Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________________


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

For the quarterly period ended June 30, 2004


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

For the transition period from to

Commission file number 333-84903-1

J.L. FRENCH AUTOMOTIVE CASTINGS, INC.

(Exact name of Registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization) 4508 IDS Center Minneapolis, Minnesota (Address of principal executive offices)		13-3983670 (I.R.S. Employer Identification No.) 55402 (Zip Code)

(612) 332-2335
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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, and (2) has been subject to such filing requirements for the past 90 days.


Yes x		No o

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

The number of shares outstanding of the Registrant’s common stock at August 12, 2004 was 11 shares of Class A common stock, 7 shares of Class A-1 common stock, 21 shares of Class B common stock, 5 shares of Class C common stock, 7 shares of Class D-1 common stock, 7 shares of Class D-2 common stock, 4 shares of Class E common stock, 14 shares of Class P common stock, 65,118 shares of Class Q-1 common stock and 11,593 shares of Class Q-2 common stock. Registrant’s common equity is not publicly traded.

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL STATEMENTS

Table of Contents


	Page
Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 (Unaudited)		3

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003 (Unaudited)		4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited)		5

Notes to Condensed Consolidated Financial Statements (Unaudited)		6

Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Certification of CEO Required by Section 302
Certification of CFO Required by Section 302
Certification of CEO Required by Section 906
Certification of CFO Required by Section 906

ITEM 1 — FINANCIAL INFORMATION

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands — Unaudited)


	June 30,			December 31,
ASSETS	2004			2003
Current assets:
Cash and cash equivalents	$	788		$	1,497
Accounts receivable, net		50,695			46,550
Inventories		34,802			32,623
Assets held for sale		3,516			4,677
Other current assets		12,251			12,742

Total current assets		102,052			98,089
Property, plant and equipment, net		244,552			251,993
Other assets, net		15,184			16,599

	$	361,788		$	366,681

LIABILITIES & STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	47,628		$	52,332
Accrued liabilities		32,025			33,485
Current portion of long-term debt		21,780			23,333

Total current liabilities		101,433			109,150
Long-term debt, net of current portion		429,840			419,192
Subordinated notes		175,000			175,000
Other noncurrent liabilities		20,225			21,680

Total liabilities		726,498			725,022
Redeemable common stock		60,000			60,000
Stockholders’ deficit:
Common stock		1			1
Additional paid-in capital		87,072			87,144
Accumulated deficit		(510,937	)		(504,022	)
Accumulated other comprehensive loss		(846	)		(1,464	)

Total stockholders’ deficit		(424,710	)		(418,341	)

	$	361,788		$	366,681

The accompanying notes are an integral part
of these condensed consolidated balance sheets.

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands — Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Sales	$	140,049		$	132,963		$	287,101		$	276,584
Cost of sales		120,469			116,453			246,718			241,415

Gross profit		19,580			16,510			40,383			35,169
Selling, general and administrative expenses		3,550			3,758			7,205			7,836
Restructuring and impairment charges		1,721			(58	)		3,253			(58	)

Operating income		14,309			12,810			29,925			27,391
Cash interest expense		15,259			14,525			30,284			28,980
Non-cash interest expense		3,084			4,285			6,206			8,207

Interest expense		18,343			18,810			36,490			37,187
Other income		—			(2,313	)		—			(617	)

Loss before income taxes		(4,034	)		(3,687	)		(6,565	)		(9,179	)
Provision (benefit) for income taxes		(205	)		29			350			97

Net loss	$	(3,829	)	$	(3,716	)	$	(6,915	)	$	(9,276	)

The accompanying notes are an integral part
of these condensed consolidated financial statements.

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands — Unaudited)


	Six Months Ended
	June 30,
	2004			2003
OPERATING ACTIVITIES:
Net loss	$	(6,915	)	$	(9,276	)
Adjustments to reconcile net loss to net cash provided by operating activities
Asset impairment charge		1,197			—
Non-cash interest		6,206			8,207
Depreciation and amortization		22,844			23,330
Changes in other operating items		(13,766	)		1,885

Net cash provided by operating activities		9,566			24,146
INVESTING ACTIVITIES:
Capital expenditures		(15,400	)		(27,761	)
Proceeds from sale of property, plant and equipment		1,139			47

Net cash used for investing activities		(14,261	)		(27,714	)
FINANCING ACTIVITIES:
Borrowings under revolving credit facilities		58,705			30,702
Repayments of revolving credit facilities		(49,453	)		(3,779	)
Long-term borrowings		3,680			9,713
Repayment of long-term borrowings		(8,883	)		(33,834	)
Other		(72	)		(413	)

Net cash provided by financing activities		3,977			2,389
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		9			119

NET CHANGE IN CASH AND CASH EQUIVALENTS		(709	)		(1,060	)
CASH AND CASH EQUIVALENTS:
Beginning of period		1,497			3,337

End of period	$	788		$	2,277

NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Capital leases	$	566		$	4,742

The accompanying notes are an integral part
of these condensed consolidated financial statements.

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		ORGANIZATION AND BASIS OF PRESENTATION

		J.L. French Automotive Castings, Inc. (“French” or the “Company”) is an international designer and manufacturer of aluminum die cast components and assemblies for the global automotive industry. The Company’s primary operating subsidiaries are J.L. French Corporation (“Sheboygan”), Allotech International (“Allotech”), Nelson Metal Products Corporation (“Nelson”), Shoreline Industries, Inc. (“JLF Benton Harbor”), J.L. French U.K. Ltd. (“JLF UK”), Fundiciones Viuda de Ansola, S.A. (“Ansola”), and J.L. French S. de R.L. de C.V. (“JLF Mexico”), all of which are wholly owned. We have manufacturing facilities located in Kentucky, Michigan, Wisconsin, Mexico, Spain and the United Kingdom.

		The accompanying condensed consolidated financial statements have been prepared by French without audit. The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

		Sales and operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year.

2.		FINANCIAL LEVERAGE AND COVENANT COMPLIANCE

		The Company has a substantial amount of leverage. As of June 30, 2004, the Company had outstanding indebtedness of $626.6 million, and working capital of $0.6 million. In addition, the Company incurred net losses of $132.7 million and $272.1 million in 2003 and 2002, respectively. Total shareholders’ deficit was $424.7 million at June 30, 2004. In 2003, cash interest costs were $60.2 million and total interest costs were $74.8 million. Management believes total interest costs will remain at approximately the same levels in 2004. For the six months ended June 30, 2004, cash interest costs were $30.3 million and total interest costs were $36.5 million. In order to maintain compliance with restrictive loan covenants for the remainder of 2004 and beyond, the Company will need to improve its consolidated earnings before interest, taxes, depreciation, amortization, restructuring and impairment charges (“EBITDA”) and cash flows from current levels. As of June 30, 2004, the Company had borrowing availability under its revolving credit facility and cash on hand of approximately $18.2 million.

		In order to reduce costs, improve EBITDA and maintain adequate liquidity, the Company has taken the following actions: (i) completed the December 27, 2002 financing transactions (see Note 9) which eliminated all scheduled senior debt principal repayments until 2006, (ii) closed the Grandville, Michigan facility in May, 2003, (iii) closed two facilities in JLF UK in the first quarter of 2004, (iv) aligned the cost structure with the revenue base through personnel and other cost reductions, and (v) implemented stringent operating and cost management policies and controls.

The Company’s credit facilities contain restrictive covenants that, among other things, limit the Company’s ability to incur indebtedness, make capital expenditures, and pay dividends. The most restrictive covenants require the Company to maintain the following financial ratios:

	•		Ratio of consolidated earnings before interest, taxes, depreciation, amortization, restructuring and impairment charges, or EBITDA, as defined, to consolidated cash interest expense of not less than 1.40 at June 30, 2004 and December 31, 2003 (actual of 1.72 and 1.60, respectively) and 1.50 at December 31, 2004.

	•		Ratio of total indebtedness to EBITDA, as defined (“Total Leverage Ratio”), of less than 6.75 at June 30, 2004 and December 31, 2003 (actual of 6.11 and 6.43, respectively) and 6.25 at December 31, 2004.

	•		Ratio of indebtedness under the Senior Credit Facility, including outstanding standby letters of credit, to EBITDA, as defined, of less than 3.25 at June 30, 2004 and December 31, 2003 (actual of 2.95 and 3.03, respectively) and 3.25 at December 31, 2004.

		The most restrictive quarterly covenant in 2004 will be the Total Leverage Ratio at December 31, 2004. Assuming total debt at $626.5 million (the balance at June 30, 2004), either an EBITDA, as defined, of approximately $102 million would need to be achieved to be in compliance with the required ratio of 6.25 at December 31, 2004 (EBITDA, as defined, was $96.6 million in 2003) or debt would need to be reduced to a sufficient level such that the required ratio would be achieved. Management believes its operating plans for the remainder of 2004 will enable the Company to remain in compliance with the quarterly covenants for the remainder of 2004. Management also believes that cash generated from operations together with available borrowings under the senior credit facility will provide sufficient liquidity and capital resources to fund working capital, debt service obligations and capital expenditures during the remainder of 2004. The assumptions underlying this belief include, among other things, that there will be no future material adverse developments in either the Company’s business or the automotive market in general.

		The aggregate maturities of long-term debt and obligations under capital leases are $23.3 million in 2004 and $9.9 million in 2005. In October 2006, the Company’s senior credit facility matures, resulting in cash requirements of approximately $297.0 million. The Company will need to enter into a new credit facility or raise additional capital prior to the October 2006 maturity. There is no assurance the Company can enter into a new credit facility or raise additional required capital on terms acceptable to the Company, or at all.

		On July 14, 2004, the Company announced a tender offer to acquire its outstanding 11 1/2% senior subordinated notes due 2009 (“Notes”). Under the terms of the tender offer as amended, the Company offered to acquire the Notes at a price of $850 per $1,000 principal amount. Completion of the tender offer is conditioned upon, among other things, the tender of a minimum of 85% of the outstanding Notes and the completion of the financing described below. The tender offer expires on August 13, 2004.

		The tender offer is being made in connection with a proposed refinancing of the Company’s current credit facilities, as well as a proposed offering of $165 million in preferred equity securities. In support of the refinancing, the Company’s current stockholders may purchase up to $50 million of the preferred equity securities. The Company expects to use the net proceeds from the refinancing and the preferred equity offering to fund the purchase of notes in the tender offer and to repay existing senior indebtedness. There can be no assurances that the Company will be successful in consummating these transactions.

3.		COMPREHENSIVE LOSS

		The following presents comprehensive loss, defined as changes in stockholders’ deficit except changes related to transactions with stockholders of the Company, for the three and six month periods ended June 30, 2004 and 2003 (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Net loss	$	(3,829	)	$	(3,716	)	$	(6,915	)	$	(9,276	)
Change in cumulative translation adjustment		(587	)		1,822			134			2,210
Derivative instrument unrealized income		—			(45	)		—			153
Minimum pension liability (U.K. pension plan)		241			(288	)		484			(161	)

Comprehensive loss	$	(4,175	)	$	(2,227	)	$	(6,297	)	$	(7,074	)

4.		NEW ACCOUNTING PRONOUNCEMENTS

		In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. The revised SFAS No. 132 requires additional disclosures concerning the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit costs recognized during the interim periods. The Company adopted the annual provisions of the revised SFAS No. 132 in 2003 and the interim provisions during 2004. See Note 10 for additional required disclosures.

5.		INVENTORIES

		Inventories are stated at the lower of cost or market with cost determined by the first in, first out (FIFO) or average cost methods, which approximate current costs. Inventories consisted of the following (in thousands):


	June 30,		December 31,
	2004		2003
Raw materials	$	16,315	$	15,671
Work-in-process		9,076		7,738
Finished goods		9,411		9,214

	$	34,802	$	32,623

6.		SALE-LEASEBACK

		The Company entered into certain sale and leaseback transactions in 2003 and 2002, applying the provisions of SFAS No. 98, Accounting for Leases. Upon commencement of the lease term, the assets were removed from the Company’s balance sheet in accordance with accounting for the equipment as operating leases. The following transactions were entered into:

	•		In October 2003, the Company entered into an agreement to sell and lease back two pieces of equipment. The majority of the assets sold in the transaction were purchased during 2003. Net proceeds from the transaction were approximately $3.0 million. The transaction resulted in an insignificant loss.

	•		In March 2002, the Company entered into an agreement to sell and lease back five pieces of equipment. All of the assets sold in the transaction were purchased during the first quarter of 2002. Net proceeds from the transaction were approximately $4.6 million. The transaction resulted in a gain of approximately $0.2 million, which was deferred and is being amortized over the lease term.

The present value of the future minimum lease payments for these two sale-leasebacks was approximately $4.2 million at June 30, 2004.

7.		RESTRUCTURING AND IMPAIRMENT CHARGES

		*Grandville Restructuring and Asset Impairment (“2002 Restructuring”) —On December 31, 2002, the Company’s board of directors approved a restructuring plan that included the closing of the Grandville, Michigan facility. As a result, the Company recognized a charge to earnings of $21.3 million in the fourth quarter of 2002, which reflected the estimated qualifying exit costs to be incurred over the next year. Included in this charge were estimated costs associated with closing the facility of $3.3 million in accordance with EITF No. 94-3 and asset impairments of $18.0 million that were recognized in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets*. With the transfer of production to other facilities, the closing of the Grandville, Michigan facility resulted in a net workforce reduction of 225 hourly and salaried employees, which occurred throughout the five-month period ending May 31, 2003. The 2002 restructuring charge did not cover certain aspects of the activities that occurred in 2003, including the movement of equipment, certain severance costs and employee relocation and training. Certain of these costs, totaling $2.7 million (net of $1.0 million of accrual reversals), were recognized in 2003 with the remaining costs estimated at $0.3 million, to be recognized in future periods.

		The Company anticipates utilizing the remaining restructuring reserves as originally intended, with the ultimate dispositions occurring during 2004.

		During the three and six months ended June 30, 2004, the Company recorded $0.1 million and $0.3 million, respectively, in incremental restructuring charges that had not been specifically reserved for in 2002 as they did not qualify under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, in conjunction with the Grandville restructuring. These amounts have been recognized as expense as incurred and are recorded in restructuring and impairment charges in the accompanying condensed consolidated statements of operations.

		In connection with the closing of the Grandville facility in the second quarter of 2003, the Company assessed property, plant and equipment in accordance with SFAS No. 144 and reclassified $4.5 million as current assets based on the Company’s preliminary assessment of the likelihood of sale of those assets. These assets are classified as assets held for sale in the accompanying condensed consolidated balance sheets. Certain of the equipment was sold in August 2003. The remaining assets, which primarily consist of real estate held for sale, was $3.3 million as of December 31, 2003. During the period ended March 31, 2004, the Company recorded an additional impairment charge of $1.2 million as a result of recent market activity. This charge is reflected in restructuring and impairment charges in the accompanying condensed consolidated statements of operations. As of June 30, 2004, the assets held for sale are valued at $2.1 million in the condensed consolidated balance sheets.

		*U.K. Restructuring and Asset Impairment (“2003 Restructuring”) —*During the fourth quarter of 2003, the Company announced and implemented a restructuring plan for its U.K. operations. As a result, the Company recognized a charge to earnings of $2.8 million, which reflects $0.6 million in severance costs in accordance with SFAS No. 146 and asset impairments of $2.2 million that were recognized in accordance with SFAS No. 144. With the transfer of production to other facilities estimated to be completed by the end of 2004, the closing of the Cheshunt, England facility will result in a net workforce reduction of 50 hourly and salaried employees. The closure of the Birmingham, England tooling operation resulted in a net workforce reduction of 21 hourly and salaried employees. The 2003 restructuring charge did not cover certain aspects of the activities that will be occurring in future periods, including the movement of equipment, contractual lease payments, certain severance costs and employee relocation and training. During the three and six months ended June 30, 2004, these costs were mainly severance related and amounted to $1.6 million and $1.7 million, respectively, which are reflected in restructuring and impairment charges in the accompanying condensed consolidated statements of operations. The remaining estimated costs of $3.6 million as of June 30, 2004, principally related to contractual lease payments, will be recognized through the remainder of 2004, culminating with the determination of the cease-use date of the facility, in accordance with SFAS No. 146.

		*Saltillo, Mexico Asset Impairment—*During 2003, the Company concluded that it could not manufacture components for its key customer at its Saltillo, Mexico facility at an acceptable profit margin. Therefore, the business was anticipated to be sourced to another supplier. As a result, the Company concluded that the cash flows from its Saltillo, Mexico operations would be less than the carrying value of those fixed assets. Accordingly, the Company recorded an impairment charge of approximately $4.9 million related to the fixed assets of that operation. The estimated fair value of $1.8 million at December 31, 2003 was as follows: $1.4 million in assets held for sale and $0.4 million in depreciable property, plant and equipment. In January 2004, the Company sold a portion of the land for its carrying value of $0.5 million. In April 2004, the Company sold another parcel of land with a carrying value of $0.3 million for $0.6 million. At June 30, 2004, $0.6 million in assets held for sale and $0.3 in depreciable property, plant and equipment are included in the accompanying condensed consolidated balance sheet, based on the anticipated disposition and use of the equipment, respectively.

		*Company-wide Consolidated Restructuring Activity—*The accrual of $0.6 million and $1.1 million at June 30, 2004 and December 31, 2003, respectively, is recorded in accrued liabilities in the Company’s consolidated balance sheets. The following table summarizes activity specific to the initial restructuring accrual established, for 2004 (in thousands):


Balance at December 31, 2003	$	1,149
Cash payments		(556	)

Balance at June 30, 2004	$	593

The Company recorded the following restructuring and impairment charges in the accompanying condensed consolidated statements of operations (in thousands):


	For the Three Months				For the Three Months
	Ended June 30, 2004				Ended June 30, 2003
Asset impairment			$	—				$	—
Restructuring costs:
Post-retirement medical plan curtailment gain		—				(784	)
Equipment moving and related costs		646				385
Severance and employee related costs		1,001				243
Facility closure costs		67				—
Other		7				98

Total restructuring costs				1,721					(58	)

Total restructuring and impairment charges			$	1,721				$	(58	)


	For the Six Months Ended				For the Six Months Ended
	June 30, 2004				June 30, 2003
Asset impairment			$	1,197				$	—
Restructuring costs:
Post-retirement medical plan curtailment gain		—				(784	)
Equipment moving and related costs		690				385
Severance and employee related costs		1,275				243
Facility closure costs		67				—
Other		26				98

Total restructuring costs				2,056					(58	)

Total restructuring and impairment charges			$	3,253				$	(58	)

The Company has recorded the following activity throughout the duration of the various restructurings (in thousands):

2002 Restructuring


				Lease & Other			Facility			Total
				Contractual			Exit &			Accrued			Non-Cash		Total
	Employee Costs			Obligations			Other Costs			Liability			Charge		Charge
Balance at December 31, 2002	$	—		$	1,512		$	1,843		$	3,355		$	—	$	3,355
Cash payments		(1,040	)		(378	)		(3,706	)		(5,123	)
(Reversals) charges		1,040			(995	)		2,470			2,514			63		2,577

Balance at December 31, 2003		—			139			607			746			63		5,932
Cash payments		(35	)		(89	)		(290	)		(414	)
(Reversals) charges		35			—			227			262			—		262

Balance at June 30, 2004	$	—		$	50		$	543		$	593		$	63	$	6,194

2003 Restructuring


				Lease & Other			Facility			Total
				Contractual			Exit &			Accrued			Non-Cash		Total
	Employee Costs			Obligations			Other Costs			Liability			Charge		Charge
Balance at December 31, 2002	$	—		$	—		$	—		$	—		$	—	$	—
Cash payments		(337	)		—			—			(337	)
(Reversals) charges		633			—			107			740			—		740

Balance at December 31, 2003		296			—			107			403			—		740
Cash payments		(1,341	)		(609	)		(247	)		(2,197	)
(Reversals) charges		1,045			609			140			1,794			—		1,794

Balance at June 30, 2004	$	—		$	—		$	—		$	—		$	—	$	2,534

Total Company-Wide Restructuring


				Lease & Other			Facility			Total
				Contractual			Exit &			Accrued			Non-Cash		Total
	Employee Costs			Obligations			Other Costs			Liability			Charge		Charge
Balance at December 31, 2002	$	—		$	1,512		$	1,843		$	3,355		$	—	$	3,355
Cash payments		(1,377	)		(378	)		(3,706	)		(5,460	)
(Reversals) charges		1,673			(995	)		2,577			3,254			63		3,317

Balance at December 31, 2003		296			139			714			1,149			63		6,672
Cash payments		(1,376	)		(698	)		(537	)		(2,611	)
(Reversals) charges		1,080			609			367			2,056					2,056

Balance at June 30, 2004	$	—		$	50		$	543		$	593		$	63	$	8,728

8.		INCOME TAXES

		As of December 31, 2003, the Company had approximately $16.4 million of state tax credit carry forwards which expire through 2018, $105.4 million of state net operating loss carry forwards which expire between 2014 and 2023, $26.0 million of foreign net operating loss carry forwards which expire in 2018 and $202.1 million of federal net operating loss carry forwards which expire between 2018 and 2023. No provision has been made for U.S. income taxes related to undistributed earnings of foreign subsidiaries that are intended to be permanently invested.

		In the fourth quarter of 2002, the Company recorded a valuation allowance for its U.S. Federal and all state deferred tax assets. In prior years, the Company recorded a valuation allowance for its foreign deferred tax assets and certain state deferred tax assets. SFAS No. 109, Accounting for Income Taxes, and relevant interpretations of SFAS No. 109, require a valuation allowance be provided when it is more probable than not that the related income tax assets will not be utilized. Reported historical income has been adversely impacted by the write-off of goodwill, restructuring and impairment charges (see Note 7) and other nonrecurring events such as integration difficulties involving the acquisition of Nelson. As a result of accounting charges related to these and other events, the Company has incurred net losses on a cumulative basis since 1999. Because SFAS No. 109 requires the Company to weight historical reported results greater than projections of future income, the Company recorded a full valuation allowance on the deferred tax assets in 2002 and continued to record a full valuation allowance in 2003 and into 2004 due to continuing operating losses. The Company will continue to assess the need for a valuation allowance on these assets in the future.

9.		LONG-TERM DEBT

		Long-term senior debt consisted of the following (in thousands):


	June 30,			December 31,
	2004			2003
Senior Credit Facility:
Revolving credit facility	$	69,258		$	59,798
Tranche B term loan		134,281			133,761
Tranche C term loan		96,878			96,257

Total senior credit facility		300,417			289,816
Secured second lien term loans, net of unamortized discount of $1,725 and $2,333		105,488			101,548
Peseta term loans		18,421			21,684
Obligations under capital leases and other		27,294			29,477

Total senior debt		451,620			442,525
Less current maturities		(21,780	)		(23,333	)

Total long-term senior debt	$	429,840		$	419,192

The Company and certain of its direct and indirect subsidiaries have a senior credit facility that provides a tranche B term loan, a tranche C term loan and revolving credit facility which provides for total borrowings and letters of credit of $90 million. As of June 30, 2004, after taking into consideration outstanding borrowings under the revolving credit facility of $69.3 million and outstanding letters of credit of $3.3 million, the Company had borrowing availability under the revolving credit facility and cash on hand of approximately $18.2 million.

		As of June 30, 2004, rates on borrowings under the senior credit facility varied from 5.11% to 11.0%. Borrowings under both tranches are due and payable in October 2006. The revolving credit facility is available until June 2006. The senior credit facility is secured by all of the assets of and guaranteed by all material present and future subsidiaries of the Company, in each case with exceptions for certain foreign subsidiaries and to the extent permitted by applicable law (“Guarantors”). The term loans are subject to the following exit fees: tranche B is 1% in 2003, 2% in 2004, and 3% in 2005 and thereafter, tranche C is 5% over the duration of the loan. At June 30, 2004, approximately $1.6 million and $1.9 million of the outstanding tranche B and tranche C balances, respectively, represents these accrued fees.

		In December 2002, the Company issued a secured second lien term loan of $96.4 million, resulting in net proceeds of $94.0 million. The loan bears 12% cash interest, payable quarterly, and 7% deferred interest, payable in 2007. The borrowings and deferred interest are due and payable in December 2007. At June 30, 2004 and December 31, 2003, $10.8 million and $7.1 million, respectively, of the outstanding debt balance was accrued paid-in-kind interest. Borrowings under the loan are secured by a second lien on all of the assets of and guaranteed by all material present and future subsidiaries of the Company, in each case with exceptions for certain foreign subsidiaries and to the extent permitted by applicable law.

		The senior credit facility and secured second lien term loan include certain restrictive covenants. The Company was in compliance with all financial covenants at June 30, 2004 and December 31, 2003. The senior credit facility and secured second lien term loan, as amended, requires the Company to maintain certain financial ratios including minimum interest coverage ratios and maximum leverage ratios. They also limit capital expenditures and cash dividends, among other restrictions.

		Borrowings under the term loans and secured second lien term loan are subject to mandatory prepayments based on excess cash flow and proceeds from asset sales, as defined in the agreements. As of June 30, 2004, no such prepayments were required.

		Other long-term debt consists principally of obligations under capital leases and outstanding loans of the Company’s foreign subsidiaries in Spain and the United Kingdom.

		The Company also has outstanding $175 million of senior subordinated notes. These notes mature in May 2009 and bear interest at 11 1/2%.

10.		EMPLOYEE BENEFIT PLANS

		The components of net periodic benefit costs were as follows (in thousands):


							Postretirement Benefits Other
	Pension Benefits for the						Than Pensions for the
	Three Months Ended June 30,						Three Months Ended June 30,
	2004			2003			2004		2003
Service cost	$	205		$	487		$	—	$	44
Interest cost		408			750			—		106
Expected return on plan assets		(396	)		(713	)		—		—
Amortization of prior service cost		3			2			—		(14	)
Recognition of actuarial loss		—			18			—		—
Curtailment gain		—			—			—		(784	)
Other		81			227			—		—

Net periodic benefit costs	$	300		$	771		$	—	$	(649	)


							Postretirement Benefits Other
	Pension Benefits for the						Than Pensions for the
	Six Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004		2003
Service cost	$	409		$	974		$	—	$	87
Interest cost		816			1,500			—		212
Expected return on plan assets		(792	)		(1,425	)		—		—
Amortization of prior service cost		6			4			—		(28	)
Recognition of actuarial loss		—			37			—		—
Curtailment gain		—			—			—		(784	)
Other		161			451			—		—

Net periodic benefit costs	$	600		$	1,541		$	—	$	(513	)

		As part of the restructurings (see Note 7), the Company’s pension and postretirement medical plan obligations were required to be remeasured for purposes of determining any curtailment gains/losses in accordance with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. Both plans were remeasured at December 31, 2002 and again at May 31, 2003 upon the accelerated plant closure, and in October 2003, the Company exercised its right to terminate the benefits for the hourly participants in the Nelson postretirement medical and death benefit plan. The participants were notified that the benefits would cease on December 31, 2003.

		The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2003, that it expected to contribute $0.4 million to its domestic pension plan in 2004. For the six months ended June 30, 2004, the Company has contributed $0.1 million to its domestic pension plan. On July 15, 2004, the Company contributed another $0.1 million. The Company presently anticipates that it will contribute the remaining $0.2 million to fund its domestic pension plan in 2004.

		In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) became law. The Act introduces a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Questions have arisen regarding whether an employer that provides postretirement prescription drug coverage should recognize the effects of the Act on the plan’s accumulated postretirement benefit obligation (“APBO”) and the employer’s postretirement benefit costs and, if so, when and how to account for those effects. FASB Staff Position (“FSP”) 106-2 provides guidance on the accounting for the effects of the Act for employers that sponsor postretirement heath care plans that provide prescription drug benefits. FSP 106-2 also requires those employers to provide certain disclosures regarding the effect of the federal subsidy provided by the Act.

		The Company will determine whether benefits provided by its plan are actuarially equivalent upon its annual valuation on October 31, 2004. As such, measures of the APBO or net periodic postretirement benefit cost do not reflect any amount associated with the subsidy as the Company continues to determine whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act.

11.		SUPPLEMENTAL CASH FLOW INFORMATION

		Supplemental cash flow information (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Cash paid for -
Interest	$	19,824	$	19,182	$	29,417	$	28,117
Income taxes, net of refunds received		158		182		228		335

The following table presents a reconciliation of total cash paid for interest in the periods presented to the total interest expense recorded in the accompanying condensed consolidated statements of operations:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Cash paid for interest	$	19,824		$	19,182		$	29,417		$	28,117
Change in accrual		(4,565	)		(4,657	)		867			863
Plus:
Non-cash
Secured second term lien loan 7% “in-kind” accrual		1,865			1,718			3,696			3,406
Debt issuance cost amortization		831			834			1,664			1,660
Tranches exit/anniversary fee accruals		570			1,051			1,140			1,616
Secured second term lien loan discount amortization		122			122			244			243
Interest rate swap prepaid interest amortization		—			747			—			1,494
Other		(304	)		(187	)		(538	)		(212	)

Total non-cash		3,084			4,285			6,206			8,207

Interest expense, net	$	18,343		$	18,810		$	36,490		$	37,187

12.		FOREIGN CURRENCY TRANSACTIONS

		The assets and liabilities of all foreign subsidiaries are translated into U.S. dollars using rates of exchange at period end. Results of operations are translated at average rates prevailing throughout the period. Related translation adjustments are recorded as a component of other accumulated comprehensive income (loss). To the extent that transactions are denominated in a currency other than the functional currency, any changes in the expected amount of functional currency cash flows upon settlement of the transaction due to changes in exchange rates will be considered in determining earnings during the period. During the three and six months ended June 30, 2003, the Company recorded $2.3 million and $0.6 million, respectively, of foreign currency exchange income related to borrowings by the U.S. based company to JLF UK. This amount is reflected in “Other income” in the accompanying condensed consolidated statements of operations.

13.		STOCKHOLDERS’ DEFICIT

		The following table presents a summary of activity in the accumulated deficit account for the six months ended June 30, 2004 and 2003 (in thousands):


	Six Months Ended
	June 30,
	2004			2003
Beginning balance	$	(504,022	)	$	(371,333	)
Net loss		(6,915	)		(9,276	)

Ending balance	$	(510,937	)	$	(380,609	)

On December 29, 2003, the Company effected a 1,000-for-1 reverse stock split. All references to number of shares outstanding have been retroactively restated to reflect the reverse stock split.

14.		CONDENSED CONSOLIDATING INFORMATION

		The following consolidating financial information presents statement of operations, balance sheet and cash flow information related to the Company’s businesses. Each Guarantor is a direct wholly owned domestic subsidiary of the Company and has fully and unconditionally guaranteed the 11 1/2% senior subordinated notes issued by J.L. French Automotive Castings, Inc., on a joint and several basis. The Non-Guarantor companies are the Company’s foreign subsidiaries, which include JLF UK, Ansola and JLF Mexico. Separate financial statements and other disclosures concerning the Guarantors have not been presented because management believes that such information is not material.

14.

Consolidating guarantor and non-guarantor financial information (continued):

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet as of June 30, 2004
(Amounts in thousands — unaudited)


	J.L. French
	Automotive			Guarantor			Non-Guarantor
	Castings, Inc.			Companies			Companies			Eliminations			Consolidated
Assets:
Cash & cash equivalents	$	8		$	99		$	681		$	—		$	788
Accounts receivable, net		165,260			67,229			32,668			(214,462	)		50,695
Inventories		—			25,870			8,932			—			34,802
Assets held for sale		—			2,095			1,421			—			3,516
Other current assets		653			7,549			4,049			—			12,251

Total current assets		165,921			102,842			47,751			(214,462	)		102,052
Property, plant & equipment		—			296,154			163,688			—			459,842
Accumulated depreciation		—			(166,343	)		(48,947	)		—			(215,290	)

Net property, plant & equipment		—			129,811			114,741			—			244,552
Investment in subsidiaries		(9,248	)		—			—			9,248			—
Other assets, net		102,818			1,017			2,221			(90,872	)		15,184

Total assets	$	259,491		$	233,670		$	164,713		$	(296,086	)	$	361,788

Liabilities:
Accounts payable	$	1,121		$	25,128		$	21,379		$	—		$	47,628
Accrued liabilities		5,512			16,784			9,729			—			32,025
Current portion of long-term debt		—			575			21,205			—			21,780

Total current liabilities		6,633			42,487			52,313			—			101,433
Intercompany payables		45,250			129,225			39,987			(214,462	)		—
Other noncurrent liabilities		1,944			636			17,645			—			20,225
Long-term debt, net of current portion		568,547			42,221			84,944			(90,872	)		604,840

Total liabilities		622,374			214,569			194,889			(305,334	)		726,498
Redeemable common stock		60,000			—			—			—			60,000
Stockholders’ investment (deficit):
Common stock		1			—			—			—			1
Additional paid-in-capital		87,072			259,808			71,449			(331,257	)		87,072
Accumulated deficit		(510,937	)		(239,608	)		(100,897	)		340,505			(510,937	)
Accumulated other comprehensive income (loss)		981			(1,099	)		(728	)		—			(846	)

Total stockholders’ investment (deficit)		(422,883	)		19,101			(30,176	)		9,248			(424,710	)

Total liabilities and stockholders’ investment (deficit)	$	259,491		$	233,670		$	164,713		$	(296,086	)	$	361,788

14.

Consolidating guarantor and non-guarantor financial information (continued):

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Accumulated Deficit
For the Three Months Ended June 30, 2004
(Amounts in thousands — unaudited)


	J.L. French
	Automotive			Guarantor			Non-Guarantor
	Castings, Inc.			Companies			Companies			Eliminations			Consolidated
Sales	$	—		$	105,429		$	35,036		$	(416	)	$	140,049
Cost of sales		—			86,219			34,666			(416	)		120,469

Gross profit		—			19,210			370			—			19,580
Selling, general and administrative expenses		(5,498	)		7,925			1,123			—			3,550
Restructuring and impairment charges		—			100			1,621			—			1,721

Operating income (loss)		5,498			11,185			(2,374	)		—			14,309
Cash interest expense		14,194			99			966			—			15,259
Non-cash interest expense (income)		3,454			(371	)		1			—			3,084

Interest expense		17,648			(272	)		967			—			18,343
Income (loss) before income taxes		(12,150	)		11,457			(3,341	)		—			(4,034	)
Provision (benefit) for income taxes		(1,555	)		113			1,237			—			(205	)
Equity in earnings (losses) of subsidiaries		6,766			—			—			(6,766	)		—

Net loss	$	(3,829	)	$	11,344		$	(4,578	)	$	(6,766	)	$	(3,829	)

Accumulated deficit:
Beginning of period	$	(507,108	)	$	(250,952	)	$	(96,319	)	$	347,271		$	(507,108	)
Net income (loss)		(3,829	)		11,344			(4,578	)		(6,766	)		(3,829	)

End of period	$	(510,937	)	$	(239,608	)	$	(100,897	)	$	340,505		$	(510,937	)

14.

Consolidating guarantor and non-guarantor financial information (continued):

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Accumulated Deficit
For the Six Months Ended June 30, 2004
(Amounts in thousands — unaudited)


	J.L. French
	Automotive			Guarantor			Non-Guarantor
	Castings, Inc.			Companies			Companies			Eliminations			Consolidated
Sales	$	—		$	216,107		$	71,626		$	(632	)	$	287,101
Cost of sales		—			177,516			69,834			(632	)		246,718

Gross profit		—			38,591			1,792			—			40,383
Selling, general and administrative expenses		(23,057	)		28,134			2,128			—			7,205
Restructuring and impairment charges		—			1,459			1,794			—			3,253

Operating income (loss)		23,057			8,998			(2,130	)		—			29,925
Cash interest expense		28,397			138			1,749			—			30,284
Non-cash interest expense (income)		6,810			(507	)		(97	)		—			6,206

Interest expense		35,207			(369	)		1,652			—			36,490
Income (loss) before income taxes		(12,150	)		9,367			(3,782	)		—			(6,565	)
Provision (benefit) for income taxes		(1,555	)		233			1,672			—			350
Equity in earnings (losses) of subsidiaries		3,680			—			—			(3,680	)		—

Net income (loss)	$	(6,915	)	$	9,134		$	(5,454	)	$	(3,680	)	$	(6,915	)

Accumulated deficit:
Beginning of period	$	(504,022	)	$	(248,742	)	$	(95,443	)	$	344,185		$	(504,022	)
Net income (loss)		(6,915	)		9,134			(5,454	)		(3,680	)		(6,915	)

End of period	$	(510,937	)	$	(239,608	)	$	(100,897	)	$	340,505		$	(510,937	)

14.

Consolidating guarantor and non-guarantor financial information (continued):

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2004
(Amounts in thousands — unaudited)


	J.L. French
	Automotive			Guarantor			Non-Guarantor
	Castings, Inc.			Companies			Companies			Eliminations			Consolidated
OPERATING ACTIVITIES:
Net income (loss)	$	(6,915	)	$	9,133		$	(5,453	)	$	(3,680	)	$	(6,915	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Asset impairment charge		—			1,197			—			—			1,197
Non-cash interest		6,744			(448	)		(90	)		—			6,206
Depreciation and amortization		—			15,135			7,709			—			22,844
Income (loss) from investment in subsidiaries		6,915			—			—			(6,915	)		—
Changes in other operating items		(107,154	)		(15,211	)		7,132			101,467			(13,766	)

Net cash provided by (used for) operating activities		(100,410	)		9,806			9,298			90,872			9,566
INVESTING ACTIVITIES:
Capital expenditures		—			(9,737	)		(5,663	)		—			(15,400	)
Proceeds from sale of property, plant and equipment		—			20			1,119			—			1,139

Net cash used for investing activities		—			(9,717	)		(4,544	)		—			(14,261	)
FINANCING ACTIVITIES:
Borrowings under revolving credit facilities		53,900			—			4,805			—			58,705
Repayments of revolving credit facilities		(44,300	)		—			(5,153	)		—			(49,453	)
Long-term borrowings		90,872			—			3,680			(90,872	)		3,680
Repayment of long-term borrowings		—			(282	)		(8,601	)		—			(8,883	)
Other		(72	)		—			—			—			(72	)

Net cash provided by (used for) financing activities		100,400			(282	)		(5,269	)		(90,872	)		3,977
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		—			—			9			—			9

NET CHANGE IN CASH AND CASH EQUIVALENTS		(10	)		(193	)		(506	)		—			(709	)
CASH AND CASH EQUIVALENTS:
Beginning of period		19			292			1,186			—			1,497

End of period	$	9		$	99		$	680		$	—		$	788

NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Capital leases	$	—		$	—		$	566		$	—		$	566

14.

Condensed consolidating guarantor and non-guarantor financial information (continued):

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet as of December 31, 2003
(Amounts in thousands — unaudited)


	J.L. French
	Automotive			Guarantor			Non-Guarantor
	Castings, Inc.			Companies			Companies			Eliminations			Consolidated
Assets:
Cash & cash equivalents	$	19		$	292		$	1,186		$	—		$	1,497
Accounts receivable, net		128,024			75,038			29,447			(185,959	)		46,550
Inventories		—			23,456			9,167			—			32,623
Assets held for sale		—			3,291			1,386			—			4,677
Other current assets		33			6,015			6,694			—			12,742

Total current assets		128,076			108,092			47,880			(185,959	)		98,089
Net property, plant & equipment		—			134,757			117,236			—			251,993
Investment in subsidiaries		(12,928	)		—			—			12,928			—
Other assets, net		13,609			862			2,128			—			16,599

Total assets	$	128,757		$	243,711		$	167,244		$	(173,031	)	$	366,681

Liabilities:
Accounts payable	$	1,430		$	31,320		$	19,582		$	—		$	52,332
Accrued liabilities		5,399			18,004			10,082			—			33,485
Current portion of long-term debt		—			568			22,765			—			23,333

Total current liabilities		6,829			49,892			52,429			—			109,150
Intercompany payables		11,828			140,343			33,788			(185,959	)		—
Other noncurrent liabilities		3,500			997			17,183			—			21,680
Long-term debt, net of current portion		462,995			42,510			88,687			—			594,192

Total liabilities		485,152			233,742			192,087			(185,959	)		725,022
Redeemable common stock		60,000			—			—			—			60,000
Stockholders’ investment (deficit):
Common stock		1			—			—			—			1
Additional paid-in-capital		87,144			259,808			71,449			(331,257	)		87,144
Accumulated deficit		(504,022	)		(248,742	)		(95,443	)		344,185			(504,022	)
Accumulated other comprehensive income (loss)		482			(1,097	)		(849	)		—			(1,464	)

Total stockholders’ investment (deficit)		(416,395	)		9,969			(24,843	)		12,928			(418,341	)

Total liabilities and stockholders’ investment (deficit)	$	128,757		$	243,711		$	167,244		$	(173,031	)	$	366,681

14.

Condensed consolidating guarantor and non-guarantor financial information (continued):

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Accumulated Deficit
For the Three Months Ended June 30, 2003
(Amounts in thousands — unaudited)


	J.L. French
	Automotive			Guarantor			Non-Guarantor
	Castings, Inc.			Companies			Companies			Eliminations			Consolidated
Sales	$	—		$	100,202		$	32,761		$	—		$	132,963
Cost of sales		—			85,697			30,756			—			116,453

Gross profit		—			14,505			2,005			—			16,510
Selling, general and administrative expenses		1,188			1,816			754			—			3,758
Restructuring and impairment charges		—			(58	)		—			—			(58	)

Operating income (loss)		(1,188	)		12,747			1,251			—			12,810
Interest expense, net		12,734			5,270			806			—			18,810
Other income		—			—			(2,313	)		—			(2,313	)

Income (loss) before income taxes		(13,922	)		7,477			2,758			—			(3,687	)
Provision for income taxes		(49	)		192			(114	)		—			29
Equity in earnings (losses) of subsidiaries		10,157			—			—			(10,157	)		—

Net income (loss)	$	(3,716	)	$	7,285		$	2,872		$	(10,157	)	$	(3,716	)

Accumulated deficit:
Beginning of period	$	(376,893	)	$	(132,483	)	$	(70,972	)	$	203,455		$	(376,893	)
Net income (loss)		(3,716	)		7,285			2,872			(10,157	)		(3,716	)

End of period	$	(380,609	)	$	(125,198	)	$	(68,100	)	$	193,298		$	(380,609	)

14.

Condensed consolidating guarantor and non-guarantor financial information (continued):

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Accumulated Deficit
For the Six Months Ended June 30, 2003
(Amounts in thousands — unaudited)


	J.L. French
	Automotive			Guarantor			Non-Guarantor
	Castings, Inc.			Companies			Companies			Eliminations			Consolidated
Sales	$	—		$	209,735		$	66,849		$	—		$	276,584
Cost of sales		—			179,767			61,648			—			241,415

Gross profit		—			29,968			5,201			—			35,169
Selling, general and administrative expenses		1,981			4,319			1,536			—			7,836
Restructuring and impairment charges		—			(58	)		—			—			(58	)

Operating income (loss)		(1,981	)		25,707			3,665			—			27,391
Interest expense, net		24,832			10,619			1,736			—			37,187
Other income		—			—			(617	)		—			(617	)

Income (loss) before income taxes		(26,813	)		15,088			2,546			—			(9,179	)
Provision (benefit) for income taxes		(118	)		377			(162	)		—			97
Equity in earnings (losses) of subsidiaries		17,419			—			—			(17,419	)		—

Net income (loss)	$	(9,276	)	$	14,711		$	2,708		$	(17,419	)	$	(9,276	)

Accumulated deficit:
Beginning of period	$	(371,333	)	$	(139,909	)	$	(70,808	)	$	210,717		$	(371,333	)
Net income (loss)		(9,276	)		14,711			2,708			(17,419	)		(9,276	)

End of period	$	(380,609	)	$	(125,198	)	$	(68,100	)	$	193,298		$	(380,609	)

14.

Condensed consolidating guarantor and non-guarantor financial information (continued):

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2003
(Amounts in thousands — unaudited)


	Automotive			Guarantor			Guarantor
	Castings, Inc.			Companies			Companies			Eliminations			Consolidated
OPERATING ACTIVITIES:
Net income (loss)	$	(9,276	)	$	14,712		$	2,707		$	(17,419	)	$	(9,276	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Non-cash interest		8,207			—			—			—			8,207
Depreciation and amortization		—			16,744			6,586			—			23,330
Income (loss) from investment in subsidiaries		(17,419	)		—			—			17,419			—
Changes in other operating items		17,612			(13,170	)		(2,557	)		—			1,885

Net cash provided by (used for) operating activities		(876	)		18,286			6,736			—			24,146
INVESTING ACTIVITIES:
Capital expenditures		—			(18,223	)		(9,491	)		—			(27,714	)

Net cash used for investing activities		—			(18,223	)		(9,491	)		—			(27,714	)
FINANCING ACTIVITIES:
Borrowings under revolving credit facilities		28,100			—			28,073			(25,471	)		30,702
Repayments of revolving credit facilities		(26,820	)		—			(2,430	)		25,471			(3,779	)
Long-term borrowings		—			—			9,713			—			9,713
Repayment of long-term borrowings		—			(118	)		(33,716	)		—			(33,834	)
Other		(413	)		—			—			—			(413	)

Net cash provided by (used for) financing activities		867			(118	)		1,640			—			2,389
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		—			—			119			—			119

NET CHANGE IN CASH AND CASH EQUIVALENTS		(9	)		(55	)		(996	)		—			(1,060	)
CASH AND CASH EQUIVALENTS:
Beginning of period		25			174			3,138			—			3,337

End of period	$	16		$	119		$	2,142		$	—		$	2,277

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

General

J.L. French Automotive Castings, Inc. (“French,” “Company,” “we,” “us,” or “our”) is an international designer and manufacturer of aluminum die cast components and assemblies for the global automotive industry. The Company’s primary operating subsidiaries are J.L. French Corporation (“Sheboygan”), Allotech International (“Allotech”), Nelson Metal Products Corporation (“Nelson”), Shoreline Industries, Inc. (“JLF Benton Harbor”), J.L. French U.K. Ltd. (“JLF UK”), Fundiciones Viuda de Ansola, S.A. (“Ansola”), and J.L. French S. de R.L. de C.V. (“JLF Mexico”), all of which are wholly owned. We have manufacturing facilities located in Kentucky, Michigan, Wisconsin, Mexico, Spain and the United Kingdom.

We manufacture highly engineered, assembly-line ready engine and drivetrain components, such as cam covers, bedplates, engine front covers, front-end accessory drive brackets, oil pans, transmission cases and water pump housings. Over the past five years, we have grown significantly by capitalizing on the trend toward the use of lighter-weight, more fuel-efficient aluminum components in automobiles. During the same period, we have enhanced operating margins by leveraging our proprietary processing technologies and highly efficient, fully-integrated aluminum recycling and casting operations. Unlike most of our competitors who focus primarily on either aluminum casting or machining, we machine and assemble over 80% of the components we cast, thereby increasing the value we provide to our customers while improving our profitability.

The Company ordinarily begins working on products awarded for new or redesigned platforms two to five years prior to initial vehicle production. During such period, French incurs (i) costs related to the design and engineering of such products, (ii) costs related to production of the tools and dies used to manufacture the products and (iii) start-up costs associated with the initial production of such product. In general, design and engineering costs are expensed in the period in which they are incurred. Costs incurred in the production of the tools and dies are generally capitalized and reimbursed by the customer prior to production. Start-up costs, which are generally incurred 30 to 60 days immediately prior to and immediately after production, are expensed as incurred.

The contracts the Company enters into typically: (i) range from one year to the life of the platform, (ii) are on a sole-source basis, (iii) do not require the purchase by the customer of any minimum number of units, (iv) are at fixed prices subject to annual price reductions or renegotiations and (v) provide for price adjustments related to a portion of the changes in the cost of aluminum. The Company’s sales are dependent on its customers’ production schedules which, in turn, are dependent on retail sales of new automobiles and light trucks.

Critical Accounting Policies

A “critical accounting policy” is one that is both important to the portrayal of the Company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes that the following accounting policies fit this definition:

Critical Accounting Estimates — Preparation of our financial statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to our consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The most significant areas involving management judgments and estimates are described below. Ultimate results in these areas could differ from our estimates.

Revenue Recognition — We typically enter into contracts to provide products for the life of a platform for automotive original equipment manufacturers. Revenue is recognized when the product is shipped from our facility as that is the time that title passes to the customer and the selling price is fixed. We establish reserves as appropriate for any pricing related disputes.

Allowance for Doubtful Accounts — Senior management reviews the accounts receivable aging on a monthly basis to determine if any receivables will potentially be uncollectable. Detailed reviews are conducted on any accounts significantly in arrears or of material amounts. After all attempts to collect the receivable have failed, the receivable is written off against the reserve. Based on the information available, management believes the reserve for doubtful accounts, inclusive of reserves for pricing disputes, of $2.5 million at June 30, 2004 is adequate. However, no assurances can be given that actual write-offs will not exceed the recorded reserve.

Valuation of Long-Lived Assets and Investments — We periodically review the carrying value of our long-lived assets and investments for continued appropriateness. This review is based upon our projections of anticipated future cash flows and is performed whenever events or changes in circumstances indicate that asset carrying value may not be recoverable. Such changes in circumstances include, but are not limited to, significant adverse changes in the extent or manner in which a long-lived asset or group of assets is being used, the accumulation of costs significantly in excess of the amount originally expected for the acquisition of a long-lived asset or group of assets, current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or group of assets, and expectations that, more likely than not, a long-lived asset or group of assets will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

The closure of our Grandville, Michigan production facility, which was announced in December 2002, prompted our review of the recoverability of the long-lived assets at that facility. We categorized the Grandville assets by those that were to be transferred to our Sheboygan and Glasgow production facilities, those that were to be sold, and those that were to be disposed. We projected the future cash flows on the latter two categories of these assets to be less than their carrying value. Our estimated future cash flows for the Grandville assets included assumptions regarding the fair value of assets to be sold, based in part on independent appraisals, and the extent of use and duration of time that the assets will continue to be utilized. During the period ended March 31, 2004, we recorded an additional impairment charge of $1.2 million to revalue the carrying value of $3.3 million related of the Grandville, Michigan facility to $2.1 million as a result of prevailing market activity at the time. As of June 30, 2004, the facility remains for sale. While management believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect the valuations. See further discussion of the Grandville closure under “Restructuring Costs” below.

During 2003, we concluded that we could not manufacture components for the key customer at our Saltillo, Mexico facility at an acceptable profit margin. Therefore, the business is being re-sourced to another supplier. As a result, the Company concluded that the cash flows from its Saltillo, Mexico operations would be less than the carrying value of those fixed assets. Accordingly, we recorded an impairment charge of approximately $4.9 million in 2003 related to the fixed assets of that operation. The estimated fair value of $1.8 million at December 31, 2003 was as follows: $1.4 million in assets held for sale and $0.4 million in depreciable property, plant and equipment. In January 2004, we sold a portion of the land for its carrying value of $0.5 million. In April 2004, we sold another parcel of land with a carrying value of $0.3 million for $0.6 million. At June 30, 2004, $0.6 million in assets held for sale and $0.3 million in depreciable property, plant and equipment remain based on the anticipated disposition and use of the equipment, respectively.

Pension and Other Post-Employment Benefits —The Company maintains two defined benefit pension plans, which cover all union employees of our former Grandville, Michigan facility and pre-acquisition employees at our United Kingdom facilities. Our policy is to fund each plan based upon actuarially determined amounts and as required by law.

The assumptions used to account for plan assets include a discount rate of 5.6% to 6.25% for 2003 based upon a review of long-term bonds as reviewed by our actuaries. The top end of our discount rate range has decreased from our range of 5.6% to 6.75% in 2002. In developing our expected long-term rate of return assumption, we evaluated input from our actuaries as well as review of broad equity and bond indices. In 2004 and 2003, we maintained our long-term return assumption of 8.0%.

We regularly review our actual asset allocation and periodically balance our investments to our targeted allocation when considered appropriate. We will continue to evaluate at least annually our actuarial assumptions, including our expected rate of return, and will adjust these as necessary. Our measurement date for both plans is October 31. For both plans, we follow SFAS No. 87, Employers’ Accounting for Pensions and SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits.

Our actual return on plan assets approximated $4.2 million and $(0.3) million for the years ended December 31, 2003 and December 31, 2002, respectively. We contributed $1.4 million and $2.6 million for the years ended December 31, 2003 and December 31, 2002, respectively. The actual return on plan assets and contributions are based upon a number of actuarial assumptions as described above. The fair value of our plan assets increased from $33.0 million at December 31, 2002 to $40.1 million at December 31, 2003. The investment performance returns, somewhat reduced by our declining discount rates, have decreased our underfunded position from $16.2 million at December 31, 2002 to $15.4 million at December 31, 2003. The Company will be making the required quarterly payments as determined by our actuaries related to our pension plans.

Over the past few years, the value of assets in the plans have declined in line with the performance of the financial markets generally. This situation combined with the increase in the present value of pension obligations results in pension obligations exceeding the fair value of plan assets. In this circumstance, the accounting rules require that we record an immediate adjustment to reflect the unfunded accumulated pension obligation. Accordingly, at December 31, 2003, we recorded an additional minimum pension liability adjustment totaling $8.6 million ($6.1 million after tax). The accounting rules require that this after-tax adjustment be recorded as a reduction of equity by charging accumulated other comprehensive income in our consolidated balance sheets rather than as a current year expense in our consolidated statements of operations.

Expense recognition under the pension accounting rules is based upon plan asset returns and plan benefit costs over the life of the Company’s workforce. Pension expense increased from $2.1 million in 2002 to $3.1 million in 2003. The increase in 2003 was due primarily to a lower discount rate used to measure the present value of plan obligations and a lower expected long-term return on plan assets. For 2003 expense, the discount rate assumption decreased from a range of 5.5% to 7.25% for 2002 expense to a range of 5.6% to 6.75% reflecting the decline in overall market interest rates and the expected return on plan assets was reduced from a range of 8.0% to 9.0% for 2002 expense to 8.0% reflecting trends in the overall financial markets.

We expect pension costs to decrease in 2004 to $1.2 million. The decrease is due primarily to the fact that there will be no additional service cost relative to our Grandville, MI pension plan as the facility was closed on May 31, 2003. For 2004 expense, the discount rate assumption is decreasing from a range of 5.6% to 6.75% for 2003 expense to a range of 5.6% to 6.25%, reflecting the further decline in prevailing market interest rates. Our long-term expected rate of return on plan assets remains at 8.0% for 2004.

A 25 basis point decrease (increase) in our discount rate, holding constant our expected long-term return on plan assets and other assumptions, would increase (decrease) pension expense by approximately $140,000 per year. We elected to utilize a 25 basis point hypothetical change as the assumption difference to demonstrate the sensitivity of our pension expense to a change in the discount rate. A one percent decrease (increase) in the expected return on plan assets assumption, holding constant our discount rate and other assumptions, would increase (decrease) pension expense by approximately $401,000 per year. We elected to use a one percent hypothetical change as the assumption difference facilitates extrapolation of changes in the expected rate of return assumption.

The Company also maintains a noncontributory defined contribution plan that covers certain U.S. based employees after one year of service. Contributions made by the Company are based upon the number of hours worked for participants. All investments are self-directed by participants.

Income Tax Accounting — As part of the process of preparing the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for accounting and tax purposes. These temporary differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized, considering future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. Increases in the valuation allowance result in additional expense to be reflected within the tax provision in the consolidated statement of operations. Our historical results have been adversely impacted by the impairment of goodwill and the restructuring charge previously discussed as well as other non-recurring events such as integration difficulties involving the acquisition of Nelson. As a result of accounting charges related to these events, the Company has incurred accounting losses on a cumulative basis since 1999. Because SFAS No. 109, Accounting for Income Taxes, requires that we weight historical reported results greater than projections of future income, management increased the valuation allowance on the deferred tax assets to $93.3 million at the end of 2002. As we potentially realize positive earnings in the future, we will reassess the need for this valuation allowance, and based on positive historical earnings and projections that demonstrate all or a portion of the related tax assets will be utilized, we will appropriately reduce the valuation allowance and credit the income tax provision.

Restructuring Costs — In 2002, we recorded a pretax restructuring charge of $21.3 million related to the closing of our Grandville, Michigan facility. Included in this charge are costs associated with closing the facility of $3.3 million and asset impairments of $18.0 million. These charges related to the impairment of property, plant and equipment, lease terminations, employee-related costs and other exit costs. These actions resulted in the net workforce reduction of 225 salaried and hourly employees, the elimination of approximately 224,000 square feet of facilities and the disposal of assets associated with the exited facilities. Shutdown expenses that occurred in 2003 were expensed in accordance with SFAS No. 146. For the year ended December 31, 2003, the Company expensed $3.3 million in cash costs which were not reserved for, of which $2.7 million related to the Grandville restructuring and $0.6 million related to the JLF UK restructuring.

During the fourth quarter of 2003, we announced and implemented a restructuring plan for our U.K. operations. As a result, we recognized a charge to earnings of $2.8 million, which reflects $0.6 million in severance costs in accordance with SFAS No. 146 and asset impairments of $2.2 million that were recognized in accordance with SFAS No. 144. With the transfer of production to other facilities estimated to be completed by the end of 2004), the closing of the Cheshunt, England facility will result in a net workforce reduction of 50 hourly and salaried employees. The closure of the Birmingham, England tooling operation during the first quarter of 2004 resulted in a net workforce reduction of 21 hourly and salaried employees. The 2003 restructuring charge did not cover certain aspects of the activities that will be occurring in future periods, including the movement of equipment, certain severance costs and employee relocation and training. For the three months and six months ended June 30, 2004, we recognized $1.6 million and $1.8 million, respectively, related to these activities. The remaining estimated costs of $3.6 million, principally related to contractual lease payments, will be recognized through the remainder of 2004, culminating with the determination of the cease-use date of the facility, in accordance with SFAS No. 146.

During the three and six months ended June 30, 2004, we recorded incremental restructuring charges that had not been specifically reserved for in as they did not meet the requirements to be accrued under the provisions of SFAS No. 146:

Three months ended June 30, 2004:

•

$0.1 million in conjunction with the Grandville restructuring

•

$1.6 million in conjunction with the U.K. restructurings. These costs were mainly severance related.

Six months ended June 30, 2004:

•

$0.3 million in conjunction with the Grandville restructuring

•

$1.8 million in conjunction with the U.K. restructurings. These costs were mainly severance related.

These restructuring costs, combined with the Grandville impairment charge, were as follows (in thousands):


	Three Months Ended		Six Months Ended
	June 30, 2004		June 30, 2004
Restructuring costs	$	1,721	$	2,056
Grandville impairment charge		—		1,197

Total restructuring and impairment charges	$	1,721	$	3,253

Contingencies — We are involved in various legal proceedings. Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental intervention. Management assesses the probability of loss for such contingencies and accrues a liability and/or discloses the relevant circumstances, as appropriate. Management believes that any liability that may arise as a result of currently pending legal proceedings will not have a material adverse effect on the financial condition or results of operations of the Company taken as a whole.

Comparison of the Three Months Ended June 30, 2004 to the Three Months Ended June 30, 2003

Sales — Sales for the three months ended June 30, 2004 increased by $7.0 million, or approximately 5.3%, to $140.0 million from $133.0 million for the three months ended June 30, 2003. Sales from our North American operations increased to $105.3 million in the 2004 period from $101.2 million in the 2003 period. The North American operations were positively impacted by stronger production of Ford transmission cases, resulting in $7.5 million of higher sales, and by new business with Getrag that accounted for $2.7 million of higher sales. These higher sales were offset by lower production on specific GM platforms.

Sales from our European operations increased to $34.8 million for the three months ended June 30, 2004 from $31.8 million for the three months ended June 30, 2003. Changes in currency rates had the effect of increasing sales by $3.0 million in the 2004 period.

Cost of Sales — Cost of sales for the three months ended June 30, 2004 increased by $4.0 million, to $120.5 million from $116.5 million for the three months ended June 30, 2003. As a percentage of sales, costs decreased to 86.1% in the 2004 period from 87.6% in the 2003 period. Higher aluminum prices, which are passed on to our customers, had the impact of increasing costs as a percentage of sales by 3.1% in the 2004 period. Specific items that offset these cost increases included improvement in labor productivity, reduced supplies costs, lower scrap and improved usage control in a variety of manufacturing expenses.

Selling, General and Administrative Expenses — Selling, general and administrative expenses for the three months ended June 30, 2004 decreased $0.2 million to $3.6 million from $3.8 million for the three months ended June 30, 2003. As a percentage of sales, these costs decreased to 2.6% in the 2004 period from 2.8% in the 2003 period. The decrease is attributable mainly to reduced legal and other professional service expenses and lower compensation expenses as a result of a reduction in workforce.

Restructuring and Impairment Charges — Restructuring and impairment charges for the three months ended June 30, 2004 and 2003 were as follows (in thousands):


		Three Months Ended June 30,
	Business Unit	2004		2003
Restructuring costs	Grandville, MI facility	$	—	$	(58	)
Restructuring costs	JLF UK operations		1,721	—

Total		$	1,721	$	(58	)

Restructuring charges for the three months ended June 30, 2004 related to JLF UK operations was comprised of continuing operating lease payments, employee related costs, professional fees, and other exit costs.

Other Income — During the three months ended June 30, 2003, the Company recorded non-cash income of $2.3 million related to exchange rates on debt denominated in foreign currencies.

Interest Expense — Total interest expense for the three months ended June 30, 2004 was $18.3 million compared to $18.8 million in the three months ended June 30, 2003. The decrease was due to amortization of prepaid interest on a swap agreement ceasing December 31, 2003.

(Benefit) Provision for Income Taxes — Pursuant to the requirements of SFAS No. 109, “Accounting for Income Taxes,” the Company continues to provide a valuation allowance for all U.S. Federal and remaining state deferred tax assets. Additionally, the Company provides a valuation allowance for tax benefits associated with foreign loss carryforwards. For the three months ended June 30, 2004 and 2003, the (benefit) provision for income taxes was $(0.2) million and $29,000, respectively. The 2004 and 2003 (benefit) provision is primarily the result of minimum state and foreign taxes.

Comparison of the Six Months Ended June 30, 2004 to the Six Months Ended June 30, 2003

Sales — Sales for the six months ended June 30, 2004 increased by $10.5 million, or approximately 3.8%, to $287.1 million from $276.6 million for the six months ended June 30, 2003. Sales from our North American operations increased to $216.0 million in the 2004 period from $211.7 million in the 2003 period. The North American operations were positively impacted by stronger production of specific Ford platforms, particularly transmission cases, resulting in $10.9 million of higher sales, and by new business with Getrag that accounted for $3.5 million of higher sales. These higher sales were offset by lower production on specific GM platforms that resulted in $8.6 million lower sales and lower sales to other customers of $1.5 million.

Sales from our European operations increased $6.2 million, from $64.9 million for the six months ended June 30, 2003 to $71.1 million for the six months ended June 30, 2004. Changes in currency rates had the effect of increasing sales by $8.0 million in the 2004 period. These increases were offset by changes in product mix.

Cost of Sales — Cost of sales for the six months ended June 30, 2004 increased by $5.3 million, to $246.7 million from $241.4 million for the six months ended June 30, 2003. As a percentage of sales, costs decreased to 85.9% in the 2004 period from 87.3% in the 2003 period. Higher aluminum prices, which are passed on to our customers, had the impact of increasing costs as a percentage of sales by 2.5% in the 2004 period. These cost increases were offset by improvement in labor productivity, reduced supplies costs, and improved usage control in a variety of manufacturing expenses.

Selling, General and Administrative Expenses — Selling, general and administrative expenses for the six months ended June 30, 2004 decreased $0.6 million to $7.2 million from $7.8 million for the six months ended June 30, 2003. As a percentage of sales, these costs decreased to 2.5% in the 2004 period from 2.8% in the 2003 period. The year over year change is attributable mainly to reduced legal and other professional service expenses and lower compensation expenses as a result of a reduction in workforce.

Restructuring and Impairment Charges — Restructuring and impairment charges for the six months ended June 30, 2004 and 2003 were as follows (in thousands):


		Six Months Ended June 30,
	Business Unit	2004		2003
Asset write-down	Grandville, MI facility	$	1,197	$	—
Restructuring costs	Grandville, MI facility		—		(58	)
Restructuring costs	JLF UK operations		2,056	—

Total		$	3,253	$	(58	)

Restructuring and impairment charges for the six months ended June 30, 2004 consisted of $1.2 million write-down of assets of the Grandville, MI facility and $2.1 million in restructuring costs related to JLF UK operations. The $2.1 million was comprised of continuing operating lease payments, employee related costs, professional fees, and other exit costs.

Other Income — During the six months ended June 30, 2003, the Company recorded non-cash income of $0.6 million related to exchange rates on debt denominated in foreign currencies.

Interest Expense — Total interest expense for the six months ended June 30, 2004 was $36.5 million compared to $37.2 million in the six months ended June 30, 2003. The decrease was due to amortization of prepaid interest on a swap agreement ceasing December 31, 2003.

Provision for Income Taxes — Pursuant to the requirements of SFAS No. 109, “Accounting for Income Taxes,” the Company continues to provide a valuation allowance for all U.S. Federal and remaining state deferred tax assets. Additionally, the Company provides a valuation allowance for tax benefits associated with foreign loss carryforwards. For the six months ended June 30, 2004 and 2003, the provision for income taxes was $0.3 million and $0.1 million, respectively. Provision for both periods is primarily the result of minimum state and foreign taxes.

Liquidity and Capital Resources

Sources of Cash

Our principal sources of cash are cash flow from operations and commercial borrowings. For the six months ended June 30, 2004 and 2003, we generated cash from operations of $9.6 million and $24.1 million, respectively. Before changes in working capital items, we used cash of $1.4 million from operations compared to generating cash from operations of $12.5 million during the 2003 period. Changes in working capital used cash of $11.0 million during the 2004 period compared to generating cash of $11.6 million during the 2003 period. The decreases in working capital resulted from changes in trade receivables, inventory and trade payable levels. Trade receivable balances increased in the 2004 period, consuming $4.1 million of cash compared to a source of cash in the 2003 period of $4.1 million. The receivables increase in the 2004 period was a result of higher sales as compared to the 2003 period. Inventory growth used cash of $2.2 million and $1.2 million in the 2004 and 2003 periods, respectively. Decreased accounts payable used cash of $4.7 million compared to a source of cash of $8.7 million in the 2003 period. This period-over-period decrease was the result of more restrictive credit terms with some of our raw material vendors due to the significant increase in demand in the open markets for all varieties of aluminum.

In December 2002, we amended our senior credit facility and incurred the additional following indebtedness:

	(i)		$95.0 million of a Tranche C term loan under the senior credit facility, which resulted in proceeds of $90.3 million after payment of certain fees to the lenders. The Tranche C term loan is part of our senior credit facility and matures in October 2006. The loan bears interest at the greater of 11% or prime plus 6%, payable quarterly. There are no scheduled principal payments until maturity. All principal payments are subject to an exit fee of 5% of such principal payment. Additionally, there is a 1% annual anniversary fee on all principal amounts outstanding.

	(ii)		$96.4 million secured second lien term loan, which resulted in proceeds of $94.0 million net of debt discount. The secured second lien term loan bears 12% cash interest, payable quarterly, and 7% deferred interest. The principal and deferred interest are due on December 31, 2007. The term loan is secured by a second lien on substantially all of our domestic assets. We also issued warrants to acquire 5% of our authorized Q-1 shares to the lenders of the secured second lien term loans.

Concurrently with the debt issuances, we issued 65,118 shares of Class Q-1 and 11,593 shares of Class Q-2 common stock to a partnership owned by certain of our stockholders for total proceeds of $1.0 million.

The net proceeds from the debt and stock issuances described above were used to retire all tranche A term loan balances of $125.4 million, repay $16.6 million of the tranche B term loan, reduce borrowings under the revolving credit facility by $33.8 million and pay transaction related costs of $9.5 million.

In connection with the financing described above, we also amended our senior credit facility to extend the revolving credit facility availability until June 30, 2006. Our senior credit facility and the secured second lien notes include certain quarterly restrictive financial covenants including minimum interest coverage and maximum leverage ratios. We were in compliance with all financial covenants at June 30, 2004 and December 31, 2003.

At June 30, 2004, our senior credit facility consisted of: (i) a $134.3 million tranche B term loan that matures in October 2006, bears interest at prime plus 3.5% or minimum LIBOR of 2.5% plus 4.5% and has no scheduled principal repayments until maturity; (ii) a $96.9 million tranche C term that matures in October 2006, bears interest at the greater of 11% or prime plus 6% and has no scheduled principal repayments until maturity; and (iii) a $90.0 million revolving credit facility. At June 30, 2004, borrowings outstanding totaled $69.3 million under the revolving credit facility. At June 30, 2004, rates on borrowings under the senior credit facility varied from 5.1% to 11.0%.

Net cash provided by financing activities for the six months ended June 30, 2004 and 2003 totaled $4.0 million and $2.4 million, respectively. During the 2004 period, net cash provided was primarily due to borrowings under our revolving senior credit facility to service debt and fund operations. During the 2003 period, net cash provided was primarily due to cash outlays for the repayment of the unsecured sterling loan notes in February 2003 offset by borrowings under revolving credit facilities.

Uses of Cash

Net cash used in investing activities was $14.3 million for the six months ended June 30, 2004 compared to $27.7 million for the six months ended June 30, 2003. The capital expenditure portion of this was $15.4 million and $27.8 million, respectively, with $1.1 million and $47,000, respectively, in proceeds from the sale of fixed assets representing the difference. Such capital expenditures were primarily for equipment purchases related to new programs and replacement programs, as well as general maintenance. In 2003, we entered into an agreement to sell and lease back two pieces of equipment at our Sheboygan, Wisconsin facilities. The majority of the assets sold in the transaction were purchased during 2003. Net proceeds from the transaction were approximately $3.0 million.

Liquidity

We have a substantial amount of leverage. As of June 30, 2004, we had outstanding indebtedness of approximately $626.6 million. In addition, our cash interest expense will approximate $61.9 million in 2004. However, the December 2002 financing transactions eliminated all scheduled senior debt principal repayments until 2006. As of June 30, 2004, we had borrowing availability under our revolving credit facility and cash on hand of approximately $18.2 million.

We believe that cash generated from operations together with available borrowings under our senior credit facility will provide sufficient liquidity and capital resources to fund working capital, debt service obligations and capital expenditures for the foreseeable future. The assumptions underlying this belief include, among other things, that there will be no material adverse developments in either our business or the automotive market in general. There can be no assurances, however, that these assumptions will turn out to be correct.

At June 30, 2004, our commercial commitments included $3.3 million of standby letters of credit that were available under our senior credit facility.

Seasonality

The Company typically experiences decreased sales and operating income during the third calendar quarter of each year due to production shutdowns at OEMs for model changeovers and vacations.

Effects of Inflation

Inflation affects the Company in two principal ways. First, a portion of the Company’s debt is tied to prevailing short-term interest rates which may change as a result of inflation rates, translating into changes in interest expense. Second, general inflation can impact material purchases, labor and other costs. While the contracts with customers provides for pass through increases in the price of aluminum, the Company

does not have the ability to pass through inflation-related cost increases for labor and other costs. In the past few years, however, inflation has not significantly affected operating results.

Market Risk

The Company is exposed to various market risks arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The strategy for management of currency risk relies primarily upon conducting operations in such countries’ respective currencies and the Company may, from time to time, engage in hedging programs intended to reduce its exposure to currency fluctuations. The counterparties are major financial institutions.

Interest rate risk is managed by balancing the amount of fixed and variable debt. For fixed rate debt, interest rate changes affect the fair market value of such debt but do not impact earnings or cash flows. Conversely for variable rate debt, interest rate changes generally do not affect the fair market value of such debt, but do impact future earnings and cash flows, assuming other factors are held constant. At June 30, 2004, all of the Company’s debt other than the outstanding senior subordinated notes was variable rate debt. Holding other variables constant (such as foreign exchange rates and debt levels), a one percentage point change in interest rates would be expected to have an estimated impact on pre-tax earnings and cash flows for the next year of approximately $3.5 million.

The Company currently does not have any derivative financial instruments in place to manage interest costs, but may consider utilizing such instruments in the future as a means to manage interest rate risk.

A portion of the Company’s sales is derived from manufacturing operations in the UK, Spain and Mexico. The results of operations and the financial position of the operations in these countries are principally measured in their respective currency and translated into U.S. dollars. The effects of foreign currency fluctuations in such countries are somewhat mitigated by the fact that expenses are generally incurred in the same currencies in which sales are generated. The reported income of these operations will be higher or lower depending on a weakening or strengthening of the U.S. dollar against the respective foreign currency.

Certain of the Company’s assets are located in foreign countries and are translated into U.S. dollars at currency exchange rates in effect as of the end of each period, with the effect of such translation reflected as a separate component of stockholders’ investment. Accordingly, the consolidated stockholders’ investment will fluctuate depending upon the weakening or strengthening of the U.S. dollar against the respective foreign currency.

New Accounting Pronouncements

In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. The revised SFAS No. 132 requires additional disclosures concerning the types of plan assets, investment strategy, measurement
date(s), plan obligations, cash flows, and components of net periodic benefit costs recognized during the interim periods. The Company adopted the annual provisions of the revised SFAS No. 132 in 2003 and the interim provisions during 2004.

Forward-Looking Statements

All statements, other than statements of historical fact, included in this Form 10-Q, including without limitation the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company’s management as well as on assumptions made by and information currently available to the Company at the time such statements were made. Various economic and competitive factors could cause actual results to differ materially from those discussed in such forward-looking statements, including factors which are outside the control of the Company, such as risks relating to: (i) the Company’s ability to develop or successfully introduce new products; (ii) general economic or business conditions affecting the automotive industry; (iii) increased competition in the automotive components supply market; and (iv) the Company’s failure to complete or successfully integrate additional strategic acquisitions. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by such cautionary statements.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Market Risk” section of Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 4: CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of our Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13c — 15(e) and 15d — 15(e)) as of June 30, 2004, the end of the three month period covered by this report. The Company’s management, including our Chief Executive Officer and Chief Financial Officer, have concluded, based on that evaluation, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934.

There have been no significant changes in our internal controls over financial reporting during our last quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

PART II. OTHER INFORMATION

J.L. FRENCH AUTOMOTIVE CASTINGS, INC. AND SUBSIDIARIES

Item 1. Legal Proceedings:

None.

Item 2. Change in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities:

None.

Item 3. Defaults Upon Senior Securities:

None.

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

None.

Item 5. Other Information:

None.

Item 6. Exhibits and Reports on Form 8-K:

(a) Exhibits:


31.1		Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

During the quarter for which this report is filed, the Company filed the following Form 8-K Current Reports with the Securities and Exchange Commission:

(i)

Filing on May 5, 2004. The purpose of the filing, under Item 7, was to disclose the Company’s results for the first quarter of 2004.

SIGNATURE

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.


	J.L. FRENCH AUTOMOTIVE CASTINGS, INC.

Date: August 12, 2004	By	/s/ Anthony A. Barone

		Anthony A. Barone
		Chief Financial Officer

EXHIBIT INDEX


31.1		Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

JL FRENCH AUTOMOTIVE CASTING INC 10-Q