENTS



|                              |  |                                                                                                                                              |  |         
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                                              |  | Page No.
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                             
|                              |  |                                                                                                                                             
|Item 1.                       |  | Financial Statements                                                                                                                         |  | 3       
|                              |  |                                                                                                                                             
|                              |  | Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004                                                                         |  | 3       
|                              |  |                                                                                                                                             
|                              |  | Statements of Operations and Comprehensive Income for the three months and six months ended June 30, 2005 and 2004 (as restated) (unaudited) |  | 4       
|                              |  |                                                                                                                                             
|                              |  | Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (as restated) (unaudited)                                           |  | 5       
|                              |  |                                                                                                                                             
|                              |  | Notes to the Financial Statements                                                                                                            |  | 6       
|                              |  |                                                                                                                                             
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                        |  | 13      
|                              |  |                                                                                                                                             
|                              |  | Overview                                                                                                                                     |  | 13      
|                              |  |                                                                                                                                             
|                              |  | Critical Accounting Policies                                                                                                                 |  | 14      
|                              |  |                                                                                                                                             
|                              |  | Environmental Issues                                                                                                                         |  | 14      
|                              |  |                                                                                                                                             
|                              |  | Results of Operations                                                                                                                        |  | 14      
|                              |  |                                                                                                                                             
|                              |  | Liquidity and Capital Resources                                                                                                              |  | 16      
|                              |  |                                                                                                                                             
|                              |  | Recent Accounting Pronouncements                                                                                                             |  | 18      
|                              |  |                                                                                                                                             
|                              |  | Disclosure Regarding Forward-Looking Statements                                                                                              |  | 18      
|                              |  |                                                                                                                                             
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                   |  | 18      
|                              |  |                                                                                                                                             
|Item 4.                       |  | Controls and Procedures                                                                                                                      |  | 19      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                             
|                              |  |                                                                                                                                             
|Item 6.                       |  | Exhibits                                                                                                                                     |  | 20      



2



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##### Table of Contents

PART I - FINANCIAL INFORMATION



Item 1. Financial Statements



BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

BALANCE SHEETS

(dollars in
thousands)



|                                                                                                           |  |               |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                           |  | June 30, 2005 |         |   | December 31,2004 |  
|                                                                                                           |  | (unaudited)   |         |   |                  |  
|ASSETS                                                                                                     |  |               |         |   |                  |   |         |  
|Current assets:                                                                                            |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                  |  | $             |        |   |                  | $ |        |  
|Trade accounts receivable, less allowance for returns and doubtful accounts of $284 and $366, respectively |  |               | 17,947  |   |                  |   | 16,833  |  
|Inventories                                                                                                |  |               | 26,941  |   |                  |   | 27,095  |  
|Other current assets                                                                                       |  |               | 3,139   |   |                  |   | 3,165   |  
|Assets held for sale                                                                                       |  |               | 245     |   |                  |   | 245     |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total current assets                                                                                       |  |               | 48,272  |   |                  |   | 47,338  |  
|Net property, plant and equipment                                                                          |  |               | 37,913  |   |                  |   | 39,081  |  
|Other noncurrent assets, net                                                                               |  |               | 3,124   |   |                  |   | 3,525   |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total assets                                                                                               |  | $             | 89,309  |   |                  | $ | 89,944  |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                      |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                       |  |               |         |   |                  |   |         |  
|Cash overdraft                                                                                             |  | $             | 1,175   |   |                  | $ | 512     |  
|Accounts payable                                                                                           |  |               | 6,415   |   |                  |   | 5,813   |  
|Accrued liabilities                                                                                        |  |               | 12,509  |   |                  |   | 11,469  |  
|Short-term borrowings                                                                                      |  |               | 5,800   |   |                  |   | 6,500   |  
|Current portion of long-term debt                                                                          |  |               | 1,200   |   |                  |   | 1,200   |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                  |  |               | 27,099  |   |                  |   | 25,494  |  
|Long-term debt, net of discount of $607 and $708, respectively                                             |  |               | 87,776  |   |                  |   | 88,982  |  
|Finance obligation                                                                                         |  |               | 2,721   |   |                  |   | 2,634   |  
|Deferred income taxes                                                                                      |  |               | 2,359   |   |                  |   | 2,359   |  
|Postretirement benefit and pension obligations                                                             |  |               | 4,322   |   |                  |   | 5,674   |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                          |  |               | 124,277 |   |                  |   | 125,143 |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|Commitments and contingencies                                                                              |  |               |         |   |                  |   |         |  
|                                                                                                           |  |              
|Stockholders deficit:                                                                                     |  |               |         |   |                  |   |         |  
|Common stock, $1.00 par value. Authorized 3,000 shares; issued and outstanding 1,000 shares                |  |               | 1       |   |                  |   | 1       |  
|Capital in excess of par value                                                                             |  |               | 34,999  |   |                  |   | 34,999  |  
|Accumulated deficit                                                                                        |  |               | (69,916 | ) |                  |   | (70,147 | )
|Accumulated other comprehensive loss                                                                       |  |               | (52     | ) |                  |   | (52     | )
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total stockholders deficit                                                                                |  |               | (34,968 | ) |                  |   | (35,199 | )
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders deficit                                                                |  | $             | 89,309  |   |                  | $ | 89,944  |  
|                                                                                                           |  |               |         |   |                  |   |         |  



The accompanying
notes are an integral part of the financial statements.



3



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

STATEMENTS OF OPERATIONS

AND
COMPREHENSIVE INCOME

(dollars in thousands)



|                                             |  |                                    |        |   |                                  |   |        |      |  |                    |        |  |   |       
|-------------------------------------------- |  | ---------------------------------- | ------ | - | -------------------------------- | - | ------ | ---- |  | ------------------ | ------ |  | - | ------
|                                             |  | For the Three Months EndedJune 30, |        |   | For the Six Months EndedJune 30,
|                                             |  | 2005                               |        |   | 2004 (as restated)               |   |        | 2005 |  | 2004 (as restated)
|                                             |  | (unaudited)                        |        |   | (unaudited)                     
|Net sales                                    |  | $                                  | 41,728 |   |                                  | $ | 39,928 |      |  | $                  | 78,773 |  | $ | 78,772
|Cost of goods sold                           |  |                                    | 35,115 |   |                                  |   | 33,551 |      |  |                    | 67,321 |  |   | 65,770
|                                             |  |                                    |        |   |                                  |   |        |      |  |                    |        |  |   |       
|Gross profit                                 |  |                                    | 6,613  |   |                                  |   | 6,377  |      |  |                    | 11,452 |  |   | 13,002
|Selling, general and administrative expenses |  |                                    | 2,769  |   |                                  |   | 2,424  |      |  |                    | 5,304  |  |   | 4,954 
|                                             |  |                                    |        |   |                                  |   |        |      |  |                    |        |  |   |       
|Operating income                             |  |                                    | 3,844  |   |                                  |   | 3,953  |      |  |                    | 6,148  |  |   | 8,048 
|Interest expense                             |  |                                    | 2,921  |   |                                  |   | 2,976  |      |  |                    | 5,865  |  |   | 5,956 
|Other (income) expense, net                  |  |                                    | (25    | ) |                                  |   | (2     | )    |  |                    | 52     |  |   | 11    
|                                             |  |                                    |        |   |                                  |   |        |      |  |                    |        |  |   |       
|Income before income taxes                   |  |                                    | 948    |   |                                  |   | 979    |      |  |                    | 231    |  |   | 2,081 
|Income tax expense                           |  |                                    |       |   |                                  |   |       |      |  |                    |       |  |   |      
|                                             |  |                                    |        |   |                                  |   |        |      |  |                    |        |  |   |       
|Net income and total comprehensive income    |  | $                                  | 948    |   |                                  | $ | 979    |      |  | $                  | 231    |  | $ | 2,081 
|                                             |  |                                    |        |   |                                  |   |        |      |  |                    |        |  |   |       



The accompanying
notes are an integral part of the financial statements.



4



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

STATEMENTS OF CASH FLOWS

(dollars in
thousands)



|                                                                                                  |  |                                  |         |   |                    |   |        |  
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------ | - | ------ | -
|                                                                                                  |  | For the Six Months EndedJune 30, |        
|                                                                                                  |  | 2005                             |         |   | 2004 (as restated) |  
|                                                                                                  |  | (unaudited)                      |        
|Cash flows from operating activities:                                                             |  |                                  |         |   |                    |   |        |  
|Net income                                                                                        |  | $                                | 231     |   |                    | $ | 2,081  |  
|Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                  |         |   |                    |   |        |  
|Depreciation                                                                                      |  |                                  | 2,549   |   |                    |   | 2,752  |  
|Amortization of noncurrent assets                                                                 |  |                                  | 421     |   |                    |   | 431    |  
|Amortization of discount on notes                                                                 |  |                                  | 86      |   |                    |   | 96     |  
|Write off of debt issuance costs                                                                  |  |                                  | 38      |   |                    |   |       |  
|Loss on disposal of equipment                                                                     |  |                                  | 69      |   |                    |   | 93     |  
|Noncash interest on finance obligation                                                            |  |                                  | 87      |   |                    |   | 36     |  
|Gain on extinguishment of Senior Subordinated Notes                                               |  |                                  | (50     | ) |                    |   |       |  
|Postretirement benefit and pension obligations                                                    |  |                                  | 958     |   |                    |   | 354    |  
|Change in assets and liabilities:                                                                 |  |                                  |         |   |                    |   |        |  
|Trade accounts receivable, net                                                                    |  |                                  | (1,450  | ) |                    |   | (4,951 | )
|Other current assets                                                                              |  |                                  | 26      |   |                    |   | (46    | )
|Inventories                                                                                       |  |                                  | 154     |   |                    |   | (3,737 | )
|Current income tax refundable                                                                     |  |                                  |        |   |                    |   | 390    |  
|Other assets                                                                                      |  |                                  | (58     | ) |                    |   | (33    | )
|Accounts payable                                                                                  |  |                                  | 546     |   |                    |   | 340    |  
|Accrued liabilities                                                                               |  |                                  | (1,270  | ) |                    |   | 470    |  
|                                                                                                  |  |                                  |         |   |                    |   |        |  
|Net cash provided by (used in) operating activities                                               |  |                                  | 2,337   |   |                    |   | (1,724 | )
|                                                                                                  |  |                                  |         |   |                    |   |        |  
|Cash flows from investing activities:                                                             |  |                                  |         |   |                    |   |        |  
|Purchases of property, plant and equipment                                                        |  |                                  | (1,432  | ) |                    |   | (834   | )
|Proceeds from sale of equipment                                                                   |  |                                  | 353     |   |                    |   | 44     |  
|                                                                                                  |  |                                  |         |   |                    |   |        |  
|Net cash used in investing activities                                                             |  |                                  | (1,079  | ) |                    |   | (790   | )
|                                                                                                  |  |                                  |         |   |                    |   |        |  
|Cash flows from financing activities:                                                             |  |                                  |         |   |                    |   |        |  
|Book overdraft                                                                                    |  |                                  | 663     |   |                    |   |       |  
|Proceeds from revolving credit facility                                                           |  |                                  | 24,600  |   |                    |   | 1,500  |  
|Payments on revolving credit facility                                                             |  |                                  | (25,300 | ) |                    |   | (1,500 | )
|Proceeds received from term loan                                                                  |  |                                  | 2,760   |   |                    |   |       |  
|Payments on term loan                                                                             |  |                                  | (1,217  | ) |                    |   | (645   | )
|Proceeds received on loan receivable from parent                                                  |  |                                  |        |   |                    |   | 344    |  
|Purchases of Senior Subordinated Notes                                                            |  |                                  | (2,764  | ) |                    |   |       |  
|                                                                                                  |  |                                  |         |   |                    |   |        |  
|Net cash used in financing activities                                                             |  |                                  | (1,258  | ) |                    |   | (301   | )
|                                                                                                  |  |                                  |         |   |                    |   |        |  
|Net increase (decrease) in cash and cash equivalents                                              |  |                                  |        |   |                    |   | (2,815 | )
|Cash and cash equivalents at beginning of period                                                  |  |                                  |        |   |                    |   | 3,964  |  
|                                                                                                  |  |                                  |         |   |                    |   |        |  
|Cash and cash equivalent at end of period                                                         |  | $                                |        |   |                    | $ | 1,149  |  
|                                                                                                  |  |                                  |         |   |                    |   |        |  
|Supplemental disclosures of cash flow information:                                                |  |                                  |         |   |                    |   |        |  
|Cash paid during the period for interest                                                          |  | $                                | 5,552   |   |                    | $ | 5,329  |  
|                                                                                                  |  |                                  |         |   |                    |   |        |  
|Cash paid (received) during the period for income taxes                                           |  | $                                | 16      |   |                    | $ | (390   | )
|                                                                                                  |  |                                  |         |   |                    |   |        |  
|Supplemental disclosure of non-cash investing and financing activities:                           |  |                                  |         |   |                    |   |        |  
|Property and equipment financed in accounts payable                                               |  | $                                | 35      |   |                    | $ | 25     |  
|                                                                                                  |  |                                  |         |   |                    |   |        |  



The accompanying
notes are an integral part of the financial statements

.



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands)



1. Basis of Presentation



The accompanying unaudited interim financial statements of BGF Industries, Inc. (the Company) have been prepared in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of items of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 2005 are not necessarily indicative
of the results to be expected for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.



These financial statements should be read in conjunction with the audited financial statements of BGF Industries, Inc. as of and for the year ended December 31, 2004 on
file with the Securities and Exchange Commission in the Companys 2004 Annual Report on Form 10-K.



The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Changes in the facts and circumstances could have a significant impact on the resulting financial statements. The critical accounting policies that affect the Companys more complex judgments and estimates are described in the Companys
Annual Report on Form 10-K for the year ended December 31, 2004 and in this Report under Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Policies.



Certain amounts from the prior financial statements have been reclassified to conform to
current presentation.



2. Liquidity and Financial Condition



The Company had net income of $231 for the six months ended June 30, 2005 and had a
$34,968 stockholders deficit as of June 30, 2005. In the year ended December 31, 2004, the Company had net income of approximately $1,881 and had a $35,199 stockholders deficit as of December 31, 2004.



On April 4, 2005, the Company executed an amendment to its five-year financing arrangement
with Wells Fargo Foothill, Inc. (the WFF Loan) to increase its total borrowing availability by approximately $5,000. The amendment was deemed to be effective as of March 31, 2005. The amendment provided for the following: (1) reduced the
maximum facility size to $25,000; (2) reloaded the term loan back to the lesser of $6,000 or 70% of the orderly liquidation value of eligible equipment; (3) increased the advance rate on finished goods inventory from 45% to 55%; (4) reduced the
Excess Availability to $1,000 at all times; and (5) released the $550 environmental reserve previously in place. (See Note 8). Availability under the revolver credit line totaled $10,174 as of June 30, 2005.



The Companys continued existence is dependent upon several factors including its
ability to continue to generate sufficient operating cash flow to fund its operations and interest payments on its Senior Subordinated Notes and its ability to continue to meet its financial covenants and make required payments under the WFF loan.
(See Note 8). While the Companys performance to date in 2005 and for the 2004 year has enabled it to meet its financial obligations, there can be no assurance that the Company will be able to sustain its current level of operations. The
Company continues to evaluate its current business plan in light of the current market conditions.



3. Inventories



Inventories consist of
the following:



|                 |  |               |        |                   |   |       
|---------------- |  | ------------- | ------ | ----------------- | - | ------
|                 |  | June 30, 2005 |        | December 31, 2004
|                 |  | (unaudited)   |        |                  
|Supplies         |  | $             | 1,506  |                   | $ | 1,532 
|Raw materials    |  |               | 2,247  |                   |   | 2,657 
|Stock-in-process |  |               | 3,989  |                   |   | 4,233 
|Finished goods   |  |               | 19,199 |                   |   | 18,673
|                 |  |               |        |                   |   |       
|                 |  | $             | 26,941 |                   | $ | 27,095
|                 |  |               |        |                   |   |       



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands)



4. Assets Held for Sale



In September 2004, the Companys board made the decision to hold the land and building of the South Hill heavyweight fabrics facility
for sale. These assets have a net book value as of June 30, 2005 and December 31, 2004 of $245 and have been classified as a current asset on the balance sheets.



5. Property, Plant and Equipment, Net



Net property, plant and equipment consists of the following:



|                                    |  |               |         |   |                   |   |         |  
|----------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                    |  | June 30, 2005 |         |   | December 31, 2004 |  
|                                    |  | (unaudited)   |         |   |                   |  
|Land                                |  | $             | 2,873   |   |                   | $ | 2,873   |  
|Buildings                           |  |               | 38,253  |   |                   |   | 37,576  |  
|Machinery and equipment             |  |               | 81,417  |   |                   |   | 80,830  |  
|                                    |  |               |         |   |                   |   |         |  
|Gross property, plant and equipment |  |               | 122,543 |   |                   |   | 121,279 |  
|Less: accumulated depreciation      |  |               | (84,630 | ) |                   |   | (82,198 | )
|                                    |  |               |         |   |                   |   |         |  
|Net property, plant and equipment   |  | $             | 37,913  |   |                   | $ | 39,081  |  
|                                    |  |               |         |   |                   |   |         |  



6. Other Noncurrent Assets, Net



Other noncurrent assets, net consist of the following:



|                                        |  |               |        |   |                   |   |        |  
|--------------------------------------- |  | ------------- | ------ | - | ----------------- | - | ------ | -
|                                        |  | June 30, 2005 |        |   | December 31, 2004 |  
|                                        |  | (unaudited)   |        |   |                   |  
|Debt issuance costs                     |  | $             | 5,611  |   |                   | $ | 5,689  |  
|Accumulated amortization                |  |               | (2,995 | ) |                   |   | (2,646 | )
|                                        |  |               |        |   |                   |   |        |  
|                                        |  |               | 2,616  |   |                   |   | 3,043  |  
|Unrecognized pension prior service cost |  |               | 12     |   |                   |   | 12     |  
|Other noncurrent assets                 |  |               | 496    |   |                   |   | 470    |  
|                                        |  |               |        |   |                   |   |        |  
|Total other noncurrent assets, net      |  | $             | 3,124  |   |                   | $ | 3,525  |  
|                                        |  |               |        |   |                   |   |        |  



Debt issuance costs are being
amortized over the lives of the respective debt instruments.



Amortization of
deferred financing charges of $210 and $421 for the three and six months ended June 30, 2005 and $215 and $431 for the three and six months ended June 30, 2004, respectively, has been included in interest expense.



In June 2005, the Company purchased $2,850 (face amount) of Senior Subordinated Notes. (See
Note 8). As a result of this transaction, debt issuance costs related to the original issuance of these notes of $37 were written off to interest expense.



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands)





7. Accrued Liabilities



Accrued liabilities consist of the following:



|                                        |  |               |        |                   |   |       
|--------------------------------------- |  | ------------- | ------ | ----------------- | - | ------
|                                        |  | June 30, 2005 |        | December 31, 2004
|                                        |  | (unaudited)   |        |                  
|Interest                                |  | $             | 4,007  |                   | $ | 4,153 
|Environmental                           |  |               | 2,668  |                   |   | 2,696 
|Current contribution to retirement plan |  |               | 2,310  |                   |   |      
|Payroll                                 |  |               | 257    |                   |   | 239   
|Profit sharing                          |  |               |       |                   |   | 876   
|Other employee benefits                 |  |               | 574    |                   |   | 1,237 
|Medical benefits                        |  |               | 700    |                   |   | 727   
|Other                                   |  |               | 1,993  |                   |   | 1,541 
|                                        |  |               |        |                   |   |       
|Total accrued liabilities               |  | $             | 12,509 |                   | $ | 11,469
|                                        |  |               |        |                   |   |       



Environmental. The Company is
engaged in an Environmental Protection Agency (EPA)-supervised Voluntary Remediation Program at its Altavista facility, to address reportable quantities of polychlorinated biphenyls (PCBs) discovered during a 1998
environmental site assessment at the former site of a heat transfer oil tank that the previous owner of the facility had removed before BGFs 1988 acquisition. A 1998 Phase Two Environmental Site Assessment revealed PCB contamination in several
areas inside the plant and on its roof, in the soil, in the sanitary and storm sewers within the plant, and in the surface waters to which the storm sewers drain. In addition, testing confirmed that measurable quantities of PCBs may have migrated
into the City of Altavistas water treatment plant.



In 2003, the Company
submitted to the EPA a final Site Characterization Report (SCR) documenting the assessment of the BGF property and the creek that drains from the property. In May 2004, the EPA approved the SCR and described acceptable steps for a
multi-phased clean-up of the site. The Company is in the process of drafting a two-phase clean-up plan, consistent with the EPAs directions. In 2004, the Company submitted to the EPA a draft plan for Phase I, addressing cleanup around the
site. The Company currently is developing revisions to the Phase I plan and expects to submit an updated plan to the EPA later this year. The Company will submit a plan for Phase II, addressing the creek areas, after receiving EPA approval for the
Phase I cleanup plan. At this time, the Company is unable to determine if there will be a financial effect different from the already established reserves.



A 1998 Phase Two Environmental Site Assessment at the Companys Cheraw, South Carolina facility revealed reportable levels of chlorinated solvents and hydrocarbons
in soil and groundwater. The contamination resulted from the previous owners printing operations. Assessment and cleanup are regulated by South Carolinas Department of Health and Environmental Control (DHEC), which notified
the Company that the chlorinated solvent residuals constitute the sole remediation concern. With DHEC oversight and approval, the Company is pursuing a Monitored Natural Attenuation strategy, which includes periodic groundwater monitoring. Recent
tests show reduced levels of solvent concentrations.



As of June 30, 2005 and
December 31, 2004, the Company had reserves of $2,668 and $2,696, respectively, for environmental exposure. The reserves reflect the estimated remediation costs for the Altavista facility, as obtained from the environmental consulting firm that
conducted the site assessment and submitted the SCR to the EPA. Remediation costs are estimates, subject to the EPAs approval of a remediation plan and to other factors that may arise in the remediation process. Estimated remediation costs at
the Cheraw facility are $400, which also is reflected in the reserve.



As the
cleanup progresses, the Company may need to revise these reserves, but the Company is unable to derive a more precise estimate at this time, as actual costs remain uncertain. The Company does not anticipate significant cash outflows associated with
this liability in the next twelve months, as it must await the EPAs approval of the final remediation plan. However, there can be no assurance that the Company 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 that would have a material adverse effect on the Companys financial condition.



8



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands)





7. Accrued Liabilities 
(Continued)



Current contribution to retirement plan. In order to
continue to provide all distribution options allowed by the defined benefit pension plan, the Company accelerated its 2004 contributions and paid $2,310 into the defined benefit plan on July 14, 2005. (See Note 10).



Other employee benefits.In 2004, the Company approved a management bonus of $1,215,
which was paid in the first quarter of 2005.



Employee severance. During
the first quarter of 2005, the Company eliminated nine salary positions at its South Hill lightweight fabrics facility, which resulted in approximately $383 of non-recurring severance costs. All of these costs have been paid as of June 30, 2005.



8. Debt



Debt consists of the following:



|                                                                                      |  |               |        |                   |   |       
|------------------------------------------------------------------------------------- |  | ------------- | ------ | ----------------- | - | ------
|                                                                                      |  | June 30, 2005 |        | December 31, 2004
|                                                                                      |  | (unaudited)   |        |                  
|Senior Credit Facility:                                                               |  |               |        |                   |   |       
|Term loan                                                                             |  | $             | 5,683  |                   | $ | 4,140 
|Revolver                                                                              |  |               | 5,800  |                   |   | 6,500 
|Senior Subordinated Notes, net of unamortized discount of $607 and $708, respectively |  |               | 83,293 |                   |   | 86,042
|                                                                                      |  |               |        |                   |   |       
|Total debt                                                                            |  |               | 94,776 |                   |   | 96,682
|Less: Current Maturities                                                              |  |               | 7,000  |                   |   | 7,700 
|                                                                                      |  |               |        |                   |   |       
|Long-term debt                                                                        |  | $             | 87,776 |                   | $ | 88,982
|                                                                                      |  |               |        |                   |   |       



On June 6, 2003, the Company obtained
a five-year financing arrangement with Wells Fargo Foothill, Inc. (WFF). On April 4, 2005, the Company executed an amendment to its five-year financing arrangement with WFF (the WFF Loan) to increase its total borrowing
availability by approximately $5,000. The amendment was deemed to be effective as of March 31, 2005. The amendment provided for the following: (1) reduced the maximum facility size to $25,000; (2) reloaded the term loan back to the lesser of $6,000
or 70% of the orderly liquidation value of eligible equipment; (3) increased the advance rate on finished goods inventory from 45% to 55%; (4) reduced the Excess Availability to $1,000 at all times; and (5) released the $550 environmental reserve
previously in place.



As a result of the amendment, the WFF Loan now has a
maximum revolver credit line of $19,000 with a letter of credit sub-line of $4,000, an inventory sub-line of $10,000 and a term loan of $6,000, of which the principal was fully funded at the amendment date and is being amortized over 60 months. WFF
has a first priority, perfected security interest in our assets. The WFF Loan provides for the following: (1) a borrowing base with advance rates on eligible accounts receivable and eligible finished goods and raw materials inventory of 85%, 55% and
35%, respectively, with inventory to be capped at the lesser of the eligible inventory calculation, $10.0 million or 80% times the percentage of the book value of our inventory that is estimated to be recoverable upon liquidation; (2) borrowing
rates of LIBOR + 3.25% or the Wells Fargo Prime Rate + 1.00% for the revolver with a 50 basis points increase if outstanding advances exceed $7,000 and of LIBOR + 3.5% or the Wells Fargo Prime Rate + 1.00% for the term loan with, at all times, a
minimum rate of 5% for both facilities; (3) certain financial covenants including (i) a minimum excess availability at all times, (ii) a minimum trailing twelve month EBITDA level and (iii) a cap on yearly capital expenditures; and (iv) an early
termination fee. Under the WFF Loan, yearly capital expenditures are set at the lesser of (a) $5,000 or (b) the last twelve months cumulative EBITDA less $16,000 times 50% plus $2,000. As of June 30, 2005, the Company is in compliance with the WFF
Loan covenants.



The WFF Loan proceeds are used to finance ongoing working
capital, capital expenditures, and general corporate needs of the Company and retire other outstanding debt. The WFF Loan is guaranteed by the Companys parent, NVH, Inc. and two of NVH, Inc.s subsidiaries, Glass Holdings LLC and BGF
Services, Inc. As of June 30, 2005, amounts outstanding under the WFF Loan totaled $11,483 and consisted of $5,683 under the term loan and $5,800 under the revolver. As of December 31, 2004, amounts outstanding under the WFF Loan totaled $10,640 and
consisted of $4,140 under the term loan and $6,500 under the revolver. As



9



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands)



8. Debt  (Continued)



of June 30, 2005, the Company had exercised its LIBOR Rate option on $5,000 of the term loan and $2,000 of the revolver. Interest rates as
of June 30, 2005 on the outstanding amounts under the LIBOR options were 6.71% and 6.46% on the term loan and revolver, respectively. Interest rates as of June 30, 2005 on the amounts outstanding under the Wells Fargo Prime Rate portion of the term
loan and revolver were 7.00% and 7.50%, respectively. Interest rates on the amounts outstanding under the term loan and revolver as of December 31, 2004 were 6.25%.



Availability under the revolver at June 30, 2005 and December 31, 2004 was $10,174 and $6,907, respectively. This availability has been
reduced by a reserve to allow for the annual interest payments on the Senior Subordinated Notes as well as a reserve of $0 and $550 for June 30, 2005 and December 31, 2004, respectively for potential environmental liabilities. The reserve for
interest payments is increased by $189 a week in 2004 and $171 a week in 2005, and is reset to $0 when such payment is made. As of June 30, 2005 and December 31, 2004, the total outstanding reserves amounted to $4,104 and $5,270, respectively.



The Senior Subordinated Notes bear interest at a rate of 10.25%, which is
payable semi-annually in January and July through the maturity date of January 15, 2009. The original amount of the Senior Subordinated Notes issued was $100,000, of which $83,900 in face amount remains outstanding, as a result of repurchases made
by the Company in 2003, 2004 and in the second quarter of 2005. On June 23, 2005, the Company purchased $2,850 (face value) of Senior Subordinated Notes for $2,765 plus accrued interest of $128. This transaction resulted in a net gain on
extinguishment of debt of $50.



The fair value of the Senior Subordinated Notes
as of June 30, 2005 and December 31, 2004 was $81,803 and $86,750, respectively.



9. Income Taxes



During 2002, the Company recorded interest
income earned under the terms of the loan agreement with its previous parent, Glass Holdings, for tax purposes. The Company did not record this income for financial reporting purposes, which results in a deferred tax asset. The Company recorded a
full valuation allowance against this and other deferred tax assets of approximately $56,477 in the second quarter of 2002 as it is more likely than not that their benefits will not be realized in the future. Additionally, no deferred tax assets
were recognized in 2003. During 2004, the intercompany loan was distributed to Glass Holdings as a dividend. Thereupon, the related deferred tax assets for the intercompany loan and the related interest income were reversed. Since a full valuation
allowance was established for the intercompany loan and the related interest income, the reversal of the associated tax assets had no tax impact.



The effective tax rate for the three and six months ended June 30, 2005 and June 30, 2004 was 0.0%. The Company incurred no tax provision in these periods due to the fact
that the Company has a full valuation allowance recorded against its net deferred tax assets which include net operating loss carry-forwards.



10. Employee Benefits



The Company has a defined benefit pension plan covering substantially all of its employees. Participating employees are required to contribute to the pension plan.



The Company also has a post-retirement benefit plan that covers substantially all of its
employees. Upon the completion of the attainment of age fifty-five and ten years of continuous service, an employee may elect to retire. Employees eligible to retire receive post-retirement health benefits, including medical and dental coverage.



Net periodic costs for pension benefits and other post-retirement benefits for
the three and six months ended June 30, 2005 and June 30, 2004 were comprised of:



10



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands)



10. Employee Benefits  (Continued)



|                                        |  |                                    |      |                                  |                         |   |                  |      |  |                         |    |      |   |    |      |   |      |      |  |      |      |   |  |   |    |  |   |    
|--------------------------------------- |  | ---------------------------------- | ---- | -------------------------------- | ----------------------- | - | ---------------- | ---- |  | ----------------------- | -- | ---- | - | -- | ---- | - | ---- | ---- |  | ---- | ---- | - |  | - | -- |  | - | ---
|                                        |  | For the Three Months Ended June 30 |      | For the Six Months Ended June 30
|                                        |  | Pension Benefits                   |      |                                  | Post-retirementBenefits |   | Pension Benefits |      |  | Post-retirementBenefits
|                                        |  | 2005                               |      |                                  | 2004                    |   |                  | 2005 |  | 2004                    |    | 2005 |   |    | 2004 |   |      | 2005 |  | 2004
|Net periodic pension cost:              |  |                                    |      |                                  |                         |   |                  |      |  |                         |    |      |   |    |      |   |      |      |  |      |      |   |  |   |    |  |   |    
|Service cost                            |  | $                                  | 305  |                                  |                         | $ | 247              |      |  | $                       | 22 |      | $ | 22 |      | $ | 572  |      |  | $    | 490  |   |  | $ | 45 |  | $ | 46 
|Interest cost                           |  |                                    | 344  |                                  |                         |   | 300              |      |  |                         | 27 |      |   | 34 |      |   | 666  |      |  |      | 596  |   |  |   | 53 |  |   | 71 
|(Expected return on plan assets)        |  |                                    | (294 | )                                |                         |   | (249             | )    |  |                         |   |      |   |   |      |   | (596 | )    |  |      | (463 | ) |  |   |   |  |   |   
|Amortization of prior service cost      |  |                                    | 2    |                                  |                         |   | 2                |      |  |                         |   |      |   |   |      |   | 3    |      |  |      | 3    |   |  |   |   |  |   |   
|Recognized net actuarial (gain) or loss |  |                                    | 49   |                                  |                         |   | 25               |      |  |                         |   |      |   | 4  |      |   | 70   |      |  |      | 50   |   |  |   |   |  |   | 8  
|                                        |  |                                    |      |                                  |                         |   |                  |      |  |                         |    |      |   |    |      |   |      |      |  |      |      |   |  |   |    |  |   |    
|Total net periodic pension cost         |  | $                                  | 406  |                                  |                         | $ | 325              |      |  | $                       | 49 |      | $ | 60 |      | $ | 715  |      |  | $    | 676  |   |  | $ | 98 |  | $ | 125
|                                        |  |                                    |      |                                  |                         |   |                  |      |  |                         |    |      |   |    |      |   |      |      |  |      |      |   |  |   |    |  |   |    



In order to continue to provide all
distribution options allowed by the defined benefit pension plan, the Company accelerated its 2004 contributions and paid $2,310 into the defined benefit plan on July 14, 2005. Based on the current pension funding requirements for the year ended
December 31, 2005, there are no additional expected contributions.



Expected
net employee contributions for the post-retirement benefit plan for the year ended December 31, 2005 are $145.



11. Segment Information



The Company
operates in one business segment that manufactures specialty woven and non-woven fabrics for use in a variety of industrial and commercial applications. The Companys principal market is the United States. The nature of the markets, products,
production processes and distribution methods are similar for substantially all of the Companys products.



Net sales information by geographic area is presented below, with sales based on the location of the customer. The Company does not have any long-lived assets outside the
United States.



|              |  |                                     |        |                                   |   |        |  |      |        |  |   |       
|------------- |  | ----------------------------------- | ------ | --------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|              |  | For the Three Months Ended June 30, |        | For the Six Months Ended June 30,
|              |  | 2005                                |        | 2004                              |   | 2005   |  | 2004
|              |  | (unaudited)                         |        | (unaudited)                      
|United States |  | $                                   | 37,876 |                                   | $ | 37,252 |  | $    | 72,608 |  | $ | 73,905
|Foreign       |  |                                     | 3,852  |                                   |   | 2,676  |  |      | 6,165  |  |   | 4,867 
|              |  |                                     |        |                                   |   |        |  |      |        |  |   |       
|              |  | $                                   | 41,728 |                                   | $ | 39,928 |  | $    | 78,773 |  | $ | 78,772
|              |  |                                     |        |                                   |   |        |  |      |        |  |   |       



12. Commitments and Contingencies



As discussed in Note 7, the Company has environmental exposures
associated with two of its manufacturing facilities.



From time to time, the
Company is involved in various other legal proceedings and environmental matters arising in the ordinary course of business. Management believes, however, that the ultimate resolution of such matters will not have a material adverse impact on the
Companys financial position or results of operations.



As permitted by
Delaware law, the Company may indemnify its directors, officers, employees and agents and its former directors, officers, employees and agents and those who serve, at the corporations request in such capacities with another enterprise, against
expenses (including attorneys fees), as well as judgments, fines and settlements in non-derivative lawsuits, actually and reasonably incurred in connection with the defense of any action, suit or proceeding in which they or any of them were or
are made parties or are threatened to be made parties by reason of their serving or having served in such capacity. Article V of the Companys bylaws provide, under certain circumstances, for the indemnification of the Companys present or
former directors or



11



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands)



|12. | Commitments and Contingencies  (Continued)
|--- | -------------------------------------------



officers or persons who, at the request of the Company, are or were serving in a similar capacity for another corporation or entity. These provisions also allow the Board
of Directors to purchase and maintain insurance on behalf of BGF Industries, Inc.s present or former directors, officers or persons who are or were serving at the request of BGF Industries, Inc. as a director or officer of another corporation
or entity. No liabilities have been recorded for such purposes as of June 30, 2005.



Operating Leases.The Company leases facilities and equipment under operating lease agreements. Generally, these leases contain renewal options under cancelable and non-cancelable operating leases. Rent expense amounted to $609 and
$302 for the six and three months ended June 30, 2005, respectively, and $618 and $318 for the six and three months ended June 30, 2004, respectively. Under the terms of non-cancelable operating leases, the Company is committed to the following
future minimum lease payments at June 30, 2005:



|            |  |   |    
|----------- |  | - | ---
|Fiscal Year |  |  
|2005        |  | $ | 513
|2006        |  |   | 817
|2007        |  |   | 355
|2008        |  |   | 267
|Thereafter  |  |   |   



13. Recent Accounting
Pronouncements



There are no new accounting pronouncements that could have
an impact on the Companys consolidated financial statements.



14. Related Party Transactions



The Company is a wholly owned
subsidiary of Porcher Industries through NVH, Inc., a U.S. holding company. The Company has ongoing financial, managerial and commercial agreements and arrangements with Porcher Industries, NVH, Inc. and wholly-owned subsidiaries of NVH, Inc.,
including Glass Holdings, as well as other affiliates of Porcher Industries.



The Company is the guarantor of an executives deferred compensation agreement with a subsidiary of Glass Holdings.



15. Restatement of Financial Statements



The Company has restated its unaudited interim financial statements for the six months ended June 30, 2004. The restatement corrects the accounting in 2003 for a sale and
leaseback of the Companys corporate headquarters facility that was accounted for as a financing under the provisions of FAS 98 Accounting for Leases. The Company previously amortized the financing obligation over the initial 7 year
term of the agreement resulting in an effective interest rate of approximately 4%. The Company has now determined that the amortization of the financing obligation should be over the entire 22-year term of the agreement, which includes the renewal
option periods, resulting in an effective interest rate of 18%. The effect of the restatement was to record additional interest expense of approximately $100 for the three months ended June 30, 2004 and $200 for the six months ended June 30, 2004.
The following table reconciles previously reported and restated financial information.



|                                       |  |                                                                    |         |   |                                                         |   |         |                                                                   |  |   |                                                       |   |  |   |         |  
|-------------------------------------- |  | ------------------------------------------------------------------ | ------- | - | ------------------------------------------------------- | - | ------- | ----------------------------------------------------------------- |  | - | ----------------------------------------------------- | - |  | - | ------- | -
|                                       |  | Three Months EndedJune 30, 2004 As Previously Reported (unaudited) |         |   | Three Months EndedJune 30, 2004 As Restated (unaudited) |   |         | Six Months Ended June 30, 2004 As Previously Reported (unaudited) |  |   | Six Months Ended June 30, 2004 As Restated(unaudited) |  
|Interest expense on finance obligation |  | $                                                                  | 21      |   |                                                         | $ | 121     |                                                                   |  | $ | 42                                                    |   |  | $ | 242     |  
|Net income                             |  |                                                                    | 1,079   |   |                                                         |   | 979     |                                                                   |  |   | 2,281                                                 |   |  |   | 2,081   |  
|Finance obligation                     |  |                                                                    | 2,003   |   |                                                         |   | 2,603   |                                                                   |  |   | 2,003                                                 |   |  |   | 2,603   |  
|Total liabilities                      |  |                                                                    | 130,324 |   |                                                         |   | 130,924 |                                                                   |  |   | 130,324                                               |   |  |   | 130,924 |  
|Stockholders deficit                  |  |                                                                    | (34,917 | ) |                                                         |   | (35,517 | )                                                                 |  |   | (34,917                                               | ) |  |   | (35,517 | )



12



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



This Quarterly Report contains forward-looking statements with respect to our operations, industry, financial condition and liquidity. These statements reflect our
assessment of a number of risks and uncertainties. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth in this Quarterly Report. An additional statement
made pursuant to the Private Securities Litigation Reform Act of 1995 and summarizing certain of the principal risks and uncertainties inherent in our business is included herein under the caption Disclosure Regarding Forward-Looking
Statements. You are encouraged to read this statement carefully.



You
should read the following discussion and analysis in conjunction with the accompanying financial statements and related notes, and with our audited financial statements and related notes as of and for the year ended December 31, 2004 set forth in
our 2004 Annual Report on Form 10-K.



We have restated our results for the
three and six months ended June 30, 2004. This restatement is due to an adjustment relating to the accounting in 2003 for a sale and leaseback of our corporate headquarters facility located in Greensboro, North Carolina. The transaction was
accounted for as a financing under the provisions of FAS 98 Accounting for Leases. In our previously reported financial statements, the amortization of the financing obligation utilized the initial 7 year term of the agreement and an
effective interest rate of approximately 4% which was causing the obligation to be amortized faster than the related assets were being depreciated, resulting in a built-in loss on the property. We discussed our accounting for the transaction with
our independent registered public accounting firm at the time of the transaction. We subsequently determined that the amortization of the financing obligation should be over the entire 22-year term of the agreement, which includes the renewal option
periods, at an effective interest rate of 18%. This adjustment resulted in an increase of $0.1 million in interest expense for the three months ended June 30, 2004 and $0.2 million for the six months ended June 30, 2004. We have discussed our
revised accounting and the related adjustments with our independent registered public accounting firm. See Note 15 to our financial statements for further discussion of this adjustment.



Overview



Our business focuses on the production
of value-added specialty woven fabrics, non-woven fabrics and parts made from glass, carbon, aramid and silica fibers. Our products are a critical component in the production of a variety of electronic, filtration, composite, insulation, protective,
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 products 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 line with our strategy of continued new product development, we realized 21% of our sales in the second quarter 2005 from products that are new within the last three years.



Overall sales increased $1.8 million to $41.7 million in the three months ended June 30, 2005 compared to the three months ended June 30,
2004. This increase in sales is mainly the result of strengthening in our aerospace and filtration businesses. Our profitability declined slightly with gross margins decreasing from 16.0% in the three months ended June 30, 2004 to 15.8% in the three
months ended June 30, 2005. These factors directly impacted our net income, resulting in a net income of $0.9 million in the three months ended June 30, 2005 compared to a net income of $1.0 million in the three months ended June 30, 2004 (as
restated).



Overall sales were flat in the six months ended June 30, 2005 as
compared to the six months ended June 30, 2004. Our profitability declined with gross margins decreasing from 16.5% in the six months ended June 30, 2004 to 14.5% in the six months ended June 30, 2005 mainly due to lower production volumes. These
factors directly impacted our net income, resulting in a net income of $0.2 million in the six months ended June 30, 2005 as compared to net income of $2.1 million in the six months ended June 30, 2004 (as restated).



During the first quarter of 2005, we eliminated nine salary positions at our South Hill
multi-layer fabrics facility. This action was taken as a result of the unanticipated and continuing decline in the domestic electronics market, which has delayed the expansion of the multi-layer facility for the foreseeable future. This resulted in
approximately $0.4 million of non-recurring severance costs. All of these costs have been paid as of June 30, 2005. We anticipate future savings of approximately $0.6 million per year as a result of the elimination of the salary positions.



On April 4, 2005, we executed an amendment to our five-year financing
arrangement with Wells Fargo Foothill, Inc. (the WFF Loan) to increase our total borrowing availability by approximately $5.0 million. The amendment was deemed to be effective as of March 31, 2005. The amendment provided for the
following: (1) reduced the maximum facility size to $25.0 million; (2) reloaded the term loan back to the lesser of $6.0 million or 70% of the orderly liquidation value of eligible equipment; (3) increased the advance rate on finished goods
inventory from 45% to 55%; (4) reduced the excess availability to $1.0 million at all times; and (5) released the $0.6 million environmental reserve previously in place.



13



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##### Table of Contents

While our performance to date in 2005 and for the year 2004 has enabled us to meet our financial obligations, there can
be no assurance that we will be able to continue to generate sufficient operating cash flow to fund our operations and interest payments on our Senior Subordinated Notes or that we will be able to continue to meet the financial covenants and make
required loan payments under the WFF Loan.



Critical Accounting Policies



The preparation of
financial statements and accompanying notes in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported. Changes in the facts and circumstances could have a significant
impact on the resulting financial statements. The critical accounting policies that affect our more complex judgments and estimates are described in the Annual Report on Form 10-K for the year ended December 31, 2004.



Environmental Issues



We are engaged in an
Environmental Protection Agency (EPA)-supervised Voluntary Remediation Program at our Altavista facility, to address reportable quantities of polychlorinated biphenyls (PCBs) discovered during a 1998 environmental site
assessment at the former site of a heat transfer oil tank that the previous owner of the facility had removed before BGFs 1988 acquisition. A 1998 Phase Two Environmental Site Assessment revealed PCB contamination in several areas inside the
plant and on its roof, in the soil, in the sanitary and storm sewers within the plant, and in the surface waters to which the storm sewers drain. In addition, testing confirmed that measurable quantities of PCBs may have migrated into the City of
Altavistas water treatment plant.



In 2003, we submitted to the EPA a
final Site Characterization Report (SCR) documenting the assessment of the BGF property and the creek that drains from the property. In May 2004, the EPA approved the SCR and described acceptable steps for a multi-phased clean-up of the
site. We are in the process of drafting a two-phase clean-up plan, consistent with the EPAs directions. In 2004, we submitted to the EPA a draft plan for Phase I, addressing cleanup around the site. We are currently developing revisions to the
Phase I plan and expect to submit an updated plan to the EPA later this year. We will submit a plan for Phase II, addressing the creek areas, after receiving EPA approval for the Phase I cleanup plan. At this time, we are unable to determine if
there will be a financial effect on us that is different from our current established reserves.



A 1998 Phase Two Environmental Site Assessment at our Cheraw, South Carolina facility revealed reportable levels of chlorinated solvents and hydrocarbons in soil and groundwater. The contamination resulted from the
previous owners printing operations. Assessment and cleanup are regulated by South Carolinas DHEC, which notified us that the chlorinated solvent residuals constitute the sole remediation concern. With DHEC oversight and approval, we are
pursuing a Monitored Natural Attenuation strategy, which includes periodic groundwater monitoring. Recent tests show reduced levels of solvent concentrations.



As of June 30, 2005 and December 31, 2004, we had reserves of $2.7 million and $2.7 million, respectively, for environmental exposure. The reserves reflect the
estimated remediation costs for the Altavista facility, as obtained from the environmental consulting firm that conducted the site assessment and submitted the SCR to the EPA. Estimated remediation costs at the Cheraw facility are $0.4 million,
which also is reflected in the reserve. Remediation costs are estimates, subject to the EPAs approval of a remediation plan and to other factors that may arise in the remediation process.



As the cleanup progresses, we may need to revise these reserves but we are unable to derive a
more precise estimate at this time, as actual costs remain uncertain. We must await the EPAs approval of the final remediation plan before we can revise these estimates. However, there can be no assurance that we will not be required to
respond to our environmental issues on a more immediate basis and that such response, if required, will not result in significant cash outlays that would have a material adverse effect on our financial condition.



Results of Operations



The
following table summarizes our historical results of operations as a percentage of net sales:



|                                             |  |                                    |   |  |                                  |   |  |       |   |  |               |  
|-------------------------------------------- |  | ---------------------------------- | - |  | -------------------------------- | - |  | ----- | - |  | ------------- | -
|                                             |  | For the Three Months EndedJune 30, |   |  | For the Six Months EndedJune 30, |  
|                                             |  | 2005                               |   |  | 2004                             |   |  | 2005  |   |  | 2004          |  
|                                             |  |                                    |   |  | (as restated)                    |   |  |       |   |  | (as restated) |  
|Net sales                                    |  | 100.0                              | % |  | 100.0                            | % |  | 100.0 | % |  | 100.0         | %
|Cost of goods sold                           |  | 84.2                               | % |  | 84.0                             | % |  | 85.5  | % |  | 83.5          | %
|                                             |  |                                    |   |  |                                  |   |  |       |   |  |               |  
|Gross profit                                 |  | 15.8                               | % |  | 16.0                             | % |  | 14.5  | % |  | 16.5          | %
|Selling, general and administrative expenses |  | 6.6                                | % |  | 6.1                              | % |  | 6.7   | % |  | 6.3           | %
|                                             |  |                                    |   |  |                                  |   |  |       |   |  |               |  
|Operating income                             |  | 9.2                                | % |  | 9.9                              | % |  | 7.8   | % |  | 10.2          | %
|Interest expense                             |  | 7.0                                | % |  | 7.4                              | % |  | 7.4   | % |  | 7.6           | %
|Other (income), net                          |  |                                   |   |  |                                 |   |  |      |   |  |              |  
|                                             |  |                                    |   |  |                                  |   |  |       |   |  |               |  
|Income before income taxes                   |  | 2.2                                | % |  | 2.5                              | % |  | 0.4   | % |  | 2.6           | %
|Income tax benefit                           |  |                                   |   |  |                                 |   |  |      |   |  |              |  
|                                             |  |                                    |   |  |                                  |   |  |       |   |  |               |  
|Net income                                   |  | 2.2                                | % |  | 2.5                              | % |  | 0.4   | % |  | 2.6           | %
|                                             |  |                                    |   |  |                                  |   |  |       |   |  |               |  



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Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004 (as restated)



Net Sales. Net sales increased $1.8 million, or 4.5%, to $41.7 million in the three
months ended June 30, 2005 from $39.9 million in the three months ended June 30, 2004.



Sales of our composite fabrics, which are used in various applications including structural aircraft parts and interiors, increased $1.9 million, or 16.1%, for the three months ended June 30, 2005 as compared to the three months ended June
30, 2004 due to an increase in aircraft build rates.



Sales of our filtration
fabrics used by industrial customers to control emissions into the environment increased $1.4 million, or 22.6%, for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004. This increase is due primarily to a shift
in product mix and a large utility contract.



Sales of protective fabrics,
which are used in various ballistics applications including personal and vehicle armor, increased $0.6 million, or 14.6%, for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 due to strong military demand.



Sales of our insulation fabrics, used for high temperature products, decreased
$0.7 million, or 17.1%, for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 due primarily to insourcing by a major appliance customer.



Sales of our electronics fabrics used in multi-layer and rigid printed circuit boards, coated fabrics and specialty electronic tapes
decreased $1.8 million, or 18.6%, for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 due to softening in domestic market demand.



Gross Profit Margins. Gross profit margins decreased to 15.8% in the three months ended June 30, 2005 from 16.0% in the three months
ended June 30, 2004 due primarily to decreased production levels.



Selling,
General and Administrative Expenses. Selling, general and administrative expenses increased $0.4 million to $2.8 million in the three months ended June 30, 2005 from $2.4 million in the three months ended June 30, 2004. This was primarily due to
an increase in consulting and professional fees.



Operating Income. As a
result of the aforementioned factors, operating income decreased $0.2 million to $3.8 million, or 9.2% of net sales, in the three months ended June 30, 2005, from $4.0 million, or 9.9% of net sales in the three months ended June 30, 2004.



Interest Expense. Interest expense remained flat at $2.9 million, or
7.0% of net sales, in the three months ended June 30, 2005 compared to $3.0 million, or 7.4% of net sales, in the three months ended June 30, 2004.



Other (Income)Expense Net.Other income, net, increased slightly in the three months ended June 30, 2005 from the three months ended June 30, 2004. This was
primarily the result of a gain on extinguishment of debt of $0.1 million.



Income Tax Expense. The effective tax rates in the three months ended June 30, 2005 and 2004 were 0.0%. Due to the fact that we have a full valuation allowance against our deferred tax assets, we did not realize a tax provision for
the three months ended June 30, 2005 and June 30, 2004.



Net Income. As
a result of the aforementioned factors, our net income decreased $0.1 million to a net income of $0.9 million in the three months ended June 30, 2005, from a net income of $1.0 million in the three months ended June 30, 2004.



Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004 (as restated)



Net Sales. Net sales were $78.8 million in the six months
ended June 30, 2005 and $78.8 million in the six months ended June 30, 2004.



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Sales of our filtration fabrics used by industrial customers to control emissions into the environment increased $2.8
million, or 22.1%, for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004. This increase is due primarily to a shift in product mix and a large utility contract.



Sales of protective fabrics, which are used in various ballistics applications, including
personal and vehicle armor, increased $1.4 million, or 27.3%, for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004 due to strong military demand.



Sales of composite fabrics, which are used in various applications including structural aircraft parts and interiors, increased $0.5 million
or 1.9%, for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004 due to an increase in aircraft build rates.



Sales of our insulation fabrics, used for high temperature products, decreased $1.0 million, or 12.3%, for the six months ended June 30, 2005 as compared to the six
months ended June 30, 2004 due primarily to insourcing by a major appliance customer.



Sales of our electronics fabrics used in multi-layer and rigid printed circuit boards, coated fabrics and specialty electronic tapes decreased $3.9 million, or 20.4%, for the six months ended June 30, 2005 as compared to the six months
ended June 30, 2004 due to softening in the domestic market demand.



Gross
Profit Margins. Gross profit margins decreased to 14.5% in the six months ended June 30, 2005 from 16.5% in the six months ended June 30, 2004 due to a decrease in rental income associated with the co-location facility at the lightweight fabrics
facility, lower absorption of fixed costs as a result of less capacity utilization, as well as non-recurring severance costs of $0.4 million.



Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.4 million to $5.3 million in the six months ended June 30,
2005 from $4.9 million in the six months ended June 30, 2004. This was primarily due to an increase in consulting and professional fees.



Operating Income. As a result of the aforementioned factors, operating income decreased $1.9 million to $6.1 million, or 7.8% of net sales, in the six months ended
June 30, 2005, from $8.0 million, or 10.2% of net sales in the six months ended June 30, 2004.



Interest Expense. Interest expense remained flat at $5.9 million, or 7.4% of net sales, in the six months ended June 30, 2005 compared to $6.0 million, or 7.6% of net sales, in the six months ended June 30,
2004.



Other (Income) Expense Net.Other expense net includes a net gain
on extinguishment of debt of $0.1 million in the six months ended June 30, 2005 .



Income Tax Expense. The effective tax rates in the six months ended June 30, 2005 and 2004 were 0.0%. Due to the fact that we have a full valuation allowance against our deferred tax assets, we did not realize a tax benefit for the
six months ended June 30, 2005 and June 30, 2004.



Net Income. As a
result of the aforementioned factors, our net income decreased $1.9 million to a net income of $0.2 million in the six months ended June 30, 2005, from a net income of $2.1 million in the six months ended June 30, 2004.



Balance Sheets



Accounts Receivable. Accounts receivable increased $1.1 million, or 6.7%, from December 31, 2004 to June 30, 2005. This increase was
a result of low sales during the month of December, resulting in abnormally low accounts receivable at the end of December.



Inventory. Inventory remained flat at $27.0 million at June 30, 2005, compared to $27.1 million at December 31, 2004.



Accounts Payable and Accrued Liabilities. Accounts payable and accrued liabilities
increased $1.6 million, or 9.5%, from December 31, 2004 to June 30, 2005. This increase was primarily the result of an increase in accrued employee benefits.



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 $83.3 million Senior Subordinated Notes ($83.9 million net of
unamortized discount of $0.6 million), principal and interest payments on the WFF Loan, and the funding of capital expenditures and working capital requirements. There are no mandatory payments of principal on the Senior Subordinated Notes



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scheduled prior to their maturity in January 2009. Based upon our current and anticipated levels of operations, we believe, but cannot guarantee, that our
cash flows from operations, combined with availability under the WFF financing arrangement, will be adequate to meet our liquidity needs for the next twelve months. However, this forward-looking statement is subject to risks and uncertainties. See
Disclosure Regarding Forward-Looking Statements included below.



On
June 6, 2003, we entered into the five-year financing agreement with WFF. The WFF Loan is guaranteed by our parent, NVH, Inc. On April 4, 2005, we executed an amendment to the WFF Loan to increase our total borrowing availability by approximately
$5.0 million. The amendment was deemed to be effective as of March 31, 2005. The amendment provided for the following: (1) reduced the maximum facility size to $25.0 million; (2) reloaded the term loan back to the lesser of $6.0 million or 70% of
the orderly liquidation value of eligible equipment; (3) increased the advance rate on finished goods inventory from 45% to 55%; (4) reduced the Excess Availability to $1.0 million at all times; and (5) released the $0.6 million environmental
reserve previously in place.



As a result of the amendment, the WFF Loan now
has a maximum revolver credit line of $19.0 million with a letter of credit sub-line of $4.0 million, an inventory sub-line of $10.0 million and a term loan of $6.0 million, of which the principal was fully funded at the amendment date and is being
amortized over 60 months. WFF has a first priority, perfected security interest in our assets. The WFF Loan provides for the following: (1) a borrowing base with advance rates on eligible accounts receivable and eligible finished goods and raw
materials inventory of 85%, 55% and 35%, respectively, with inventory to be capped at the lesser of the eligible inventory calculation, $10.0 million or 80% times the percentage of the book value of our inventory that is estimated to be recoverable
upon liquidation; (2) borrowing rates of LIBOR + 3.25% or the Wells Fargo Prime Rate (RR) + 1.00% for the revolver with a 50 basis points increase if outstanding advances exceed $7.0 million and of LIBOR + 3.5% or RR + 1.00% for the term loan with,
at all times, a minimum rate of 5% for both facilities; (3) certain financial covenants including (i) a minimum excess availability at all times, (ii) a minimum trailing twelve month EBITDA level and (iii) a cap on yearly capital expenditures; and
(iv) an early termination fee. Under the WFF Loan, yearly capital expenditures are set at the lesser of (a) $5.0 million or (b) the last twelve months cumulative EBITDA less $16.0 million times 50% plus $2.0 million.



As of June 30, 2005, amounts outstanding under the WFF Loan totaled $11.5 million, which
consisted of $5.7 million under the term loan and $5.8 million under the revolver. As of December 31, 2004, amounts outstanding under the WFF Loan totaled $10.6 million and consisted of $4.1 million under the term loan and $6.5 million under the
revolver. As of June 30, 2005, we had exercised the LIBOR Rate option on $5.0 million of the term loan and $2.0 million of the revolver. Interest rates as of June 30, 2005 on the outstanding amounts under the LIBOR options were 6.71% and 6.46% on
the term loan and revolver, respectively. Interest rates as of June 30, 2005 on the amounts outstanding under the Wells Fargo Prime Rate portion of the term loan and revolver were 7.0% and 7.5%, respectively. Interest rates on the amounts
outstanding under the term loan and revolver as of December 31, 2004 were 6.25%.



Availability under the revolver as of June 30, 2005 and August 1, 2005 was $10.2 million and $7.8 million, respectively. This availability has been reduced by a reserve to allow for the annual interest payments on the Senior Subordinated
Notes. The reserve for interest payments is increased by $0.2 million per week and is reset to $0 when such payment is made. As of June 30, 2005 and August 1, 2005, the outstanding reserves totaled $4.1 million and $0.5 million, respectively.



On June 23, 2005, we purchased $2.9 million (face value) of Senior
Subordinated Notes for $2.8 million plus accrued interest of $0.1 million. This transaction resulted in a gain on extinguishment of debt of $0.1 million.



The fair value of the Senior Subordinated Notes as of June 30, 2005 and December 31, 2004 was approximately $81.8 million and $86.8 million, respectively.



In order to reduce future cash interest payments, as well as future amounts due at maturity
or upon redemption, we or our affiliates may, from time to time, purchase such securities for cash in open market purchases, privately negotiated transactions or otherwise. Although our financing agreement with WFF limits our ability to purchase
such securities if the securities are trading at greater than 80% of their face value, we believe that WFF would likely consent to spot purchases at a higher price, although no assurances can be made.



Net Cash Provided by (Used In) Operating Activities. Net cash provided by (used in)
operating activities for the six months ended June 30, 2005 was $2.3 million, compared with $(1.7) million in the six months ended June 30, 2004 (as restated), and was primarily the result of an increase in our working capital in the last six months
of 2004 compared to a stable working capital during the first six months of 2005, which was partially offset by a decrease in our net income.



Net Cash Used in Investing Activities. Net cash used in investing activities was $1.1 million for the six months ended June 30, 2005, compared to $0.8 million for
the six months ended June 30, 2004 (as restated), and was primarily the result of purchases of property, plant and equipment.



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Net Cash Used In Financing Activities. Net cash used in financing activities was $1.3 million for the six months
ended June 30, 2005, compared with net cash used in financing activities of $0.3 million for the six months ended June 30, 2004 (as restated) and was primarily the result of the purchase of $2.8 million of Senior Subordinated Notes.



Outlook for the Remainder of 2005



The following section contains forward-looking statements about our plans, strategies and
prospects during the remainder of 2005. 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,
Disclosure Regarding Forward-Looking Statements.



Looking ahead for
the remainder of 2005:



| |  |  | Sales trends during July and early August 2005 appear to be consistent with the first six months of 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | We plan to continue our efforts to reduce our inventory during the remainder of 2005.
| | - |  | -------------------------------------------------------------------------------------



Recent Accounting Pronouncements



There are no
new recent accounting pronouncements that could have an impact on our consolidated financial statements.



Disclosure Regarding Forward-Looking Statements



Some of the information in this Quarterly 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
Exchange 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:



| |  |  | whether or not our cash flows from operations are sufficient to meet ongoing liquidity needs;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | our significant level of indebtedness and limitations on our ability to incur additional debt;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | our dependence upon some of our suppliers to provide us with materials and services;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our concentrated customer base and the competitive nature of our markets;
| | - |  | -------------------------------------------------------------------------



| |  |  | a disruption of production at one of our facilities;
| | - |  | ----------------------------------------------------



| |  |  | an easing of duties with respect to glass fiber fabrics;
| | - |  | --------------------------------------------------------



| |  |  | whether or not we are able to comply with environmental and safety and health laws and requirements;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | whether or not we are able to address technological advances in the markets we serve;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | changes in economic conditions generally; and
| | - |  | ---------------------------------------------



| |  |  | whether or not we are able to satisfy the covenants and other provisions under our various financial instruments.
| | - |  | -----------------------------------------------------------------------------------------------------------------



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 Quarterly 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.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



The effects of potential changes in interest rates are discussed below. Our market risk discussion includes forward-looking



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statements and represents an estimate of possible changes in fair value that would occur assuming hypothetical future movements in interest 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 financing arrangements 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 WFF Loan. The WFF Loan bears interest based on LIBOR or prime. When deemed appropriate, our risk management strategy is to use derivative financial instruments, such
as swaps or caps, to hedge interest rate exposures. We do not enter into derivatives for trading or speculative purposes.



The fair value of the Senior Subordinated Notes as of June 30, 2005 and August 1, 2005 was approximately $81.8 million and $81.8 million, respectively.



Item 4. 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 president and chief financial officer, to allow timely
decisions regarding required disclosure.



Based on the most recent evaluation,
which was completed as of the end of the period covered by this 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 during the second quarter of 2005 or subsequent to the date we completed our evaluation.



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PART II - OTHER INFORMATION



Item 6. Exhibits



| | (a) | Exhibits
| | --- | --------



| | 31.1 | Certification of President Pursuant to Section 302 of Sarbanes-Oxley Act
| | ---- | ------------------------------------------------------------------------



| | 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
| | ---- | --------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



BGF INDUSTRIES, INC./s/ Philippe R. DorierPhilippe R. Dorier Chief Financial
Officer (Principal Financial and Accounting Officer)




/s/ James R. HendersonJames R. Henderson President




Date: August 9, 2005



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