EXHIBIT 99.1
Blue Diamond Parts, LLC
Index to Financial Statements
December 31, 2008, 2007, and 2006
| Page | ||
Report of Independent Registered Public Accounting Firm | E-3 | |
Balance Sheets | E-4 | |
Statements of Operations | E-5 | |
Statements of Cash Flows | E-6 | |
Statements of Members’ Equity | E-7 | |
Notes to Financial Statements | E-8 |
E-2
Report of Independent Registered Public Accounting Firm
To the Members of Blue Diamond Parts, LLC:
We have audited the accompanying balance sheets Blue Diamond Parts, LLC (the Company) as of December 31, 2008 and 2007, and the related statements of operations, members’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Blue Diamond Parts, LLC as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
The Company is a joint venture between its members, and, as disclosed in the accompanying notes to financial statements, has extensive transactions and relationships with the members. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.
/s/ KPMG LLP
Chicago, Illinois
March 26, 2009
E-3
Blue Diamond Parts, LLC
Balance Sheets
December 31, 2008 and 2007
| 2008 | 2007 | |||||
Assets | ||||||
Cash and cash equivalents | $ | 7,422,490 | $ | 11,814,397 | ||
Accounts receivable from Ford | 40,251,320 | 48,869,476 | ||||
Accounts receivable from Navistar | 835,657 | 2,907,825 | ||||
Prepaid assets | 305,613 | 25,000 | ||||
Property and equipment, net | — | 40,375 | ||||
Total assets | $ | 48,815,080 | $ | 63,657,073 | ||
Liabilities | ||||||
Accounts payable to Navistar | $ | 22,432,010 | $ | 39,875,043 | ||
Accounts payable to Ford | 249,237 | 1,547,843 | ||||
Accrued income taxes | 931,994 | 437,080 | ||||
Accrued liabilities | 3,444,665 | 4,148,317 | ||||
Total liabilities | 27,057,906 | 46,008,283 | ||||
Members’ equity | ||||||
Retained earnings | 19,792,757 | 15,684,373 | ||||
Member contributions | 1,964,417 | 1,964,417 | ||||
Total Members’ equity | 21,757,174 | 17,648,790 | ||||
Total liabilities and Members’ equity | $ | 48,815,080 | $ | 63,657,073 | ||
See accompanying notes to financial statements.
E-4
Blue Diamond Parts, LLC
Statements of Operations
Years Ended December 31, 2008, 2007, and 2006
| 2008 | 2007 | 2006 | |||||||
Revenues: | |||||||||
Net service revenue | $ | 198,912,706 | $ | 186,668,044 | $ | 211,686,954 | |||
Other income | 1,439,508 | 1,718,960 | 1,211,127 | ||||||
| 200,352,214 | 188,387,004 | 212,898,081 | |||||||
Expenses: | |||||||||
Hired services | 7,261,043 | 6,524,492 | 6,764,103 | ||||||
Salary and employee benefits | 4,517,735 | 3,974,471 | 4,197,812 | ||||||
Distribution costs | 5,054,782 | 5,384,243 | 4,785,694 | ||||||
Marketing and promotional expenses | 2,764,035 | 3,485,187 | 2,532,796 | ||||||
Finance charges | 5,503,709 | 10,307,496 | 11,208,688 | ||||||
Systems expense | 340,571 | 317,127 | 430,466 | ||||||
Depreciation expense | 40,375 | 96,900 | 111,313 | ||||||
Other costs | 2,438,121 | 1,703,678 | 1,478,144 | ||||||
Total expenses | 27,920,371 | 31,793,594 | 31,509,016 | ||||||
Income before income taxes | 172,431,843 | 156,593,410 | 181,389,065 | ||||||
Income tax expense | 85,688 | 885,741 | 1,869,502 | ||||||
Net income | $ | 172,346,155 | $ | 155,707,669 | $ | 179,519,563 | |||
See accompanying notes to financial statements.
E-5
Blue Diamond Parts, LLC
Statements of Cash Flows
Years Ended December 31, 2008, 2007, and 2006
| 2008 | 2007 | 2006 | ||||||||||
Beginning cash and cash equivalents | $ | 11,814,397 | $ | 9,090,374 | $ | 3,038,027 | ||||||
Cash flows provided by operating activities: | ||||||||||||
Net income | 172,346,155 | 155,707,669 | 179,519,563 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation expense | 40,375 | 96,900 | 111,313 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable | 10,690,324 | (18,344,677 | ) | 19,703,197 | ||||||||
Prepaid assets | (280,613 | ) | (16,667 | ) | (8,333 | ) | ||||||
Accounts payable | (18,741,639 | ) | 24,583,335 | (24,362,350 | ) | |||||||
Accrued income taxes | 494,914 | (5,449,359 | ) | 1,869,501 | ||||||||
Accrued liabilities | (703,652 | ) | 1,159,362 | 550,245 | ||||||||
Net cash provided by operating activities | 163,845,864 | 157,736,563 | 177,383,136 | |||||||||
Cash flows used in financing activities: | ||||||||||||
Cash distributions to members | (168,237,771 | ) | (155,012,540 | ) | (171,330,789 | ) | ||||||
Net cash used in financing activities | (168,237,771 | ) | (155,012,540 | ) | (171,330,789 | ) | ||||||
Net (decrease) increase in cash and cash equivalents | (4,391,907 | ) | 2,724,023 | 6,052,347 | ||||||||
Ending cash and cash equivalents | $ | 7,422,490 | $ | 11,814,397 | $ | 9,090,374 | ||||||
See accompanying notes to financial statements.
E-6
Blue Diamond Parts, LLC
Statements of Members’ Equity
Years Ended December 31, 2008, 2007, and 2006
| Member Contributions | Retained Earnings | Total | |||||||||
Balance at December 31, 2005 | $ | 1,964,417 | $ | 6,800,470 | $ | 8,764,887 | |||||
Net income | — | 179,519,563 | 179,519,563 | ||||||||
Dividends declared | — | (171,330,789 | ) | (171,330,789 | ) | ||||||
Balance at December 31, 2006 | 1,964,417 | 14,989,244 | 16,953,661 | ||||||||
Net income | — | 155,707,669 | 155,707,669 | ||||||||
Dividends declared | — | (155,012,540 | ) | (155,012,540 | ) | ||||||
Balance at December 31, 2007 | 1,964,417 | 15,684,373 | 17,648,790 | ||||||||
Net income | — | 172,346,155 | 172,346,155 | ||||||||
Dividends declared | — | (168,237,771 | ) | (168,237,771 | ) | ||||||
Balance at December 31, 2008 | $ | 1,964,417 | $ | 19,792,757 | $ | 21,757,174 | |||||
See accompanying notes to financial statements.
E-7
Blue Diamond Parts, LLC
Notes to Financial Statements
December 31, 2008, 2007, and 2006
| (1) | Summary of Significant Accounting Policies |
Nature of Operations
Blue Diamond Parts, LLC (Blue Diamond or the Company) was formed on August 7, 2001 pursuant to the applicable laws of the state of Delaware, as a joint venture (JV) between Ford Motor Company (Ford) and Navistar International Corporation (Navistar) (collectively, the Members), with Ford owning 51% and Navistar owning 49%. The joint venture manages the sourcing, merchandising, and distribution of various spare parts for vehicles the Members sell in North America. These spare parts are primarily for Navistar diesel engines in Ford trucks, commercial truck parts, and certain parts for F650/750 and LCF trucks produced for Ford by Blue Diamond Truck, S.de R.L. de C.V., which is a separate joint venture between Ford and Navistar. Substantially all of the Company’s transactions are between the Company and its Members.
In accordance with the joint venture agreement between the Members, between 2002 and 2005 Navistar contributed an estimated $2.0 million to pay for information systems improvements to provide interface capabilities for the Members’ data systems.
The financial statements and notes are representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied, on a material basis, in the preparation of the financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. At December 31, 2008 and 2007, cash equivalents consisted primarily of deposits in money market funds.
Revenue Recognition
Blue Diamond recognizes revenue at the time products are shipped, which is the point at which risks and rewards of ownership are transferred to the customer.
Pursuant to the guidance in Emerging Issues Task Force Issue (EITF) Issue No. 99-19,Reporting Revenue Gross as a Principal Versus Net as an Agent, the net service revenue in the Company’s statements of operations represents the net results of certain of its activities based upon an analysis of various factors, including the risks and rewards assumed by the Company related to the selling and distribution of parts.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivable are included in net cash provided by operating activities in the statements of cash flows.
No allowance for uncollectible accounts has been provided because management believes that all balances in accounts receivable are collectible.
Property and equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. These assets were depreciated over estimated useful lives ranging from three to five years.
Core Charges
Certain remanufactured parts purchased by the Company for resale require a refundable deposit known as a core charge. A core component is the basic forging or casting, such as an engine block, that can be remanufactured by a certified remanufacturing supplier. Navistar charges Blue Diamond for this core charge, including a mark up, and Blue Diamond passes this charge (including the mark up) on to Ford. Blue Diamond acts only as a conduit for passing these charges between Ford and Navistar, and these charges have no impact on the Company’s statements of operations.
E-8
Retained Earnings
Net income of the JV is distributed to the Members monthly, unless otherwise determined by the Executive Board, provided, however, that the tax distributions would be made in accordance with the JV operating agreement.
Warranty
Each Member provides its customary service parts warranty with respect to parts distributed by the JV.
Description of Various Expenses
The JV’s expenses are initially incurred by the Members and are passed on to Blue Diamond. These expenses are allocated by the Members to the JV based on actual costs incurred. Management believes that this method is reasonable and approximates what the expenses would have been on a stand-alone basis.
Hired services include the costs associated with the outside field sales organization, including personnel costs, travel, administrative, and other expenses. Hired services also include salary-related costs for other non marketing contract personnel.
Salaries and employee benefits include the costs associated with Member personnel assigned to Blue Diamond.
Distribution costs include expenses related to the movement of parts from source to customer, primarily including labor and overhead, freight, and packaging.
Marketing and promotional expenses cover the expenses for various sales and marketing programs and materials including promotional events, brochures and other printed literature, and branded merchandise giveaways.
Finance charges represent the time value of money the Members have invested in working capital and inventory to support Blue Diamond.
Systems expense includes costs incurred to develop or modify IT systems in support of Blue Diamond.
Income Taxes
The Company is a limited liability company that has elected to be taxed as a partnership for U.S. tax purposes. The taxes included in the Company’s statements of operations relate to estimated state taxes payable at the LLC level. The Company’s operating results for federal income tax purposes are included in the tax returns of the Members.
| (2) | Supplemental Cash Flow Information |
Supplemental disclosure of cash flow information is as follows for the years ended December 31, 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | |||||||
Cash paid during the year for: | |||||||||
Interest | $ | 9.4 million | $ | 12.4 million | $ | 14.2 million | |||
Income taxes | .5 million | 6.3 million | — | ||||||
| (3) | Related-Party Transactions |
The Company and its Members have entered into several agreements that govern transactions between the parties.
The Company earns revenues based upon distribution of parts to the Members for ultimate sale to third parties. These revenues are at prices negotiated between the Company and the respective Member. All parts distributed pursuant to these transactions are purchased from the Members at prices negotiated by the Company and the respective Member, generally at cost. The net service revenue included in the accompanying statements of operations primarily represents the difference between the negotiated selling prices to the Members, net of certain costs incurred by the Members, and the negotiated costs of parts purchased from the Members.
In addition, each Member provides administrative and other support services for which the Company is billed directly by the Members. These services include personnel, accounting and treasury, planning and support, insurance, internal auditing, governmental relations, procurement and distribution support, and other services. The Company is invoiced each month for the services provided and pays an amount equal to the Members’ fully accounted and allocated costs, such fee to be calculated without markup except to the extent required to be paid by applicable law. For the years ended December 31, 2008, 2007 and 2006, $27.9 million, $31.8 million and $31.5 million, respectively, were charged for the services purchased from the Members.
| (4) | Subsequent Events |
In January 2009, Ford and Navistar reached agreement to restructure their ongoing business relationship and settle all existing litigation between the companies. As part of that agreement, Navistar will increase its equity ownership of Blue Diamond to 75% (from 49%) and Ford will reduce its equity ownership to 25% (from 51%).
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