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Form 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003

OR

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)

(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.

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 6, 2003 was 11,383 shares of Class A common stock, 7,124 shares of Class A-1 common stock, 20,660 shares of Class B common stock, 5,165 shares of Class C common stock, 7,054 shares of Class D-1 common stock, 7,314 shares of Class D-2 common stock, 3,592 shares of Class E common stock, 14,248 shares of Class P common stock, 65,118,328 shares of Class Q-1 common stock and 11,592,672 shares of Class Q-2 common stock. Registrant’s common equity is not publicly traded.

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

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ITEM 1 — FINANCIAL INFORMATION

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands — Unaudited)

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

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands — Unaudited)

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

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

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands — Unaudited)

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

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands — Unaudited)

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

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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., formerly known as Morris Ashby 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. The Company has 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, 2002.
		Sales and operating results for the three and six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year.
		Certain amounts previously reported in the 2002 consolidated financial statements have been reclassified to conform to the 2003 presentation. Beginning in 2003, the Company began classifying certain plant related expenses as cost of sales. Previously, these costs were classified as selling, general and administrative expenses. These reclassifications had no effect on previously reported net loss or stockholders’ deficit.
2.		COMPREHENSIVE (LOSS) INCOME
		The following presents comprehensive (loss) income, defined as changes in the stockholders’ deficit except changes related to transactions with stockholders of the Company, for the three and six month periods ended June 30, 2003 and 2002 (in thousands):

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3.		GOODWILL
		In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually for impairment, or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives.
		The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company adopted SFAS No. 142 effective January 1, 2002.
		Upon adoption of SFAS No. 142, the Company completed step one of the transitional goodwill impairment test, using a combination of valuation techniques, including the discounted cash flow approach and the market multiple approach, for each of its five reporting units (Sheboygan, the Grandville, Michigan and Glasgow, Kentucky facilities of Nelson, JLF Benton Harbor, JLF UK, and Ansola). Upon completion of the required assessments under SFAS No. 142, it was determined that the fair market value of the goodwill assigned to its Nelson, Benton Harbor, and JLF UK reporting units was lower than the book value of those particular reporting units, resulting in a transitional impairment charge of approximately $202.6 million. This charge represents the entire write-off for the Nelson, Benton Harbor, and JLF UK reporting units’ goodwill. The write-off was recorded as a cumulative effect of a change in accounting principle on January 1, 2002 in the Company’s consolidated statement of operations for the year ended December 31, 2002, which the Company retroactively reflected in the first quarter of 2002 results.
		The Company will also perform impairment tests annually and whenever events or circumstances occur indicating that goodwill or other intangible assets might be impaired.
		The change in the carrying amount of goodwill for the six months ended June 30, 2003, by reporting units, was as follows (in thousands):

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4.		NEW ACCOUNTING PRONOUNCEMENTS
		In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. SFAS No. 144 primarily addresses significant issues relating to the implementation of SFAS No. 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. The Company adopted the provisions of SFAS No. 144 on January 1, 2002. See Note 8 for further discussion.
		In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary item of income and requires that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board No. 30, “Reporting Results of Operations.” This statement also requires sales-leaseback accounting for certain transactions and makes various other technical corrections to existing pronouncements. The Company adopted SFAS No. 145 on January 1, 2003 and, as a result the $13.5 million extraordinary loss recorded in the fourth quarter of 2002 related to the early retirement of debt will be presented as a component of income from continuing operations for the year ended December 31, 2002.
		In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between SFAS No. 146 and EITF No. 94-3 relates to SFAS No. 146’s requirements for the timing of recognizing a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. SFAS No. 146 also increases the disclosure requirements associated with exit or disposal activities. SFAS No. 146 is applied prospectively. On December 31, 2002, the Company announced the closure of its Grandville facility. All accruals related to the closure made in 2002 were in compliance with EITF No. 94-3. Accounting for the exit activities related to this closure are in accordance with SFAS No. 146 commencing in 2003 and any relevant additional liabilities will be recorded when they are incurred. See Note 8 for further discussion.
		In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”. FIN 46 addresses consolidation by business enterprises of variable interest entities and significantly changes the consolidation application of consolidation policies to variable interest entities and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through variable interest entities. FIN 46 applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. FIN 46 applies to the Company’s third quarter for variable interest entities in which the Company holds a variable interest acquired before February 1, 2003. The Company does not hold any variable interest entities.

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		In April 2003, the FASB released SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 clarifies the accounting for derivatives, amending the previously issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, amends the definition of an underlying contract, and clarifies when a derivative contains a financing component in order to increase the comparability of accounting practices under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material impact on the Company’s financial position or results of operations.
		In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 applies specifically to a number of financial instruments that companies have historically presented within their financial statements either as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise will be effective in the quarter ending September 30, 2003. The Company is currently assessing the implementation of SFAS No. 150 specifically as it relates to the $60.0 million of redeemable common stock currently presented between the liabilities and stockholders deficit sections of the condensed consolidated balance sheets. The Company will adopt the provisions of SFAS No. 150 in the third quarter of 2003.
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):

6.		SALE-LEASEBACK
		In March 2002, the Company entered into an agreement to sell five machines and lease the machines back, applying the provisions of SFAS No. 98, “Accounting for Leases”. All of the assets sold in the transaction were purchased during the first quarter of 2002. Upon the commencement of the lease term, the assets were removed from the Company’s balance sheet in accordance with accounting for the machines as an operating lease. Net proceeds from the sale were approximately $4.6 million. The transaction resulted in a gain of approximately $200,000, which was deferred and is being amortized over the lease term. As of June 30, 2003, the present value of the future minimum lease payments was $2.7 million.

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7.		INTEREST RATE SWAP AGREEMENT
		At June 30, 2003, the Company had an interest rate swap agreement on $75 million notional amount of long-term debt. The interest rate swap agreement, which expires in December 2003, has been designated as, and meets the criteria for a cash flow hedge. The fair value of the interest rate swap agreement was a liability of $0.6 million and $1.1 million at June 30, 2003 and December 31, 2002, respectively.
8.		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. With the transfer of production to other facilities, the closing of the Grandville, Michigan facility resulted in a net workforce reduction of 142 hourly and salaried employees (original estimate was 225 as of December 31, 2002). The 2002 restructuring charge did not cover certain aspects of the activities that are occurring in 2003, including the movement of equipment, severance costs and employee relocation and training. Certain of these costs have been recognized in the three months ended June 30, 2003 with the remaining costs to be recognized in future periods as incurred in accordance with SFAS No. 146.
		The Company originally estimated the closure to be completed by the fourth quarter of 2003. On April 1, 2003, the Company distributed notices to all employees notifying them that operations would cease on May 30, 2003. The acceleration of the close was primarily due to available capacity at other lower cost facilities to fulfill customer orders.
		The restructuring also required the Company’s pension and post-retirement medical plan obligations to be re-measured 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 re-measured at December 31, 2002 and again at May 30, 2003 upon the accelerated plant closure. The curtailment gains/losses were as follows:

The pension plan curtailment loss of $155,000 as of December 31, 2002 was recognized as part of the initial 2002 restructuring charge with a subsequent charge against the restructuring accrual in the three-month period ended June 30, 2003 for $148,000. The post-retirement medical plan curtailment gain was not recognized until May 30, 2003 in accordance with SFAS No. 106.

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The accrual of $2.4 million and $3.3 million at June 30, 2003 and December 31, 2002, respectively is recorded in “Accrued liabilities” in the Company’s condensed consolidated balance sheets. The following table provides a rollforward of the restructuring accrual for the six months ended June 30, 2003 (in thousands):

		The Company anticipates utilizing the remaining restructuring reserves as originally intended, with the ultimate disposition occurring during the year ending December 31, 2003.
		During the three months ended June 30, 2003, the Company recorded $726,000 in incremental restructuring charges that had not been specifically reserved for in 2002 in accordance with EITF No. 94-3. These amounts have been recognized as expense as incurred in accordance with SFAS No. 146 and are recorded in “Restructuring charges” along with the $784,000 post-retirement medical plan curtailment gain in the accompanying condensed consolidated statements of operations. The amount was comprised of the following (in thousands):

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. This amount is classified as “Assets held for sale” in the accompanying condensed consolidated balance sheets.

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9.		INCOME TAXES
		As of June 30, 2003, the Company had approximately $15.4 million of state tax credit carry forwards which expire through 2017, $77.7 million of state net operating loss carry forwards which expire between 2014 and 2022, $9.0 million of foreign net operating loss carry forwards which expire in 2017 and $144.0 million of federal net operating loss carry forwards which expire between 2018 and 2022.
		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. In accordance with SFAS No. 109 “Accounting for Income Taxes” and relevant interpretations of SFAS No. 109, a valuation allowance is to be provided when it is more likely than not that the related deferred tax assets will not be utilized. Reported historical income has been adversely impacted by the write-off of goodwill, the restructuring charge and other non-recurring events such as integration difficulties involving the acquisition of Nelson Metal Products. As a result of accounting charges related to these events, the Company has incurred accounting losses on a cumulative basis since 1999. While management anticipates there will be positive income generated over time due to significant new business awards and cost reductions that will result from planned restructuring, the interpretations of SFAS No. 109 place greater emphasis on historical results and verifiable events than projected future results. Because SFAS No. 109 requires the Company to weight historical reported results greater than projections of future income, the Company provided a complete valuation allowance on the deferred tax assets. The Company will continue to assess the need for a valuation allowance on these assets in the future. As a result of the valuation allowance on deferred tax assets, the Company did not provide an income tax benefit for the loss incurred in the first six months of 2003, but did record an income tax provision, primarily related to minimum state net worth, franchise taxes and Mexican asset taxes.
10.		LONG-TERM DEBT
		Long-term senior debt consisted of the following (in thousands):

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		The Company and certain of its 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, 2003, after taking into consideration outstanding borrowings under the revolving credit facility of $54.1 million and outstanding letters of credit of $3.9 million, the Company had borrowing availability under the revolving credit facility and cash on hand of approximately $34.3 million.
		As of June 30, 2003, rates on borrowings under the senior credit facility varied from 5.1% 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 (“Guarantors”), in each case with exceptions for certain foreign subsidiaries and to the extent permitted by applicable law. All tranche principal payments are subject to an exit fee: Tranche B is 1% in 2003, 2% in 2004, and 3% in 2005 and thereafter, Tranche C is 5% for the duration. Additionally, the Tranche C is subject to a 1% annual anniversary fee. As of June 30, 2003, $0.5 million and $1.1 million of the outstanding debt balances represent accrued fees on Tranche B and Tranche C, respectively. As of December 31, 2002, there were no accrued fees in the outstanding debt balances.
		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. As of June 30, 2003 and December 31, 2002, $3.4 million and $0.1 million, respectively, of the outstanding debt balance is accrued interest paid-in-kind. The borrowings and deferred interest are due and payable in December 2007. 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 quarterly restrictive covenants. The Company was in compliance with all financial covenants at June 30, 2003 and December 31, 2002.
		Borrowings under the Tranche B and Tranche C 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, 2003, no such prepayments were required.
		The Company also has outstanding $175 million of senior subordinated notes. These notes mature in May 2009 and bear interest at 11 1/2%.
		In conjunction with the acquisition of JLF UK, unsecured sterling loan notes were issued in exchange for certain shares acquired by the Company. The loan notes were guaranteed by a letter of credit that expired in January 2003 under the Company’s revolving credit facility. Payment was made in February 2003 utilizing the Company’s borrowing capacity under the revolving credit facility and cash flow from operations.
		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.

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11.		SUPPLEMENTAL CASH FLOW INFORMATION
		Supplemental cash flow information (in thousands):

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

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12.		FOREIGN CURRENCY TRANSACTIONS
		The assets and liabilities of all foreign subsidiaries are translated at current exchange rates. 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 with regards 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, 2003 and 2002 (in thousands):

		The Company accrued dividends of $2.4 million on the outstanding Class P common stock for the six months ended June 30, 2002 and these dividends were included in “Other noncurrent liabilities” in the accompanying condensed consolidated balance sheets.
		Concurrently with the December 2002 debt issuances, the Company issued 65.1 million and 11.6 million shares of Class Q-1 and Q-2 common stock to a partnership owned by certain Company stockholders. As a result of the issuance of the shares and amendment to the Company’s Articles of Incorporation in December 2002, the Company concluded that the Class P and Class A-1 accrued dividends will not be paid. Accordingly, the Company credited to retained earnings the accrued Class P cash dividends of $10.0 million and the accrued Class A-1 in-kind dividends of $1.9 million in December 2002. Furthermore, the Class P and A-1 shares will not accrue the aforementioned dividends in the future.
14.		LOSS CONTRACTS
		As a result of the acquisition of Nelson Metal Products Corporation in 1999, the Company identified certain customer contract commitments that existed at the acquisition date that will result in future losses. At December 31, 2002, the liability for those losses was $2.8 million. For the six months ended June 30, 2003, the liability was reduced by $1.7 million; $0.7 million due to sales of products and $1.0 million due to cost reductions from the movement of certain production from the closed Grandville facility on May 30, 2003 to other lower cost facilities and reductions in estimated future shipments. The reserve for loss contracts at June 30, 2003 consisted of a $0.6 million current liability and $0.5 million of long-term liability.

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15.		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.

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

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

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