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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
MARCH 31, 1997.
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Commission File No. 1-12394
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DETROIT DIESEL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 38-2772023
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
13400 OUTER DRIVE WEST, DETROIT, MICHIGAN 48239-4001
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(Address of principal executive offices, including zip code)
313-592-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
COMMON STOCK $0.01 PAR VALUE 24,698,816 SHARES
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Class Outstanding at May 1, 1997
This report contains 16 pages. The exhibit index is on page 14.
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Statements of Income for the
Three Months Ended March 31, 1997 and 1996 3
Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Independent Accountants' Report 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 9
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 12
SIGNATURE 13
EXHIBIT INDEX 14
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DETROIT DIESEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1997 1996
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Net revenues $ 519.7 $ 478.8
Cost of sales 397.5 366.6
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Gross profit 122.2 112.2
Expenses:
Selling and administrative 83.3 71.7
Research and development 25.5 24.5
Interest 3.2 2.8
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Total 112.0 99.0
Income before income taxes and minority interests 10.2 13.2
Provision for income taxes 3.8 4.6
Minority interests - .3
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Net income $ 6.4 $ 8.3
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Primary net income per share (Note 5) $ .26 $ .34
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See accompanying Notes to Unaudited Consolidated Financial Statements.
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DETROIT DIESEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DEC. 31,
1997 1996
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ASSETS (Unaudited)
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CURRENT ASSETS:
Cash and cash equivalents $ 18.7 $ 3.0
Receivables, net of allowances of $5.6 and $6.1, respectively 327.3 293.1
Inventories 296.5 292.1
Prepaid expenses, deferred charges and other current assets 15.9 19.8
Deferred tax assets 57.5 56.4
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TOTAL CURRENT ASSETS 715.9 664.4
PROPERTY, PLANT AND EQUIPMENT:
Net of accumulated depreciation of $131.5 and $125.3, respectively 280.1 281.5
DEFERRED TAX ASSETS 23.7 26.0
INTANGIBLE ASSETS, NET 98.9 103.9
OTHER ASSETS 36.7 36.8
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TOTAL ASSETS $ 1,155.3 $ 1,112.6
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable $ 9.8 $ 16.6
Accounts payable 312.3 279.9
Accrued expenses 174.5 179.8
Current portion of long-term debt and capital leases 10.0 9.8
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TOTAL CURRENT LIABILITIES 506.6 486.1
LONG-TERM DEBT AND CAPITAL LEASES 128.7 92.6
OTHER LIABILITIES 156.7 165.2
DEFERRED TAX LIABILITIES 31.8 35.4
DEFERRED INCOME 6.3 6.5
MINORITY INTERESTS .5 5.6
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, no shares issued - -
Common stock, par value $0.01 per share, 24.7 million shares issued .2 .2
Additional paid-in capital 217.8 217.8
Retained earnings 115.3 108.9
Additional minimum pension liability (2.5) (2.5)
Currency translation adjustment (6.0) (3.0)
Deferred compensation on restricted stock (.1) (.2)
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TOTAL STOCKHOLDERS' EQUITY 324.7 321.2
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,155.3 $ 1,112.6
=========== ============
See accompanying Notes to Unaudited Consolidated Financial Statements.
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DETROIT DIESEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6.4 $ 8.3
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 9.1 8.0
Changes in assets and liabilities which provided (used) cash:
Accounts and notes receivable (39.8) (14.1)
Inventories (7.9) (14.6)
Prepaid expenses, deferred charges and other current assets 3.6 (21.4)
Deferred taxes (.4) .9
Accounts payable 40.5 33.2
Accrued expenses and other liabilities (10.1) (15.7)
Other assets 2.8 (.3)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4.2 (15.7)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (15.4) (19.0)
Proceeds from sale of property, plant and equipment .2 .1
Investments in and advances to affiliates (2.5) (.2)
Acquisition of subsidiaries (1.8) -
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NET CASH USED IN INVESTING ACTIVITIES (19.5) (19.1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable (6.6) 2.8
Net proceeds from long-term debt 37.8 30.6
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NET CASH PROVIDED BY FINANCING ACTIVITIES 31.2 33.4
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (.2) (.3)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15.7 (1.7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 3.0 5.1
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CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 18.7 $ 3.4
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3.1 $ 2.8
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Income Taxes $ .4 $ .7
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Noncash investing and financing activities:
Issuance of debt to acquire subsidiary $ 7.2
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Capital lease obligations incurred $ 2.0
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Contribution of assets to joint venture $ .5
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Issuance of deferred stock $ .4
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See accompanying Notes to Unaudited Consolidated Financial Statements.
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DETROIT DIESEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - FINANCIAL STATEMENTS.
The accompanying unaudited consolidated financial statements have been
prepared by management and, in the opinion of management, contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial position of Detroit Diesel Corporation and its
majority-owned subsidiaries ("Detroit Diesel" or the "Company") as of
March 31, 1997 and the results of its operations for the three month periods
ended March 31, 1997 and 1996 and its cash flows for the three month periods
ended March 31, 1997 and 1996.
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the
Company's 1996 Annual Report to Stockholders. The results of operations for
the three month period ended March 31, 1997 will not necessarily be indicative
of the operating results of the full year.
NOTE 2 - CASH AND CASH EQUIVALENTS.
Cash equivalents represent short-term deposits with financial institutions
that have maturities of generally less than 90 days. At March 31, 1997, cash
and cash equivalents include approximately $3.5 million which is restricted
for specific capital expenditures in Brazil.
NOTE 3 - INVENTORIES.
At March 31, 1997 and December 31, 1996, inventories (principally using
the first-in, first-out method) consist of the following:
MARCH 31, DEC. 31,
($ in millions) 1997 1996
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(Unaudited)
Productive $ 159.9 $ 161.1
Service parts 98.4 89.8
Remanufactured parts 33.0 34.7
Non-productive 5.2 6.5
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$ 296.5 $ 292.1
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The components of productive inventory are:
Material 47% 48%
Work in process 24% 24%
Finished product 29% 28%
NOTE 4 - INTANGIBLE ASSETS.
Intangible assets include goodwill of $76.3 million at March 31, 1997.
Accumulated amortization of intangible assets as of March 31, 1997 and
December 31, 1996 was $15.1 million and $13.9 million, respectively.
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NOTE 5 - NET INCOME PER SHARE.
Primary net income per share for the three month period ended March 31,
1997 was computed by dividing net income by the weighted average number of
common shares outstanding (24,698,816) plus the weighted average dilutive
effect of the Company's incentive stock options (303) determined using the
treasury stock method.
Primary net income per share for the three month period ended March 31,
1996 was computed by dividing net income by the weighted average number of
common shares outstanding (24,697,316) plus the weighted average dilutive
effect of the Company's incentive stock options (332) determined using the
treasury stock method.
NOTE 6 - COMMITMENTS AND CONTINGENCIES.
The Company is contingently liable for letters of credit and guarantees to
banks aggregating $83.9 million at March 31, 1997.
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INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Detroit Diesel Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
Detroit Diesel Corporation and subsidiaries (the "Company") as of March 31,
1997, and the related condensed consolidated statements of income and cash
flows for the three-month periods ended March 31, 1997 and 1996. These
consolidated financial statements are the responsibility of Company's
management. We were furnished with the report of other accountants on their
review of the interim financial information of VM Motori S.p.A. (a
consolidated subsidiary) for the three-month period ended March 31, 1996, whose
total revenues constituted 13% of consolidated total revenues for this
three-month period.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is an expression of an opinion regarding the consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review and the report of other accountants, we are not aware of
any material modifications that should be made to such condensed consolidated
financial statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for the year then ended (not presented herein); and in our
report dated February 3, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet at December 31, 1996
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
DETROIT, MICHIGAN
April 29, 1997
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The percentage relationships between net revenues and other elements of
the Company's Consolidated Statements of Income for the comparative reporting
periods were:
THREE MONTHS ENDED
MARCH 31,
1997 1996
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Net revenues 100.0% 100.0%
Cost of sales 76.5% 76.6%
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Gross profit 23.5% 23.4%
Expenses:
Selling and administrative 16.1% 14.9%
Research and development 4.9% 5.1%
Interest 0.6% 0.6%
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Total 21.6% 20.6%
Income before income taxes and minority interests 1.9% 2.8%
Provision for income taxes 0.7% 1.0%
Minority interests 0.0% 0.1%
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Net income 1.2% 1.7%
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The Company's net revenues for each of its markets were:
THREE MONTHS ENDED
MARCH 31,
(In millions) 1997 1996
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On-Highway Truck $219 $194
Construction & Industrial 77 87
Automotive 71 52
Coach & Bus 57 51
Power Generation 36 31
Marine 35 38
Military 25 26
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Net revenues $520 $479
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THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
NET REVENUES. Net revenues for the three months ended March 31, 1997 were
$519.7 million, an increase of $40.9 million, or 9% from $478.8 million for the
comparable period of 1996. The increase in net revenues during the first
quarter 1997 reflects a 7% increase in engine unit sales to approximately
39,900 units, combined with growth in service parts and remanufactured
component sales. The increase in engine units reflects growth in demand for
the Company's products in the on-highway heavy-duty truck market as sales of
the Company's products increased nearly 13% over the comparable period of 1996.
Automotive market revenues increased 37% in the first quarter of 1997 as
compared to the first quarter of 1996 reflecting the strength of the Company's
automotive products.
GROSS PROFIT. Gross profit for the three months ended March 31, 1997 was
$122.2 million, or 23.5% of net revenues, compared to $112.2 million, or 23.4%
of net revenues, for the three months ending March 31, 1996, representing an
increase of $10 million. Gross profit as a percent of net revenues during the
first quarter of 1997 was comparable to the first quarter of 1996, and reflects
a combination of a competitive pricing environment offset by favorable changes
in the Company's product sales mix and the benefits of the Company's cost
reduction efforts.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $83.3 million for the three months ended March 31, 1997, compared to $71.7
million for the three months ended March 31, 1996, an increase of $11.6
million. The increase in selling and administrative expenses is due to higher
accruals and other selling expenses in support of increased sales volume,
combined with expenses associated with new product releases.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses of
$25.5 million for the three months ended March 31, 1997 were $1 million higher
than the corresponding period of 1996. This increase reflects the Company's
continued investment in new products.
INTEREST EXPENSE. Interest expense was $3.2 million for the three months
ended March 31, 1997, an increase of $.4 million over the corresponding period
of 1996. The increase in the first quarter of 1997 is attributable to the
Company's higher debt levels in 1997, associated with increased working capital
and increased production volumes.
INCOME TAX EXPENSE. Income tax expense is reported during interim
reporting periods on the basis of the Company's estimated annual effective tax
rate for the taxable jurisdictions in which the Company operates. The Company
estimates that its annual effective tax rate of 1997 is approximately 37%,
which is higher than the 1996 rate, as the Company realized certain benefits
associated with foreign tax credits during 1996, which are not expected to
reoccur in 1997.
NET INCOME. Net income for the three months ended March 31, 1997 was
$6.4 million, a decrease of $1.9 million, or 23%, from $8.3 million for the
comparable period of 1996.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity have been cash
provided by operations, and bank borrowings under various revolving lines of
credit and bank notes, including the Company's $300 million revolving line of
credit, of which approximately $188 million was available as of March 31, 1997.
Additionally, the Company's subsidiary, VM Motori S.p.A. ("VM"), has $60 million
in unsecured, short-term lines of credit with several banks, of which
approximately $55 million was available at March 31, 1997.
Cash provided by operations for the three months ended March 31, 1997 was
approximately $4 million, reflecting the Company's net income and non-cash
charges offset by changes in working capital.
Capital expenditures were $15.4 million for the first three months of 1997
and were used for tooling and machinery and equipment expenditures associated
with increased production volumes and enhancements to facilities. Capital
expenditures during the first quarter include the purchase of a new assembly
facility in Brazil for approximately $3 million in connection with the
production of the Company's automotive products.
The Company is subject to risks of changes in foreign currency exchange
rates due to its operations located outside of the United States, particularly
in Italy, Mexico and Brazil where the Company has subsidiary activities.
During the first quarter of 1997, the decrease in value of the Italian Lira
compared to the U.S. Dollar resulted in unfavorable translation adjustments
relating to the Company's investment in VM.
The Company expects that it will be able to satisfy on-going cash
requirements (including capital expenditures for environmental compliance and
other projects), for the next 12 months and thereafter, with cash flow from
operations, supplemented, if necessary, by borrowings under its $300 million
revolving line of credit.
PROSPECTIVE INFORMATION
The Company expects the North American heavy-duty truck market to remain a
significant part of its business. The overall strength of this market and the
requirements to compete in this market will impact the Company's performance
during 1997. Management anticipates that industry demand in North America will
remain near 1996 levels. Management believes that all of its markets will
experience continued price competition, particularly the North American
heavy-duty truck market.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share." This statement is
effective for financial statements issued after December 15, 1997. The
statement requires companies to present earnings per share on the face of the
income statement into two categories called "Basic" and "Diluted" and requires
restatement of all periods presented. The Company will adopt Statement No. 128
during the fourth quarter of 1997.
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CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" UNDER THE PRIVATE SECURITIES
REFORM ACT OF 1995
This document may include projections, forecasts and other forward-looking
statements about the Company, the industry in which it competes and the markets
it serves. The achievement of such projections, forecasts and other
forward-looking statements is subject to certain risks and uncertainties, fully
detailed in the "Cautionary Statement for purposes of 'Safe Harbor' under the
Private Securities Act of 1995" in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, which is on file with the Securities and
Exchange Commission.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on April 29, 1997. At
this meeting, an election was held (i) to elect four directors to serve
three-year terms expiring at the 2000 annual meeting, and (ii) to ratify the
appointment of Deloitte & Touche LLP as the Company's independent auditors for
the fiscal year ending December 31, 1997. The voting results for each item are
summarized in the table below:
ELECTION OF DIRECTORS: FOR WITHHELD
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Gary G. Jacobs 23,701,334 35,598
Timothy D. Leuliette 23,670,609 66,323
Joseph F. Welch 23,700,582 36,350
R. Jamison Williams, Jr. 23,700,134 36,798
APPROVAL OF AUDITORS: FOR AGAINST ABSTAIN
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Deloitte & Touche LLP 23,706,581 19,048 11,303
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION
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15.1 Letter re: unaudited interim financial information
27 Financial Data Schedule
(b) During the first three months of 1997, the Company filed a Form 8-K
regarding a change in the certifying accountant for the Company's VM
Motori S.p.A. subsidiary dated March 26, 1997, which was amended by
Forms 8-K/A, filed on April 3, 1997 and April 24, 1997, respectively.
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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.
DETROIT DIESEL CORPORATION
Date: May 14, 1997
By: /s/ J. Randall Lawrence
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J. Randall Lawrence
Its: Senior Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
The following constitutes the exhibits to the Quarterly Report on Form
10-Q of the Company for the period ended March 31, 1997:
EXHIBIT NUMBER EXHIBIT
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15.1 Letter re: unaudited interim financial information
27 Financial Data Schedule
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