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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
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, 1998
OR
[ ] 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. 1-14787
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-3430473
(state or other jurisdiction of (IRS employer
incorporation or organization) identification number)
5725 Delphi Drive, Troy, Michigan 48098
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code (248) 813-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 par New York Stock Exchange
value per share
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 and 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__. No__X__. We became subject to
such filing requirements on February 4, 1999 and have filed all required reports
since that date.
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. [ ]
As of March 1, 1999, the aggregate market value of the registrant's Common
Stock, par value $ 0.01 per share, held by nonaffliates of the registrant was
about $1.9 billion. The closing price of the Common Stock on March 1, 1999 as
reported on the New York Stock Exchange was $18.69 per share. As of March 1,
1999, the number of shares outstanding of the registrant's Common Stock was
565 million shares.
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DELPHI AUTOMOTIVE SYSTEMS CORPORATION
INDEX AND CROSS REFERENCE
Page
Part I
Item 1. Business 3
Item 2. Properties 37
Item 3. Legal Proceedings 37
Item 4. Submission of Matters to a Vote of Security Holders 38
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 39
Item 6. Selected Financial Data 40
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 42
Item 7a. Quantitative and Qualitative Disclosures About
Market Risks 56
Item 8. Financial Statements 57
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 84
Part III
Items 10. Management: Includes Directors, Executive Officers and Key
- 13. Employees of Delphi, Executive Compensation, Security
Ownership and Certain Relationships and Related
Transactions 84
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports 100
on Form 8-K
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PART I
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
ITEM 1. Business
History of Delphi. Delphi Automotive Systems Corporation ("Delphi") was
incorporated in Delaware in late 1998. Before 1991, our business was conducted
by many separate automotive parts operations which General Motors Corporation
("GM" or "General Motors") had acquired over time. These operations were
generally managed independently from each other within the GM organization. In
1991, General Motors organized its components businesses into the Automotive
Components Group. GM's stated objective was to improve the competitiveness of
these operations and then, based on this improved competitive position, increase
its business through penetration of new markets. Since that time, we have
transformed our business from a North America-based, captive component supplier
to GM into a global supplier of components, integrated systems and modules for a
wide range of customers. In 1995, the group was given the name "Delphi
Automotive Systems" in order to establish its separate identity in the
automotive parts industry.
In late 1997, in connection with the spin-off by GM of its defense
electronics business, GM transferred Delco Electronics Corporation ("Delco
Electronics") to us in order to more closely integrate Delco Electronics'
expertise in electronics with our capabilities in automotive components and
systems. Our Electronics & Mobile Communication product sector consists of the
operations of Delco Electronics. From 1986 through 1997, Delco Electronics had
been operated by GM's Hughes Electronics Corporation subsidiary. Effective
January 1, 1999, General Motors transferred or agreed to transfer the assets
used in our business to our company and our subsidiaries, and we and our
subsidiaries have assumed, or agreed to assume, pay, perform, satisfy and
discharge, the related liabilities.
In February, we completed an initial public offering (the "IPO") of 100
million shares of our $0.01 par value common stock ("Common Stock"), which
represents about 17.7% of our outstanding Common Stock. GM currently owns the
remaining 82.3% of our outstanding Common Stock. GM has announced that it
currently plans to complete its divestiture of Delphi later in 1999 by
distributing all of its shares of our Common Stock to the holders of GM's $1-2/3
common stock (the "Distribution"). GM currently expects to accomplish the
Distribution through a:
o Split-Off--such as an exchange offer by GM in which holders of GM's $1-2/3
common stock would be invited to tender their shares in exchange for shares
of our Common Stock; or
o Spin-Off--a pro rata distribution by GM of its shares of our Common Stock
to holders of GM's $1-2/3 common stock; or
o Combined Split-Off/Spin-Off--some combination of the above transactions.
GM has the sole discretion to determine the timing, structure and all terms
of the Distribution. We have agreed to cooperate with GM in all respects to
complete the divestiture because we believe that our complete separation from GM
will enhance our ability to pursue our business strategy. GM has received a
private letter ruling from the IRS to the effect that its distribution of its
shares of our Common Stock to the holders of its $1-2/3 common stock would be
tax-free to GM and its stockholders for U.S. federal income tax purposes.
However, GM is not obligated to complete the divestiture and we cannot assure
you as to whether or when it will occur.
Overview. Delphi is the world's largest and most diversified supplier of
components, integrated systems and modules to the automotive industry, with 1998
net sales of $28.5 billion. We have become a leader in the global automotive
parts industry by capitalizing on the extensive experience we have gained as the
principal supplier of automotive parts to General Motors, the world's largest
manufacturer of automotive vehicles. We are primarily a "Tier 1" supplier, which
means that we generally provide our products directly to automotive vehicle
manufacturers ("VMs"). We also sell our products to the worldwide aftermarket
for replacement parts and to non-VM customers.
Several years ago, we began to transform our company from a North
America-based, captive component supplier to GM into a global supplier of
components, integrated systems and modules for a wide range of customers. We now
sell our products to every major manufacturer of light vehicles in the world.
Since 1993, our sales to customers other than GM have grown from 13.3% of our
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total sales to 21.4% in 1998 (although our sales to GM were reduced as a
result of work stoppages at certain GM and Delphi locations in the United States
during 1998). For this purpose, our total sales include all sales by entities in
which we own a minority interest.
We have also established an expansive global presence, with a network of
manufacturing sites, technical centers, sales offices and joint ventures located
in every major region of the world. About 60% of our employees and, based on
square footage, about 30% of our wholly owned and leased manufacturing sites
were located outside the United States and Canada as of December 31, 1998. About
30% of our total 1998 sales were derived from products manufactured at sites
located outside the United States and Canada.
Through our experience with General Motors, we have developed a sophisticated
understanding of the design, engineering, manufacture and operation of all
aspects of the automotive vehicle. We have both extensive technical expertise in
a broad range of product lines and strong systems integration skills, which
enable us to provide comprehensive, systems-based solutions for our customers.
We believe that we are one of the leading Tier 1 suppliers in each of our
focused product areas. We operate our business along three major product sectors
which work closely together to coordinate our product development and marketing
efforts. Our three product sectors are: Electronics & Mobile Communication,
which includes our automotive electronics and audio and communication systems;
Safety, Thermal & Electrical Architecture, which includes our interior, thermal
and power and signal distribution products; and Dynamics & Propulsion, which
includes our energy and engine management, chassis and steering products. See
Note 14 to our consolidated financial statements included elsewhere in this
report for additional information.
Industry
General. Our industry generally provides components, systems, subsystems and
modules to VMs for the manufacture of new vehicles, as well as to the
aftermarket for use as replacement parts for current production and older
vehicles.
Today, suppliers offer their component products to VMs individually as well
as in a variety of more fully engineered forms, such as modules and systems:
o "Modules" are groups of component parts arranged in close physical
proximity to each other within a vehicle, which are often assembled by the
supplier and shipped to the VM for installation in a vehicle as a unit.
Modular instrument panels, cockpit modules and door modules are examples.
o "Systems" and "subsystems" are groups of component parts located throughout
the vehicle which operate together to provide a specific vehicle function.
Braking systems, electrical systems and steering systems are examples.
Historically, many large VMs have operated internal divisions to provide a
wide range of component parts for their vehicles. However, vehicle manufacturers
have recently moved towards a competitive sourcing process for automotive parts,
including increased purchases from independent suppliers, as they seek
lower-priced and/or higher-technology products. These independent parts
suppliers, which often have lower cost structures than in-house component
operations, have become an important part of the automotive parts industry. Many
captive suppliers no longer provide their products exclusively to their parent
VM.
Our industry is generally divided into several groups or "tiers:"
o "Tier 1" suppliers such as Delphi sell their products principally to VMs
directly and often offer a broad range of product capabilities, including
design, engineering and assembly services.
o "Tier 2" suppliers sell their products principally to Tier 1 suppliers, who
then combine these parts into their own product offerings. Smaller Tier 2
suppliers are sometimes referred to as "Tier 3" suppliers.
Industry Trends. Five key trends have been reshaping the automotive parts
industry over the past several years:
o Increased Emphasis on Systems and Modules Sourcing. In order to simplify
the vehicle design and assembly processes and reduce their costs, VMs
increasingly look to their suppliers to provide fully engineered,
pre-assembled combinations of components rather than individual components.
By offering sophisticated systems and modules rather than individual
components, Tier 1 suppliers have assumed many of the design, engineering,
research and development and assembly functions traditionally performed by
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VMs. In addition, suppliers now often manufacture and ship component parts
to the general location of a VM's assembly line and then provide local
assembly of systems and modules.
o Globalization of Suppliers. The globalization of VMs, which reflects the
broader global market for vehicle sales and the desire of VMs to increase
vehicle production in low-cost markets, has driven the globalization of
suppliers as they follow their customers. In order to serve multiple
markets in a more cost effective manner, many VMs are turning to global
vehicle platforms such as "world cars," which typically are designed in one
location but produced and sold in many different geographic markets around
the world. Suppliers for a specific world car are often required by the VM
to provide their services in all global locations where that vehicle is
manufactured.
o Increasing Electronic Content. We believe that the electronic content of
vehicles has been increasing and will continue to increase in the future.
This increase in electronic content is largely driven by continued, and
often increasingly stringent, regulatory standards for automotive emissions
and safety as well as consumer demand for increased vehicle performance and
functionality at lower cost. Electronics integration, which generally
refers to replacing mechanical with electronic components and integration
of mechanical and electrical functions within the vehicle, allows VMs to
achieve substantial reduction in the weight and complexity of automotive
vehicles, resulting in easier assembly, enhanced fuel economy, improved
emissions control and better vehicle performance. Electronic content varies
significantly among vehicle models, with higher-end vehicles having more
sophisticated and extensive electronic controls and systems. As consumers,
particularly in more developed markets such as North America and Europe,
seek more competitively-priced ride and handling performance, safety,
security, communications, convenience, entertainment and
environment-friendly options in vehicles, such as air bags, keyless entry,
global positioning systems, audio systems and advanced emission control
systems, Delphi believes that electronic content per vehicle will continue
to increase but will remain subject to technology-driven price declines and
pricing pressures from VMs.
o Ongoing Industry Consolidation. The worldwide automotive parts industry is
consolidating as suppliers seek to achieve operating synergies through
business combinations, shift production to locations with more flexible
local work rules and practices, acquire complementary technologies, build
stronger customer relationships and follow their customers as they expand
globally. The need for suppliers to provide VMs with single-point sourcing
of integrated systems and modules on a global basis has helped fuel
industry consolidation. Furthermore, the cost focus of most major VMs has
forced suppliers to reduce their prices, both in the initial bidding
process and throughout the term of the contract. Consequently, a supplier's
viability depends upon its continuing ability to maintain and increase
operating margins by reducing costs and improving productivity on an
ongoing basis, including by achieving economies of scale through
consolidation.
o Shorter Product Development Cycles. Suppliers are under pressure from VMs
to respond more quickly with new designs and product innovations in order
to support rapidly changing consumer tastes and regulatory requirements.
Vehicle demand in North America has shifted from cars to light trucks and
vans over the last several years, requiring suppliers to modify their
operations to focus on parts for these vehicles. In North America and
Europe, consumers have been increasingly seeking vehicles with more
lower-cost ride and handling performance, safety, security, communications,
convenience and entertainment options, such as global positioning systems,
air conditioning, anti-lock brakes, air bags, power steering, keyless entry
and advanced emissions control systems. In developing countries, as broad
economic improvements are made, demand has increased for smaller, less
expensive vehicles that satisfy basic transportation needs. Additionally,
increasingly stringent government regulations regarding vehicle safety and
environmental standards, such as those mandating the use of airbags in new
vehicles and emissions standards, are driving new product development.
Strategy
The key elements of our business strategy are to supply our customers with
high-quality, innovative components, systems and modules; to exceed existing
customers' expectations while building new relationships; to leverage our global
presence to meet our customers' needs; to improve our operating performance; and
to complete strategic acquisitions, joint ventures and alliances. Each of these
elements is discussed more fully below:
Supply High-Quality, Innovative Components, Systems and Modules. We believe
that the current industry trend towards increased system and module sourcing by
VMs creates a substantial competitive advantage for our company. We believe that
our extensive operating history as a vertically integrated supplier to the
world's largest VM provides us with the electronics integration and other
technical expertise, breadth of product offerings and manufacturing scale needed
to compete successfully on a system and module basis while continuing to supply
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high-quality components. We have developed significant systems capabilities in a
number of key product areas, including power and propulsion systems, ride and
handling systems, passenger environment systems, and control and communication
systems. We also have substantial in-house electronics integration capabilities.
We coordinate our product development and marketing efforts across all of our
product groups and sectors.
By building on our electronics integration expertise, our systems
capabilities and the breadth of our product offerings, we are working to develop
high-quality product offerings which will provide our customers with the ability
to offer consumers enhanced vehicle control, superior occupant protection,
collision avoidance systems, onboard communications systems, advanced energy and
engine management systems, advanced electrical and electronic vehicle
architecture and passenger entertainment and convenience features at competitive
prices.
Exceed Existing Customers' Expectations while Building New Relationships.
We are pursuing increased business with customers other than GM-North America
and we believe that our principal opportunity for future earnings growth will be
increased sales to these customers. Although we intend to pursue new business
with GM and expect to continue to be a principal supplier to GM and its GM-North
America operations for a significant period of time, our strategy focuses on
growing our business across a more diversified customer base, thereby making us
less dependent on the volume of vehicles produced by GM-North America.
Our goal has been and continues to be to increase our total sales to
customers other than GM-North America to at least 50% of our total sales by the
end of 2002. We caution you, however, that this goal is a "forward-looking
statement" that may turn out not to be attainable. We cannot give you any
assurance that we will achieve this goal, including within the time period
indicated. In establishing and measuring our progress towards achieving this
goal, we include in "total sales" all of the sales from minority joint ventures
and other investments even though these sales are not reflected in our sales as
reported in our consolidated financial statements included elsewhere in this
report. On this basis, in 1998, 62.2% of our total sales were to GM-North
America and 37.8% of our total sales were to other customers, as compared to
73.7% and 26.3% of our total sales, respectively, in 1993. Excluding these
minority joint venture sales, the percentages for GM-North America are higher.
We believe that, as an independent company no longer owned by General
Motors, we will have significant opportunities to expand our business with other
VMs around the world. We believe that our status as a part of GM has
historically been a major impediment to the expansion of our business with
customers other than GM, as other VMs have shown varying degrees of reluctance
to source extensively from a supplier owned by a major competitor.
Our focus on customer satisfaction, as demonstrated by our technology
leadership, product quality, cost control and customer responsiveness, positions
us well as we strive to increase our sales to customers other than GM-North
America. This focus also enhances our ability to execute our business with
GM-North America. In order to better serve our customers, our sales and
marketing personnel are organized into 25 dedicated customer service teams, 19
of which work with customers other than GM. Each of our major customers is
served by its own team which has responsibility for satisfying that customer's
needs. Each team is lead by one of our managers and functions as a single point
of contact within the company to represent the interests of the customer
throughout our organization. These teams are supported by our network of
manufacturing facilities and engineering and technical resources worldwide.
Leverage Global Presence. We can provide significant manufacturing,
engineering, technical and other support to our customers in every major market
in which they operate. We believe that our geographic presence is one of the
broadest in the industry. As of December 31, 1998, we had 168 wholly owned and
leased manufacturing sites, 27 technical centers, 51 customer service centers
and sales activity offices and 40 joint ventures or other strategic alliances in
36 countries on six continents. We are continuously evaluating and enhancing our
engineering and technical resources, which currently include over 15,000
engineers, scientists and technicians, to provide an efficient, customer-focused
global network of engineering and technology customer centers that we believe
will better serve our customers around the world.
We believe that we are particularly well positioned as VMs turn to global
vehicle platforms, such as world cars, that are manufactured and sold in
numerous markets around the world. Since we have manufacturing sites located in
every major region around the world, we are often able to capitalize on these
world car opportunities to gain access to new customers. Delphi currently
supplies parts for a number of global vehicle platforms. In addition, we believe
that our global presence also provides us opportunities by allowing us to
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leverage sales to a customer in one location or for one product into sales in
other locations and for other products.
From 1992 to 1998, the percentage, based on square footage, of our wholly
owned and leased manufacturing sites located outside the United States and
Canada has increased from about 20% to about 30%, reflecting the globalization
of our VM customers. During the same period, the percentage of our employees
located outside the United States and Canada has increased from about 38% to
about 60%. About 30% of our total 1998 sales were derived from products
manufactured at sites located outside the United States and Canada. See "Item 2.
Properties" for additional information on our facilities and capabilities.
We also have a large number of joint ventures and other strategic
partnerships in various locations throughout the world, with the largest number
located in the Asia/Pacific region, including China and Korea. Our joint
ventures and other investments as of December 31, 1998 are shown below by
geographic region:
United States/Canada............................ 5
Europe/Middle East/Africa....................... 8
Mexico/South America............................ 8
Asia/Pacific.................................... 19
--
Total......................................... 40
==
For financial information regarding the principal geographic areas in which we
operate, see Note 14 to the consolidated financial statements included elsewhere
in this report.
Improve Operating Performance. We have developed, and are implementing,
initiatives to improve our operating performance. Operational improvements have
enabled Delphi to achieve significant cost reductions and improve productivity
in the face of an increasingly aggressive cost focus by most major VMs. Our
continued ability to realize operating performance improvements is important to
our ability to achieve our business objective. Although we have made substantial
progress in implementing the initiatives described below, we believe that in
many cases the full impact of these initiatives has not yet been realized. Our
primary initiatives to improve operating performance are:
o Delphi Manufacturing System. In 1997, we developed and began the process of
implementing the Delphi Manufacturing System throughout our global
operations which involves reorganizing the workplace and improving the
production process in order to maximize manufacturing flexibility, reduce
total manufacturing costs and achieve lean production. Under the Delphi
Manufacturing System, traditional manufacturing production lines are
replaced by more flexible manufacturing cells which focus on utilizing
one-piece production flow rather than traditional batch processing. These
flexible manufacturing cells typically consist of clusters of individual
manufacturing operations and efficient work stations, with the operators
placed centrally within each cellular configuration to increase operational
availability. This cell design provides flexibility by varying the number
of operations each operator performs. The Delphi Manufacturing System has
allowed us to improve our product quality and be more responsive to the
changing needs of our customers. We believe that continued implementation
of the Delphi Manufacturing System will allow us to improve our
manufacturing productivity, increase our daily inventory turns and reduce
our production lead times.
o Structural Cost Reductions. We continuously seek to achieve savings through
reducing our structural costs. Structural costs generally consist of our
fixed costs, including our selling, general and administrative and other
commercial costs, engineering costs and labor and other manufacturing
costs. We expect to continue to reduce our structural costs principally
through infrastructure improvements, such as combining operations whenever
possible to reduce our overhead, administrative and related costs, and
eliminate redundancies. Separately, in connection with the recent
integration of Delco Electronics into our operations, we expect to realize
additional structural cost savings. We also seek to reduce our structural
costs by implementing a unified, common approach to operations throughout
our global facilities, including a common organizational and management
structure, application of the Delphi Manufacturing System at all of our
manufacturing plants, common training programs and a common set of key
metrics for measuring actual performance in comparison to common standards
and goals.
o Global Sourcing. We use global sourcing in order to obtain the best prices
for our direct and indirect materials, machinery and equipment and
services. Global sourcing is a competitive bidding process among
prospective suppliers located throughout the world. Our purchasing process
is organized by commodity groups for each major region of the world and
focuses on advance, long-term sourcing through long-term or lifetime
contracts. In order to ensure a consistent high-quality supply of goods and
services, we utilize common systems, policies and procedures across our
company, including a common supplier quality improvement process. Due to
our size, we believe we have sufficient scale and purchasing leverage to
enable us to continue to secure significant volume discounts after our
separation from GM. On average, since 1993, we have reduced our materials
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costs by about 3% to 4% per year based on a year-to-year actual price
comparison, excluding Delco Electronics, which was not integrated into our
operations until December 1997.
o Labor Relations. We emphasize the sharing of relevant information with
our international and local union leadership worldwide and working with
the unions to jointly develop local work rules and practices. While we
have been a part of GM, the national labor agreements negotiated by GM
with the unions have applied to our workforce in the United States and
Canada. We believe that, as a fully independent company with control
over our own labor relations after the Distribution, we would have the
right to negotiate regarding our own national and local labor agreements
directly with the unions representing our employees. We believe that our
complete separation from General Motors will enable us, over time, to
increase our competitiveness by establishing local work rules and
practices more consistent with those generally prevailing in the
automotive parts industry. However, we cannot assure you as to when or
the extent to which we will be able to achieve these benefits.
o Product Portfolio Management. We have implemented a portfolio management
process designed to streamline and focus our product portfolio to
facilitate our emphasis on comprehensive, integrated systems-based
solutions for customers. Under this process, our management regularly
evaluates all of our company's product lines in order to analyze how each
product supports our overall vision and strategic objectives. Excluding
Delco Electronics, we streamlined our portfolio as a result of this
process to about 151 product lines in 1998, down from about 210 in 1992.
Our current product portfolio includes about 190 product lines and
reflects the integration of 30 product lines from Delco Electronics as
well as new product development activities. We expect to continue to
review and refine our product portfolio in light of industry trends,
with an emphasis on integrated systems and modules as well as product
featuring electronics integration.
o Fix/Sell/Close Process. We have adopted a "fix/sell/close" process to
improve our cost competitiveness. Under this process, we review our
global operations and investments, including our joint ventures, on an
ongoing basis to identify operations or investments not performing at
desired levels. These operations or investments are placed into a
category to be fixed, sold or closed. With input from our unions,
management then develops a specific plan to deal with each operation
in a timely manner. With respect to many of our operations in North
America, both our local and international unions have cooperated with
management in initiatives to improve the viability of our operations.
As operations are improved or eliminated, they are removed from the
category. Since 1995, this process, together with the product portfolio
process described above, has resulted in the closing, sale or
consolidation of over 50 operations worldwide as well as the
substantial improvement of many other operations. We will continue to
monitor our operations and investments and we believe that this
ongoing process will continue to improve our cost competitiveness in the
future. However, our ability to eliminate product lines, close plants
and divest businesses is subject to certain restrictions in our
Supply Agreement with General Motors as described elsewhere in this
report.
Complete Strategic Acquisitions, Joint Ventures and Alliances. We intend to
participate actively in the industry trend towards consolidation by pursuing
strategic acquisitions and alliances in order to complement or fill gaps in our
existing product portfolio, enhance our design and manufacturing capabilities,
improve our geographic presence in selected areas and increase our access to new
customers. We will be restricted from executing certain types of transactions
without GM's consent for a period of time following the IPO and the
Distribution as a result of covenants arising from our separation from GM as
described elsewhere in this report. In addition, we are bound for limited
periods of time by certain covenants not to compete which we entered into in
connection with some of our past divestitures. We do not believe that these
restrictions will materially impair our ability to execute this business
strategy.
While we currently believe that we will be able to successfully execute the
business strategies outlined above, we cannot assure you in this regard. Our
ability to execute each of the business strategies discussed above is subject to
numerous risks and uncertainties, including those described elsewhere in this
report and in our other filings with the Securities and Exchange Commission,
including our registration statement on Form S-1, dated February 4, 1999
(Registration No. 333-67333).
Research and Development
We have substantial technical and vehicle integration expertise as a result
of our extensive operating history as the in-house supplier to the world's
largest VM. We were the first supplier to produce a number of new products,
including the first electric self-starter, in-dash radio, turn signal, catalytic
converter, airbag, tilt steering column, independent front-wheel suspension,
energy-absorbing steering column, electric power sliding door and integrated
child safety seat. More recently, we were the first supplier to produce
brake-by-wire systems and computer-controlled engine management systems. As a
result, we have developed a comprehensive knowledge of the design, engineering,
manufacture and operation of all aspects of the automotive vehicle.
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We believe that our engineering and technical expertise, together with our
emphasis on continuing research and development, allows us to use the latest
technologies, materials and processes to solve problems for our customers and to
bring new, innovative products to market. Delphi maintains technical engineering
centers in every major region of the world to develop and provide advanced
products, processes and manufacturing support for all of our manufacturing sites
and to provide our customers with local engineering capabilities and design
development on a global basis. As of December 31, 1998, we employed more than
15,000 engineers, scientists and technicians around the world. We continuously
evaluate and enhance our engineering and technical resources and are currently
considering plans to reorganize our worldwide engineering and technical
resources into a more efficient, customer-focused global network.
We believe that continued research and development activities are critical
to maintaining our leadership position in the industry. Our total expenditures
for research, development and engineering activities were $1.4 billion, $1.5
billion and $1.6 billion in 1998, 1997 and 1996, respectively. As a result, we
have introduced over 50 new products and processes during each of the last
several years.
Intellectual Property
We have generated a large number of patents and trademarks in the operation
of our business. Under our separation arrangements with GM, generally speaking,
we own the patents, patent applications and records of invention that are
primarily related to components produced or sold by us and any other patents
that would be more valuable to us than to GM. Accordingly, GM has transferred to
us full or partial ownership of about 2,800 patents, 640 U.S. patent
applications and 620 records of invention as well as the corresponding foreign
patent and patent applications. In addition, we and GM have agreed to license
certain of our existing patents to each other. While we believe that these
patents, inventions and licenses are, in the aggregate, important to the conduct
of our business, none is individually considered material to our business.
Although we do not rely on material "patent-protected" technology, our
ability to continue to generate technological innovations is important to ensure
our long-term success as well as the competitiveness of our business. Our focus
on innovation is evidenced by the 586 patents relating to our business which
have been recorded in recent years. We intend to continue to actively pursue
technological innovation.
GM has transferred to us ownership of about 1,170 trademark registrations
and applications, including about 70 in the United States, as well as
unregistered trademarks. Our trademarks include the following: E-STEER(TM),
FOREWARN(TM), Freedom(TM), Gold Dot(TM), INTELLEK(TM), Monsoon(TM),
QUADRASTEER(TM) and TRAXXAR(TM).
Products and Competition
We believe that we have the largest and most diversified portfolio of
products in the industry. Our product offerings are organized in three product
sectors: Electronics & Mobile Communication; Safety, Thermal & Electrical
Architecture; and Dynamics & Propulsion. For more information on our product
sectors, see Note 14 to the consolidated financial statements included elsewhere
in this report.
We conduct our business in a highly competitive industry. The global
automotive parts industry principally involves the supply of components, systems
and modules to VMs for the manufacture of new vehicles, to other suppliers for
use in their product offerings and to the aftermarket for use as replacement
parts for older vehicles. Although the overall number of our competitors has
decreased due to ongoing industry consolidation, the automotive parts industry
remains extremely competitive. VMs rigorously evaluate suppliers on the basis of
product quality, price competitiveness, reliability and timeliness of delivery,
product design capability, technical expertise and development capability, new
product innovation, leanness of facilities, operational flexibility, customer
service and overall management. Some of our competitors have substantial size
and scale and some have lower cost structures, particularly lower hourly wage
structures, than our company.
Our overall product portfolio is extremely broad by industry standards.
Very few other Tier 1 suppliers compete across the full range of our product
areas. However, we do face significant competition across all three of our
principal product sectors from each of the following major Tier 1 suppliers:
Robert Bosch GmbH, Denso Inc. and Visteon Automotive Systems, a unit of Ford
Motor Company. Our product sector offerings and principal competitors are
summarized below:
9
Electronics & Mobile Communication. Our Electronics & Mobile Communication
product sector accounted for $4.6 billion, or 16.1%, of our 1998 net sales,
excluding certain inter-sector sales which we eliminate for purposes of
determining our total consolidated net sales. This sector is one of the leading
global providers of automotive electronics products. The sector also offers a
wide variety of audio and communication systems for the vehicle. The automotive
electronics capabilities of this sector are utilized in connection with many of
the product offerings of our two other product sectors to produce systems,
subsystems and modules designed to enhance vehicle safety, comfort, security and
efficiency. Our principal competitors in the Electronics & Mobile Communication
product sector include the following: Denso Inc., Siemens AG, Robert Bosch GmbH,
Mannesman VDO AG and Motorola, Inc. Our principal electronics and mobile
communication product lines include the following:
Product Line Description
------------ -----------
Audio Systems Audio systems and components ranging from AM radios
to integrated compact disc players, including the
Monsoon(R) Audio System.
Communication Communication and information systems, including
Systems the EyeCue(R) head up display system and mobile
multimedia.
Advanced Controllers Microprocessor-based engine management controllers
and anti-lock brake controllers.
Powertrain and Engine Modules designed to optimize engine and
Control Modules transmission performance.
Collision Warning FOREWARN(R) collision warning systems are
Systems microwave-based forward, rear and side object
detection systems which present warning signals to
drivers in a wide range of formats and warning
levels.
Security Systems Products include sounders, inclination sensors,
glass breakage sensors, remote key actuation
products and vehicle immobilization products, some
of which are sold under the TEXALARM(R) brand.
Safety Systems Products include frontal inside airbag controllers,
occupant positioning, adaptive restraints and
roll-over sensing.
Safety, Thermal & Electrical Architecture. Our Safety, Thermal & Electrical
Architecture product sector accounted for $11.1 billion, or 39.0%, of our 1998
net sales, excluding inter-sector sales. This sector offers a wide range of
products relating to the vehicle interior as well as the expertise to integrate
them into individual vehicle designs to simplify manufacturer assembly and
enhance vehicle marketability. The sector also offers thermal products,
including powertrain cooling systems and climate control systems that meet
global mandates for alternative refrigerant capabilities. The sector is also a
global leader in the production of wiring harnesses and connectors for
electrical power and signal distribution. Our principal competitors in the
Safety, Thermal & Electrical Architecture product sector include the following:
Yazaki Corp., Valeo SA, Autoliv Inc., Denso Inc. and TRW Inc.
o Interior Products. These products accounted for $3.3 billion, or 29.7%, of
the Safety, Thermal & Electrical Architecture product sector's 1998 net
sales, excluding inter-sector sales. Our principal interior product lines
include the following:
Product Line Description
------------ -----------
Safety/Airbag Airbag systems and modules and adaptive restraint
Systems technologies, including driver and passenger airbag
modules, side airbag modules and integral steering
wheels.
Door Modules Integrated door hardware systems with various
features of power and signal distribution, safety
and security, heating, ventilation and air
conditioning ("HVAC"), electronic control and
interior trim systems.
Power Product Systems include power sliding doors, power
Systems liftgates and power decklids.
Modular Cockpits Fully integrated interior systems, featuring
electrical/electronic systems, structure and trim
systems, steering systems, thermal systems and
entertainment and safety systems.
10
o Thermal Products. These products accounted for $2.7 billion, or 24.3%, of
the Safety, Thermal & Electrical Architecture product sector's 1998 net
sales, excluding inter-sector sales. Our principal thermal product lines
include the following:
Product Line Description
------------ -----------
Thermal Management Systems designed to optimize total vehicle thermal
Systems management functions, maintain passenger comfort
and powertrain cooling in all climates and driving
conditions.
Climate Control Systems which include HVAC modules, compressors
Systems and condensors and are designed to maintain
passenger comfort in all climates and weather
conditions.
HVAC Systems and HVAC systems and modules regulate airflow,
Modules temperature, humidity and air direction and include
evaporators, lightweight aluminum heater cores,
blower motor fans and compressors.
Powertrain Cooling Systems designed to optimize powertrain cooling for
Systems various driving conditions, including radiators,
fans and hoses.
Front End Modules Modules feature a single-part concept, resulting
in reduced product weight and size and higher
system performance at lower cost.
o Power and Signal Distribution Products. These products accounted for $5.1
billion, or 46.0%, of the Safety, Thermal & Electrical Architecture product
sector's 1998 net sales, excluding inter-sector sales. Our principal power
and signal distribution product lines include the following:
Product Line Description
------------ -----------
Electrical/Electronic Products and services relating to E/E system design
("E/E") Systems and production, including E/E centers designed
Centers in a variety of configurations and tailored to meet
customer-specific applications.
Connection Systems Wiring connection systems with current-carrying
capacity ranging from signal-level to over 300
amps, including the GT Connection System(TM), and a
variety of fiberoptic data network and
point-to-point connection systems.
Electronic Products Electronic products featuring micro-processor based
designs with custom integrated circuits and
analog/digital/microcomputer/mixed design
capabilities.
Advanced Data Products include an optical star coupler, which
Communication Systems distributes data in real time via plastic optical
fiber throughout an expandable network; and
customized multiplex systems and components.
Fiber Optic Lighting DELight(TM) fiber optic lighting systems utilize
Systems centrally located light sources to provide lighting
throughout the vehicle.
Ignition Wiring Ignition wiring systems and components.
Systems
Sensors Temperature sensors and multifunction sensors that
integrate electronics into the packaging. Some of
these sensors are sold under the brand name
INTELLEK(TM).
Switch Products Pushbutton switches, elastomer switches
incorporating integrated electronics and
miscellaneous specialty switches.
11
Dynamics & Propulsion. Our Dynamics & Propulsion product sector accounted for
$12.8 billion, or 44.9%, of our 1998 net sales, excluding inter-sector sales.
This sector offers a wide range of energy and engine management systems designed
to optimize engine performance and emissions control through management of
vehicle air intake, fuel delivery, combustion and exhaust after-treatment. The
sector also offers all major chassis control systems--steering, braking,
suspension and engine, with a focus on providing superior ride and handling
performance, high reliability, reduced mass and improved fuel efficiency. The
sector's steering products feature vehicle control and driveline technologies
and advanced electronic controls to improve performance. Our principal
competitors in the Dynamics & Propulsion product sector include the following:
Robert Bosch GmbH, LucasVarity PLC, NSK Ltd., Siemens AG and TRW Inc.
o Energy and Engine Management Products. These products accounted for $5.8
billion, or 45.3%, of the Dynamics & Propulsion product sector's 1998 net
sales, excluding inter-sector sales. Our principal energy and engine
management product lines include the following:
Product Line Description
------------ -----------
Air/Fuel Management Subsystems measure, control, manage and deliver
a combustible mixture of fuel and air to the
combustion chamber.
Energy Storage and The generator and battery comprise the principal
Conversion electrical system in the vehicle. The battery
stores energy for transfer to the starter during
engine start-up; once the engine is running, the
generator supplies the vehicle's electrical power
requirements. Among other products, we sell
batteries into the aftermarket under the brand, as
described under "--Customers--Aftermarket."
Valve Train Systems manage engine timing and performance to
improve fuel economy, reduce emissions and
increase torque and power.
Exhaust Subsystems carry gas away from the engine and
After-Treatment removes harmful chemical compounds through
catalytic reaction of contaminants.
Sensors and Solenoids Sensors, including our INTELLEK(TM) brand sensors,
monitor conditions such as presence, speed and
chemical content within the vehicle. Solenoids are
actuators that control mechanical movement and the
flow of fluids within the vehicle.
Ignition Subsystems provide spark energy for combustion
initiation of the air/fuel mixture. Coils,
electronics, wires/boots and spark plugs generate
and deliver a high voltage charge to the combustion
chamber.
Fuel Handling Subsystems contain and deliver fuel to the air/fuel
architecture and control evaporative emissions.
Controls Subsystems consist of the electronic control module
and related software and algorithms which are
customized to meet VM needs.
Advanced Propulsion New propulsion technologies include different
Systems vehicle system approaches--from powertrain
integration to advanced electro-chemical fuel cell
engines.
12
o Chassis Products. These products accounted for $3.8 billion, or 29.7%, of
the Dynamics & Propulsion product sector's 1998 net sales, excluding
inter-sector sales. Our principal chassis product lines include the
following:
Product Line Description
------------ -----------
Intelligent Chassis TRAXXAR(TM) vehicle stability enhancement system
Control Systems integrates all major chassis control
systems--steering, braking, suspension and
powertrain. GALILEO(TM)intelligent brake-by-wire
control system combines power assist, anti-lock
braking functions traction control and tunable
pedal feel in a modular design.
Advanced Ride Manual Selectable Ride System is a controlled
Control Suspension suspension system designed with two independent
Systems driver-selectable levels of damping. Continuously
Variable Real-Time Damping System provides full car
modal control with continuously variable
independent damping control at each corner.
Chassis Systems and Systems and modules include complete wheel-to-wheel
Modules modules, chassis corner modules, brake corner
modules, damper modules and bearings.
Brake Systems Anti-lock brake systems feature solenoid technology
and can accommodate traction control, variable
effort steering and other vehicle enhancements.
Suspension and Brake Components include calipers, rotors, drums, master
Components cylinders, boosters, drum brake assemblies, shock
absorbers and leveling height sensors.
o Steering Products. These products accounted for $3.2 billion, or 25.0%,
of the Dynamics & Propulsion product sector's 1998 net sales, excluding
inter-sector sales. Our principal steering product lines include the
following:
Product Line Description
------------ -----------
Steering Systems Steering components and fully integrated systems.
Components include hydraulic pumps, steering gears
and steering hoses.
Columns and Steering columns, including TILT WHEEL(TM),
Intermediate LUXURY-TILT(TM) power adjustable wheel function
Shafts and manual tilt and telescope. Intermediate shaft
offerings include cardan joint, flexible couplings,
pot-style joint, spline shaft and concentric
isolator.
Driveline Systems Halfshafts that transmit the power of the vehicle's
engine to the wheels. Integrated halfshaft designs
in a wide variety of joint types and sizes.
Fuel Efficiency and E-STEER(TM) Electric Power Steering is and
Performance Steering all-electric, engine independent system featuring
Systems space efficiency, environmental compatibility and
fuel efficiency.
E-H-STEER(TM) Electro-Hydraulic Power Steering
features optional variable-assist steering.
QUADRASTEER(TM) Four Wheel Steering features a
short turning radius, enhanced control and improved
handling. MAGNASTEER(TM) Magnetic Variable Assist
Steering features variable effort power steering.
13
Customers
General. We currently sell our products to all of the major VMs. While we
expect our business with customers other than GM to increase over time, we also
expect that GM will remain our largest customer by far for a significant period
of time due to the long-term nature of sales contracts in our industry, our
strong customer-supplier relationship with GM and the new supply agreement we
entered into with GM in January 1999 in connection with our separation from GM
(the "Supply Agreement") (See "--Arrangements between GM and Delphi--Supply
Agreement"). We supply parts to each regional sector of GM's Automotive
Operations, including its automotive operations in the United States, Canada and
Mexico ("GM-North America"), and to GM's automotive operations throughout the
rest of the world ("GM-International"). In addition, we sell our products to the
worldwide aftermarket for replacement parts. Currently, most of our aftermarket
sales are to GM's Service Parts Operations ("GM-SPO") for distribution
principally to the North American aftermarket.
The following table shows how our total sales were derived for each of the
last three years. The percentages for 1998 were affected by work stoppages at
certain GM and Delphi locations in the United States in June and July 1998.
Total Sales
Year Ended
December 31,
--------------------------
Customer 1998 1997 1996
-------- ---- ---- ----
GM-North America..........62.2% 65.4% 66.6%
GM-International..........11.0 11.2 11.7
GM-SPO.................... 5.4 5.1 5.2
---- ---- ----
Total GM................78.6 81.7 83.5
Other Customers...........21.4 18.3 16.5
---- ---- ----
100.0% 100.0% 100.0%
===== ===== =====
For purposes of the foregoing table, "total sales" include all of the sales
from joint ventures and other investments in which we own a minority interest
even though these sales are not reflected in our sales as reported in our
consolidated financial statements included elsewhere in this report. This is how
we have historically tracked our sales by customer for internal purposes. We
include our minority joint venture sales for this purpose because, among other
things, they principally relate to our joint ventures outside the United States
where we frequently have significant influence over product design and
technology and customer relationships but do not own more than 50%. If we owned
more than 50% of these joint ventures, in most cases, we would include these
sales in our consolidated sales. In addition, many of these joint ventures use
our technologies. If we did not include these sales, the percentages set forth
above for GM would be higher.
Awarded Business. We have a substantial base of awarded business from VMs,
including business with GM-North America under arrangements that are governed by
the Supply Agreement. We track as "awarded business" the future sales that we
have a strong expectation of realizing based on various types of VM awards to us
and various assumptions we make regarding, among other things, the timing and
volume of vehicle production, option mix and product pricing. On that basis, we
believe that we currently have a solid foundation of awarded business upon which
to grow our company. We cannot assure you, however, that we will in fact realize
any specific amount of awarded business because it remains in all cases subject
to a number of important risks and uncertainties. We currently estimate revenues
from our existing awarded business to be about $28 billion for 1999 and about
$22 billion for 2003. The amount of our awarded business declines over time as
the vehicle programs in which we are currently participating mature and
eventually terminate. However, particularly in the later years, we expect that
we will be awarded additional business from GM and other customers.
Sales to General Motors. In 1992, General Motors launched a major
reorganization of its automotive business to streamline its business practices
and downsize its North American automotive operations. At that time, GM
announced its intention to begin filling its procurement needs on a global
basis. GM strives through this global sourcing strategy to leverage its
purchasing power by sourcing its products on a global basis and to increase
competition for its business among its suppliers on the basis of quality,
service, technology and price. Pursuant to this initiative, GM has provided
suppliers worldwide with the opportunity to bid for GM-North America business
historically sourced with us. As a result, our share of GM-North America's
automotive parts requirements has declined since 1992.
14
We believe that we are and will continue to be able to compete effectively
for GM-North America business because of the high quality of our products, our
ongoing cost reduction efforts and our product and technological innovations. As
a principal supplier to GM, we periodically have discussions with GM relating to
its future vehicle programs and our long-term technology and product
development. Although we have no commitments to GM in this regard, we expect to
continue these discussions for some period of time after our separation from GM
based on our strong customer-supplier relationship. However, we do expect the
portion of GM-North America's automotive parts requirements which we supply and
the prices we charge to GM-North America to continue to decline over the next
several years. As a result, we also expect that our total sales to GM will
decline over the next several years. Through our strategy of aggressively
pursuing increased business with customers other than GM-North America,
including additional sales to GM-International, however, we will strive to
mitigate these effects and increase our total sales.
We have historically supplied a lower percentage of GM-International's
automotive parts requirements than the percentage of parts we have supplied to
GM-North America. Until the last several years, we were operated by GM as a
captive, North America-based supplier to GM's North American operations. As a
result, we did not focus heavily on our global business opportunities, including
those with GM-International. We also did not have the global presence to compete
effectively for GM-International business. As noted above, we have substantially
expanded our global presence over the last several years and intend to continue
to compete for additional GM-International business.
Supply Agreement. The Supply Agreement we have entered into with General
Motors in connection with our separation provides that all existing contracts
between General Motors and our company as of January 1, 1999 will generally
remain in effect, including the pricing, duration and purchase order terms and
conditions. However, the timing of payments from GM to us under the existing
contracts will change. The Supply Agreement provides us with certain rights to
provide on competitive terms the first replacement cycle of all product programs
in the United States and Canada which we were providing to GM as of January 1,
1999, provided that GM sources such replacement programs prior to January 1,
2002 and we are competitive in terms of design, quality, price, service and
technology as these factors relate to all aspects of bid packages that may be
submitted by other suppliers. For more information regarding the terms of the
Supply Agreement, see "--Arrangements Between GM and Delphi--Supply Agreement."
Other VMs. Although General Motors is by far our largest customer, we do
business with all of the other major VMs worldwide. Our top five VM customers
other than GM are DaimslerChrysler, Toyota, Fiat, Volkswagen, and Renault. Our
combined sales to these customers accounted for about 8% of our total 1998 net
sales, and our top ten VM customers other than GM accounted for about 11% of our
total 1998 net sales. In determining these percentages, we have not included
sales of entities in which we have a minority interest.
Substantially all of our existing contracts with these non-GM customers,
which we entered into while we were a business sector of GM, require the consent
of the customer in order to assign or transfer the contract. We have had
discussions with all of our major non-GM customers regarding our separation from
GM and our intent to continue to perform under these existing contracts. Given
the extremely large number of existing contracts with our non-GM customers and
the positive feedback received during discussions with our major non-GM
customers, we do not currently intend either to seek consents from or to enter
into new contracts with these customers in connection with our separation from
GM. Based on these discussions, we do not believe that our separation from GM
will adversely affect our business with these customers. However, we cannot
assure you in this regard.
Aftermarket. We sell products to the worldwide aftermarket as replacement
parts for current production and older vehicles. In 1998, our aftermarket
revenues of $2.1 billion represented 7.2% of our total net sales. We currently
sell most of these products into the North American aftermarket under
arrangements with GM-SPO, the principal aftermarket sales organization of GM.
GM-SPO distributes replacement parts to the aftermarket primarily through GM
automobile dealerships and independent distributors, including warehouse
distributors and direct retailers. Outside North America, we principally sell
into the aftermarket through independent distributors.
Under the terms of our separation from GM, we and GM have agreed that,
subject to certain exceptions, GM-SPO will be the exclusive distributor of our
products into the U.S. aftermarket and we will be the exclusive supplier of
these products to GM-SPO through at least December 31, 2000. GM-SPO currently
markets our products under a number of brand names, including ACDelco(R),
Freedom(R) and Voyager(R). In connection with our separation from GM, we have
agreed with GM-SPO to split the ownership of these aftermarket brands. GM-SPO
owns the ACDelco brand and any AC and Delco derivatives and formatives. However,
as described further under "Arrangements Between Delphi and General
Motors--Intellectual Property," we have been granted a perpetual, worldwide,
royalty-free license to use the trade name "Delco Electronics" and the
trademarks "DELCO" and "DELCO ELECTRONICS" in connection with certain of our
products as well as a worldwide license to use the trademarks "AC," "DELCO" and
"AC Delco" until January 1, 2000. We own the Freedom brand, although we may not
use the brand in the United States until the expiration of our arrangement with
GM-SPO. GM-SPO will own the Voyager battery brand, but may only use it on
batteries it purchases from us. For more information about these arrangements,
see "--Arrangements Between GM and Delphi --Aftermarket Sales."
15
We have historically derived our principal aftermarket revenues through our
relationship with GM-SPO. We believe that there exist opportunities to increase
our revenues from sales in the aftermarket and augment the "Delphi" brand
presence in the aftermarket over time by establishing new supply relationships
with various participants along the aftermarket distribution channel. We believe
that our ability to sell products developed for the VM market to aftermarket
customers can reduce the impact of adverse changes in demand for new vehicles.
With respect to the aftermarket in the United States, we intend to continue to
sell products through GM-SPO until the expiration of the transitional
arrangements described above. Outside the United States, we are initially
focusing on the aftermarket business in Europe and South America.
We believe that incremental aftermarket sales opportunities will be available
to us following our complete separation from GM. However, growth in the highly
competitive aftermarket business will take time to achieve in light of the
significant investment in an aftermarket distribution infrastructure that is
required.
Non-VM Customers. We are also diversifying by supplying certain of our
products, including connection systems, flex-circuits wiring, instrumentation
and map sensors, to new customer areas, such as the aerospace, motorcycle and
computer industries. Our non-VM customers include Boeing Company,
Harley-Davidson Inc. and Silicon Graphics Inc. We are also building
relationships with Tandem Computers Inc., Storage Technologies and Lucent
Technologies Inc. These non-VM sales accounted for only a nominal amount of our
total 1998 net sales. We believe that opportunities exist to increase our sales
in this area and we intend to continue to work to expand our sales to non-VM
customers.
Variability in Delphi's Business
There are a number of factors that contribute to variability in our business.
The variability can produce significant fluctuations in sales and earnings from
quarter to quarter, and in some cases from year to year. The primary factors
that affect variability are summarized below.
Automotive Industry. Almost all of our business is directly related to
automotive sales and production by our customers, which are highly cyclical and
depend on general economic conditions and other factors, including consumer
spending and preferences. Any significant reduction in automotive production and
sales by our customers would have a material adverse effect on our business.
Regional. We have substantial operations in every major region of the world
and economic conditions in these regions often differ. The recent economic
downturn in Asia and in Brazil and other regions of Latin America, including
Mexico, has led to reductions in demand for automobiles and component parts in
those areas and has had an adverse effect on our financial results in 1998. To
the extent that these conditions continue to worsen, or spread to other regions,
particularly in the United States, our business will continue to be adversely
affected.
Seasonal. Our business is moderately seasonal as our primary North American
customers historically halt operations for about two weeks in July and about one
week in December. In addition, third quarter automotive production is
traditionally lower as new models enter production. Accordingly, third and
fourth quarter results may reflect these trends.
Purchasing
We purchase various raw materials for use in our manufacturing processes. The
principal raw materials we purchase include platinum group metals, copper,
aluminum, steel, lead and resins. All of these raw materials, except the
platinum group metals we use to produce our catalytic converters, are available
from numerous sources. Currently, all of the platinum group metals used by
Delphi for catalytic converters produced for GM are purchased by GM directly
from suppliers of these metals which are located principally in Russia and South
Africa. In light of the potential political instability in these areas, Delphi
maintains a three to four month inventory of platinum group metals. Delphi
purchases the platinum group metals it uses in catalytic converters manufactured
for its customers other than GM directly from suppliers.
We have not experienced any shortages of raw materials or other products and
normally do not carry inventories of raw materials or finished products in
excess of those reasonably required to meet our production and shipping
schedules, except for the three to four month supply of platinum group metals.
16
Environmental Compliance
We are subject to the requirements of federal, state, local and foreign
environmental and occupational safety and health laws and regulations. These
include laws regulating air emissions, water discharge and waste management. We
have an environmental management structure designed to facilitate and support
our compliance with these requirements. We cannot assure you, however, that we
are at all times in compliance with all such requirements. Although we have made
and will continue to make capital and other expenditures to comply with
environmental requirements, we do not expect capital or other expenditures for
environmental compliance to be material in 1999 or 2000. Environmental
requirements are complex, change frequently and have tended to become more
stringent over time. Accordingly, we cannot assure you that these requirements
will not change or become more stringent in the future in a manner that could
have a material adverse effect on our business.
We are also subject to environmental laws requiring the investigation and
cleanup of environmental contamination. We are in various stages of
investigation and cleanup at our manufacturing sites where contamination has
been alleged. As of December 31, 1998, Delphi had recorded a reserve of about
$20 million for such environmental investigation and cleanup. We cannot assure
you that our environmental cleanup costs and liabilities will not exceed the
amount of our current reserve.
We have entered into certain arrangements with General Motors regarding the
allocation of environmental liabilities relating to our business as part of our
separation from General Motors. For more information, see "--Arrangements
Between GM and Delphi --Real Estate and Environmental."
Arrangements Between GM and Delphi
The separation of Delphi from General Motors and the transactions being
undertaken in connection therewith are being effected pursuant to a Master
Separation Agreement, dated December 22, 1998, to which Delphi and General
Motors are parties (as amended from time to time, the "Separation Agreement").
In addition, we have entered into certain ancillary agreements contemplated by
the Separation Agreement (collectively, as amended from time to time, the
"Ancillary Agreements") and certain other agreements which govern various
interim and ongoing relationships between us and GM. The Ancillary Agreements
include, among others, agreements relating to the IPO and the Distribution, our
sale of products to GM, employee matters, tax matters, intellectual property,
real estate and environmental matters, product liability and the provision of
certain interim services. The Ancillary Agreements also require us to cooperate
with GM in all respects to complete the Distribution and provide for
registration rights for GM in the event the Distribution is not completed or is
completed without GM divesting itself of all of its Delphi Common Stock.
Certain international, intellectual property and real property assets
relating primarily to the business of Delphi are still held by GM or its
affiliates, pending receipt of consents or approvals or satisfaction of other
applicable requirements necessary for the transfer of such assets to Delphi. We
do not believe that these assets and operations are, individually or in the
aggregate, material to our company. However, the information included in this
report, including our consolidated financial statements, assumes the completion
of all such transactions. See "--International Agreements." In addition, certain
information technology assets relating primarily to our business are still held
by GM or its affiliates, pending receipt of consents necessary for the transfer
of such assets to Delphi, or may be retained by GM if consents to their transfer
cannot be obtained. Also, certain assets and liabilities relating to employees
working under collective bargaining agreements will be transferred to Delphi in
connection with the Distribution. Capitalized terms which we use in this section
but do not otherwise define below or elsewhere herein have their respective
meanings as set forth in the Separation Agreement.
All of these agreements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
GM. The terms of these agreements may be more or less favorable to us than if
they had been negotiated with unaffiliated third parties.
We have set forth below a summary description of the Separation Agreement
and certain of the Ancillary Agreements. This description, which summarizes the
material terms of such agreements, does not purport to be complete and is
qualified in its entirety by reference to the full text of such agreements.
Certain of these agreements, including the Separation Agreement, the IPO and
Distribution Agreement and the Registration Rights Agreement, the Supply
Agreement, the Business Relationship Agreement, the U.S. Employee Matters
Agreement and certain tax allocation agreements have been filed as exhibits to
this report and are incorporated by reference.
17
Separation Agreement. The Separation Agreement, which became effective on
January 1, 1999, sets forth our agreements with GM with respect to the principal
corporate transactions required to effect the transfers of assets and
assumptions of liabilities necessary to separate our company from GM and certain
other agreements governing our relationship thereafter.
Transfer of Assets and Assumption of Liabilities. General Motors has
transferred, or agreed to transfer, or to cause its subsidiaries and
representatives to transfer, the Delphi Assets to our company and our
subsidiaries, and we and our subsidiaries have assumed, or agreed to assume,
and have agreed to pay, perform, satisfy and discharge on a timely basis the
Delphi Liabilities in accordance with their respective terms. Except as
expressly set forth in the Separation Agreement or in any Ancillary
Agreement, GM has not made any representation or warranty with respect to any
Delphi Asset and the Delphi Assets are being transferred on an "as is, where
is" basis.
Transition Services. The Separation Agreement provides that if we identify
any services that GM, or its affiliates or their suppliers, were providing to
us immediately prior to January 1, 1999 and any of such services is not being
provided to us pursuant to any of the Ancillary Agreements, GM agrees, upon
our written request, to use its reasonable best efforts to provide that
service to us until January 1, 2000. GM is not required to provide any
service which GM would not be legally permitted to provide to a third party.
We must use all commercially reasonable efforts to obtain any transition
services provided pursuant to this provision of the Separation Agreement from
a source other than GM before January 1, 2000. If we cannot obtain such
transition service from a source other than GM and such service is necessary
to operate the Delphi Automotive Systems Business in substantially the same
manner as it was conducted immediately before January 1, 1999, GM has agreed
to provide such transition service to us for an additional period not to
exceed six months.
For the majority of the transition services provided to us by GM pursuant
to the Separation Agreement and for services provided to us by GM pursuant to
the Ancillary Agreements, we must pay GM on or prior to the fifteenth day
following receipt of an invoice:
(1)in the case of any transition service provided pursuant to the Separation
Agreement or pursuant to an Ancillary Agreement in which a payment amount
or formula has not been set forth, an amount equal to the cost
historically allocated to our business for such services as of January 1,
1999, adjusted to reflect any changes in the nature, cost or level of
services provided; provided that, if no cost has historically been
allocated to us for such service, then we shall pay to GM:
(a) that portion of the total costs borne by GM which GM would have
allocated to Delphi under its internal allocation formula; plus
(b) any direct user charges provided for in clause (a) above; plus
(c) any other reasonable charges necessary to make GM whole for the
provision of such services; or
(2)in the case of any service to be provided pursuant to an Ancillary
Agreement in which a payment amount or formula has been set forth, the
amount owed pursuant to the terms of such Ancillary Agreement.
If we make payment later than the forty-fifth day after the date we
receive an invoice, we must pay interest on the amount due based on the Prime
Rate. For any such services that are provided to us directly by third
parties, we will pay such third party directly where such direct payment is
permissible. These payment provisions do not apply to services provided to us
pursuant to any real estate leases, any health care services pursuant to the
Employee Matters Agreement, and certain other agreements. In addition, we are
responsible for providing certain transitional services to GM with respect to
certain businesses retained by GM.
Ancillary Agreements. Except with respect to the provisions regarding
payment for transition services described above, to the extent that any
Ancillary Agreement expressly addresses any matters addressed by the
Separation Agreement, the terms and conditions of the Ancillary Agreement
will govern the rights and obligations of the parties regarding such matters.
We must use all commercially reasonable efforts to obtain services provided
to us by GM under the terms of those Ancillary Agreements relating to
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transition services from a source other than GM. Certain of the Ancillary
Agreements provide that the transition service may be extended beyond the
termination of the transition periods provided for therein and we expect that
after the Distribution we would negotiate with GM at arm's length the terms
of any such extension, including fair market value pricing for all such
services.
Indemnification. We have agreed to indemnify, defend and hold harmless
General Motors and each of its subsidiaries and their respective
successors-in-interest, and each of their respective past and present
representatives against any losses, claims, damages, liabilities or actions
arising, whether prior to or after the Contribution Date, out of or in
connection with the Delphi Liabilities and/or our conduct of our business and
affairs after the Contribution Date. Certain of the Ancillary Agreements
provide for indemnification between us and GM relating to the substance of
such agreements. The Separation Agreement and certain of the Ancillary
Agreements specify certain procedures with respect to claims thereunder
subject to indemnification and related matters.
Claims and Litigation. The Separation Agreement provides for the
allocation of the liability between us and GM for certain claims and
litigation relating to or arising out of the Delphi Automotive Systems
Business.
o Product Liability. GM has retained responsibility for all product
liability actions relating to products we manufactured prior to January 1,
1999 and sold or otherwise supplied to GM either before or after that date.
Responsibility for product liability actions relating to products we
manufacture on or after January 1, 1999 and sell to GM shall be determined
in accordance with the agreements for such sales. We will be responsible
for liability relating to all products we sold at any time or sell in the
future to customers other than GM. In connection therewith, we will
indemnify GM against, and reimburse GM for costs associated with, the
claims for which we are liable, and GM will indemnify us against, and
reimburse us for costs associated with, the claims for which GM has
retained liability.
o General Litigation. With respect to general litigation claims, we have
assumed the liability for all new claims related to the Delphi Automotive
Systems Business and for certain specified claims. GM has agreed to defend
certain other specified claims at our expense and GM has retained the
liability for certain other specified claims. In connection therewith, we
will indemnify GM against, and reimburse GM for costs associated with, the
claims for which we are liable, and GM will indemnify us against, and
reimburse us for costs associated with, the claims for which GM has
retained liability.
o Employment-Related Claims. We have assumed the liability for certain
specified employment-related claims and we will indemnify GM against any
such claims and reimburse GM for any legal or other expenses reasonably
incurred by GM in connection with such claims. Certain other employment
related claims will be jointly defended by us and GM. We have financial
responsibility for employment related claims regarding all Delphi Employees
and Delphi Terminated Employees whether incurred before or after the
Contribution Date. We will mutually determine with GM how new claims shall
be treated. However, U.S. claims for pension and welfare benefits from
salaried employees who retire on or before the Contribution Date and hourly
employees who retire on or before October 1, 1999 will remain the
responsibility of GM.
We have agreed with GM to cooperate with each other in the defense of any
and all claims covered by these provisions of the Separation Agreement.
Insurance. The Separation Agreement provides that during the period
beginning on the Contribution Date and ending on the earlier of the date of
the completion of the Distribution or the first anniversary of the
Contribution Date (the "Insurance Transition Period"), GM shall, subject to
certain conditions and exceptions, maintain policies of insurance, including
for the benefit of Delphi or any of its affiliates, directors, officers or
other covered parties, which are comparable to those generally maintained by
GM. The Separation Agreement sets forth procedures we must follow for
asserting claims, reimbursing GM for premium expenses and other insurance
related matters during the Insurance Transition Period. Following the
expiration of the Insurance Transition Period, except as provided in the
Separation Agreement, we will be responsible for obtaining and maintaining
our own insurance programs.
Dispute Resolution. The Separation Agreement contains provisions that
govern, except as provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims that may arise between us and GM. The
Separation Agreement provides that the parties will use all commercially
reasonable efforts to settle all disputes arising in connection with the
Separation Agreement without resorting to mediation, arbitration or
otherwise. If these efforts are not successful, any party may submit the
dispute for non-binding mediation by delivering notice to the other party of
the dispute and expressly requesting mediation of the dispute. If, after
mediation, the parties disagree regarding the mediator's recommendation, the
dispute will be submitted to binding arbitration in accordance with the terms
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of the Separation Agreement. The Separation Agreement contains procedures for
the selection of a three-arbitrator panel to act by majority vote and the
conduct of the arbitration hearing, including certain limitations on the
discovery rights of the parties. We and GM have agreed that all disputes or
other matters related to the Supply Agreement and certain of the other
Ancillary Agreements are exempt from the dispute resolution procedures
established in the Separation Agreement.
Certain Definitions Relating to the Separation Agreement. Set forth below
are certain defined terms contained in the Separation Agreement:
"Contribution Date" means January 1, 1999.
"Delphi Assets" means all of GM's right, title and interest in and to all
assets, excluding cash and cash equivalents, that:
(1)except as set forth on a schedule to the Separation Agreement or as
otherwise provided in the Separation Agreement or in an Ancillary
Agreement, are reflected in the Delphi Financial Statements and not
disposed of by GM after the date thereof and before the Contribution
Date, including assets written off or expensed but still used by Delphi
which Delphi can demonstrate to GM's reasonable satisfaction were paid
for by the Delphi Automotive Systems Sector of GM; or
(2)are to be transferred pursuant to Section 2.01(c) of the Separation
Agreement, which relates to assets relating to certain international
operations; or
(3)are acquired by the Delphi Automotive Systems Business after the date
of the Delphi Financial Statements and would be reflected in the
financial statements of Delphi as of the Contribution Date if such
financial statements were prepared using the same accounting principles
under which the Delphi Financial Statements were prepared; or
(4)are expressly provided by the Separation Agreement or any Ancillary
Agreement to be transferred to Delphi; or
(5)are listed on the schedule to the Separation Agreement that sets forth
the facilities to be transferred to Delphi; or
(6)except as otherwise provided in an Ancillary Agreement or other express
agreement of the parties, are used exclusively by the Delphi Automotive
Systems Business as of the Contribution Date;
provided, unless the parties otherwise expressly agree, that if the
accounting principles under which the Delphi Financial Statements were
prepared would have required any asset described in the clause (6) above to
be reflected in the Delphi Financial Statements as of the date thereof, then
such asset shall be included in the "Delphi Assets" only if so reflected.
"Delphi Automotive Systems Business" means the business conducted by the
Delphi Automotive Systems business sector of General Motors at any time on or
before the Contribution Date, including:
(1)all business operations whose financial performance is reflected in
the Delphi Financial Statements;
(2)all business operations initiated or acquired by the Delphi Automotive
Systems business sector of GM after the date of the Delphi Financial
Statements; and
(3)all business operations that were conducted at any time in the past by
the Delphi Automotive Systems business sector of GM or by any
predecessor of such business sector, including, without limitation, the
GM Automotive Components Group, but were discontinued or disposed of
prior to the date of the Delphi Financial Statements other than by
transfer or disposition to any other business sector of GM.
"Delphi Financial Statements" means the consolidated financial statements
and the notes thereto of Delphi for the nine months ended September 30, 1998 as
set forth in the registration statement relating to our IPO as amended through
December 22, 1998, the date of the Separation Agreement. Such financial
statements are substantially similar to the financial statements for such period
included in the prospectus dated February 4, 1999 related to the IPO, a copy of
which is on file with the Commission.
"Delphi Liabilities" means all of the Liabilities of General Motors that:
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(1)except as otherwise set forth on a schedule to the Separation Agreement
or as otherwise provided in the Separation Agreement or in an Ancillary
Agreement, are reflected in the Delphi Financial Statements and remain
outstanding at the Contribution Date; or
(2)are to be transferred pursuant to Section 2.01(c) of the Separation
Agreement, which relates to assets relating to certain international
operations; or
(3)arise in connection with the Delphi Automotive Systems Business after
the date of the Delphi Financial Statements and would be reflected in
financial statements of Delphi as of the Contribution Date if such
financial statements were prepared using the same accounting principles
under which the Delphi Financial Statements were prepared; or
(4)are expressly provided by the Separation Agreement or any Ancillary
Agreement to be transferred to and assumed by Delphi; or
(5)except as otherwise provided in an Ancillary Agreement or other express
agreement between the parties, are related to or arise out of or in
connection with the Delphi Assets; or
(6)except as otherwise provided in an Ancillary Agreement or other express
agreement of the parties, are related to or arose out of or in
connection with the Delphi Automotive Systems Business, including, but
not limited to the covenants not to compete entered into by GM prior to
the Contribution Date set forth on a schedule to the Separation
Agreement, whether before or after the date of the Delphi Financial
Statements;
provided, unless the parties otherwise expressly agree, that if the
accounting principles under which the Delphi Financial Statements were
prepared would have required any liabilities described in clause (6) above to
be reflected in the Delphi Financial Statements as of the date thereof, then
such liabilities shall be considered to be "Delphi Liabilities" only if so
reflected.
"Liabilities" means any and all debts, liabilities, guarantees,
assurances, commitments and obligations, whether fixed, contingent or
absolute, asserted or unasserted, matured or unmatured, liquidated or
unliquidated, accrued or not accrued, known or unknown, due or to become due,
whenever or however arising, including, without limitation, whether arising
out of any contract or tort based on negligence or strict liability, and
whether or not the same would be required by generally accepted accounting
principles to be reflected in financial statements or disclosed in the notes
thereto.
IPO and Distribution Agreement. We have entered into an Initial Public
Offering and Distribution Agreement (as amended from time to time, the "IPO
and Distribution Agreement") with GM which governs our respective rights and
duties with respect to the IPO and the Distribution, and sets forth certain
covenants we have agreed to for various periods following the IPO and the
Distribution. Although GM has announced that it currently plans to complete
the Distribution, and we have agreed to cooperate with GM in all respects to
complete the Distribution, it is not obligated to do so. We cannot assure you
as to whether or when the Distribution will occur.
The Distribution. We have agreed that we will cooperate with GM in all
respects to accomplish the Distribution and, at GM's direction, promptly take
all actions necessary or desirable to effect the Distribution, including the
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of GM's shares of our capital stock. General Motors has the sole
discretion to determine whether to proceed with all or part of the
Distribution and all terms of the Distribution, including the form, structure
and terms of any transaction(s) and/or offering(s) to effect the Distribution
and the timing of and conditions to the consummation of the Distribution. In
the event that GM determines that it no longer intends to proceed with or
complete the Distribution, GM must provide us notice to such effect. Upon
such notification, GM's rights and our obligations under the Registration
Rights Agreement described below become immediately effective.
Preservation of the Tax-Free Status of the Distribution. General Motors
intends for the Distribution to qualify as a tax-free distribution under
Section 355 of the Code to GM and its stockholders. On January 13, 1999, GM
received from the IRS a private letter ruling (the "IRS Ruling") to such
effect. In connection with GM's request for the IRS Ruling, we made certain
representations and warranties to GM regarding our company and our business.
We have also agreed to certain covenants in the IPO and Distribution
Agreement intended to preserve the tax-free status of the Distribution. We
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may take any action otherwise prohibited by these covenants only if GM has
determined, in its sole and absolute discretion, that such action would not
jeopardize the tax-free status of the Distribution. See "--Cooperation on Tax
Matters." Certain of these covenants are described in greater detail below:
o Stock Issuance. Prior to the completion of the Distribution, we have
agreed not to issue or agree to issue shares of our capital stock in an
amount that would result in GM owning less than 80% of the total combined
voting power of all outstanding shares of our voting stock and/or less than
80% of any other class and/or series of Delphi capital stock. This covenant
will not prohibit us from issuing stock options and restricted stock awards
to our employees so long as we repurchase sufficient shares of our capital
stock prior to the date when such options and awards become exercisable to
ensure that GM's ownership remains at or higher than 80% and GM approves of
our procedures to comply with this covenant.
o Certain Acquisition Transactions. Until two years after the completion of
the Distribution, or, if GM determines not to complete the Distribution,
the last date on which GM distributed any Delphi common stock in connection
with the Distribution, we have agreed not to enter into or permit any
transaction or series of transactions which would result in a person or
persons acquiring or having the right to acquire shares of our capital
stock that would comprise 50% or more of either the value of all
outstanding shares of our capital stock or the total combined voting power
of our outstanding voting stock.
o Continuation of Active Trade or Business. Until two years after the
completion of the Distribution, or, if GM determines not to complete the
Distribution, the last date on which GM distributed any Delphi common stock
in connection with the Distribution, we have agreed to continue to conduct
the active trade or business, within the meaning of Section 355 of the
Code, of our company as we conduct it immediately prior to the completion
of the Distribution. During such time, we have agreed not to:
o liquidate, dispose of or otherwise discontinue the conduct of any
portion of our active trade or business with a value in excess of $2.0
billion; or
o dispose of any business or assets that would cause our company to be
operated in a manner inconsistent in any material respect with the
business purposes for the Distribution as described to the IRS or tax
counsel in connection with GM's request for the IRS Ruling.
Also, until two years after the completion of the Distribution, we
have agreed not to liquidate, dispose of, or otherwise discontinue the
conduct of any portion of the active trade or business of our company if
such liquidation, disposition or discontinuance would breach the covenant
described below regarding our continuity of business.
o Continuity of Business. Until two years after the completion of the
Distribution, or, if GM determines not to complete the Distribution, the
last date on which GM distributed any Delphi common stock in connection
with the Distribution, we have agreed that:
o we will not voluntarily dissolve or liquidate; and
o except in the ordinary course of business, neither we nor any of our
direct or indirect subsidiaries will sell, transfer, or otherwise
dispose of or agree to dispose of assets, including any shares of
capital stock of our subsidiaries, that, in the aggregate, constitute
more than:
(x) 60% of our gross assets; or
(y) 60% of the consolidated gross assets of us and our subsidiaries.
For this purpose, we are not deemed to directly or indirectly control a
subsidiary unless we own, directly or indirectly, shares constituting:
o 80% or more of the total combined voting power of all outstanding shares
of voting stock of such subsidiary; and
22
o80% or more of the total number of outstanding shares of each class or
series of capital stock of such subsidiary other than voting stock.
oDischarge of Intracompany Debt. Prior to the first date on which GM
distributes any Delphi common stock in connection with the Distribution, we
have agreed to fully discharge and satisfy all debt that we owe GM. For such
purpose, debt does not include payables arising in the ordinary course of
business. Until two years after the completion of the Distribution, or, if
GM determines not to complete the Distribution, the last date on which GM
distributed any Delphi common stock in connection with the Distribution, we
will not be able to have any such indebtedness with GM.
In the event that GM notifies us that it no longer intends to proceed
with or complete the Distribution and GM has not yet distributed any of its
Delphi common stock, these covenants to preserve the tax-free status of the
Distribution will terminate.
Other Covenants Regarding Tax Treatment of the Transactions. General
Motors intends the transfer of assets and liabilities from GM to our company
as contemplated by the Separation Agreement (the "Contribution") to qualify
as a reorganization under Section 368(a)(1)(D) of the Code (a "D
Reorganization"). Until two years after the completion of the Distribution,
we have agreed not to take, or permit any of our subsidiaries to take, any
actions or enter into any transaction or series of transactions that would be
reasonably likely to jeopardize the tax-free status of the Distribution or
the qualification of the Contribution as a D Reorganization, including any
action or transaction that would be reasonably likely to be inconsistent with
any representation made to the IRS or tax counsel. We may take any action
that would otherwise violate this covenant only if GM has determined, in its
sole and absolute discretion, that such action or transaction would not
jeopardize the tax-free status of the Distribution or the qualification of
the Contribution as a D Reorganization.
Cooperation on Tax Matters. We and GM have agreed to certain procedures
with respect to the tax-related covenants in the IPO and Distribution
Agreement. We are required to notify GM if we desire to take any action
prohibited by the tax-related covenants described above. Upon such
notification, if GM determines that such action might jeopardize the tax-free
status of the Distribution or the qualification of the Contribution as a D
Reorganization, GM has agreed to elect either to:
o use all commercially reasonable efforts to obtain a private letter
ruling from the IRS or a tax opinion that would permit us to take the
desired action, and we have agreed to cooperate in connection with such
efforts; or
o provide all reasonable cooperation to us in connection with our
obtaining such an IRS ruling or tax opinion.
In either case, GM has agreed to bear its reasonable costs and expenses of
obtaining such an IRS ruling or tax opinion.
Indemnification for Tax Liabilities. We have generally agreed to indemnify
GM and its affiliates against any and all tax-related losses incurred by GM
in connection with any proposed tax assessment or tax controversy with
respect to the Distribution or the Contribution to the extent caused by any
breach by us of any of our representations, warranties or covenants made in
the IPO and Distribution Agreement. This indemnification does not apply to
actions which GM permits us to take as a result of a determination under the
tax-related covenants as described above.
Other Delphi Covenants. General Motors currently owns a significant
portion of our common stock. As a result, GM will continue to include us as a
"subsidiary" for various financial reporting, accounting and other purposes.
Accordingly, we have agreed to certain covenants in the IPO and Distribution
Agreement. Certain of these covenants are described below:
o Covenants Regarding the Incurrence of Debt. So long as GM is a
significant stockholder of our company, the amount of our indebtedness for
borrowed money will affect GM's financial position. Thus, we have agreed
to certain limitations on our ability to incur debt:
o For so long as GM continues to own at least 50% of our outstanding
common stock, without GM's prior written consent, which it may withhold in
its sole and absolute discretion, we will not, and will not permit any of
our subsidiaries to:
o create, incur, assume or suffer to exist any Indebtedness in excess
of an aggregate of $5.0 billion outstanding at any time; provided,
however, that we may make an acquisition as a result of which our
Indebtedness would exceed $5.0 billion so long as both the acquisition
target has an FFO to Debt Ratio of at least 20% and our Indebtedness
after giving effect to the acquisition, including, without
duplication, any Indebtedness incurred in connection with the
acquisition and any indebtedness of the acquisition target that will
become our Indebtedness as a result of such acquisition, would not be
greater than $6.0 billion; and
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o consummate, or agree to consummate, any acquisition of any
acquisition target with an FFO to Debt Ratio less than 20% unless our
Adjusted Indebtedness would not exceed $5.0 billion.
For purposes of these covenants, the following terms have the following
meanings:
"Adjusted Indebtedness" means, with respect to any proposed acquisition,
the sum of:
(1)our Indebtedness immediately after giving effect to such
acquisition, including, without duplication, any Indebtedness
incurred in connection with the acquisition and any indebtedness of
the acquisition target that will become our Indebtedness as a result
of such acquisition; and
(2)the amount by which the number described in clause (2) of the
definition of "FFO to Debt Ratio" would need to be reduced in order
for the acquisition target's FFO to Debt Ratio to be equal to 20%.
"Indebtedness" means the sum of:
(1)the aggregate principal amount of our and our subsidiaries' total
long-term and short-term liabilities for borrowed money including
capitalized leases, as determined for purposes of our consolidated
financial statements; and
(2)the aggregate amount attributable to all factoring or securitization
of receivables and other financial assets by us and our subsidiaries
in excess of $1.2 billion.
"FFO to Debt Ratio" means, for any acquisition target, as of immediately
prior to the proposed acquisition, the percentage determined by dividing:
(1)the sum of such acquisition target's net income plus depreciation
and amortization for the last four full fiscal quarters, as
determined for purposes of its consolidated financial statements; by
(2)the additional Indebtedness that would be incurred in connection
with such proposed acquisition, including any indebtedness of the
acquisition target that will become our Indebtedness as a result of
such proposed acquisition.
o Other Covenants. For so long as GM continues to own at least 50% of our
outstanding common stock, we have agreed that:
owe will not, without GM's prior written consent, which it may withhold
in its sole and absolute discretion, take any action which has the effect
of limiting GM's ability to freely sell, pledge or otherwise dispose of
shares of our common stock or limiting the legal rights of or denying any
benefit to GM as a Delphi stockholder in a manner not applicable to
Delphi stockholders generally; this means that, among other things, we
will not, without GM's prior written consent, which it may withhold in
its sole and absolute discretion, alter our Rights Plan, or any successor
stockholder rights plan, in a manner that would result in GM's ownership
of our common stock causing the rights to detach or become exercisable;
owe will not, without GM's prior written consent, which it may withhold
in its sole and absolute discretion, issue any shares of common stock or
any rights, warrants or options to acquire our common stock, if after
giving effect to such issuance GM would own less than 50% of the then
outstanding shares of our common stock; and
oto the extent that GM is a party to, or enters into, any agreements that
provide that certain actions of GM's subsidiaries may result in GM being
in breach or default under such agreements, and we have been advised of
the existence of such agreements, we will not take any actions that may
result in GM being in breach or default under any such agreement.
o Financial Information. We have agreed that, for so long as GM is
required to consolidate our results of operations and financial position or
24
account for its investment in our company, we will provide GM certain
financial information regarding our company and our subsidiaries; provide GM
copies of all quarterly and annual financial information and other reports
and documents we intend to file with the SEC prior to such filings, as well
as final copies upon filing; provide GM with copies of our budgets and
financial projections, as well as the opportunity to meet with our management
to discuss such budgets and projections; consult with GM regarding the timing
and content of earnings releases; and cooperate fully, and cause our
accountants to cooperate fully, with GM in connection with any of its public
filings. This covenant is subject to appropriate confidentiality provisions
to protect the confidentiality commitments we have made to our customers.
o Auditors and Audits; Annual Statements and Accounting. We have agreed
that, for so long as GM is required to consolidate our results of operations
and financial position or account for its investment in our company, we will
not change our auditors without GM's prior written consent, which will not be
unreasonably withheld, and will use our best efforts to enable our auditors
to complete their audit of our financial statements such that they will date
their opinion the same date that they date their opinion on GM's financial
statements; provide to GM and its auditors all information required for GM to
meet its schedule for the filing and distribution of its financial
statements; make available to GM and its auditors work papers related to the
annual audit of our company as well as access to the personnel who perform
the annual audit and our subsidiaries' books and records so that GM and its
auditors may conduct reasonable audits relating to our financial statements;
adhere to certain specified accounting standards; and notify and consult with
GM regarding any changes to our accou