<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended MARCH
31, 1998.
Commission File No. 1-12394
DETROIT DIESEL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 38-2772023
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
13400 OUTER DRIVE WEST, DETROIT, MICHIGAN 48239-4001
(Address of principal executive offices, including zip code)
313-592-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
COMMON STOCK $0.01 PAR VALUE 24,700,566 SHARES
- ---------------------------- --------------------------
Class Outstanding at May 1, 1998
This report contains 22 pages. The exhibit index is on page 14.
<PAGE> 2
Detroit Diesel Corporation Form 10-Q (continued)
TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Statements of Income for the
Three Months Ended March 31, 1998 and 1997 3
Consolidated Balance Sheets at March 31, 1998
and December 31, 1997 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 12
SIGNATURE 13
EXHIBIT INDEX 14
2
<PAGE> 3
Detroit Diesel Corporation Form 10-Q (continued)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DETROIT DIESEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------- -------
<S> <C> <C>
Net revenues $ 588.8 $ 519.7
Cost of sales 454.4 397.5
------- -------
Gross profit 134.4 122.2
Expenses:
Selling and administrative 91.2 83.3
Research and development 24.5 25.5
Interest 3.3 3.2
------- -------
Total 119.0 112.0
Income before income taxes 15.4 10.2
Provision for income taxes 5.7 3.8
------- -------
Net income $ 9.7 $ 6.4
======= =======
Basic net income per share $ .39 $ .26
======= =======
Diluted net income per share $ .39 $ .26
======= =======
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE> 4
Detroit Diesel Corporation Form 10-Q (continued)
DETROIT DIESEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DEC. 31,
1998 1997
--------- ---------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8.8 $ 3.2
Receivables, net of allowances of $4.7 and $4.4, respectively 356.6 318.8
Inventories 310.7 305.8
Prepaid expenses, deferred charges and other current assets 12.4 13.0
Deferred tax assets 52.0 52.1
--------- ---------
TOTAL CURRENT ASSETS 740.5 692.9
PROPERTY, PLANT AND EQUIPMENT:
Net of accumulated depreciation of $162.8 and $153.7, respectively 296.0 298.3
DEFERRED TAX ASSETS 18.4 18.4
INTANGIBLE ASSETS, net 100.8 104.8
OTHER ASSETS 41.1 42.1
--------- ---------
TOTAL ASSETS $ 1,196.8 $ 1,156.5
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 30.0 $ 44.7
Accounts payable 329.2 297.0
Accrued expenses 188.4 175.0
Current portion of long-term debt and capital leases 2.8 6.9
--------- ---------
TOTAL CURRENT LIABILITIES 550.4 523.6
LONG-TERM DEBT AND CAPITAL LEASES 74.6 73.8
OTHER LIABILITIES 186.8 182.5
DEFERRED TAX LIABILITIES 25.0 25.3
DEFERRED INCOME 5.8 5.9
MINORITY INTERESTS .6 .6
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, no shares issued - -
Common stock, par value $0.01 per share, 24.7 million shares issued .2 .2
Additional paid-in capital 224.2 224.2
Retained earnings 148.5 138.8
Additional minimum pension adjustment (9.7) (9.7)
Currency translation adjustment (9.6) (8.7)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 353.6 344.8
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,196.8 $ 1,156.5
========= =========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
4
<PAGE> 5
Detroit Diesel Corporation Form 10-Q (continued)
DETROIT DIESEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9.7 $ 6.4
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 11.5 9.1
Changes in assets and liabilities which provided (used) cash:
Accounts and notes receivable (38.9) (39.8)
Inventories (5.5) (7.9)
Prepaid expenses, deferred charges and other current assets .6 3.6
Deferred taxes .3 (.4)
Accounts payable 34.4 40.5
Accrued expenses and other liabilities 18.6 (10.1)
Other assets (5.0) 2.8
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 25.7 4.2
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (10.2) (15.4)
Proceeds from sale of property, plant and equipment - .2
Investments in and advances to affiliates - (2.5)
Acquisition of subsidiaries - (1.8)
Proceeds from sale of investment 6.4 -
------- -------
NET CASH USED IN INVESTING ACTIVITIES (3.8) (19.5)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from notes payable (14.4) (6.6)
Net proceeds (borrowings) from long-term debt (2.1) 37.8
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (16.5) 31.2
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .2 (.2)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5.6 15.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 3.2 3.0
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 8.8 $ 18.7
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3.3 $ 3.1
======= =======
Income Taxes $ - $ .4
======= =======
Noncash investing and financing activities:
Issuance of debt to acquire subsidiary $ - $ 7.2
======= =======
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
5
<PAGE> 6
Detroit Diesel Corporation Form 10-Q (continued)
DETROIT DIESEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - FINANCIAL STATEMENTS.
The accompanying unaudited consolidated financial statements have been
prepared by management and, in the opinion of management, contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial position of Detroit Diesel Corporation and its
majority-owned subsidiaries ("Detroit Diesel" or the "Company") as of March 31,
1998 and December 31, 1997 and the results of its operations for the three
month periods ended March 31, 1998 and 1997 and its cash flows for the three
month periods ended March 31, 1998 and 1997.
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the
Company's 1997 Annual Report to Stockholders. The results of operations for
the three-month period ended March 31, 1998 will not necessarily be indicative
of the operating results of the full year.
NOTE 2 - INVENTORIES.
At March 31, 1998 and December 31, 1997, inventories (principally using
the first-in, first-out method) consist of the following:
<TABLE>
<CAPTION>
March 31, Dec. 31,
($ in millions) 1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Productive $ 169.8 $ 178.4
Service parts 98.3 90.7
Remanufactured parts 36.6 30.4
Non-productive 6.0 6.3
-------- --------
$ 310.7 $ 305.8
======== ========
The components of productive inventory are:
Material 51% 49%
Work in process 24% 24%
Finished product 25% 27%
</TABLE>
NOTE 3 - INTANGIBLE ASSETS.
Intangible assets include goodwill of $62.5 million and $65.1 million at
March 31, 1998 and December 31, 1997, respectively. Accumulated amortization
of intangible assets as of March 31, 1998 and December 31, 1997 was $19.9
million and $18.8 million, respectively.
NOTE 4 - NET INCOME PER SHARE.
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 three
6
<PAGE> 7
Detroit Diesel Corporation Form 10-Q (continued)
months ended March 31, 1998 and 1997, the weighted average number of shares
outstanding were 24,700,566 shares and 24,698,066 shares, respectively.
Diluted net income per share represents net income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period plus the weighted average diluted effect of the Company's
incentive stock options outstanding during the period calculated using the
treasury stock method. The dilutive effect of the Company's incentive stock
options for the three months ended March 31, 1998 and 1997 were 61,683 shares
and 304 shares, respectively.
NOTE 5 - COMMITMENTS AND CONTINGENCIES.
The Company is contingently liable for letters of credit and guarantees to
banks aggregating $49.2 million at March 31, 1998.
NOTE 6 - COMPREHENSIVE INCOME.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income, which
requires that all items recognized as components of other comprehensive income
be reported in the financial statements. Comprehensive income for the Company
generally represents items that are reported as components of stockholders'
equity in accordance with generally accepted accounting principles but have not
been recognized as part of net income. For example, other comprehensive income
may include foreign currency translation adjustments, minimum pension
liability adjustments, and deferred compensation on restricted stock.
The reconciliation of net income to comprehensive income for the three
months ended March 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income $ 9.7 $ 6.4
Other comprehensive income:
Foreign currency translation adjustment (0.9) (3.0)
Deferred compensation on restricted stock - 0.1
----- -----
Total other comprehensive income (0.9) (2.9)
----- -----
Comprehensive income $ 8.8 $ 3.5
===== =====
</TABLE>
7
<PAGE> 8
Detroit Diesel Corporation Form 10-Q (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The percentage relationships between net revenues and other elements of
the Company's Consolidated Statements of Income for the comparative reporting
periods were:
`
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------- -----------
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of sales 77.2% 76.5%
----- -----
Gross profit 22.8% 23.5%
Expenses:
Selling and administrative 15.4% 16.1%
Research and development 4.2% 4.9%
Interest 0.6% 0.6%
----- -----
Total 20.2% 21.6%
Income before income taxes 2.6% 1.9%
Provision for income taxes 0.9% 0.7%
----- -----
Net income 1.7% 1.2%
===== =====
</TABLE>
The Company's net revenues for each of its markets were:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
($ In millions) 1998 1997
---------- ----------
<S> <C> <C>
On-Highway $ 332 $ 276
Off-Road 160 137
Automotive 63 71
Power Generation 34 36
----- -----
Net revenues $589 $520
===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
NET REVENUES. Net revenues for the three months ended March 31, 1998 were
$588.8 million, an increase of $69.1 million, or 13% from $519.7 million for
the comparable period of 1997. The increase in net revenues during the first
quarter 1998 reflects a 20% increase in heavy-duty engine unit sales to
approximately 22,900 units, combined with moderate growth in service parts
and remanufactured component sales. Total units sales for the three months
ended March 31, 1998 were over 43,700 units, up 9% compared to 39,900 units for
the three months ended March 31, 1997. The growth in units sales is
attributable to increased sales of the
8
<PAGE> 9
Detroit Diesel Corporation Form 10-Q (continued)
Company's Series 60 engine and the ramp up in volume of the Series 2000 and
Series 4000 engines, somewhat offset by a decline in two cycle unit sales.
Net revenues in the on-highway market for the three months ended March 31,
1998 increased 20% principally on the strength of Series 60 engine sales in the
on-highway heavy-duty truck market. Off-road market revenues grew 17% for the
three months ended March 31, 1998 compared to the same period last year. Sales
of Series 2000 and Series 4000 units increased coupled with the timing of
military shipments during the quarter.
Automotive market revenues declined 11% for the three months ended March
31, 1998 compared to the same period last year principally due to changes in
the value of the Italian Lira. Unit sales in this market remain strong,
although unit sales and revenue growth in this market are expected to decline
during the remainder of 1998 as certain automotive programs are either
completed or transmitted.
GROSS PROFIT. Gross profit for the three months ended March 31, 1998 was
$134.4 million, or 22.8% of net revenues, compared to $122.2 million,
or 23.5% of net revenues, for the three months ending March 31, 1997,
representing an increase of approximately $12 million. Gross margin in the
first quarter of 1998 was affected by several factors including the mix of
engine revenues versus service parts revenues during the quarter.
Additionally, the composition of the two-cycle engine mix and capacity
constraints associated with the Company's Series 60 engine contributed to the
deterioration in margin. The Company expects that margins in 1998 will be
consistent with gross margin for 1997.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $91.2 million for the three months ended March 31, 1998, compared to $83.3
million for the three months ended March 31, 1997, an increase of $7.9 million.
The increase in selling and administrative expenses is due to the increase in
sales volume in the first quarter of 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$24.5 million for the three months ended March 31, 1998, compared to $25.5
million for the three months ended March 31, 1997, a decrease of $1.0 million.
The decrease in R&D expenses reflects the decrease in spending on Series
2000/4000 engine development as the new products were launched in late 1997,
offset by spending associated with product enhancements and emissions-related
efforts.
INTEREST EXPENSE. Interest expense was $3.3 million for the three months
ended March 31, 1998, consistent with the comparable period of 1997, despite
the increase in business volumes.
INCOME TAX EXPENSE. Income tax expense is reported during interim
reporting periods on the basis of the Company's estimated annual effective tax
rate for the taxable jurisdictions in which the Company operates. The Company
estimates that its annual effective tax rate of 1998 is approximately 37%.
NET INCOME. Net income for the three months ended March 31, 1998 was
$9.7 million, an increase of $3.3 million, or 51%, from $6.4 million for the
comparable period of 1997.
9
<PAGE> 10
Detroit Diesel Corporation Form 10-Q (continued)
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity have been cash
provided by operations, and bank borrowings under various revolving lines of
credit and bank notes, including the Company's $300 million revolving line of
credit, of which approximately $263 million was available as of March 31,
1998. Additionally, the Company's subsidiary, VM Motori S.p.A. ("VM"), has
$50.7 million in unsecured, short-term lines of credit with several banks, of
which approximately $40.7 million was available at March 31, 1998.
Cash provided by operations for the three months ended March 31, 1998 was
approximately $25.7 million, reflecting the Company's net income and non-cash
items offset by changes in working capital.
Capital expenditures were $10.2 million for the first three months of
1998 and were used to expand and enhance Series 60 engine production capacity,
Series 2000 and 4000 equipment and tooling, to upgrade engineering facilities,
equipment and systems and for various capital projects at the subsidiary
locations.
The Company is subject to risks of changes in foreign currency exchange
rates due to its operations located outside of 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 25.1 million in Deutsche Marks ("DM") as of March 31, 1998.
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 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 and is developing appropriate plans to assure year 2000
compliance. 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.
As discussed in the Company's 1997 Form 10-K, the Company and the
heavy-duty diesel engine industry are having on-going discussions with the U.S.
Environmental Protection Agency ("EPA"), the U.S. Department of Justice and the
California Air Resources Board to address NOx emissions from heavy-duty diesel
engines under certain driving conditions. The Company believes its engines are
in compliance with EPA emissions standards and fully supports cooperative
efforts of industry and government to meet increasingly stringent Clean Air Act
emissions standards. At this stage, the Company cannot predict the final
results of these discussions. Please refer to the Compnay's 1997 Form 10-K on
file with the Securities and Exchange Commission for more information.
The Company expects that it will be able to satisfy on-going cash requirements
(including capital expenditures for environmental compliance and other
projects), for the next 12 months and
10
<PAGE> 11
Detroit Diesel Corporation Form 10-Q (continued)
thereafter, with cash flow from operations, supplemented, if necessary, by
borrowings under its $300 million revolving line of credit.
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
the rest of 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 ("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.
NEW ACCOUNTING PRONOUNCEMENTS.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
the way public companies report information about operating segments and
requires select information be reported in both interim and annual
reports. The Statement is effective for fiscal years beginning after December
15, 1997, but need not be applied to interim financial statements in the
initial year of application, although restatement of interim periods presented
is required in subsequent interim reports. The Company is required to adopt
this standard for the 1998 annual report.
In February 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. This Statement
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. Restatement of
disclosures for earlier periods is required. This Statement is effective for
the Company's financial statements for the year ended December 31, 1998.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" UNDER THE PRIVATE SECURITIES
REFORM ACT OF 1995
This document may include projections, forecasts and other forward-looking
statements about the Company, the industry in which it competes and the markets
it serves. The achievement of such projections, forecasts and other
forward-looking statements is subject to certain risks and uncertainties, fully
detailed in the "Cautionary Statement for purposes of 'Safe Harbor' under the
Private Securities Act of 1995" in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, which is on file with the Securities and
Exchange Commission.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on April 29, 1998. At
this meeting, an election was held (i) to elect four directors to serve
three-year terms expiring at the 2001 annual meeting, and (ii) to ratify the
appointment of Deloitte & Touche LLP as the Company's independent auditors for
the fiscal year ending December 31, 1998. The voting results for each item are
summarized in the table below:
<TABLE>
ELECTION OF DIRECTORS: FOR WITHHELD
--- --------
<S> <C> <C>
John E. Doddridge 23,544,118 62,169
Ludvik F. Koci 23,537,189 69,098
Dr. Kurt J. Lauk 22,055,566 1,550,721
Charles G. McClure 23,539,864 66,423
</TABLE>
11
<PAGE> 12
Detroit Diesel Corporation Form 10-Q (continued)
APPROVAL OF AUDITORS: FOR AGAINST ABSTAIN
---------- --------- -------
Deloitte & Touche LLP 23,593,185 5,274 7,828
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
4 Second Amendment to the Termination, Replacement and
Restatement Agreement dated February 27, 1998, among Detroit
Diesel Corporation, the several banks and other financial
institutions parties thereto 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.
11 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
(b) The Company filed a Form 8-K on March 13, 1998 regarding the appointment
of Robert E. Belts as Senior Vice President - Finance and Chief Financial
Officer of Detroit Diesel Corporation, effective March 9, 1998, under Item
5 - "Other Events" of such report.
12
<PAGE> 13
Detroit Diesel Corporation Form 10-Q (continued)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DETROIT DIESEL CORPORATION
Date: May 14, 1998
By: /s/ R. E. Belts
---------------
R. E. Belts
Its: Senior Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
13
<PAGE> 14
EXHIBIT INDEX
The following constitutes the exhibits to the Quarterly Report on Form
10-Q of the Company for the period ended March 31, 1998:
SEQUENTIAL
EXHIBIT NUMBER EXHIBIT PAGE NUMBER
- -------------- --------------------------------------------------- -----------
4 Second Amendment to the Termination, Replacement 15
and Restatement Agreement dated February 27, 1998,
among Detroit Diesel Corporation, the several
banks and other financial institutions parties
thereto 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.
11 Statement of Computation of Earnings Per Share 21
27 Financial Data Schedule 22
14
<PAGE> 1
EXHIBIT 4
SECOND AMENDMENT, dated as of February 27, 1998 (this "Amendment"), to
that certain Credit Agreement (the "Credit Agreement") which became effective
pursuant to the terms of the Termination, Replacement and Restatement Agreement
dated as of June 7, 1995 (the "Restatement Agreement"), among DETROIT DIESEL
CORPORATION, a Delaware corporation (the "Borrower"), the several banks and
other financial institutions parties thereto (the "Lenders") and Chemical Bank,
a New York banking corporation, as agent for the Lenders and the predecessor in
interest of The Chase Manhattan Bank, a New York banking corporation, now
acting as agent for the Lenders (in such capacity, the "Agent").
WITNESSETH:
WHEREAS, the parties hereto originally entered into a credit agreement
(the "Original Credit Agreement"), dated as of January 7, 1994; and
WHEREAS, the parties subsequently entered into the Restatement Agreement
whereby the Original Credit Agreement was terminated, subject to applicable
survival provisions, and simultaneously replaced by the Credit Agreement; and
WHEREAS, pursuant to the Original Credit Agreement and the Credit
Agreement, the Lenders have agreed to make, and have made, certain loans to the
Borrower; and
WHEREAS, the Borrower has requested, and, upon this Amendment becoming
effective, the Majority Lenders have agreed, that certain provisions of the
Credit Agreement be amended in the manner provided for in this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
I. DEFINED TERMS. Except as otherwise specifically defined herein,
capitalized terms defined in the Credit Agreement and used herein and therein
shall have the meanings given to them in the Credit Agreement. References to
sections and subsections in this Amendment shall be to the Credit Agreement.
II. AMENDMENTS TO CREDIT AGREEMENT.
A. Amendments to Section 1. Subsection 1.1 of the Credit Agreement
is hereby amended by (i) deleting the definition of "Reportable Event" contained
therein and (ii) inserting in their correct alphabetic order the following new
definitions:
"'Reportable Event': any of the events set forth in Section 4043 of
ERISA, other than those events as to which the thirty day notice period
is waived under subsections .22, .23, .25, .27, .28, .29, .31 or .32 of
PBGC Reg. Section 4043.
<PAGE> 2
"'Second Amendment Effective Date': the date on which the conditions
to effectiveness of the Second Amendment, dated as of February 27, 1998,
to this Credit Agreement have been satisfied."
"'Total Basket Amount': the sum of the following amounts:
(a) the aggregate outstanding principal amount of all Indebtedness
secured by Liens permitted under Section 7.2(g);
(b) the aggregate amount of Attributable Debt under Section 7.3(b);
and
(c) the aggregate outstanding principal amount of all Indebtedness
of all Subsidiaries, excluding (i) the Excluded Indebtedness, and (ii)
for so long as the applicable Subsidiary Guarantee remains in effect,
Indebtedness for which the Subsidiary executes and delivers (A) a
Subsidiary Guarantee in favor of the Agent for the benefit of the
Lenders, substantially in the form of Exhibit I, and (B) as reasonably
requested by the Agent, one or more certificates, resolutions and
opinions of counsel, in each case, in form and substance reasonably
acceptable to the Agent."
B. Amendments to Section 4. Section 4 of the Credit Agreement is hereby
amended by deleting in its entirety Section 4.12 thereof and substituting in
lieu thereof a new paragraph to read as follows:
"4.12 ERISA. Neither a Reportable Event nor an "accumulated funding
deficiency" (within the meaning of Section 412 of the Code or Section 302
of ERISA) has occurred during the five-year period prior to the date on
which this representation is made or deemed made with respect to any
Plan, and each Plan has complied in all material respects with the
applicable provisions of ERISA and the Code and any applicable
regulations thereof. No distress termination (as provided in Section 4041
of ERISA) and no termination as provided in Section 4042 of ERISA of a
Single Employer Plan has occurred, and no Lien in favor of the PBGC or a
Plan has arisen, during such five-year period. The present value of all
accrued benefits under each Single Employer Plan maintained by the
Borrower or any Commonly Controlled Entity (based on those assumptions
used to fund the Plans and calculated in accordance with FASB 35) did
not, as of the last annual valuation date prior to the date on which this
representation is made or deemed made, exceed the value of the assets of
such Plan allocable to such accrued benefits. Neither the Borrower nor
any Commonly Controlled Entity has had a complete or partial withdrawal
from any Multiemployer Plan such that such entity by virtue of such
withdrawal became subject to any material liability under ERISA, nor does
the Borrower nor any Commonly Controlled Entity presently intend to
completely or partially withdraw from any Multiemployer Plan such that
such entity would thereby become subject to any material liability under
ERISA, and neither the Borrower nor any Commonly Controlled Entity would
become subject to any material liability under ERISA if the Borrower or
any such Commonly Controlled Entity were to withdraw completely from all
Multiemployer Plans as of the valuation date most closely preceding the
date on which this representation is made or deemed made. No such
Multiemployer Plan is in Reorganization or Insolvent. There is no pending
or, to the best of the Borrower's
<PAGE> 3
knowledge, threatened litigation or investigation questioning the form or
operation of any Plan nor is there any basis for any such litigation or
investigation which if adversely determined could have a Material Adverse
Effect."
C. Amendments to Section 7. Section 7 of the Credit Agreement is hereby
amended as follows:
1. by deleting in its entirety paragraph (g) of subsection 7.2
thereof and substituting in lieu thereof a new paragraph to read as follows:
"(g) Liens not otherwise permitted hereunder which secure
Indebtedness in an aggregate principal amount at any time outstanding if,
after giving effect thereto, the Total Basket Amount does not exceed 40%
of Net Worth at such time."
2. by deleting in its entirety subsection 7.3 thereof and
substituting in lieu thereof a new subsection to read as follows:
"7.3 Limitation on Sales and Leasebacks. Enter into any
Sale/Leaseback Transaction (a) other than the Sale/Leaseback Transactions
in existence on the Second Amendment Effective Date and listed on
Schedule 7.3 (and any replacements thereof on comparable terms) or (b)
unless (i) after giving effect thereto, the Total Basket Amount does not
exceed 40% of Net Worth at such time, (ii) immediately before and
immediately after giving effect to such transaction, no Default or Event
of Default shall have occurred and be continuing and (iii) the gross sale
proceeds received by the Borrower or the selling Subsidiary are not less
than the subject property's fair market value at such time, as determined
by the Board of Directors of the Borrower or such Subsidiary."
3. by deleting in its entirety the subsection 7.7 thereof and
substituting in lieu thereof a new subsection to read as follows:
"7.7 Limitation on Subsidiary Indebtedness. Permit any Subsidiary to
create, incur, assume or suffer to exist any Indebtedness (other than (i)
Indebtedness of such Subsidiary to the Borrower or any other Subsidiary,
(ii) and Indebtedness secured by Liens permitted under subsection 7.2 and
(iii) Indebtedness of such Subsidiary that is supported by the Italian
Letter of Credit (collectively, "Excluded Indebtedness")) if, after
giving effect thereto, the Total Basket Amount would exceed 40% of Net
Worth at such time."
III. Conditions to Effectiveness. This Amendment shall become effective on
the date (the "Second Amendment Effective Date") on which the Borrower, the
Majority Lenders and the Agent shall have executed and delivered to the Agent
this Amendment.
IV. General.
A. Representations and Warranties. In order to induce the Agent and the
Lenders parties hereto to enter into this Amendment, the Borrower hereby
represents and warrants to the Agent and all of the Lenders as of the Second
Amendment Effective Date that the representations
<PAGE> 4
and warranties made by the Borrower in the Credit Agreement are true and
correct in all material respects on and as of the Second Amendment Effective
Date, before and after giving effect to the effectiveness of this Amendment, as
if made on and as of the Second Amendment Effective Date (it being understood
and agreed that any representation or warranty which by its terms is made as of
a specified date shall be required to be true and correct in all material
respects only as of such specified date).
B. Payment of Expenses. The Borrower agrees to pay or reimburse the Agent
for all of its reasonable out-of-pocket costs and expenses incurred in
connection with this Amendment, including, without limitation, the reasonable
fees and disbursements of counsel to the Agent.
C. No Other Amendments Confirmation. Except as expressly amended, modified
and supplemented hereby, the provisions of the Credit Agreement and the Notes
are and shall remain in full force and effect.
D. Governing Law: Counterparts. 1. This Amendment and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
2. This Amendment may be executed by one or more of the parties to this
Agreement on any number of separate counterparts, and all of said counterparts
taken together shall be deemed to constitute one and the same instrument. A set
of the copies of this Amendment signed by all the parties shall be lodged with
the Borrower and the Agent. This Amendment may be delivered by facsimile
transmission of the relevant signature pages hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
DETROIT DIESEL CORPORATION
By: /s/ Daniel J. McEnroe
Name: Daniel J. McEnroe
Title: Treasurer
THE CHASE MANHATTAN BANK, as Agent, as
Issuing Bank and as a Lender
By: /s/ Andris E. Kalnins
Name: Andris E. Kalnins
Title: Vice President
BANK OF AMERICA NT&SA
(formerly known as Bank of America
Illinois)
By: /s/ Steven K. Ahrenholz
Name: Steven K. Ahrenholz
Title: Vice President
<PAGE> 5
BANK OF MONTREAL
By: /s/ L. Durning
Name: L. Durning
Title: Portfolio Manager
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
Name: F.C.H. Ashby
Title: Senior Manager Loan Operations
CIBC INC.
By: /s/ Stephanie Johnson-Devane
Name: Stephanie Johnson-Devane
Title: Executive Director, CIBC
Oppenheimer Corp., as agent
CITIBANK, N.A.
By: /s/ Brian Ike
Name: Brian Ike
Title: Attorney-In-Fact
COMERICA BANK
By: /s/ Andrew R. Craig
Name: Andrew R. Craig
Title: Vice President
CORESTATES BANK, N.A.
By: /s/ S. Scott Gates
Name: S. Scott Gates
Title: Vice President
CREDIT LYONNAIS CHICAGO BRANCH
By: /s/ Kent S. Davis
Name: Kent S. Davis
Title: Vice President
DG BANK
DEUTSCHE GENOSSENSCHAFTSBANK DG
By: /s/ Pamela Ingram
Name: Pamela Ingram
Title: Assistant Vice President
By: /s/ Robert B. Herber
Name: Robert B. Herber
Title: Vice President
FIRST UNION NATIONAL BANK
(formerly known as First Union National
<PAGE> 6
Bank of North Carolina)
By: /s/ Jorge Gonzalez
Name: Jorge Gonzalez
Title: Senior Vice President
NATIONSBANK, N.A.
By: /s/ Valerie C. Mills
Name: Valerie C. Mills
Title: Vice President
NBD BANK
By: /s/ William H. Canney
Name: William H. Canney
Title: Vice President
THE SUMITOMO BANK, LIMITED
By: /s/ John C. Kissinger
Name: John C. Kissinger
Title: Joint General Manager
WELLS FARGO BANK, N.A.
By: /s/ John Hukari
Name: John Hukari
Title: Assistant Vice President
<PAGE> 1
EXHIBIT 11
Detroit Diesel Corporation
Statement of Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---------- ----------
<S> <C> <C>
Basic net income per share
Net income 9,700,000 6,400,000
Weighted average number of shares outstanding 24,700,566 24,698,066
---------- ----------
Basic net income per share 0.39 0.26
========== ==========
Diluted net income per share:
Net income 9,700,000 6,400,000
Weighted average number of shares outstanding 24,700,566 24,698,066
Dilutive effect of stock options 61,683 (1) 304 (2)
---------- ----------
Weighted average number of shares outstanding 24,762,249 24,698,370
Diluted net income per share 0.39 0.26
========== ==========
</TABLE>
(1) Represents the weighted average dilutive effect of 297,750, 265,500,
105,000, 20,000 and 2,500 stock options exercisable at $20.00, $17.00,
$23.75, $21.81 and $23.94 per share, respectively, calculated using the
treasury stock method.
(2) Represents the weighted average dilutive effect of 303,750, 217,500,
108,000 and 5,000 stock options exercisable at $20.00, $17.00, $23.75 and
$18.00 per share, respectively, calculated using the treasury stock method.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,800
<SECURITIES> 0
<RECEIVABLES> 356,600
<ALLOWANCES> 4,700
<INVENTORY> 310,700
<CURRENT-ASSETS> 740,500
<PP&E> 458,800
<DEPRECIATION> 162,800
<TOTAL-ASSETS> 1,196,800
<CURRENT-LIABILITIES> 550,400
<BONDS> 74,600
0
0
<COMMON> 200
<OTHER-SE> 353,400
<TOTAL-LIABILITY-AND-EQUITY> 1,196,800
<SALES> 588,800
<TOTAL-REVENUES> 588,800
<CGS> 454,400
<TOTAL-COSTS> 454,400
<OTHER-EXPENSES> 115,700
<LOSS-PROVISION> 400
<INTEREST-EXPENSE> 3,300
<INCOME-PRETAX> 15,400
<INCOME-TAX> 5,700
<INCOME-CONTINUING> 9,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,700
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
</TABLE>
