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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1997 OR
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( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________
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 (IRS Employer Identification No.)
of incorporation or organization)
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)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
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Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 1998 was approximately $183 million.
The number of shares of Common Stock outstanding as of March 1, 1998 was
24,700,566 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in Detroit Diesel Corporation's Proxy Statement in
connection with the Annual Meeting of Stockholders to be held on April 29, 1998,
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A, not later than 120 days after the end of the fiscal year, is
incorporated by reference into Part III (Items 10, 11, 12 and 13) of this Form
10-K.
THIS DOCUMENT CONTAINS 74 PAGES. THE EXHIBIT INDEX BEGINS ON PAGE 58.
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PART I
ITEM 1. BUSINESS.
GENERAL
Detroit Diesel Corporation (the "Company" or "Detroit Diesel") designs,
manufactures, markets, services and provides aftermarket and remanufactured
products for a full range of high performance diesel and alternative fuel
engines, and offers financing through Detroit Diesel Capital
Corporation. The Company offers a complete line of diesel engines from ten to
10,000 horsepower for the on-highway, off-road, automotive and power generation
markets through a worldwide network of more than 2,500 authorized distributors
and dealers. Additionally, the Company sells its engines directly to original
equipment manufacturers ("OEMs") as well as to governmental entities. In 1997,
approximately 65% of the Company's net revenues were derived from sales made
directly to U.S.-based customers, with the balance sold to international
accounts. A portion of U.S. sales were exported as part of equipment built by
U.S. customers.
Detroit Diesel Remanufacturing Corporation, a consolidated subsidiary,
remanufactures two-cycle and four-cycle engines and component parts at
facilities located in Tooele, Utah; Emporia, Kansas; and Cambridge, Ohio.
Remanufactured products are sold directly to the Company's authorized
distributors and are maintained by the Company's Parts Distribution Center in
Canton, Ohio, under the Company's reliabilt(R) tradename.
Detroit Diesel's world headquarters is located in Detroit, Michigan.
The Company operates diesel engine manufacturing plants in Redford, Michigan
and Cento, Italy, as well as engine assembly facilities in Emporia, Kansas
and Curitiba, Brazil. Additionally, the Company operates a worldwide Parts
Distribution Center in Canton, Ohio, complemented by service parts warehouses
located in The Netherlands and in Singapore.
The Company was incorporated in the State of Delaware on November 23,
1987.
PRODUCTS
The following table shows the number of heavy-duty four-cycle and
two-cycle engines, light-duty engines, and other engines sold by the Company
during the periods indicated:
YEARS ENDED DECEMBER 31,
(UNITS) 1997 1996 1995
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Heavy-Duty Four-cycle 71,013 54,514 66,201
Heavy-Duty Two-cycle 12,007 13,282 14,184
Light-Duty 76,946 64,476 63,566
Selected Products / Other 3,225 24,438 22,757
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Total 163,191 156,710 166,708
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The Company offers four four-cycle engine product series: the Series 60
engine, the Series 50 engine, the Series 2000 engine and the Series 4000 engine.
The Series 60 engine is a six-cylinder engine offering 285 to 500 horsepower,
and the Series 50 engine is a four-cylinder version of the Series 60 engine
offering 250 to 350 horsepower. The Series 2000 and Series 4000 engines were
introduced during 1997, the result of the Company's collaborative development
agreements with MTU Motoren- und Turbinen-Union Friedrichschafen GmbH ("MTU").
The Series 2000 and
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Series 4000 engines are available in eight, twelve and sixteen-cylinder
configurations and range from 525 to 1,800 horsepower and 1,180 to 3,650
horsepower, respectively.
The Series 60 engine is the Company's highest volume heavy-duty
engine product, accounting for approximately 41%, 38%, and 40% of the Company's
net revenues in 1997, 1996 and 1995, respectively. The Series 60 engine
is sold primarily in the on-highway market; however, the Company sells this
product in other market applications as well. The Series 50 engine is also
principally sold in the on-highway market but has expanded into other markets
as the Company targets applications that have horsepower requirements below the
Series 60 range. The Series 2000 and Series 4000 engines are designed to
service the Company's off-road market segments. The Series 60, Series 50,
Series 2000 and Series 4000 engines feature integral electronic
controls consisting of an electronic control module and electronic unit
injectors known as Detroit Diesel Electronic Controls ("DDEC").
The Company currently sells four two-cycle engine product series: the
Series 53 engine (79 to 400 horsepower), the Series 71 engine (120 to 1,550
horsepower), the Series 92 engine (260 to 1,450 horsepower) and the Series 149
engine (630 to 2,935 horsepower). DDEC is available with all of these products.
The Company's two-cycle engines are used primarily by customers who
require engines that are able to start and accelerate to full speed quickly,
respond quickly to load shifts, and have lower exhaust temperatures.
VM Motori S.p.A. ("VM" or "DDC Cento"), located in Cento, Italy, is a
wholly owned subsidiary of Detroit Diesel and is a major independent supplier of
diesel engines to the international automotive industry. Its principal product
for this sector is a high-performance 2.5-liter, 4-cylinder, turbocharged diesel
engine, which is currently being used in passenger cars, mini-vans, four-wheel
drive and multi-purpose vehicles. During 1997, the Company expanded its
automotive operations with the addition of an assembly facility in Curitiba,
Brazil.
The Company markets medium-duty diesel engines, built in the United
States by Navistar International Transportation Corporation. The Company's
distribution rights include applications which serve NAFTA and other worldwide
Markets. Within NAFTA, the Company serves the transit bus industry
exclusively, generator set and specialty on-highway applications such as custom
fire trucks, motor homes, refuse vehicles, and trailer spotters. Outside
NAFTA, the Company will serve the same applications, plus commercial on-highway
vehicle manufacturers. The Company also has agreements with AB Volvo
Penta and its North American subsidiary to distribute certain Volvo Penta
marine diesel products in the NAFTA area. Additionally, Detroit Diesel is the
exclusive master distributor for MTU products in the U.S. and a portion of
Canada. The Company and MTU have a license agreement to develop, produce and
distribute specific variations of the MTU MT880 Series of heavy-duty diesel
engines for combat vehicles and military applications manufactured in the U.S.
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The Company sells to licensees completely knocked-down and semi
knocked-down unassembled engine kits for sale within selected markets.
In addition to its diesel-fueled engines, the Company currently offers
certain of its four-cycle and two-cycle engine products fueled by natural gas.
The Company also sells new components and parts and remanufactured components,
parts and engines.
MARKETS AND CUSTOMERS
Detroit Diesel serves the on-highway, off-road, automotive and power
generation markets. Following is a brief description of these markets.
ON-HIGHWAY. The largest market for the Company's engines continues to
be the on-highway market. This market is served primarily by the Company's
four-cycle products. The Series 60 engine is the Company's highest volume engine
for this use, accounting for approximately 92% of the Company's on-highway unit
sales in 1997. The Company's engines are available through all major North
American heavy-duty truck manufacturers. The Company's largest OEM customers for
this market in 1997 were Freightliner Corporation, Navistar International
Transportation Corp., PACCAR Inc. and Volvo Trucks North America Corporation,
which represented approximately 39% of the Company's 1997 consolidated net
revenues. Sales to Freightliner Corporation represented approximately one-half
of this total. The loss of any of these customers could have an adverse effect
on the Company's business.
OFF-ROAD. The off-road market consists of a variety of applications,
including construction, forestry, mining, earth moving, material handling,
stationary mechanical power, petroleum, commercial and pleasure craft marine,
and military combat and tactical vehicles. The Company's two-cycle engines
account for the majority of the Company's sales in this market. However, the
Company's four-cycle product sales are growing rapidly after new introductions
in 1997. The Company's products are available from a variety of industrial
equipment manufacturers and Detroit Diesel distributors worldwide.
AUTOMOTIVE. The automotive market is currently served by DDC Cento. DDC
Cento sells to OEMs state-of-the-art turbo diesel engines that are used in
passenger cars, mini-vans and sport utility vehicles sold for the European
automotive market. The Company's largest customer in this market is Chrysler
Corporation. During 1997, the Company established an automotive engine assembly
facility in Curitiba, Brazil to support Chrysler's operations in that region.
POWER GENERATION. The power generation market requires engines for
electric power generation applications. These are packaged into generator sets,
which include an electric generator together with the generator drive engine.
The Company's two-cycle products account for the majority of its generator drive
engine sales. The Company has entered into an agreement with Kohler Company
("Kohler"), its largest customer for generator set engines, pursuant to which
the Company has agreed to supply virtually all of Kohler's engine requirements
for industrial generator sets of 200kW and above. Detroit Diesel and Kohler
distributors market these products under the Spectrum and Kohler tradenames.
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SALES AND DISTRIBUTION
Sales of the Company's products are made directly to major OEM's and
through a direct sales force and a worldwide network of independently-owned
and company-owned distributors who sell engines, components and parts and
provide service support to local OEMs, dealers and end-users. As of December
31, 1997 there were 29 distributors in North America operating a total of 180
authorized facilities and 70 distributors outside of North America operating
133 authorized facilities. The network of authorized service dealers, which is
generally administered by these distributors, consists of over 2,510 dealers
worldwide, of which approximately 2,230 are in North America. The Company has
a controlling interest in four distributors worldwide and investments in three
other distributors, including one in North America and two overseas.
In support of its distribution system, the Company maintains a
worldwide Parts Distribution Center in Canton, Ohio and overseas regional
warehouses in The Netherlands and in Singapore. In addition, the Company's sales
and service activities are supported by three remanufacturing centers in the
United States that provide remanufactured engines, components and parts. The
Company also operates regional sales offices strategically located to support
customers in all market segments.
Because orders for two-cycle products are ordinarily filled within two
to ten weeks, the Company's customers normally place orders on that basis.
However, certain orders such as military contracts or bus orders may be placed
up to 12 months in advance of required delivery. On-highway OEM customers
normally place firm orders for Series 60 engines only one month in advance of
their next month's production run. However, the Company typically negotiates
annual volume targets with each OEM, and certain programs are used to provide
incentives for the OEMs to purchase their targeted annual volume. Therefore,
while firm orders are only received monthly, there are reasonably anticipated
annual requirements that allow for production planning.
For the reasons stated above, the Company's backlog of firm orders
typically averages two to three months' production, but the Company normally is
aware of reasonably anticipated future orders well in advance of the placement
of a firm order. At December 31, 1997 and 1996, the Company's backlog of firm
orders was approximately $333 million and $217 million, respectively.
The Company's business is moderately seasonal, as its major OEM
customers historically have two- to four-week summer shutdowns of operations
during the third quarter. The Company typically shuts down its own operations
for one week each July, although a shutdown is not expected to occur in 1998.
Additionally, the Company's automotive operations typically shut down
during the month of August. Consequently, the Company's third quarter results
reflect the effects of these shutdowns.
INTERNATIONAL
A significant portion of the Company's products is sold in overseas
markets, either directly as loose engines or indirectly in vehicles and
equipment made by North American OEMs. Sales of automotive products are
concentrated outside of North America. The Company has established foreign sales
subsidiaries in Europe, Asia and Latin America which also function in a service
and product support capacity. Parts warehousing operations are strategically
located in The Netherlands
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and in Singapore, and work in conjunction with the Company's Parts Distribution
Center located in Canton, Ohio to maintain a high level of parts availability to
overseas customers. The Company has also entered into technical assistance and
license agreements in strategic worldwide locations for the assembly and sale of
products and components to meet the needs of local markets, and is pursuing
similar arrangements in other locations. The Company also operates manufacturing
and assembly facilities located in Cento, Italy and Curitiba, Brazil,
respectively.
With the increase in global business activity, the Company is subject
to risks of conducting business abroad, including currency exchange rate
fluctuations, limits on repatriation of funds, compliance with foreign laws and
other economic and political uncertainties that may threaten the Company's
operations or assets located in foreign countries. Changes in foreign currency
exchange rates are generally reported as a component of stockholders'
equity. Changes in the value of the Italian Lira, the Singapore Dollar and the
Brazilian Real will impact the Company's translation adjustments in the future.
Additionally, the Company has entered into transactions denominated in Deutsche
Marks ("DM"). Changes in the value of the DM versus the United States dollar
will affect the Company's results of operations and financial position.
Summary information by geographic area is set forth in "Segments of
Business" in Note 9 of the Notes to the Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are intended to
facilitate its ability to respond to market needs and the technological demands
of the market. Total research and development expenditures were $97.5 million,
$105.2 million and $94.8 million for 1997, 1996 and 1995, respectively. In
addition, the Company conducts research and development that is funded by
various government agency-sponsored projects.
SUPPLIERS
The Company believes it has adequate sources for the supply of raw
materials and components for its manufacturing needs. The Company's suppliers
are located primarily in North America and Western Europe. The Company has
initiated a policy of strengthening its supplier relationships by concentrating
its purchases for particular parts over a limited number of suppliers. The
Company believes that this policy contributes to quality control and cost
control and increases the suppliers' commitment to the Company. Moreover, the
Company relies upon, and expects to continue to rely upon, single source
suppliers for critical components: electronic unit injectors from Diesel
Technology Company, an affiliated company; camshafts and cylinder liners from
Dana Corporation; piston castings from General Motors Corporation, Powertrain
Division; crankshafts from Krupp Hoesch Automotive; valves from Eaton
Corporation; engine retarders from Jacobs Vehicle Systems; turbochargers from
Allied Signal Automotive; and electronic control modules from Motorola, Inc.
Additionally, with the introduction of new products during 1997, the Company
uses several European suppliers for critical components. The loss of any of
these suppliers could have an adverse effect on the Company's business.
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COMPETITION
The heavy-duty diesel engine business is highly competitive. The
Company competes based on price, quality, durability, fuel economy, emissions
compliance, reliability and availability of replacement parts and service, as
well as overall customer service. The distributor network plays a key
competitive role in providing parts and service to end-users. The Company
competes with independent diesel engine manufacturers as well as OEMs that
manufacture engines for their own products. Certain of these OEMs are also
customers of the Company. The Company's principal competitors in international
markets vary from country to country, with local manufacturers generally
predominating each particular market. In North America, Caterpiller Inc. and
Cummins Engine Company, Inc. are the Company's principal competitors in
each of its markets. In its international markets, the Company also competes
with several other manufacturers in Europe and Japan. The Company's principal
competitors are larger than the Company and have substantial resources. There
can be no assurance that competitors will not be able to take actions,
including developing new technology or products, or offering prolonged reduced
pricing, which could adversely affect the Company.
PATENTS AND TRADEMARKS
The Company maintains and has pending various U.S. and foreign patents
and patent licenses relating to its business, which it believes are appropriate
to protect the Company's interest in existing products, new inventions and
product developments. DDC Cento also maintains various U.S. and foreign patents
relating to its business. The Company does not believe any single patent is
material to its business, nor would the expiration or invalidity of any patent
have a material adverse effect on its business or its ability to compete. The
Company is currently involved in two patent infringement lawsuits with its two
principal competitors. Refer to Item 3 for a discussion involving these matters.
The Company owns and maintains U.S. trademark registrations in all of
its principal trademarks, including Detroit Diesel(R), the spinning arrows
design, reliabilt(R) and Series 60(R). Registrations for its principal
trademarks are also maintained in other countries where a significant volume of
its products are sold and such registration is considered appropriate to protect
the Company's proprietary rights. All authorized distributors and
remanufacturing centers are licensed to use these trademarks in the conduct of
their businesses.
EMPLOYEES
At December 31, 1997, the Company (including its distributor and
remanufacturing subsidiaries) employed approximately 6,500 persons worldwide.
Approximately 2,000 of the Company's employees are represented by the
International Union, United Automobile, Aerospace and Agricultural Implement
Workers of America, Local 163 ("UAW") under a four-year collective bargaining
agreement which expires on August 30, 1998. The Company has no reason to believe
it will not reach a satisfactory new agreement with the UAW, although
negotiations have not yet commenced.
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ENVIRONMENTAL MATTERS
PRODUCT COMPLIANCE. The Company's engines are subject to extensive
regulatory requirements. Specific emission standards are imposed by the U.S.
Environmental Protection Agency ("EPA") the California Air Resources Board
("CARB") and foreign regulatory agencies. The Company's ability to comply with
current and future emission requirements is a critical element in maintaining
and improving the Company's position in the diesel engine marketplace and the
inability to comply could have a significant impact on the Company's future
financial results. Substantial resources are included in the Company's capital
and operating budgets to comply with emission requirements.
The Clean Air Act, as amended, establishes the U.S. regulatory
framework for air quality and provides the EPA with authority for promulgating
regulations and setting emission standards for mobile sources, including those
applicable to engines used in heavy-duty, on-highway vehicles, as well as
non-road vehicles and equipment. The federal Clean Air Act allows only the State
of California to have its own standards.
In 1998, the standard for nitrogen oxide ("NOx") emissions from new
engines used in heavy-duty trucks and urban buses was reduced from 5.0 to 4.0
grams per brake horsepower-hour ("g/bhp-hr"). Engines used in trucks and buses
must also meet standards for particulate matter ("PM"), hydrocarbons ("HC"),
carbon monoxide ("CO") and smoke opacity. The current standards for on-highway
diesel engines have been set to remain in effect through 2003. CARB standards
are identical to EPA standards for 1998 through 2003.
The Company has a full line of on-highway engines of various horsepower
ratings and configurations for trucks and buses which are divided into families.
The Company has received EPA and CARB certification for these families for 1998.
During 1997, the EPA and CARB advised heavy-duty engine manufacturers,
including the Company, that engine control strategies employed to
maximize fuel economy, although producing lower levels of emissions such as CO2
and particulate matter, may under certain driving conditions result in NOx
emission levels higher than those specified under the federal test procedure.
The Company's 1998 EPA and CARB certificates for certain on-highway engine
families like those of other engine manufacturers, are conditioned upon the
Company showing that the engines comply with emissions-related requirements.
The Company, as well as other manufacturers, is currently operating under
these circumstances and has responded to EPA information requests relative to
EPA requirements and the conditions placed on the 1998 certificates. The
industry is participating in discussions with the EPA, CARB and the U. S.
Department of Justice to address agency concerns and desire for lower NOx
emissions. The Company believes its prior and current production engines are
in compliance with the applicable laws and regulations and fully supports the
cooperative efforts of industry and government to resolve any issues. Because
these issues are as yet unresolved, predicting the outcome of this matter,
which could involve legal proceedings and possible penalties, is premature at
this time.
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In addition to the diesel-fueled engine families noted above, the
Company also has obtained 1998 EPA and CARB certification of a spark-ignited
Series 50G urban bus engine family which uses natural gas for fuel. Natural gas
engines have NOx and PM emissions which are inherently lower than diesel-fueled
engines and is an important alternative for customers seeking low emission
engines, such as in the urban bus market.
Aside from the procedures required to obtain the new engine
certification, the EPA has three principal means by which to verify compliance
with its emission standards: (1) voluntary emission audit testing by the
manufacturer, (2) Selective Enforcement Audits ("SEAs") in which production
engines are taken off the assembly line and tested in the presence of EPA
compliance officers, and (3) in-use compliance testing in which the EPA removes
engines from in-service vehicles and performs emission tests. To date, the EPA
has relied on manufacturer audits and SEA testing and has not used its authority
to conduct in-use tests. For several years, the Company has maintained an active
program of voluntary emission audits. In 1997, the Company completed six
voluntary emission audits and reported the results to the EPA. In addition, the
EPA conducted SEAs on two of the Company's engine families, and both
demonstrated that the production engines were in compliance with the emission
standards. Successful completion of SEAs is important since upon failure of an
SEA, the EPA has the authority to void the engine family certificate, require
recertification of the engine family and require the manufacturer to recall
non-complying engines.
The EPA also has an emission defect reporting program and may require a
recall if defects are found in an emission-related component on 25 or more
engines. CARB regulations require the Company to report failure of
emission-related components through the monitoring of warranty claims. When the
failure rate reaches a specified level (the greater of 25 component failures or
one per cent of the engines built), reports are required to be filed with the
CARB. A recall may be triggered if failures are found on the greater of 50
engines or two percent of the engines built. The Company has submitted regular
reports of warranty failures to the CARB, but no recalls have been conducted as
a result of these reports.
In 1993, the EPA issued a retrofit/rebuild rule for urban bus engines.
Under the provisions of the rule, certain transit bus operators are required to
use certified emission upgrade equipment when rebuilding their 1993 and earlier
urban bus engines. The Company has certified equipment for use on certain of
these engines which reduces PM emissions by 25%. Currently, the Company is in
the process of certifying equipment for these same engines which will reduce PM
emissions to below 0.10 g/bhp-hr, and expects it to be available for customer
use during 1998.
The EPA also has promulgated regulations for engines used in non-road
vehicles and equipment used in mining, agriculture, industrial, construction and
other uses. The requirements phased in by engine power level categories
beginning in 1996 with engines having rated horsepower ("hp") in the 175 to 750
range. Requirements for 100 to 175 hp
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and 50 to 100 hp took effect in 1997 and 1998. Engines rated above 750
hp will be covered in 2000. The EPA's regulations complement CARB regulations
which went into effect in 1996 for 175 to 750 hp engines and which will apply to
engines over 750 hp in 2000. Since the Clean Air Act amendments preempt
California from regulating non-road engines under 175 hp, these engines are only
covered by EPA regulations. The Company has certified a complete line of
non-road engines with various power ratings to meet EPA and CARB requirements.
The EPA is in the process of developing emission regulations for propulsion and
auxiliary engines over 50 hp used on marine vessels. It is anticipated that
these regulations will be formally proposed in late 1998 and finalized in 1999.
It is uncertain when these rules will take effect. The Company believes that the
emission control technologies developed for non-road engines can be adapted for
use on marine engines and that the Company will be well-positioned to offer a
full line of marine engines that comply with the emission requirements.
Emission regulations for heavy-duty engines are prevalent throughout
the world. In North America, Mexico has adopted, and Canada is expected to
adopt, U.S. emission requirements for on-highway engines. Europe also has
emission requirements for on-highway engines. Since the current regulations
known as "Euro II" took effect in 1995, the Company has obtained certification
authority approval for several Series 50 and Series 60 engine ratings. New and
more stringent "Euro III" regulations have been adopted and will take effect in
2000. Europe is also finalizing regulations applicable to engines used in
non-road mobile machinery. These regulations include two stages of standards
which will phase in by power level beginning in 1999. The standards and phase-in
dates are generally compatible with the EPA's current and proposed standards for
non-road engines. The Company believes it is well-positioned to meet these
regulatory requirements for the product it sells in those markets.
The EPA also regulates noise emissions from heavy-duty vehicles. The
Company works with vehicle OEMs to assure that vehicles with the Company's
engines comply with the noise requirements.
FACILITY COMPLIANCE. The Company believes that the facilities operated
by it and its subsidiaries are in material compliance with applicable
environmental statutes and regulations. Factory operations include machining,
plating, painting, assembly and testing of diesel engines. An environmental
engineering staff under the direction of the Company's manufacturing operations
group monitors air, water and solid waste discharge which result from those
activities. Prior to Detroit Diesel's commencement of operations in January
1988, certain areas of the Company's manufacturing facilities were identified as
requiring remediation to comply with applicable environmental laws. Remediation
activities have been completed with respect to certain matters and are ongoing
for others. The Company operates through subsidiaries an engine manufacturing
facility in Cento, Italy and an engine assembly facility in Curitiba, Brazil.
The Company believes that these overseas facilities are in compliance with
applicable environmental laws and regulations.
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The distributor facilities owned or leased by the Company's
subsidiaries and other distributors are engaged in the ordinary course
of business in activities which involve steam and chemical cleaning of engines
and component parts and the use and handling of petroleum products for the
fueling and lubrication of vehicles, vessels and equipment with diesel engines.
Remanufacturing facilities are engaged in similar activities as well as
assembling and testing new and remanufactured engines. The Company's
remanufacturing subsidiary in Cambridge, Ohio has been named in a third party
claim in a lawsuit with respect to the Fultz Landfill site in Byesville, Ohio.
The Company expects to end its involvement in this matter by making a de
minimis contribution to a settlement fund.
Facilities purchased or leased by the Company are typically subject to
an environmental audit before commencing operations. Several of such facilities
are or have been subject to remedial activities. Amounts expended in such
remediation activities have been within anticipated budgets or covered under
indemnity agreements from prior owner/operators and none have individually or in
the aggregate been considered significant or material to the Company.
ITEM 2. PROPERTIES.
The Company's world headquarters is located in Detroit, Michigan and
its primary manufacturing facility is on adjoining premises located in the
township of Redford, Michigan. The 129-acre site includes almost three million
square feet of manufacturing and storage buildings, engineering laboratory, and
administrative offices. The Company leases this facility on a long-term basis
with a right of first refusal and purchase option. The Company also operates a
575,000 square foot Parts Distribution Center in Canton, Ohio under a lease
which expires in 2005. The Company and its remanufacturing subsidiary lease from
an affiliate a 300,000 square foot manufacturing facility in Tooele, Utah. Its
regional sales offices in North America and Europe are operated from leased
facilities. The Company's automotive operations are located in Cento, Italy and
Curitiba, Brazil. The 19-acre site in Cento contains approximately 500,000
square feet of developed space for manufacturing, engineering and administrative
offices. In 1997, the Company developed a 50,000 square foot automotive engine
assembly facility in Curitiba. The Company believes its facilities are suitable
for its current needs.
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The Company-owned distributors either own or lease their facilities.
The Company also subleases similar facilities in various locations to several
independently owned distributors. The Company's remanufacturing business is
conducted from three facilities: the leased facility in Tooele, Utah and two
owned locations in Emporia, Kansas and Cambridge Ohio. During 1997, the Company
relocated its remanufacturing operations in Sugarland, Texas to the facility in
Tooele, Utah. Lease terms generally range from 5 to 15 years with renewal
options.
ITEM 3. LEGAL PROCEEDINGS.
The Company is presently involved in certain claims and litigation
arising in the ordinary course of its business, including claims relating to the
use of and performance of the Company's products. The Company does not believe
that the resolution of any of these matters will have a material adverse effect
on the Company's results of operations or financial position.
James M. Wright, and five other individuals, filed a class action
lawsuit against the Company and General Motors Corporation in the
Superior Court of New Jersey, Camden County Law Division, on February 15, 1993,
seeking actual and punitive damages based on breach of warranty, fraud,
negligent misrepresentation and violation of the Magnuson-Moss Warranty Act and
the New Jersey Consumer Fraud Act. Plaintiffs initially sought to represent a
class consisting of marine pleasurecraft owners whose vessels were equipped
with Series 92 and 71 industrial engines that were marinized by third parties
after their initial manufacture. The court denied plaintiffs' request to
certify such a class in October 1993, but allowed plaintiffs to refile their
request after conducting discovery. After over two years of discovery,
plaintiffs filed another request to certify an expanded class that included
factory-built marine engines. On November 12, 1996, the court again denied
plaintiffs' request for class certification. Plaintiffs appealed the decision
to deny class certification and on November 21, 1997, the New Jersey Court of
Appeals affirmed the trial court's decision. Plaintiffs motion to appeal to the
New Jersey Supreme Court was denied on March 11, 1998 and plaintiffs now have
filed a motion for reconsideration. The Company believes that it has
meritorious defenses and those proceedings will not have a material adverse
impact on the financial position or results of operations of the Company.
Caterpillar Inc., a competitor of the Company, filed a lawsuit on June
12, 1995 in the U.S. District Court, Northern District of Indiana (South Bend
Division) claiming that the cruise power feature used on certain of the
Company's on-highway engines infringes on a Caterpillar patent. Caterpillar
seeks an injunction and unspecified damages. The Company has responded to the
complaint denying infringement and has filed several motions for summary
judgment of non-infringement and patent invalidity, which are pending with the
court. The Company believes that it has meritorious defenses to the claims and
that the proceedings will not have a material adverse impact on the financial
position or results of operations of the Company.
Cummins Engine Company, Inc., a competitor of the Company, filed a
lawsuit on June 6, 1997 in the U. S. District Court, Southern District of
Indiana (Indianapolis Division) claiming that Detroit Diesel infringes a Cummins
patent which discloses a method and device to generate information and software
to calibrate electronic engine control modules. Cummins seeks an injunction and
unspecified damages. The Company has responded to the complaint denying
infringement and believes it has meritorious defenses to all claims and that the
proceedings will not have a material adverse impact on the financial position or
results of operations of the Company.
As described in more detail under Item 1 - Business-Environmental
Matters, the Company is currently participating with industry in
discussions with the EPA, CARB and the U.S. Department of Justice which could
involve legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets out the names and ages of the executive
officers of the Company, their present positions and their business experience
during the past five years.
Name Age Positions with Company
---- --- ----------------------
Roger S. Penske 61 Chairman and Director
Timothy D. Leuliette 48 Vice Chairman and Director
Ludvik F. Koci 61 Vice Chairman and Director
Charles G. McClure 44 President and Director
Robert R. Allran 55 Executive Vice President-Operations
A. Gordon Clark 76 Senior Vice President-Sales
Robert E. Belts 48 Senior Vice President-Finance
David F. Merrion 61 Senior Vice President-Engineering
Calvin C. Sharp 46 Senior Vice President- Administration
Robert A. Sisk 43 Senior Vice President - Strategic Planning
and Business Development
Paul F. Walters 54 Senior Vice President
John F. Farmer 44 Vice President and General Counsel
Roger S. Penske has been Chairman and a director of the Company since
its organization in 1987. Mr. Penske is also Chairman of the Board and Chief
Executive Officer of Penske Corporation. Penske Corporation is a privately-owned
diversified transportation services company which (among other things) holds,
through its subsidiaries, interests in a number of businesses, including Penske
Truck Leasing Co., L.P., Penske Motorsports, Inc., and Diesel Technology
Company. Mr. Penske is also a member of the Boards of Directors of Philip Morris
Companies Inc., Gulfstream Aerospace Corporation, General Electric Company and
Penske Motorsports, Inc.
Tim Leuliette has been a director and Vice Chairman of the Company
since 1996. Before that, Mr. Leuliette had been President and Chief Executive
Officer of ITT Automotive, Inc., and Senior Vice President of ITT Industries,
Inc. since 1991 and was President and Chief Executive Officer of Siemens
Automotive, L.P. from 1988 to 1991. Mr. Leuliette is also a director and the
President and Chief Operating Officer of Penske Corporation. Mr. Leuliette is a
director of the Detroit Branch of The Federal Reserve Bank of Chicago. His other
affiliations have been with the Leukemia Society of America, Children's Center,
Vision 2000, Arthritis Foundation and Junior Achievement.
Ludvik F. Koci has been a director of the Company since its
organization in 1987 and Vice Chairman since August 1997. Before that, Mr. Koci
had been President and Chief Operating Officer since December 1989. Mr. Koci is
also a director of Wabash National Corporation.
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Charles G. McClure has been President of the Company since August 1997
and a director since November 1997. Before that, Mr. McClure had been
President, and previously Vice President and General Manager, of the Americas
Division of Johnson Controls, Inc. since 1995, and Vice President and Managing
Director of Johnson Controls' Automotive Systems Groups' Europe Operations from
1992 to 1995.
Robert R. Allran was appointed Executive Vice President Operations in
September 1997. Prior to that, Mr. Allran was Senior Vice President-Operations
since the Company's organization in 1987.
A. Gordon Clark has been Senior Vice President-Sales since October
1993. Before that, Mr. Clark had been active in the Company's business in his
capacity as Executive Vice President-Sales of Penske Transportation, Inc. since
1989. Mr. Clark has an employment agreement with the Company that provides an
annual salary of $350,000.
Robert E. Belts was appointed Senior Vice President-Finance in March
1998. Prior to this appointment, Mr. Belts was Vice President and Controller of
Detroit Diesel Corporation since 1995 and Controller since 1987.
David F. Merrion has been Senior Vice President-Engineering since the
Company's organization in 1987.
Calvin C. Sharp was appointed Senior Vice President - Administration in
July 1997. Prior to this appointment, Mr. Sharp was Director - Industrial
Relations and Administration since the Company's organization in 1987.
Robert A. Sisk has been Senior Vice President - Strategic Planning and
Business Development since January 1997. Before that, he was Vice President,
Business Development from 1992 to 1997, and Vice President, Power Systems from
1989 to 1992.
Paul F. Walters has been Senior Vice President since July 1997. Mr.
Walters is also the Executive Vice President-Administration of Penske
Corporation since July 1997. Prior to that, Mr. Walters was Senior Vice
President-Administration of the Company since it's organization in 1987.
John F. Farmer has been General Counsel of the Company since 1988 and a
Vice President of the Company since April 1993. From 1988 to January 1994, Mr.
Farmer was also Secretary of the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
On March 1, 1998, the Company had 24,700,566 shares of its common stock
$.01 par value outstanding, which were owned by 2,605 stockholders of record.
The Company did not pay any dividends in 1997, 1996 or 1995 and does
not anticipate payment of cash dividends on its common stock in the foreseeable
future. The Company's current policy is to retain all future earnings for use in
the operation and expansion of its business. Furthermore, the Company's credit
agreement and lease of its primary production facility and
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administrative offices contain certain restrictions on the payment of dividends
or other distributions.
The common stock has been traded on the New York Stock Exchange under
the symbol "DDC", since October 8, 1993. From that date to December 31, 1997,
the common stock has had a low market price of $15 3/4 per share and a high
market price of $36 7/8 per share.
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCK QUARTERLY MARKET PRICE INFORMATION
- ---------------------------------------------------------------------------------------------------------------------
1997 1996
FISCAL QUARTER HIGH LOW HIGH LOW
- ---------------------------------------------------------------------------------------------------------------------
First 24 1/8 15 3/4 20 3/4 18 1/8
Second 24 15 7/8 20 5/8 18 5/8
Third 26 1/4 21 11/16 20 1/8 18 1/8
Fourth 24 3/16 19 3/4 23 18 1/2
- ---------------------------------------------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected Statement of Income and Balance
Sheet Data for the periods indicated. This table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's Consolidated Financial Statements and related
notes included in Item 8.
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(In millions, except per share and unit amounts) YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA
Net revenues $ 2,163.9 $ 1,962.9 $ 2,087.1 $ 1,662.5 $1,560.1
Gross profit 494.8 449.1 486.3 388.8 348.7
Selling and administrative expenses 338.9 292.1 311.0 259.9 245.0
Research and development expenses 97.5 105.2 94.8 64.4 58.3
Interest expense 12.9 12.1 9.7 4.9 13.1
Special charge - 38.3 - - -
Restructuring charge - - 10.0 - -
Income before income taxes and minority
interests 45.5 1.4 60.8 59.6 32.3
Net income 29.9 3.8(1) 40.1(2) 36.1 20.7
Basic net income per share $ 1.21 $ .16(1) $ 1.62(2) $ 1.52 -
Diluted net income per share $ 1.21 $ .16(1) $ 1.62(2) $ 1.52 -
Pro forma net income per share - - - - $ 1.17
BALANCE SHEET DATA
Total assets $ 1,156.5 $ 1,112.6 $ 1,045.1 $ 711.2 $ 652.7
Long-term debt 73.8 92.6 58.5 - 44.7
Total debt 125.4 119.0 90.1 - 62.3
Total liabilities 811.7 791.4 734.7 433.5 446.1
Total stockholders' equity 344.8 321.2 310.4 277.7 206.6
Working capital 169.3 178.3 140.7 174.1 147.3
OPERATING DATA
Number of manufactured engines sold 159,966 132,272 143,951 73,953 66,909
Income before interest, taxes and minority
interests $ 58.4 $ 13.5 $ 70.5 $ 64.5 $ 45.4
Capital expenditures 63.2 57.8 76.5 37.9 34.6
(1) Includes a $24.9 million, net of tax, special charge for product coverage
and to reduce the value of an investment in Mexico. Excluding this charge
net income would have been $28.7 million, or $1.17 per share.
(2) Includes a $6.7 million, net of tax, restructuring charge to cover costs of
a reduction in salaried personnel. Excluding this charge, net income would
have been $46.8 million, or $1.90 per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of Detroit Diesel Corporation's ("Detroit Diesel" or
the "Company") historical results of operations and of its liquidity and capital
resources should be read in conjunction with the Consolidated Financial
Statements and related notes thereto.
OVERVIEW
Detroit Diesel's net revenues, gross profit and net income increased from 1996
levels. Net revenues in 1997 were $2.16 billion, an increase of 10%,
representing a record for Detroit Diesel. Net income for 1997 increased to $29.9
million, or $1.21 per share, compared to $3.8 million, or $.16 per share in
1996. The Company sold approximately 160,000 manufactured units, an increase of
21% over 1996, including heavy-duty engine shipments of over 83,000 units versus
67,800 units in 1996, an increase of 22%. This sales increase is attributable to
the strength of the North American on-highway heavy-duty truck market and the
Company's increased share of this market in 1997. Additionally, the Company's
subsidiary in Italy, which primarily produces automotive diesel engines, had
record unit volume in 1997 of nearly 77,000 units, an increase of 19% from 1996
levels.
At the beginning of 1997, the Company introduced its new management organization
called Detroit Diesel 2000 ("DDC 2000"), a focused management plan organized
around the Company's major product lines with performance measures aimed at
improving Detroit Diesel's competitive cost position. With this new management
approach Detroit Diesel can focus its core business and product strategies
toward improving overall product quality and Company profitability. An example
of this new focus is the Company's warranty cost reduction efforts during 1997.
Product quality improvements have enabled the Company to significantly reduce
its estimate of warranty costs on engines produced during 1997, and on those it
will produce during 1998, compared to costs incurred in prior years.
Additionally, DDC 2000 has resulted in a more effective deployment of resources
and manufacturing cost reductions.
The Company's ability to achieve sales growth in 1998 depends, in part, on the
level of heavy-duty truck sales in North America and the strength of the
European automotive market. To support growth in the automotive market, the
Company added an assembly facility in Curitiba, Brazil to manufacture automotive
products. The growth of the automotive market, coupled with the launch of the
Series 2000 and Series 4000 engines for the off-road markets during 1997,
provides a strong basis to further diversify the Company's revenue base and
provide sales growth to the Company in 1998 and beyond. Additional growth is
planned for remanufactured products in 1998 as well.
Total assets increased to $1.2 billion in 1997. The Company's debt to total
capitalization ratio improved to 26.7% at the end of 1997 compared to 27.0% at
the end of 1996, despite increases in working capital requirements related to
sales volume and capital investment in 1997.
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth the percentage of net
revenues represented by certain items included in the Company's Consolidated
Statements of Income.
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YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 77.1 77.1 76.7
------- ------- -------
Gross profit 22.9 22.9 23.3
Expenses:
Selling and administrative 15.7 14.9 14.9
Research and development 4.5 5.4 4.5
Interest .6 .6 .5
Special charge - 1.9 -
Restructuring charge - - .5
------- ------- -------
Total 20.8 22.8 20.4
Income before income taxes and
minority interests 2.1 .1 2.9
Provision for income taxes .7 (.1) .9
Minority interests - - .1
------- ------- -------
Net income 1.4% .2% 1.9%
======= ======= =======
The Company's net revenues for each of its market segments during the last three
years were:
(In millions) YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------
On-Highway $1,210 $ 975 $1,117
Off-Road 573 633 614
Automotive 240 222 213
Power Generation 141 133 143
------ ------ ------
Net revenues $2,164 $1,963 $2,087
====== ====== ======
The on-highway market is Detroit Diesel's largest market. Net revenues from this
market represented approximately 56% of total consolidated revenues in 1997,
versus approximately 50% in 1996 and 54% in 1995. The overall gain resulted from
increased Series 60 engine shipments and steady improvement in the Mexican bus
market, along with the Company's increased share of the North American Class 8
heavy-duty truck market at 29.5%, up from 26.3% in 1996.
Net revenue gains in the automotive and power generation markets also occurred
during 1997. The automotive market increased 8% versus 1996, reflecting record
unit volume. Power generation net revenues increased 6% in 1997 as demand for
its higher horsepower engines remains strong.
These increases were partially offset by decreases in net revenues in the
Company's off-road market segment. The discontinued distribution of Perkins
products at the end of 1996 contributed to the decrease. Excluding the effect of
the Perkins business, net revenues remained consistent with 1996. Additionally,
off-road market revenues were affected by the decline in United States defense
spending, partially offset by increases in international shipments and parts and
remanufactured products.
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1997 COMPARED TO 1996
NET REVENUES. Record total 1997 net revenues of $2.16 billion were $201
million higher than 1996 net revenues of $1.96 billion. The increase in net
revenues during 1997 reflects the overall strength of the North American
on-highway heavy-duty truck market, coupled with the strength of the Company's
automotive market. Additionally, service part sales and revenues from the
Company's wholly-owned distributorships and remanufacturing operations increased
5%, while unit sales of Volvo Penta, MTU and Series 30/40 engine products
distributed by the Company grew 11%.
During 1997, the Company sold 65,700 Series 60 engines, an increase of
approximately 16,000 units over 1996 levels, or 32%. This increase was somewhat
offset by the decline in two-cycle unit sales of 10% as customers transition to
new products manufactured by the Company.
GROSS PROFIT. Gross profit for 1997 was $494.8 million, or 22.9% of net
revenues, compared to $449.1 million, or 22.9% of net revenues for 1996, an
increase of $45.7 million. The increase in gross profit is attributable to the
increase in net revenues and unit volume, partially offset by production costs
associated with new product introductions.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses for 1997 were $338.9 million, or 15.7% of net revenues, compared to
$292.1 million, or 14.9% of net revenues for 1996, an increase of $46.8 million.
The increase in selling and administrative expenses is attributable to the
increase in sales volume in 1997, costs associated with new product
introductions, and product shipping costs to meet customer demand.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $97.5 million for 1997 compared to $105.2 million for 1996, a decrease of
$7.7 million, as the Company's investments into new products declined moderately
from 1996 levels associated with the introduction of the Series 2000 and Series
4000 engines.
INTEREST EXPENSE. Interest expense was $12.9 million for 1997 compared
to $12.1 million for 1996, an increase of $.8 million. The increase in interest
expense is due to changes in interest rates and the composition of the Company's
outstanding borrowings throughout 1997.
INCOME TAX EXPENSE. Income tax expense for 1997 was $15.5 million
compared to a tax benefit of $3 million in 1996. The effective tax rate for 1997
was 34.2%. The increase in tax expense during 1997 reflects the higher level of
earnings in 1997, offset by benefits attributable to the Company's foreign sales
corporation and a reduction in corporate tax rates in Italy.
NET INCOME. Net income for 1997 was $29.9 million, compared to $3.8
million for 1996, an increase of $26.1 million. Net income in 1996 included the
after-tax effect of a special charge of $24.9 million.
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1996 COMPARED TO 1995
NET REVENUES. Net revenues for 1996 were $1.96 billion, a decrease of
$124 million, or 6.0%, from $2.09 billion for 1995. The decrease in net revenues
during 1996 reflects lower demand in the North American Class 8 heavy-duty truck
market, which achieved record unit volume during 1995, and the sale of certain
company-owned distributors during 1995. These decreases were somewhat offset by
an increase in parts sales plus higher revenues from remanufactured products and
from automotive products.
During 1996, sales of the Company's Series 60 engine were approximately 49,700
units, a decrease of 12,200 units, or 20%, from 1995 levels. Two-cycle unit
sales declined 6% as sales transitioned to the Company's Series 50 engine, which
increased 6% to nearly 4,600 units. Sales of Volvo Penta, MTU and Series 30/40
engine units distributed by the Company rose 25%.
During 1996, Detroit Diesel and Perkins Group Limited (of Peterborough, England)
elected not to renew their engine supply and distribution agreement. The loss of
revenues and the related earnings associated with this activity was not
significant.
GROSS PROFIT. Gross profit for 1996 was $449.1 million, or 22.9% of net
revenues, compared to $486.3 million, or 23.3% of net revenues for 1995, a
decrease of $37.2 million. The decrease in gross profit reflects the Company's
lower revenues in 1996 combined with a change in sales mix and higher price
incentives in most markets, particularly the on-highway heavy-duty truck market.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses were $292.1 million, or 14.9% of net revenues for 1996, compared to
$311 million, or 14.9% of net revenues, for 1995, a decrease of $18.9 million.
Selling and administrative expense includes warranty, service parts warehousing,
direct selling, sales promotion, advertising and general expenses. The $18.9
million decrease from 1995 reflects lower bonus and profit sharing obligations
and lower expenses due to the sale of certain company-owned distributors during
1995.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $105.2 million, or 5.4% of net revenues for 1996, compared to $94.8
million, or 4.5% of net revenues for 1995, an increase of $10.4 million. The
increase is attributable to continued development of Series 2000 and Series 4000
engines, off-road emissions efforts and automotive engine development.
INTEREST EXPENSE. Interest expense was $12.1 million for 1996, compared
to $9.7 million for 1995, an increase of $2.4 million. The increase in interest
expense is attributed to higher debt levels in 1996 associated with capital
spending and an increase in working capital requirements.
SPECIAL CHARGE. In the second quarter of 1996, the Company recorded a
special charge of $38.3 million, or $24.9 million net of taxes, for product
support and to reduce the value of an investment in Mexico. The charge was used
to cover costs associated with variability in component machining that could
cause engine failures on four-cycle on-highway products under specific
application conditions. The charge reflected the estimated amount of expected
costs for repair or replacement of the affected products. In response to this
situation, management adopted a specific action plan to provide customers with
appropriate product support to correct the
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problem and made changes in the manufacturing and design process to remedy the
situation. Management believes that its proactive approach in handling this
situation has produced favorable results with distributors and customers. As
part of the special charge, the Company also reduced the value of an investment
in Mexico by $2 million.
INCOME TAX EXPENSE. Income taxes for 1996 reflect a credit of $3
million. This compares to income tax expense of $19.8 million during 1995. The
decrease in tax expense is attributable to the Company's lower level of earnings
during 1996, the benefit from the formation of a foreign sales corporation and
the utilization of foreign tax credits.
NET INCOME. Net income for 1996 was $3.8 million, compared to $40.1
million for 1995. Net income for 1996 reflects a $38.3 million, $24.9 million
net of tax, special charge related to product coverage and to reduce the value
of an investment in Mexico. Excluding the special charge, net income was $28.7
million, or $1.17 per share.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended December 31, 1997, Detroit Diesel funded its
working capital, investments and capital expenditure requirements using cash
flows from operations and bank borrowings under various revolving lines of
credit and bank notes.
The Company has a $300 million, unsecured revolving credit agreement with a bank
group, including The Chase Manhattan Bank ("Chase"), as participant and agent
for the other participating banks, which expires in the year 2000. Borrowings
under this agreement bear interest at LIBOR-based rates, prime-based rates and
rates determined by competitive bidding among the participating banks. The
Company had available credit under this agreement totaling approximately $262
million at December 31, 1997. Additionally, the Company has interest rate swap
agreements, which extend through June 2000 and may be extended through June
2001, that effectively convert $50 million of its variable rate debt to fixed
rates ranging from 5.75% to 6.24%.
The Company's subsidiary, DDC Cento, has approximately $52 million in unsecured,
short-term lines of credit with several banks. At December 31, 1997, DDC Cento
had available credit of approximately $29 million under these lines of credit.
The Company generated cash flows from operations of $54.9 million, $22.9 million
and $97.4 million for 1997, 1996 and 1995, respectively, which reflects the
Company's net income, adjusted for non-cash items and changes in working
capital. The Company funded the acquisition of DDC Cento in 1995 using its
revolving credit agreement to borrow approximately $125 million.
Capital expenditures were $63.2 million in 1997, compared to $57.8 million in
1996 and $76.5 million in 1995. Capital expenditures in 1997 were to acquire and
develop a new manufacturing facility in Curitiba, Brazil, to acquire machinery,
equipment and tooling to manufacture the Series 2000 and Series 4000 engines, to
expand and enhance facilities and equipment at the Company's remanufacturing
centers, to update various vendor tooling, and to enhance various company
facilities, systems and equipment. The Company's capital expenditure program for
1998 is approximately $54 million.
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At December 31, 1997, the Company was contingently liable for letters of credit
of approximately $15.1 million and guarantees to banks of approximately $32.1
million. The Company had commitments of approximately $5.6 million to complete
various capital projects.
The Company is in the process of addressing its compliance with Year 2000 issues
related to its manufacturing systems, business computer systems, and software
and hardware products. The Company is in the process of updating its current
systems and software to a new operating environment, and the modifications are
expected to be completed by the end of 1998 to permit sufficient test time
during 1999. The Company is also reviewing its software and hardware products
for compliance and developing appropriate plans for non-compliant products. The
Company believes that the costs associated with Year 2000 compliance will not be
material to its results of operations or financial position, although the total
cost of compliance is not yet known.
The Company is subject to the risk of changes in foreign currency exchange rates
due to operations located outside the United States. Changes in foreign currency
exchange rates are generally reported as a component of stockholders' equity.
Changes in the value of the Italian Lira, the Singapore Dollar and the Brazilian
Real will impact the Company's translation adjustments in the future.
Additionally, the Company has recorded liabilities approximating 34 million in
Deutsche Marks ("DM") as of December 31, 1997. Changes in the value of the DM
versus the United States dollar will affect the Company's results of operations
and financial position.
The Company believes that it will be able to satisfy ongoing cash requirements,
including capital expenditures for environmental compliance and other projects,
for the next twelve months and thereafter, with cash flows from operations,
supplemented as necessary, by borrowings under its revolving credit agreement.
SEASONALITY
The Company's business is moderately seasonal, as its major OEM customers
historically have two- to four-week summer shutdowns of operations during the
third quarter. The Company typically shuts down its own operation for one week
each July. Additionally, the Company's automotive operations typically shut down
during the month of August. Consequently, the Company's third quarter results
reflect the effects of these shutdowns.
EFFECTS OF INFLATION
The Company believes that the relatively moderate inflation rate over the last
few years has not had a significant impact on the Company's revenues or
profitability. The Company does not expect inflation to have any near-term
material effect on the sales of its products, although there can be no assurance
that such an effect will not occur in the future.
FOREIGN OPERATIONS
Approximately 35% of the Company's 1997 net revenues were derived from sales
made to purchasers in foreign countries. Included are the Company's subsidiary
locations in Cento, Italy and Curitiba, Brazil which operate manufacturing
facilities located in these countries. Because
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of these factors, the Company's business is subject to the risks of conducting
business abroad, including currency exchange rate fluctuations, limits on
repatriation of funds, compliance with foreign laws and other economic and
political uncertainties. (See Note 9 of Notes to Consolidated Financial
Statements.)
PROSPECTIVE INFORMATION
The Company anticipates improved financial performance in 1998, based upon
current forecasts, primarily generated through a continued emphasis on cost
reduction activities and operating performance enhancements, combined with
moderate overall revenue growth. Increased shipments of the Series 2000 and
Series 4000 engines in off-road markets are anticipated, while the transition of
certain customer programs within the automotive sector is expected to result in
lower unit volume in 1998. Exposure to the Asia region for the Company is
limited, and primarily concentrated within the power generation market. The
recent economic events in this region may affect the growth of this market for
1998.
The Company's primary production facility located in Michigan employs
approximately 2,000 employees represented by the International Union, The United
Automobile, Aerospace and Agricultural Implement Workers of America, Local 163
("U.A.W.") under a four-year collective bargaining agreement which expires on
August 30, 1998. The Company has no reason to believe it will not reach a
satisfactory new agreement with the U.A.W., although negotiations have not yet
commenced.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards ("SFAS") No. 130, "Comprehensive Income" and No. 131,
"Disclosures about Segments of an Enterprise and Related Information." These
statements are effective for fiscal years beginning after December 15, 1997. The
Company expects the adoption of these accounting standards will not materially
impact its results of operations or financial position.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" UNDER THE PRIVATE SECURITIES
REFORM ACT OF 1995
The Company may, from time to time, make forward-looking statements, including
statements projecting, forecasting or estimating company performance and
industry trends. The achievement of the projections, forecasts or estimates
contained in these statements is subject to certain risks and uncertainties, and
actual results and events may differ materially from those projected, forecasted
or estimated.
The applicable risks and uncertainties include general economic and industry
conditions that affect all international businesses, as well as matters that are
specific to the Company and the markets it serves. For example, the achievement
of projections, forecasts or estimates contained in the Company's
forward-looking statements may be impacted by national and international
economic conditions; compliance with U.S. and foreign treaties, laws and
regulations; and the general risks associated with doing business abroad, such
as currency exchange rate fluctuations, limits on repatriation of funds and
political uncertainties.
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Risks that are specific to the Company and its markets include compliance with
increasingly stringent emissions controls standards applicable to diesel
engines; the cyclical demand for engines, particularly in the on-highway
heavy-duty truck market; competition in pricing and new product development from
larger companies with substantial resources; the concentration of a substantial
percentage of the Company's sales with a few major OEM customers, the loss of,
or change in demand from, any of which could have a material impact on the
Company; increasing diversification in overseas markets and operations; labor
relations at the Company and its customers and suppliers; and the Company's
single-source supply and just-in-time inventory strategies, which could
adversely affect production if a single-source supplier is unable for any reason
to meet the Company's requirements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Refer to "Index to Financial Statements and Schedule" on page 30.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
As to directors, the information under the caption "Proposals-Election
of Directors" and "Board of Directors-Directors Continuing in Office" in the
Proxy Statement furnished in connection with the solicitation by the Board of
Directors of the Company of proxies for the 1998 Annual Meeting of Stockholders
to be held April 29, 1998 (the "Proxy Statement") is incorporated herein by
reference. As to executive officers, information is contained under the caption
"Executive Officers of the Registrant" hereof. Information contained under the
caption "Board of Directors-Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Board of Directors-Director
Compensation" and "Executive Compensation," and Appendix A - Performance Graph
and Appendix C - Executive Compensation, of the Proxy Statement is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Appendix B - Stockholdings" of the
Proxy Statement is incorporated herein by reference, and the information
regarding beneficial owners of more than 5% of the shares of the Company's
common stock of the Proxy Statement is incorporated herein by reference.
24
25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Stockholders" of the Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report:
(a) Financial Statements and Schedule
Refer to the "Index to Financial Statements and Schedule" on page 30
for a list of financial statements and schedule filed as a part of this
report.
(b) Reports on Form 8-K
The Company filed no current reports on Form 8-K with the Securities
and Exchange Commission during the quarter ended December 31, 1997.
(c) Exhibits:
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation, as amended, which is
incorporated by reference from Exhibit 3.1 of the
Company's Registration Statement on Form S-1, File
No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
3.2 Amended and Restated Bylaws of Detroit Diesel
Corporation, which is incorporated by reference from
Exhibit 3.2 of the Company's Registration Statement
on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993,
as amended.
4.1 Termination, Replacement and Restatement Agreement
dated as of June 7, 1995 among Detroit Diesel
Corporation, the Lenders listed on Exhibit A and
Chemical Bank, as agent for the lenders, which is
incorporated by reference from Exhibit 10.1 of the
Company Form 10-Q, File No. 1-12394, filed with the
Securities and Exchange Commission on August 10,
1995.
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26
Exhibit
Number Description of Exhibit
4.1.1 First Amendment to the Termination, Replacement and
Restatement Agreement, dated November 22, 1996, among
Detroit Diesel Corporation, the several banks and
other financial institutions and Chemical Bank, as
agent for the Lenders and the predecessor in interest
of The Chase Manhattan Bank, now acting as agent for
the Lenders, which is incorporated by reference from
Exhibit 4.1.1 of the Company's Annual Report on Form
10-K, File No. 1-12394, filed with the Securities and
Exchange Commission on March 27, 1997.
4.2 Specimen Form of Certificate for Common Stock, which
is incorporated by reference from Exhibit 4.4 of the
Company's Registration Statement on Form S-1, File
No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
Long-term debt instruments and credit facility
agreements of the Detroit Diesel Corporation, under
each of which the authorized debt is equal to less
than 10% of the total assets of the Detroit Diesel
Corporation and its subsidiaries on a consolidated
basis, are not filed as exhibits to this report.
Detroit Diesel Corporation agrees to furnish to the
Commission, upon request, copies of any such unfiled
instruments.
10.1 Form of 1993 Stock Incentive Plan, which is
incorporated by reference from Exhibit 10.1 of the
Company's Registration Statement on Form S-1, File
No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
10.1.1 Form of 1993 Stock Incentive Plan Restricted Stock
Award and Deferred Stock Award, which is incorporated
by reference from Exhibit 10.1.1 of the Company's
Registration Statement on Form S-1, File no.
33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
10.2 Collaboration Agreement, dated as of January 31,
1993, between Detroit Diesel Corporation and
Mercedes-Benz AG, which is incorporated by reference
from Exhibit 10.2 of the Company's Registration
Statement on Form S-1, File No. 33-66760, filed with
the Securities and Exchange Commission on July 30,
1993, as amended.
#10.3 Development Agreement, dated as of December 21, 1992,
between Detroit Diesel Corporation and Mercedes-Benz
AG, which is incorporated by reference from Exhibit
10.3 of the Company's Registration Statement on Form
S-1, File No. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.
26
27
Exhibit
Number Description of Exhibit
#10.4 License Agreement, dated as of March 27, 1993,
between Detroit Diesel Corporation and Mercedes-Benz
AG, which is incorporated by reference from Exhibit
10.4 of the Company's Registration Statement on Form
S-1, File No. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.
10.5 Financing Agreement between Diesel Project
Development, Inc. and Detroit Diesel Corporation,
dated as of April 30, 1993, which is incorporated by
reference from Exhibit 10.5 of the Company's
Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
10.6 Amended and Restated Lease Agreement by and between
Corporate Property Associates 8, L.P., and Corporate
Property Associates 9, L.P. and Detroit Diesel
Corporation, dated as of May 24, 1994, which is
incorporated by reference from Exhibit 10.6 of
Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-79286, filed with
the Securities and Exchange Commission on June 15,
1994.
10.7 Lease Agreement, dated June 30, 1988, between the
Timken Company and Detroit Diesel Corporation, which
is incorporated by reference from Exhibit 10.7 of the
Company's Registration Statement on Form S-1, File
No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
10.8 Agreement for Data Processing Services between
Electronic Data Systems Corporation and the Company,
dated as of January 1, 1988 (as amended and effective
through December 31, 2003), which is incorporated by
reference from Exhibit 10.9 of the Company's
Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
10.9 Master Lease Agreement between Detroit Diesel
Corporation and GECC, dated as of May 26, 1992, which
is incorporated by reference from Exhibit 10.11 of
the Company's Registration Statement on Form S-1,
File No. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.
#10.10 Requirements Agreement between Diesel Technology
Company and Detroit Diesel Corporation, dated
February 17, 1992, which is incorporated by reference
from Exhibit 10.15 of the Company's Registration
Statement on Form S-1, File No. 33-66760, filed with
the Securities and Exchange Commission on July 30,
1993, as amended.
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28
Exhibit
Number Description of Exhibit
10.11 Purchase Agreement between Detroit Diesel Corporation
and Penske Truck Leasing Corporation, dated October
7, 1993, related to purchase of remanufacturing
business, which in incorporated by reference from
Exhibit 10.18 of the Company's Registration Statement
on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993,
as amended.
10.12 Employment Agreement, dated February 1, 1989, between
Penske Transportation, Inc. and A. Gordon Clark, as
amended, assumed by Detroit Diesel Corporation, which
is incorporated by reference from Exhibit 10.19 of
the Company's Registration Statement on Form S-1,
File No. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.
10.12.1 Second Amendment to Employment Agreement dated as of
January 31, 1995, between Detroit Diesel Corporation,
as assignee of Penske Transportation, Inc., and A.
Gordon Clark, which is incorporated by reference from
Exhibit 10.12.1 of the Company's Annual Report on
Form 10-K, File No. 1-12394, filed with the
Securities and Exchange Commission on March 31, 1995,
as amended.
10.13 Restated Share Purchase Agreement by and between
Montagu Private Equity Investments Limited and
others, and Detroit Diesel Corporation, dated January
4, 1995, which is incorporated by reference from
Exhibit 10.13 of the Company's Annual Report on Form
10-K, File No. 1-12394, filed with the Securities and
Exchange Commission on March 31, 1995, as amended.
#10.14 TED Joint Development and License Agreement by and
among Detroit Diesel Corporation and Mercedes-Benz
Aktiengesellschaft and MTU Motoren- und
Turbinen-Union Friedrichschafen GmbH, dated September
5, 1994, which is incorporated by reference from
Exhibit 10.3 of the Company's Quarterly Report on
Form 10-Q, File No. 1-12394, filed with the
Securities and Exchange Commission on November 11,
1994.
#10.15 FEAT Joint Development and License Agreement by and
between MTU Motoren- und Turbinen-Union
Friedrichschafen GmbH and Detroit Diesel Corporation,
dated June 28, 1994, which is incorporated by
reference from Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q, File No. 1-12394,
filed with the Securities and Exchange Commission on
November 11, 1994.
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29
Exhibit
Number Description of Exhibit
10.15.1 Amendment to FEAT Joint Development and License
Agreement by and between MTU Motoren- und
Turbinen-Union Friedrichschafen GmbH and Detroit
Diesel Corporation, dated June 28, 1994, which is
incorporated by reference from Exhibit 10.4.1 of the
Company's Quarterly Report on Form 10-Q, File No.
1-12394, filed with the Securities and Exchange
Commission on November 11, 1994.
10.16 Mutual Distribution Agreement by and between Detroit
Diesel Corporation and MTU Motoren- und
Turbinen-Union Friedrichschafen GmbH, dated June 28,
1994, which is incorporated by reference from Exhibit
10.5 of the Company's Quarterly Report on Form 10-Q,
File No. 1-12394, filed with the Securities and
Exchange Commission on November 11, 1994.
10.17 Joinder Agreement by and between Detroit Diesel
Corporation, Mercedes-Benz AG and Motoren- und
Turbinen-Union Friedrichschafen GmbH, dated July 13,
1994, which is incorporated by reference from Exhibit
10.6 of the Company's Quarterly Report on Form 10-Q,
File No. 1-12394, filed with the Securities and
Exchange Commission on November 11, 1994.
11.1 Statement re: Computation of Per Share Earnings
21.1 List of Subsidiaries
23.1 Consent of Deloitte & Touche LLP
25.1 Powers of Attorney of Directors and Officers of the
Registrant
27 Financial Data Schedule
-------------------
# Does not include certain information as to which the Company has been
granted confidential treatment.
29
30
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995 31
Consolidated Balance Sheets at December 31, 1997 and 1996 32
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 34
Notes to Consolidated Financial Statements 35
Quarterly Financial Data 51
Report of Management 52
Independent Auditors' Report 53
Independent Auditors' Report on Schedule 54
Schedule II - Valuation and Qualifying Accounts 55
30
31
DETROIT DIESEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------
Net revenues $ 2,163.9 $ 1,962.9 $ 2,087.1
Cost of sales 1,669.1 1,513.8 1,600.8
----------- ----------- -----------
Gross profit 494.8 449.1 486.3
Expenses:
Selling and administrative 338.9 292.1 311.0
Research and development 97.5 105.2 94.8
Interest 12.9 12.1 9.7
Special charge (Note 2) - 38.3 -
Restructuring charge (Note 17) - - 10.0
----------- ----------- -----------
Total 449.3 447.7 425.5
Income before income taxes and minority interests 45.5 1.4 60.8
Provision for income taxes 15.5 (3.0) 19.8
Minority interests .1 .6 .9
----------- ----------- -----------
Net income $ 29.9 $ 3.8 $ 40.1
=========== =========== ===========
Basic net income per share (Note 3) $ 1.21 $ .16 $ 1.62
=========== =========== ===========
Diluted net income per share (Note 3) $ 1.21 $ .16 $ 1.62
=========== =========== ===========
The accompanying notes are an integral part of this statement.
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DETROIT DIESEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
DECEMBER 31,
- ------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 3.2 $ 3.0
Accounts and notes receivable, net 318.8 293.1
Inventories 305.8 292.1
Prepaid expenses, deferred charges and other current assets 13.0 19.8
Deferred tax assets 52.1 56.4
---------- ----------
Total Current Assets 692.9 664.4
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 78.7 69.4
Machinery, equipment and tooling 373.3 337.4
---------- ----------
Total Property, Plant and Equipment 452.0 406.8
Less: accumulated depreciation 153.7 125.3
---------- ----------
Net Property, Plant and Equipment 298.3 281.5
---------- ----------
DEFERRED TAX ASSETS 18.4 26.0
INTANGIBLE ASSETS, NET 104.8 103.9
OTHER ASSETS 42.1 36.8
---------- ----------
TOTAL ASSETS $ 1,156.5 $ 1,112.6
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 44.7 $ 16.6
Accounts payable 297.0 279.9
Accrued expenses 175.0 179.8
Current portion of long-term debt and capital leases 6.9 9.8
---------- ----------
Total Current Liabilities 523.6 486.1
---------- ----------
LONG-TERM DEBT AND CAPITAL LEASES 73.8 92.6
OTHER LIABILITIES 182.5 165.2
DEFERRED TAX LIABILITIES 25.3 35.4
DEFERRED INCOME 5.9 6.5
MINORITY INTERESTS .6 5.6
COMMITMENTS AND CONTINGENCIES (NOTE 13)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share: authorized
10 million shares; no shares issued - -
Common Stock, par value $.01 per share: authorized
40 million shares; 24.7 million shares issued and outstanding .2 .2
Additional paid-in capital 224.2 217.8
Retained earnings 138.8 108.9
Additional minimum pension adjustment (9.7) (2.5)
Currency translation adjustment (8.7) (3.0)
Deferred compensation on restricted stock - (.2)
---------- ----------
Total Stockholders' Equity 344.8 321.2
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,156.5 $ 1,112.6
========== ==========
The accompanying notes are an integral part of this statement.
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DETROIT DIESEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONAL CURRENCY
COMMON ADDITIONAL MINIMUM TRANSLATION
COMMON STOCK PAID-IN RETAINED PENSION ADJUSTMENT
STOCK AMOUNT CAPITAL EARNINGS ADJUSTMENT AND OTHER TOTAL
- --------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1995 24.7 $ .2 $ 217.4 $ 65.0 $ (4.9) $ 277.7
Net income 40.1 40.1
Additional minimum pension
adjustment, net of taxes
of $3.3 million $ (6.7) (6.7)
Currency translation (1.1) (1.1)
adjustment
Deferred compensation on
restricted stock - - .4 .4
---------- ---------- ------------ --------- ---------- ---------- ------------
Balance at December 31, 1995 24.7 .2 217.4 105.1 (6.7) (5.6) 310.4
Issuance of common stock .4 .4
Net income 3.8 3.8
Reduction in minimum pension
adjustment, net of taxes
of $1.9 million 4.2 4.2
Currency translation
adjustment 2.0 2.0
Deferred compensation on
restricted stock - - .4 .4
---------- ---------- ------------ --------- ---------- ---------- -----------
Balance at December 31, 1996 24.7 .2 217.8 108.9 (2.5) (3.2) 321.2
Net income 29.9 29.9
Transfer of income tax
benefits 6.4 6.4
Additional minimum pension
adjustment, net of taxes
of $3.4 million (7.2) (7.2)
Currency translation
adjustment (5.7) (5.7)
Deferred compensation on
restricted stock .2 .2
---------- ---------- ------------ --------- ---------- ---------- -----------
Balance at December 31, 1997 24.7 $ .2 $ 224.2 $ 138.8 $ (9.7) $ (8.7) $ 344.8
========== ========== ============ ========= ========== ========== ===========
The accompanying notes are an integral part of this statement.
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DETROIT DIESEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29.9 $ 3.8 $ 40.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 39.4 33.8 33.1
Gain on sale of property, plant and equipment (.6) (1.8) -
Exchange gains - (4.0) -
Changes in assets and liabilities which
provided (used) cash:
Accounts and notes receivable (34.5) (7.0) (19.4)
Inventories (19.7) (8.2) (42.6)
Prepaid expenses, deferred charges and other current assets 6.3 (8.2) (.6)
Deferred taxes 8.8 (5.8) (6.4)
Accounts payable 27.0 1.6 57.1
Accrued expenses and other liabilities 13.2 21.0 39.4
Intangible and other assets (14.9) (2.3) (3.3)
------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 54.9 22.9 97.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (63.2) (57.8) (76.5)
Proceeds from sale of property, plant and equipment 1.3 12.9 -
Investments in and advances to affiliates (2.5) (5.6) (1.9)
Proceeds from sale of investment - - 10.0
Acquisition of consolidated subsidiaries (8.0) - (129.9)
Proceeds from sale of subsidiaries 4.7 - 27.5
------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES (67.7) (50.5) (170.8)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable 30.0 (13.1) 17.1
Proceeds from revolving lines of credit - 135.0 -
Payments on revolving lines of credit - (145.0) -
Net proceeds from (payments on) other long-term borrowings (17.1) 48.1 52.3
------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12.9 25.0 69.4
EFFECT OF EXCHANGE RATE CHANGES ON CASH .1 .5 (2.2)
------- -------- ---------
NET INCREASE (DECREASE) IN CASH .2 (2.1) (6.2)
CASH AT THE BEGINNING OF THE PERIOD 3.0 5.1 11.3
------- -------- ---------
CASH AT THE END OF THE PERIOD $ 3.2 $ 3.0 $ 5.1
======= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 12.5 $ 12.5 $ 9.2
======= ======== =========
Income taxes $ 5.0 $ 8.3 $ 26.7
======= ======== =========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Issuance of debt to acquire subsidiary $ 7.2 $ - $ -
======= ======== =========
Reserve transferred to equity $ 6.4 $ - $ -
======= ======== =========
Capital lease obligations incurred $ .2 $ 2.3 $ -
======= ======== =========
Other $ - $ 2.4 $ 2.3
======= ======== =========
The accompanying notes are an integral part of this statement.
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DETROIT DIESEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Detroit Diesel Corporation (the "Company," "Detroit Diesel" or "DDC") is engaged
in the design, manufacture, sale and service of heavy-duty diesel and
alternative fuel engines, automotive diesel engines, and engine-related
products, and provides financing through Detroit Diesel Capital Corporation. The
Company offers a complete line of diesel engines from ten to 10,000 horsepower
for the on-highway, off-road, automotive, and power generation markets. Detroit
Diesel services these markets directly and through a worldwide network of more
than 2,500 authorized distributors and dealers. DDC is a QS-9000 certified
company.
Detroit Diesel's major shareholders are Penske Corporation (45.5%), a closely-
held diversified transportation services company, Diesel Project Development,
Inc. ("DPD") (20%) and public stockholders (34.5%).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. Affiliated companies in which the Company owns
at least 20% of the voting securities are accounted for using the equity method.
All significant intercompany transactions have been eliminated in consolidation.
FOREIGN CURRENCY
The Company is subject to the risk of changes in foreign currency exchange rates
due to operations located outside the United States. Changes in foreign currency
exchange rates are generally reported as a component of stockholders' equity.
Changes in the value of the Italian Lira, the Singapore Dollar and the Brazilian
Real will impact the Company's translation adjustments in the future.
Additionally, the Company has recorded liabilities approximating 34 million in
Deutsche Marks as of December 31, 1997.
ACCOUNTS AND NOTES RECEIVABLE
The accounts and notes receivable are net of an allowance of $4.4 million and
$6.1 million at December 31, 1997 and 1996, respectively. The carrying value of
accounts and notes receivable approximate fair value.
INVENTORIES
Substantially all inventories are stated at the lower of cost or market, with
cost determined by the first-in, first-out (FIFO) method.
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36
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is computed
using the straight-line method. The estimated service lives range from 5 to 35
years for buildings and improvements and 5 to 28 years for machinery, equipment
and tooling, and leasehold improvements.
INTANGIBLE ASSETS
The Company amortizes the excess of cost over fair value of net assets acquired
(Goodwill) on a straight-line basis over periods ranging from 5 to 40 years and
other intangible assets over periods ranging from 3 to 30 years. Intangible
assets are reported net of accumulated amortization of $18.8 million and $13.9
million at December 31, 1997 and 1996, respectively. Approximately 59% and 78%
of the Company's unamortized goodwill and other intangibles at December 31, 1997
and 1996, respectively, relates to VM Motori S.p.A. ("DDC Cento"), which was
acquired in 1995. The Company periodically evaluates the carrying value of its
intangible assets for impairment. This evaluation is based principally on the
projected, undiscounted cash flows generated by the related tangible assets.
INCOME TAXES
Deferred tax assets and liabilities reflect the impact of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
PRODUCT COVERAGE PROGRAMS
Estimated costs of product coverage, including warranty, are charged to
operations at the time the Company sells its products. Such costs were $103.3
million, $129.6 million, and $88.0 million in 1997, 1996 and 1995, respectively.
Product coverage costs in 1996 reflect a special charge of $36.3 million. This
charge related to costs associated with variability in component machining
affecting a limited number of engines used in specific duty cycles. In addition
to amounts included in accrued expenses (Note 7), other liabilities include
$62.4 million and $75.6 million at December 31, 1997 and 1996, respectively, for
these programs.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS
The Company records postretirement healthcare benefit costs during the period
employees provide service to the Company. The Company funds its postretirement
healthcare benefit obligation as benefits are paid. The Company amortizes the
initial accumulated benefit obligation over a 20 year period (Note 15). The
Company provides other postemployment benefits to substantially all U.S.
employees. Postemployment benefits offered include disability benefits,
supplemental unemployment benefits, workers' compensation benefits, and
continuation of health care benefits and life insurance coverage. The Company
records
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37
postemployment benefit costs at the time the employees leave active service. The
costs of providing postemployment benefits are not significant.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company may enter into derivative financial instruments to manage its
exposure to fluctuations in interest and currency exchange rates. Derivative
financial instruments are not used for speculative or investment purposes. The
Company is exposed to market risks arising from changes in interest and foreign
currency exchange rates. Interest rate swap agreements that effectively change
the interest rate characteristics of existing debt are accounted for as an
adjustment to interest expense.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities reported
therein. Actual results reported in future periods may differ from these
estimates.
LONG LIVED ASSETS
The Company evaluates the carrying value of its long lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may be impaired. During 1996, the Company reduced the carrying value of
an investment in Mexico by $2 million, which is included as part of the special
charge.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform with
the classifications used in 1997.
3. NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 replaces the presentation of
primary earnings per share ("EPS") and fully diluted EPS with a presentation of
basic EPS and diluted EPS. The effect of adoption of SFAS No. 128 did not
significantly impact the presentation of EPS for the current or prior
years.
Basic net income per share represents net income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. For the years ended December 31, 1997, 1996 and 1995 the
weighted average number of shares outstanding were 24,698,402 shares, 24,697,316
shares and 24,676,696 shares, respectively.
Diluted net income per share represents net income available to common
stockholders divided by the weighted average number of common shares
outstanding plus the average dilutive effect of the Company's incentive stock
options outstanding (See Note 18) during the period calculated using the
treasury stock method. The dilutive effect of the Company's incentive stock
options for the years ended December 31, 1997, 1996 and 1995 were 81,379
shares, 344 shares and 16,722 shares, respectively.
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38
4. INVENTORIES
At December 31, 1997 and 1996, inventories consist of the following:
(In millions)
- --------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------
Productive $ 178.4 $ 161.1
Service parts 90.7 89.8
Remanufacturing parts 30.4 34.7
Non-productive 6.3 6.5
--------- ---------
Total $ 305.8 $ 292.1
========= =========
The components of productive inventory are:
Raw materials 49% 48%
Work in process 24% 24%
Finished product 27% 28%
5. INTANGIBLE ASSETS
At December 31, 1997 and 1996, intangible assets, net of accumulated
amortization, consist of the following:
(In millions)
- --------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------
Goodwill $ 65.1 $ 80.0
Pension plan intangible asset 11.4 11.6
Other 28.3 12.3
--------- ---------
Total $ 104.8 $ 103.9
========= =========
6. NOTES PAYABLE
The Company and its subsidiaries have $44.7 million and $16.6 million in debt
under lines of credit and bank loan agreements at December 31, 1997 and 1996,
respectively. The weighted average interest rate at December 31, 1997 was 7.0%.
The amount available for borrowing under these lines of credit and bank loan
agreements was approximately $44 million at December 31, 1997. At December 31,
1997, approximately $22 million of notes payable is denominated in Italian Lira.
The carrying value of notes payable approximates fair value.
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39
7. ACCRUED EXPENSES
At December 31, 1997 and 1996, accrued expenses consist of the following:
(In millions)
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
Policy and warranty $ 61.5 $ 72.3
Accrued payroll and related taxes 32.5 31.8
Other 81.0 75.7
--------- ---------
Total $ 175.0 $ 179.8
========= =========
8. LONG-TERM DEBT AND CAPITAL LEASES
At December 31, 1997 and 1996, long-term debt and capital leases consist of the
following:
(In millions)
- -------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Unsecured, $300 million revolving line of credit bearing interest at
7.8%, expires in 2000 $ 32.7 $ 80.9
Unsecured lines of credit with a weighted average interest rate of 7.8%,
expires in 1998 21.7 7.4
Term loan with a related party bearing interest at 9.5%, due in 1998 1.5 -
Interest-free Brazilian government loan maturing in 2007 6.8 -
Various loans with a weighted average interest rate of 7.5%, due in
varying installments from 2001 through 2010 13.4 6.8
Capital leases with a weighted average interest rate of 9.5%, due in
varying installments through 2001 4.6 7.3
-------- --------
Total long-term debt and capital leases 80.7 102.4
Less current portion 6.9 9.8
-------- --------
Total $ 73.8 $ 92.6
======== ========
Principal repayment requirements on long-term debt and minimum lease payments on
capitalized leases are as follows:
(In millions)
- ---------------------------------------------------------------------------
CAPITAL
DEBT LEASES TOTAL
- ---------------------------------------------------------------------------
1998 $ 4.9 $ 2.4 $ 7.3
1999 22.5 2.1 24.6
2000 34.5 .7 35.2
2001 1.8 - 1.8
2002 1.6 - 1.6
2003 and thereafter 10.8 - 10.8
------- ------- -------
Total payments 76.1 5.2 81.3
Less: Amount representing interest - .6 .6
------- ------- -------
Total long-term debt $ 76.1 $ 4.6 $ 80.7
======= ======= =======
39
40
The Company has a $300 million, unsecured variable rate credit facility which
expires in the year 2000. This facility has several covenants which require the
maintenance of a certain level of net worth, restrict the Company's ability to
incur additional debt and require maintenance of minimum interest coverage and
leverage ratios. At December 31, 1997, the Company had approximately $262
million available under its revolving lines of credit. At December 31, 1997,
approximately $38 million of long-term debt is denominated in Italian Lira. The
carrying value of long-term debt approximates fair value.
The Company has interest rate swap agreements, which extend through June 2000
and may be extended through June 2001, that effectively convert $50 million of
its variable rate debt to fixed rates ranging from 5.75% to 6.24%.
The Company is exposed to risk of loss on the interest rate swap agreement in
the event of nonperformance by The Chase Manhattan Bank ("Chase"). Such risk
of loss is limited to amounts accrued by the Company as a receivable from
Chase. The Company believes the risk of nonperformance is remote.
9. SEGMENTS OF BUSINESS
The Company operates in the single industry segment of design, manufacture, sale
and service of heavy-duty diesel and alternative fuel engines, automotive diesel
engines, off-road diesel engines and engine parts. Manufacturing activities are
carried out in the United States, Europe and Brazil. Major distribution centers
are located in the United States, Europe and Asia to support sales to all areas
of the world.
Financial information is listed below by geographic area. Transfers to other
geographic areas primarily represent intercompany export sales of United
States produced goods and are accounted for by transfer prices based upon
business conditions, distribution costs and other costs incurred in marketing
products. Operating profit is total revenues less operating expenses and
excludes interest expense, income taxes and minority interests. Operating profit
for each area may not be a meaningful representation of each area's contribution
to consolidated operating results because of the significant sales of products
from the Company's domestic operations to foreign operations. Identifiable
assets are those assets identified with the operations in each geographic area.
40
41
(In millions) YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
NET REVENUES
United States:
Domestic customers $ 1,411.9 $ 1,298.9 $ 1,402.2
Export customers 339.3 281.5 304.8
Transfers to other
geographic areas 92.2 83.8 88.2
----------- ----------- -----------
Total United States 1,843.4 1,664.2 1,795.2
Europe/Middle East/Africa 360.8 331.9 311.2
Other 51.9 50.6 68.9
Eliminations (92.2) (83.8) (88.2)
----------- ----------- -----------
Total $ 2,163.9 $ 1,962.9 $ 2,087.1
=========== =========== ===========
OPERATING PROFIT
United States $ 33.5 $ (9.8)(1) $ 54.4(2)
Europe/Middle East/Africa 22.9 19.7 13.2
Other 2.0 3.6 2.9
----------- ----------- -----------
Total $ 58.4 $ 13.5 $ 70.5
=========== =========== ===========
IDENTIFIABLE ASSETS
United States $ 860.8 $ 786.8 $ 720.0
Europe/Middle East/Africa 252.9 300.2 301.9
Other 50.8 32.7 31.8
Eliminations (8.0) (7.1) (8.6)
----------- ----------- -----------
Total $ 1,156.5 $ 1,112.6 $ 1,045.1
=========== =========== ===========
(1) Includes a $38.3 million pretax special charge (Note 2)
(2) Includes a $10 million pretax restructuring charge (Note 17).
Net revenues by customer location were:
(In millions) YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
United States $ 1,411.9 $ 1,298.9 $ 1,402.2
Europe/Middle East/Africa 380.3 347.9 335.8
Canada 188.1 161.1 202.2
Mexico 63.8 40.6 20.5
Asia/Pacific 90.6 83.9 99.8
Latin America 29.2 30.5 26.6
----------- ---------- ----------
Total $ 2,163.9 $ 1,962.9 $ 2,087.1
=========== ========== ==========
41
42
10. MAJOR CUSTOMERS AND MARKETS
The Company sells its products to the on-highway, off-road, automotive, and
power generation markets. The on-highway truck market comprised approximately
45%, 38% and 45% of the Company's net revenues for 1997, 1996, and 1995,
respectively. Within this market, the Company's largest OEM customers are
Freightliner Corporation, Navistar International Transportation Corp., Volvo GM
Heavy Truck Corporation and PACCAR Inc., from which approximately 39%, 33% and
40% of the Company's net revenues in 1997, 1996 and 1995, respectively, were
derived. The Company also sells automotive products to Chrysler Corporation
which accounted for approximately 7%, 7% and 6% of net revenues during 1997,
1996 and 1995, respectively. While the Company sells its products directly to
OEMs, the ultimate customers are major fleet carriers and other end users in
North America and throughout the world.
11. RELATED PARTY TRANSACTIONS
The Company's purchases from Diesel Technology Company, an affiliate, for the
years ended December 31, 1997, 1996, and 1995, were $110 million, $94 million,
and $108 million, respectively. Accounts payable to Diesel Technology Company
were $18 million at December 31, 1997 and $16 million at December 31, 1996.
The Company's payments to Penske Corporation and its affiliates, other than
Diesel Technology Company, for miscellaneous expenses and other items for the
years ended December 31, 1997, 1996 and 1995 were $11.5 million, $7.1 million,
and $14.2 million, respectively. During the years ended December 31, 1997,
1996 and 1995, the Company had sales to affiliates of Daimler-Benz
Aktiengesellschaft ("Daimler-Benz"), indirect parent corporation of DPD, of
$501.1 million, $395.6 million and $426.4 million, respectively. Substantially
all of these sales were to one major customer. Purchases from Daimler-Benz
affiliates were $45.1 million during 1997, $48.0 million during 1996 and $33.4
million during 1995. At December 31, 1997 and 1996, the Company had accounts
receivable of $43.4 million and $32.1 million due from such affiliates.
Accounts payable to Daimler-Benz affiliates were $7.6 million and $15.1 million
at December 31, 1997 and 1996, respectively.
The Company is a lessee under agreements with GE Capital Corporation, a
partner in a Penske Corporation affiliate, for certain manufacturing equipment.
Rent expense was $9.1 million in 1997, 1996 and 1995. Future minimum rental
payments are: $9.7 million in 1998, $4.2 million in 1999, $2.4 million in the
year 2000, and $.6 million in the years 2001 and 2002.
12. INCOME TAXES
For the years ended December 31, 1997, 1996, and 1995, the Company's provision
for income taxes consists of the following:
42
43
(In millions) YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------
Current:
Federal $ 1.3 $ (.1) $ 25.3
State & local .1 .9 2.9
Foreign 2.1 1.0 1.4
-------- -------- --------
Total current 3.5 1.8 29.6
-------- -------- --------
Deferred:
Federal 9.8 (6.7) (6.3)
State and local .4 (1.1) (1.6)
Foreign 5.6 3.0 (1.9)
Enacted rate change (3.8) - -
-------- -------- --------
Total deferred 12.0 (4.8) (9.8)
-------- -------- --------
Total income tax provision $ 15.5 $ (3.0) $ 19.8
======== ======== ========
Income before income taxes and minority interests consists of the following:
(In millions) YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------
Domestic $ 20.6 $ (17.8) $ 50.2
Foreign 24.9 19.2 10.6
-------- -------- ---------
Total pretax income $ 45.5 $ 1.4 $ 60.8
======== ======== =========
Temporary differences which give rise to deferred tax assets and liabilities at
December 31, 1997 and 1996 are as follows:
(In millions)
- ------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------
Deferred tax assets:
Accrued expenses $ 76.3 $ 81.2
State and local 4.3 4.7
Inventory 3.2 4.8
Foreign loss carryforwards - 2.7
Foreign tax credit carryforward 2.0 -
Other 14.4 11.7
--------- ----------
Subtotal 100.2 105.1
Valuation allowance - (2.7)
--------- ----------
Total deferred tax assets $ 100.2 $ 102.4
========= ==========
Deferred tax liabilities
Fixed assets $ 40.4 $ 40.7
Other 14.6 14.7
--------- ----------
Total deferred tax liabilities $ 55.0 $ 55.4
========= ==========
The consolidated income tax provision differs from the amount computed on pretax
income using the U.S. statutory income tax rate for the years ended December 31,
for the following reasons:
43
44
(In millions)
- ----------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
Federal income tax
at statutory rates $ 15.9 $ .5 $ 21.3
Increase (decrease) in taxes:
Nondeductible goodwill 1.2 1.7 1.1
State, local taxes, net .6 (.2) .8
Foreign investment credits - (.8) (2.9)
Foreign Sales Corporation benefit (3.6) (1.0) -
Foreign taxes at other than 35% 3.7 (3.3) (.2)
Impact of Italian rate change on
deferred taxes (3.8) - -
Other 1.5 .1 (.3)
-------- ------- --------
Provision for income taxes $ 15.5 $ (3.0) $ 19.8
======== ======= ========
Effective tax rate 34.2% - 32.5%
======== ======= ========
During 1997, the Company evaluated the reserve applicable to income tax benefits
received from Penske Transportation, Inc. in 1993, when the Company completed
its initial public offering of common stock and separated from the consolidated
tax group. The evaluation resulted in $6.4 million of such reserve being
transferred to stockholders' equity.
During 1997, the Company reassessed its deferred taxes associated with tax
losses which were acquired with the purchase of VM in 1995. These loss
carryforwards were realized by VM during 1997. The review resulted in a
reduction in deferred tax liabilities and goodwill of approximately $6.3
million.
In December, 1997, income tax rates in Italy were reduced from 53% to 41%
effective January 1, 1998. Accordingly, a reduction in deferred tax liabilities
of $3.8 million is included in the Company's income from continuing operations.
The Company has not recorded deferred taxes on the undistributed earnings of
foreign subsidiaries which are deemed to be indefinitely reinvested. Such
undistributed earnings aggregate to approximately $17.9 million, $7.8 million
and $4.5 million at December 31, 1997, 1996 and 1995, respectively.
13. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Several claims, suits and complaints arising in the ordinary course of business
have been threatened or are pending against the Company. In the opinion of
management, all such matters are adequately covered by insurance or
indemnification or, if not so covered, there are meritorious defenses to
substantiate all such claims, or they are of such kind, or involve such amounts,
as would not have a materially adverse effect on the financial position or
Results of operations of the Company if disposed of unfavorably.
Facilities purchased or leased since the Company began operations are typicallY
subject to an environmental audit before commencing operations. Several of such
facilities have been subject to remedial activities due to non-compliance with
applicable regulations. Amounts expended in such remediation activities have
generally been insignificant or have been covered under indemnity agreements
from prior owner/operators and none have individually or in the aggregate been
considered material to the Company's financial position or results of
operations.
At December 31, 1997, the Company is contingently liable for letters of credit
of $15.1 million, bank guarantees of $32.1 million, and has commitments of
$5.6 million to complete various capital projects. The Company leases its
United States production facility and administrative offices, certain
distributor and
44
45
remanufacturing facilities, certain production machinery, equipment and tooling,
its parts distribution center and various transportation and office equipment.
Certain leased properties are subleased to distributors. The leases have terms
of varying lengths and substantially all are accounted for as operating leases.
Certain of the leases contain several covenants which require the maintenance of
a certain level of net worth, restrict the Company's ability to incur additional
debt and require the maintenance of minimum interest coverage and leverage
ratios.
Future minimum payments under non-cancelable operating leases and other
commitments, including related party leases, at December 31, 1997 are: $33.8
million in 1998; $26.4 million in 1999; $24.4 million in 2000; $22.0 million in
2001; $21.5 million in 2002 and $80.9 million in the year 2003 and subsequent
years.
Rental expense for the years ended December 31, 1997, 1996, and 1995 are as
follows:
(In millions)
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
Rentals $ 24.2 $ 21.2 $ 20.7
Less: Sublease rentals 2.9 2.0 2.2
--------- --------- ----------
Net Rentals $ 21.3 $ 19.2 $ 18.5
========= ========= ==========
The Company believes it has adequate sources for the supply of raw materials
and components for its manufacturing requirements. The Company's suppliers are
located primarily in North America and Western Europe. The Company has a policy
of strengthening its supplier relationships by concentrating its purchases for
particular parts over a limited number of suppliers in order to maintain
quality and cost control and to increase the suppliers' commitment to the
Company. The Company relies upon, and expects to continue to rely upon, several
single source suppliers for critical components.
The Company's primary production facility located in Michigan employs
approximately 2,000 employees represented by the International Union, The
United Automobile, Aerospace and Agricultural Implement Workers of America,
Local 163 under a four-year collective bargaining agreement which expires on
August 30, 1998. The Company has no reason to believe it will not reach a
satisfactory new agreement with the union, although negotiations have not yet
commenced.
45
46
14. PENSION AND OTHER EMPLOYEE BENEFITS
The Company has defined benefit pension plans covering the majority of its
employees. Benefits for salaried employees are provided under an account balance
type of defined benefit plan, under which the benefit is determined primarily on
the basis of annual contributions, with a minimum benefit related to an
employee's highest average annual compensation determined over a 60-month period
selected out of the 120-month period immediately prior to retirement. Benefits
for hourly employees are provided primarily on the basis of a monthly amount for
each year of credited service. The types of assets held by the plans include
equity, fixed income and real estate funds. It is the Company's policy to make
contributions to these plans to meet funding levels required by ERISA.
The following tables set forth the plans' funded status, amounts recognized in
the Company's balance sheet, and components of net periodic pension expense:
(In millions) DECEMBER 31,
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
Actuarial present value of benefit
obligations:
Vested $ 194.4 $ 185.3
Non-vested 103.9 65.7
--------- ---------
Accumulated benefit obligation $ 298.3 $ 251.0
========= =========
Projected benefit obligation for service
rendered to date $ 320.6 $ 270.4
Plan assets at fair value 267.4 234.7
--------- ---------
Plan assets less than projected benefit
obligation 53.2 35.7
Unrecognized prior service cost (18.3) (19.6)
Unrecognized net loss (23.4) (1.1)
Additional liability 26.4 15.5
--------- ---------
Pension liability included in the consolidated
balance sheet $ 37.9 $ 30.5
========= =========
Net periodic pension expense included the following components:
(In millions) YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
Service cost benefits during the year $ 8.1 $ 8.6 $ 6.2
Interest cost on projected benefit
obligation 21.6 20.0 18.1
Actual return on plan assets (26.7) (32.1) (52.5)
Net amortization and deferral 7.0 12.1 34.0
Effect of plan curtailment - - .6
--------- ---------- ----------
Net periodic pension expense $ 10.0 $ 8.6 $ 6.4
========= ========== ==========
The projected benefit obligation was determined using discount rates of 7.0% and
7.5% at December 31, 1997 and 1996, respectively. The annual long-term rate of
return on assets was assumed to be 11% for 1997 and 1996 and 10.5% for 1995.
Actual return on plan assets in 1997 are shown net of assets transferred during
the year to another plan reflecting employees who
46
47
elected to retire under the General Motors Salaried and Hourly Employees Pension
Plan. The amount of assets transferred is $17 million. Compensation increases
for applicable employees were estimated using 4.5% for 1997 and thereafter.
The Company also sponsors other defined contribution plans, including deferred
savings plans, covering a majority of its domestic employees. Employee
contributions are based on a percentage of payroll. Certain plans require the
Company to make matching contributions based on a percentage of employee
contributions. They may also provide for the employer to make discretionary or
fixed contributions. Where contributions are made, amounts are based on a
percentage of payroll for eligible employees. Contributions to these plans in
1997, 1996 and 1995 totaled $6.8 million, $5.2 million and $4.7 million,
respectively.
The Company maintains profit-sharing programs covering all of its domestic
employees and a cash bonus plan covering certain senior officers and other
eligible employees. Contributions to these programs are based on income
before interest and taxes. The cost of these programs for 1997, 1996, and
1995 was $7.5 million, $2.1 million, and $11.4 million, respectively.
The Company's Italian subsidiary, VM, accrues employee termination indemnities
in accordance with local civil and labor laws based upon each employee's length
of service, employment category and remuneration. There are no vesting period
or funding requirements associated with this liability and benefits are payable
immediately upon separation. The liability is adjusted annually by a
cost-of-living index provided by the Italian government. The costs of providing
these benefits during 1997, 1996 and 1995 approximated $1.9 million, $2.1
million and $1.8 million, respectively. The termination liability recorded in
the balance sheet is the amount to which the employee would be entitled upon
separation from the Company.
15. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care benefits for retired employees.
Eligibility is based on years of service and requires employees to remain
employed until retirement age. These benefits are either self-insured or are
provided through health insurance plans.
The employee separation program discussed in Note 17 provides for
postretirement health insurance benefits. The effect of that program on
accumulated postretirement health insurance benefits was accounted for as a
curtailment during 1995.
Net periodic postretirement benefit cost for the years ended December 31, 1997,
31, 1997, 1996 and 1995 includes the following components:
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48
(In millions)
- -----------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------
Service cost $ 1.4 $ 1.5 $ 1.7
Interest cost 6.7 6.3 5.7
Amortization of prior service and losses .2 .5 .1
Amortization of transition obligation 2.6 2.6 2.6
Effect of plan curtailment - - .8
---------- --------- --------
Net periodic postretirement benefit cost $ 10.9 $ 10.9 $ 10.9
========== ========= ========
The following table sets forth the amount recorded in the consolidated balance
sheet at December 31, 1997 and 1996:
(In millions)
- -------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 24.6 $ 25.2
Fully eligible active plan participants 32.3 27.8
Other active plan participants 43.3 36.1
--------- ---------
Total 100.2 89.1
Unrecognized transition obligation (39.0) (41.6)
Unrecognized prior service costs (.7) (.8)
Unrecognized net loss (16.4) (10.8)
--------- ---------
Accrued postretirement benefit liability recognized in
the consolidated balance sheet $ 44.1 $ 35.9
========= =========
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1997 and 1996. The rate was assumed
to remain at 6% after 1997. The health care cost trend rate assumption has an
effect on the amount reported. Changing the assumed health care cost trends by
one percentage point in each year would change the accumulated postretirement
benefit obligation as of December 31, 1997 and 1996 by approximately $.7
million, and net periodic postretirement benefit cost by $.1 million for 1997
and 1996. The estimate incorporates defined dollar limits on Company costs for
postretirement benefits and is supplemented by amounts contributed by the
Company and the union to a fund that can be used to reimburse retirees whose
costs exceed the plan coverage limits. The weighted average discount rate used
in determining the accumulated postretirement benefit obligation was 7.0% in
1997 and 7.5% in 1996.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has the following derivative financial instruments at December 31:
48
49
(In millions)
- ---------------------------------------------------------------------
NOTIONAL CARRYING FAIR
1997 AMOUNT VALUE VALUE
- ---------------------------------------------------------------------
Interest rate swap agreements $ 50.0 $ .9 $ (.5)
- ---------------------------------------------------------------------
1996
- ---------------------------------------------------------------------
Interest rate swap agreements $ 50.0 $ 1.9 $ -
- ---------------------------------------------------------------------
The fair value of the interest rate swap agreements was determined using
prevailing spot rates at December 31, 1997 and 1996, and discounted as
applicable.
17. RESTRUCTURING CHARGE
In December 1995, the Company established a salaried employee separation program
to reduce its workforce by approximately 5%. In connection with this program,
the Company recorded a pretax charge of $10 million for severance related costs,
including pension and health care benefits. During 1996 substantially all the
costs related to the restructuring plan were incurred.
18. STOCK INCENTIVE PLAN
The Company has a stock incentive plan reserving 975,000 shares of common stock
for issuance pursuant to that plan. Under the plan, the Company can grant
restricted or unrestricted stock, stock appreciation rights, non-qualified
options and options qualifying as incentive stock options under the Internal
Revenue Code of 1986, as amended. The term of an option cannot exceed 10 years
from the grant date and the option price may not be less than market value at
the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25 and related interpretations. No compensation cost has
been recognized for stock option grants since the options have exercise prices
of not less than the market value of the Company's common stock at the date of
the grant. If compensation cost for stock option grants had been determined
based on the fair value at the grant dates for 1997, 1996, and 1995 consistent
with Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), the
Company's net income and net income per share would not be materially different
than the amounts presented in the accompanying Statement of Income. At
December 31, 1997 and 1996 shares available for granting options were 219,405
and 448,086, respectively. Under SFAS No. 123, the fair value of each option is
estimated on the date of the grant using an option pricing model with
assumptions for dividend yield, volatility, risk-free interest and expected
life. The Company estimated the fair value of the options granted in 1997, 1996
and 1995 according to the following assumptions: dividend yield of zero,
expected price volatility of 32%, risk-free interest rates of 6% and expected
lives of five years.
49
50
A summary of options granted under the Company's stock incentive plan as of
December 31, 1997, 1996 and 1995 and changes during the years then ending is
presented below:
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Options, beginning
of year 473,500 $ 20.55 432,000 $ 20.95 324,000 $ 20.00
Granted 237,500 $ 17.45 55,500 $ 17.34 109,000 $ 23.75
Exercised (4,500) $ 21.04 - - - -
Forfeited (15,750) $ 20.77 (14,000) $ 20.27 (1,000) $ 20.00
---------- ---------- ---------- --------- --------- ----------
Options, end of year 690,750 $ 19.48 473,500 $ 20.55 432,000 $ 20.95
========== ========== ========== ========= ========= ==========
Options exercisable at
year end 362,750 $ 20.44 271,304 $ 20.39 158,280 $ 20.00
Weighted average fair
value of options
granted during the year $1,602,759 $ 372,550 $1,003,736
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
- ------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
RANGE OF EXERCISE WEIGHTED AVERAGE AVERAGE AVERAGE
PRICES OPTIONS REMAINING LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
----------------- ------- ---------------- -------------- ------- --------------
$17.00 265,500 9.3 years $ 17.00 12,500 $ 17.00
$20.00 297,750 5.8 years $ 20.00 297,750 $ 20.00
$21.81 20,000 9.7 years $ 21.81 - -
$23.75 105,000 7.2 years $ 23.75 52,500 $ 23.75
$23.94 2,500 9.6 years $ 23.94 - -
----------- --------- ----------- ---------
$17.00 to $23.94 690,750 7.5 years $ 19.48 362,750 $ 20.44
=========== ========= =========== =========
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51
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents the Company's quarterly results:
(In millions, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Net revenues $ 519.7 $ 478.8 $ 557.4 $ 491.3 $ 524.1 $ 487.6 $ 562.7 $ 505.2
Gross profit 122.2 112.2 126.0 112.7 117.2 112.3 129.4 111.9
Net income 6.4 8.3 7.4 (16.2) 8.2 7.1 7.9 4.6
Basic net income
per share $ .26 $ .34 $ .30 $ (.66) $ .33 $ .29 $ .32 $ .19
Diluted net income
per share $ .26 $ .34 $ .30 $ (.66) $ .33 $ .29 $ .32 $ .19
Net income for the second quarter of 1996 includes a $24.9 million after tax
special charge. The special charge is associated with product coverage and the
reduction of the value of an investment in Mexico. Excluding the special charge,
net income for the second quarter of 1996 was $8.7 million, or $.35 per share.
Net income for the fourth quarter of 1995 includes a $6.7 million after tax
restructuring charge to cover costs of a reduction in salaried personnel.
Excluding the restructuring charge, net income for the fourth quarter of 1995
was $11.2 million, or $.46 per share.
51
52
DETROIT DIESEL CORPORATION
REPORT OF MANAGEMENT
The consolidated financial statements of Detroit Diesel Corporation have been
prepared by management and have been audited by Detroit Diesel Corporation's
independent auditors, Deloitte & Touche LLP. Management is responsible for the
consolidated financial statements, which have been prepared in conformity with
generally accepted accounting principles and include amounts based on
management's judgments.
Management is also responsible for maintaining internal accounting control
systems designed to provide reasonable assurance, at appropriate cost, that
assets are recorded in accordance with established policies and procedures.
Detroit Diesel Corporation's systems are under continuing review and are
supported by, among other things, business conduct and other written
guidelines, an internal audit function and the selection and training of
qualified personnel.
The Board of Directors is responsible for the Company's financial and
accounting policies, practices and reports. Its Audit Committee, comprised of
outside directors, meets regularly with the independent auditors,
representatives of management and the internal auditors to discuss and make
inquiries into their activities. Both the independent auditors and the internal
auditors have free access to the Audit Committee, with and without management
representatives in attendance, to discuss the results of the audit, the
adequacy of internal accounting controls, and the quality of the financial
reporting.
It is management's conclusion that the system of internal accounting controls
at December 31, 1997 provides reasonable assurance that the books and records
reflect the transactions of the Company and that the Company has complied with
its established policies and procedures.
/s/ Roger S. Penske
Chairman
/s/ Robert E. Belts
Senior Vice President - Finance
February 2, 1998
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INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Detroit Diesel Corporation
We have audited the accompanying consolidated balance sheets of Detroit Diesel
Corporation and subsidiaries (the Company) as of December 31, 1997 and 1996 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes 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 such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1997 and 1996 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Detroit, Michigan
February 2, 1998
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INDEPENDENT AUDITORS' REPORT
Shareholders and Board of directors
Detroit Diesel Corporation
Detroit, Michigan
We have audited the consolidated financial statements of Detroit Diesel
Corporation and subsidiaries (the "Company") as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, and have
issued our report thereon dated February 2, 1998; such report is included
elsewhere in the Form 10-K. Our audits also included the financial statement
schedule of Detroit Diesel Corporation and subsidiaries, listed in Item 14.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, based on our audits, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Detroit, Michigan
February 2, 1998
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DETROIT DIESEL CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
--------------------------------------
Charged to Charged to Deductions-
Balance costs and other accounts- Write-offs and Balance
January 1 expenses Acquisitions Disposals December 31
--------- ---------- --------------- --------- -----------
DOUBTFUL ACCOUNTS RESERVES
For the Year Ended December 31,
1997 ..................................... $ 6,105 $ 2,959 $ - $ (4,634) $ 4,430
1996 ..................................... $ 5,210 $ 1,962 $ - $ (1,067) $ 6,105
1995 ..................................... $ 3,712 $ 2,011 $ 819 $ (1,332) $ 5,210
INVENTORY RESERVES
For the Year Ended December 31,
1997 ..................................... $ 11,014 $ 3,226 $ - $ (3,889) $ 10,351
1996 ..................................... $ 9,677 $ 3,192 $ - $ (1,855) $ 11,014
1995 ..................................... $ 10,119 $ 1,310 $ 1,626 $ (3,378) $ 9,677
TAX VALUATION ALLOWANCE
For the Year Ended December 31,
1997 ..................................... $ 2,685 $ - $ - $ (2,685) $ -
1996 ..................................... $ 1,322 $ 1,363 $ - $ - $ 2,685
1995 ..................................... $ - $ - $ 1,322 $ - $ 1,322
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Roger S. Penske
-------------------------------------------
Roger S. Penske
Chairman of the Board and
Chief Executive Officer
March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Roger S. Penske Chairman of the Board, Director March 26, 1998
- ------------------------------------------------- and Chief Executive Officer
Roger S. Penske
(Principal Executive Officer)
/s/ Robert E. Belts Senior Vice President-Finance March 26, 1998
- ------------------------------------------------- and Chief Financial Officer
Robert E. Belts
(Principal Financial and
Accounting Officer)
/s/ Timothy D. Leuliette Vice Chairman and Director March 26, 1998
- -------------------------------------------------
Timothy D. Leuliette
/s/ Ludvik F. Koci Vice Chairman and Director March 26, 1998
- -------------------------------------------------
Ludvik F. Koci
/s/ Charles G. McClure President and Director March 26, 1998
- -------------------------------------------------
Charles G. McClure
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/s/ Dr. Eckhard Cordes * Director March 26, 1998
- -------------------------------------------------
Dr. Eckhard Cordes
/s/ John E. Doddridge * Director March 26, 1998
- -------------------------------------------------
John E. Doddridge
/s/ William E. Hoglund * Director March 26, 1998
- -------------------------------------------------
William E. Hoglund
/s/ Gary G. Jacobs * Director March 26, 1998
- -------------------------------------------------
Gary G. Jacobs
/s/ Dr. Kurt J. Lauk * Director March 26, 1998
- -------------------------------------------------
Dr. Kurt J. Lauk
/s/ Joseph F. Welch * Director March 26, 1998
- -------------------------------------------------
Joseph F. Welch
/s/ R. Jamison Williams, Jr. * Director March 26, 1998
- -------------------------------------------------
R. Jamison Williams, Jr.
*By: /s/ John F. Farmer
---------------------------------------
Attorney-in-Fact
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EXHIBIT INDEX
The following constitutes the exhibits to the report on Form 10-K of the Company
for the year ended December 31, 1997:
Exhibit Sequential
Number Description of Exhibit Page Number
- ------------ ------------------------ ------------
3.1 Certificate of Incorporation, as amended, which is N/A
incorporated by reference from Exhibit 3.1 of the Company's
Registration Statement on Form S-1, File No. 33-66760, filed
with the Securities and Exchange Commission on July 30, 1993,
as amended.
3.2 Amended and Restated Bylaws of Detroit Diesel Corporation, N/A
which is incorporated by reference from Exhibit 3.2 of the
Company's Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange Commission
on July 30, 1993, as amended.
4.1 Termination, Replacement and Restatement Agreement dated as N/A
of June 7, 1995 among Detroit Diesel Corporation, the Lenders
listed on Exhibit A and Chemical Bank, as agent for the
lenders, which is incorporated by reference from Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q, File No.
1-12394, filed with the Securities and Exchange Commission on
August 10, 1995.
4.1.1 First Amendment to the Termination, Replacement and N/A
Restatement Agreement, dated November 22, 1996, among Detroit
Diesel Corporation, the several banks and other financial
institutions and Chemical Bank, as agent for the Lenders and
the predecessor in interest of The Chase Manhattan Bank, now
acting as agent for the Lenders, which is incorporated by
reference from Exhibit 4.1.1 of the Company's Annual Report
on Form 10-K, File No. 1-12394, filed with the Securities and
Exchange Commission on March 27, 1997.
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Exhibit Sequential
Number Description of Exhibit Page Number
--------- ------------------------ -------------
4.2 Specimen Form of Certificate for Common Stock, which is N/A
incorporated by reference from Exhibit 4.4 of the Company's
Registration Statement on Form S-1, File No. 33-66760, filed
with the Securities and Exchange Commission on July 30, 1993,
as amended.
Long-term debt instruments and credit facility agreements of N/A
the Detroit N/A Diesel Corporation, under each of which the
authorized debt is equal to less than 10% of the total assets
of the Detroit Diesel Corporation and its subsidiaries on a
consolidated basis, are not filed as exhibits to this report.
Detroit Diesel Corporation agrees to furnish to the
Commission, upon request, copies of any such unfiled
instruments.
10.1 Form of 1993 Stock Incentive Plan, which is incorporated by N/A
reference from Exhibit 10.1 of the Company's Registration
Statement on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993, as
amended.
10.1.1 Form of 1993 Stock Incentive Plan Restricted Stock Award and N/A
Deferred Stock N/A Award, which is incorporated by reference
from Exhibit 10.1.1 of the Company's Registration Statement
on Form S-1, File no. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.
10.2 Collaboration Agreement, dated as of January 31, 1993, N/A
between Detroit Diesel Corporation and Mercedes-Benz AG,
which is incorporated by reference from Exhibit 10.2 of the
Company's Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange Commission
on July 30, 1993, as amended.
#10.3 Development Agreement, dated as of December 21, 1992, between N/A
Detroit Diesel Corporation and Mercedes-Benz AG, which is
incorporated by reference from Exhibit 10.3 of the Company's
Registration Statement on Form S-1, File No. 33-66760, filed
with the Securities and Exchange Commission on July 30, 1993,
as amended.
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Exhibit Sequential
Number Description of Exhibit Page Number
--------- ------------------------ -------------
#10.4 License Agreement, dated as of March 27, 1993, between N/A
Detroit Diesel Corporation and Mercedes-Benz AG, which is
incorporated by reference from Exhibit 10.4 of the Company's
Registration Statement on Form S-1, File No. 33-66760, filed
with the Securities and Exchange Commission on July 30, 1993,
as amended.
10.5 Financing Agreement between Diesel Project Development, Inc. N/A
and Detroit Diesel Corporation, dated as of April 30, 1993,
which is incorporated by reference from Exhibit 10.5 of the
Company's Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange Commission
on July 30, 1993, as amended.
10.6 Amended and Restated Lease Agreement by and between Corporate N/A
Property Associates 8, L.P., and Corporate Property
Associates 9, L.P. and Detroit Diesel Corporation, dated as
of May 24, 1994, which is incorporated by reference from
Exhibit 10.6 of Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-79286, filed with the
Securities and Exchange Commission on June 15, 1994.
10.7 Lease Agreement, dated June 30, 1988, between the Timken N/A
Company and Detroit Diesel Corporation, which is incorporated
by reference from Exhibit 10.7 of the Company's Registration
Statement on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993, as
amended.
10.8 Agreement for Data Processing Services between Electronic N/A
Data Systems Corporation and the Company, dated as of January
1, 1988 (as amended and effective through December 31, 2003),
which is incorporated by reference from Exhibit 10.9 of the
Company's Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange Commission
on July 30, 1993, as amended.
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Exhibit Sequential
Number Description of Exhibit Page Number
--------- ------------------------ -------------
10.9 Master Lease Agreement between Detroit Diesel Corporation and N/A
GECC, dated as of May 26, 1992, which is incorporated by
reference from Exhibit 10.11 of the Company's Registration
Statement on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993, as
amended.
#10.10 Requirements Agreement between Diesel Technology Company and N/A
Detroit Diesel Corporation, dated February 17, 1992, which is
incorporated by reference from Exhibit 10.15 of the Company's
Registration Statement on Form S-1, File No. 33-66760, filed
with the Securities and Exchange Commission on July 30, 1993,
as amended.
10.11 Purchase Agreement between Detroit Diesel Corporation and N/A
Penske Truck Leasing Corporation, dated October 7, 1993,
related to purchase of remanufacturing business, which in
incorporated by reference from Exhibit 10.18 of the Company's
Registration Statement on Form S-1, File No. 33-66760, filed
with the Securities and Exchange Commission on July 30, 1993,
as amended.
10.12 Employment Agreement, dated February 1, 1989, between Penske N/A
Transportation, Inc. and A. Gordon Clark, as amended, assumed
by Detroit Diesel Corporation, which is incorporated by
reference from Exhibit 10.19 of the Company's Registration
Statement on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993, as
amended.
10.12.1 Second Amendment to Employment Agreement dated as of January N/A
31, 1995, between Detroit Diesel Corporation, as assignee of
Penske Transportation, Inc., and A. Gordon Clark, which is
incorporated by reference from Exhibit 10.12.1 of the
Company's Annual Report on Form 10-K, File No. 1-12394, filed
with the Securities and Exchange Commission on March 31,
1995, as amended.
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Exhibit Sequential
Number Description of Exhibit Page Number
--------- ------------------------ -------------
10.13 Restated Share Purchase Agreement by and between Montagu N/A
Private Equity Investments Limited and others, and Detroit
Diesel Corporation, dated January 4, 1995, which is
incorporated by reference from Exhibit 10.13 of the Company's
Annual Report on Form 10-K, File No. 1-12394, filed with the
Securities and Exchange Commission on March 31, 1995, as
amended.
#10.14 TED Joint Development and License Agreement by and among N/A
Detroit Diesel Corporation and Mercedes-Benz
Aktiengesellschaft and MTU Motoren- und Turbinen-Union
Friedrichschafen GmbH, dated September 5, 1994, which is
incorporated by reference from Exhibit 10.3 of the Company's
Quarterly Report on Form 10-Q, File No. 1-12394, filed with
the Securities and Exchange Commission on November 11, 1994.
#10.15 FEAT Joint Development and License Agreement by and between N/A
MTU Motoren- und Turbinen-Union Friedrichschafen GmbH and
Detroit Diesel Corporation, dated June 28, 1994, which is
incorporated by reference from Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q, File No. 1-12394, filed with
the Securities and Exchange Commission on November 11, 1994.
10.15.1 Amendment to FEAT Joint Development and License Agreement by N/A
and between MTU Motoren- und Turbinen-Union Friedrichschafen
GmbH and Detroit Diesel Corporation, dated June 28, 1994,
which is incorporated by reference from Exhibit 10.4.1 of the
Company's Quarterly Report on Form 10-Q, File No. 1-12394,
filed with the Securities and Exchange Commission on November
11, 1994.
10.16 Mutual Distribution Agreement by and between Detroit Diesel N/A
Corporation and MTU Motoren- und Turbinen-Union
Friedrichschafen GmbH, dated June 28, 1994, which is
incorporated by reference from Exhibit 10.5 of the Company's
Quarterly Report on Form 10-Q, File No. 1-12394, filed with
the Securities and Exchange Commission on November 11, 1994.
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Exhibit Sequential
Number Description of Exhibit Page Number
--------- ------------------------ -------------
10.17 Joinder Agreement by and between Detroit Diesel Corporation, N/A
Mercedes-Benz AG and Motoren- und Turbinen-Union
Friedrichschafen GmbH, dated July 13, 1994, which is
incorporated by reference from Exhibit 10.6 of the Company's
Quarterly Report on Form 10-Q, File No. 1-12394, filed with
the Securities and Exchange Commission on November 11, 1994.
11.1 Statement re: Computation of Per Share Earnings 64
21.1 List of Subsidiaries 65
23.1 Consent of Deloitte & Touche LLP 66
25.1 Powers of Attorney of Directors and Officers of the
Registrant 67
27 Financial Data Schedule 74
- -------------------
# Does not include certain information as to which the Company has been granted
confidential treatment.
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