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
2
<PAGE>
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
19
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 accounting principles; and make any changes
to our accounting estimates and principles requested by GM.
We have generally agreed to indemnify General Motors and its affiliates
against all liabilities arising out of any incorrect, inaccurate or
incomplete financial and other information we provide to GM pursuant to the
terms of the IPO and Distribution Agreement.
Indemnification Relating to the IPO and the Distribution. We have
generally agreed to indemnify General Motors and its affiliates against all
liabilities arising out of any material untrue statements and omissions
in any and all registration statements, information statements and/or other
documents filed with the SEC in connection with the IPO and the Distribution.
However, our indemnification of GM does not apply to information relating to
General Motors, excluding information relating to Delphi. GM has agreed to
indemnify us for this information.
Expenses. GM has generally agreed to pay all costs and expenses relating
to the IPO and the Distribution. We will, however, pay for the costs and
expenses of our financial, legal, accounting and other advisers, if any,
incurred in connection with the Distribution. We will also pay for our
internal costs and expenses.
Registration Rights Agreement. As noted above, General Motors has
announced its current plan to divest itself of ownership of our stock through
the Distribution and we have agreed to cooperate with GM in all respects to
complete the Distribution. In the event that GM does not divest itself of
all of its shares of Delphi common stock in the Distribution, GM could not
freely sell all of such shares without registration under the Securities Act.
Accordingly, we have entered into a Registration Rights Agreement (as amended
from time to time, the "Registration Rights Agreement") with GM to provide it
(or any other person to whom GM has transferred our shares) with certain
registration rights relating to the shares of our common stock which it
holds. These registration rights generally become effective at such time, if
any, as GM informs us that it no longer intends to proceed with or complete
the Distribution.
Demand Registrations. Under the agreement, GM may request registration
(each, a "Demand Registration") under the Securities Act of all or any
portion of our shares covered by the Registration Rights Agreement and we
will be obligated to register such shares as requested by GM.
oTerms of Each Offering. General Motors will designate the terms of each
offering effected pursuant to a Demand Registration, which may take any
form, including:
(1) an underwritten public offering;
(2) a shelf registration;
(3) a registration in connection with the distribution of, or exchange
of or offer to exchange, shares of our common stock to holders of
debt or equity securities of GM, a subsidiary or affiliate thereof
or any other person; or
(4) a distribution in connection with the registration by GM or a
subsidiary or affiliate thereof of securities convertible into,
exercisable for or otherwise related to such shares of our common
stock.
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Except for an offering described in clauses (3) and (4) above, each
Demand Registration must meet a certain minimum aggregate expected
offering price.
oTiming of Demand Registrations. We are not required to undertake a
Demand Registration within 90 days of the effective date of a previous
Demand Registration, other than a Demand Registration that was effected
as a shelf registration. Also, we have the right to postpone the filing
or effectiveness of any Demand Registration for up to 90 days if in the
reasonable judgment of our General Counsel such registration would
reasonably be expected to have a material adverse effect on any existing
proposal or plans by our company to engage in certain material
transactions; provided, however, that we may exercise this right only
once in any 12-month period.
oPiggyback Registrations. The Registration Rights Agreement also provides
for certain "piggyback" registration rights for General Motors. Whenever
we propose to register any of our securities under the Securities Act for
ourselves or others, subject to certain customary exceptions, we must
provide prompt notice to GM and include in such registration all shares
of our stock which GM requests to be included (each, a "Piggyback
Registration"). In certain circumstances, General Motors has the
right to reasonably object to our selection of any investment banker(s)
and manager(s) in connection with a Piggyback Registration.
The Registration Rights Agreement sets forth customary registration
procedures, including a covenant by us to make available our senior management
for road show presentations. All registration expenses incurred in connection
with the Registration Rights Agreement, including all filing fees, fees and
expenses of compliance with securities and/or blue sky laws, financial printing
expenses, fees and disbursements of custodians, transfer agents, exchange agents
and/or information agents, and fees and disbursements of counsel for our company
and all independent certified public accountants, underwriters, excluding
discounts and commissions, and other persons retained by us will be paid by us.
In addition, we must reimburse GM for the fees and disbursements of its outside
counsel as well as out-of-pocket expenses incurred in connection with any such
registration. The Registration Rights Agreement also contains customary
indemnification and contribution provisions by us for the benefit of General
Motors and any underwriters and by General Motors for the benefit of us and any
underwriters with respect to information provided by GM.
Supply Agreement. We have entered into a Component Supply Agreement with GM
(as amended from time to time, the "Supply Agreement") which we believe will
provide us with a substantial base of future business with GM-North America well
into the next decade. GM currently sources a significant amount of its
automotive parts requirements from us pursuant to certain existing contractual
commitments. Except as described below, the Supply Agreement between GM and
Delphi provides that all existing contracts as of January 1, 1999 will generally
remain in effect, including the pricing, duration and purchase order terms and
conditions. The Supply Agreement also provides that, subject to certain
exceptions as described below, we have the right 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 cycle business prior to January 1, 2002. We expect
these programs will cover specific vehicle models introduced from 1999 well into
the next decade. We will also have the opportunity to bid on other new GM
business on the same basis as other suppliers.
Our ability to realize revenues on all GM business, including business
awarded pursuant to existing contracts, is in all cases subject to a variety of
factors, including the volume and option mix of vehicles actually produced by
GM. The Supply Agreement provides that General Motors has the right to move its
business with us to other suppliers in the event that we are not competitive in
terms of quality, service, design and technology. In addition, GM has the right
at all times to adopt new technology, whether or not such technology is
available through us. If we are unable to provide the new technology or an
equivalent technology acceptable to GM on a competitive basis, GM is free to
move the business from us to another supplier.
Existing Contracts. Under the terms of the Supply Agreement, except as
provided below, all existing contractual commitments between us and GM relating
to the purchase and supply of motor vehicle-related components and systems as of
January 1, 1999 will generally remain in effect, including the existing pricing,
duration and purchase order terms and conditions. This includes existing
contracts under which we have not yet begun to supply products. All existing
contracts are subject to the volume and option mix of vehicles actually produced
by General Motors and other factors.
Under the terms of the Supply Agreement, Delphi and General Motors have
agreed to honor all "nomination letters" in place as of January 1, 1999
regardless of whether formal purchase orders or other contractual commitments
have been issued with respect to such business. Nomination letters refer to
letters from General Motors informing a supplier that it has been awarded
specific business to supply a product for a particular vehicle program. In
light of the long product development cycles in the automotive industry,
General Motors typically issues its nomination letters and other new business
26
commitments about three years in advance of actual production of the vehicle
program. These nomination letters commit GM, subject to certain conditions,
to source products for a particular vehicle program from a supplier. However,
if GM determines for any reason not to proceed with the vehicle program
covered by a nomination letter, it is under no obligation to such supplier.
Also, as with other purchase arrangements, nomination letters do not require
any minimum purchase and are subject to actual production volumes, supplier
competitiveness and other factors.
Payment Terms. Until recently, most of our existing contracts with GM
required payment by GM in the month following GM's receipt of our invoice.
Except as described below, payment terms on all existing contracts have been
modified by the Supply Agreement to generally require payment from GM to us
under such contracts on the second day of the second month following the date
of shipment by Delphi. For more information regarding the impact of these
modified payment terms on our financial condition, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Extension of Payment Terms." The
modified payment terms became effective on January 1, 1999 and also apply to
future contracts with GM. These modified payment terms are consistent with
the new payment terms that GM is currently in the process of introducing to
its other suppliers.
The Supply Agreement also provides that certain contracts relating to
purchases of parts for Saturn vehicle models will retain the consumption
methodology currently in place, which generally provides that Saturn pays
only for the actual amount of product used rather than the amount of product
delivered. Also, certain existing contracts relating to purchases by GM's
international automotive operations will retain the existing payment terms.
Our Ability to Secure Certain Next Generation Business. The Supply
Agreement is intended to provide us the opportunity to capture future GM
business that replaces current GM business over the next several years.
Through December 31, 2001, we will have the ability to secure under
competitive purchase order terms the first replacement cycle of all product
programs in the United States and Canada which we were providing to General
Motors as of January 1, 1999, and certain other product programs as described
below. Thus, we will have the opportunity to match competitive bids from
other suppliers on the next generation of the product programs we provided to
GM in the United States and Canada as of January 1, 1999, provided those
programs are sourced by GM prior to January 1, 2002. However, in order to
utilize this ability to secure next generation business, we must be
competitive in terms of design, quality, price, service and technology. Other
suppliers' bids to provide particular products may include offers of price
reductions to GM on other current or future products, and GM may under the
Supply Agreement consider the economic effect of such package proposals in
assessing our competitiveness.
As noted above, General Motors generally sources its product needs about
three years in advance of the start of production for each vehicle program.
Since many of these contractual commitments cover a significant period of
time due to the duration of many vehicle programs of about five to eight
years, depending on the vehicle model, we expect that this ability to secure
next generation business, together with our existing contracts and nomination
letters, will provide us with the opportunity to maintain substantial
business with GM well into the next decade.
Our ability to secure next generation business as described above, which
is sometimes referred to as a "right of last refusal," includes production in
the United States and Canada of common global vehicle platforms to the extent
that we can provide or execute designs that comply with the required form and
function specifications determined by GM, as well as production in Mexico of
vehicles intended for sale in the United States or Canada; provided that in
all cases such programs must meet all of the other necessary criteria,
including that such programs were programs in the United States and Canada
which we were providing to GM as of January 1, 1999. Other than as described
immediately above, our ability to secure next generation business will not
apply to any programs of GM's international automotive operations or to GM
vehicle production in Mexico.
The Supply Agreement also expressly provides that GM will not be
responsible under any circumstances for any supplemental or compensatory
payments to us in the event that we fail to exercise our ability to secure
any next generation business or if we cannot provide our products on a
competitive basis.
New Business. All new business awarded to us by General Motors will be
governed by the specific terms of the contracts under which such new business
is awarded. Other than with respect to next generation business as described
above, if we elect to bid for GM business, we will do so on the same basis as
all other suppliers. General Motors will award any such business in its sole
discretion.
27
GM's Right to Re-Source. Consistent with GM's contracts with other
suppliers, the Supply Agreement provides General Motors the right to
re-source its business with us in the event that we are not competitive in
terms of quality, service, design and technology. Competitiveness is defined
by demonstrable product and performance levels available to GM from other
suppliers. The term "re-sourcing" refers to the process of moving existing
business from Delphi to another supplier.
In the event that we are non-competitive with respect to a particular
product, General Motors is required to notify us of any such
non-competitiveness and provide us with a reasonable period of time during
which to correct any such non-competitiveness before GM may re-source the
business. With respect to non-competitiveness in terms of quality and
service, the parties will follow GM's Supplier Quality Improvement Process,
which is also known as the "16-Step Process", in order to identify and remedy
quality and service problems. With respect to non-competitiveness in terms of
design and technology, the parties will work together to identify acceptable
solutions and GM will be permitted to re-source the business only if these
efforts are unsuccessful within a reasonable period of time.
GM's Right to Adopt New Technologies. The Supply Agreement permits General
Motors at all times to adopt new technology, whether or not any such new
technology is available through us. In the event that GM wishes to introduce
a technological change to a product covered by a then existing contract with
us, we have a right of last refusal to implement the new technology or an
equivalent technology acceptable to GM and continue production through the
remaining term of the existing contractual commitment. If we are unable to
provide the new technology or equivalent technology on a competitive basis,
General Motors is free to re-source the business to another supplier.
Disputes regarding new technology under this process will be resolved by a
senior engineer from each of GM and Delphi plus a third-party facilitator
mutually acceptable to both sides.
Technical Information. Consistent with general practice within our
industry, we have agreed under the Supply Agreement to cooperate with GM to
share with GM technical information about the products we supply to GM and
their manufacture, without restriction as to use.
Use of GM's Tooling. We will not use tooling to produce products for other
customers if such tooling is used to produce products for GM; provided,
however, that we will be allowed to continue the use of such tooling to the
extent necessary to satisfy contracts with other customers where the tooling
has been used for this purpose before January 1, 1999 and for extensions of
such contracts. We have agreed not to use tooling owned by GM to compete
against GM-SPO in the aftermarket.
Delphi Plant Closures and Product Eliminations. In the event that we
propose to close a plant or eliminate a product line, we must keep General
Motors informed on a timely basis of our decision-making process and in good
faith reasonably consider modifying our plans in order to accommodate GM's
timing requirements with respect to re-sourcing the business. Additionally,
the Supply Agreement provides that in the event of an extension of production
by General Motors of an existing product, which is covered by a contract with
a fixed term, beyond the term of the original anticipated program life,
General Motors has the right to require us to continue production and sale of
that product to GM for a reasonable period of time on commercially reasonable
terms to be negotiated between the parties.
Delphi Divestitures. In the event that we propose to divest a business, we
must keep General Motors informed on a timely basis of our decision-making
process and in good faith reasonably consider GM's input and concerns. Upon
our selection of a qualified buyer, existing contracts with GM relating to
the business being sold may be assigned to the buyer upon GM's prior written
consent, which will not be unreasonably withheld. In such cases, General
Motors will negotiate a new supply agreement with the buyer which will
contain substantially the same terms as our existing arrangements with
General Motors with respect to the business being sold. Any deviations from
the terms of the existing arrangements, including with respect to price, must
be mutually agreed upon by us and GM. During the term of the assigned
contract, Delphi and General Motors have agreed to dedicate appropriate
resources and efforts to ensure that General Motors receives comparable
levels of quality, service, delivery, price and technology.
Service Parts. The Supply Agreement also applies to service parts we
provide to General Motors for sale to GM-authorized dealers worldwide. In
general, unless otherwise provided in our existing contracts with GM, the
unit pricing on service parts that are not "past model" will continue at the
prices charged to General Motors until three years after such service parts
go past model. The term "past model" refers to parts which are used on
vehicle models which are no longer in production. Thereafter, unit prices for
such service parts will be negotiated between the parties.
28
Quality Improvement. In order to facilitate quality improvement, the
Supply Agreement provides that we will participate in all GM supplier quality
and development programs. General Motors is entitled to require us to achieve
reasonable increased quality standards. All increased quality standards
established by General Motors must be comparable to then existing industry
standards.
Termination. Unless terminated in accordance with its terms, the Supply
Agreement will remain in effect as long as any existing agreement is in
effect, including any extensions of any such existing agreement. Either
Delphi or General Motors may terminate the Supply Agreement for:
o material breach by the other party;
o insolvency or bankruptcy of the other party; or
oattachment, embargo or expropriation of a significant portion of the
other party's assets necessary in order for that party to perform its
obligations under the Supply Agreement.
In addition, General Motors can terminate the Supply Agreement if:
o35% or more of our company becomes owned or controlled, directly or
indirectly, by a competitor of General Motors in the business of
manufacturing automotive vehicles; or
oall of the underlying contracts governed by the Supply Agreement become
subject to termination or cancellation pursuant to their terms.
Underlying contracts become subject to termination or cancellation by GM
as the result of a variety of factors, such as our non-competitiveness,
cause, expiration and, in some cases, termination for convenience.
Termination for convenience means GM can terminate the contract at any time
for any reason. The majority of underlying contracts having termination for
convenience provisions are shorter-term purchase orders. This right to
terminate for convenience could be exercised by GM in connection with any
change in control of Delphi. Certain change in control transactions could
also give GM the right to terminate underlying contracts pursuant to the
provisions prohibiting us from assigning our contracts to another entity.
In the event that a competitor of GM in the business of manufacturing
automotive vehicles acquires, directly or indirectly, a significant interest
in our company, we must provide GM with reasonable assurances that we will
use our best efforts to preserve the confidentiality of all information
relating to products supplied to General Motors and GM vehicle programs.
Termination of the Supply Agreement would be likely to have a material
adverse effect on our company.
Dispute Resolution. The Supply Agreement provides that all disputes or
other matters related to the Supply Agreement will be exempt from the dispute
resolution process set forth in the Separation Agreement or in any other
agreement related to the transactions contemplated therein.
Aftermarket Sales. We are currently party to a Business Relationship
Agreement (as modified and as amended from time to time, the "Business
Relationship Agreement") with GM-SPO regarding aftermarket sales in the United
States. This agreement does not, however, cover the service parts provided to
General Motors pursuant to the Supply Agreement for sale to GM-authorized
dealers and distributors. The Business Relationship Agreement becomes subject to
termination by either party on or after December 31, 1999 upon twelve months
prior notice to the other party. This means the Business Relationship Agreement
cannot be terminated any earlier than December 31, 2000. Until such time, in
return for certain royalties and fees it pays to us, GM-SPO generally has the
right to act as the exclusive distributor of our aftermarket parts in the United
States. The pricing under the Business Relationship Agreement is being
benchmarked in an effort to ensure market based pricing with respect to
ACDelco(R) branded products. Pursuant to an Aftermarket Agreement dated as of
January 1, 1999, the payment terms between us and GM-SPO are being modified so
that GM-SPO will pay us on the second day of the second month following our
shipment of a product. Under the Business Relationship Agreement, if we can meet
the market price for a particular aftermarket product, GM-SPO must buy such
aftermarket product from us. Alternatively, we may choose not to meet the market
price for a particular aftermarket product and cease supplying such product in
the aftermarket in the United States. Until January 1, 2001, we are obligated to
offer all new technology with respect to aftermarket products to GM-SPO on a
non-exclusive basis, under terms no less favorable than those
29
offered to our other customers. Following the termination of the Business
Relationship Agreement, we may begin distributing our own products in the
aftermarket in the United States.
Outside the United States, we distribute our own aftermarket products
independently of General Motors and, with certain exceptions related to
batteries, we are free to seek any aftermarket sales opportunities.
We have agreed with GM-SPO to split the ownership of current aftermarket
brands. As a result, we own the Freedom(R) brand, but may not use the brand in
the United States until after the expiration of the Business Relationship
Agreement; GM-SPO owns the ACDelco(R) brand and any AC and Delco derivatives and
formatives; and GM-SPO owns the Voyager(R) battery brand, but may only use it on
batteries sourced from us. There will be a transition period for us and our
licensees to wind down our use of the brands owned by GM or brands owned by
Delphi but currently used by GM.
Purchasing. We have entered into agreements with GM pursuant to which we will
continue to purchase productive materials under existing contracts that were
entered into by General Motors on our behalf, until those contracts expire. Such
agreements provide that we are entitled to continue to use the purchasing
systems currently used by GM's purchasing organization until such time as we
establish our own purchasing system, which we estimate will not take more than
five years. In addition, in certain international operations, we may continue to
operate in a shared purchasing arrangement with GM for up to five years.
Employee Matters. We have entered into several agreements (collectively, as
amended from time to time, the "Employee Matters Agreements") with GM to
allocate responsibility and liability for certain employee related matters.
However, GM is obligated to bargain in good faith with the unions representing
our hourly employees regarding the effects of the separation of Delphi from GM
on their members. As a result, the understandings between us and GM related to
the effect of the separation on our hourly employees represented by unions may
be affected by negotiations with the unions representing these employees. GM has
advised us that it intends to work with such unions in this regard. The Employee
Matters Agreements generally provide for the following:
Employee Transfers. As of January 1, 1999, all GM salaried employees,
active and inactive, who are employees in our operations were transferred to
Delphi. GM U.S. hourly employees, active and inactive, who are employees in
our operations were transferred to Delphi as of January 1, 1999 and will
remain under the applicable national collective bargaining agreement, and
incorporated employee benefit plans, until the Distribution. However, the
transfer of salaried and hourly employees at certain of our international
operations, and of certain related pension and employee benefits plans, may
not take place until the receipt of consents or approvals or the satisfaction
of other applicable requirements. For all U.S. salaried employees who retired
on or before January 1, 1999, GM is retaining responsibility for pension
obligations and for other postretirement employee benefits ("OPEB")
obligations, consisting primarily of retiree medical obligations. GM has had
discussions with certain of the unions that represent the GM hourly employees
transferred to us regarding the effect of the separation on the employees.
For information regarding these discussions, "-- Strategy--Improve Operating
Performance--Labor Relations." With regard to our hourly employees and the
employees of divested Delphi units, GM generally will retain postretirement
benefit obligations for U.S. hourly employees who retire on or before October
1, 1999. We have reached agreements with the UAW and the IUE to this effect.
We anticipate that we will assume OPEB obligations and pension obligations
for such employees who retire after October 1, 1999.
As between GM and Delphi, the allocation of these obligations has been
made based on certain estimated levels of employee retirement prior to
October 1, 1999 based on historical experience and conditions surrounding
Delphi's separation from GM. We have agreed with GM to recalculate the
allocation of these liabilities based on the actual level of retirements on
or before October 1, 1999. Accordingly, if and to the extent that greater
than the assumed number of employees retire on or before October 1, 1999, we
would be required to make a payment to GM. Depending on the amount of such a
payment, if any, it could have a material adverse effect on our short-term
liquidity. Similarly, if and to the extent that fewer than the assumed number
of employees retire on or before October 1, 1999, GM would be required to
make a payment to us. The amount of postretirement benefits varies from time
to time, depending on factors such as discount rate, asset returns,
contributions and other factors. As of December 31, 1998, Delphi's salaried
and hourly OPEB obligation was about $4.6 billion and the hourly underfunded
pension obligation was about $2.1 billion.
Certain Flow-Back Rights. It is anticipated that the union discussions may
result in some of our hourly employees in the United States being provided
30
with certain opportunities to transfer to GM as appropriate job openings
become available at GM and GM employees in the United States having similar
opportunities to transfer to our company to the extent job openings become
available at our company. In general, if an employee transfers from our
company to GM and then retires from GM, or transfers from GM to our company
and retires from our company, both our company and GM will be responsible for
pension payments which in total reflect such employee's entire years of
service. Responsibility for such pension payments will generally be allocated
between the companies based on such employee's entire pre-transfer or
post-transfer service, respectively. In the case of employees transferring
from Delphi to GM, pre-transfer service will include service with GM prior to
our separation from GM and thus will be reflected in the portion of the
pension payments we must bear. It is not currently anticipated that there
will be any transfer of pension assets or liabilities between us and GM with
respect to such employees that transfer between our companies.
With respect to OPEB obligations for such transferring employees, the
company to which an employee transfers will provide the OPEB benefits for
such employee. We have entered into an agreement with GM which provides for a
mechanism for determining a cash settlement amount for OPEB obligations
associated with employees that transfer between our company and GM during any
year. Pursuant to this agreement, upon identification of the employees who
transferred between GM and our company during the past year, an actuarial
analysis will be done to determine an estimated pattern of employment
cessation, including from retirement, death, or voluntary termination, of
such employees. This estimated pattern of employment cessation will determine
the timing of payments due between us and GM for the employees that
transferred between our companies in a given year.
Separate actuarial analysis will be done for employees transferring from
our company to GM and from GM to our company. The actuarial assumptions to be
used in valuing the OPEB obligations associated with transferring employees
will be based on those used in conjunction with the receiving company's
annual OPEB valuation for the given period. The liability with respect to
such transferring employees will be retained by the company from which the
employee transferred until the cash settlement with respect thereto has been
made, upon which such liability will be recognized by the company to which
the employee transferred.
Employee Benefits. We have established or will establish our own pension
and employee benefit plans, which generally will be the same as GM's pension
and employee benefit plans. Our U.S. salaried employees began participating
in these plans on January 1, 1999 and our U.S. hourly employees will begin
participating in these plans at the time of the Distribution.
Our plans generally will assume all liabilities under GM's plans to
employees assigned to us. Certain pension assets funding pension liabilities
will be transferred from trusts and other funding vehicles associated with
GM's plans to the corresponding trusts for our plans.
General Motors Stock Awards. In connection with the completion of the
Distribution, awards (collectively, "GM Awards") held by our employees as of
such date under GM's incentive and variable pay plans will be replaced with
awards under our incentive and variable pay plans. With certain exceptions,
GM Awards held by individuals employed by General Motors as of the date of
the completion of the Distribution and by individuals who have retired prior
to replacement of such GM Award, will remain outstanding as GM Awards, with
an appropriate revaluation to reflect the Distribution.
In the case of GM Awards consisting of stock options, such awards will be
replaced with options to acquire a number of shares of our common stock equal
to the number of shares of GM $1-2/3 common stock subject to such GM Award as
of the date of the completion of the Distribution, multiplied by the Ratio
described below, rounded down to the nearest whole share. The per share
exercise price of such converted award will equal the per share exercise
price of such GM Award divided by the Ratio.
In the case of awards under the GM Performance Achievement Plan, any
unvested installments of final awards which are in the form of GM $1-2/3
common stock or GM Class H common stock, will be converted into shares of
Delphi common stock using a ratio similar to the one described below for
converting GM Awards consisting of stock options into options to acquire
shares of Delphi's common stock.
The "Ratio" means the amount determined by dividing:
othe average of the daily high and low per share prices of the GM $1-2/3
common stock, or the Class H common stock if Class H common stock awards
are being converted, as reported in The Wall Street Journal, during the
three trading days ending on a date of record established by the GM Board
of Directors in connection with the Distribution; by the
31
othe average of the daily high and low per share prices of the Delphi
common stock, as reported by The Wall Street Journal, for the three
trading days commencing on the day after such date of record.
Shares of Delphi's Common Stock Subject to Substitute Awards. It is not
possible at this time to specify how many shares of our common stock will be
subject to substitute awards for GM Awards. We expect that some GM Awards
consisting of stock options held by our employees will be exercised, other GM
Awards will vest and other GM Awards could be granted, prior to the date of
the completion of the Distribution. In addition, the remaining balance of
unexercised options pursuant to GM Awards will be replaced with options to
acquire shares of our common stock by reference to the Ratio, which will not
be known until the time of the Distribution. Our stockholders, are, however,
likely to experience some dilutive impact from the above-described
adjustments.
As of February 2, 1999, our employees held about 4,416,000 shares of GM
$1-2/3 common stock subject to options pursuant to GM Awards, about 1,457,000
of which were exercisable as of February 2, 1999. If the Ratio were
determined using the $89.44 per share closing price of the GM $1-2/3 common
stock on February 2, 1999, as reported in The Wall Street Journal and the
offering price of $17.00 per share of our common stock, the foregoing number
of shares of GM $1-2/3 common stock subject to GM stock options would be
replaced with options on about 23,231,000 shares of our common stock. As of
February 2, 1999, there were less than 5,600 shares of GM's Class H common
stock subject to GM Awards held by our employees which will be replaced with
awards of our common stock.
Tax Matters. We have entered into two income tax allocation agreements with
GM to govern the allocation of U.S. income tax liabilities and to set forth
agreements with respect to certain other tax matters. The first tax allocation
agreement is effective from the Contribution Date until such time as we cease to
be a member of the General Motors consolidated group. The second tax allocation
agreement, which supersedes and replaces the first agreement, is effective on
the day after we cease to be a member of the General Motors consolidated group.
Under the Code, we would cease to be a member of the General Motors consolidated
group upon the completion of the Distribution or if GM owns less than 80% of our
outstanding capital stock. The first tax allocation agreement is only effective
from January 1, 1999 until tax deconsolidation. Unless otherwise noted, the
provisions described below are contained in both agreements.
GM generally will pay all income taxes attributable to Delphi and its
subsidiaries for tax periods before the Contribution Date. For tax periods
during which we are a member of the General Motors consolidated group, we will
calculate our tax liability as if we were a separate affiliated group of
corporations filing a consolidated return, but we will pay our calculated taxes
to General Motors, which will then file a consolidated or combined return with
the appropriate tax authorities. There may be certain U.S. state or local
jurisdictions in which we will file a separate income tax return, not combined
or consolidated with GM, for tax periods before tax deconsolidation. In that
circumstance, we would file the income tax return with the appropriate tax
authorities, and pay the tax directly to the tax authority. Tax benefits
generated by our company for tax periods before tax deconsolidation will reduce
our tax liability, but not below zero, and we will not be compensated for tax
benefits generated by our company and used by the General Motors consolidated
group. Except for tax elections, which are defined for purposes of allocating
taxes as the treatment of items in tax returns and filings, that may have an
adverse impact on the General Motors consolidated group or tax elections that
must be made by the parent corporation of a consolidated group, we will
determine all tax elections for tax periods during which we are a member of the
GM consolidated group. We will prepare and file all tax returns, and pay all
income taxes due with respect to all tax returns required to be filed by us for
all tax periods after we cease to be a member of the GM consolidated group or
for U.S. state or local jurisdictions in which our return is not combined or
consolidated with GM's return.
GM is responsible for most U.S. tax adjustments related to Delphi for all
periods prior to tax deconsolidation, other than adjustments related to Delco
Electronics, which previously had been a separate entity in the General Motors
consolidated group, or related to certain tax elections made by Delphi. In
addition, we and GM have agreed to cooperate in any tax audits, litigation or
appeals that involve, directly or indirectly, periods prior to the time that we
cease to be a member of the General Motors consolidated group. We and GM have
agreed to indemnify each other for tax liabilities resulting from the failure to
cooperate in such audits, litigation or appeals, and for any tax liability
resulting from the failure to maintain adequate records. The second tax
allocation agreement also provides that with respect to our foreign taxes, we
may be required to indemnify General Motors in certain situations where we
receive a refund of foreign tax related to a tax period prior to tax
deconsolidation and GM's foreign tax credit is reduced as a result of the
refund. With a few exceptions, Delphi's subsidiaries outside the United States
will generally be responsible for foreign tax adjustments relating to Delphi's
businesses for all periods prior to the Contribution Date.
32
Intellectual Property. We have entered into agreements with GM to govern the
division and transfer of certain intellectual property. Pursuant to these
agreements, General Motors has assigned, or agreed to transfer, to us all
patents, patent applications and invention records that are primarily related to
components produced or sold by us and any other patents that are more valuable
to us than to General Motors. 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. We have agreed with GM to enter into royalty-free cross-licenses
for certain intellectual property and we believe that the aggregate values of
the cross-licenses are about equal. We have also agreed with GM that each of us
can collect reasonable royalties or damages under certain patents from the
other's suppliers with whom the other does not have or extend an existing supply
commitment. Also, GM has transferred to us ownership of about 1,170 trademark
registrations and applications, about 70 of which are U.S. and the balance of
which are foreign, as well as unregistered trademarks. Certain other
intellectual property agreements relating to our business have been transferred
to us, and with respect to intellectual property agreements entered into for the
benefit of both parties, GM will use reasonable efforts to have us made party to
such agreements.
We have entered into agreements with GM that place restrictions on the use of
certain technologies. For example: GM will have a right of first access and
limited exclusivity for certain OnStar-related vehicle information management
technology; each party is restricted from disclosing certain powertrain, vehicle
control, collision avoidance and other software algorithms to third parties
without the consent of the other party; and General Motors will retain ownership
of certain fuel cell propulsion system and related technologies, although we
will have the right to supply a minimum of 25% of the volume of components for
GM's first two major vehicle programs to utilize the fuel cell technology,
provided we can meet certain conditions, including competitive benchmarks on
quality, service and price.
There are certain restrictions on our use of some of the trademarks that have
been assigned to us. In addition, certain trademarks and trade names have been
licensed, rather than transferred, to us, and there are restrictions on the
geographical territory, duration and/or scope of our use of such licensed
trademarks and trade names. Our Delco Electronics subsidiary has a perpetual,
worldwide, royalty-free license to use the trade name "Delco Electronics" and
the trademarks "DELCO" and "DELCO ELECTRONICS" in connection with several of our
business units, but we must wind down our use of that trade name and those
trademarks to include only automotive audio products by January 1, 2001. We have
a worldwide license to use the trademarks "AC," "DELCO" and "AC Delco," but we
must wind down all use of these marks, including such use by our dealers and
distributors by January 1, 2000. This license is royalty-free, except that under
certain circumstances relating to joint ventures and third-party relationships
that have been assigned to us, we may be required to pay GM a royalty.
Real Estate and Environmental. We have entered into agreements with GM and
executed certain instruments to assign or sub-lease GM's real estate portfolio
related to the Delphi Automotive Systems Business, consisting of both owned and
leased property, between our companies as follows:
oWith respect to the facilities that were owned by GM and used only in
connection with our business, such facilities have been transferred to our
company.
oWith respect to facilities owned by GM and used by both GM and us, GM is
leasing to us the portion of such facilities which we use. Such leases are
generally for a term of three years and the rent thereunder approximates
prevailing market rates.
oWith respect to facilities that were leased by GM and used only in
connection with our business, GM has assigned such leases to us. Pursuant to
these assignments, we have assumed all of GM's obligations under each
assigned lease and agreed to indemnify GM against all obligations arising
under such leases after their assignment.
oWith respect to facilities leased by GM and used by both GM and us, GM has
sub-leased to us the portion of such facilities which we use. Such
sub-leases are generally for the then remaining term of GM's lease for such
facilities, less one day, and the rent thereunder shall generally equal the
occupancy cost per square foot payable under GM's lease for such facility.
oGM has also assigned to us its interest in the facilities held by joint
ventures in which GM was a party and which facilities we utilize or operate.
Under the lease and sub-lease arrangements described above, the lessor will
retain responsibility for releases of hazardous materials at the facility before
33
the closing of the real estate transactions and for certain identified
environmental non-compliance matters relating to pre-closing operations. The
lessee will be responsible for releases of hazardous materials at the facility
after the closing and for all other environmental non-compliance matters during
the lease term.
With respect to the facilities transferred to us, we have assumed all
operating costs thereof and applicable financial and environmental reserves with
respect thereto. With respect to facilities that are not transferred to us,
including all facilities closed or sold prior to January 1, 1999, General Motors
has retained all operating costs thereof and applicable financial and
environmental reserves with respect thereto, whether or not such facilities were
previously used by Delphi.
Pursuant to the separation arrangements between our company and GM, GM will
be responsible for environmental liabilities at the GM facilities that are not
transferred to us, including all facilities closed or sold prior to January 1,
1999, except that we will be responsible for any environmental liabilities at
such facilities that we cause after January 1, 1999. We will be responsible for
environmental liabilities at the facilities that are transferred to us, except
that GM will be responsible for any environmental liabilities at such facilities
that GM causes after January 1, 1999.
In addition, with respect to liability for offsite waste disposal, GM will
retain responsibility for sites where GM's liability is known or alleged prior
to January 1, 1999, except that we will be responsible for any wastes Delphi
contributes to these sites after January 1, 1999. We will not, however, be
responsible for any contributions to these sites from the facilities transferred
to us that occurred prior to January 1, 1999. At other waste disposal sites,
GM's and Delphi's respective liability will be allocated based on each party's
respective contribution of wastes to such sites. In particular, GM's liability
will be based on contributions from the facilities it retains and any other
facility owned or operated by GM, except the facilities transferred to us.
Delphi's liability will be based on contributions from the facilities
transferred to us and any other facility owned or operated by Delphi.
Tooling, Containers and Dunnage. We have entered into agreements with GM to
allocate the ownership of tooling, containers and dunnage. GM and Delphi will
each own the tooling that was reflected on their respective balance sheets as of
January 1, 1999. The term "tooling" refers to all tools, jigs, dies, gauges,
fixtures, molds, patterns and similar items necessary for the production of
automotive parts. We will not use tooling to produce products for other
customers if such tooling is used to produce products for GM; provided, however,
that we will be allowed to continue the use of such tooling to the extent
necessary to satisfy existing contracts, and extensions of such contracts, where
we have previously used such tooling to produce products for other customers.
For more information, see "--Supply Agreement--Use of GM's Tooling."
Containers and dunnage used for the transportation of our products from our
facilities to GM facilities or other Tier 1 suppliers to GM will be owned by
General Motors. The term "dunnage" refers to the materials, such as padding,
wrappings and other loose materials, used to protect automotive parts during
shipment. We will own containers and dunnage used for the transportation of our
products within our facilities. Finally, we will own containers and dunnage used
for the transportation of products between us and our suppliers.
Warranty Matters. Our warranty responsibility for products supplied to
General Motors under existing contractual arrangements will be governed by the
terms and conditions of those contracts. Generally, those terms and conditions
provide that Delphi expressly warrants to GM that all goods and services covered
by the contract will conform to the specifications, drawings, samples or
descriptions furnished to or by General Motors, and will be merchantable, of
good material and workmanship and free from defect. In addition, Delphi
acknowledges that it knows of GM's intended use for the products and expressly
warrants that the products have been selected, designed, manufactured or
assembled based on GM's stated use and will be fit and sufficient for the
purposes intended by General Motors.
We have agreed with GM pursuant to the Supply Agreement to work together in
good faith to reduce warranty costs, including through participation in GM
warranty programs. In addition, the Supply Agreement provides that our warranty
responsibility for products supplied under new contracts will be governed by the
terms and conditions negotiated between the parties in those contracts.
Interim Services. The Ancillary Agreements provide that General Motors will
furnish us with a number of interim services, which services will generally be
provided to us at cost. In addition to any services discussed above, such
services include, among others:
ocertain treasury, accounting, which includes accounts payable and
receivable, tax, travel, customs and payroll services;
34
ocertain information systems services, including financial, engineering,
environmental, human resources, manufacturing, communications, legal,
logistics, purchasing and warranty and service systems;
oa variety of employee-related administrative support services, including
human resource planning and employee placement and medical services;
o certain legal services;
o certain audit services; and
omanaged access to proving grounds, test facilities, research and
development and engineering centers and the services provided at such sites
by General Motors personnel.
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 prices
charged to us under these agreements may be higher or lower than the prices that
may be charged by unaffiliated third parties for similar services and the
services provided may not be the same, in scope and level, as those provided
before our separation from GM.
International Agreements. We have entered into a series of agreements with GM
similar to those discussed above with respect to those Delphi Assets located
outside the United States. In most countries, GM's vehicle and component
businesses are operated by separate legal entities. In such countries, the
entities that operate the components business will be transferred to Delphi.
Where certain facilities or functions are shared by such separate legal
entities, the shared functions or facilities will generally be separated in
accordance with the principles set forth in the corresponding Ancillary
Agreement in the United States. In those countries in which the vehicle and
components businesses are owned by one legal entity, new entities have been or
will be formed in order to separate the Delphi business from the GM business.
Agreements have been or will be entered into in each of the countries where
operations are to be transferred to Delphi. Although the agreements for most
countries have or will have different terms than the Ancillary Agreements in the
United States, in general they are or will be similar in scope to the Ancillary
Agreements. Certain international assets relating primarily to our business may
still be held by General Motors or its affiliates following the Offering pending
receipt of consents or approvals or satisfaction of other applicable
requirements necessary for the transfer of such assets to Delphi. These assets
and operations are not, individually or in the aggregate, material to our
company. For example, certain assets and operations located in Brazil, Germany
and Canada are subject to such restrictions. However, the information included
in this report regarding our company and our facilities and operations,
including the information set forth in the "Item 1. Business" section and our
consolidated financial statements presented elsewhere in this report, assumes
and gives effect to the completion of these transactions.
35
Employees; Union Representation
As of December 31, 1998, excluding our joint ventures and other investments,
we employed 197,568 persons, including 32,896 salaried employees and 164,672
hourly employees. Of our hourly employees, about 93% are represented by about 53
unions, including the UAW, the IUE and the USW. The UAW is our largest union,
representing about 28% of our unionized employees. Our union representation by
major region as of December 31, 1998 is indicated in the table below:
Union Representation
Number of Number of
Region Unions Employees
------ ------ ---------
United States
UAW.......... 1 43,150
IUE.......... 1 15,837
USW.......... 1 1,403
Other unions. 3 250
- ------
Total United States. 6 60,640
Canada......... 2 957
Mexico......... 6 58,758
Europe......... 32 27,715
South America.. 5 5,265
Asia/Pacific... 2 637
-- -------
Total..... 53 153,972
== =======
The national collective bargaining agreements negotiated by GM with the
unions currently apply to our workforce. GM's national agreement with the UAW
expires in September 1999, GM's national agreement with the IUE expires in
November 1999 and GM's national agreement with the USW expires in September
2002. We will assume the terms of the existing collective bargaining agreements
for our employees in connection with the Distribution.
The percentage of our employees located outside the United States and Canada
has increased from about 38% in 1992 to about 60% in 1998. We expect that the
percentage of our employee population located outside the United States and
Canada will continue to increase over time as we continue to expand our
operations globally.
36
ITEM 2. PROPERTIES
Our world headquarters is located in Troy, Michigan and occupies about
264,000 square feet. We occupy this facility, as well as certain other
facilities, under agreements with General Motors. We expect to purchase our
headquarters upon expiration of our agreement with GM related thereto.
We also maintain regional headquarters for our Asia/Pacific region in Tokyo,
Japan, for our Europe/Middle East/Africa region in Paris, France and for our
South America region in Sao Paulo, Brazil. Excluding our joint ventures and
other investments, we currently maintain a total of 244 sites in 36 countries
throughout the world. The following table, which gives full effect to the
international asset transfers contemplated by the Separation Agreement, but
excludes our joint ventures and other investments, shows our principal
facilities as of December 31, 1998:
Number of Total Owned Total Leased
Region Sites Square Footage Square Footage
------ ----- -------------- --------------
United States/Canada....... 78 44,837,322 13,448,992
Europe/Middle East/Africa.. 93 6,058,025 4,942,674
Mexico/South America....... 47 7,919,242 3,752,457
Asia/Pacific............... 26 1,392,501 723,502
-- ---------- ----------
Total............ 244 60,207,090 22,867,625
=== ========== ==========
In some cases, our manufacturing sites, technical centers and/or customer
service centers and sales activity offices are located at a single
multiple-purpose site. We also have a limited number of miscellaneous
facilities. The following table, which gives full effect to the international
asset transfers contemplated by the Separation Agreement, but does not reflect
our joint ventures and other investments, shows our capabilities as of December
31, 1998:
Customer
Manufacturing Technical Centers and
Region Sites Centers Sales Offices
------ ----- ------- -------------
United States/Canada.......... 48 14 11
Europe/Middle East/Africa..... 64 7 20
Mexico/South America.......... 41 4 6
Asia/Pacific.................. 15 2 14
-- -- --
Total........... 168 27 51
=== == ==
We are currently evaluating long-term plans to consolidate our worldwide
engineering and technical resources, including our technical centers, into a
more efficient, customer-focused global engineering support network. While we
believe that this consolidation will enhance our ability to provide engineering
and technical support to our customers around the world, we also expect that it
will have the effect of reducing the overall number of our technical centers.
We believe that our facilities are suitable and adequate, and have sufficient
productive capacity, to meet our current and currently anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
We are involved in routine litigation incidental to the conduct of our
business. We do not believe that any of the litigation to which we are currently
a party will have a material adverse effect on our business or financial
condition.
Although we do not believe any current litigation will have a material
adverse effect on our business or financial condition, we face an inherent
business risk of exposure to product liability claims in the event that the
failure of our products results or is alleged to result in personal injury or
death, and we cannot assure you that we will not experience any material product
liability losses in the future. In addition, if any Delphi-designed products are
or are alleged to be defective, we may be required to participate in a recall
involving such products. Each VM has its own policy regarding product recalls
and other product liability actions relating to its suppliers. However, as
suppliers become more integrally involved in the vehicle design process and
assume more of the vehicle assembly functions, VMs are increasingly looking to
37
their suppliers for contribution when faced with product liability claims.
Because this is a new trend in our industry and we have only limited experience
in this regard, we cannot assure you that our costs associated with providing
product warranties will not be material.
In connection with our separation from General Motors, GM has agreed to
retain 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. We will be responsible for all product
liability actions relating to products we sold at any time to customers other
than GM. Responsibility for product liability actions relating to products we
manufacture on or after January 1, 1999 and sell to GM will be determined in
accordance with the agreements for such sales.
From time to time, in the ordinary course of business, Delphi receives
notices from customers that products may not function properly. Our warranty
responsibility for our products is generally governed by the terms and
conditions of the applicable contract, which vary from contract to contract.
Most of our contracts require that we make certain warranties to our customers
regarding, among other things, conformity to specifications and freedom from
defect. For information regarding our warranty responsibility for products
supplied to General Motors, see "Item 1. Business--Arrangements Between GM and
Delphi --Warranty Matters."
VMs generally offer warranties to new vehicle purchasers which cover the
repair and replacement of defective parts on their vehicles for a specified
period of time. Traditionally, VMs have borne the cost associated with such
warranty programs, including costs related to the repair and replacement of
parts supplied to the vehicle manufacturer by the supplier. VMs are increasingly
requiring their outside suppliers to guarantee or warrant their products.
Depending on the terms under which Delphi supplies products to a VM, a VM might
seek to hold Delphi responsible for some or all of the repair or replacement
costs of such products under new vehicle warranties, when the product supplied
did not perform as represented. Because this is a new trend in our industry and
we have only limited experience in this regard, we cannot assure you that our
costs associated with providing product warranties will not be material.
We believe that we are adequately insured, including with respect to
product liability coverage, at levels sufficient to cover the claims described
above, subject to commercially reasonable deductible amounts. Delphi is insured
under all of GM's property and liability insurance programs worldwide. We will
remain insured under those programs, subject to the same limitations and
conditions of coverage applicable to all GM operations, until the earlier of the
Distribution and January 1, 2000. We expect to purchase product liability
insurance to be effective at the time such GM coverage ceases, with reasonable
deductibles or self-insured retentions. We have also established reserves in
amounts we believe are reasonably adequate to cover any adverse judgments.
However, any adverse judgment in excess of our insurance coverage and such
reserves could have a material adverse effect on our business.
On December 17, 1998, General Motors entered into a consent order with the
New York Department of Environmental Conservation to settle a notice of
violation the Department issued to our Lockport, New York facility on November
24, 1998. The notice alleged that the facility had installed thermal degreasers
without obtaining an air emission permit or complying with certain requirements
for volatile organic compound emissions from new emission sources. The consent
order requires payment of a civil penalty of $110,000 to the Department. We have
paid the penalty on behalf of GM and will be reimbursed from GM pursuant to the
separation arrangements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 27, 1998, the Company's sole stockholder, by written consent in
lieu of a meeting, elected as directors Messrs. Battenberg, Losh, Smith, Pearce
and Wyman. See Items 10 through 13.
38
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Sales of Unregistered Securities
In connection with its incorporation and organization, on September 16,
1998, Delphi issued ten shares of common stock to GM for an aggregate
consideration of $1.00. We believe that this issuance was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
transaction not involving any public offering.
Use of Proceeds From Sales of Registered Securities
In February 1999, Delphi completed an initial public offering of 100
million shares of its $.01 par value Common Stock. Morgan Stanley & Co.
Incorporated, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation and Schroeder
& Co. Inc., acted as representatives for the U.S. underwriters, and Morgan
Stanley & Co. International Limited, Goldman Sachs International, Merrill Lynch
International, Donaldson, Lufkin and Jenrette International, and J. Henry
Schroeder & Co. Limited acted as international representatives for the
international underwriters. The shares of Common Stock sold in the IPO were
registered under the Securities Act of 1933, as amended, on a registration
statement on Form S-1 (Registration No. 333-67333) that was declared effective
by the Securities and Exchange Commission on February 4, 1999. The IPO commenced
on February 4, 1999. All 100 million shares of Common Stock registered were sold
at a price of $17 per share. The aggregate offering price of the shares of
Common Stock registered and sold was $1.7 billion. Delphi paid an aggregate of
about $79 million in underwriting discounts and commissions, resulting in net
proceeds to Delphi of about $1.6 billion.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities registered in the IPO. All amounts are estimated
except the Securities and Exchange Commission registration fee and the NASD
registration fee. GM has generally agreed to pay these costs and expenses. The
underwriters have agreed to reimburse GM for certain of its expenses incurred in
connection with the IPO.
Securities and Exchange Commission registration fee. $ 575,460
NASD registration fee............................... 30,500
NYSE original and continued listing fees............ 962,135
Blue Sky qualification fees and expenses............ 5,000
Legal fees and expenses............................. 1,650,000
Accounting fees and expenses........................ 2,000,000
Transfer agent and registrar fees................... 60,500
Printing and engraving expenses..................... 3,020,000
Miscellaneous expenses.............................. 1,696,405
-----------
Total............................................. $10,000,000
===========
None of the expenses or net proceeds of the IPO were paid directly or
indirectly to any director or officer of Delphi or their associates, persons
owing 10% or more of the equity securities of Delphi, or an affiliate of Delphi.
In managing our cash position, we used the proceeds of the offering to pay down
borrowings under our revolving credit facilities and subsequently re-borrowed
from our credit facilities to fund our operations. Borrowings under such credit
facilities have due dates of January 3, 2000 and January 3, 2004. As of March 1,
1999, the interest rates on our borrowings under these credit facilities ranged
between about 5.3% and 5.44%.
Our Common Stock is listed on the New York Stock Exchange under the symbol
"DPH." The Transfer Agent and Registrar for our Common Stock is BankBoston, N.A.
On February 24, 1999, there were 461 holders of record of our Common Stock.
We currently intend to pay dividends on a quarterly basis, at an initial
rate of about $0.07 per share, commencing with the first declaration in June
1999 for payment in July 1999. Our Board is free to change its dividend
practices at any time and from time to time and to decrease or increase the
dividend paid, or not to pay a dividend, on the Common Stock on the basis of the
results of operations, financial condition, cash requirements and future
prospects of our company and other factors deemed relevant by our Board.
39
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of Delphi reflect the historical
results of operations and cash flows of the businesses that were considered part
of the Delphi Automotive Systems business sector of GM during each respective
period. In addition, the data for all periods include amounts relating to Delco
Electronics, the electronics and mobile communication business that was
transferred by GM from Hughes Electronics to Delphi in December 1997. The
historical consolidated statement of operations data set forth below do not
reflect many significant changes that will occur in the operations and funding
of our company as a result of our separation from GM and the IPO. The historical
consolidated balance sheet data set forth below reflect the assets and
liabilities transferred to our company in accordance with the Separation
Agreement.
The selected financial data of Delphi should be read in conjunction with,
and are qualified by reference to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto included elsewhere in this report. The consolidated
statement of operations and cash flow data set forth below for each of the three
years in the period ended December 31, 1998, and the consolidated balance sheet
data as of December 31, 1998 and 1997 are derived from, and qualified by
reference to, the consolidated financial statements included elsewhere in this
report, and should be read in conjunction with those consolidated financial
statements and the notes thereto. The consolidated statement of operations and
cash flow data for the year ended December 31, 1995 and the consolidated balance
sheet data as of December 31, 1996 are derived from audited consolidated
financial statements not included in this report. The consolidated statement of
operations and cash flow data for the year ended December 31, 1994 and the
consolidated balance sheet data as of December 31, 1995 and 1994 are derived
from unaudited consolidated financial statements not included in this report,
which in our opinion, include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the results for such
periods.
The financial information presented below may not be indicative of our
future performance and does not necessarily reflect what our financial position
and results of operations would have been had we operated as a separate,
stand-alone entity during the periods presented. You should read the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section, which describes a number of factors which have affected our
financial results, including significant price reductions as GM implemented its
global sourcing initiative, labor disruptions at both GM and Delphi and charges
associated with certain competitiveness initiatives.
40
Year Ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994(1)
---- ---- ---- ---- -------
(in millions, except per share amounts)
Statement of Operations Data:
Net sales................... $28,479 $31,447 $31,032 $31,661 $31,044
Operating expenses:
Cost of sales, excluding
items listed below....... 26,135 27,710 27,471 27,384 27,081
Selling, general and
administrative........... 1,463 1,415 1,445 1,366 1,157
Depreciation and
amortization............. 1,102 1,970 843 773 722
------- ------- ------- ------- -------
Operating (loss)income..... (221) 352 1,273 2,138 2,084
Interest expense........... (277) (287) (276) (293) (310)
Other income, net.......... 232 194 115 101 103
------ ------- ------- ------- ------
(Loss)income before
income taxes.............. (266) 259 1,112 1,946 1,877
Income tax (benefit)expense. (173) 44 259 639 644
------ ------- ------- ------- ------
(Loss) income before
cumulative effect of change
in accounting principle.... (93) 215 853 1,307 1,233
------ ------- ------- ------- ------
Cumulative effect of change in
accounting principle, net
of tax..................... -- -- -- -- (258)
------- ------- ------ ------- ------
Net (loss) income........... $ (93) $ 215 $ 853 $ 1,307 $ 975
====== ======= ======= ======= =======
Basic and diluted (loss)
earnings per share $(0.20) $ 0.46 $ 1.83 $ 2.81 $ 2.10
====== ======= ======= ======= =======
Statement of Cash Flows Data:
Cash provided by operating
activities................ $ 849 $ 2,918 $ 2,701 $ 1,370 n/a
Cash used in investing
activities................ (1,216) (1,320) (995) (1,141) n/a
Cash provided by (used in)
financing activities...... 384 (1,549) (1,686) (263) n/a
Other Financial Data:
EBITDA(2).................. $1,056 $2,459 $2,182 $ 2,959 $ 2,603
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in millions)
Balance Sheet Data:
Total assets.............. $15,506 $15,026 $15,390 $15,635 $14,494
Total debt................ 3,500 3,500 3,500 3,500 3,500
Equity (deficit).......... 9 (413) 922 1,354 120
(1) Delphi adopted Statement of Financial Accounting Standards ("SFAS") No.
112, "Employers' Accounting for Postemployment Benefits," effective January
1, 1994. The adoption had an unfavorable cumulative effect of $258 million
after-tax, which is reflected in 1994 net income. Earnings per share before
the unfavorable cumulative effect of the change in accounting principle was
$2.65 per share. The unfavorable cumulative effect of the change in
accounting principle was $0.55 per share.
(2)"EBITDA" is defined as income before provision for interest expense and
interest income, income taxes, depreciation and amortization. EBITDA is not
presented as an alternative measure of operating results or cash flow from
operations, as determined in accordance with generally accepted accounting
principles, but because we believe it is a widely accepted indicator of our
ability to incur and service debt. EBITDA does not give effect to cash used
for debt service requirements and thus does not reflect funds available for
dividends, reinvestment or other discretionary uses. In addition, EBITDA as
presented herein may not be comparable to similarly titled measures reported
by other companies.
41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Historical Financial Statements
Our consolidated financial statements, which are discussed below, reflect the
historical results of operations and cash flows of the businesses that were
considered part of the Delphi business sector of GM during each respective
period; however, they do not reflect many significant changes that will occur in
the operations and funding of our company as a result of our separation from GM
and the IPO. The historical consolidated balance sheets reflect the assets and
liabilities transferred to our company in accordance with the transactions
contemplated by the Separation Agreement to which we and GM are parties.
Delphi and Delco Electronics were under the common control of GM during such
periods; therefore, our consolidated financial statements include amounts
relating to Delco Electronics for all periods presented, although Delco
Electronics was not integrated with our company until December 1997. See Note 1
to our consolidated financial statements included elsewhere in this report for a
summary of our organization and significant factors reflected in our historical
financial statements. See "--Results of Operations" "--Liquidity and Capital
Resources" and Note 17 to our consolidated financial statements included
elsewhere in this report for information on changes in our operations and
funding that are expected to result from our separation from GM and the IPO.
Separation
Delphi and General Motors (and, in some cases, their respective affiliates)
have entered into certain agreements providing for the separation of our
business from General Motors, including a Master Separation Agreement to which
GM and Delphi are parties (as amended from time to time, the "Separation
Agreement"). For more information regarding the separation terms, including the
Supply Agreement between the companies, see "Item 1. Business--Arrangements
Between GM and Delphi ."
Results of Operations
To facilitate analysis, the following table sets forth historical
consolidated statement of operations data as a percentage of consolidated net
sales for each of the periods presented:
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- ------
Net sales................ 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales, excluding
items listed below..... 91.8 88.1 88.5
Selling, general and
administrative......... 5.1 4.5 4.7
Depreciation and
amortization........... 3.9 6.3 2.7
------ ------ ------
Operating (loss)income .. (0.8) 1.1 4.1
Interest expense......... (0.9) (0.9) (0.9)
Other income, net........ 0.8 0.6 0.4
------ ------ ------
(Loss) income before
income taxes............ (0.9) 0.8 3.6
Income tax (benefit)
expense ................ (0.6) 0.1 0.8
------ ------ ------
Net (loss) income ..... (0.3)% 0.7% 2.8%
===== ===== =====
In order to more fully understand the fluctuations, you should consider the
impact of special items and work stoppages as discussed below.
Special Items and Work Stoppages
The global automotive components and systems market is increasingly
competitive and is undergoing significant restructuring and consolidation
activities. All of our major industry competitors continue to increase their
42
focus on efficiency and cost improvements, while facing increasing price
pressures from vehicle manufacturer customers. As a result, in 1997, we
initiated a study to evaluate the long-term competitiveness of all facets of
our businesses ("Competitiveness Study"). As market conditions continued to
warrant such review, a Competitiveness Study was again completed in 1998 in
conjunction with our annual business planning cycle. Additional information
regarding the results of each Competitiveness Study is included below and in
Note 3 to our consolidated financial statements included elsewhere in this
report.
Our operating results for the periods presented also were impacted by a
number of other special items which management views as non-recurring in nature.
Such special items included divestitures and plant closing charges as well as
work stoppages at certain GM and Delphi locations. Although these items are
considered non-recurring, we cannot provide assurance that other special items
and/or work stoppages will not occur with greater or lesser effects in future
periods.
The following is a summary of the special items that impacted our operating
results during the periods presented:
1998
o During 1998, we recorded a $310 million charge, or $192 million after-tax,
related to the 1998 Competitiveness Study. Overall, the charge had the
effect of increasing cost of sales and depreciation and amortization by
$154 million and $156 million, respectively.
o During 1998, we recorded a loss of $430 million, or $271 million after-tax,
related to divestitures involving our seating, lighting, and coil spring
businesses. The charge had the effect of increasing cost of sales and
depreciation and amortization by $382 million and $48 million,
respectively.
o Work stoppages at GM and Delphi during 1998 reduced operating income by
about $726 million, or $450 million after-tax, after considering partial
recovery of lost production in subsequent periods.
1997
o During 1997, we recorded a $1.4 billion charge, or $870 million after-tax,
relating to the 1997 Competitiveness Study. Overall, the charge had the
effect of increasing 1997 cost of sales and depreciation and amortization
by $262 million and $1.1 billion, respectively.
o Work stoppages during 1997 reduced operating income by about $148 million,
or $92 million after-tax, after considering partial recovery of lost
production in subsequent periods.
o During 1997, we recorded an $80 million plant closing charge, or $50
million after-tax, relating to a facility in Trenton, New Jersey. This
charge had the effect of increasing cost of sales by $80 million.
o Other special items included gains aggregating $97 million, or $60 million
after-tax. These gains primarily related to the sale of certain businesses
and investments, none of which were material on an individual basis.
1996
o During 1996, we sold four facilities located in Flint and Livonia, Michigan
and Oshawa and Windsor, Ontario, which resulted in a loss of $247 million,
or $153 million after-tax. The loss had the effect of increasing cost of
sales and depreciation and amortization by $167 million and $80 million,
respectively.
o During 1996, three major work stoppages at various GM and Delphi facilities
in the United States and Canada had an unfavorable impact of $453 million,
or $281 million after-tax, resulting from lower GM production volumes,
after considering partial recovery of lost production in subsequent
periods.
o Retiree lump sum benefit payments resulting from U.S. labor negotiations
during 1996 resulted in a charge of $86 million, or $53 million after-tax.
o Other special charges totaled $50 million, or $31 million after-tax. These
costs primarily reflect the sale of certain business investments, none of
which were material on an individual basis.
43
1998 versus 1997
Net Sales. Consolidated net sales and changes in net sales by product
sector and in total for the years ended December 31, 1998 and 1997 were:
Year Ended
December 31, Change
---------------------- ------------------
Product Sector 1998 1997 $ %
------------------------- -------- -------- --------- --------
(dollars in millions)
Electronics & Mobile
Communication............ $ 4,823 $ 5,539 $ (716) (12.9)%
Safety, Thermal &
Electrical Architecture. 11,226 12,728 (1,502) (11.8)
Dynamics & Propulsion.... 12,862 13,733 (871) (6.3)
Eliminations............. (432) (553) 121 n/a
------ ------ ------ ----
Consolidated net sales. $28,479 $31,447 $(2,968) (9.4)%
======= ======= ======= ====
The decrease in consolidated net sales for each product sector reflects
unfavorable volume associated with work stoppages, after considering partial
recovery of lost production, divested businesses (primarily in our Safety,
Thermal and Electrical Architecture product sector) and economic conditions in
Asia and Latin America. In addition, our net sales continue to be impacted by
pricing pressures as vehicle manufacturers reduce their cost structures through
competitive sourcing initiatives and global vehicle platforms. Specifically, all
of our product sectors were impacted by price reductions required by GM and
other customers which totaled $465 million (or 1.6% of net sales). As a
percentage of net sales, price reductions declined from 1997 levels to levels
which we believe will be more indicative of future pricing pressures from
vehicle manufacturers, although we cannot assure you in this regard. Overall,
price reductions had the largest impact on our Electronics & Mobile
Communication product sector (2.7% of net sales) due to the impact of GM-North
America's continued implementation of its global sourcing strategy and
reflecting the overall price declines throughout the electronics industry. The
unfavorable impact of lower volumes, as discussed above, and price reductions
was partially offset by an increase in sales to customers other than GM. Sales
to customers other than GM during 1998 increased about $620 million or 11%
compared to 1997.
Cost of Sales. Cost of sales represented 91.8% of consolidated net sales for
1998 compared to 88.1% for the 1997 year. The increase reflects the impact of
special items and work stoppages along with other factors which are described in
greater detail in the operating (loss) income discussion below.
Selling, General and Administrative and Depreciation and Amortization.
Selling, general and administrative expenses increased by $48 million during
1998 compared to 1997. Depreciation and amortization increased by $28 million
during 1998 excluding the impact of special charges during 1998 and 1997
totaling $204 million and $1.1 billion, respectively, related to divestitures
and the Competitiveness Study for each period. The increase in depreciation and
amortization, excluding the impact of special charges, reflected incremental
depreciation associated with a larger fixed asset base.
Operating (Loss) Income. Our operating loss was $221 million for 1998
compared to operating income of $352 million in 1997. Excluding the impact of
special items and work stoppages, operating income totaled $1.2 billion and $1.9
billion for the years ended December 31, 1998 and 1997, respectively. The
following information on operating income and changes in operating income and
its components excludes the impact of special items and work stoppages. See
"--Special Items and Work Stoppages" for additional information.
44
Operating income by product sector and in total, excluding the impact of
special items and work stoppages, was:
Year Ended
December 31,
-----------------
Product Sector 1998 1997
---------------------------------- ------ -----
(in millions)
Electronics & Mobile Communication........ $ 511 $ 612
Safety, Thermal & Electrical Architecture. 707 1,060
Dynamics & Propulsion..................... 314 400
Other..................................... (287) (130)
----- -----
Total operating income excluding the impact
of special items and work stoppages..... $1,245 $1,942
====== ======
Operating income, excluding the impact of special items and work stoppages,
was unfavorably impacted by continuing price pressures, the economic downturn in
Latin America and unfavorable design costs and product mix. These unfavorable
items were significantly offset by our aggressive cost reduction efforts as we
have implemented several strategies to reduce our cost structure and maintain
our desired level of profitability. Specifically, each of our product sectors
achieved material and manufacturing cost savings which totaled about $945
million during 1998, exceeding price reductions and unrecovered design change
costs by $110 million. Cost savings achieved primarily reflect the results of
our global sourcing initiatives and continued implementation of lean
manufacturing strategies. In addition, operating income was favorably impacted
by greater sales penetration of non-GM customers during 1998.
Interest Expense. Interest expense totaled $277 million and $287 million for
the years ended December 31, 1998 and 1997, respectively. The decrease in
interest expense reflects lower interest rates during 1998 in comparison to 1997
rates.
Other Income, Net. Other income, net totaled $232 million for 1998, compared
to $194 million in 1997. The increase primarily reflects improved profitability
for certain non-consolidated ventures during 1998.
Taxes. The effective income tax rate for 1998 was a 65.0% credit compared to
an effective income tax rate of 17.0% for 1997. During 1998, certain deductions
and tax credits remained constant while taxable income decreased substantially,
resulting in a greater effective tax benefit as a percentage of pretax income.
Net (Loss) Income. Our historical net loss totaled $93 million in 1998
compared to net income of $215 million during 1997. Excluding special items and
work stoppages, our income was $820 million and $1.2 billion for the years ended
December 31, 1998 and 1997, respectively, reflecting the impact of items
discussed above.
Pro forma 1998
Our operating loss and net loss, as reported for 1998, does not reflect the
impact of many changes in our operations that are expected to result from our
separation from GM. After giving effect to the terms of the Separation
Agreement, our operating loss and net loss would have been $110 million and $24
million, respectively, for 1998. Excluding the impact of special items and work
stoppages and after giving effect to the terms of the Separation Agreement,
operating income and net income would have been $1.4 billion and $889 million,
respectively, for 1998. Overall, the terms of the Separation Agreement would
have had a favorable impact on our reported operating loss and net loss of $111
million and $69 million, respectively, for the year ended December 31, 1998,
reflecting the net effect of lower employee benefit costs and higher other costs
associated with operating Delphi as a stand-alone company. For additional
information on the impact of the terms of the Separation Agreement, see Note 17
to our consolidated financial statements included elsewhere in this report.
45
1997 versus 1996
Net Sales. Consolidated net sales and changes in net sales by product
sector and in total for the years ended December 31, 1997 and 1996 were:
Year Ended
December 31, Change
------------------ -------------
Product Sector 1997 1996 $ %
-------------------------- ------ ------ ----- -----
(dollars in millions)
Electronics & Mobile
Communication............ $5,539 $5,315 $224 4.2%
Safety, Thermal &
Electrical Architecture... 12,728 12,942 (214) (1.7)
Dynamics & Propulsion..... 13,733 13,293 440 3.3
Eliminations.............. (553) (518) (35) n/a
------- ------- ---- ----
Consolidated net sales. $31,447 $31,032 $415 1.3%
======= ======= ==== ===
The increase in consolidated net sales during 1997 reflects a $260 million
increase in sales to non-GM customers and improved GM-North America production
volumes, after adjusting for the impact of work stoppages. These improved
volumes during 1997 were partially offset by the impact of the 1996 sale of four
plants by the Safety, Thermal & Electrical Architecture product sector, which
had combined historical annual net sales of about $1.0 billion, as well as
continued price pressures. Price reductions required by GM and non-GM customers
had an unfavorable sales impact on all of our product sectors and totaled about
$730 million, or 2.3% of net sales, during 1997. Price reductions for our
Electronics & Mobile Communication product sector, representing 3.3% of net
sales, exceeded the overall percentage for Delphi on a consolidated basis due to
the timing of the implementation of GM-North America's global sourcing as it
related to electronics products and the overall price declines throughout the
electronics industry.
Cost of Sales. Cost of sales, as a percentage of consolidated net sales,
decreased to 88.1% in 1997 from 88.5% in 1996. The decrease as a percentage of
net sales reflects a lower impact of work stoppages in 1997 compared to 1996
along with other factors which are described in greater detail in the operating
income discussion below.
Selling, General and Administrative and Depreciation and Amortization.
Selling, general and administrative expenses remained constant during 1997 and
1996 while depreciation and amortization, excluding the $1.1 billion charge
associated with the Competitiveness Study, increased slightly.
Operating Income. Operating income decreased to $352 million in 1997 from
$1.3 billion in 1996. Excluding the impact of special items and work stoppages,
operating income totaled $1.9 billion in 1997 compared to $2.1 billion in 1996.
The following information on operating income and changes in operating income
and its components excludes the impact of special items and work stoppages. See
"--Special Items and Work Stoppages" for additional information.
Operating income by product sector and in total, excluding the impact of
special items and work stoppages was:
Year Ended
December 31,
-----------------
Product Sector 1997 1996
---------------------------------- ---- ----
(in millions)
Electronics & Mobile Communication $612 $810
Safety, Thermal & Electrical
Architecture...................... 1,060 955
Dynamics & Propulsion............. 400 321
Other............................. (130) (27)
----- ----
Total operating income excluding the
impact of special items and work
stoppages..... $1,942 $2,059
====== ======
As a result of strategies implemented to reduce our cost structure, we
realized material and manufacturing cost savings of about $450 million during
1997. Cost savings were realized by all of our product sectors; however, price
reductions and unrecovered design change costs, which together totaled about
$960 million in 1997, more than offset the cost savings. Unrecovered design
change costs had an unfavorable impact on operating income of about $230 million
in 1997, primarily affecting our Electronics & Mobile Communication product
sector. In addition, operating income was favorably impacted by greater sales
penetration of non-GM customers and improved GM-North America production volumes
after adjusting for the impact of work stoppages.
46
Interest Expense. Interest expense totaled $287 million and $276 million in
1997 and 1996, respectively. The increase in interest expense in 1997 primarily
reflected slightly higher interest rates during the period.
Other Income, Net. Other income, net totaled $194 million in 1997 compared
with $115 million in 1996. The amount reported for 1997 includes a gain of $97
million, or $60 million after-tax, relating to the sale of certain business
investments. The gain was partially offset by a decline in earnings of
nonconsolidated affiliates, which decreased to $27 million in 1997 compared with
$57 million in 1996. The decline reflected lower equity earnings due to the sale
of certain minority owned investments and the unfavorable impact of economic
volatility on overseas joint ventures.
Taxes. The effective income tax rate for 1997 was 17.0% compared with 23.3%
for 1996. The lower 1997 effective income tax rate primarily reflected the
favorable impact of state and local income tax rates which were generally lower
than in 1996. The favorable impact of state and local tax rates was partially
offset by higher foreign tax rates during 1997.
Net Income. Net income totaled $215 million in 1997 and $853 million in 1996.
Income, excluding the impact of special items and work stoppages, totaled $1.2
billion in 1997 compared to $1.4 billion in 1996 reflecting the items discussed
above.
Liquidity and Capital Resources
Pursuant to a Cash and Debt Management Agreement with GM and an intracompany
note payable to GM, our historical balance sheets reflect cash and marketable
securities of $1.0 billion and combined short-term and long-term debt
capitalization of $3.5 billion at December 31, 1998 and 1997. The short-term and
long-term debt capitalization included a $3.1 billion intracompany note payable
to GM and outstanding debt at our international subsidiaries. The $3.1 billion
intracompany note payable to GM represented the portion of GM's outstanding debt
that was specifically related to our operations.
Our net liquidity was $(2.5) billion at December 31, 1998 and 1997. Our net
liquidity consists of cash and marketable securities less the total of
short-term and long-term debt. The ratio of total debt to total capital, which
consists of total debt plus equity, was 100% at December 31, 1998 compared to
113% at December 31, 1997. The ratio of total debt to total capital was greater
than 100% at December 31, 1997, reflecting the impact of a net deficit in
stockholder's equity. The ratio of total debt to total capital decreased during
1998, reflecting differences in various separation adjustments required at each
date. The IPO and other related transactions resulted in a pro forma total debt
to total capital ratio of 52% at December 31, 1998.
Liquidity Prior to and Upon Our Separation from GM and the IPO
The following table sets forth the changes in our net liquidity, certain of
which occurred immediately prior to or in connection with the transfer of assets
and liabilities from GM to our company. The extension of payment terms for
intracompany accounts receivable and the settlement of intracompany accounts
receivable with the intracompany note payable occurred before assets and
liabilities were transferred to Delphi Automotive Systems Corporation.
Consequently, these transactions were executed by the Delphi businesses, and not
by Delphi Automotive Systems Corporation.
Cash and
Marketable Short- and Net
Securities Long-Term Debt Liquidity
--------- -------------- ---------
(in billions)
Net liquidity at December 31, $ 1.0 $ 3.5 $(2.5)
1998--As reported.................
Extension of payment terms for
intracompany accounts
receivable from GM............. (2.1) -- (2.1)
Settlement of intracompany note
payable to GM.................... -- (3.1) 3.1
Increase in accounts receivable,
subsequent to settlement of
intracompany accounts receivable. (1.6) -- (1.6)
Proceeds from third party 3.1 3.1 --
financing.....................
Proceeds from the IPO............. 1.6 -- 1.6
----- ----- -----
Pro forma net liquidity......... $ 2.0 $ 3.5 $(1.5)
===== ===== =====
Each of the above changes in our net liquidity is discussed in the sections
that follow.
47
Extension of Payment Terms
In accordance with the Supply Agreement, which became effective January 1,
1999, payment terms for intracompany accounts receivable from GM have been
modified such that payments will generally be due from GM on the second day of
the second month following the date of shipment by Delphi. These modified
payment terms are consistent with those GM is currently in the process of
introducing to all of its suppliers. Previous payment terms generally required
GM to make intracompany accounts receivable payments in the month following
shipment by Delphi. Overall, Delphi expects this change to increase accounts
receivable by about $2.1 billion beginning in 1999. While Delphi intends to seek
an extension of payment terms with its suppliers over time, in most cases, it
currently pays suppliers on the 25th day of the month following the date a
shipment is received. The difference in the payment terms for accounts
receivable and accounts payable results in a monthly short-term cash flow gap.
Delphi is financing this short-term cash flow gap through short-term borrowings,
as discussed below.
Debt Capitalization and Available Financing Sources
Immediately prior to the transactions contemplated by the Separation
Agreement, approximately $1.6 billion of certain intracompany accounts
receivable from GM were offset with the $3.1 billion outstanding intracompany
note payable to GM, with the difference resulting in an increase in GM's net
investment in Delphi. We expect to finance our operations with third party
funding of up to $3.1 billion. Such funding will be in the form of draw downs
from the available $4.9 billion third party revolving credit facilities and
structured financing arrangements. In this regard, borrowings under third party
credit facilities were about $2 billion as of February 1, 1999. In addition,
during the fourth quarter of 1998, we implemented a $175 million accounts
receivable factoring program.
In January 1999, we entered into two financing arrangements with a
syndicate of lenders providing for an aggregate of $4.9 billion in available
revolving credit facilities. In general, we may borrow up to $4.9 billion under
the facilities through January 3, 2000, after which $1.5 billion will be
available through January 3, 2004. The $4.9 billion we may borrow will be
reduced to the extent of any net cash proceeds from post IPO public offerings
and private placements of debt securities, excluding debt securities with a
maturity of less than one year. The total reduction arising from issuances of
common stock and debt securities will not exceed $2.0 billion. We may borrow
under these financing arrangements for general corporate purposes. The credit
facilities include certain customary affirmative and negative covenants,
including maintenance of a ratio of consolidated total debt to consolidated
EBITDA, excluding extraordinary items. The credit facilities also provide for
certain events of default, including upon a change in control, which is defined
to include the acquisition of more than 20% of the voting power of our Common
Stock by any person other than GM. For additional information on revolving
credit facilities, see Note 8 to the consolidated financial statements included
elsewhere in this report.
We expect the draw downs from the revolving credit facilities to be
refinanced with a combination of operating cash flows and the issuance of
long-term debt during the first half of 1999. Subsequently, it is expected that
the available $4.9 billion revolving credit facilities would be reduced to $3.0
billion in available funds, generally split between 364-day and five-year
tranches.
General Motors continues to own about 82.3% 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 regarding the incurrence of debt. Specifically, so long as GM owns at
least 50% of our outstanding shares of Common Stock, these covenants limit our
maximum indebtedness, including indebtedness incurred in connection with
acquisitions.
Delphi's intra-year cash fluctuations are impacted by the volume and timing
of worldwide vehicle production. Examples of seasonal effects in the industry
include the shut-down of operations of our primary North American customers for
about two weeks in July, the subsequent ramp-up of new model production and the
additional one-week shut-down in December. We believe that our company has
sufficient financial flexibility to fund these fluctuations and to access the
global capital markets on terms and in amounts satisfactory to it, although
there can be no assurance that will be the case. In addition, we expect cash
flows from operations, the establishment of the revolving credit facilities and
other short-term sources to be sufficient to satisfy future working capital,
capital expenditures, research and development, pension funding requirements and
debt service requirements during the next 12 to 18 months. We expect cash flows
from operations, the establishment of the revolving credit facilities and access
to the short-term and long-term capital markets to satisfy our funding needs
during our five-year business planning cycle. See "--Cash Flows--Investing
Activities" and "--Our Other Postretirement Employee Benefits and Underfunded
Pension Obligations."
48
Cash Flows
Operating Activities. Net cash provided by operating activities was $849
million for the year ended December 31, 1998 compared to $2.9 billion in 1997
and $2.7 billion in 1996. The decrease in 1998 cash flows reflects the impact of
work stoppages and the related overall net loss for 1998, as well as decreases
in accrued and other liabilities. The decrease in accrued and other liabilities
in 1998 reflected a reduction in income taxes payable and the timing of
settlements for amounts accrued in prior periods. The 1997 increase in cash
flows from operating activities primarily reflects increases in accounts
payable, accrued liabilities and other liabilities partially offset by increased
accounts receivable and cash used for other postretirement benefits as discussed
below. The 1997 changes referenced above primarily reflected an increased volume
of activity, differences in the timing of settlements, and amounts accrued in
connection with the competitiveness studies.
Operating cash flow during 1998 and 1997 reflected contributions to a
Voluntary Employees' Beneficiary Association ("VEBA") trust. The contributions,
which totaled $677 million in 1998 and $925 million in 1997, were made in
connection with GM's pre-funding of a portion of its other postretirement
benefit liabilities. In accordance with the terms of the Separation Agreement,
GM will retain 100% of the pre-funding and accordingly, Delphi's other
postretirement benefit liabilities do not reflect an allocation of the VEBA
trust assets.
Investing Activities. Cash flows used in investing activities totaled $1.2
billion, $1.3 billion and $1.0 billion for the years ended December 31, 1998,
1997 and 1996, respectively. Overall, cash flows used in investing activities
primarily relate to our capital expenditure program, partially offset by
proceeds from asset sales. Our capital expenditure program promotes our
growth-oriented business strategy by investing in existing core areas, where
efficiencies and profitability can be enhanced, and by targeting funds for new
innovative technologies, where long-term growth opportunities can be realized.
Capital expenditures by product sector and geographic region for the periods
presented were:
Year Ended December 31,
------------------------
1998 1997 1996
------ ------ ------
(in millions)
Electronics & Mobile
Communication............... $ 180 $ 122 $ 195
Safety, Thermal &
Electrical Architecture..... 449 464 418
Dynamics & Propulsion....... 741 778 548
Other....................... 11 19 16
------ ------ ------
Total Capital Expenditures. $1,381 $1,383 $1,177
====== ====== ======
United States............... $ 888 $ 930 $ 809
Canada & Mexico............. 127 88 65
Other International......... 366 365 303
----- ----- -----
Total Capital Expenditures. $1,381 $1,383 $1,177
====== ====== ======
The increased spending during 1998 and 1997 primarily relates to the timing
of the start-up of new product programs, increased penetration with non-GM
customers and expansion into new market areas primarily outside the United
States.
We expect capital expenditures to total $1.5 billion in 1999. Such
expenditures will primarily be utilized for equipment, tooling and other
spending associated with new product programs, including increasing sales to
non-GM customers. Expenditures will also be used for expansion into new markets
outside the United States and the continued implementation of lean manufacturing
strategies. About 43% of 1999 capital expenditures are targeted outside the
United States. The Electronics & Mobile Communication, Safety, Thermal &
Electrical Architecture and the Dynamics & Propulsion product sectors are
expected to account for about 18%, 34% and 48%, respectively of 1999 capital
expenditures.
Financing Activities. Net cash provided by financing activities was $384
million during 1998 compared to net cash used in financing activities of $1.5
and $1.7 billion in 1997 and 1996, respectively. Cash provided by or used in
financing activities primarily related to the transfer or assumption of assets
and liabilities to our company from GM under the terms of the Separation
Agreement. The period to period changes reflect differences in separation
adjustments for various assets and liabilities.
49
Our Other Postretirement Employee Benefits and Underfunded Pension Obligations
In connection with our separation from General Motors, we have entered into
several agreements relating to pensions and other postretirement employee
benefits for our employees as well as certain employees associated with prior
divestitures. Our pension obligations are based on the pension plans' assets,
the expected investment return on those assets and the plans' expected
liabilities. Under current economic conditions and federal government
regulations, our pension obligations would be considered to be "underfunded."
The amount of underfunding can vary from time to time, depending on factors such
as discount rates, asset returns, contributions and other factors. As of
December 31, 1998, Delphi's U.S. salaried and hourly other postretirement
employee benefit obligation was about $4.6 billion and the underfunded pension
obligation was about $2.2 billion.
Because of the underfunded nature of certain pension plans, federal
regulations will require that our contributions over time meet minimum funding
requirements. Delphi is responsible for assuming the underfunded hourly pension
liability associated with Delphi hourly employees or paying GM for underfunding
relating to such employees.
Although we are not required to do so, we have commenced discussions with
the Pension Benefit Guaranty Corporation ("PBGC") regarding the underfunded
nature of certain pension plans. In connection with these discussions, the PBGC
may request that we take actions in excess of federal regulatory minimum
requirements. The outcome of these discussions is as yet unknown, but if any
actions in excess of federal regulatory minimum requirements are discussed, we
intend to seek to maintain sufficient financial flexibility in order to execute
our business strategy. We also may determine, as part of our capital planning
process, to make voluntary contributions to our pension plans in excess of
federal regulatory minimum requirements in order to further address the
underfunded status of our pension plans.
In any event, regardless of the outcome of our discussions with the PBGC,
we expect these contributions to be material to our results of operations and
financial condition. We cannot accurately predict the amount or timing of
contributions that will be required in the future or the related impact on our
financial results and financial condition. These amounts may be affected by
general economic conditions, including anticipated interest rates, the actual
investment return on plan assets, the retirement rate of our employees, the
attrition rate of our employees and other factors.
In addition, we and GM have agreed with the UAW and the IUE that any of our
hourly employees who are members of such unions and who retire on or before
October 1, 1999 will be treated as GM employees for purposes of postretirement
benefit obligations. We anticipate that we will assume OPEB obligations and
pension obligations for such employees who retire after October 1, 1999. The
allocation of pension and other postretirement benefit obligations between us
and GM assumes certain levels of employee retirements prior to October 1,1999,
based on historical experience and conditions surrounding our separation from
GM. We have agreed with GM to recalculate the allocation of those liabilities
based on the actual level of retirements on or before October 1, 1999.
Accordingly, if and to the extent that greater than the assumed number of our
employees retire on or before October 1, 1999, we would be required to make a
payment to GM. Depending on the amount of such a payment, if any, it could have
a material adverse effect on our short-term liquidity.
Inflation
Inflation generally affects Delphi by increasing the cost of labor,
equipment and raw materials. We believe that, because rates of inflation in
countries where we have significant operations have been moderate during the
periods presented, inflation has not had a significant impact on our results of
operations.
Year 2000
Many computerized systems and microprocessors that are embedded in a
variety of products either made or used by Delphi have the potential for
operational problems if they lack the ability to handle the transition to the
Year 2000. This issue has the potential to cause disruption to our business, our
suppliers and the companies we supply. In our capacity as principal supplier to
and majority-owned subsidiary of GM, we are part of GM's comprehensive worldwide
Year 2000 program. As part of that program, Delphi is identifying and
remediating potential Year 2000 problems in its business information systems and
other systems embedded in its engineering and manufacturing operations. Delphi,
in conjunction with GM's supplier assessment and remediation program, has also
initiated communications and site assessments with its suppliers and other third
parties in order to assess and reduce the risk that Delphi's operations could be
adversely affected by the failure of these third parties to address adequately
the Year 2000 issue.
50
One of our first priorities was the analysis of microprocessors used in our
automotive components, integrated systems and modules supplied to vehicle
manufacturers, which has now been completed. Most of the processors reviewed
have no date-related functionality, and accordingly have no specific Year 2000
issues. Of the vehicle processors that perform date-related functions, none had
any Year 2000 issues. However, one trip computer module supplied by us to
another vehicle manufacturer does not recognize 2000 as a leap year but can be
reset without affecting performance. This does not affect vehicle operation or
occupant safety nor is it expected to result in material cost to Delphi.
Our Year 2000 program teams are responsible for remediating all of our
information technology and embedded systems. Information technology principally
consists of business information systems, such as mainframe and other shared
computers and associated business application software, and infrastructure, such
as personal computers, operating systems, networks and devices like switches and
routers. Embedded systems include microprocessors used in factory automation and
in systems such as elevators, security and facility management. Delphi's Year
2000 program includes assessment and remediation services provided by Electronic
Data Systems Corporation ("EDS"), which is a principal supplier of information
technology services to Delphi.
The Year 2000 program is being implemented in seven phases, some of which are
being conducted concurrently:
o Inventory. This phase involves the identification and validation of an
inventory of all systems that could be affected by the Year 2000 issue. The
inventory phase commenced in earnest in 1997 and is substantially complete.
As a result, we have identified approximately 1,600 business information
systems and about 300,000 infrastructure items and embedded systems.
o Assessment. This phase involves the initial testing, code scanning and
supplier contacts to determine whether remediation is needed and to develop
a remediation plan, if applicable. The assessment of business information
systems is substantially complete and included a determination that about
one quarter of such systems should be regarded as "critical" based on
criteria such as the potential for business disruption. The assessment of
infrastructure items and embedded systems was substantially complete by the
end of 1998.
o Remediation. This phase involves the design and execution of a remediation
plan, followed by testing for adherence to the design. Although we have
substantially completed the remediation of our critical systems, we expect
to continue to address remediation of these and other systems on a
selectively prioritized basis in the future. Unimportant systems have been
and will continue to be removed from our Year 2000 inventory and will not
be remediated. We believe that we are substantially on track to meet our
remediation targets. Based on our ongoing plan to implement new enterprise
software incrementally, we will replace rather than remediate certain
existing information systems. In this regard, a number of implementations
are scheduled to be completed in Europe in the first quarter of 1999. In
the United States, implementation of the enterprise software at one of our
principal product groups is expected to be completed in July 1999.
o System Test. This phase involves the testing of remediated items to ensure
that they function normally after being replaced in their original
operating environment. It is closely related to the remediation phase and
follows essentially the same schedule.
o Implementation. This phase involves the return of items to normal operation
after satisfactory performance in system testing. It follows essentially
the same schedule as remediation and system testing.
o Readiness Testing. This phase involves the planning for and testing of
integrated systems in a Year 2000 ready environment, including ongoing
auditing and follow-up. Readiness testing is currently underway. This phase
commenced in the fourth quarter of 1998 and is expected to be a major focus
of the Year 2000 program throughout 1999.
o Contingency Planning. This phase involves the development and execution of
plans that narrow the focus on specific areas of significant concern and
concentrate resources to address them. We currently believe that the most
reasonably likely worst case scenario is that there will be some localized
disruptions of systems that will affect individual business processes,
facilities or suppliers for a short time rather than systemic or long-term
problems affecting our business operations as a whole. Our contingency
planning will continue to identify systems or other aspects of our business
or that of our suppliers that we believe would be most likely to experience
Year 2000 problems as well as those business operations in which a
localized disruption could have the potential for causing a wider problem
by interrupting the flow of products, materials or data to other
operations. Because there is uncertainty as to which activities may be
affected and the exact nature of the problems that may arise, our
51
contingency planning will focus on minimizing the scope and duration of any
disruptions by having sufficient personnel, inventory and other resources
in place to permit a flexible, real-time response to specific problems as
they may arise at individual locations around the world. Some of the
actions that we may consider include the deployment of emergency response
teams on a regional or local basis and the development of plans for the
allocation, stockpiling or re-sourcing of components and materials that may
be critical to our continued production. Specific contingency plans and
resources for permitting the necessary flexibility of response are expected
to be identified and put into place commencing in mid-1999.
The assessment and remediation phases described above include communicating
with our suppliers as part of a broader supplier assessment program in which we
are participating with GM. As part of that program, an industry trade
association, the Automotive Industry Action Group ("AIAG"), has distributed Year
2000 compliance questionnaires as well as numerous Year 2000 awareness and
assistance mailings to many of the 40,000 supplier sites that supply Delphi
throughout the world. We are not relying entirely on assurances contained in
those questionnaire responses and we are participating in GM's own further
assessment of our suppliers. That further assessment includes GM's own on-site
review of suppliers considered to be critical to GM's operations, including
Delphi's operations as part of GM. These supplier assessment efforts have been
substantially completed with respect to our critical supplier sites. Based on
our participation with GM in this assessment activity to date, we believe that a
substantial majority of our suppliers are making acceptable progress toward Year
2000 readiness. We are also participating in a program that GM has established
to provide further assistance to suppliers that desire more input or that are
believed to be at high risk of noncompliance as a result of the foregoing
assessment efforts. This supplier assistance program currently includes
providing compliance workshops and remediation consultants to work with
suppliers on developing and implementing their own remediation programs. We also
expect that our contingency planning efforts described above will address any
critical suppliers that we still identify as being at high risk of encountering
Year 2000 problems upon completion of the supplier assistance program. We intend
to enter into appropriate arrangements with GM to provide for continued
coordination or our respective supplier assessment and assistance efforts after
the Distribution.
In contrast to some Year 2000 programs, we are not relying entirely on the
receipt of written assurances from our suppliers with respect to their Year 2000
compliance; rather, together with GM, we are also evaluating certain suppliers
on a first-hand basis and are seeking to enhance their likelihood of full Year
2000 readiness by actively assisting them with training and consultation
regarding Year 2000 remediation projects. We expect that information from our
suppliers, written responses and our interactions with them will provide us with
a basis for further contingency planning and risk management.
The cost of our Year 2000 program is being expensed as incurred with the
exception of capitalizable replacement hardware and, beginning in 1999,
capitalizable computer software costs developed for internal use. Total
incremental spending by Delphi is not expected to be material to the company's
operations, liquidity or capital resources. We incurred about $40 million and $7
million of Year 2000 expense during 1998 and 1997, respectively. Delphi
currently expects its total Year 2000 spending to be about $106 million, which
will be funded from operations, with peak spending occurring in late 1998 and
early 1999, plus about $9 million of additional costs associated with
information technology projects that were already underway or scheduled
independently of our Year 2000 program but that have been accelerated due to the
Year 2000 issue. This total spending also includes an additional payment of
about $13 million, part of GM's overall additional payment to EDS of $75 million
at the end of the first quarter of 2000 if systems remediated by EDS under its
master information technology services agreement with GM are capable of
continued operation before, on and after January 1, 2000 without causing a
significant business disruption that results in a material financial loss to
"GM" due to the millennium change. For this purpose, "GM" includes Delphi and
all other GM units being supported by EDS as of December 31, 1998, taken in the
aggregate, including any such GM unit which may subsequently be divested but
that continues to be supported by the remediation services of EDS. The estimated
value of the services EDS is required to provide to Delphi under its master
information technology services agreement with GM that are included in normal
fixed price services and other on-going payments to EDS that are attributable to
work being performed in connection with Delphi's Year 2000 program is about $73
million, which is part of the estimated $260 million attributable to GM overall.
This does not represent incremental spending to Delphi. None of our information
technology projects has been delayed due to Year 2000.
In view of the foregoing, we do not currently anticipate that we will
experience a significant disruption of our business as a result of the Year 2000
issue. However, there is still uncertainty about the broader scope of the Year
2000 issue as it may affect Delphi and third parties, including our customers,
that are critical to Delphi's operations. For example, lack of readiness by
electrical and water utilities, financial institutions, governmental agencies or
other providers of general infrastructure could, in some geographic areas, pose
significant impediments to Delphi's ability to carry on our normal operations in
the area or areas so affected. In the event that Delphi is unable to complete
our remedial actions as described above and is unable to implement adequate
52
contingency plans in the event that problems are encountered, there could be a
material adverse effect on Delphi's business, results of operations or financial
condition.
Statements made herein about the implementation of various phases of Delphi's
Year 2000 program, the costs expected to be associated with that program and the
results that Delphi expects to achieve constitute forward-looking information.
As noted above, there are many uncertainties involved in the Year 2000 issue,
including the extent to which Delphi will be able to successfully remediate
systems and adequately provide for contingencies that may arise, as well as the
broader scope of the Year 2000 issue as it may affect third parties that are not
controlled by Delphi. Accordingly, the costs and results of Delphi's Year 2000
program and the extent of any impact on Delphi operations could vary materially
from those stated herein.
European Monetary Union
Within Europe, the European Economic and Monetary Union (the "EMU")
introduced a new currency, the euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash transactions such as banking. The existing local currencies, or
legacy currencies, will remain legal tender through January 1, 2002. Beginning
on January 1, 2002, euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and use exclusively
the euro.
The introduction of the euro is a significant event with potential
implications for our existing operations within countries participating in the
EMU. As such, we have committed resources to conduct risk assessments and to
take corrective actions, where required, to ensure that we are prepared for the
introduction of the euro. We have undertaken a review of the euro implementation
and concentrated on areas such as operations, finance, treasury, legal,
information management, procurement and others, both in participating and
non-participating European Union countries where we have operations. Also,
existing legacy accounting and business systems and other business assets have
been reviewed for euro compliance, including assessing any risks from third
parties. Progress regarding euro implementation is reported periodically to
management.
We have not experienced any significant operational disruptions to date and
do not currently expect the continued implementation of the euro to cause any
significant operational disruptions. In addition, we have not incurred and do
not expect to incur any significant costs from the continued implementation of
the euro, including any currency risk, which could materially affect our
liquidity or capital resources.
Deferred Income Taxes
At December 31, 1998, Delphi's consolidated balance sheet included a net
deferred tax asset of about $2.9 billion. This net deferred tax asset relates to
temporary differences between amounts of assets and liabilities for financial
reporting purposes and the basis of such assets and liabilities as measured by
tax laws. For more information, see Note 5 to our consolidated financial
statements included elsewhere in this report. About $1.6 billion of the net
deferred tax asset balance is related to the obligation for postretirement
benefits other than pensions. Realization of the net deferred tax asset is
dependent upon profitable operations in the United States and future reversals
of existing taxable temporary differences. Although realization is not assured,
we believe that it is more likely than not that such benefits will be realized
through the reduction of future taxable income. Management has carefully
considered various factors in assessing the probability of realizing these
deferred tax assets including:
o Delphi's operating results, excluding the impact of special items and work
stoppages, over the most recent three year period and overall financial
forecasts of book and taxable income for the 1999-2004 period.
o The ability to utilize tax planning, such as capitalization of research and
experimentation costs for tax purposes, so that Delphi does not generate
any significant U.S. federal tax net operating loss carryforwards.
o The extended period of time over which the tax assets can be utilized.
Postretirement benefits become tax deductions over periods up to 50 years.
53
Environmental Matters
Delphi is subject to various laws governing the protection of the environment
including laws regulating air emissions, water discharges and waste management.
Delphi has made and will continue to make capital and other expenditures to
comply with environmental requirements. However, such expenditures were not
material during the years ended December 31, 1998, 1997 and 1996 and are not
expected 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.
Delphi is also subject to environmental laws requiring investigation and
cleanup of environmental contamination and is in various stages of investigation
and cleanup at its manufacturing sites where contamination has been alleged. At
December 31, 1998, our reserve for such environmental investigation and cleanup
totaled about $20 million.
The process of estimating environmental clean up liabilities is complex and
dependent primarily on the nature and extent of historical information and
physical data relating to a contaminated site, the complexity of the site, the
uncertainty as to what remedy and technology will be required, the outcome of
discussions with regulatory agencies and, at multi-party sites, other
potentially responsible parties. In future periods, new laws or regulations,
advances in cleanup technologies and additional information about the ultimate
cleanup remedy that is used could significantly change our estimates.
Accordingly, we cannot assure you that our environmental cleanup costs and
liabilities will not exceed the amount of our current reserve.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires recognition of all derivative financial instruments as either assets or
liabilities in consolidated balance sheets at fair value and determines the
method(s) of gain/loss recognition. We are required to adopt SFAS No. 133 with
our fiscal year ending December 31, 2000 and are currently assessing the effect
that it may have on our consolidated financial statements.
SFAS No. 133 provides that, if certain conditions are met, a derivative may
be specifically designated as:
o a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment (a "fair value
hedge");
o a hedge of the exposure to variable cash flows of a forecasted
transaction (a "cash flow hedge"); or
o a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated
forecasted transaction (a "foreign currency hedge").
Under SFAS No. 133, the accounting for changes in the fair value of a
derivative depends on its intended use and designation. For a fair value hedge,
the gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income as
part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change.
In March 1998, the Accounting Standards Executive Committee ("ASEC") for the
American Institute of Certified Public Accountants released Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
for Internal Use." SOP 98-1 requires the capitalization of certain expenditures
for software that is purchased or internally developed once certain criteria are
met. Currently, we generally expense the costs of developing or obtaining
internal use software as incurred. We adopted SOP 98-1 on January 1, 1999, as
required. We expect that about $30 to $40 million of spending that would have
otherwise been expensed as incurred will be capitalized in 1999 in accordance
with the provisions of SOP 98-1.
54
Forward-Looking Statements
Delphi is subject to various factors, many of which are outside of its
control, that could cause actual results to differ from those expressed in
forward-looking statements made by us throughout this report and elsewhere. All
statements which address operating performance, events or developments that we
expect or anticipate will occur in the future, including statements relating to
volume growth, share of sales and earnings per share growth or statements
expressing general optimism about future operating results, are forward-looking
statements. The following are the principal important factors which may cause
actual results to differ from those expressed in such forward-looking
statements:
o Changes in GM's previously announced intention to complete its divestiture
of our company later in 1999.
o The ability of our company to increase sales to customers other than GM
and to achieve the labor benefits we expect from our separation from GM.
o Changes in the operations, financial condition or results of operations
of our customers, including our largest customer, GM.
o Changes in economic conditions, currency exchange rates, or political
stability in the major markets where our company procures material,
components, and supplies for the production of our principal products or
where our products are produced, distributed, or sold (i.e., North America,
Europe, Latin America and Asia-Pacific), including the effects of current
economic problems in Asia, Brazil and other regions of Latin America,
including Mexico.
o Shortages of materials or interruptions in transportation systems, labor
strikes, work stoppages, or other interruptions to or difficulties in the
employment of labor in the major markets where our company purchases
material, components and supplies for the production of our products or
where our products are produced, distributed or sold.
o Significant changes in the competitive environment in the major markets
where our company purchases material, components and supplies for the
production of our products or where our products are produced, distributed,
or sold.
o Changes in the laws, regulations, policies or other activities of
governments, agencies and similar organizations where such actions may
affect the production, licensing, distribution or sale of our company's
products, the cost thereof or applicable tax rates.
o The ability of our company to generate cost savings and operational
improvements in the future sufficient to offset contractually required
price reductions, price reductions necessary to win additional business and
increases in raw material costs.
o The ability of our company to maintain financial flexibility to make
payments for pensions and other postretirement employee benefits and to
implement capital expenditures, all at the levels and times planned by
management.
o Additional risk factors include our ability to provide high quality
products at competitive prices, to sustain technological competitiveness,
to develop new products that meet changing consumer preferences, to meet
changing vehicle manufacturer supply requirements on a timely, cost
effective basis, and the ability to respond to competitive pressures and
react quickly to other major changes in the marketplace.
55
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risks from changes in foreign currency exchange
rates and certain commodity prices. In order to manage these risks until January
1, 1999, we participated in GM's risk management program, which includes
entering into a variety of foreign exchange and commodity forward contracts and
options. The commodity price hedging programs were managed on a centralized
basis by GM and foreign currency risks were managed by both GM and certain
foreign locations. After January 1, 1999, we will continue to manage market
risks we are exposed to using our own centralized risk management program.
A discussion of our accounting policies for derivative instruments is
included in Note 2 to our consolidated financial statements included elsewhere
in this report and further disclosure is provided in Note 16 to those financial
statements. Delphi and GM maintain risk management control systems to monitor
foreign exchange and commodity risks, and related hedge positions. Positions are
monitored using a variety of analytical techniques including market value,
sensitivity analysis, and value-at-risk models. The following analyses are based
on sensitivity analysis tests which assume instantaneous, parallel shifts in
exchange rates and commodity prices. For options and instruments with non-linear
returns, appropriate models are utilized to determine the impact of sensitivity
shifts.
Foreign Currency Exchange Rate Risk
We have foreign currency exposures related to buying, selling and financing
in currencies other than the local currencies in which it operates. More
specifically, we are exposed to foreign currency risk related to uncertainty to
which future earnings or assets and liability values are exposed due to
operating cash flows and various financial instruments that are denominated in
foreign currencies. Currently, our most significant foreign currency exposures
relate to Brazil, Mexico, Germany, France, Spain and South Korea. As of December
31, 1998, the net fair value asset of financial instruments with exposure to
foreign currency risk was about $114 million. The potential loss in fair value
for such financial instruments from a hypothetical 10% adverse change in quoted
foreign currency exchange rates would be about $11 million. The model assumes a
parallel shift in foreign currency exchange rates; however, exchange rates
rarely move in the same direction. The assumption that exchange rates change in
a parallel fashion may overstate the impact of changing exchange rates on assets
and liabilities denominated in a foreign currency.
Commodity Price Risk
Commodity forward and option contracts are executed to offset our exposure
to the potential change in prices mainly for various non-ferrous metals used in
the manufacturing of automotive components. The net fair value liability of such
contracts, excluding the underlying exposures, as of December 31, 1998 was about
$28 million. The potential change in the fair value of commodity forward and
option contracts, assuming a 10% change in the underlying commodity price, would
be about $29 million at December 31, 1998. This amount excludes the offsetting
impact of the price risk inherent in the physical purchase of the underlying
commodities.
Interest Rate Risk
Due to limited borrowings from third party credit sources, our historical
interest rate risk was generally not significant. Subsequent to our separation
from GM, we expect to manage our exposure to interest rate risk through the use
of derivative instruments designed to manage risk and minimize interest expense.
56
ITEM 8. FINANCIAL STATEMENTS
RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Delphi Automotive Systems
Corporation ("Delphi") were prepared by management, which is responsible for
their integrity and objectivity. The statements have been prepared in conformity
with generally accepted accounting principles and, as such, include amounts
based on judgments of management.
Management is further responsible for maintaining internal control designed to
provide reasonable assurance that the books and records reflect the transactions
of Delphi and that established policies and procedures are carefully followed.
From a stockholder's point of view, perhaps the most important feature in
internal control is that it is continually reviewed for effectiveness and is
augmented by written policies and guidelines, the careful selection and training
of qualified personnel, and a strong program of internal audit.
Deloitte & Touche LLP, an independent audit firm, is engaged to audit the
consolidated financial statements of Delphi and issue reports thereon. The audit
is conducted in accordance with generally accepted auditing standards that
comprehend the consideration of internal control and tests of transactions to
the extent necessary to form an independent opinion on the financial statements
prepared by management. The independent auditors' report appears on the next
page.
The Board of Directors, through the Audit Committee (composed entirely of
non-employee Directors) is responsible for assuring that management fulfills its
responsibilities in the preparation of the consolidated financial statements.
The Audit Committee selects the independent auditors and reviews the scope of
the audits and the accounting principles being applied in financial reporting.
The independent auditors, representatives of management, and the internal
auditors meet regularly (separately and jointly) with the Audit Committee to
review the activities of each, to ensure that each is properly discharging its
responsibilities, and to assess the effectiveness of internal control. It is
management's conclusion that internal control at December 31, 1998 provides
reasonable assurance that the books and records reflect the transactions of the
companies and that established policies and procedures are complied with. To
ensure complete independence, Deloitte & Touche LLP has full and free access to
meet with the Audit Committee, without management representatives present, to
discuss the results of the audit, the adequacy of internal control, and the
quality of financial reporting.
/s/ J.T. Battenberg III /s/ Alan S. Dawes /s/ Paul R. Free
- ----------------------- ----------------- ----------------
J.T. Battenberg III Alan S. Dawes Paul R. Free
Chairman, Chief Executive Chief Financial Officer Chief Accounting
Officer and President and Vice President Officer and
Controller
57
INDEPENDENT AUDITORS' REPORT
Delphi Automotive Systems Corporation:
We have audited the accompanying consolidated balance sheets of Delphi
Automotive Systems Corporation ("Delphi"), a subsidiary of General Motors
Corporation, as of December 31, 1998 and 1997, and the related consolidated
statements of operations, of equity (deficit) and comprehensive income (loss),
and of cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the management of
Delphi. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Delphi as of December 31, 1998 and
1997 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Detroit, Michigan
January 20, 1999
(February 5, 1999 as to Note 17)
58
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
--------------
1998 1997
------ ------
(in millions)
ASSETS
Current assets:
Cash and cash equivalents................. $ 995 $ 989
Other marketable securities............... 5 11
------- -------
Total cash and marketable securities. 1,000 1,000
Accounts receivable, net:
General Motors and affiliates.......... 2,236 2,284
Other customers........................ 977 982
Inventories, net (Note 4)................. 1,770 1,868
Deferred income taxes (Note 5)............ 285 183
Prepaid expenses and other assets......... 137 61
------- -------
Total current assets................. 6,405 6,378
Property, net (Note 6)...................... 4,965 4,600
Deferred income taxes (Note 5).............. 2,813 3,007
Other assets................................ 1,323 1,041
------- -------
Total assets................................$15,506 $15,026
======= =======
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of
long-term debt (Note 8).................$ 363 $ 159
Accounts payable:
General Motors and affiliates.......... 89 86
Other suppliers........................ 2,171 2,157
Accrued liabilities (Note 7).............. 1,438 1,664
------- -------
Total current liabilities............ 4,061 4,066
Long-term debt, including intracompany note
payable with General Motors
(Note 8).................................. 3,137 3,341
Pension benefits (Note 9)................... 2,180 1,799
Postretirement benefits other than pensions
(Note 9).................................. 4,573 4,788
Other liabilities........................... 1,546 1,445
------- -------
Total liabilities.................... 15,497 15,439
------ ------
Commitments and contingencies (Note 10)
Equity (deficit):
General Motors' net investment............ 77 (335)
Accumulated translation adjustments....... (68) (78)
------- -------
Total equity (deficit)............... 9 (413)
------- -------
Total liabilities and equity (deficit)......$15,506 $15,026
======= =======
See notes to consolidated financial statements.
59
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------
1998 1997 1996
------- ------- -------
(in millions, except per share amounts)
Net sales:
General Motors and affiliates...... $ 22,322 $25,907 $25,748
Other customers.................... 6,157 5,540 5,284
-------- ------- -------
Total net sales................... 28,479 31,447 31,032
-------- ------- -------
Operating expenses:
Cost of sales, excluding items
listed below........................ 26,135 27,710 27,471
Selling, general and administrative. 1,463 1,415 1,445
Depreciation and amortization....... 1,102 1,970 843
-------- ------- -------
Total operating expenses........... 28,700 31,095 29,759
-------- ------- -------
Operating (loss) income.............. (221) 352 1,273
Interest expense (Note 8)............ (277) (287) (276)
Other income, net (Note 12).......... 232 194 115
-------- ------- -------
(Loss) income before income taxes.... (266) 259 1,112
Income tax (benefit) expense (Note 5) (173) 44 259
-------- ------- -------
Net (loss) income ................... $ (93) $ 215 $ 853
======== ===== =====
(Loss) earnings per share (Note 2)
Basic and diluted................... $ (0.20) $ 0.46 $ 1.83
======== ======= =======
See notes to consolidated financial statements.
60
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
Accumulated General Total
Comprehensive Translation Motors' Net Equity
Income (loss) Adjustments Investment (Deficit)
------------- ----------- ---------- ---------
(in millions)
Balance at January 1, 1996.... $ 36 $ 1,318 $ 1,354
Comprehensive income:
Net income................... $853 853 853
Other comprehensive
loss (Note 11)-
Foreign currency translation
adjustments.............. (31) (31) (31)
----
Comprehensive income.......... $822
====
Net effect of assets and
liabilities transferred to
General Motors.............. (1,254) (1,254)
------ ------ ------
Balance at December 31, 1996. 5 917 922
Comprehensive income:
Net income................... $215 215 215
Other comprehensive loss
(Note 11)-
Foreign currency translation
adjustments............... (83) (83) (83)
----
Comprehensive income.......... $132
====
Net effect of assets and
liabilities transferred
to General Motors........... (1,467) (1,467)
------ ------ ------
Balance at December 31, 1997. (78) (335) (413)
Comprehensive loss:
Net loss..................... $(93) (93) (93)
Other comprehensive income
(Note 11)-
Foreign currency translation
adjustments............... 10 10 10
-------------------------- ----
Comprehensive loss............ $(83)
====
Net effect of assets and
liabilities transferred from
General Motors.............. 505 505
---- --- ---
Balance at December 31, 1998 $(68) $ 77 $ 9
==== ===== =====
See notes to consolidated financial statements.
61
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- ------
(in millions)
Cash flows from operating activities:
Net (loss) income................... $ (93) $ 215 $ 853
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization.... 1,102 1,970 843
Pension expense, net of
contributions................... 61 (29) 94
Postretirement benefits other
than pensions, net of payments
and VEBA contributions.......... (339) (551) 403
Deferred income taxes............ 123 196 391
Changes in operating assets and
liabilities:
Accounts receivable, net......... 37 (557) 688
Inventories, net................. 218 92 (67)
Prepaid expenses and other assets (59) 95 (19)
Accounts payable................. (92) 149 (361)
Accrued liabilities.............. (150) 618 138
Other liabilities................ 103 1,038 (506)
Other............................... (62) (318) 244
------- ------ -----
Net cash provided by operating
activities..................... 849 2,918 2,701
------- ------ -----
Cash flows from investing activities:
Capital expenditures................ (1,381) (1,383) (1,177)
Investment in joint ventures and
affiliates, net of cash acquired. (201) (24) (54)
Acquisition of marketable securities (695) (303) (153)
Liquidation of marketable securities 701 321 168
Other............................... 360 69 221
------- ------ -----
Net cash used in investing (1,216) (1,320) (995)
activities....................------- ------ -----
Cash flows from financing activities:
Cash effect of assets and liabilities
transferred to General Motors...... 384 (1,549) (1,686)
------- ------ -----
Net cash provided by (used in) 384 (1,549) (1,686)
financing activities..........------- ------ -----
Effect of exchange rate fluctuations
on cash and cash equivalents........ (11) (31) (5)
------- ------ -----
Increase in cash and cash equivalents: 6 18 15
Cash and cash equivalents at
beginning of year................. 989 971 956
------- ------ -----
Cash and cash equivalents at end of $ 995 $ 989 $ 971
year..............................======= ====== =====
See notes to consolidated financial statements.
62
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
Background--Delphi Automotive Systems Corporation ("Delphi") was
incorporated in late 1998 as a subsidiary of General Motors Corporation ("GM").
During 1998, GM announced its intention to create and eventually divest of a
separate company comprised of the GM businesses and operations that now comprise
Delphi and the associated assets and liabilities of such businesses and
operations (the "Separation"). The divestiture is currently expected to occur in
two stages, the first of which involved an offering to the public of
approximately 100 million common shares of Delphi (the "IPO"--See Note 17). The
second stage involves GM distributing to holders of its $1-2/3 common stock
later in 1999, all of its interest in Delphi (the "Distribution") through one of
the following transactions:
o A split-off transaction, such as one in which Delphi shares would be
offered in exchange for GM $1-2/3 common stock to those GM stockholders
who elect to participate in an exchange offer; or
o A spin-off transaction in which the shares of Delphi would be distributed
to GM $1-2/3 common stockholders on a pro-rata basis; or
o Some combination of the above.
GM has the sole discretion to determine the timing, structure, and all
terms of the distribution. However, GM is not obligated to complete the
distribution.
Under Delphi's Amended and Restated Certificate of Incorporation, the
authorized capital stock of Delphi consists of two billion shares, of which 1.35
billion shares are common stock, par value $0.01 per share, and 650 million
shares are preferred stock, par value $0.10 per share. Delphi will begin
accumulating retained earnings on January 1, 1999, the date on which GM
transferred to Delphi substantially all of the assets and liabilities related to
Delphi's business and operations.
Basis of Presentation--The consolidated financial statements of Delphi
reflect the historical results of operations and cash flows of the businesses
that were considered part of the Delphi business sector of GM during each
respective period; they do not reflect many significant changes that will occur
in the operations and funding of Delphi as a result of the Separation and the
IPO. The historical consolidated balance sheets reflect the assets and
liabilities transferred to Delphi in accordance with the terms of a master
separation agreement to which Delphi and GM are parties (the "Separation
Agreement"). Delphi and Delco Electronics Corporation ("Delco Electronics"), the
electronics and mobile communication business that was transferred to Delphi in
December 1997, were under the common control of GM during such periods;
therefore, the consolidated financial statements include amounts relating to
Delco Electronics for all periods presented, although Delco Electronics was not
integrated with Delphi until December 1997.
The following significant factors are reflected in the consolidated financial
statements:
Capital Arrangements
o Delphi operated under a cash and debt management agreement with GM (the
"Cash and Debt Management Agreement"), and an intracompany note payable to
GM. The Cash and Debt Management Agreement established Delphi's combined
cash and marketable securities balance at $1.0 billion. Delphi's total debt
was $3.5 billion, reflecting a $3.1 billion intracompany note payable to GM
and outstanding debt at Delphi's international subsidiaries. The $3.1
billion intracompany note payable to GM reflected the portion of GM's
outstanding debt that was specifically related to Delphi's operations. The
historical consolidated financial statements give effect to the terms of
the Cash and Debt Management Agreement and the intracompany note payable,
and accordingly, reflect cash and marketable securities and the combined
short-term and long-term debt capitalization totaling $1.0 billion and $3.5
billion, respectively, at December 31, 1998 and 1997.
o Interest expense reflects interest associated with the historical debt
capitalization discussed above, primarily using a blend of prevailing
short-term and long-term weighted-average interest rates commensurate with
the overall credit risk of the Delphi business sector.
63
Employee Benefits Arrangements
o The Separation Agreement provides generally that pension plan assets and
liabilities related to Delphi's U.S. salaried active and inactive employees
retiring after January 1, 1999 will be assumed by Delphi. Delphi has
established defined benefit pension plans for its salaried employees under
the same terms that existed for the GM plans at the time of separation. The
consolidated balance sheets reflect the assets and liabilities related to
U.S. salaried employees that Delphi assumes pursuant to the Separation
Agreement, and exclude employee benefit obligations and assets related to
salaried employees retired on or before January 1, 1999. Generally,
Delphi's U.S. hourly employees will continue to participate in the defined
benefit pension plan for hourly workers administered by GM until the
Distribution. Generally, Delphi will assume the pension obligations for
U.S. hourly employees who retire after October 1, 1999 and GM will retain
pension obligations for U.S. hourly employees who retire on or before
October 1, 1999. The amount of such obligations varies depending on factors
such as discount rates, asset returns, contribution levels and other
factors. The obligation attributable to Delphi was $2.1 billion and $1.7
billion at December 31, 1998 and 1997, respectively. Delphi intends to work
with GM to ensure that any plan transfers are accomplished in accordance
with applicable laws and regulations.
o The Separation Agreement provides in general that GM will retain other
postretirement benefit liabilities related to Delphi's U.S. salaried
employees retiring on or prior to January 1, 1999. The liabilities related
to Delphi's U.S. salaried active and inactive employees retiring after
January 1, 1999 will be assumed by Delphi. Delphi's U.S. hourly employees
will continue to participate in the postretirement plans administered by GM
until the Distribution, and GM generally will retain postretirement benefit
obligations for U.S. hourly employees retired on or before October 1, 1999.
o The liabilities set forth in Delphi's consolidated balance sheets include
employee benefit obligations related to its active and inactive employees
only; however, the consolidated statements of operations include benefit
costs for Delphi's active, inactive and retired employees. Such accrued
obligations and employee benefit costs are based upon actuarial methods and
assumptions.
Operating Costs
o Operating costs and expenses include allocations of general corporate
overhead expenses related to GM's corporate headquarters and common support
activities, including payroll administration, employee medical coverage and
property and casualty insurance, financial, legal, tax and human resources.
These allocated costs amounted to $135 million, $130 million and $124
million in 1998, 1997 and 1996, respectively, and have been allocated to
Delphi based on usage or allocation methodologies primarily based on total
net sales, certain tangible assets and payroll expenses. Although Delphi
believes the allocations and charges for such services to be reasonable,
the costs of these services charged to Delphi may not be indicative of the
costs that would have been incurred if Delphi had been a stand-alone
entity.
Income Taxes
o Income taxes were determined in accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." Once Delphi is a stand-alone entity and is no longer included in
GM's consolidated income tax return, it will no longer benefit from its
position within GM's consolidated income tax environment. As a result,
Delphi expects its effective income tax rates in future periods generally
to be higher than its historical effective income tax rates.
Cash Flows
o The consolidated statements of cash flows present the historical operating
cash flows of Delphi's businesses. The net cash effect of the adjustments
specified in the Separation Agreement is included in cash flows from
financing activities. The net cash effect of the separation adjustments was
(less than) more than the net equity effect of such adjustments by
approximately $(121) million, $82 million and $432 million in 1998, 1997
and 1996, respectively. This was caused by changes during these years in
separation adjustments for various assets and liabilities, principally
pension and other postretirement benefits, which affected net equity, but
did not necessarily affect cash.
64
The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in equity
(deficit) and cash flows of Delphi in the future or what they would have been
had Delphi been a separate, stand-alone entity during the periods presented.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation--The consolidated financial statements include the accounts
of Delphi and domestic and foreign subsidiaries that are majority-owned.
Delphi's share of the earnings or losses of affiliates, in which at least 20% of
the voting securities is owned, is included in the consolidated operating
results using the equity method of accounting. All significant intercompany
transactions and balances between the Delphi businesses have been eliminated.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported therein. Due to the
inherent uncertainty involved in making estimates, actual results reported in
future periods may be based upon amounts that differ from those estimates.
Earnings Per Common Share--Basic and diluted earnings per share
attributable to Delphi common stock were determined based on net income divided
by the 465 million common shares outstanding immediately prior to the IPO. For
purposes of the earnings per share calculation, the shares outstanding after
January 1, 1999 but prior to the IPO are treated as outstanding for all periods
presented. There were no potentially dilutive securities outstanding during the
periods presented.
Revenue Recognition--Sales are recorded upon shipment of product to
customers and transfer of title under standard commercial terms.
Research and Development--Delphi incurs costs in connection with research
and development programs that are expected to contribute to future earnings.
Such costs are charged against income as incurred. Research and development
expenses were $1.4 billion, $1.5 billion and $1.6 billion for the years ended
December 31, 1998, 1997 and 1996, respectively.
Cash and Cash Equivalents--Cash and cash equivalents are defined as
short-term, highly liquid investments with original maturities of 90 days or
less. In addition, pursuant to the Cash and Debt Management Agreement, GM
provided Delphi access to cash and cash equivalents in an amount which
fluctuated based on Delphi's other balances, such that total cash and marketable
securities at each period end was $1.0 billion. Income taxes paid by Delphi
totaled $741 million and $132 million in 1998 and 1996, respectively. Income
taxes paid during 1997 were not significant. Interest paid by Delphi totaled
$286 million, $299 million, and $267 million in 1998, 1997 and 1996,
respectively.
Marketable Securities--Marketable securities are classified as
available-for-sale. The fair value of such marketable securities approximates
book value, with cost determined on the specific identification basis. Proceeds
from sales and maturities of marketable securities attributable to Delphi
totaled $701 million, $321 million and $168 million in 1998, 1997 and 1996,
respectively. The gross gains and losses related to sales of marketable
securities were not significant to Delphi.
Inventories--Inventories in the U.S. are stated at the lower of cost or
market, as determined substantially by the last-in, first-out (LIFO) method,
while inventories in countries other than the U.S., and at Delco Electronics,
are stated under the first-in, first-out (FIFO) method. Delphi's inventory data
is combined with similar data from other GM businesses for purposes of applying
the LIFO method of accounting. Delphi has been allocated a pro rata portion of
GM's LIFO reserve based on the relative inventory levels of Delphi before
application of such reserve. The effect of the LIFO method of accounting was to
increase Delphi's operating income by $38 million, $73 million, and $21 million,
in 1998, 1997 and 1996, respectively.
Depreciation and Amortization--Depreciation is provided based on the
estimated useful lives of groups of property generally using accelerated
methods, which accumulate depreciation of approximately two-thirds of the
depreciable cost during the first half of the estimated useful lives. Leasehold
improvements are amortized over the period of the lease or the life of the
property, whichever is shorter, with the amortization applied directly to the
asset account. Expenditures for repairs and maintenance are charged to expense
as incurred.
65
Environmental Liabilities--Delphi recognizes environmental cleanup
liabilities when a loss is probable and can be reasonably estimated. Such
liabilities are generally not subject to insurance coverage. The cost of each
environmental cleanup is estimated by engineering, financial, and legal
specialists within Delphi based on current law. Such estimates are based
primarily upon the estimated cost of investigation and remediation required and
the likelihood that other potentially responsible parties ("PRPs") will be able
to fulfill their commitments at the sites where Delphi may be jointly and
severally liable. For closed or closing plants owned by Delphi and properties
being sold, an estimated liability is typically recognized at the time the
closure decision is made or sale is recorded and is based on an environmental
assessment of the plant property.
The process of estimating environmental cleanup liabilities is complex and
dependent primarily on the nature and extent of historical information and
physical data relating to a contaminated site, the complexity of the site, the
uncertainty as to what remedy and technology will be required, the outcome of
discussions with regulatory agencies and other PRPs at multi-party sites. In
future periods, new laws or regulations, advances in cleanup technologies and
additional information about the ultimate cleanup remedy that is used could
significantly change Delphi's estimates.
Pursuant to the separation arrangements between Delphi and GM, GM is
responsible for environmental liabilities at the GM facilities not transferred
to Delphi, including all facilities closed or sold prior to January 1, 1999,
except that Delphi is responsible for any environmental liabilities at such
facilities that Delphi causes after January 1, 1999. Delphi is responsible for
environmental liabilities at the facilities transferred to Delphi, except that
GM will be responsible for any environmental liabilities at such facilities that
GM causes after January 1, 1999.
In addition, with respect to liability for offsite waste disposal, GM has
retained responsibility for sites where GM's liability is known or alleged prior
to January 1, 1999, except that Delphi will be responsible for any wastes Delphi
contributes to these sites after January 1, 1999. Delphi is not, however,
responsible for any contributions to these sites from the facilities transferred
to Delphi that occurred prior to January 1, 1999. At other waste disposal sites,
GM's and Delphi's respective liability will be allocated based on each party's
respective contribution of wastes to such sites. In particular, GM's liability
will be based on contributions from the facilities retained by GM and any other
facility owned or operated by GM, except the facilities transferred to Delphi.
Delphi's liability will be based on contributions from facilities transferred to
Delphi and any other facility owned or operated by Delphi.
Foreign Currency Translation--Assets and liabilities of foreign subsidiaries
generally are translated to U.S. dollars at end-of-period exchange rates. The
effects of translation for most foreign subsidiaries are reported in a separate
component of equity. The effect of remeasurement of assets and liabilities of
foreign subsidiaries that use the U.S. dollar as their functional currency is
included in income. Income statement elements of all foreign subsidiaries are
translated to U.S. dollars at average-period exchange rates and are recognized
as part of revenues, costs and expenses. Also included in income are gains and
losses arising from transactions denominated in a currency other than the
functional currency of a particular subsidiary.
Net transaction gains and losses, as described above, decreased net income by
$25 million during 1998, and increased net income by $68 million and $21 million
during 1997 and 1996, respectively.
Valuation of Long-lived Assets--Management of Delphi periodically evaluates
the carrying value of long-lived assets to be held and used, including
intangible assets, when events or circumstances warrant such a review. The
carrying value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such an asset is separately identifiable and is less
than the carrying value of the asset. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that fair market values are reduced for the cost to dispose of
the assets.
Accrued Commitments Under Loss Contracts--Management periodically evaluates
the profitability of contractual commitments on a customer basis, and will
establish a reserve whenever expected costs exceed related revenues, based upon
a reasonable estimate of the costs and product pricing expected to exist over
the course of the contract period. Such reserves would be recorded only to the
extent the total estimated losses exceeded any related impairment reserves
separately recognized on related long-lived assets.
66
Derivative Financial Instruments--During the periods presented, Delphi's
exposure to fluctuations in foreign exchange rates and certain commodities
prices was managed by GM. GM is party to a variety of foreign exchange, interest
rate, and commodity forward contracts and options entered into in connection
with the management of its exposure to fluctuations in foreign exchange rates,
interest rates, and certain commodities prices, including foreign exchange and
certain commodities price exposures relating to Delphi. These financial
exposures were managed in accordance with GM's corporate policies and
procedures.
GM established a Risk Management Committee to develop and monitor its
financial risk strategies, policies and procedures. The GM Risk Management
Committee reviews and approves all new risk management strategies, establishes
approval authority guidelines for approved programs and monitors compliance and
performance of existing risk management programs. GM does not enter into
derivative transactions for trading purposes.
As part of the hedging program approval process, as it relates to Delphi,
GM and Delphi management representatives are required to identify the specific
financial risk which the derivative transaction will minimize, the appropriate
hedging instrument to be used to reduce the risk, and the correlation between
the financial risk and the hedging instrument. Purchase orders, letters of
intent, vehicle production forecasts, capital planning forecasts, and historical
data are used as the basis for determining the anticipated values of the
transactions to be hedged. Generally, GM does not enter into derivative
transactions that do not have a high correlation with the underlying financial
risk. In the infrequent instances in which a derivative transaction is entered
into that does not have a high correlation with the underlying exposure, then
the derivative is marked to market for accounting purposes. The hedge positions
related to Delphi as well as the correlation between the transaction risks and
the hedging instruments, are reviewed by GM and Delphi management on an ongoing
basis.
Subsequent to the Separation, Delphi has assumed management of its exposure
to fluctuations in foreign exchange rates, interest rates, and certain commodity
prices. GM has assigned to Delphi certain derivative contracts from its foreign
exchange and commodities portfolio, based on Delphi's level of exposure at the
time of the Separation. This assignment does not alter the original terms of the
contracts being transferred. In addition, Delphi will not be required to pay any
fee in order to assume the contracts. GM did not manage any interest rate
contracts on behalf of Delphi during the periods presented, and no such
contracts were assumed by Delphi as part of the Separation.
Foreign exchange forward and option contracts are accounted for as hedges
to the extent they are designated, and are effective, as hedges of firm foreign
currency commitments. Additionally, certain foreign exchange option contracts
receive hedge accounting treatment to the extent such contracts hedge certain
anticipated foreign currency transactions. Other such foreign exchange contracts
and options are marked to market on a current basis.
GM, on behalf of Delphi, also enters into commodity forward and option
contracts. Since GM has the discretion to settle these transactions either in
cash or by taking physical delivery, these contracts are not considered
financial instruments for accounting purposes. Commodity forward contracts and
options are accounted for as hedges to the extent they are designated, and are
effective, as hedges of firm or anticipated commodity purchase contracts. Other
commodity forward contracts and options are marked to market on a current basis.
Postemployment Benefits and Employee Termination Benefits--Delphi's
postemployment benefits primarily relate to Delphi's extended-disability benefit
program in the United States and supplemental unemployment compensation
benefits, mainly pursuant to union or other contractual agreements.
Extended-disability benefits are accrued on a service-driven basis and
supplemental unemployment compensation benefits are accrued on an event-driven
basis. Accruals for postemployment benefits represent the discounted future cash
expenditures expected during the period between the idling of affected employees
and the time when such employees are redeployed, retire or otherwise terminate
their employment.
Voluntary termination benefits are accrued when the employees accept the
offer. Involuntary termination benefits are accrued when management has
committed to a termination plan and the benefit arrangement is communicated to
affected employees.
Labor Force--On a worldwide basis, Delphi has a concentration of employees
working under union collective bargaining agreements representing approximately
93% of its hourly workforce. Of these represented employees, a significant
number of hourly employees are working under agreements that will expire in
1999. Certain suppliers and customers of Delphi also have represented work
forces. Future work stoppages by Delphi's employees or by employees of Delphi's
suppliers or customers could disrupt Delphi's production of automotive
components and systems.
67
During the years ended December 31, 1998, 1997 and 1996, work stoppages at
certain GM and Delphi locations had an estimated unfavorable impact on net
income of $450 million, $92 million and $281 million, respectively. Delphi
generally estimates the impact of work stoppages by multiplying standard
contribution margins by the estimated decline in vehicle production that is
directly attributable to the work stoppages, after considering partial recovery
of lost production, if any, in subsequent periods.
Recently Issued Accounting Pronouncements--In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires recognition of all
derivative financial instruments as either assets or liabilities in consolidated
balance sheets at fair value and determines the method(s) of gain/loss
recognition. Delphi is required to adopt SFAS No. 133 with its fiscal year
ending December 31, 2000 and is currently assessing the effect that it may have
on its consolidated financial statements.
SFAS No. 133 provides that, if certain conditions are met, a derivative may
be specifically designated as:
o a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment (a "fair value
hedge");
o a hedge of the exposure to variable cash flows of a forecasted
transaction ( a "cash flow hedge"); or
o a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated
forecasted transaction ( a "foreign currency hedge").
Under SFAS No. 133, the accounting for changes in the fair value of a
derivative depends on its intended use and designation. For a fair value hedge,
the gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income as
part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change.
In March 1998, the Accounting Standards Executive Committee ("ASEC") for the
American Institute of Certified Public Accountants released Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
for Internal Use." SOP 98-1 requires the capitalization of certain expenditures
for software that is purchased or internally developed once certain criteria are
met. Currently, Delphi generally expenses the costs of developing or obtaining
internal use software as incurred. Delphi adopted SOP 98-1 on January 1, 1999,
as required. Delphi expects that about $30 to $40 million of spending that would
have otherwise been expensed as incurred will be capitalized in 1999 in
accordance with the provisions of SOP 98-1.
68
3. COMPETITIVENESS INITIATIVES
The global automotive components and systems market is increasingly
competitive and is undergoing significant restructuring and consolidation. All
of the major industry competitors continue to increase their focus on efficiency
and cost improvements, while facing increasing price pressures. As a result,
Delphi has implemented a process for evaluating the long-term competitiveness of
all facets of its business (the "Competitiveness Studies"). These studies are
performed in conjunction with the business planning cycle and are substantially
completed in December of each year. Based on the results of the Competitiveness
Studies, Delphi recorded pre-tax charges of approximately $310 million and $1.4
billion ($192 million and $870 million after-tax) during the years ended
December 31, 1998 and 1997, respectively. The charges were comprised of:
1998 1997
- -------------------------- --------------------------
Pre-tax After-tax Pre-tax After-tax
- ------- --------- ------- ---------
$176 million $109 million $791 million $506 million Underperforming assets
$134 million $83 million $55 million $34 million Capacity reductions
n/a n/a $516 million $330 million Assets held for disposal
Overall, these charges had the effect of increasing cost of sales and
depreciation and amortization by $154 million and $156 million, respectively for
the year ended December 31, 1998 and $262 million and $1.1 billion,
respectively, for the year ended December 31, 1997.
The amount included for underperforming assets represents charges pursuant
to Delphi's policy for the valuation of long-lived assets. Delphi re-evaluates
the carrying value of its long-lived assets as events and circumstances of the
industry change. The re-evaluation is performed using product specific cash flow
information. As a result of this process, the carrying values of certain
long-lived assets, principally property, plant and equipment, were determined to
be impaired as the separately identifiable, undiscounted future cash flows from
such assets were less than their respective carrying values. The resulting
impairment charge represented the amount by which the carrying value of such
assets exceeded their estimated fair market value.
The amount included for capacity reductions represents postemployment
benefits payable to employees, pursuant to contractual agreements. Such capacity
reductions affected approximately 5,700 persons and 2,000 persons in 1998 and
1997, respectively. Approximately $60 million of the accruals established in
1998 and 1997 had been paid as of December 31, 1998. The remaining accruals are
expected to be paid during 1999.
Assets held for disposal in 1997 primarily related to Delphi's seating,
lighting and coil spring businesses, which were announced for sale during 1997,
and certain other losses on assets subject to disposal. The related pre-tax
charges represented the amount by which the carrying value of such assets
exceeded the estimated fair value, net of related costs to dispose. Delphi sold
its seating, lighting and coil springs businesses during 1998, resulting in an
additional pre-tax loss of $430 million ($271 million after-tax). The additional
loss had the effect of increasing cost of sales and depreciation and
amortization by $382 million and $48 million, respectively. Delphi's results of
operations included total operating losses related to these businesses of $107
million, $488 million and $224 million for the years ended December 31, 1998,
1997 and 1996, respectively.
Separately, Delphi recognized a charge to cost of sales totaling $80
million ($50 million after-tax) during 1997 to provide for postemployment
benefits and other site-related closure costs in connection with the decision to
cease production at its Trenton, New Jersey, plant. In 1996, Delphi sold four
component facilities located in Flint and Livonia, Michigan and Oshawa and
Windsor, Ontario, which resulted in a loss of $247 million ($153 million
after-tax). The loss had the effect of increasing cost of sales and depreciation
and amortization by $167 million and $80 million, respectively.
69
4. INVENTORIES, NET
Inventories, net consisted of:
December 31,
------------
1998 1997
-------- --------
(in millions)
Productive material, work-in-process
and supplies...................... $1,910 $2,035
Finished goods..................... 253 264
------ ------
Total inventories at FIFO....... 2,163 2,299
Less allowance to adjust the
carrying value of certain
inventories to LIFO............... (393) (431)
------ ------
Total inventories, net.......... $1,770 $1,868
====== ======
5. INCOME TAXES
(Loss) income before income taxes for U.S. and foreign operations was:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in millions)
U.S.(Loss)income ..... $(501) $(99) $ 584
Foreign income........ 235 358 528
----- ----- ----
Total............... $(266) $259 $1,112
====== ==== ======
The provision for income taxes was:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in millions)
Income taxes estimated to be (refundable)
payable:
U.S. federal........................... $(47) $ 849 $(107)
Foreign................................ 134 203 108
U.S. state and local................... (19) 32 50
----- ----- ----
Total payable currently.............. 68 1,084 51
Deferred income tax (benefit) expense, net
U.S. federal........................... (228) (915) 244
Foreign............................... 8 (47) (3)
U.S. state and local.................. (11) (71) (26)
----- ----- ----
Total deferred....................... (231) (1,033) 215
Investment tax credits................ (10) (7) (7)
----- ----- ----
Total income tax provision........... $(173) $ 44 $259
===== ===== ====
A reconciliation of the provision for income taxes compared with the amounts
at the U.S. federal statutory rate was:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in millions)
Tax at U.S. federal statutory
income tax rate................. $ (93) $ 91 $389
U.S. state and local
income taxes.................... (27) (39) 25
Foreign rates other than 35%...... 59 31 (80)
Research and experimentation
credits......................... (58) (50) (49)
Other adjustments................. (54) 11 (26)
----- ---- ----
Total income tax provision....... $(173) $ 44 $259
====== ==== ====
Deferred income tax assets and liabilities for 1998 and 1997 reflect the
impact of temporary differences between amounts of assets and liabilities for
financial reporting purposes and the bases of such assets and liabilities as
measured by tax laws. Such deferred tax balances are based on the assets and
liabilities transferred to Delphi pursuant to the Separation Agreement.
70
Temporary differences that gave rise to deferred tax assets and liabilities
included:
Year Ended December 31,
--------------------------------------
1998 1997
---------------- --------------
(in millions)
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Postretirement benefits
other than pensions...... $1,575 $ -- $1,677 $ --
Postemployment benefits..... 167 -- 170 --
Depreciation................ 8 -- -- 29
Employee benefits........... 941 -- 886 --
Tax on unremitted profits... -- 42 -- 36
U.S. state and local taxes.. 268 -- 134 --
Other U.S................... 106 68 247 57
Other foreign............... 98 56 45 85
----- --- ----- ---
Total..................... 3,163 166 3,159 207
Valuation allowances........ (65) -- (23) --
----- --- ----- ---
Total deferred taxes...... $3,098 $166 $3,136 $207
====== ==== ====== ====
Realization of the net deferred tax assets is dependent on future reversals
of existing taxable temporary differences and adequate future taxable income,
exclusive of reversing temporary differences and carryforwards. Although
realization is not assured, management believes that it is more likely than not
that the net deferred tax assets will be realized.
Annual tax provisions include amounts considered sufficient to pay
assessments that may result from examination of prior year tax returns; however,
income tax accruals in the consolidated balance sheets reflect that, as part of
the Separation Agreement, GM agreed to indemnify Delphi, excluding Delco
Electronics, for prior year tax issues in the United States.
Provisions are made for estimated U.S. and foreign income taxes, less
available tax credits and deductions, which may be incurred on the remittance of
Delphi's share of subsidiaries' undistributed earnings not deemed to be
permanently reinvested. Taxes have not been provided on foreign subsidiaries'
earnings which are deemed permanently reinvested, of approximately $33 million
at December 31, 1998. The amount of such permanently reinvested earnings is not
material to our consolidated financial statements.
6. PROPERTY, NET
Property, net consisted of:
Estimated Useful December 31,
------------
Lives (Years) 1998 1997
------------- ---- ----
(in millions)
Land............................... -- $ 60 $ 66
Land and leasehold improvements.... 3-30 212 249
Buildings.......................... 29-45 1,975 2,114
Machinery, equipment and tooling... 3-30 9,990 10,159
Furniture and office equipment..... 3-20 164 153
Construction in progress........... -- 752 762
------ ------
Total............................. 13,153 13,503
Less accumulated depreciation and
amortization...................... (8,188) (8,903)
------ ------
Total property, net................ $4,965 $4,600
====== ======
71
7. ACCRUED LIABILITIES
Accrued liabilities consisted of:
December 31,
----------------
1998 1997
------ ------
(in millions)
Payroll related obligations..... $617 $636
Income taxes payable............ 81 671
Deferred income taxes........... 176 36
Taxes other than income......... 138 119
Other........................... 426 202
------ ------
Total...... $1,438 $1,664
====== ======
8. INTRACOMPANY NOTES PAYABLE AND LONG-TERM DEBT
Pursuant to the Cash and Debt Management Agreement, Delphi's consolidated
financial statements reflect an outstanding intracompany note payable with the
automotive and corporate sectors of GM of approximately $3.1 billion at both
December 31, 1998 and 1997. This intracompany note payable bears interest at
variable interest rates established consistent with the overall credit risk of
the Delphi business sector; such rates approximated 6.7%, 7.2% and 7.3% in 1998,
1997 and 1996, respectively. The intracompany note payable matures on January 1,
2000, and is not subject to any collateral or covenant requirements.
At December 31, 1998, Delphi had certain other long-term debt outstanding,
principally at certain international subsidiaries. The amount of the
intracompany note payable was increased or repaid pursuant to the Cash and Debt
Management Agreement such that the total long-term debt outstanding at any
period end is $3.5 billion. The repayment schedule of amounts due at December
31, 1998 was as follows: 1999--$363 million; 2000--$3.1 billion; 2001-- $1
million; 2002--$3 million; 2003--$4 million; 2004 and thereafter--$30 million.
On January 1, 1999, immediately prior to the separation, the Cash and Debt
Management Agreement was cancelled and amounts due thereunder were settled with
certain intracompany accounts receivable, as described further in Note 17,
Subsequent Events.
On January 4, 1999, Delphi entered into two financing agreements with a
syndicate of lenders providing for an aggregate of $4.9 billion in available
revolving credit facilities. In general, borrowings of up to $4.9 billion are
available under the facilities through January 3, 2000, after which $1.5 billion
will be available through January 3, 2004. The $4.9 billion Delphi may borrow
will be reduced to the extent of any net cash proceeds from post IPO public
offerings and private placements of debt securities, excluding debt securities
with a maturity of less than one year. The total reduction arising from
issuances of common stock and debt securities will not exceed $2.0 billion.
Borrowings under these financing arrangements may be used for general corporate
purposes. The credit facilities include certain customary affirmative and
negative covenants. The credit facilities also provide for certain events of
default, including upon a change of control, which is defined to include the
acquisition of more than 20% of the voting power of Delphi common stock by any
person other than GM.
The credit facilities provide that the interest rate is to be based, at
Delphi's option, on either an Alternate Base Rate (higher of prime, federal
funds or certificate of deposit based rates) or a Eurodollar rate, plus, a
margin. Delphi also has the right under the credit facilities to request that
lenders provide from time to time alternative rates on loans. The rates offered
by the lenders on these loans will either be fixed rates or rates based on a
Eurodollar rate, plus at the discretion of the offering lender, a margin. In
addition to interest payments, Delphi is obligated to pay certain facility fees
throughout the term of the facilities.
9. PENSION AND OTHER POSTRETIREMENT BENEFITS
During the periods presented, substantially all of Delphi's U.S. employees
participated in GM's defined benefit pension plans and various postretirement
medical, dental, vision and life insurance plans. The cost of such benefits is
recognized in the consolidated financial statements during the period employees
provide service to Delphi. Pension plans covering U.S. represented employees
generally provide benefits of negotiated stated amounts for each year of
service, as well as supplemental benefits for employees who qualify for
retirement before normal retirement age. The benefits provided by the plans
covering U.S. salaried employees are generally based on years of service and
salary history. Certain Delphi employees also participate in GM's nonqualified
pension plans covering executives, which are unfunded. Such plans are based on
targeted wage replacement percentages, and are generally not significant to
Delphi. Delphi's funding policy with respect to its qualified plans is to
contribute annually, not less than the minimum required by applicable laws and
regulations.
72
The Separation Agreement provides generally that pension plan assets and
liabilities and other postretirement liabilities related to Delphi's U.S.
salaried active and inactive employees retiring after January 1, 1999 will be
assumed by Delphi. Delphi will establish and administer defined benefit pension
and other postretirement plans for its salaried employees under the same terms
that existed for the GM plans at the time of separation, subject to all plan
terms. The consolidated financial statements reflect the assets and liabilities
related to U.S. salaried employees that Delphi will assume pursuant to the
Separation Agreement, and exclude employee benefit obligations and any assets
related to employees retired as of January 1, 1999. Delphi's U.S. hourly
employees will continue to participate in the defined benefit pension plan for
hourly workers administered by GM until the Distribution at which time Delphi
will assume responsibility for other postretirement costs related to active U.S.
hourly employees. Delphi is also responsible for assuming the unfunded hourly
pension liability associated with Delphi hourly employees either through the
transfer of specified obligations and plan assets to a Delphi plan at the date
of the Distribution, or through an equivalent series of future payments to GM
under certain circumstances. Delphi's obligation to GM related to the U.S.
hourly pension plan is specified in the Separation Agreement to equal the
projected benefit obligation related to Delphi U.S. hourly active and inactive
employees, using applicable pension actuarial assumptions, less an amount equal
to the level of plan assets that would be received by Delphi under applicable
laws and regulations had the plan transfer occurred on January 1, 1999, adjusted
for subsequent asset returns. Such obligation totaled $2.1 billion and $1.7
billion at December 31, 1998 and 1997, respectively. Delphi intends to work with
GM to ensure that any plan transfers are accomplished in accordance with
applicable law and regulations.
The net assets (liabilities) related to the defined benefit pension
obligation for U.S. salaried employees and other postretirement obligations for
U.S. salaried and hourly employees for which Delphi will retain responsibility
are as follows:
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits (1)
---------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Change in benefit obligation: (in millions)
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year ....... $ 2,511 $ 2,252 $ 4,610 $ 4,307
Service cost ................................ 95 82 180 175
Interest cost ............................... 178 175 901 896
Actuarial losses ............................ 148 130 186 221
Other, including curtailments ............... 19 10 (17) --
Impact of Separation Agreement .............. (567) (138) (1,257) (989)
------- ------- ------- -------
Benefit obligation at end of year ............... 2,384 2,511 4,603 4,610
------- ------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 2,500 2,240 -- --
Actual return on plan assets .............. 392 544
Plan participants' contributions .......... 7 7
Impact of Separation Agreement ............ (426) (291) --
------- ------- ------- -------
Fair value of plan assets at end of year ..... 2,473 2,500 -- --
------- ------- ------- -------
Funded (unfunded) status ........................ 89 (11) (4,603) (4,610)
Unamortized actuarial loss (gain) ............ 284 291 81 (114)
Unamortized prior service cost ............... 122 139 (51) (64)
Unrecognized transition asset ................ (22) (38) -- --
------- ------- ------- -------
Net amount recognized in consolidated
balance sheets .............................. $ 473 $ 381 $(4,573) $(4,788)
------- ------- ------- -------
Amounts recognized in the consolidated balance
sheets consist of:
Long term prepaid benefit cost ............... 545 445 -- --
Accrued benefit liability .................... (72) (64) (4,573) (4,788)
------- ------- ------- -------
Net amount recognized ........................... $ 473 $ 381 $(4,573) $(4,788)
======= ======= ======= =======
</TABLE>
73
(1)During 1998 and 1997, Delphi contributed $677 million and $925 million,
respectively, to a Voluntary Employees' Beneficiary Association (VEBA)
trust. The contribution was made in connection with GM's pre-funding of a
portion of its other postretirement employee benefit liability. In
accordance with the terms of the Separation Agreement, GM will retain 100%
of the pre-funding and accordingly, Delphi's other postretirement employee
benefit liability does not reflect an allocation of the VEBA trust assets.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for salaried employee pension plans with accumulated
benefit obligations in excess of plan assets were $124 million, $74 million and
$16 million, respectively, as of December 31, 1998, and $97 million, $52 million
and $0, respectively, as of December 31, 1997.
Certain of Delphi's international subsidiaries also sponsor defined benefit
pension plans, which generally provide benefits based on negotiated amounts for
each year of service, and other postretirement plans. The unfunded international
pension plans have projected benefit obligations of approximately $76 million
and $63 million at December 31, 1998 and 1997, respectively. The funded
international pension plans have assets in excess of projected benefit
obligations of approximately $21 million and $25 million at December 31, 1998
and 1997, respectively. Certain of Delphi's international subsidiaries have
other postretirement plans, although most participants are covered by government
sponsored or administered programs. The annual cost of such pension and
postretirement plans is generally not significant to Delphi.
Benefit costs presented below were determined based on actuarial methods and
include costs related to Delphi salaried active employees and retirees for
pension expense and Delphi salaried and hourly active employees and retirees for
other benefits for all periods presented. Such benefit costs included the
following components:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(in millions)
Service Cost ....... $ 95 $ 82 $ 88 $ 180 $ 175 $ 185
Interest Cost ...... 178 175 368 901 896 859
Expected return on
plan assets ...... (341) (287) (495) (88) -- --
Net amortization and
other ............ 17 19 66 (27) (24) (29)
----- ----- ----- ----- ------ ------
Net periodic benefit
cost ............. $ (51) $ (11) $ 27 $ 966 $1,047 $1,015
===== ===== ===== ===== ====== ======
</TABLE>
Also, during the periods presented, Delphi participated in GM's U.S. defined
benefit pension plans for hourly employees. GM charged Delphi approximately $330
million, $433 million and $337 million, in 1998, 1997 and 1996, respectively,
related to Delphi hourly employees and retirees in the U.S.
The principal assumptions used to determine the pension and other
postretirement expense and the actuarial value of the projected benefit
obligation for the U.S. salaried pension plan and U.S. postretirement plans
were:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
----------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Weighted-average discount rate. 6.75% 7.0% 7.5% 6.75% 7.25% 7.8%
Weighted-average rate of
increase in compensation levels 5.0% 5.0% 5.0% 4.4% 4.4% 4.3%
Expected long-term rate of
return on plan assets ......... 10.0% 10.0% 10.0% 10.0% n/a n/a
</TABLE>
For measurement purposes, a 6.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease on a linear basis through 2004, to the ultimate weighted-average
trend rate of 5.0%.
A one percentage point increase in the assumed health care trend rate would
have increased the aggregate service and interest cost components of non-pension
postretirement benefit expense for 1998 by $131 million, and would have
increased the related accumulated postretirement benefit obligation by $761
million.
74
Delphi has disclosed in the consolidated financial statements certain amounts
associated with estimated future postretirement benefits other than pensions and
characterized such amounts as "costs" or "obligations." Notwithstanding the
recording of such amounts and the use of these terms, Delphi does not admit or
otherwise acknowledge that such amounts or existing postretirement benefit plans
of GM, other than pensions, represent legally enforceable liabilities of Delphi.
10. COMMITMENTS AND CONTINGENCIES
Rental expense totaled $104 million, $99 million and $98 million for the
years ended December 31, 1998, 1997 and 1996, respectively. Delphi had minimum
lease commitments under noncancelable operating leases at December 31, 1998
totaling $331 million which become due as follows: 1999--$63 million; 2000--$57
million; 2001--$51 million; 2002--$47 million; 2003--$45 million and
thereafter--$68 million.
Delphi is from time to time subject to various legal actions and claims
incidental to its business, including those arising out of alleged defects,
breach of contracts, product warranties, employment-related matters and
environmental matters. Litigation is subject to many uncertainties, and the
outcome of individual litigated matters is not predictable with assurance. After
discussions with counsel, it is the opinion of management that the outcome of
such matters will not have a material adverse impact on the consolidated
financial position, results of operations or cash flows of Delphi.
11. OTHER COMPREHENSIVE INCOME (LOSS)
The annual change in other comprehensive income (loss), net of the related
tax effect was:
<TABLE>
<CAPTION>
Pre-tax Tax Effect Net
Amount (Credit) Amount
------- ---------- ------
(in millions)
Other comprehensive income (loss)--
foreign currency translation adjustments:
<S> <C> <C> <C> <C>
1998.............................. 16 (6) 10
1997.............................. (134) 51 (83)
1996.............................. (50) 19 (31)
</TABLE>
12. OTHER INCOME, NET
Other income, net included:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Claims and commissions..................... $86 $80 $76
Gain (loss) on disposition of assets, net.. 36 52 (44)
Interest income............................ 57 57 49
Earnings of non-consolidated affiliates.... 55 27 57
Other expense.............................. (2) (22) (23)
---- ---- ----
Other income, net.......................... $232 $194 $115
==== ==== ====
</TABLE>
13. STOCK INCENTIVE PLANS
Certain eligible employees of Delphi are participants in the General Motors
1997 Stock Incentive Plan ("GMSIP"), formerly the General Motors Amended 1987
Stock Incentive Plan. Pursuant to the GMSIP, shares, rights, or options to
acquire GM $1-2/3 common stock may be granted through May 31, 2002. The option
price is equal to 100% of the fair market value of GM $1-2/3 common stock on the
date the options are granted. These non-qualified options generally expire 10
years from the dates of grant and are subject to earlier termination under
certain conditions. Upon completion of the Distribution, all outstanding options
on GM $1-2/3 common stock previously granted to Delphi employees will be
converted to equivalent stock options on Delphi common stock, subject to the
terms of the Separation Agreement.
75
14. SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," established standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services,
geographic areas, and major customers. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing
performance. Delphi's chief operating decision making group is the Delphi
Strategy Board, which is comprised of the Chief Executive Officer and 20 senior
executives from the three operating segments and the world headquarters staff.
Certain senior executives for each operating segment are also members of a
Strategy Board or equivalent committee that manages the profitability and cash
flow of each respective segment's various product lines and businesses. The
three operating segments are managed separately because of differences in the
nature of the respective products.
Delphi's reportable operating segments ("product sectors") are Electronics &
Mobile Communication; Safety, Thermal & Electrical Architecture; and Dynamics &
Propulsion. The Electronics & Mobile Communication product sector supplies
various electronic products, as well as audio and communication systems for
vehicles. The Safety, Thermal & Electrical Architecture product sector offers a
wide range of products relating to the vehicle interior and powertrain cooling
systems and climate control systems. In addition, the segment produces wiring
harnesses and connectors for electrical power and signal distribution. The
Dynamics & Propulsion product sector offers a wide range of energy and engine
management systems, chassis control systems and steering products.
The accounting policies of the product sectors are the same as those
described in the summary of significant accounting policies except that the
disaggregated financial results for the product sectors have been prepared using
a management approach, which is consistent with the basis and manner in which
management internally disaggregates financial information for the purposes of
assisting in making internal operating decisions. Generally, Delphi evaluates
performance based on stand-alone product sector net income and accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices. Net sales are attributed to
geographic areas based on the location of the assets producing the revenues.
Financial information by reportable product sector is as follows:
<TABLE>
<CAPTION>
Safety,
Electronics Thermal
& Mobile & Electrical Dynamics &
1998 Communication Architecture Propulsion Other(a) Total
---- ------------- ------------ ---------- -------- -----
(In millions)
<S> <C> <C> <C> <C> <C>
Net sales to GM and
affiliates................. $3,917 $ 8,059 $10,346 $ -- $22,322
Net sales to other customers. 649 3,000 2,508 -- 6,157
Inter-sector net sales....... 257 167 8 (432) --
------- ------- -------- ----- -------
Total net sales............ $4,823 $11,226 $12,862 $(432) $28,479
======= ======= ======== ====== =======
Depreciation and
amortization................ $ 181 $ 290 $ 631 $ -- $ 1,102
Interest expense............. 40 105 115 17 277
Income tax expense (benefit). 119 (36) (132) (124) (173)
Net income (loss) (b)........ 194 (44) (162) (81) (93)
Sector assets................ 2,099 5,855 6,882 670 15,506
Capital expenditures......... 180 449 741 11 1,381
</TABLE>
76
<TABLE>
<CAPTION>
Safety,
Electronics Thermal
& Mobile & Electrical Dynamics &
1997 Communication Architecture Propulsion Other(a) Total
---- ------------- ------------ ---------- -------- -----
(In millions)
<S> <C> <C> <C> <C> <C>
Net sales to GM and
affiliates................. $4,652 $9,756 $11,499 $ -- $25,907
Net sales to other customers. 539 2,776 2,225 -- 5,540
Inter-sector net sales....... 348 196 9 (553) --
------ ------- ------- ----- -------
Total net sales........... $5,539 $12,728 $13,733 $(553) $31,447
====== ======= ======= ===== =======
Depreciation and
amortization............... $ 481 $ 539 $ 950 $ -- $ 1,970
Interest expense............. 41 109 119 18 287
Income tax expense (benefit). 11 48 3 (18) 44
Net income (loss)(b)......... 53 234 15 (87) 215
Sector assets................ 2,063 5,749 6,328 886 15,026
Capital expenditures......... 122 464 778 19 1,383
</TABLE>
<TABLE>
<CAPTION>
Safety,
Electronics Thermal
& Mobile & Electrical Dynamics &
1996 Communication Architecture Propulsion Other(a) Total
---- ------------- ------------ ---------- -------- -----
(In millions)
<S> <C> <C> <C> <C> <C>
Net sales to GM and
affiliates.................... $4,540 $10,009 $11,199 $ -- $25,748
Net sales to other customers.... 490 2,733 2,061 -- 5,284
Inter-sector net sales.......... 285 200 33 (518) --
------ ------- ------- ----- -------
Total net sales.............. $5,315 $12,942 $13,293 $(518) $31,032
====== ======= ======= ===== =======
Depreciation and
amortization.................. $ 196 $ 325 $ 322 $ -- $ 843
Interest expense................ 47 102 115 12 276
Income tax expense (benefit).... 106 166 67 (80) 259
Net income (loss)(b)............ 349 548 222 (266) 853
Sector assets................... 2,615 5,687 6,396 692 15,390
Capital expenditures............ 195 418 548 16 1,177
</TABLE>
(a)Other includes activity not allocated to the product sectors and the
elimination of inter-sector transactions.
(b)Our operating results for the years ended December 31, 1998, 1997, and 1996
were impacted by a number of special items, including the competitiveness
studies, divestitures and plant closings (see Note 3), as well as work
stoppages at certain GM and Delphi locations (see Note 2). The net
unfavorable impact on net income for each product sector was as follows:
Safety,
Electronics & Thermal &
Year Ended Mobile Electrical Dynamics &
December 31, Communication Architecture Propulsion Total
------------ ------------- ------------ ---------- -----
(In millions)
1998 $ 86 $ 474 $ 353 $ 913
1997 239 271 442 952
1996 98 282 138 518
77
Information concerning principal geographic areas is set forth below. Net
sales data is for the year ended December 31 and net property data is as of
December 31.
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
Net Net Net Net Net Net
Sales Property Sales Property Sales Property
----- -------- ----- -------- ----- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
North America:
United States............ $19,457 $3,360 $21,925 $3,186 $22,139 $3,777
Canada................... 432 15 806 14 719 9
Mexico................... 3,235 268 3,448 263 2,714 264
------- ------ ------- ------ ------- ------
Total North America.... 23,124 3,643 26,179 3,463 25,572 4,050
Europe:
France.................. 803 262 645 267 713 284
Germany................. 1,449 159 1,365 181 1,502 211
Spain................... 488 133 575 131 637 145
United Kingdom.......... 341 13 324 7 349 47
Other................... 1,250 347 1,311 234 1,454 261
------- ------ ------- ------ ------- ------
Total Europe........... 4,331 914 4,220 820 4,655 948
South America:
Brazil.................. 444 112 598 91 399 91
Other................... 99 16 64 26 43 13
------- ------ ------- ------ ------- ------
Total South America.... 543 128 662 117 442 104
All Other................ 481 280 386 200 363 139
------- ------ ------- ------ ------- ------
Total.................. $28,479 $4,965 $31,447 $4,600 $31,032 $5,241
======= ====== ======= ====== ======= ======
</TABLE>
Historically, Delphi has relied on GM for a substantial portion of its
total revenues. Delphi expects that a significant portion of its future revenues
will continue to be generated by GM. Any substantial reduction in orders by GM
could have a materially adverse impact on Delphi's operating results.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of derivative financial instruments reflects the estimated
amounts which Delphi would receive or pay to terminate contracts which it
assumed under the Separation Agreement; such estimated amounts take into account
the current unrealized gains or losses on open contracts that are deferred and
recognized when the offsetting gains or losses are recognized on the related
hedged items. The fair value of foreign exchange forward contracts is estimated
based on foreign exchange rate quotes at the reporting date. At December 31,
1998 and 1997, the total estimated fair value of open contracts were generally
not significant to Delphi. No amounts were recorded for such contracts on
Delphi's consolidated balance sheets at these dates.
For certain international long-term debt, which was recorded at $346
million and $230 million, at December 31, 1998 and 1997, respectively, the
related fair value approximated $337 million and $232 million. For all other
financial instruments recorded at December 31, 1998 and 1997, fair value
approximates book value.
16. DERIVATIVES INSTRUMENTS
Delphi, through its relationship with GM, is a party to financial
instruments with off-balance sheet risk, which are used in the normal course of
business to manage exposure principally to foreign exchange rate fluctuations.
The primary class of such derivatives used are foreign exchange forward
contracts and purchased and written foreign exchange options, which involve
varying degrees of market risk, and elements of credit risk in the event of
counterparty default. Derivative transactions are entered into in order to hedge
underlying business exposures. The market risk in these instruments is offset by
opposite movements in the underlying exposure. Cash receipts and payments on
these contracts normally occur at maturity.
Delphi is an international corporation with operations in 36 countries, and
has foreign currency exposure related to buying and selling in currencies other
than the local currencies. Delphi's most significant foreign exposures relate to
Brazil, Mexico, Germany, France, Spain and South Korea. The magnitude of these
exposures varies over time, depending on the strength of local automotive
markets.
78
On Delphi's behalf, GM enters into agreements by which it seeks to manage
certain of its foreign exchange exposures in accordance with established policy
guidelines. These agreements primarily hedge cash flows such as debt, firm
commitments and anticipated transactions involving component materials and fixed
asset purchases. As a general practice, GM does not hedge the foreign exchange
exposure related to either the translation of overseas earnings into U.S.
dollars, or the translation of overseas equity positions back to U.S. dollars.
On Delphi's behalf, GM uses foreign exchange forward contracts as well as
purchased and written foreign exchange options to manage such foreign exchange
and transaction exposures. Foreign exchange forward contracts are legal
agreements between two parties to purchase or to sell a foreign currency for a
price specified at the contract date, with delivery and settlement in the
future.
At December 31, 1998 and 1997, GM held foreign exchange forward contracts
related to Delphi totaling $18 million and $31 million, respectively. The
foreign exchange options contracts related to Delphi were not significant at
December 31, 1998 and 1997. Forward contracts and options related to Delphi's
business at the time of the Separation were assumed by Delphi pursuant to the
Separation Agreement. Deferred hedging gains and losses on outstanding foreign
exchange forward and options contracts were not significant at December 31, 1998
and 1997. Such deferred amounts will be included in the cost of such underlying
assets when purchased, and subsequently recognized in operations as part of the
basis of these assets. In the event a contract is terminated early or the
anticipated transaction is no longer considered likely to occur, the derivative
is then marked to market. Foreign exchange forward contracts, which hedge
foreign exchange exposures of anticipated inventory or fixed asset transactions,
are marked to market and recognized with other gains or losses on foreign
exchange transactions in the consolidated statement of operations. Firm
commitments typically extend for periods of up to three years.
The foreign contracts or options previously discussed contain an element of
risk that counterparties may be unable to meet the terms of the agreements.
However, such risk is minimized by limiting the counterparties to major
international banks or financial institutions that meet established credit
guidelines, and by limiting the risk exposure to any one bank or financial
institution. GM generally does not require or place collateral for these
financial instruments. Management does not expect to incur any losses as a
result of counterparty default.
Delphi has business activities with customers and affiliates around the
world. Although Delphi does have large volumes of its receivables from a limited
number of vehicle manufacturer customers, particularly GM, such receivables are
managed under standard commercial terms. Consequently, in management's opinion,
any concentration of credit risk relating to these customers is appropriately
managed.
17. SUBSEQUENT EVENTS
On January 1, 1999, the assets and liabilities of the Delphi business
sector were transferred to Delphi Automotive Systems Corporation in accordance
with the Separation Agreement. In addition, Delphi and GM consummated several
other transactions, as described below. In February, Delphi issued 100
million shares in the IPO for $17.00 per share less underwriting discounts and
commissions of about $0.79 per share. After the IPO, General Motors owned
approximately 82.3% of the outstanding shares of Common Stock. The unaudited pro
forma condensed consolidated balance sheet data below has been prepared as if
the transactions described below and the IPO occurred on December 31, 1998. The
unaudited pro forma condensed consolidated statement of operations data has been
prepared as if the separation from GM and the IPO had taken place on January 1,
1998. The unaudited pro forma condensed consolidated balance sheet and statement
of operations data presented below purport to represent Delphi's financial
position and results of operations had the IPO and certain other transactions
occurred on the dates indicated. The unaudited pro forma condensed consolidated
balance sheet and statement of operations data do not, however, purport to
project Delphi's financial position or results of operations for any future
date. The unaudited pro forma adjustments are based upon available information
and certain assumptions that Delphi believes are reasonable. The unaudited pro
forma condensed consolidated balance sheet and statement of operations data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," appearing elsewhere in this
report.
79
<TABLE>
<CAPTION>
Unaudited Pro Forma Condensed Consolidated Statement of Income
For The Year Ended December 31, 1998
(in millions, except per share amounts)
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Net Sales .................................. $ 28,479 $ 28,479
Operating expenses:
Cost of sales, excluding items listed below 26,135 $ (248) (1) 25,887
Selling, general and administrative ....... 1,463 (15) (1)
152 (2) 1,600
Depreciation and amortization ............. 1,102 1,102
-------- ------ --------
Total operating expenses ................ 28,700 (111) 28,589
-------- ------ --------
Operating loss ............................. (221) 111 (110)
Interest expense ........................... (277) (277)
Other income, net .......................... 232 232
-------- ------ --------
Loss before income taxes ................... (266) 111 (155)
Income tax benefit ......................... (173) 42 (3) (131)
-------- ------ --------
Net loss ................................... $ (93) $ 69 $ (24)
======== ====== ========
Basic and diluted loss per share:
Historical-based on 465,000,000 shares
outstanding ............................... $ (0.20)
========
Pro forma-based on 565,000,000 shares
outstanding ............................... $ (0.04)
=======
</TABLE>
80
<TABLE>
<CAPTION>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of December 31, 1998
(in millions)
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and marketable securities $ 1,000 $ 1,621 (4)
(2,100) (5)
3,141 (6)
(1,600) (7) $ 2,062
Accounts receivable, net
General Motors and affiliates 2,236 2,100 (5)
(1,600) (6)
1,600 (7) 4,336
Other customers 977 977
Inventories, net 1,770 1,770
Deferred income taxes 285 285
Prepaid expenses and other assets 137 137
--------- -------- --------
Total current assets 6,405 3,162 9,567
Property, net 4,965 4,965
Deferred income taxes 2,813 2,813
Other assets 1,323 1,323
--------- -------- --------
Total assets $ 15,506 $ 3,162 $ 18,668
========= ======== ========
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and current portion of
long-term debt $ 363 $ 363
Accounts payable
General Motors and affiliates 89 89
Other suppliers 2,171 2,171
Accrued liabilities 1,438 1,438
--------- -------- --------
Total current liabilities 4,061 4,061
Long-term debt, including intracompany
note payable with General Motors 3,137 $ (3,141) (6)
3,141 (6) 3,137
Pension benefits 2,180 2,180
Postretirement benefits other than pensions 4,573 4,573
Other liabilities 1,546 1,546
--------- -------- --------
Total liabilities 15,497 - 15,497
--------- -------- --------
Equity:
Common Stock - 1 (4)
5 (8) 6
Additional paid in capital - 1,620 (4)
1,613 (8) 3,233
General Motors' net investment 77 1,541 (6)
(1,618) (8) -
Accumulated translation adjustments (68) - (68)
--------- -------- --------
Total equity 9 3,162 3,171
--------- -------- --------
Total liabilities and equity $ 15,506 $ 3,162 $ 18,668
========= ======== ==============
</TABLE>
81
The following pro forma adjustments were made to reflect the terms of the
Separation Agreement and the IPO:
(1)Delphi and General Motors have entered into agreements regarding
certain employee benefit obligations. The pro forma adjustment for
the year ended December 31, 1998 is summarized as follows (in
millions):
Pension related costs $ 210
Postretirement benefits other than pension (475)
Other employee benefits 2
-------
Total $ (263)
=======
Portion attributable to cost of sales $ (248)
=======
Portion attributable to selling, general
and administrative $ (15)
=======
(2)Reflects the estimated incremental selling, general and
administrative costs associated with operating Delphi as a
stand-alone publicly traded company. The pro forma adjustment for
the year ended December 31, 1998 is as follows (in millions):
Incremental insurance and risk management $ 36
Incremental corporate costs* 48
Taxes other than income 52
Other 16
-------
Total $ 152
=======
* Incremental corporate costs include additional personnel and
systems costs required to operate independently, and reflect
transitional service arrangements with General Motors at terms
provided in the Separation Agreement. Other costs include certain
sales tax expenses associated with the separation.
(3)Income taxes were determined in accordance with the provisions of
SFAS No.109, "Accounting for Income Taxes." Once Delphi is
no longer included in GM's consolidated income tax return, Delphi
will no longer benefit from GM's consolidated income tax
environment. As a result, Delphi expects effective income tax
rates in future periods generally to be higher than Delphi's
historical effective income tax rates. For purposes of this pro
forma presentation only, adjustments necessary to record the
income tax effect of the pro forma adjustments assume a combined
federal and state income tax rate of 38%.
(4)Reflects the net proceeds from the sale of 100,000,000 shares of
common stock in the IPO at a price of $17.00 per share. The IPO
proceeds are being used for general corporate purposes, including
working capital requirements that have been impacted by the change
in General Motors accounts receivable payment terms described note
(5) below.
(5)Reflects the change in payment terms for intracompany accounts
receivable from General Motors in accordance with the terms of the
Separation Agreement. Such payment terms, which generally called for
payment in the month following shipment by Delphi, were modified to
require payment by General Motors on the second day of the second
month following shipment by Delphi.
(6)Reflects the settlement of certain intracompany accounts receivable
from GM with the intracompany note payable to GM. On January 1,
1999, immediately prior to the transactions contemplated by the
Separation Agreement, certain intracompany accounts receivable from
GM, of about $1.6 billion, were settled with the $3.1 billion
outstanding intracompany note payable to GM with the difference
resulting in an increase in GM's net investment in Delphi. It is
expected that during the first half of 1999, Delphi will finance its
operations with third party funding of up to $3.1 billion.
(7)Reflects the required adjustment, subsequent to the settlement of
intracompany accounts receivable described in note (6) above, to
adjust cash and accounts receivable balances to levels that are
indicative of amounts associated with ongoing operations.
(8)Reflects the adjustment to equity to reclassify GM's net investment
as common stock and additional paid-in capital.
82
18. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, Total
--------- -------- --------- -------- -----
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
1998
Net sales......................................... $7,623 $7,041 $6,015 $7,800 $28,479
Cost of sales, excluding items listed below....... 6,789 6,280 6,151 6,915 26,135
Selling, general and administrative............... 300 367 345 451 1,463
Depreciation and amortization..................... 200 283 248 371 1,102
------ ------ ------ ------ -------
Operating income (loss)........................... 334 111 (729) 63 (221)
Interest expense.................................. (64) (67) (68) (78) (277)
Other income (expense), net....................... 79 55 (10) 108 232
------ ------ ------ ------ -------
Income (loss) before income taxes................. 349 99 (807) 93 (266)
Income tax expense (benefit)...................... 113 16 (307) 5 (173)
------ ------ ------ ------ -------
Net income (loss)................................. $ 236 $ 83 $ (500) $ 88 $ (93)
====== ====== ====== ====== =======
Basic and diluted earning (loss) per share $ 0.51 $ 0.18 $(1.08) $ 0.19 $ (0.20)
====== ====== ====== ====== =======
1997
Net sales......................................... $7,995 $8,190 $7,183 $8,079 $31,447
Cost of sales, excluding items listed below....... 6,957 7,061 6,489 7,203 27,710
Selling, general and administrative............... 334 345 332 404 1,415
Depreciation and amortization..................... 207 197 217 1,349 1,970
------ ------ ------ ------ -------
Operating income (loss)........................... 497 587 145 (877) 352
Interest expense.................................. (80) (57) (69) (81) (287)
Other income, net................................. 7 49 9 129 194
------ ------ ------ ------ -------
Income (loss) before income taxes................. 424 579 85 (829) 259
Income tax expense (benefit)...................... 137 206 9 (308) 44
------ ------ ------ ------ -------
Net income (loss)................................. $ 287 $ 373 $ 76 $ (521) $ 215
====== ====== ====== ====== ======
Basic and diluted earnings (loss) per share $ 0.62 $ 0.80 $ 0.16 $(1.12) $ 0.46
====== ====== ====== ====== =======
</TABLE>
The following is a summary of various factors that impacted our quarterly
operating results during the periods presented:
1998
o Work stoppages at GM and Delphi locations in the United States during
1998 reduced operating income by about $468 million, or $290 million
after-tax, and $435 million, or $270 million after-tax, during the
second and third quarters of 1998, respectively. The estimated full year
impact of work stoppages was $726 million, or $450 million after-tax,
after considering partial recovery of lost production in the fourth
quarter. See "Labor Force" in Note 2 for additional information.
o During the third quarter of 1998, Delphi recorded an operating loss of
$430 million, or $271 million after-tax, related to divestitures
involving its seating, lighting and coil spring businesses. See Note 3.
o Charges associated with a Competitiveness Study reduced operating income
by $310 million, or $192 million after-tax, during the fourth quarter of
1998. See Note 3.
1997
o During the first quarter of 1997, Delphi recorded an $80 million plant
closing charge, or $50 million after-tax, relating to a facility in
Trenton, New Jersey. See Note 3.
o Work stoppages at certain GM and Delphi locations during the second
quarter of 1997 had an unfavorable impact of $185 million, or $115
million after-tax. The full year impact of work stoppages was $148
million, or $92 million after-tax, after considering partial recovery of
lost production primarily in the third quarter of 1997. See "Labor
Force" in Note 2 for additional information.
o Other special items included gains aggregating $58 million and $39
million, or $36 million and $24 million after-tax, respectively, during
the second and fourth quarters of 1997, respectively. These gains
primarily related to the sale of certain businesses and investments, none
of which were material on an individual basis.
o During the fourth quarter of 1997, Delphi recorded a $1.4 billion
charge, or $870 million after-tax, relating to Competitiveness Studies.
See Note 3.
83
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEMS 10 THROUGH 13. MANAGEMENT
Directors, Executive Officers and Key Employees of Delphi
Set forth below is certain information concerning the executive officers
and key employees of our company. Our Board currently has 11 members. At our
first board meeting following the IPO, the original five members of the Board of
Directors elected six new directors. Each newly elected director had previously
been identified as a director nominee in the February 4, 1999 prospectus
relating to our stock offering. The newly elected board members were Oscar
De Paula Bernardes Neto, Virgis W. Colbert, Shoichiro Irimajiri (effective
April 1, 1999), Susan A. McLaughlin, John D. Opie and Roger S. Penske. The
new board members joined previously elected directors J.T. Battenberg III,
J. Michael Losh, Harry J. Pearce, John F. Smith, Jr. and Thomas H. Wyman.
Messrs. Losh, Pearce, and Smith are currently executive officers and/or
directors of General Motors, and Mr. Wyman was a director of General Motors
until October, 1998. We expect to add an additional independent Board member
in the several months following the IPO. The three directors who are currently
executive officers and/or directors of GM have advised us that they will resign
from our Board effective as of the completion of the Distribution. The ages
listed below are as of January 1, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
J.T. Battenberg III............... 55 Chairman of the Board, Chief Executive Officer and President
Alan S. Dawes..................... 44 Chief Financial Officer and Vice President
Volker J. Barth................... 51 Vice President
William A. Ebbert................. 56 Vice President
Guy C. Hachey..................... 43 Vice President
David R. Heilman.................. 54 Vice President
Rodney O'Neal..................... 45 Vice President
Ronald M. Pirtle.................. 44 Vice President
Donald L. Runkle.................. 53 Vice President
Paul J. Tosch..................... 58 Vice President
Hans J. Weiser.................... 60 Vice President
David B. Wohleen.................. 48 Vice President
John P. Arle...................... 51 Vice President, Mergers, Acquisitions and Planning
James A. Bertrand................. 41 Vice President, Operations
John G. Blahnik................... 44 Vice President and Treasurer
Ray C. Campbell................... 56 Vice President, Purchasing
Karen L. Healy.................... 44 Vice President, Corporate Affairs
Peter H. Janak.................... 59 Vice President and Chief Information Officer
Mark C. Lorenz.................... 48 Vice President, Production Control and Logistics
Logan G. Robinson................. 49 Vice President and General Counsel
Mark R. Weber..................... 50 Vice President, Human Resources Management
Thomas H. Wyman................... 69 Director (Lead Independent Director)
John F. Smith, Jr................. 60 Director
Harry J. Pearce................... 56 Director
J. Michael Losh................... 52 Director
Oscar De Paula Bernardes Neto..... 52 Director
Virgis W. Colbert................. 59 Director
Shoichiro Irimajiri............... 58 Director (effective April 1999)
Susan A. McLaughlin............... 46 Director
John D. Opie...................... 61 Director
Roger S. Penske................... 61 Director
</TABLE>
Our Board has been divided into three classes serving staggered terms. After
an initial transition period, directors in each class will be elected to serve
for three-year terms and until their successors are elected and qualified. Each
year, the directors of one class will stand for election as their terms of
office expire. Messrs. Battenberg, Colbert and Irimajiri and Ms. McLaughlin have
84
been designated as Class I directors, with their terms of office expiring in
2000; Messrs. Bernardes Neto, Opie and Penske have been designated as Class II
directors, with their terms of office expiring in 2001; and Messrs. Losh,
Pearce, Smith and Wyman have been designated as Class III directors, with their
terms of office expiring in 2002.
Our Board is permitted to appoint a non-employee director to serve as its
"lead independent director." The lead independent director serves as a liaison
between the Board and members of management and chairs the executive sessions of
the Board. Mr. Wyman will initially serve as the lead independent director.
Mr. Battenberg has led Delphi and its precursor, the Automotive Components
Group Worldwide ("ACG Worldwide"), since 1992. In July 1995, he was named
President of Delphi. He was named Chief Executive Officer of Delphi in August
1998 and Chairman of the Board of Delphi in November 1998. Mr. Battenberg also
serves as the Chairman of the Delphi Strategy Board. Mr. Battenberg held various
positions with General Motors beginning in 1961, including Superintendent of
Industrial Engineering, Comptroller, Production Manager and Plant Manager. In
1986, he was appointed Product Manager for the former Buick-Oldsmobile-Cadillac
Group's Flint Automotive Division. He later served as Vice President of the
division, and then Vice President and Group Executive for the
Buick-Oldsmobile-Cadillac Group. Mr. Battenberg was named Vice President and
Group Executive of ACG Worldwide in 1992. Two years later, he was elected a
Senior Vice President and President of ACG Worldwide. In July 1995, he was
elected Executive Vice President of GM and President of Delphi Automotive
Systems, formerly ACG Worldwide. Mr. Battenberg is on the Board of Trustees of
Kettering University, formerly known as General Motors Institute ("GMI"), and
the National Advisory Board for Chase Manhattan Corp. He is also a member of the
Council on Competitiveness.
Mr. Dawes was named Chief Financial Officer of Delphi in August 1998 and a
Delphi Automotive Systems Vice President in November 1998. Previously, Mr. Dawes
served as General Manager of Delphi Chassis Systems, formerly Delco Chassis
Systems, a position to which he was named in 1994. From 1992 to 1994, he was
Executive-in-Charge of Operations for ACG Worldwide. Mr. Dawes joined General
Motors in 1981, originally as a financial analyst with its Treasurer's Office,
and held a number of positions including Assistant Treasurer in 1988 and
Assistant Comptroller in 1991.
Mr. Barth was named a Delphi Automotive Systems Vice President in November
1998 and President of Delphi South America in November 1996. He had been
Executive Director of Worldwide Purchasing for Delphi since 1994. From 1993 to
1994, he was Executive Director of Worldwide Purchasing-Metallic. From 1992 to
1993, he was Director of Materials Management for GM do Brasil in Sao Paulo, and
from 1991 to 1992, he was Director of Purchasing for the same. Prior thereto, he
held several purchasing assignments for GM's Adam Opel subsidiary since joining
GM in 1963.
Mr. Ebbert was named a Delphi Automotive Systems Vice President in November
1998 and President of Delphi Asia Pacific in July 1993. He had been Chairman and
Managing Director of Vauxhall Motors Limited, UK, since 1988. Previously, Mr.
Ebbert had been Group Director of Business Operations for Delphi Automotive
Systems. Prior thereto, he held a number of senior assignments with Delphi
Saginaw Steering Systems' central office. He joined GM in 1965.
Mr. Hachey was named a Delphi Automotive Systems Vice President and President
of Delphi Chassis Systems in November 1998. He had been General Manager of
Delphi Chassis Systems since August 1998. Previously, Mr. Hachey had been
Manufacturing Manager, Worldwide Operations, for the former Delphi Interior &
Lighting Systems since 1995. From 1994 to 1995, he was Director of Manufacturing
Operations for Delphi Automotive Systems and, from 1992 to 1994, he was Director
of Manufacturing Operations for the heating, ventilation and air
conditioning/heat exchangers business unit of what is now Delphi Harrison
Thermal Systems. Prior thereto, Mr. Hachey held several manufacturing positions
with GM since 1978.
Mr. Heilman was named a Delphi Automotive Systems Vice President and
President of Delphi Packard Electric Systems in November 1998. He had been
General Manager of Delphi Packard Electric Systems since October 1994. From 1993
to 1994, Mr. Heilman served as Director of Delphi Packard Electric Systems'
North American Business Unit and from 1991 to 1993, he was Director of Packard
International. Prior thereto, Mr. Heilman served in numerous engineering,
manufacturing and product-related positions since joining Delphi Packard
Electric Systems in 1964.
Mr. O'Neal was named a Delphi Automotive Systems Vice President and President
of Delphi Interior Systems in November 1998. He had been General Manager of the
former Delphi Interior & Lighting Systems since May 1997. Previously, Mr. O'Neal
had been General Director of Warehousing and Distribution for GM-SPO since 1994.
From late 1992 to 1994, Mr. O'Neal served as Director of Manufacturing for ACG
Worldwide. From 1991 to late 1992, Mr. O'Neal was first Director of Industrial
Engineering for Chevrolet-Pontiac-GM of Canada ("C-P-C") and later was named
Director of Manufacturing Engineering with GM. Prior thereto, Mr. O'Neal held
numerous engineering and manufacturing positions with GM since 1971.
85
Mr. Pirtle was named a Delphi Automotive Systems Vice President and
President of Delphi Harrison Thermal Systems in November 1998. He had been
General Manager of Delphi Harrison Thermal Systems since November 1996.
Previously, Mr. Pirtle had been Director of North American Operations at Delphi
Packard Electric Systems since 1994. From 1992 to 1994, Mr. Pirtle was Finance
Director for AC Delco Systems and, from 1990 to 1992, he was Executive-in-Charge
of GM's Corporate Strategic Planning Group. Prior thereto, Mr. Pirtle held
various engineering and financial and planning positions with GM since 1972. Mr.
Pirtle is a Board member of the Alumni Association of Kettering University,
formerly GMI, and a Board member of the University of Pittsburgh School of
Engineering.
Mr. Runkle was named a Delphi Automotive Systems Vice President and
President of Delphi Energy and Engine Management Systems in November 1998. He
had been General Manager of Delphi Energy & Engine Management Systems since May
1996. Previously, Mr. Runkle had been General Manager of Delphi Saginaw Steering
Systems since August 1993. From 1992 to 1993, Mr. Runkle was in charge of GM's
North American Advanced Engineering Center and, from 1988 to 1992, he was in
charge of GM's former Advanced Engineering Staff. Prior thereto, Mr. Runkle
served in a series of engineering positions with GM since 1968.
Mr. Tosch was named a Delphi Automotive Systems Vice President and
President of Delphi Saginaw Steering Systems in November 1998. He had been
General Manager of Delphi Saginaw Steering Systems since May 1997. Previously,
Mr. Tosch had been General Manager of the former Delphi Interior & Lighting
Systems since October 1994. From 1991 to 1994, Mr. Tosch was General Manager of
Delphi Harrison Thermal Systems. From 1987 to 1991, he was Managing Director of
Vauxhall Motors Limited. Prior thereto, Mr. Tosch held various engineering and
managerial positions with GM since 1963.
Mr. Weiser was named a Delphi Automotive Systems Vice President in November
1998 and has been President of Delphi Automotive Systems Europe, formerly ACG
Europe, since 1993. He became Managing Director of Packard Electric Europa in
Wuppertal, Germany, in 1990 and was appointed Chairman of the Supervisory Board
of all Corporate Subsidiaries of Packard Electric Europa, a position he held
until his current assignment. Mr. Weiser was appointed Chairman of the Executive
Board of Kabelwerke Reinshagen GmbH in 1986. Mr. Weiser had been with Kabelwerke
Reinshagen GmbH since 1974, which was acquired by Delphi Packard Electric in
1981.
Mr. Wohleen was named a Delphi Automotive Systems Vice President and
President of Delphi Delco Electronics in November 1998. He had been General
Manager of Delphi Delco Electronics since August 1998. Prior to his current
position, he had been a General Director of Engineering with Delco Electronics,
which is now Delphi Delco Electronics, since February 1997. In 1994, Mr. Wohleen
was named Director of Electrical, Interior and HVAC for GM's Midsize Car
Division in Warren, Michigan, and in 1995, he assumed additional responsibility
for general assembly, tools and process and powertrain coordination for GM's
MidLux Car Division in Warren. Prior thereto, Mr. Wohleen held a series of
engineering and manufacturing positions with GM since 1978.
Mr. Arle was named Vice President of Mergers, Acquisitions and Planning for
Delphi Automotive Systems in November 1998. He had been Executive Director of
Planning for Delphi since February 1998. Previously, he was Vice President and
Chief Financial Officer for Saab Automobile AB since 1993. From 1992 to 1993, he
was Vice President and Finance Manager for GM of Canada, Ltd. From 1988 to 1992,
he was General Manager and Comptroller for the GM/Toyota NUMMI joint venture.
Prior thereto, he held several finance and human resources positions at GM since
1975.
Mr. Bertrand was named Vice President of Operations for Delphi Automotive
Systems in November 1998. He had been Executive Director of Operations for
Delphi since June 1997. Previously, he was Executive Director of Development for
small cars at GM's International Operations since 1995. From 1992 until 1995, he
was Comptroller at Adam Opel AG in Russelsheim, Germany. From 1989 to 1992, he
was Director of Financial Analysis and Planning for GM Europe. Prior thereto, he
held finance, business and engineering positions for GM since 1979.
Mr. Blahnik was named Treasurer of Delphi Automotive Systems in August 1998
and a Delphi Vice President in November 1998. He had been Executive Director of
Finance for Delphi since June 1996. Previously, he was Senior Vice President and
Chief Financial Officer at Delco Electronics since 1995. From 1994 to 1995, he
was Director of Finance for GM's Lansing Automotive Division. From 1991 to 1994,
he was Executive Director for GM's Latin American Operations and President of
Banco General Motors, and from 1988 until 1991, he was a Comptroller of GM do
Brasil. Prior thereto, he held several finance positions at GM since 1978.
86
Mr. Campbell was named Vice President of Purchasing for Delphi Automotive
Systems in November 1998. He had been Executive Director of Worldwide Purchasing
for Delphi since November 1996. Previously, he was Executive Director of
Worldwide Purchasing, Quality/Supplier Development, at GM's North American
Operations since 1995. From 1994 to 1995, he was Executive Director of Worldwide
Purchasing, Strategic and Metallic Activities. Prior thereto, he held a variety
of managerial and purchasing positions at GM since 1964.
Ms. Healy was named Vice President of Corporate Affairs for Delphi Automotive
Systems in November 1998. She had been Executive Director of Communications for
Delphi since June 1997. Previously, she was Manufacturing Manager for Delphi's
Flint East Operations, Plants 6 and 7, since July 1996. From June 1995 to July
1996, she was Director of Corporate Communications at GM's central office. From
January 1995 to June 1995, she was Director of Communications for Delphi. Prior
thereto, Ms. Healy held several personnel, labor relations and communications
positions at GM since 1976. She serves on the Board of Trustees for the Music
Hall Center for the Performing Arts in Detroit and the Executive Board for the
Troy Chamber of Commerce.
Mr. Janak was named Chief Information Officer for Delphi Automotive Systems
in April 1998 and a Delphi Vice President in November 1998. He had been a Vice
President and Chief Information Officer at TRW Inc., since February 1995.
Previously, he was Vice President and General Manager of TRW's Information
Services Division. Prior thereto, he worked in propulsion engineering for NASA's
Apollo program and worked for Chrysler Corporation, Teledyne Brown Engineering,
Planning Research Corporation and the German firm, Technologieforshung.
Mr. Lorenz was named Vice President of Production Control and Logistics for
Delphi Automotive Systems in November 1998. He had been Director of Production
Control and Logistics for Delphi since March 1996. Previously, he had been
Director of Materials Management for GM's North American Operations Prototype
Shops since June 1993. From 1991 to 1993, he was Director of Materials
Management, Experimental Manufacturing. From 1990 to 1991, he was Manager of
Synchronous Organization, and from 1989 to 1990, he was Advisor, C-P-C
production systems. Prior thereto, he held various manufacturing and materials
management positions at GM since 1973.
Mr. Robinson was named General Counsel and a Delphi Automotive Systems Vice
President in December 1998. Previously, he was Of Counsel to the Corporate,
Securities and Business Law group at Dickinson Wright PLLC, a Michigan law firm
headquartered in Detroit, since April 1998. From February 1996 to April 1998, he
was Senior Vice President, Secretary and General Counsel for ITT Automotive,
Inc. From April 1987 to February 1996, he was a lawyer for Chrysler Corporation
serving, among other positions, as Vice President and General Counsel for
Chrysler International Corporation, a subsidiary of Chrysler Corporation, and
Geschaftsfuhrer, or Managing Director, of Chrysler Austria GmbH. Prior thereto,
he held positions at TRW, Inc. in Cleveland, Ohio, and at Coudert Brothers and
Wender, Murase & White in New York City.
Mr. Weber was named Vice President of Human Resources Management for Delphi
Automotive Systems in November 1998. He had been Executive Director of Human
Resources Management for Delphi since January 1995. Previously, he was General
Director of Personnel and Public Affairs at the former Inland Fisher Guide since
1993. From 1991 to 1993, he was General Director of Personnel for the same. From
1988 to 1991, he was Director of Industrial Relations at C-P-C, and from 1986 to
1988, he served as Director of Human Resources for Salaried Personnel at C-P-C.
From 1985 to 1986, he was Director of General Offices Personnel at C-P-C. Prior
thereto, he held a number of human resource and personnel positions at GM since
1966.
87
Mr. Wyman was named Lead Independent Director for Delphi Automotive Systems
in October 1998. Mr. Wyman had served on the Board of Directors of General
Motors from 1985 until October 1998. Mr. Wyman was formerly Chairman, President
and Chief Executive Officer of CBS, Inc., New York. Mr. Wyman was Senior Advisor
of SBC Warburg Inc. from 1996 to 1997 and Chairman of S.G. Warburg & Co. Inc.
from 1992 to 1996. Mr. Wyman is also a Director of AT&T Corporation and of AGCO
Corporation. Mr. Wyman is a member of the Advisory Board of Nestle USA, Inc.,
the International Advisory Group of Toshiba Corporation (Tokyo) and The Business
Council. Mr. Wyman is Trustee Emeritus of The Ford Foundation and The Aspen
Institute and Chairman Emeritus of Amherst College.
Mr. Smith has been associated with General Motors since 1961 and was named
a Director of Delphi Automotive Systems in October 1998. On January 1, 1996, Mr.
Smith became Chairman of the Board of Directors of GM and in October 1998, Mr.
Smith's title was changed from Chief Executive Officer and President to Chief
Executive Officer of GM. Effective November 1992, Mr. Smith was elected as GM's
Chief Executive Officer and President. Effective August 1990, Mr. Smith was
elected Vice Chairman of the Board of Directors of GM and, on April 6, 1992, he
was elected President and Chief Operating Officer of GM. Mr. Smith was elected
Executive Vice President in charge of International Operations for GM in 1988.
He is also a Director of Hughes Electronics and The Procter & Gamble Company.
Mr. Smith is Co-Chairman of The Business Roundtable and a member of The Business
Council, the U.S.-Japan Business Council, Catalyst and The Chancellor's
Executive Committee of the University of Massachusetts. Mr. Smith is a member of
the Board of Trustees, Boston University; the Board of Overseers of Memorial
Sloan-Kettering Cancer Center; the Board of Governors of The Nature Conservancy;
and the Board of Polish-American Enterprise Fund.
Mr. Pearce has been associated with General Motors since 1985 and was named
a Director of Delphi Automotive Systems in October 1998. Effective January 1,
1996, Mr. Pearce was elected a Director and became Vice Chairman of the Board of
Directors of GM. In July 1994, Mr. Pearce assumed responsibility for GM's
Strategic Decision Center, Corporate Communications, Allison Transmission
Division, Electro-Motive Division, Urban and Community Affairs, Executive
Compensation and Corporate Governance and the Corporate Services Staff.
Effective November 1992, he was elected Executive Vice President of GM. In May
1987, Mr. Pearce was elected Vice President and General Counsel of General
Motors, a position he retained through August 1, 1994. Mr. Pearce is also a
Director of Hughes Electronics, Marriott International, Inc. and MDU Resources
Group, Inc. Mr. Pearce is a member of The Conference Board, Northwestern
University School of Law Dean's Advisory Council and the Board of Visitors of
the United States Air Force Academy. Mr. Pearce is also a Trustee of Howard
University.
Mr. Losh has been associated with General Motors since 1964 and was named a
Director of Delphi Automotive Systems in October 1998. In July 1994, Mr. Losh
was elected Executive Vice President and Chief Financial Officer of GM.
Effective May 1992, Mr. Losh was elected Group Executive in charge of North
American Vehicle Sales, Service and Marketing of GM. He was named General
Manager of GM's Oldsmobile Division in June 1989. In July 1984, Mr. Losh was
elected Vice President of General Motors and General Manager of its Pontiac
Division.
Mr. Bernardes Neto was elected Chief Executive Officer in 1996 of Bunge
International, a Bermuda holding company headquartered in Sao Paulo, Brazil,
which controls a number of food, agribusiness and fertilizer companies around
the world. Before joining Bunge, he was a Senior Partner with Booz-Allen &
Hamilton where he specialized in strategy and organization consulting to
industry in Latin America. His 15 years of consulting experience include several
projects related to the automotive industry in South America. Mr. Bernardes is a
Director for RBS and Alcoa in Brazil. He is also a member of the Advisory Board
for Booz-Allen & Hamilton.
Mr. Colbert was appointed an Executive Vice President of Miller Brewing
Company in July 1997. He is responsible for all plant operations, brewing,
research, quality assurance, engineering, purchasing, corporate operations
planning and improvement and information systems. He had been a Senior Vice
President, Worldwide Operations since 1995. In 1993, he was elected to the
Miller Board of Directors and Executive Committee. Also in 1993, he was named
Senior Vice President in charge of operations, a position he held until 1995.
From 1990 to 1993, he was Vice President of plant operations, and from 1989 to
1990 he was Vice President of materials manufacturing. Prior thereto he held
several manufacturing and production positions at Miller since joining the
company in 1979. Mr. Colbert is a Director for Aeroquip-Vickers, Inc., Milwaukee
County Council, Boy Scouts of America, Columbia Health Systems and Greater
Milwaukee Open. He is Chairman of the Board of the Thurgood Marshall Scholarship
Fund and he is a member of the Board of Trustees of Fisk University, Nashville,
Tennessee. Mr. Colbert also serves on the Board of Regents of the Milwaukee
School of Engineering, is a member of the Executive Advisory Committee for the
National Urban League's Black Executive Exchange Program, and serves on the
Opportunities Industrialization Centers of America's National Industrial
Council.
Mr. Irimajiri was elected President and Representative Director of Sega
Enterprises, Ltd. in February 1998. He had been responsible for the CS Business
Group, Quality Assurance Division and Intellectual Property Rights Department
since August 1997. Previously, he was Co-Chairman of Sega America, Inc., since
July 1996. From April 1996 to July 1996, he was responsible for CS Research &
Development Group, Overseas Consumer Business Group, Quality Assurance Division,
Multimedia Office and Intellectual Property Department. Prior thereto, he held
various positions at Sega since 1993. Before joining Sega, Mr. Irimajiri had
been an Executive Vice President at Honda Motor Co. Ltd. since June 1990. He was
responsible for directing Honda's development and production activities. He had
been associated with Honda since 1963.
88
Ms. McLaughlin is President, Consumer Services for BellSouth
Telecommunications, Inc., a position she has held since March 1998. From 1987 to
1998, Ms. McLaughlin held numerous financial and marketing management positions
at Eastman Kodak in Rochester, N.Y. Her most recent position was Vice President
and Chief Operating Officer of Kodak Professional, where she managed that
division's worldwide operations, including sales and marketing. Before joining
Kodak, Ms. McLaughlin spent 13 years in corporate banking with Citibank and
Chase. Ms. McLaughlin serves on the Board of Directors of Dayton Hudson
Corporation.
Mr. Opie was elected Vice Chairman of the Board and an Executive Officer
for General Electric Company in 1995. He had been President and Chief Executive
Officer of GE Lighting and a GE Senior Vice President since 1986. Previously, he
had been Vice President of GE's distribution equipment business since 1983. From
1982 to 1983 he was President of the Specialty Plastics Division. From 1980 to
1982 he was Vice President of the Lexan Products Division of GE Plastics, and
from 1977 to 1980 he was General Manager of the division. In 1975, Mr. Opie
became General Manager of the battery business, a position he held until moving
to GE Plastics. He has been associated with General Electric since 1961.
Mr. Penske is the founder and Chairman of Penske Corporation, which was
established in 1969 and is comprised of three business groups: Transportation
Services, Automotive and Performance. In the Transportation Services Group, Mr.
Penske serves as the Chairman and Chief Executive Officer of Detroit Diesel
Corporation. He is Chairman of the Board of Penske Truck Leasing Corporation and
Penske Motorsports, Inc. and a Director of General Electric Company and
Gulfstream Aerospace Corporation. He is Chairman of the Detroit Investment Fund,
which was created by Detroit Renaissance, of which he is also a Director. Mr.
Penske is also a member of the Robert Bosch International AG Advisory Board and
a Trustee of the Henry Ford Museum & Greenfield Village and a member of the
Business Council.
Committees of the Board of Directors
We have four standing committees: an executive committee (the "Executive
Committee"), an audit committee (the "Audit Committee"), an executive
development and compensation committee (the "Compensation Committee") and a
corporate governance and public issues committee (the "Corporate Committee").
Messrs. Battenberg, Losh, Pearce, Smith and Wyman were appointed as the members
of the Executive Committee. Messrs. Bernardes Neto, Opie and Wyman were
appointed as the members of the Audit Committee. Messrs. Pearce, Smith and Wyman
were appointed as the members of the Compensation Committee. Messrs. Penske and
(effective April 1, 1999) Irimajiri were appointed as the members of the
Corporate Committee. We expect that membership on some of these committees will
be modified and that we will complete the appointment of other members,
including newly elected directors to some of these committees. We expect that,
so long as GM owns a majority of our outstanding common stock, the majority of
the members of the Executive Committee and the Compensation Committee will be
directors who are also directors and/or officers of GM.
The Executive Committee is authorized to exercise, between meetings of our
Board, all of the powers and authority of the Board in the direction and
management of Delphi, except as prohibited by applicable law or our Restated
Certificate of Incorporation and except to the extent another committee shall
have been accorded authority over the matter. The Audit Committee will select
the independent public accountants to audit our annual financial statements and
will establish the scope and oversee the annual audit. The Corporate Committee
is responsible for matters relating to service on our Board, including the size
of our Board and the recommendation of nominees for our Board, and for matters
related to corporate governance and the company's business activities as they
relate to matters of public policy. The Compensation Committee will determine
the compensation for employee directors and, after receiving and considering the
recommendation of our Chief Executive Officer and the President, all officers of
the company and any other employee that the Compensation Committee may designate
from time to time and will approve and administer employee benefit plans. Our
Board may establish other committees from time to time to facilitate the
management of the business and affairs of our company.
Compensation of Directors
Directors who are also employees of GM or Delphi receive no remuneration
for serving as directors or committee members. Non-employee directors receive
compensation consisting of a cash retainer and common stock units. Non-employee
directors other than the lead independent director receive total compensation of
$110,000 per year, equally divided between the two components, and the lead
independent director receives total compensation of $300,000 per year, $100,000
of which is cash and $200,000 of which is common stock units. Non-employee
directors other than the lead independent director receive an additional fee of
$5,000 per year for serving as chairperson of a board committee.
89
The stock portion of each non-employee director's annual compensation will
automatically be deferred in units until such person no longer serves on our
Board. Under Delphi's Deferred Compensation Plan for Non-Employee Directors,
non-employee directors, at their option, may convert the cash portion of their
compensation into common stock units. Dividend equivalents on any common stock
units will accrue quarterly and be converted into additional common stock units.
Directors will receive the cash value of all of their accumulated common stock
units following their departure from the Board.
Stock Ownership of Directors and Executive Officers and Certain Beneficial
Owners
To the extent directors and officers of Delphi own shares of GM $1-2/3
common stock at the time of the Distribution, they will participate in the
Distribution on the same terms as other holders of GM $1-2/3 common stock. In
connection with the IPO, certain executives, including the executive officers
named in the Summary Compensation Table in the "--Executive Compensation"
section below, were awarded options to purchase shares of Delphi common stock
and were awarded restricted stock units. See "--Incentive Plans--Founders
Grants." In addition, certain awards of GM $1-2/3 common stock, including the
stock options and awards reflected in the tables set forth in the "--Grants of
Stock Options," "--Exercises of Stock Options" and "--Long Term Incentive Plan
Awards" sections below, will be replaced with comparable awards under Delphi's
incentive plans in connection with the completion of the Distribution. See
"--Incentive Plans--Substitute Awards."
The following table sets forth the number of shares of Delphi Common Stock
and GM $1-2/3 common stock beneficially owned on February 28, 1999 by GM and by
each director, each director nominee, each of the executive officers named in
the Summary Compensation Table in the "--Executive Compensation" section below,
and all directors, director nominees and executive officers of Delphi as a
group. Except as otherwise noted, the individual director or executive officer
or their family members had sole voting and investment power with respect to
such securities.
<TABLE>
<CAPTION>
Delphi
Common
Stock GM $1-2/3 Common Stock
----------- --------------------------------------------------
Shares Shares
Beneficially Beneficially Deferred Total Stock
Name Owned(2) Owned(2) Stock Units(3) Shares Options(4)
--------------------------------- ------------ ------------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C>
General Motors Corporation (1)... 465,000,000 0 0 0 0
J.T. Battenberg III.............. 100,000 4,157 15,493 19,650 128,401
Alan S. Dawes.................... 30,000 8,383 2,337 10,720 66,209
David R. Heilman................. 6,000 11,490 2,392 13,882 11,739
Donald L. Runkle................. 10,000 10,812 2,657 13,469 16,909
Paul J. Tosch(5)................. 6,000 4,072 3,072 7,144 11,394
Thomas H. Wyman.................. 1,000 3,084 9,930(6) 13,014 0
John F. Smith, Jr................ 1,000 171,465 53,694 225,159 804,495
Harry J. Pearce.................. 0 40,357 24,663 64,990 308,211
J. Michael Losh.................. 0 29,117 14,386 43,503 239,342
Oscar De Paula Bernardes Neto.... 0 0 0 0 0
Virgis W. Colbert................ 0 0 0 0 0
Shoichiro Irimajiri.............. 0 0 0 0 0
Susan A. McLaughlin.............. 0 0 0 0 0
John D. Opie..................... 10,000 0 0 0 0
Roger S. Penske.................. 0 0 0 0 0
All directors, director nominees
and executive officers of Delphi
as a group (33 persons)......... 268,400 332,375 137,976 470,351 1,749,837
</TABLE>
(1)General Motors Corporation's Global Headquarters mailing address is 100
Renaissance Center, P.O. Box 100, Detroit, MI 48265-1000. General Motors
Corporation currently owns about 82.3% of our outstanding common stock.
(2)No individual director, director nominee or executive officer beneficially
owns 1% or more of the Delphi Common Stock or GM $1-2/3 common stock, nor do
the directors, director nominees and executive officers as a group.
(3)Deferred Stock Units for all persons other than Mr. Wyman include shares
under the General Motors Benefit Equalization Plan-Savings (the "GM BEP-S").
This plan is a non-qualified "excess benefit" plan that is exempt from ERISA
and the Code limitations and provides GM executives with full GM matching
contributions without regard to limitations imposed by the Code. The amounts
credited under the plan are maintained in share units of GM $1-2/3 common
stock. Following termination of employment an employee may, at any time,
elect to receive a complete distribution of amounts in the GM BEP-S account,
which will be paid in cash. Delphi has adopted its BEP-S in connection with
its separation from GM and the amounts in the GM BEP-S will be transferred to
Delphi's BEP-S. Deferred Stock Units also includes undelivered GM incentive
awards which will vest upon the occurrence of certain events and which are
subject to forfeiture under certain circumstances.
90
(4)Includes the number of shares of GM $1-2/3 common stock that may be acquired
through the exercise of stock options exercisable within 60 days of February
28, 1999. The shares reported in this column reflect the adjustments to the
original option grants to reflect the effect of the recapitalization of GM in
connection with transactions completed by General Motors in connection with
the 1997 spin-off of the defense electronics business of its Hughes
Electronics subsidiary and the related transfer of Delco Electronics to us
from Hughes Electronics.
(5)Data for Mr. Tosch include 2,009 shares owned by, and 3,285 shares acquirable
pursuant to options held by, his spouse.
(6)Includes amounts under the General Motors Deferred Compensation Plan for
Non-Employee Directors and the General Motors Director's Long-Term Stock
Incentive Plan. These amounts relate to compensation deferred while Mr. Wyman
was a member of the Board of Directors of GM.
Executive Compensation
The following table sets forth certain compensation information for the chief
executive officer and the four other executive officers of Delphi who, based on
salary and bonus compensation from General Motors and its subsidiaries, were the
most highly compensated officers of Delphi for the year ended December 31, 1998.
All information set forth in this table reflects compensation earned by such
individuals for services with General Motors and its subsidiaries.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------
Awards Payouts
---------- -------------
Annual Compensation
---------------------------------------------- Securities
Other Annual Underlying Long-Term All Other
Name and Principal Salary Bonus Compensation Options Incentive Compensation
Position Year ($) ($)(1) ($) (#)(2) Payouts($)(3) ($)(4)
-------------------------- ------ --------- --------- ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
J.T. Battenberg III........ 1998 1,000,000 450,000 50,624 100,000 750,000 49,215
Chairman, Chief Executive 1997 887,000 1,020,000 53,448 108,495 475,000 38,112
Officer and President
Donald L. Runkle........... 1998 458,000 235,000 n/a 16,000 198,000 19,250
Vice President 1997 391,000 325,000 n/a 17,359 111,000 14,085
David R. Heilman........... 1998 369,000 211,000 n/a 16,000 198,000 15,488
Vice President 1997 350,000 295,000 n/a 17,359 111,000 12,600
Paul J. Tosch.............. 1998 395,000 202,000 n/a 14,000 198,000 16,590
Vice President 1997 372,000 262,000 n/a 15,189 111,000 13,380
Alan S. Dawes.............. 1998 398,000 210,000 n/a 14,000 198,000 16,730
Chief Financial Officer 1997 360,000 262,000 n/a 15,189 111,000 12,960
and Vice President
- ----------
</TABLE>
(1)These awards are based on performance for 1997 and 1998. General Motors
management recommended and the Executive Compensation Committee concurred
that 1998 annual awards for GM Named Executive Officers, which included Mr.
Battenberg, would be reduced to reflect the year-to-year decline in reported
earnings. The other GM Named Executive Officers are Messrs. Smith, Pearce,
Wagoner and Hughes.
(2)1997 options are adjusted to reflect the effect of the recapitalization of GM
in connection with transactions completed by General Motors in connection
with the 1997 spin-off of the defense electronics business of its Hughes
Electronics subsidiary and the related transfer of Delco Electronics to us
from Hughes Electronics.
(3)Reflects long-term incentive payouts in the form of GM $1-2/3 common stock
and GM Class H common stock under the General Motors 1992 Performance
Achievement Plan. The performance period for such awards was 1995 through
1997 and 1996 through 1998. The awards to Mr. Battenberg vest in four equal
installments. The first installment vests on the date the final award is
determined, the second installment vests at the end of the year in which the
final award was determined, the third installment vests one year after the
second installment vests. The fourth installment of the 1996-1998 grant vests
one year after the third installment and the fourth installment of the
91
1995-1997 grant vests subsequent to retirement. The awards to the other named
executive officers vest in one or two equal annual installments, depending on
the value of the award payout. Dividend equivalents are paid on unvested
shares. The following table sets forth the number of GM shares of such award
that were vested and paid to the executive officers and the number of shares
that remained unvested and unpaid:
<TABLE>
<CAPTION>
First and Second Installment of
1995-97 Grant and Third
1996-98 Grant Installment of 1994-96 Grant
----------------------------------- -------------------------------
Shares Value of Shares
Shares Vested Shares Vested Unvested
Vested as of as of as of
January Shares December 31, December 31, December 31,
1999(#) Unvested(#) 1998(#) 1998($)* 1998(#)
-------------- ----------------- -------------- --------------- --------------
$1 2/3 Cl.H $1 2/3 Cl.H $1 2/3 Cl.H $1 2/3 Cl.H $1 2/3 Cl.H
------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
J.T. Battenberg III..... 2,037 946 6,111 2,836 6,487 2,718 464,210 107,877 6,487 2,717
D.L. Runkle............. 915 0 1,774 0 3,293 0 235,647 0 0 0
D.R. Heilman............ 915 0 1,774 0 1,858 0 132,958 0 0 0
P.J. Tosch.............. 915 0 1,774 0 3,178 0 227,418 0 0 0
A.S. Dawes.............. 915 0 1,774 0 3,178 0 227,418 0 0 0
- ----------
</TABLE>
* Based on the $71.56 closing price of GM $1-2/3 common stock and the
$39.69 closing price of GM Class H common stock on the NYSE on December 31,
1998.
(4)Reflects contributions by General Motors on behalf of each executive officer
under various savings plans. The amount for Mr. Battenberg also includes
imputed income of $7,215 for 1998 and $6,162 for 1997 for endorsement
split-dollar life insurance. In the event of Mr. Battenberg's death, General
Motors would be reimbursed for its premiums paid on such life insurance
policy.
Delphi has established executive compensation practices that will link
compensation with the performance of Delphi as well as Delphi's Common Stock. On
average, a greater portion of the executive's long-term incentive pay will be
linked to the performance of Delphi's Common Stock through the grant of stock
options. Delphi will continually review its executive compensation programs to
ensure they are competitive with those generally prevailing in its industry.
Grants of Stock Options
No stock options or stock appreciation rights were granted by Delphi during
the year ended December 31, 1998. The following table shows all grants of
options to acquire shares of GM $1-2/3 common stock granted to the executive
officers named in the Summary Compensation Table in the "--Executive
Compensation" section above under the General Motors 1997 Stock Incentive Plan
in the year ended December 31, 1998. Unless exercised prior thereto, the options
to purchase GM $1-2/3 common stock reflected below will be replaced with options
to purchase Delphi common stock in connection with the completion of the
Distribution. See "--Incentive Plans--Substitute Awards."
<TABLE>
<CAPTION>
Number of % of Total
Securities Options
Underlying Granted to Exercise or Grant Date
Options Employees in Base Price Present
Name Granted(#)(1) Fiscal Year ($/Sh.) Expiration Date Value($)(2)
-------------------------- ------------- ------------ -------- --------------- -----------
<S> <C> <C> <C> <C> <C>
J.T. Battenberg III....... 100,000 0.71 56.00 1/13/08 1,232,000
Donald L. Runkle.......... 16,000 0.11 56.00 1/13/08 197,000
David R. Heilman.......... 16,000 0.11 56.00 1/13/08 197,000
Paul J. Tosch............. 14,000 0.10 56.00 1/13/08 172,000
Alan S. Dawes............. 14,000 0.10 56.00 1/13/08 172,000
- ----------
</TABLE>
(1)These options were granted on January 12, 1998 and consist of a combination
of non-qualified and incentive stock options. These options become
exercisable to the extent of one-third of the grant on January 12, 1999,
January 12, 2000 and January 12, 2001, respectively. The incentive stock
options expire ten years from the date of grant and the non-qualified options
expire two days later.
(2)These values were determined based on the Black-Scholes option pricing model.
The following assumptions were made for purposes of calculating the Grant
Date Present Value: that the option is exercised in the fifth year after its
grant, expected price volatility of 25%, an interest rate of 5.58%, a
dividend yield of 3.57% and no adjustments were made for
92
non-transferability. Our use of this model does not necessarily mean that we
believe that this model accurately determines the value of options. The
ultimate value of the options in this table depends upon each holder's
individual investment decisions and the actual performance of GM $1-2/3
common stock and, following the Distribution, Delphi's Common Stock.
Exercises of Stock Options
No stock options or stock appreciation rights were exercised with respect
to Delphi Common Stock during the year ended December 31, 1998. The following
table shows aggregate exercises of options to purchase GM $1-2/3 common stock in
the year ended December 31, 1998 by the executive officers named in the Summary
Compensation Table in the "--Executive Compensation" section above. Unless
exercised prior thereto, the unexercised options reflected below will be
replaced with options to purchase Delphi common stock in connection with the
completion of the Distribution. See "--Incentive Plans--Substitute Awards."
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at FY-End (#)(1) Options at FY-End($)(2)
Shares Acquired Value ------------------------ -------------------------
Name on Exercise (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
---------------------- --------------- ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
J.T. Battenberg III... 60,513 1,605,951 67,918/194,027 1,193,555/3,351,195
Donald L. Runkle...... -- -- 41,673/27,570 890,393/454,906
David R. Heilman...... 44,089 1,289,493 620/27,570 11,036/205,946
Paul J. Tosch......... 13,019 271,837 17,001/24,122 294,383/398,012
Alan S. Dawes......... 3,309 99,369 60,147/24,122 1,684,322/398,012
- ----------
</TABLE>
(1) No SARs may be granted under GM's stock incentive plans.
(2)Based on the closing price of GM $1-2/3 common stock of $71.56 on the NYSE
on December 31, 1998.
Long Term Incentive Plan Awards
The following table shows long term incentive plan awards made under the
General Motors 1997 Performance Achievement Plan in the year ended December 31,
1998 to the executive officers named in the Summary Compensation Table in the
"--Executive Compensation" section above.
<TABLE>
<CAPTION>
Estimated Future Payouts Under
Non-Stock Price-Based Plans(1)
Performance or --------------------------------
Other Period
Until Maturation Threshold Target Maximum
Name or Payout ($) ($) ($)
---------------------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
J.T. Battenberg III 1998-2000 320,000 800,000 1,600,000
Donald L. Runkle...... 1998-2000 84,000 210,000 420,000
David R. Heilman...... 1998-2000 80,000 200,000 400,000
Paul J. Tosch......... 1998-2000 80,000 200,000 400,000
Alan S. Dawes......... 1998-2000 80,000 200,000 400,000
- ----------
</TABLE>
(1)These awards relate to performance during 1998 through 2000. If the minimum
or threshold performance level is met or exceeded, the percentage of the
target award that will eventually be paid to participants will depend on the
extent to which the established performance target for the three year
performance period is achieved. If the minimum performance level is not met,
no awards will be paid.
Change in Control Agreements
Delphi has entered into change in control agreements ("Change in Control
Agreements") with certain of its officers (each, a "Participant"). The Change in
Control Agreements generally provide monetary compensation and other benefits to
each Participant upon the occurrence of certain triggering events involving a
change in control of Delphi.
The Change in Control Agreements specify two triggering events:
(1) a change in control occurs within three years after the Distribution; and
93
(2) within three years after the change in control, one of the following events
occur:
(a)the Participant's employment is terminated without cause;
(b)a negative fundamental, material change is made in the Participant's
duties or responsibilities;
(c)the Participant's salary, annual or other material compensation or
benefits are decreased (and such decrease is unrelated to company or
individual performance);
(d)the Participant is required to materially relocate his or her
residence or principal office location against his or her will; or
(e)the Participant is not offered a comparable position with the
successor entity.
Change in control is defined in the Change in Control Agreements to mean the
acquisition by any person, other than the company or any subsidiary of the
company, of the beneficial ownership of 50 percent or more of the outstanding
common stock; certain mergers, consolidations, other reorganizations of the
company in which the company is not the surviving corporation; or any sale,
lease, exchange or other transfer of 50% or more of the assets of the company.
Each Participant is entitled to the following benefits at the time of the
change in control:
o all of the Participant's unvested options will vest and become
immediately exercisable in accordance with their terms;
o all of the Participant's long-term incentive awards will become
payable immediately on a pro-rated basis, calculated based on
current forecasted payouts;
o any compensation previously deferred at the election of the
Participant, together with accrued interest or earnings thereon,
will be distributed as a lump sum payout;
o the Participant's Supplemental Executive Retirement Program benefits
will be funded through a trust or other mechanism which is protected
from the persons controlling Delphi after the occurrence of a change
in control; and
o the Participant's medical coverage under the company's then existing
medical plan will remain in force for thirty-six months.
Upon the occurrence of both triggering events described above, in addition to
the payments and benefits described above, Participants will receive monetary
compensation and certain other benefits. Each Participant is entitled to receive
in addition to their base salary through the date of their termination and any
accrued vacation pay the following amount of monetary compensation:
Chairman and CEO Three times base salary and three
times target bonus
Certain Vice Presidents Two times base salary and two times
target bonus
All other Vice Presidents One times base salary and one times
target bonus
In addition, at the time of the second triggering event:
o the Participant's life-insurance coverage will be continued and the
premiums will be paid for thirty-six months;
o the Participant may receive reimbursement of up to $50,000 for
expenses related to outplacement services;
o the Participant's legal fees and expenses will be paid if litigation
is required to enforce these change in control rights;
o the Participant will be able to retain his or her company car, if
any, for one year thereafter; and
o the Participant will no longer be subject to the non-competition
provisions of the Change in Control Agreement
94
The Change in Control Agreements provide that for a period of two years
immediately following the Participant's voluntary termination of employment with
us or any of our subsidiaries, the Participant agrees not to, without the prior
written consent of our Chairman and Chief Executive Officer, engage in or
perform any services of a similar nature to those performed at our company for
any other corporation or business engaged in the design, manufacture,
development, promotion, sale or financing of automobile or truck components,
within North America, Latin America, Asia, Australia or Europe in competition
with us, any of our subsidiaries or affiliates, or any joint ventures to which
we or any of our subsidiaries are a party. The Change in Control Agreements also
provide that the Participant shall not disclose any knowledge, information or
materials, whether tangible or intangible, regarding proprietary matters
relating to the company. We expect that we will enter into Change in Control
Agreements with each of our executive officers and certain other officers.
Incentive Plans
Before the IPO, Delphi adopted, with the approval of General Motors in its
capacity as the sole stockholder of Delphi, the Delphi Automotive Systems Annual
Incentive Plan (the "Annual Incentive Plan"), the Delphi Automotive Systems
Stock Incentive Plan (the "Stock Incentive Plan") the Delphi Automotive Systems
Performance Achievement Plan (the "Performance Achievement Plan") and the Delphi
Automotive Systems Classified Salary and Hourly Stock Option Plan (the
"Classified Plan"). The Annual Incentive Plan, the Stock Incentive Plan and the
Performance Achievement Plan are administered by the Compensation Committee
and the Delphi Strategy Board will administer the Classified Plan.
Founders Grants. In connection with the IPO, certain executives were
awarded "founders grant" options to purchase shares of Delphi common stock and
"founders grant" restricted stock units. In addition, other employees of Delphi
were awarded "founders grant" options to purchase shares of Delphi common stock.
The founders grants to executives were made pursuant to the Stock Incentive Plan
and the founders grants to other employees were made pursuant to the Classified
Plan. Stock options awarded to executives as founders grants vest in equal
annual installments over the four years following the date on which they were
granted and restricted stock units awarded to executives as founders grants vest
in full four years from the date on which they were granted. Stock options
awarded to all other employees as founders grants vest in full two years from
the date on which they were granted. The exercise price per share for these
stock options is equal to $18.66 (the average of the high and low prices of the
common stock on the first day of trading of the common stock as reported in The
Wall Street Journal) and the assumed grant price per share of these restricted
stock units was equal to $17.00 per share (the price per share at which the
common stock was sold in the IPO).
A total of about 26,000,000 shares of common stock will be issuable upon
exercise of these options or vesting of these restricted stock units.
Substitute Awards. In connection with the completion of the Distribution,
substitute awards relating to Delphi common stock will be issued to employees of
Delphi in exchange for GM $1-2/3 common stock awards. The terms and conditions
of each substitute award, including, without limitation, the time or times when,
and the manner in which, each option constituting a substitute award will be
exercisable, the duration of the exercise period, the permitted method of
exercise, settlement and payment, the rules that will apply in the event of the
termination of employment of the employee, the events, if any, that may give
rise to an employee's right to accelerate the vesting or the time or exercise
thereof and the vesting provisions of any restricted stock unit or performance
achievement award constituting substitute awards, will be the same as those of
the replaced GM $1-2/3 common stock award. See "Item 1. Business--Arrangements
Between Delphi and General Motors--Employee Matters--Employee Benefits."
Stock Incentive Plan. All officers and certain other employees of Delphi will
be eligible to participate in the Stock Incentive Plan. The Stock Incentive Plan
provides for the grant of stock options and/or Restricted Stock Units ("RSUs").
An aggregate of 85,000,000 shares of common stock will be reserved for issuance
under the Stock Incentive Plan; however, the maximum number of shares that can
be granted as RSUs is 8,000,000. It is anticipated that about 650 employees
annually will participate in the Stock Incentive Plan, including about 25
officers. Subject to adjustments as set forth in the Stock Incentive Plan, the
maximum stock option grant to any individual in any calendar year may not exceed
1,000,000 shares and the maximum RSU grant to any individual in any calendar
year may not exceed 500,000 shares.
95
Options granted under the Stock Incentive Plan may be either incentive stock
options ("ISOs") or such other forms of non-qualified stock options ("NQSOs") as
the Compensation Committee may determine. ISOs are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). With certain limited exceptions,
the exercise price of any stock option generally shall not be less than 100% of
the fair market value of the common stock on the date the option is granted.
Payment of the purchase price upon exercise must be made in cash or, unless
determined otherwise by the Compensation Committee, by delivery of previously
acquired shares of common stock. In the case of shares acquired pursuant to the
exercise of an option to acquire such shares, such shares must be held for six
months before they may be used in payment of the exercise price for additional
stock options.
The term of any option will be determined by the Compensation Committee, but
no ISO may be exercised later than ten years after the date of grant, and no
NQSO may be exercised later than ten years and two days after the date of grant.
Except as otherwise determined by the Compensation Committee, no option shall
become exercisable prior to the first anniversary date of the date of the option
grant or such later date as may be established by the Compensation Committee.
After such date, the option shall be exercisable only in accordance with the
terms and conditions established by the Compensation Committee at the time of
the grant.
The Stock Incentive Plan provides that, except as otherwise determined by the
Compensation Committee, following termination of an employee's employment and
contingent upon satisfaction of certain conditions, options held by each
employee will expire not later than five years from the date of termination of
employment, subject to earlier termination by the terms of the option. However,
if termination is due to death, the options will expire three years from the
date of death, subject to earlier termination pursuant to the terms of the
option.
If required by the Compensation Committee, by accepting an option grant, an
employee will agree to remain employed by Delphi for a period of six months
following the exercise of any option granted under the Stock Incentive Plan. If
the employee retires or terminates employment without the consent of Delphi for
any reason other than death within six months of the date of exercise of a stock
option, the employee will be required to pay to Delphi the amount of any gain
realized upon such exercise.
The Compensation Committee may grant RSUs to such individuals, at such times,
and in such amounts as it may determine. Each RSU relates to one share of
Delphi's common stock, subject to certain adjustments as described in the Stock
Incentive Plan. RSUs will be awarded without consideration other than the
rendering of services, unless the Compensation Committee decides otherwise. RSUs
shall vest, subject to the satisfaction of certain conditions, at the time or
times determined by the Compensation Committee. In addition, the Compensation
Committee may establish performance vesting criteria with respect to all or any
portion of a grant of RSUs based on certain business criteria set forth in the
Stock Incentive Plan.
Upon termination of the participant's employment without the consent of
Delphi, all RSUs shall be forfeited subject to such exceptions, if any, as are
authorized by the Compensation Committee as to termination of employment by
retirement, disability, death or under special circumstances. Awards of RSUs to
participants subject to Section 162(m) of the Code are intended to qualify under
that section of the Code and the provisions of such awards will be interpreted
in a manner consistent with that intent to the extent appropriate.
The Compensation Committee generally has the power and authority to amend,
modify, suspend or terminate the Stock Incentive Plan at any time without the
approval of Delphi's stockholders, subject to applicable federal securities and
tax law limitations and NYSE regulations.
Annual Incentive Plan. Officers and certain other employees of Delphi will be
eligible to participate in the Annual Incentive Plan. The Compensation Committee
may delegate authority to the Delphi Strategy Board to determine individual
awards to employees who are not officers of Delphi. The Annual Incentive Plan
provides for the grant of cash awards based upon the achievement of certain
target levels of performance. Under the Annual Incentive Plan no individual may
be granted an award in excess of $7,500,000 in any calendar year. We anticipate
that about 600 employees annually will participate in the Annual Incentive Plan,
including about 25 officers.
Pursuant to the Annual Incentive Plan, at the beginning of each year,
commencing in 1999, the Compensation Committee will establish a targeted
performance level at which a target performance award may be earned, with a
threshold or minimum performance level below which no award will be paid, and a
maximum level beyond which no additional amounts will be paid, and will
establish the corresponding minimum and maximum awards. In determining the
performance criteria applicable to any grant of awards, the Compensation
Committee may use one or more of the business criteria set forth in the Annual
Incentive Plan.
96
The percentage of each target performance award which will become a final
award and be paid to the employee will be determined by the Compensation
Committee on the basis of the performance goals established and the related
performance achieved, as well as the employee's individual performance during
the period. Final awards actually paid to an employee may be less than or
greater than 100% of the target award. Final awards will be subject to a vesting
schedule established by the Compensation Committee. At the Compensation
Committee's discretion, interest may be paid on final awards during or at the
end of the vesting period. The Compensation Committee may delegate authority to
the Delphi Strategy Board to determine individual final awards for employees who
are not officers of the company, subject to a maximum amount approved by the
Compensation Committee.
Subject to certain exceptions, the Compensation Committee generally has the
power and authority to amend, modify, suspend or terminate the Annual Incentive
Plan.
Performance Achievement Plan. Employees are eligible to participate in the
Performance Achievement Plan only upon recommendation of the Chief Executive
Officer and with the approval of the Compensation Committee, except that the
Compensation Committee alone may determine which officers are eligible to
participate in such plan. The Performance Achievement Plan provides for the
grant of awards based on certain target levels of performance. We anticipate
that about 100 employees annually will participate in the Performance
Achievement Plan, including about 25 officers.
Employees selected to participate in the Performance Achievement Plan will be
granted target performance awards. The performance period for an award must be
at least two and not more than five years. It is anticipated that target
performance awards will be granted annually commencing in 1999, and will be for
a three-year performance period. At the beginning of each performance period,
the Compensation Committee will establish a targeted performance level at which
a target performance award may be earned, with a threshold or minimum
performance level below which no award will be paid, and a maximum level beyond
which no additional amounts will be paid. In determining the performance
criteria applicable to any grant of awards, the Compensation Committee may use
one or more of the business criteria provided in the Performance Achievement
Plan.
The percentage of each target performance award which will become a final
award and be paid to the employee will be determined by the Compensation
Committee on the basis of the performance goals established and the related
performance achieved, as well as the employee's individual performance during
the period. Final awards actually granted to an employee may be less than or
greater than 100% of the target award. The Performance Achievement Plan provides
that no individual shall be granted a final award in excess of $7,500,000 for
any performance period.
Final awards may be paid in the form of common stock, in cash, or partly in
common stock and partly in cash, as the Compensation Committee may determine.
Each final award will be subject to a vesting schedule as determined by the
Compensation Committee. At the Compensation Committee's discretion, dividend
and/or interest equivalents may be paid on final awards during or at the end of
the vesting period. In the event that the participant's employment with Delphi
is terminated, other than as a result of the participant's death, prior to
payment of the final award in full, such payment will be further contingent upon
satisfaction of certain conditions, including that the participant refrain from
activity that is competitive with the business of Delphi, unless such conditions
are waived by the Compensation Committee. The Performance Achievement Plan
provides that final awards to be paid in common stock shall be made from shares
reacquired by the company, including shares purchased on the open market.
Subject to certain exceptions, the Compensation Committee generally has the
power and authority to amend, modify, suspend or terminate the Performance
Achievement Plan.
Classified Plan. The Classified Plan provides for the grant of stock options
to all non-executive employees of Delphi. An aggregate of 26,000,000 shares of
common stock will be reserved for issuance under the Classified Plan.
Approximately 200,000 Delphi employees are eligible to participate in the
Classified Plan. No individual may be granted options in any calendar year
covering more than the target amount of shares granted to the lowest level
executive under the Stock Incentive Plan for that year.
Options granted under the Classified Plan will be in the form of
non-qualified options. The exercise price of any stock option generally shall
not be less than 100% of the fair market of the common stock on the date the
option is granted. Payment of the purchase price upon exercise must be made in
cash.
97
The term of options granted under the Classified Plan will be determined by
the Delphi Strategy Board, but no option may be exercised later than 10 years
and two days after the date of grant. Except as determined by the Delphi
Strategy Board, no option shall become exercisable prior to the first
anniversary of the date of the option grant, and after such date shall be
exercisable only in accordance with the terms and conditions established by the
Delphi Strategy Board at the time of the grant.
The Classified Plan provides that, except as otherwise determined by the
Delphi Strategy Board, following termination of an employee's employment and
contingent upon satisfaction of certain conditions, options held by each
employee will expire not later than five years from the date of termination of
employment, subject to earlier termination by the terms of the option. However,
if termination is due to death, the options will expire three years from the
date of death, subject to earlier termination pursuant to the terms of the
options.
Pension Plans
The retirement program for Delphi executives in the United States consists of
the Delphi Retirement Program for Salaried Employees (the "Retirement Program")
as well as two non-qualified plans. Together, these plans are referred to here
as the "Delphi Salaried Program." For all purposes under the Delphi Salaried
Program, the terms "service" and "credited service" refer to combined service
with General Motors that is taken into account under the General Motors
Retirement Program for Salaried Employees (the "GM Retirement Program") and
Delphi.
The Retirement Program is a tax-qualified plan subject to the requirements of
the Employee Retirement Income Security Act ("ERISA"). In general, the
Retirement Program consists of "Part A" and "Part B" benefits. The
non-contributory portion (referred to as "Part A") of the Retirement Program
provides benefits under a formula based on years of credited service and an
applicable benefit rate. The contributory portion (referred to as "Part B") of
the Retirement Program provides benefits under a formula based on years of Part
B credited service and upon the average of the highest five years of base salary
received during the final ten years of service, subject to certain limitations
imposed by the Code, which may change from time to time. Part B of the
Retirement Program also provides employees with an annual retirement benefit
which is equal to the sum of 100% of the Part B contributions they made to the
GM Retirement Program after October 1, 1979, or the Delphi Retirement Program
after January 1, 1999, and lesser percentages of their contributions made to the
GM Retirement Program before that date. If employees elect not to contribute to
Part B of the Retirement Program, they are entitled to receive only basic
retirement benefits equal to a flat dollar amount per year of credited service.
Benefits under the Retirement Program vest after five years of credited service
and are payable at age 65, either in the form of a single life annuity or in a
reduced amount in the form of a joint and survivor annuity.
If an executive makes Part B contributions to the Retirement Program, the
executive may also be eligible to receive a non-qualified Regular Supplemental
Executive Retirement Program ("SERP") benefit. The sum of the Retirement
Program's benefits plus the Regular SERP benefit will provide an eligible
executive with total annual retirement benefits under the Delphi Salaried
Program that are equal to 2% times years of Part B credited service times
average annual base salary, less 2% times years of Part A credited service times
the maximum annual Social Security benefit in the year of retirement payable to
a person retiring at age 65. For example, a 65 year old executive retiring in
1999 would be entitled to $16,476.
The table below shows the regular form of the estimated total annual
retirement benefit payable under the Delphi Salaried Program, based on average
annual base salary as of December 31, 1998, assuming the executive qualifies for
Regular SERP benefits. Such amount would be paid in 12 equal monthly
installments per year as a single life annuity to executives retiring in 1999 at
age 65. If the executive elects to receive such benefits in the form of a 60%
joint and survivor annuity, the single life annuity amounts shown would
generally be reduced from 5% to 11%, depending upon the age differential between
spouses.
Years of Part B Credited Service
------------------------------------------
Average Annual
Base Salary(a) 15 25 35 45
-------------- ------- -------- -------- ---------
$300,000 $ 85,057 $141,762 $198,467 255,172
480,000 139,057 231,762 324,467 417,172
660,000 193,057 321,762 450,467 579,172
840,000 247,057 411,762 576,467 741,172
1,020,000 301,057 501,762 702,467 903,172
1,200,000 355,057 591,762 828,467 1,065,172
- -----------------------
(a)Average annual base salary means the average of the highest five years of
base salary paid during the final ten years of service.
98
The average annual base salary and the years of Part B credited service which
may be considered in the Regular SERP calculation as of December 31, 1998 for
each of the Named Executive Officers were as follows: J.T. Battenberg
III--$767,500--36 years; Donald L. Runkle--$366,583--30 years; Paul J.
Tosch--$349,000--40 years; Alan S. Dawes--$333,667--17 years; and David R.
Heilman--$304,717--33 years. The annual base salary for the most recent year(s)
considered in the calculation reported here are shown in the "Salary" column of
the Summary Compensation Table in "--Executive Compensation" above.
Executives may be eligible to receive an Alternative SERP benefit in lieu of
the Regular SERP benefit if they satisfy certain criteria, including not working
for any competitor or otherwise acting in any manner which is not in the best
interests of Delphi. An eligible executive will receive the greater of the
Regular SERP benefit or the Alternative SERP benefit. The sum of the Retirement
Program's benefits plus the Alternative SERP benefit will provide an eligible
executive with total annual retirement benefits under the Delphi Salaried
Program that are equal to 1.5% times eligible years of Part B credited service
up to a maximum of 35 years, times the executive's average annual total direct
compensation, less 100% of the maximum annual Social Security benefit in the
year of retirement payable to a person retiring at age 65.
The following table shows the alternative form of the estimated total annual
retirement benefit payable under the Delphi Salaried Program, based upon average
annual total direct compensation as of December 31, 1998, assuming the executive
qualifies for Alternative SERP benefits. Such amount would be paid in 12 equal
monthly installments per year as a single life annuity to executives retiring in
1999 at age 65. The amounts shown would be reduced in the same way as under the
regular form if the executive were to elect joint and survivor benefits.
Eligible Years of Part B Credited Service
Average Annual -----------------------------------------------------
Total Direct
Compensation(a) 15 20 25 30 35
--------------- -------- -------- -------- --------- ----------
$ 525,000 $101,649 $141,024 $180,399 $ 219,774 $ 259,149
905,000 187,149 255,024 322,899 390,774 458,649
1,285,000 272,649 369,024 465,399 561,774 658,149
1,665,000 358,149 483,024 607,899 732,774 857,649
2,045,000 443,649 597,024 750,399 903,774 1,057,149
2,425,000 529,149 711,024 892,899 1,074,774 1,256,649
(a)Average annual total direct compensation means the sum of average annual
base salary plus the average of the highest five annual incentive awards
earned in respect of the final ten calendar years of service prior to an
executive's retirement.
The average annual total direct compensation and the eligible years of Part B
credited service which may be considered in the Alternative SERP calculation as
of December 31, 1997 for each of the Named Executive Officers was as follows:
J.T. Battenberg III--$1,453,900--35 years; Donald L. Runkle--$642,583--30 years;
Paul J. Tosch--$603,400--35 years; Alan S. Dawes--$563,067--17 years; and David
R. Heilman--$542,917--33 years. The annual total direct compensation for the
most recent year(s) considered in the calculation reported here are reported in
the "Salary" and "Bonus" columns of the Summary Compensation Table in
"--Executive Compensation" above.
In addition, the Delphi Board is expected to delegate to the Compensation
Committee discretionary authority to grant additional eligible years of credited
service to selected key executives under such terms and conditions as the
Compensation Committee shall determine for purposes of computing the regular and
alternative forms of SERP for such executives. The Regular or Alternative form
of the SERP benefit is provided under a program which is non-qualified for tax
purposes and not pre-funded. SERP benefits under the Regular and Alternative
form can be reduced or eliminated for both retirees and active employees by the
Compensation Committee and/or the Board of Directors.
99
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page No.
(a) 1. All Financial Statements
-Responsibility for Consolidated Financial Statements 57
-Independent Auditors' Report 58
-Consolidated Balance Sheets, December 31, 1998 and 1997 59
-Consolidated Statements of Operations for the Years ended
December 31, 1998, 1997, and 1996 60
-Consolidated Statements of Equity (Deficit) and Comprehensive
Income (Loss) for the Years Ended December 31, 1998, 1997,
and 1996 61
-Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996 62
-Notes to Consolidated Financial Statements 63-83
2. Financial Statement Schedules -
Schedules have been omitted because the information required
to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
3. Exhibits (Including Those Incorporated by Reference)
Exhibit
Number Exhibit Name
- ------- ------------
(3)(a) Amended and Restated Certificate of Incorporation of
Delphi Automotive Systems Corporation, incorporated by
reference to Exhibit 3.1 to the Registration Statement on
Form S-1 (Registration No.333-67333) (hereinafter referred
to as the "Registration Statement") which has been filed
by Delphi with the Securities and Exchange Commission pursuant
to the Securities Act of 1933, as amended n/a
(3)(b) By-laws of Delphi Automotive Systems Corporation, incorporated
by reference to Exhibit 3.2 to the Registration Statement n/a
(4)(a) Rights Agreement relating to Delphi's Stockholder
Rights Plan n/a
(10)(a) Master Separation Agreement among General Motors, Delphi,
Delphi Automotive Systems, LLC, Delphi Technologies, Inc. and
Delphi Automotive Systems (Holding), Inc., incorporated by
reference to Exhibit 10.1 to the Registration Statement n/a
(10)(b) Component Supply Agreement between Delphi and General Motors,
incorporated by reference to Exhibit 10.2 to the Registration
Statement n/a
(10)(c) Delphi/SPO Business Relationship Agreement, incorporated by
reference to Exhibit 10.3 to the Registration Statement n/a
(10)(d) U.S. Employee Matters Agreement between Delphi and General
Motors, incorporated by reference to Exhibit 10.4 to the
Registration Statement n/a
(10)(e) Agreement for the Allocation of United States Federal, State
and Local Income Taxes between General Motors and Delphi,
incorporated by reference to Exhibit 10.5 to the Registration
Statement n/a
(10)(f) Amended and Restated Agreement for the Allocation of United
States Federal, State and Local Income Taxes between General
Motors and Delphi, incorporated by reference to Exhibit 10.6
to the Registration Statement n/a
(10)(g) IPO and Distribution Agreement between Delphi and
General Motors n/a
(10)(h) Registration Rights Agreement between Delphi and
General Motors n/a
(10)(i) Form of Change in Control Agreement between Delphi and certain
of its officers and other executives, incorporated by reference
to Exhibit 10.9 to the Registration Statement* n/a
(10)(j) Delphi Automotive Systems Corporation Stock Incentive Plan,
incorporated by reference to Exhibit 10.10 to the Registration
Statement* n/a
(10)(k) Delphi Automotive Systems Corporation Performance Achievement
Plan, incorporated by reference to Exhibit 10.11 to the
Registration Statement* n/a
(10)(l) Delphi Automotive Systems Corporation Annual Incentive Plan,
incorporated by reference to Exhibit 10.12 to the Registration
Statement* n/a
(10)(m) Delphi Automotive Systems Corporation Deferred Compensation
Plan for Non-Employee Directors, incorporated by reference to
Exhibit 10.13 to the Registration Statement* n/a
(10)(n) $3.5 Billion Competitive Advance and Revolving Credit Facility
among Delphi and the lenders named therein, incorporated by
reference to Exhibit 10.14 to the Registration Statement n/a
100
Exhibit
Number Exhibit Name Page No.
- ------ ------------ --------
(10)(o) $1.5 Billion Competitive Advance and Revolving Credit Facility
among Delphi and the lenders named therein, incorporated by
reference to Exhibit 10.15 to the Registration Statement n/a
(10)(p) First Amendment to $3.5 Billion Competitive Advance and
Revolving Credit Facility among Delphi and the lenders named
therein, incorporated by reference to Exhibit 10.16 to the
Registration Statement n/a
(12) Computation of Ratios of Earnings to Fixed Charges for the
Years Ended December 31, 1998, 1997, 1996, 1995 and 1994. n/a
(21) Subsidiaries of Delphi n/a
(23) Consent of Deloitte & Touche LLP n/a
(27) Financial data schedule (for SEC information only) n/a
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. None
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
-------------------------------------------------------------------
(Registrant)
By:
/s/ J.T. Battenberg III
---------------------------------
(J.T. Battenberg III, Chairman
of the Board of Directors, Chief
Executive Officer and President)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on March 15, 1999 by the following persons on behalf
of the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ J.T. Battenberg III Chairman of the Board, Chief Executive
- ---------------------------------- Officer and President
(J.T. Battenberg III) (Principal Executive Officer)
/s/ Alan S. Dawes Chief Financial Officer
- ---------------------------------- and Vice President
(Alan S. Dawes) (Principal Financial Officer)
/s/ Paul R. Free Chief Accounting Officer and Controller
- ---------------------------------- (Principal Accounting Officer)
(Paul R. Free)
/s/ Thomas H. Wyman Director
- ---------------------------------- (Lead Independent Director)
(Thomas H. Wyman)
/s/ Virgis W. Colbert Director
- ----------------------------------
(Virgis W. Colbert)
/s/ J. Michael Losh Director
- -----------------------------------
(J. Michael Losh)
/s/ Susan A. McLaughlin Director
- -----------------------------------
(Susan A. McLaughlin)
/s/ Oscar De Paula Bernardes Neto Director
- -----------------------------------
(Oscar De Paula Bernardes Neto)
/s/ John D. Opie Director
- -----------------------------------
(John D. Opie)
102
SIGNATURES (concluded)
/s/ Harry J. Pearce Director
- -----------------------------------
(Harry J. Pearce)
/s/ Roger S. Penske Director
- -----------------------------------
(Roger S. Penske)
/s/ John F. Smith Jr. Director
- -----------------------------------
(John F. Smith Jr.)
103
<PAGE> 1
EXHIBIT 4a
================================================================================
RIGHTS AGREEMENT
by and between
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
and
BANKBOSTON, N.A.,
as Rights Agent
---------------
Dated as of
February 1, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
Section Page
- -------- ----
1. Certain Definitions..................................................... 1
2. Appointment of Rights Agent............................................. 8
3. Issuance of Right Certificates.......................................... 8
4. Form of Right Certificates.............................................. 11
5. Countersignature and Registration....................................... 11
6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or
Stolen Right Certificates.................................... 12
7. Exercise of Rights; Exercise Price; Expiration Date
of Rights.................................................... 13
8. Cancellation and Destruction of Right Certificates...................... 16
9. Reservation and Availability of Shares of Preferred
Stock........................................................ 16
10. Preferred Stock Record Date............................................ 18
11. Adjustment of Exercise Price or Number of Shares....................... 18
12. Certification of Adjusted Exercise Price or Number
of Shares.................................................... 25
13. Consolidation, Merger or Sale or Transfer of Assets
or Earning Power............................................. 26
14. Fractional Rights and Fractional Shares................................ 31
15. Rights of Action....................................................... 31
16. Agreement of Right Holders............................................. 32
17. Right Certificate Holder Not Deemed a Stockholder...................... 33
18. Concerning the Rights Agent............................................ 33
<PAGE> 3
Section Page
- -------- ----
19. Merger or Consolidation of, or Change in Name of,
the Rights Agent............................................. 34
20. Duties of Rights Agent................................................. 35
21. Change of Rights Agent................................................. 37
22. Issuance of New Right Certificates..................................... 38
23. Redemption............................................................. 39
24. Notice of Proposed Actions............................................. 40
25. Notices ............................................................. 41
26. Supplements and Amendments............................................. 42
27. Exchange ............................................................. 42
28. Successors............................................................. 44
29. Benefits of this Agreement............................................. 44
30. Delaware Contract...................................................... 44
31. Counterparts........................................................... 44
32. Descriptive Headings................................................... 45
33. Severability........................................................... 45
34. Determinations and Actions by the Board of Directors .................. 45
Exhibit A - Summary of Rights
Exhibit B - Form of Right Certificate
Exhibit C - Form of Certificate of Designations of Series A
Junior Preferred Stock
<PAGE> 4
RIGHTS AGREEMENT
Rights Agreement (this "AGREEMENT"), dated as of February 1,
1999, by and between Delphi Automotive Systems Corporation, a Delaware
corporation (the "CORPORATION"), and BankBoston, N.A., a national banking
association (the "RIGHTS AGENT").
W I T N E S S E T H :
WHEREAS, on February 1, 1999, the IPO Committee of the
Board of Directors (the "IPO COMMITTEE"), as specifically authorized by the
Board of Directors of the Corporation, authorized the issuance, as a dividend,
of one right (a "RIGHT") for each share of Common Stock, $0.01 par value per
share, of the Corporation outstanding as of the time and date determined by the
IPO Committee to be the record date of such distribution (the "RECORD DATE"),
each such Right representing the right to purchase one one-hundredth of a share
of Series A Junior Preferred Stock of the Corporation ("PREFERRED STOCK") having
the rights and preferences set forth in the form of Certificate of Designations
attached hereto as Exhibit C, which was authorized by the IPO Committee of the
Board of Directors on February 1, 1999, upon the terms and subject to the
conditions hereinafter set forth; and
WHEREAS, the Board of Directors of the Corporation further
authorized the issuance of one Right (subject to adjustment) with respect to
each share of Common Stock which may be issued between the Record Date and the
earlier to occur of the Distribution Date, the Expiration Date or the Final
Expiration Date (as such terms are hereinafter defined), including any shares of
Common Stock of the Corporation issued in connection with the initial public
offering of the Common Stock; provided, however, that Rights may be issued with
respect to shares of Common Stock that shall become outstanding after the
Distribution Date and prior to the Expiration Date in accordance with Section 22
hereof;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this
Agreement, the following terms shall have the meanings provided by this Section
1, any capitalized term defined in this Section 1 and used in the following
definitions having the meaning provided by this Section 1:
<PAGE> 5
(a) "ACQUIRING PERSON" shall mean any Person who or
which, together with all Affiliates and Associates of such
Person, shall be the Beneficial Owner of 15% or more of the
Voting Stock of the Corporation then outstanding; provided,
however, that an Acquiring Person shall not include (i) an
Exempt Person or any Affiliate or Associate of an Exempt
Person or (ii) any Person who or which, together with all
Affiliates and Associates of such Person, would be an
Acquiring Person solely by reason of (A) being the
Beneficial Owner of shares of Voting Stock of the
Corporation, the Beneficial Ownership of which was acquired
by such Person (together with all Affiliates and Associates
of such Person) pursuant to any action or transaction or
series of related actions or transactions approved by the
Board of Directors before such Person (together with all
Affiliates and Associates of such Person) otherwise became
an Acquiring Person or (B) a reduction in the number of
issued and outstanding shares of Voting Stock of the
Corporation pursuant to a transaction or a series of related
transactions approved by the Board of Directors of the
Corporation; provided, further, that in the event a Person
described in this clause (ii) does not become an Acquiring
Person by reason of subclause (A) or (B) of this clause
(ii), such Person nonetheless shall become an Acquiring
Person in the event such Person (together with all
Affiliates and Associates of such Person) thereafter
acquires Beneficial Ownership of an additional 1% of the
Voting Stock of the Corporation, unless the acquisition of
such additional Voting Stock results from one or more
actions or transactions approved by the Board of Directors
of the Corporation. Notwithstanding the foregoing, if the
Board of Directors of the Corporation determines in good
faith that a Person who would otherwise be an "Acquiring
Person" as defined pursuant to the foregoing provisions of
this paragraph (a) has become such inadvertently, and such
Person divests as promptly as practicable (as determined in
good faith by the Board of Directors) a sufficient number of
shares of Common Stock so that such Person would no longer
be an "Acquiring Person" as defined pursuant to the
foregoing provisions of this paragraph (a), then such Person
shall not be deemed an "Acquiring Person" for any purposes
of this Agreement.
(b) "AFFILIATE" shall have the meaning ascribed to such
term in Rule 12b-2 of the General Rules and
2
<PAGE> 6
Regulations under the Securities Exchange Act of 1934, as
amended ("EXCHANGE ACT"), as in effect on the date of this
Agreement.
(c) "ASSOCIATE" of a Person shall mean (i) with respect
to a corporation, any officer or director thereof or any
Associate of any Subsidiary thereof, or any Beneficial Owner
of 10% or more of any class of equity security thereof, (ii)
with respect to an association, any officer or director
thereof or any Associate of a Subsidiary thereof, (iii) with
respect to a partnership, any general partner thereof or any
limited partner thereof who is, directly or indirectly, the
Beneficial Owner of a 10% ownership interest therein, and
any Associate of any Subsidiary thereof, (iv) with respect
to a limited liability company, any manager or managing
member thereof and any Beneficial Owner of 10% or more or
any class of membership interest therein or other equity
security thereof, and any Associate of any Subsidiary
thereof, (v) with respect to a business trust, any officer
or trustee thereof or any Associate of any Subsidiary
thereof, (vi) with respect to any other trust or an estate,
any trustee, executor or similar fiduciary and any Person
who has a 15% or greater interest as a beneficiary in the
income from or principal of such trust or estate, (vii) with
respect to a natural person, the parents and children
thereof and any spouse or relative thereof, or any relative
of such spouse, who has the same home as such person, and
(viii) any Affiliate of such Person.
(d) A person shall be deemed the "BENEFICIAL OWNER" of,
or to "BENEFICIALLY OWN", any securities (and correlative
terms shall have correlative meanings):
(i) which such Person or any of such Person's
Affiliates or Associates beneficially owns, directly or
indirectly, for purposes of Section 13(d) of the
Exchange Act and Regulations 13D and 13G thereunder (or
any comparable or successor law or regulation), in each
case as in effect on the date hereof; or
(ii) which such Person or any of such Person's
Affiliates or Associates has (A) the right to acquire
(whether such right is exercisable immediately or only
after the passage of time
3
<PAGE> 7
or the fulfillment of a condition or both) pursuant to
any agreement, arrangement or understanding, or upon
the exercise of conversion rights, exchange rights,
other rights (other than the Rights), warrants or
options, or otherwise; provided, however, that a
Person shall not be deemed the "Beneficial Owner" of,
or to "Beneficially Own", securities tendered pursuant
to a tender or exchange offer made by such Person or
any of such Person's Affiliates or Associates until
such tendered securities are accepted for purchase or
exchange or (B) the right to vote, alone or in concert
with others, pursuant to any agreement, arrangement or
understanding (whether or not in writing); provided,
however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "Beneficially Own", any
securities if the agreement, arrangement or
understanding to vote such security (1) arises solely
from a revocable proxy or consent given in response to
a proxy or consent solicitation made pursuant to, and
in accordance with, the applicable rules and
regulations under the Exchange Act and (2) is not at
the time reportable by such Person on a Schedule 13D
report under the Exchange Act (or any comparable or
successor report), other than by reference to a proxy
or consent solicitation being conducted by such Person;
or
(iii) which are beneficially owned, directly or
indirectly, by any other Person with which such Person
or any of such Person's Affiliates or Associates has
any agreement, arrangement or understanding (whether or
not in writing) for the purpose of acquiring, holding,
voting (except as described in clause (B) of
subparagraph (ii) of this paragraph (d)) or disposing
of any securities of the Corporation; provided,
however, that for purposes of determining Beneficial
Ownership of securities under this Agreement, officers
and directors of the Corporation solely by reason of
their status as such shall not constitute a group
(notwithstanding that they may be Associates of one
another or may be deemed to constitute a group for
purposes of Section 13(d) the Exchange Act) and shall
not be deemed to own shares owned by another officer or
director of the Corporation.
4
<PAGE> 8
Notwithstanding anything in this paragraph (d) to the
contrary, (1) a Person engaged in the business of
underwriting securities shall not be deemed the "Beneficial
Owner" of, or to "Beneficially Own," any securities acquired
or otherwise beneficially owned in good faith in a firm
commitment underwriting until the expiration of forty days
after the date of the sale of securities to the public
pursuant to such firm commitment underwriting, and (2) no
Person (and no Affiliate or Associate of any Person) shall
at any time prior to the Divestiture Date be deemed the
"Beneficial Owner" of, or to "Beneficially Own," any
securities if such Person is the "Beneficial Owner" of, or
"Beneficially Owns," such securities as a result of one or
more agreements, arrangements or understandings with any GM
Entity (whether or not the Corporation or any other Person
is a party thereto) and if such Person would not be the
"Beneficial Owner" of, or "Beneficially Own", such
securities if such agreements, arrangements or
understandings were not then in effect.
(e) "BUSINESS DAY" shall mean any day other than a
Saturday, Sunday, or a day on which banking institutions in
the State of New York or the Commonwealth of Massachusetts
are authorized or obligated by law or executive order to
close.
(f) "CLOSE OF BUSINESS" on any given date shall mean
5:00 P.M., Eastern time, on such date; provided, however,
that if such date is not a Business Day it shall mean 5:00
P.M., Eastern time, on the next succeeding Business Day.
(g) "COMMON STOCK" when used with reference to the
Corporation shall collectively mean the Common Stock, $0.01
par value, of the Corporation and any other common stock of
the Corporation into or for which it is changed, converted
or exchanged. "COMMON STOCK" when used with reference to any
Person other than the Corporation which shall be organized
in corporate form shall mean the capital stock or other
equity security having of all classes of capital stock or
equity securities of such corporation the greatest aggregate
voting power in the election of directors. "COMMON STOCK"
when used with reference to any Person other than the
Corporation which shall not be organized in corporate form
shall mean units of beneficial interest in the profits or
losses of such Person or other equity
5
<PAGE> 9
security of such Person having of all classes of equity
securities of such Person the greatest aggregate voting
power in the election of the directors, trustees, managers
or other Persons performing like governance functions for
such Person.
(h) "CORPORATION" shall have the meaning provided at
the beginning hereof; provided, however, that "Corporation"
shall also include any successors to the Corporation as
provided by Section 28 hereof and shall mean a Principal
Party as provided by Section 13(a) hereof.
(i) "DISTRIBUTION DATE" shall have the meaning set
forth in Section 3(b) hereof.
(j) "DIVESTITURE DATE" shall mean the time at which GM
shall first cease to Beneficially Own fifteen (15%) or more
of the Voting Stock of the Corporation then outstanding.
(k) "EXCHANGE ACT" shall have the meaning set forth in
Section 1(b) hereof.
(l) "EXEMPT PERSON" shall mean (i) the Corporation,
(ii) any Subsidiary of the Corporation, (iii) any employee
benefit plan or employee stock plan of the Corporation or
any Subsidiary of the Corporation, or any trust or other
entity organized, appointed, established or holding Voting
Stock for or pursuant to the terms of any such plan, or (iv)
prior to the Divestiture Date, any GM Entity.
(m) "EXERCISE PRICE" shall have the meaning set forth
in Section 4 hereof.
(n) "EXPIRATION DATE" shall have the meaning set forth
in Section 7(a) hereof.
(o) "FAIR MARKET VALUE" of any property shall mean the
fair market value of such property as determined in
accordance with Section 11(b) hereof.
(p) "FINAL EXPIRATION DATE" shall have the meaning set
forth in Section 7(a) hereof.
6
<PAGE> 10
(q) "GM" shall mean General Motors Corporation, a
Delaware corporation, and any successor company thereto by
merger, consolidation or a like transaction.
(r) "GM ENTITY" shall mean GM or any Affiliate or
Associate of GM.
(s) "PERSON" shall mean any individual, company, firm,
corporation or other entity.
(t) "PRINCIPAL PARTY" shall have the meaning set forth
in Section 13(b) hereof.
(u) "REDEMPTION PRICE" shall have the meaning set forth
in Section 23(a) hereof.
(v) "RIGHT CERTIFICATE" shall have the meaning set
forth in Section 3(d) hereof.
(w) "STOCK ACQUISITION DATE" shall mean the first date
on which there shall be a public announcement by the
Corporation or an Acquiring Person that an Acquiring Person
has become such (which, for purposes of this definition,
shall include, without limitation, a report filed pursuant
to Section 13(d) of the Exchange Act) or such earlier date
as a majority of the Board of Directors of the Corporation
shall become aware of the existence of an Acquiring Person.
(x) "SUBSIDIARY" of a Person shall mean any corporation
or other entity of which securities or other ownership
interests having voting power sufficient to elect a
majority of the board of directors or other persons
performing similar functions are beneficially owned,
directly or indirectly, by such Person or by any corporation
or other entity that is otherwise controlled by such Person.
(y) "SUMMARY OF RIGHTS" shall have the meaning set
forth in Section 3(a) hereof.
(z) "TRADING DAY" shall have the meaning set forth in
Section 11(b) hereof.
(aa) "TRANSFER TAX" shall mean any tax or charge,
including any documentary stamp tax, imposed or collected
by any governmental or regulatory authority in respect of
any transfer of any security, instrument or
7
<PAGE> 11
right, including the Rights, shares of the Common Stock
and shares of the Preferred Stock.
(bb) "VOTING STOCK" shall mean (i) the Common Stock of
the Corporation and (ii) any other shares of capital stock
of the Corporation entitled to vote generally in the
election of directors or entitled generally to vote together
with the Common Stock in respect of a merger, consolidation,
sale of all or substantially all of the Corporation's
assets, liquidation, dissolution or winding up which holders
of Common Stock are entitled to vote on. For purposes of
this Agreement, a stated percentage of the Voting Stock
shall mean a number of shares of the Voting Stock as shall
equal in voting power that stated percentage of the total
voting power of the then outstanding shares of Voting Stock
in the election of a majority of the Board of Directors of
the Corporation or in respect of a merger, consolidation,
sale of all or substantially all of the Corporation's
assets, liquidation, dissolution or winding up.
Any determination required to be made by the Board of Directors of the
Corporation for purposes of applying the definitions contained in this Section 1
shall be made by a majority of the Board of Directors in its good faith
judgment, which determination shall be binding on the Rights Agent and the
holders of the Rights.
Section 2. Appointment of Rights Agent. The Corporation
hereby appoints the Rights Agent to act as agent for the Corporation and the
holders of the Rights (who, in accordance with Section 3 hereof, shall prior to
the Distribution Date be the holders of Common Stock) in accordance with the
terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Corporation may from time to time appoint such Co-Rights Agents
as it may deem necessary or desirable, upon ten (10) days prior written notice
to the Rights Agent. The Rights Agent shall have no duty to supervise, and shall
in no event be liable for, the acts or omissions of any such co-Rights Agent.
Section 3. Issuance of Right Certificates.
(a) On the Record Date (or as soon as practicable
thereafter), the Corporation or the Rights Agent shall send a copy of a Summary
of Rights, in substantially the form attached hereto as Exhibit A (the "SUMMARY
OF RIGHTS"), by first class mail, postage prepaid, to each record holder of the
Common Stock
8
<PAGE> 12
as of the Record Date, at the address of such holder shown on the
records of the Corporation.
(b) Until the close of business on the day which is the
earlier of (i) the tenth day after the Stock Acquisition Date or (ii) the tenth
Business Day (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person) after
the date of the commencement by any Person (other than an Exempt Person) of, or
the first public announcement of the intent of any Person (other than an Exempt
Person) to commence, a tender or exchange offer upon the successful consummation
of which such Person would be the Beneficial Owner of 15% or more of the then
outstanding shares of Voting Stock of the Corporation (including any such date
which is after the date of this Agreement and prior to the issuance of the
Rights; the earlier of such dates being herein referred to as the "DISTRIBUTION
DATE"), (x) the Rights shall be evidenced by the certificates for Common Stock
(or in the case of uncertificated shares of Common Stock, by the book-entry
account that evidences record ownership of such shares) registered in the names
of the holders of Common Stock (together with, in the case of certificates for
Common Stock outstanding as of the Record Date, the Summary of Rights) and not
by separate Right certificates and the record holders of such certificates (or
such book-entry accounts) for Common Stock shall be the record holders of the
Rights represented thereby and (y) each Right shall be transferable only
simultaneously and together with the transfer of a share of Common Stock
(subject to adjustment as hereinafter provided). Until the Distribution Date
(or, if earlier, the Expiration Date or Final Expiration Date), the surrender
for transfer of any certificate for Common Stock (or the effectuation of a book
entry transfer of shares of Common Stock) shall constitute the surrender for
transfer of the Right or Rights associated with the Common Stock evidenced
thereby, whether or not accompanied by a copy of the Summary of Rights.
(c) Rights shall be issued in respect of all shares of
Common Stock that become outstanding after the Record Date but prior to the
earliest of the Distribution Date, the Expiration Date or the Final Expiration
Date. Certificates for Common Stock (including, without limitation, certificates
issued upon original issuance, disposition from the Corporation's treasury or
transfer or exchange of Common Stock) after the Record Date but prior to the
earliest of the Distribution Date, the Expiration Date, or the Final Expiration
Date shall have impressed, printed, written or stamped thereon or otherwise
affixed thereto the following legend:
9
<PAGE> 13
This certificate also evidences and entitles the holder
hereof to the same number of Rights (subject to adjustment) as
the number of shares of Common Stock represented by this
certificate, such Rights being on the terms provided under the
Rights Agreement between Delphi Automotive Systems Corporation
and BankBoston, N.A. (the "Rights Agent"), dated as of February
1, 1999, as it may be amended from time to time (the
"Agreement"), the terms of which are incorporated herein by
reference and a copy of which is on file at the principal
executive offices of Delphi Automotive Systems Corporation. Under
certain circumstances, as set forth in the Agreement, such Rights
shall be evidenced by separate certificates and shall no longer
be evidenced by this certificate. Delphi Automotive Systems
Corporation shall mail to the registered holder of this
certificate a copy of the Agreement without charge within five
days after receipt of a written request therefor. As provided in
Section 7(e) of the Agreement, Rights issued to or Beneficially
Owned by Acquiring Persons or their Affiliates or Associates (as
such terms are defined in the Agreement) or any subsequent holder
of such Rights shall be null and void and may not be exercised by
or transferred to any Person.
With respect to such certificates containing the foregoing legend, until the
Distribution Date the Rights associated with the Common Stock represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate, except as otherwise provided
herein, shall also constitute the transfer of the Rights associated with the
Common Stock represented thereby. In the event that the Corporation purchases or
otherwise acquires any Common Stock after the Record Date but prior to the
Distribution Date, any Rights associated with such Common Stock shall be deemed
canceled and retired so that the Corporation shall not be entitled to exercise
any Rights associated with the Common Stock which are no longer outstanding.
Notwithstanding this paragraph (c), the omission of a legend shall not affect
the enforceability of any part of this Agreement or the rights of any holder of
the Rights.
(d) As soon as practicable after the Distribution Date, the
Corporation will prepare and execute, the Rights Agent will countersign, and the
Corporation will send or cause to be sent (and the Rights Agent will, if
requested, send), by first class mail, postage prepaid, to each record holder of
the Common
10
<PAGE> 14
Stock as of the close of business on the Distribution Date, as shown by the
records of the Corporation, at the address of such holder shown on such records,
a certificate in the form provided by Section 4 hereof (a "RIGHT CERTIFICATE"),
evidencing one Right (subject to adjustment as provided herein) for each share
of Common Stock so held. As of and after the Distribution Date, the Rights shall
be evidenced solely by Right Certificates and may be transferred by the transfer
of the Right Certificate as permitted hereby, separately and apart from any
transfer of one or more shares of Common Stock.
Section 4. Form of Right Certificates. The Right
Certificates (and the forms of election to purchase shares, certificate and
assignment to be printed on the reverse thereof), when, as and if issued, shall
be substantially in the form set forth in Exhibit B hereto and may have such
marks of identification or designation and such legends, summaries or
endorsements printed thereon as may be required to comply with any law or with
any rule or regulation made pursuant thereto or with any rule or regulation of
any stock exchange on which the Common Stock or the Rights may from time to time
be listed or as the Corporation may deem appropriate to conform to usage or
otherwise and as are not inconsistent with the provisions of this Agreement.
Subject to the provisions of Section 22 hereof, Right Certificates evidencing
Rights whenever issued, (i) shall be dated as of the date of issuance of the
Rights they represent and (ii) subject to adjustment from time to time as
provided herein, on their face shall entitle the holders thereof to purchase
such number of one one-hundredths of a share (including fractional shares which
are integral multiples of one-hundredth of a share) of Preferred Stock as shall
be set forth thereon at the price per one one-hundredth of a share of Preferred
Stock payable upon exercise of a Right provided by Section 7(b) hereof, as the
same may from time to time be adjusted as provided herein (the "EXERCISE
PRICE").
Section 5. Countersignature and Registration.
(a) Each Right Certificate shall be executed on behalf of
the Corporation by its Chairman of the Board, President or any Vice President,
either manually or by facsimile signature, and have affixed thereto the
Corporation's seal or a facsimile thereof which shall be attested by the
Secretary or an Assistant Secretary of the Corporation, either manually or by
facsimile signature. Each Right Certificate shall be countersigned by the Rights
Agent either manually or by facsimile signature and shall not be valid for any
purpose unless so countersigned. In case any officer of the Corporation who
shall have signed any Right
11
<PAGE> 15
Certificate shall cease to be such officer of the Corporation before
countersignature by the Rights Agent and issuance and delivery of the
certificate by the Corporation, such Right Certificate, nevertheless, may be
countersigned by the Rights Agent and issued and delivered with the same force
and effect as though the person who signed such Right Certificates had not
ceased to be such officer of the Corporation. Any Right Certificate may be
signed on behalf of the Corporation by any person who, on the date of the
execution of such Right Certificate, shall be a proper officer of the
Corporation to sign such Right Certificate, although at the date of the
execution of this Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will
keep or cause to be kept, at its principal office or one or more offices
designated as the appropriate place for surrender of Right Certificates upon
exercise or transfer, and in such other locations as may be required by law,
books for registration and transfer of the Right Certificates issued hereunder.
Such books shall show the names and addresses of the respective holders of the
Right Certificates, the number of Rights evidenced on its face by each of the
Right Certificates and the date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of
Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
(a) Subject to the provisions of Section 7(e), 7(f) and 14
hereof, at any time after the Close of Business on the Distribution Date, and at
or prior to the Close of Business on the earlier of the Expiration Date or the
Final Expiration Date, any Right Certificate, may be (i) transferred or (ii)
split up, combined or exchanged for one or more other Right Certificates,
entitling the registered holder to purchase a like number of one one-hundredths
of a share of Preferred Stock as the Right Certificate or Rights Certificates
surrendered then entitled such holder to purchase. Any registered holder
desiring to transfer, split up, combine or exchange any Right Certificate shall
surrender the Right Certificate at the office of the Rights Agent designated for
the surrender of Right Certificates with the form of certificate and assignment
on the reverse side thereof duly endorsed (or enclose with such Right
Certificate a written instrument of transfer in form satisfactory to the
Corporation and the Rights Agent), duly executed by the registered holder
thereof or his attorney duly authorized in writing, and with such signature duly
guaranteed. Any registered holder desiring to split up, combine or exchange any
Right Certificate shall make
12
<PAGE> 16
such request in writing delivered to the Rights Agent, and shall surrender the
Right Certificate to be split up, combined or exchanged at the office of the
Rights Agent designated therefor. Thereupon, the Rights Agent shall countersign
and deliver to the person entitled thereto a Right Certificate or Right
Certificates, as the case may be, as so requested. The Corporation may require
payment of a sum sufficient to cover any Transfer Tax that may be imposed in
connection with any transfer, split up, combination or exchange of any Right
Certificates.
(b) Subject to the provisions of Section 7(e), 7(f) and 14
hereof, at any time after the Distribution Date and prior to the Expiration
Date, upon receipt by the Corporation and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them and, if requested by the Corporation,
reimbursement to the Corporation and the Rights Agent of all reasonable expenses
incidental thereto, or upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Corporation shall cause a new Right
Certificate of like tenor to be issued and delivered to the registered owner in
lieu of the Right Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Exercise Price; Expira-
tion Date of Rights.
(a) The Rights shall not be exercisable until, and shall
become exercisable on, the Distribution Date (unless otherwise provided herein,
including, without limitation, the restrictions on exercisability set forth in
Section 7(e) and 27(b) hereof). Except as otherwise provided herein, the Rights
may be exercised, in whole or in part, at any time commencing with the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase and certificate on the reverse side thereof duly executed
(with signatures duly guaranteed), to the Rights Agent at the principal office
of the Rights Agent at 150 Royall Street, Mail Stop 45-02-62, Camden,
Massachusetts 02021 (as such address may from time to time be changed), together
with payment of the Exercise Price for each Right exercised (as the same may
have been adjusted as hereinafter provided), at or prior to the Close of
Business on the earlier of (i) January 31, 2009 (the "FINAL EXPIRATION DATE") or
(ii) the date on which the Rights are redeemed as provided in Section 23 hereof
or the date on which the Rights are exchanged as provided in Section 27 hereof
(such earlier date being herein referred to as the "EXPIRATION DATE").
13
<PAGE> 17
(b) The Exercise Price shall initially be $65 for each one
one-hundredth (1/100) of a share of Preferred Stock issued pursuant to the
exercise of a Right. The Exercise Price and the number of one one-hundredths of
a share of Preferred Stock or other securities or property to be acquired upon
exercise of a Right shall be subject to adjustment from time to time as provided
in Sections 11 and 13 hereof. The Exercise Price shall be payable in lawful
money of the United States of America, in accordance with paragraph (c) below.
(c) Except as otherwise provided herein, upon receipt of a
Right Certificate representing exercisable Rights with the form of election to
purchase and certificate duly executed, accompanied by payment by certified
check, cashier's check, bank draft or money order payable to the Corporation or
the Rights Agent of the Exercise Price for the shares of Preferred Stock to be
purchased and an amount equal to any applicable Transfer Tax required to be paid
by the holder of the Right Certificate in accordance with Section 9(e) hereof,
the Rights Agent shall thereupon promptly (i) requisition from any transfer
agent of the Preferred Stock of the Corporation one or more certificates
representing the number of shares of Preferred Stock to be so purchased, and the
Corporation hereby authorizes and directs such transfer agent to comply with all
such requests, (ii) as provided in Section 14(b), at the election of the
Corporation, cause depositary receipts to be issued in lieu of fractional shares
of Preferred Stock, (iii) if the election provided for in the immediately
preceding clause (ii) has not been made, requisition from the Corporation the
amount of cash to be paid in lieu of the issuance of fractional shares (other
than fractions that are integral multiples of one one-hundredth of a share) in
accordance with Section 14(b) hereof, (iv) after receipt of such Preferred Stock
certificates and, if applicable, depositary receipts, cause the same to be
delivered to or upon the order of the registered holder of such Right
Certificate, registered in such name or names as may be designated by such
holder and (v) when appropriate, after receipt, promptly deliver such cash to or
upon the order of the registered holder of such Right Certificate; provided,
however, that in the case of a purchase of securities other than Preferred
Stock, pursuant to Section 13 hereof, the Rights Agent shall promptly take the
appropriate actions corresponding in such case to that referred to in the
foregoing clauses (i) through (v) of this Section 7(c). Notwithstanding the
foregoing provisions of this Section 7(c), the Corporation may suspend the
issuance of shares of Preferred Stock and other securities upon exercise of a
Right for a reasonable period, not in excess of 90 days, during which the
Corporation seeks to register under the Securities Act of 1933, as amended (the
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<PAGE> 18
"ACT"), and any applicable securities law of any other jurisdiction, the shares
of Preferred Stock or other securities to be issued pursuant to the Rights;
provided, however, that nothing contained in this Section 7(c) shall relieve the
Corporation of its obligations under Section 9(d) hereof. Upon any such
suspension, the Corporation shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect.
(d) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Right
Certificate or his assign, subject to the provisions of Section 14(b) hereof.
(e) Notwithstanding any provision of this Agreement to the
contrary, from and after the time (the "INVALIDATION TIME") when any Person
first becomes an Acquiring Person, any Rights that are Beneficially Owned by (x)
such Acquiring Person (or any Associate or Affiliate of such Acquiring Person),
(y) a transferee of such Acquiring Person (or any such Associate or Affiliate)
who becomes a transferee after the invalidation time or (z) a transferee of such
Acquiring Person (or any such Associate or Affiliate) who becomes a transferee
prior to or concurrently with the invalidation time pursuant to either (I) a
transfer from the Acquiring Person (or any such Associate or Affiliate) to
holders of its equity securities or to any Person with whom it has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (II) a transfer which the Board of Directors has determined is part of
a plan, arrangement or understanding which has the purpose or effect of avoiding
the provisions of this Section 7(e), and subsequent transferees of such Persons
referred to in clause (y) and (z) above, shall be null and void without any
further action and any holder of such Rights shall thereafter have no rights
whatsoever with respect to such Rights under any provision of this Agreement.
The Corporation shall use all reasonable efforts to ensure that the provisions
of this Section 7(e) are complied with, but shall have no liability to any
holder of Right Certificates or any other Person as a result of its failure to
make any determination with respect to an Acquiring Person or its Affiliates,
Associates or transferees hereunder. No Right Certificate shall be issued
pursuant to Section 3 hereof that represents Rights beneficially owned by an
Acquiring Person or any Affiliate or Associate thereof whose Rights would be
null and void pursuant to the provisions of this Section 7(e); no Right
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<PAGE> 19
Certificate shall be issued at any time upon the transfer of any Rights to an
Acquiring Person (or an Affiliate or Associate of such Acquiring Person) whose
Rights would be null and void pursuant to the provisions of this Section 7(e) or
any Associate or Affiliate thereof or to any nominee of such Acquiring Person,
Associate or Affiliate; and any Right Certificate delivered to the Rights Agent
for transfer to an Acquiring Person (or an Associate or Affiliate of such
Acquiring Person) whose Rights would be void pursuant to the provisions of this
Section 7(e) shall be cancelled.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Corporation shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate following the form of
election to purchase set forth on the reverse side of the Right Certificate
surrendered for such exercise and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Corporation shall reasonably request.
Section 8. Cancellation and Destruction of Right
Certificates. All Right Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange shall, if surrendered to the
Corporation or to any of its agents, be delivered to the Rights Agent for
cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall
be cancelled by it, and no Right Certificates shall be issued in lieu thereof
except as expressly permitted by any of the provisions of this Agreement. The
Corporation shall deliver to the Rights Agent for cancellation and retirement,
and the Rights Agent shall cancel and retire, any Right Certificate purchased or
acquired by the Corporation otherwise than upon the exercise thereof. The Rights
Agent shall deliver all cancelled Right Certificates to the Corporation, or
shall, at the written request of the Corporation, destroy such cancelled Right
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Corporation.
Section 9. Reservation and Availability of Shares of
Preferred Stock.
(a) The Corporation covenants and agrees that it will cause
to be reserved and kept available out of the authorized and unissued shares of
preferred stock, $0.10 par value per share, of the Corporation or out of
authorized and issued shares of Preferred Stock held in its treasury, such
number of shares of
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<PAGE> 20
Preferred Stock as will from time to time be sufficient to permit the exercise
in full of all outstanding Rights.
(b) The Corporation shall use its best efforts to cause,
from and after such time as the Rights become exercisable, all shares of
Preferred Stock issued or reserved for issuance in accordance with this
Agreement to be listed, upon official notice of issuance, upon the principal
national securities exchange, if any, upon which the Common Stock is listed or,
if the principal market for the Common Stock is not on any national securities
exchange, to be eligible for quotation in the National Association of Securities
Dealers' Automated Quotation System or any successor thereto or other comparable
quotation system.
(c) The Corporation covenants and agrees that it will take
all such action as may be necessary to ensure that all shares of Preferred Stock
delivered upon exercise of Rights shall, at the time of delivery of the
certificates for such shares (subject to payment of the Exercise Price in
respect thereof), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(d) The Corporation shall use its best efforts to (i) file,
as soon as practicable following the occurrence of the event described in
Section 11(a)(ii), or as soon as is required by law following the Distribution
Date, as the case may be, a registration statement under the Act, with respect
to the shares of Preferred Stock purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing, and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting the
requirements of the Act) until the earlier of (a) the date as of which the
Rights are no longer exercisable for Preferred Stock and (b) the earlier of the
Expiration Date and the Final Expiration Date. The Corporation may temporarily
suspend, for a period of time not to exceed ninety days, the issuance of shares
of Preferred Stock upon exercise of a Right in order to prepare and file a
registration statement under the Act and permit it to become effective. The
Corporation will also take such action as may be appropriate under, or to ensure
compliance with, the securities or "blue sky" laws of the various states in
connection with the exercisability of the Rights. Notwithstanding any provision
of this Agreement to the contrary, the Rights shall not be exercisable in any
jurisdiction unless the requisite qualification in such jurisdiction shall have
been obtained and until a registration statement under the Act (if required)
shall have been declared effective.
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<PAGE> 21
(e) The Corporation covenants and agrees that it will pay
when due and payable any and all federal and state Transfer Taxes which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any shares of Preferred Stock issued or delivered upon the exercise of Rights.
The Corporation shall not, however, be required to pay any Transfer Tax which
may be payable in respect of any transfer or delivery of a Right Certificate to
a Person other than, or the issuance or delivery of certificates for Preferred
Stock upon exercise of Rights in a name other than that of, the registered
holder of the Right Certificate, and the Corporation shall not be required to
issue or deliver a Right Certificate or certificate for Preferred Stock to a
Person other than such registered holder until any such Transfer Tax shall have
been paid (any such Transfer Tax being payable by the holder of such Right
Certificate at the time of surrender) or until it has been established to the
Corporation's satisfaction that no such Transfer Tax is due.
(f) The requirements of this Section 9 shall apply to shares
of Common Stock of the Corporation if the Corporation has elected in accordance
with Section 11(a)(iii) hereof to substitute shares of Common Stock for shares
of Preferred Stock that otherwise may be purchased upon the exercise of Rights.
Section 10. Preferred Stock Record Date. Each Person in
whose name any certificate for shares of Preferred Stock is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of the Preferred Stock represented thereby on, and such certificate shall
be dated as of, the date upon which the Right Certificate evidencing such Rights
was duly surrendered and payment of the Exercise Price (and any applicable
Transfer Taxes) was made; provided, however, that, if the date of such surrender
and payment is a date upon which the Preferred Stock transfer books of the
Corporation are closed, such Person shall be deemed to have become the record
holder of such shares on, and such certificate shall be dated as of, the next
succeeding Business Day on which the Preferred Stock transfer books of the
Corporation are open.
Section 11. Adjustment of Exercise Price or Number of
Shares. The Exercise Price and the number of shares of Preferred Stock which may
be purchased upon exercise of a Right are subject to adjustment from time to
time as provided in this Section 11.
(a) (i) In the event the Corporation shall at any time after
the date of this Agreement (A) declare or pay any dividend
on Common Stock payable in shares of Common Stock, (B)
subdivide or split the outstanding
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<PAGE> 22
shares of Common Stock into a greater number of shares or
(C) combine or consolidate the outstanding shares of Common
Stock into a smaller number of shares or effect a reverse
split of the outstanding shares of Common Stock, then and in
each such event the number of one one-hundredths of a share
of Preferred Stock issuable upon the Exercise of a Right
after the record date for such event (if one shall have been
established or, if not, after the date of such event) shall
be the number of one one-hundredths of a share of Preferred
Stock issuable immediately prior to such event multiplied by
a fraction, the numerator of which is the number of shares
of Common Stock outstanding immediately prior to such event
and the denominator of which is the number of shares of
Common Stock outstanding immediately after such event and
the Exercise Price to be in effect after the record date for
such event (if one shall have been established or, if not,
after the date of such event) shall be determined by
multiplying the Exercise Price in effect immediately prior
to such event by such fraction. If an event occurs which
would require an adjustment under both this Section 11(a)(i)
and Section 11(a)(ii) hereof, the adjustment provided for in
this Section 11(a)(i) shall be in addition to, and shall be
made prior to, any adjustment required pursuant to Section
11(a)(ii).
(ii) Subject to Section 27 of this Agreement, in the
event that any Person shall become an Acquiring Person,
then, except as otherwise provided in this Section 11, each
holder of a Right, except as provided in Section 7(e)
hereof, shall thereafter have the right to receive upon
exercise of such Right in accordance with the terms of this
Agreement and payment of the Exercise Price, such number of
one one-hundredths of a share of Preferred Stock as shall
equal the result obtained by (1) multiplying the then
current Exercise Price by the number of one one-hundredths
of a share of Preferred Stock for which a Right is then
exercisable and dividing the product by (2) 50% of the per
share Fair Market Value of the Preferred Stock (determined
pursuant to Section 11(b) hereof) on the date of such
occurrence.
(iii) In the event that the Corporation does not have
available sufficient authorized but unissued Preferred Stock
to permit the exercise in full of the Rights in accordance
with the foregoing subparagraph
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<PAGE> 23
(ii), the Corporation shall take all such action as may be
necessary to authorize and reserve for issuance such number
of additional shares of Preferred Stock as may from time to
time be required to be issued upon the exercise in full of
all Rights from time to time outstanding and, if necessary,
shall use its best efforts to obtain stockholder approval
thereof. In lieu of issuing shares of Preferred Stock in
accordance with the foregoing subparagraph (ii), the
Corporation may, if the Board of Directors determines that
such action is necessary or appropriate and not contrary to
the interests of holders of Rights, elect to issue or pay,
upon the exercise of the Rights, cash, property, shares of
Preferred or Common Stock, or any combination thereof,
having an aggregate Fair Market Value equal to the Fair
Market Value of the shares of Preferred Stock which
otherwise would have been issuable pursuant to Section
11(a)(ii), which Fair Market Value shall be determined by an
investment banking firm selected by the Board of Directors.
For purposes of the preceding sentence, the Fair Market
Value of the Preferred Stock shall be as determined pursuant
to Section 11(b). Subject to Section 23 hereof, any such
election by the Board of Directors of the Corporation must
be made and publicly announced within thirty (30) days after
the date on which the event described in Section 11(a)(ii)
occurs.
(b) For the purpose of this Agreement, the "FAIR MARKET
VALUE" of any share of Preferred Stock, Common Stock or any other stock or any
Right or other security or any other property on any date shall be determined as
provided in this Section 11(b). In the case of a publicly traded stock or other
security, the Fair Market Value on any date shall be deemed to be the average of
the daily closing prices per share of such stock or per unit of such other
security for the 30 consecutive Trading Days (as such term is hereinafter
defined) immediately prior to such date; provided, however, that in the event
that the Fair Market Value per share of any share of Common Stock is determined
during a period which includes any date that is within 30 Trading Days after (i)
the ex-dividend date for a dividend or distribution on such stock payable in
shares of Common Stock or securities convertible into shares of Common Stock,
or (ii) the effective date of any subdivision, split, combination,
consolidation, reverse stock split or reclassification of such stock, then, and
in each such case, the Fair Market Value shall be appropriately adjusted by the
Board of Directors of the Corporation to take into account ex-dividend or
post-effective date trading. The
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<PAGE> 24
closing price for any day shall be the last sale price, regular way, or, in case
no such sale takes place on such day, the average of the closing bid and asked
prices, regular way (in either case, as reported in the applicable transaction
reporting system with respect to securities listed or admitted to trading on the
New York Stock Exchange), or, if the securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the applicable
transaction reporting system with respect to securities listed on the principal
national securities exchange on which such security is listed or admitted to
trading; or, if not listed or admitted to trading on any national securities
exchange, the last quoted price (or, if not so quoted, the average of the high
bid and low asked prices) in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") or such other system then in use; or, if no bids for such security
are quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in such
security selected by the Board of Directors of the Corporation. The term
"TRADING DAY" shall mean a day on which the principal national securities
exchange on which such security is listed or admitted to trading is open for the
transaction of business or, if such security is not listed or admitted to
trading on any national securities exchange, a Business Day. If a security is
not publicly held or not so listed or traded, "Fair Market Value" shall mean the
fair value per share of stock or per other unit of such other security, as
determined by an independent investment banking firm experienced in the
valuation of securities selected in good faith by the Board of Directors of the
Corporation, or, if no such investment banking firm is, in the good faith
judgment of the Board of Directors, available to make such determination, in
good faith by the Board of Directors of the Corporation; provided, however, that
for purposes of making the adjustment provided for by Section 11(a)(ii) hereof,
the Fair Market Value of a share of Preferred Stock shall not be less than 100%
of the product of the Fair Market Value of a share of Common Stock multiplied by
the higher of the then Dividend Multiple or Vote Multiple applicable to the
Preferred Stock (as defined in the Certificate of Designations relating to the
Preferred Stock) and shall not exceed 105% of the product of the then Fair
Market Value of a share of Common Stock multiplied by the higher of the then
Dividend Multiple or Vote Multiple applicable to the Preferred Stock. In the
case of property other than securities, the "Fair Market Value" thereof shall be
determined in good faith by the Board of Directors of the Corporation based upon
such appraisals or valuation reports of such independent experts as the Board of
Directors of the Corporation shall in good faith determine to be
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<PAGE> 25
appropriate in accordance with good business practices and the interests of the
holders of Rights. Any such determination of Fair Market Value shall be
described in a statement filed with the Rights Agent and shall be binding upon
the Rights Agent.
(c) In case the Corporation shall fix a record date for the
issuance of rights, options or warrants to all holders of Common Stock entitling
them (for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Common Stock or securities convertible into Common
Stock at a price per share (or having a conversion price per share, if a
security convertible into Common Stock) less than the then current per share
Fair Market Value of the Common Stock on such record date, the Exercise Price to
be in effect after such record date shall be determined by multiplying the
Exercise Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
on such record date plus the number of shares of Common Stock which the
aggregate offering price of the total number of shares of Common Stock so to be
offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current Fair Market Value
and the denominator of which shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of Common
Stock to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible). In case such
subscription price may be paid in a consideration part or all of which shall be
in a form other than cash, the value of such consideration shall be as
determined in good faith by the Board of Directors of the Corporation, whose
determination shall be described in a statement filed with the Rights Agent.
Shares of Common Stock owned by or held for the account of the Corporation shall
not be deemed outstanding for the purpose of any such computation. Such
adjustment shall be made successively whenever such a record date is fixed and
in the event that such rights, options or warrants are not so issued, the
Exercise Price shall be adjusted to be the Exercise Price which would then be in
effect if such record date had not been fixed.
(d) In case the Corporation shall fix a record date which is
subsequent to the 270th day after the initial issuance of Rights for the making
of a distribution to all holders of the Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Corporation is the continuing or surviving corporation) of evidences of
indebtedness, cash (other than a regular quarterly cash dividend not in excess
of 150% of the previous regular quarterly cash
22
<PAGE> 26
dividend out of the earnings or retained earnings of the Corporation), assets
(other than a dividend payable in shares of Common Stock) or subscription rights
or warrants (excluding those referred to in Section 11(c) hereof), the Exercise
Price to be in effect after such record date shall be determined by multiplying
the Exercise Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the Fair Market Value of the shares of
Common Stock on such record date, less the fair market value (as determined in
good faith by the Board of Directors of the Corporation, whose determination
shall be described in a statement filed with the Rights Agent) of the portion of
the assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to one share of Common Stock and the
denominator of which shall be such current Fair Market Value of the shares of
Common Stock. Such adjustment shall be made successively whenever such a record
date is fixed and in the event that such distribution is not so made, the
Exercise Price shall again be adjusted to be the Exercise Price which would then
be in effect if such record date had not been fixed.
(e) Unless the Corporation shall have exercised its election
as provided in Section 11(f), upon each adjustment of the Exercise Price as a
result of the calculations made in Section 11(c) and (d), each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Exercise Price, that number of one
one-hundredths of a share of Preferred Stock obtained by (i) multiplying (x) the
number of one one-hundredths of a share of Preferred Stock that could be
purchased upon exercise of a Right immediately prior to the adjustment pursuant
to this Section 11(e) by (y) the Exercise Price in effect immediately prior to
such adjustment of the Exercise Price and (ii) dividing the product so obtained
by the Exercise Price in effect immediately after such adjustment of the
Exercise Price.
(f) The Corporation may elect on or after the date of any
adjustment of the Exercise Price pursuant to Section 11(c) and 11(d) to adjust
the number of Rights in substitution for any adjustment pursuant to Section
11(e) in the number of one one-hundredths of a share of Preferred Stock
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment of the number of Rights shall be exercisable for the number of
one one-hundredths of a share of Preferred Stock for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights obtained by dividing the Exercise Price in effect immediately
23
<PAGE> 27
prior to adjustment of the Exercise Price by the Exercise Price in effect
immediately after adjustment of the Exercise Price. The Corporation shall make a
public announcement of its election to adjust the number of Rights, indicating
the record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Exercise
Price is adjusted or any day thereafter, but, if the Right Certificates have
been issued, shall be at least 10 days later than the date of the public
announcement. If the Right Certificates have been issued, upon each adjustment
of the number of Rights pursuant to this Section 11(e), the Corporation shall,
as promptly as practicable, cause to be distributed to holders of record of
Right Certificates on such record date Right Certificates evidencing, subject to
Section 14 hereof, the additional Rights, if any, to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Corporation,
shall cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Corporation, new
Right Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Right Certificates so to be distributed shall be
issued, executed and countersigned in the manner provided for herein and shall
be registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
(g) All calculations under this Section 11 shall be made to
the nearest cent or to the nearest one one-hundredth of a share, as the case may
be.
(h) Irrespective of any adjustment or change in the Exercise
Price or the number of shares of Preferred Stock issuable upon the exercise of
the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Exercise Price and the number of shares to be issued
upon exercise of the Rights as in the initial Right Certificates issued
hereunder but, nevertheless, shall represent the Rights as so adjusted.
(i) Before taking any action that would cause an adjustment
reducing the purchase price per whole share of Preferred Stock upon exercise of
the Rights below the then par value, if any, of the shares of Preferred Stock,
the Corporation shall use its best efforts to take any corporate action which
may, in the opinion of its counsel, be necessary in order that the Corporation
may validly and legally issue fully paid and non-
24
<PAGE> 28
assessable shares of such Preferred Stock at such adjusted purchase price per
share.
(j) Anything in this Section 11 to the contrary
notwithstanding, in the event of any reclassification of stock of the
Corporation or any recapitalization, reorganization or partial liquidation of
the Corporation or similar transaction, the Corporation shall be entitled to
make such further adjustments in the number of shares of Preferred Stock which
may be acquired upon exercise of the Rights, and such adjustments in the
Exercise Price therefor, in addition to those adjustments expressly required by
the other paragraphs of this Section 11, as the Board of Directors of the
Corporation shall determine to be necessary or appropriate in order for the
holders of the Rights in such event to be treated equitably and in accordance
with the purpose and intent of this Agreement or in order that any such event
shall not, but for such adjustment, in the opinion of counsel to the
Corporation, result in the stockholders of the Corporation being subject to any
United States federal income tax liability by reason thereof.
(k) If as a result of an adjustment made pursuant to Section
11(a) hereof, the holder of any Right thereafter exercised shall become entitled
to receive any shares of capital stock of the Corporation other than the
Preferred Stock, thereafter the Exercise Price and the number of such other
shares so receivable upon exercise of a Right shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Preferred Stock contained in Sections
11(a), 11(c), 11(e), 11(f) and 11(j) hereof, as applicable, and the provisions
of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Stock shall
apply on like terms to any such other shares.
Section 12. Certification of Adjusted Exercise Price or
Number of Shares. Whenever an adjustment is made as provided in Section 11, 13,
23 or 27, the Corporation shall (a) promptly prepare a certificate setting forth
such adjustment, and a brief statement of the facts giving rise to such
adjustment, (b) promptly file with the Rights Agent and with each transfer agent
for the Preferred Stock a copy of such certificate and (c) mail a brief summary
thereof to each holder of a Right Certificate in accordance with Section 25.
Notwithstanding the foregoing sentence, the failure of the Corporation to make
such certification or give such notice shall not affect the validity of or the
force or effect of the requirement for such adjustment. Any adjustment to be
made pursuant to Section 11, 13 or 23(c) of this Agreement shall be effective as
of the date of the event
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giving rise to such adjustment. The Rights Agent shall be fully protected in
relying on any such certificate and on any adjustment therein contained and
shall not be deemed to have knowledge of any adjustment unless and until it
shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer
of Assets or Earning Power.
(a) In the event that, at any time after the time
that any Person becomes an Acquiring Person, (x) the Corporation shall, directly
or indirectly, consolidate with, or merge with and into, any other Person or
Persons (other than an Exempt Person) and the Corporation shall not be the
surviving or continuing corporation of such consolidation or merger, or (y) any
Person or Persons (other than an Exempt Person) shall, directly or indirectly,
consolidate with, or merge with and into, the Corporation, and the Corporation
shall be the continuing or surviving corporation of such consolidation or merger
and, in connection with such consolidation or merger, all or part of the
outstanding shares of Common Stock shall be changed or converted into or
exchanged for stock or other securities of any other Person (other than an
Exempt Person) or of the Corporation or cash or any other property, or (z) the
Corporation or one or more of its Subsidiaries shall, directly or indirectly,
sell or otherwise transfer to any other Person (other than an Exempt Person), in
one or more transactions, assets or earning power aggregating more than 50% of
the assets or earning power of the Corporation and its Subsidiaries (taken as a
whole), then, on the first occurrence of any such event, proper provision shall
be made so that (i) each holder of record of a Right, except as provided in
Section 7(e) hereof, shall thereafter have the right to receive, upon the
exercise thereof at a price equal to the then current Exercise Price multiplied
by the number of one one-hundredths of a share of Preferred Stock for which a
Right is then exercisable, in accordance with the terms of this Agreement and in
lieu of shares of Preferred Stock, such number of shares of validly issued,
fully paid, non-assessable and freely tradeable Common Stock of the Principal
Party (as defined in Section 13(b) hereof), not subject to any liens,
encumbrances, rights of first refusal or other adverse claims, as shall equal
the result obtained by (1) multiplying the then current Exercise Price by the
number of one one-hundredths of a share of Preferred Stock for which a Right is
then exercisable and dividing that product by (2) 50% of the then per share Fair
Market Value of the Common Stock of the Principal Party on the date of the
consummation, merger, sale or transfer; provided, however, that the Exercise
Price (as adjusted) and the number of shares of
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Common Stock of such Principal Party so receivable upon exercise of a Right
shall be subject to further adjustment as appropriate in accordance with Section
11 hereof to reflect any events occurring in respect of the Common Stock of such
Principal Party after the occurrence of such consolidation, merger, sale or
transfer; (ii) such Principal Party shall thereafter be liable for, and shall
assume, by virtue of such consolidation, merger, sale or transfer, all the
obligations and duties of the Corporation pursuant to this Agreement; (iii) the
term "Corporation" for all purposes of this Agreement shall thereafter be deemed
to refer to such Principal Party; (iv) such Principal Party shall take such
steps (including, but not limited to, the reservation of a sufficient number of
shares of its Common Stock in accordance with the provisions of Section 9 hereof
applicable to the reservation of Preferred Stock) in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to its
shares of Common Stock thereafter deliverable upon the exercise of the Rights;
provided, however, that, upon the subsequent occurrence of any merger,
consolidation, sale of all or substantially all of the assets, recapitalization,
reclassification of shares, reorganization or other extraordinary transaction in
respect of such Principal Party, each holder of a Right shall thereupon be
entitled to receive, upon exercise of a Right and payment of the Exercise Price,
such cash, shares, rights, warrants and other property which such holder would
have been entitled to receive had it, at the time of such transaction, owned the
shares of Common Stock of the Principal Party purchasable upon the exercise of a
Right, and such Principal Party shall take such steps (including, but not
limited to, reservation of shares of stock) as may be necessary to permit the
subsequent exercise of the Rights in accordance with the terms hereof for such
cash, shares, rights, warrants and other property; and (v) the provisions of
Section 11(a)(ii) hereof shall be of no effect following the occurrence of any
event described in clause (x), (y) or (z) above of this Section 13(a).
(b) "PRINCIPAL PARTY" shall mean
(i) in the case of any transaction described in clause
(x) or (y) of the first sentence of Section 13(a) hereof:
(A) the Person that is the issuer of the securities into
which shares of Common Stock of the Corporation are changed
or otherwise exchanged or converted in such merger or
consolidation, or, if there is more than one such issuer,
the issuer of the Common Stock of which has the greatest
market value or (B) if
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no securities are so issued, (I) the Person that is the
other party to the merger or consolidation and that survives
such merger or consolidation, or, if there is more than one
such Person, the Person the Common Stock of which has the
greatest market value or (II) if the Person that is the
other party to the merger or consolidation does not survive
the merger or consolidation, the Person that does survive
the merger or consolidation (including the Corporation if it
survives); and
(ii) in the case of any transaction described in clause
(z) of the first sentence in Section 13(a), the Person that
is the party receiving the greatest portion of the assets or
earning power transferred pursuant to such transaction or
transactions, or, if each Person that is a party to such
transaction or transactions receives the same portion of the
assets or earning power so transferred or if the Person
receiving the greatest portion of the assets or earning
power cannot be determined, whichever of such Persons as is
the issuer of Common Stock having the greatest market value
of shares outstanding;
provided, however, that in any such case, if the Common Stock of such Person is
not at such time and has not been continuously over the preceding 12-month
period registered under Section 12 of the Exchange Act, then (1) if such Person
is a direct or indirect Subsidiary of another Person the Common Stock of which
is and has been so registered, the term "Principal Party" shall refer to such
other Person, or (2) if such Person is a Subsidiary, directly or indirectly, of
more than one Person, the Common Stocks of all of which are and have been so
registered, the term "Principal Party" shall refer to whichever of such Persons
is the issuer of the Common Stock having the greatest market value of shares
outstanding, or (3) if such Person is owned, directly or indirectly, by a joint
venture formed by two or more Persons that are not owned, directly or
indirectly, by the same Person, the rules set forth in clauses (1) and (2) above
shall apply to each of the owners having an interest in the venture as if the
Person owned by the joint venture was a Subsidiary of both or all of such joint
venturers, and the Principal Party in each such case shall bear the obligations
set forth in this Section 13 in the same ratio as its interest in such Person
bears to the total of such interests.
(c) The Corporation shall not consummate any consolidation,
merger or sale or transfer of assets or earning power
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referred to in Section 13(a) unless the Principal Party shall have a sufficient
number of authorized shares of its Common Stock that have not been issued or
reserved for issuance to permit exercise in full of all Rights in accordance
with this Section 13 and unless prior thereto the Corporation and the Principal
Party involved therein shall have executed and delivered to the Rights Agent an
agreement confirming that the Principal Party shall, upon consummation of such
consolidation, merger or sale or transfer of assets or earning power, assume
this Agreement in accordance with Section 13(a) hereof and that all rights of
first refusal or preemptive rights in respect of the issuance of shares of
Common Stock of the Principal Party upon exercise of outstanding Rights have
been waived and that such transaction shall not result in a default by the
Principal Party under this Agreement, and further providing that, as soon as
practicable after the date of any consolidation, merger or sale or transfer of
assets or earning power referred to in Section 13(a) hereof, the Principal Party
will:
(i) prepare and file a registration statement under the
Act with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate
form, use its best efforts to cause such registration
statement to become effective as soon as practicable after
such filing and use its best efforts to cause such
registration statement to remain effective (with a
prospectus at all times meeting the requirements of the Act)
until the date of expiration of the Rights, and similarly
comply with applicable state securities laws;
(ii) use its best efforts to list (or continue the
listing of) the Rights and the securities purchasable upon
exercise of the Rights on a national securities exchange or
to meet the eligibility requirements for quotation on
NASDAQ;
(iii) deliver to holders of the Rights historical
financial statements for the Principal Party which comply
in all respects with the requirements for registration on
Form 10 (or any successor form) under the Exchange Act. In
the event that any of the transactions described in Section
13(a) hereof shall occur at any time after the occurrence of
a transaction described in Section 11(a)(ii) hereof, the
Rights which have not theretofore been exercised shall,
subject to the provisions of Section 7(e) hereof, thereafter
be
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exercisable in the manner described in Section 13(a);
and
(iv) obtain waivers of any rights of first refusal or
preemptive rights in respect of the Common Stock of the
Principal Party subject to purchase upon exercise of
outstanding Rights.
(d) In case the Principal Party which is to be a party to a
transaction referred to in this Section 13 has a provision in any of its
authorized securities or in its Certificate of Incorporation or By-laws or other
instrument governing its affairs, which provision would have the effect of (i)
causing such Principal Party to issue, in connection with, or as a consequence
of, the consummation of a transaction referred to in this Section 13, shares of
Common Stock of such Principal Party at less than the then Fair Market Value per
share (determined pursuant to Section 11(b) hereof) or securities exercisable
for, or convertible into, Common Stock of such Principal Party at less than such
then Fair Market Value (other than to holders of Rights pursuant to this Section
13) or (ii) providing for any special tax or similar payment in connection with
the issuance to any holder of a Right of Common Stock of such Principal Party
pursuant to the provisions of this Section 13, then, in such event, the
Corporation shall not consummate any such transaction unless prior thereto the
Corporation and such Principal Party shall have executed and delivered to the
Rights Agent a supplemental agreement providing that the provision in question
of such Principal Party shall have been canceled, waived or amended, or that the
authorized securities shall be redeemed, so that the applicable provision will
have no effect in connection with, or as a consequence of, the consummation of
the proposed transaction.
(e) The Corporation covenants and agrees that it shall not,
at any time after any Person becomes an Acquiring Person, enter into any
transaction of the type described in clauses (x) through (z) of the first
sentence of Section 13(a) hereof if (i) at the time of or immediately after such
consolidation, merger, sale, transfer or other transaction there are any rights,
warrants or other instruments or securities outstanding or agreements in effect
which would substantially diminish or otherwise eliminate the benefits intended
to be afforded by the Rights, (ii) prior to, simultaneously with or immediately
after such consolidation, merger, sale, transfer or other transaction, the
stockholders of the Person who constitutes, or would constitute, the Principal
Party for purposes of Section 13(a) hereof shall have received a distribution of
Rights previously
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owned by such Person or any of its Affiliates or Associates or (iii) the form or
nature of organization of the Principal Party would preclude or limit the
exercisability of the Rights.
Section 14. Fractional Rights and Fractional Shares.
(a) The Corporation shall not be required to issue fractions
of Rights or to distribute Right Certificates which evidence fractional Rights
(i.e., Rights to acquire less than one one-hundredth of a share of Preferred
Stock), unless such fractional Rights result from a transaction referred to in
Section 11(a)(i) or 11(f) hereof. If the Corporation shall determine not to
issue such fractional Rights, then, in lieu of such fractional Rights, there
shall be paid to the holders of record of the Right Certificates with regard to
which such fractional Rights would otherwise be issuable, an amount in cash
equal to the same fraction of the Fair Market Value of a whole Right.
(b) The Corporation shall not be required to issue fractions
of shares of Preferred Stock (other than fractions that are integral multiples
of one one-hundredth of a share) upon exercise of the Rights or to distribute
certificates which evidence fractional shares (other than fractions that are
integral multiples of one one-hundredth of a share). In lieu of issuing
fractions of shares of Preferred Stock, the Corporation may, at its election,
issue depositary receipts evidencing fractions of shares pursuant to an
appropriate agreement between the Corporation and a depositary selected by it,
provided that such agreement shall provide that the holders of such depositary
receipts shall have all of the rights, privileges and preferences to which they
would be entitled as owners of the Preferred Stock. With respect to fractional
shares that are not integral multiples of one one-hundredth of a share, if the
Corporation does not issue such fractional shares or depositary receipts in lieu
thereof, there shall be paid to the holders of record of Right Certificates at
the time such Right Certificates are exercised as herein provided an amount in
cash equal to the same fraction of the Fair Market Value of a share of Preferred
Stock.
(c) The holder of a Right by the acceptance of a Right
expressly waives his right to receive any fractional Right or any fractional
shares of Preferred Stock (other than fractions which are integral multiples of
one one-hundredth of a share) upon exercise of a Right.
Section 15. Rights of Action. All rights of action in
respect of this Agreement, except the rights of action given to
the Rights Agent in Section 18 hereof, are vested in the
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respective registered holders of the Right Certificates (and, prior to the
Distribution Date, the holders of record of the Common Stock); and any holder of
record of any Right Certificate (or, prior to the Distribution Date, of the
Common Stock), without the consent of the Rights Agent or of the holder of any
other Right Certificate (or, prior to the Distribution Date, of the Common
Stock), may, in his own behalf and for his own benefit, enforce, and may
institute and maintain any suit, action or proceeding against the Corporation to
enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Right Certificate in the manner provided in such Right
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and will be entitled to specific performance of the
obligations under, and injunctive relief against actual or threatened violations
of, the obligations of any Person subject to this Agreement.
Section 16. Agreement of Right Holders. Each holder of a
Right, by accepting the same, consents and agrees with the Corporation and the
Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights shall be
evidenced by the certificates for Common Stock (or in the case of
uncertificated shares of Common Stock, by the book-entry account
that evidences record ownership of such shares) registered in the
name of the holders of Common Stock (together, as applicable,
with the Summary of Rights), which certificates for Common Stock
(or book-entry account) shall also constitute certificates for
Rights, and not by separate Right Certificates, and each Right
shall be transferable only simultaneously and together with the
transfer of shares of Common Stock;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if
surrendered at the office of the Rights Agent designated for such
purpose, duly endorsed or accompanied by a proper instrument of
transfer; and
(c) the Corporation and the Rights Agent may deem and treat
the Person in whose name the Right Certificate (or, prior to the
Distribution Date, the associated Common Stock certificate or, in
the case of uncertificated shares of Common Stock, the book-entry
account evidencing record
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<PAGE> 36
ownership of such shares) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any
notations of ownership or writing on the Right Certificates or
the associated Common Stock certificate made by anyone other than
the Corporation or the Rights Agent) for all purposes whatsoever,
and neither the Corporation nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a
Stockholder. No holder, as such, of any Right Certificate shall be entitled to
vote, receive dividends or be deemed for any purpose the holder of Preferred
Stock or any other securities which may at any time be issuable on the exercise
of the Rights represented thereby, nor shall anything contained herein or in
any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder or other securityholder
of the Corporation or of a securityholder of any other Person or any right to
vote for the election of directors or upon any matter submitted to stockholders
at any meeting thereof, or to give or withhold consent to any corporate action
or securityholder action, or to receive notice of meetings or other actions
affecting stockholders or securityholders (except as provided in Section 24
hereof), or to receive dividends or subscription rights, or otherwise, except in
any such case the rights, if any, in respect thereof provided by this Agreement,
until the Right or Rights evidenced by such Right Certificate shall have been
exercised in accordance with the provisions hereof for such stock or other
security.
Section 18. Concerning the Rights Agent.
(a) The Corporation agrees to pay to the Rights Agent
reasonable compensation for all services rendered by it hereunder and, from time
to time, on demand of the Rights Agent, its reasonable expenses and counsel fees
and other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The
Corporation also agrees to indemnify the Rights Agent for, and to hold it
harmless against, any loss, liability, or expense, incurred without gross
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted to be done by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the cost and expenses
of defending against any claim of liability relating to the Rights or this
Agreement.
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(b) The Rights Agent shall be protected against, and shall
incur no liability for or in respect of, any action taken, suffered or omitted
by it in connection with its administration of this Agreement in reliance upon
any Right Certificate or certificate for Preferred Stock or for other securities
of the Corporation, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons.
Section 19. Merger or Consolidation of, or Change in Name
of, the Rights Agent.
(a) Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust or stock transfer business of the Rights
Agent or any successor Rights Agent, shall be the successor to the Rights Agent
under this Agreement without the execution or filing of any paper or any further
act on the part of any of the parties hereto, provided that such corporation
would be eligible for appointment as a successor Rights Agent under the
provisions of Section 21 hereof. In case at the time such successor Rights Agent
shall succeed to the agency created by this Agreement any of the Rights
Certificates shall have been countersigned but not delivered, any such successor
Rights Agent may adopt the countersignature of the predecessor Rights Agent and
deliver such Right Certificates so countersigned; and in case at that time any
of the Right Certificates shall not have been countersigned, any successor
Rights Agent may countersign such Right Certificates either in the name of the
predecessor Rights Agent or in the name of the successor Rights Agent; and in
all such cases such Right Certificates shall have the full force provided in the
Right Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall
be changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned; in case at
that time any of the Right Certificates shall not have been countersigned, the
Rights Agent may countersign such Right Certificates either in its prior name or
in its changed name; in all such cases such
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<PAGE> 38
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Corporation and the holders
of Right Certificates by their acceptance thereof shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Corporation), and the opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Corporation prior to taking or suffering
any action hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed by the Chairman of the Board, the
President or any Vice President and by the Treasurer, Secretary or any Assistant
Secretary of the Corporation and delivered to the Rights Agent. Any such
certificate shall be full authorization to the Rights Agent for any action taken
or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its
own gross negligence, bad faith or willful misconduct. Anything to the contrary
notwithstanding, in no event shall the Rights Agent be liable for special,
indirect, consequential or incidental loss or damage of any kind whatsoever
(including but not limited to lost profits), even if the Rights Agent has been
advised of the likelihood of such loss or damage.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Corporation only.
(e) The Rights Agent shall not be under any responsibility
in respect of the validity of this Agreement or the execution and delivery
hereof (except the due execution hereof by the Rights Agent) or in respect of
the validity or execution of
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<PAGE> 39
any Right Certificate (except its countersignature thereof); nor shall it be
responsible for any breach by the Corporation of any covenant or condition
contained in this Agreement or in any Right Certificate; nor shall it be
responsible for any adjustment required under the provisions of Section 11 or 13
hereof or responsible for the manner, method or amount of any such adjustment or
the ascertaining of the existence of facts that would require any such
adjustment (except with respect to the exercise of Rights evidenced by Right
Certificates after receipt of a certificate describing any such adjustment); nor
shall it by any act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any shares of Preferred Stock to be
issued pursuant to this Agreement or any Right Certificate or as to whether any
shares of Preferred Stock will, when issued, be validly authorized and issued,
fully paid and nonassessable.
(f) The Corporation agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of the Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
the Chairman of the Board, the President or any Vice President or the Secretary
or the Treasurer of the Corporation, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions of any such officer or for any delay in acting while waiting for
those instructions. Any application by the Rights Agent for written instructions
from the Corporation may, at the option of the Rights Agent, set forth in
writing any action proposed to be taken or omitted by the Rights Agent under
this Agreement and the date on and/or after which such action shall be taken or
such omission shall be effective. The Rights Agent shall not be liable for any
action taken by, or omission of, the Rights Agent in accordance with a proposal
included in any such application on or after the date specified in such
application (which date shall not be less than five Business Days after the date
any officer of the Corporation actually receives such application unless any
such officer shall have consented in writing to an earlier date) unless, prior
to taking any such action (or the effective date in the case of an omission),
the Rights Agent shall have received written
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instructions in response to such application specifying the action to be taken
or omitted.
(h) The Rights Agent and any shareholder, director, officer
or employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Corporation or become pecuniarily interested in any
transaction in which the Corporation may be interested, or contract with or lend
money to the Corporation or otherwise act as fully and freely as though it were
not the Rights Agent under this Agreement. Nothing herein shall preclude the
Rights Agent from acting in any other capacity for the Corporation or for any
other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Corporation resulting from any
such act, default, neglect or misconduct, provided reasonable care was exercised
in the selection and continued employment thereof.
(j) If, with respect to any Rights Certificate surrendered
to the Rights Agent for exercise or transfer, the certificate contained in the
form of assignment or the form of election to purchase set forth on the reverse
thereof, as the case may be, has not been completed to certify the holder is not
an Acquiring Person (or an Affiliate or Associate thereof), a Rights Agent shall
not take any further action with respect to such requested exercise or transfer
without first consulting with the Corporation.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Corporation and to each
transfer agent of the Common Stock and the Preferred Stock by registered or
certified mail. The Corporation may remove the Rights Agent or any successor
Rights Agent (with or without cause) upon 30 days' notice in writing, mailed to
the Rights Agent or successor Rights Agent, as the case may be, and to each
transfer agent of the Common Stock and the Preferred Stock by registered or
certified mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Corporation shall appoint a successor
to the Rights Agent. Notwithstanding the foregoing provisions of this Section
21, in no event shall the resignation or removal of a Rights Agent be effective
until a successor Rights Agent shall have been appointed and have
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accepted such appointment. If the Corporation shall fail to make such
appointment within a period of 30 days after such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the
Corporation), then the incumbent Rights Agent or the holder of record of any
Right Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Corporation or by such a court, shall be (a) a corporation organized and
doing business under the laws of the United States or of any state thereof, in
good standing, which is authorized under such laws to exercise corporate trust
or stock transfer powers and is subject to supervision or examination in the
conduct of its corporate trust or stock transfer business by federal or state
authorities and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $5,000,000 or (b) an Affiliate
controlled by a corporation described in clause (a) of this sentence. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as Rights
Agent without further act or deed, but the predecessor Rights Agent shall
deliver and transfer to the successor Rights Agent any property at the time held
by it hereunder, and execute and deliver any further assurance, conveyance, act
or deed necessary for the purpose. Not later than the effective date of any such
appointment, the Corporation shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Stock and
Preferred Stock, and mail a notice thereof in writing to the registered holders
of the Right Certificates. Failure to give any notice provided for in this
Section 21, however, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be. Notwithstanding the foregoing
provisions, in the event of resignation, removal or incapacity of the Rights
Agent, the Corporation shall have the authority to act as the Rights Agent until
a successor Rights Agent shall have assumed the duties of the Rights Agent
hereunder.
Section 22. Issuance of New Right Certificates.
Notwithstanding any of the provisions of this Agreement or of the Rights to the
contrary, the Corporation may, at its option, issue new Right Certificates
evidencing Rights in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Exercise Price per share and the number
or kind or class of shares of stock or other securities or property
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purchasable under the Right Certificates made in accordance with the provisions
of this Agreement. In addition, in connection with the issuance or sale of
Voting Stock following the Distribution Date and prior to the Expiration Date,
the Corporation may with respect to shares of Voting Stock so issued or sold
pursuant to (i) the exercise of stock options, (ii) under any employee plan or
arrangement, (iii) upon the exercise, conversion or exchange of securities,
notes or debentures issued by the Corporation or (iv) a contractual obligation
of the Corporation, in each case existing prior to the Distribution Date, issue
Rights Certificates representing the appropriate number of Rights in connection
with such issuance or sale.
Section 23. Redemption.
(a) The Corporation may, at its option, but only by the vote
of a majority of the Board of Directors (determined as if there were no
vacancies), redeem all but not less than all of the then outstanding Rights at
any time prior to the Close of Business on the tenth day following the Stock
Acquisition Date at a redemption price of $.01 per Right, subject to adjustments
as provided in Section 23(c) (the "REDEMPTION PRICE"). The redemption of the
Rights by the Board of Directors may be made effective at such time after the
Board's action to redeem the Rights on such basis and subject to such
conditions, as the Board of Directors in its absolute discretion may establish.
(b) Without any further action and without any notice, the
right to exercise the Rights will terminate effective at the time so designated
by action of the Board of Directors ordering the redemption of the Rights and
the only right thereafter of the holders of Rights shall be to receive the
Redemption Price. Within 10 days after the effective time of the action of the
Board of Directors ordering the redemption of the Rights, the Corporation shall
give notice of such redemption to the holders of the then outstanding Rights by
mailing such notice to all such holders at their last addresses as they appear
upon the registry books of the Rights Agent or, prior to the Distribution Date,
on the registry books of the transfer agent for the Common Stock. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each notice of redemption will state the
method by which the payment of the Redemption Price will be made. At the option
of the Board of Directors, the Redemption Price may be paid in cash to each
Rights holder or by the issuance of shares (and, at the Corporation's election
pursuant to Section 14(b) hereof, cash or depositary receipts in lieu of
fractions of shares other than fractions which are integral multiples of one
one-hundredth of a
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share) of Preferred Stock or Common Stock having a Fair Market Value equal to
such cash payment.
(c) In the event the Corporation shall at any time after the
date of this Agreement but before the Distribution Date (A) pay any dividend on
Common Stock in shares of Common Stock, (B) subdivide or split the outstanding
shares of Common Stock into a greater number of shares or (C) combine or
consolidate the outstanding shares of Common Stock into a smaller number of
shares or effect a reverse split of the outstanding shares of Common Stock and
as a consequence thereof the number of Rights outstanding shall change, then,
and in each such event, the Redemption Price may, by action of the Board of
Directors of the Corporation in its discretion, be appropriately adjusted in
respect of such transaction so as to maintain the aggregate Redemption Price of
all Rights after such transaction at the same amount, insofar as practicable, as
before the transaction.
Section 24. Notice of Proposed Actions.
(a) In case the Corporation, after the Distribution Date,
shall propose (i) to effect any of the transactions referred to in Section
11(a)(i) or to pay any dividend to the holders of record of its shares of Common
Stock payable in shares of capital stock of any class or to make any other
distribution to the holders of record of its Common Stock (other than a regular
periodic cash dividend at a rate not in excess of 150% of the rate of the last
cash dividend theretofore paid), or (ii) to offer to the holders of record of
its Common Stock options, warrants, or other rights to subscribe for or to
purchase shares of Common Stock (including any security convertible into or
exchangeable for Common Stock) or shares of stock of any class or any other
securities, options, warrants, convertible or exchangeable securities or other
rights, or (iii) to effect any reclassification of its Preferred Stock or Common
Stock or any recapitalization or reorganization of the Corporation, or (iv) to
effect any consolidation or merger with or into, or to effect any sale or other
transfer (or to permit one or more of its Subsidiaries to effect any sale or
other transfer), in one or more transactions, of more than 50% of the assets or
earning power of the Corporation and its Subsidiaries (taken as a whole) to, any
other Person or Persons, or (v) to effect the liquidation, dissolution or
winding up of the Corporation, then, in each such case, the Corporation shall
give to each holder of record of a Right Certificate, in accordance with Section
25, notice of such proposed action, which shall specify the record date for the
purposes of such transaction referred to in Section 11(a)(i) or such dividend or
distribution, or the date on which
40
<PAGE> 44
such reclassification, recapitalization, reorganization, consolidation, merger,
sale or transfer of assets, liquidation, dissolution, or winding up is to take
place and the record date for determining participation therein by the holders
of record of Common Stock or Preferred Stock, if any such date is to be fixed,
and such notice shall be so given in the case of any action covered by clause
(i) or (ii) above at least 10 days prior to the record date for determining
holders of record of the Preferred Stock for purposes of such action, and in the
case of any such other action, at least 10 days prior to the date of the taking
of such proposed action or the date of participation therein by the holders of
record of Common Stock or Preferred Stock, whichever shall be the earlier. The
failure to give notice required by this Section 24 or any defect therein shall
not affect the legality or validity of the action taken by the Corporation or
the vote upon any such action.
(b) In case the event referred to in Section 11(a)(ii) shall
occur, then the Corporation shall as soon as practicable thereafter, in
accordance with Section 25 hereof, give to each holder of a Right notice of the
occurrence of such event, which notice shall describe the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) hereof.
Section 25. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of record of
any Right Certificate or Right to or on the Corporation shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed (until
another address is filed in writing with the Rights Agent) as follows:
Delphi Automotive Systems Corporation
5725 Delphi Drive
Troy, Michigan 48098-2815
Attention: Logan G. Robinson
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Corporation or by the holder of record of
any Right Certificate or Right to or on the Rights Agent shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed (until
another address is filed in writing with the Corporation) as follows:
41
<PAGE> 45
BankBoston, N.A.
150 Royall Street,
Mail Stop 45-02-65
Camden, Massachusetts 02021
Attention: Nancy Rizza
Notices or demands authorized by this Agreement to be given or made by the
Corporation or the Rights Agent to the holder of record of any Right Certificate
or Right shall be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed to such holder at the address of such holder as shown
on the registry books of the Corporation.
Section 26. Supplements and Amendments. For as long as the
Rights are then redeemable and except as provided in the last sentence of this
Section 26, the Corporation may, in its sole and absolute discretion, and the
Rights Agent shall if the Corporation so directs, supplement or amend any
provision of this Agreement without the approval of any holders of the Rights.
At any time when the Rights are not then redeemable and except as provided in
the last sentence of this Section 26, the Corporation may, and the Rights Agent
shall if the Corporation so directs, supplement or amend this Agreement without
the approval of any holders of Right Certificates (i) to cure any ambiguity,
(ii) to correct or supplement any provision contained herein which may be
defective or inconsistent with any other provisions herein or (iii) to change or
supplement the provisions hereunder in any manner which the Corporation may deem
necessary or desirable, provided that no such supplement or amendment pursuant
to this clause (iii) shall materially adversely affect the interest of the
holders of Right Certificates. Upon the delivery of a certificate from an
appropriate officer of the Corporation which states that the proposed supplement
or amendment is in compliance with the terms of this Section 26, the Rights
Agent shall execute such supplement or amendment. Notwithstanding anything
contained in this Agreement to the contrary, no supplement or amendment shall be
made which changes the Redemption Price; it being understood that an adjustment
of the Redemption Price in accordance with Section 23 shall not be considered a
supplement or amendment of this Agreement.
Section 27. Exchange.
(a) The Board of Directors of the Corporation may,
at its option, at any time after any Person becomes an Acquiring Person,
exchange all or part of the then outstanding and exercisable Rights (which shall
not include Rights that have become null and void pursuant to the provisions of
Section 7(e)
42
<PAGE> 46
hereof) for shares of Common Stock at an exchange ratio of one share per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "EXCHANGE RATIO"). Notwithstanding the foregoing,
the Board of Directors shall not be empowered to effect such exchange at any
time after any Person (other than an Exempt Person), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the Voting Stock then outstanding, but may effect such exchange as of
and simultaneously with such Person becoming, together with its Affiliates and
Associates, the Beneficial Owner of 50% or more of the Voting Stock then
outstanding. From and after the occurrence of an event specified in Section
13(a) hereof, any Rights that theretofore have not been exchanged pursuant to
this Section 27(a) shall thereafter be exercisable only in accordance with
Section 13 and may not be exchanged pursuant to this Section 27(a).
(b) Immediately upon the action of the Board of Directors of
the Corporation ordering the exchange of any Rights pursuant to paragraph (a) of
this Section 27 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of shares of Common Stock
equal to the number of such Rights held by such holder multiplied by the
Exchange Ratio. The Corporation shall promptly give public notice of any such
exchange; provided, however, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Corporation promptly
shall mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of the Rights Agent.
Any notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange will
state the method by which the exchange of the shares of Common Stock for Rights
will be effected and, in the event of any partial exchange, the number of Rights
which will be exchanged. Any partial exchange shall be effected pro rata based
on the number of Rights (other than Rights which have become null and void
pursuant to the provisions of Section 7(e) hereof) held by each holder of
Rights.
(c) In the event that there shall not be sufficient shares
of Common Stock issued but not outstanding or authorized but unissued to permit
any exchange of Rights as contemplated in accordance with this Section 27, the
Corporation shall substitute to the extent of such insufficiency, for each share
of Common
43
<PAGE> 47
Stock that would otherwise be issuable upon exchange of a Right, a number of
shares of Preferred Stock or fractions thereof having an aggregate Fair Market
Value equal to the Fair Market Value of one share of Common Stock as of the date
any Person becomes an Acquiring Person.
(d) The Corporation shall not be required to issue fractions
of shares of Common Stock or to distribute certificates which evidence
fractional shares. In lieu of such fractional shares, the Corporation shall pay
to the registered holders of the Right Certificates with regard to which such
fractional shares of Common Stock would otherwise be issuable an amount in cash
equal to the same fraction of the current market value of a whole share of
Common Stock. For the purposes of this paragraph (d), the current market value
of a whole share of Common Stock shall be the closing price of a share of Common
Stock for the Trading Day immediately prior to the date of exchange pursuant to
this Section 27.
Section 28. Successors. All of the covenants and provisions
of this Agreement by or for the benefit of the Corporation or the Rights Agent
shall bind and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Corporation, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, the holders of Common Stock
in their capacity as holders of the Rights) any legal or equitable right, remedy
or claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Corporation, the Rights Agent and the holders of record
of the Right Certificates (and, prior to the Distribution Date, the holders of
Common Stock in their capacity as holders of the Rights).
Section 30. Delaware Contract. This Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed and enforced in accordance with the laws of such state applicable to
contracts to be made and performed entirely within such state.
Section 31. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
44
<PAGE> 48
Section 32. Descriptive Headings. Descriptive headings of
the several Sections of this Agreement are inserted for convenience only and
shall not control or affect the meaning or construction of any of the provisions
hereof.
Section 33. Severability. If any term, provision, covenant
or restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 34. Determinations and Actions by the Board of
Directors. The Board of Directors of the Corporation shall have the exclusive
power and authority to interpret and apply this Agreement and to exercise the
rights and powers specifically granted to the Board of Directors of the
Corporation hereunder and may take such action as may be necessary or advisable
in the administration of this Agreement or to amend or supplement this Agreement
in accordance with its terms, including, without limitation, the right and power
to (i) make all determinations deemed necessary or advisable for the
administration of this Agreement or (ii) decide to redeem the Rights or (iii)
decide to amend this Agreement. All such actions, calculations, interpretations
and determinations (including any decision not to take any action) done or made
by the Board of Directors of the Corporation in good faith shall (x) be final,
conclusive and binding on the Corporation, the Rights Agent, the holders of the
Rights, as such, and all other Persons, and (y) not subject any member of the
Board of Directors to any liability to the holders of Rights.
45
<PAGE> 49
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, all as of the day and year first above written.
DELPHI AUTOMOTIVE SYSTEMS
CORPORATION
By: /s/ Logan G. Robinson
-------------------------------
Name: Logan G. Robinson
Title: Vice President and
General Counsel
BANKBOSTON, N.A.
By: /s/
-------------------------------
Name:
Title:
46
<PAGE> 50
EXHIBIT A
AS PROVIDED IN THE RIGHTS AGREEMENT (AS REFERRED
TO BELOW), RIGHTS ISSUED TO OR BENEFICIALLY OWNED
BY ACQUIRING PERSONS OR THEIR AFFILIATES OR
ASSOCIATES (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT) OR ANY SUBSEQUENT HOLDER OF
SUCH RIGHTS SHALL BE NULL AND VOID AND MAY NOT
BE EXERCISED OR TRANSFERRED TO ANY PERSON.
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
SUMMARY OF RIGHTS TO PURCHASE
SERIES A JUNIOR PREFERRED STOCK
On February 1, 1999, the IPO Committee of the Board of Directors (the
"IPO Committee") of Delphi Automotive Systems Corporation (the "Corporation")
declared a dividend distribution of one Preferred Stock Purchase Right for each
outstanding share of Common Stock, par value $.01 per share (the "Common
Stock"), of the Corporation. The distribution is payable as of the time and date
determined by the IPO Committee to be the record date of such distribution to
stockholders of record on such time and date (the "Record Date"). Each Right
entitles the registered holder to purchase from the Corporation one
one-hundredth (1/100) of a share of preferred stock of the Corporation,
designated as Series A Junior Preferred Stock (the "Preferred Stock") at a price
of $65 per one one-hundredth (1/100) of a share ("Exercise Price"). The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Corporation and BankBoston, N.A., as Rights
Agent (the "Rights Agent").
As discussed below, initially the Rights will not be exercisable,
certificates will not be sent to stockholders and the Rights will automatically
trade with the Common Stock.
The Rights, unless earlier redeemed by the Board of Directors, become
exercisable upon the close of business on the day (the "Distribution Date")
which is the earlier of (i) the tenth day following a public announcement that a
person or group of affiliated or associated persons, with certain exceptions set
forth below, has acquired beneficial ownership of 15% or more of the outstanding
voting stock of the Corporation (an "Acquiring Person") and (ii) the tenth
business day (or such later date as may be determined by the Board of Directors
prior to such time as any person or group of affiliated or associated persons
becomes an Acquiring
<PAGE> 51
Person) after the date of the commencement or announcement of a person's or
group's intention to commence a tender or exchange offer the consummation of
which would result in the ownership of 15% or more of the Corporation's
outstanding voting stock (even if no shares are actually purchased pursuant to
such offer); prior thereto, the Rights would not be exercisable, would not be
represented by a separate certificate, and would not be transferable apart from
the Corporation's Common Stock, but will instead be evidenced, with respect to
any of the Common Stock certificates outstanding as of the Record Date, by such
Common Stock certificate with a copy of this Summary of Rights attached thereto
(or in the case of uncertificated shares of Common Stock, by the book entry
account that evidences record ownership of such shares). An Acquiring Person
does not include (A) the Corporation, (B) any subsidiary of the Corporation, (C)
any employee benefit plan or employee stock plan of the Corporation or of any
subsidiary of the Corporation, or any trust or other entity organized,
appointed, established or holding voting stock for or pursuant to the terms of
any such plan, (D) any person or group of affiliated or associated persons whose
ownership of 15% or more of the shares of voting stock of the Corporation then
outstanding results solely from (i) any action or transaction or transactions
approved by the Board of Directors before such person or group became an
Acquiring Person or (ii) a reduction in the number of issued and outstanding
shares of voting stock of the Corporation pursuant to a transaction or
transactions approved by the Board of Directors (provided that any person or
group that does not become an Acquiring Person by reason of clause (i) or (ii)
above shall become an Acquiring Person upon acquisition of an additional 1% of
the Corporation's voting stock unless such acquisition of additional voting
stock results from one or more actions or transactions approved by the Board of
Directors of the Corporation), or (E) prior to the time at which General Motors
Corporation ("GM") shall first cease to beneficially own 15% or more of the
voting stock of the Corporation then outstanding, GM or any affiliate or
associate of GM.
Until the Distribution Date (or earlier redemption, exchange or
expiration of the Rights), new Common Stock certificates issued after the Record
Date will contain a legend incorporating the Rights Agreement by reference.
Until the Distribution Date (or earlier redemption, exchange or expiration of
the Rights), the surrender for transfer of any of the Common Stock
2
<PAGE> 52
certificates outstanding as of the Record Date, with or without a copy of this
Summary of Rights attached thereto, will also constitute the transfer of the
Rights associated with the Common Stock represented by such certificate. As soon
as practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right Certificates") will be mailed to holders of record of the
Common Stock as of the close of business on the Distribution Date and such
separate certificates alone will evidence the Rights from and after the
Distribution Date.
The Rights are not exercisable until the Distribution Date. The Rights
will expire at the close of business on January 31, 2009, unless earlier
redeemed by the Corporation as described below.
The Preferred Stock is nonredeemable and, unless otherwise provided in
connection with the creation of a subsequent series of preferred stock,
subordinate to any other series of the Corporation's preferred stock. The
Preferred Stock may not be issued except upon exercise of Rights. Each share of
Preferred Stock will be entitled to receive when, as and if declared, a
quarterly dividend in an amount equal to the greater of $16.25 per share or 100
times the cash dividends declared on the Corporation's Common Stock. In
addition, the holders of the Preferred Stock are entitled to receive 100 times
any non-cash dividends (other than dividends payable in equity securities)
declared on the Common Stock, in like kind. In the event of the liquidation of
the Corporation, the holders of Preferred Stock will be entitled to receive, for
each share of Preferred Stock, a payment in an amount equal to the greater of
$650 or 100 times the payment made per share of Common Stock. Each share of
Preferred Stock will have 100 votes, voting together with the Common Stock. In
the event of any merger, consolidation or other transaction in which Common
Stock is exchanged, each share of Preferred Stock will be entitled to receive
100 times the amount received per share of Common Stock. The rights of Preferred
Stock as to dividends, liquidation and voting are protected by anti-dilution
provisions.
The number of shares of Preferred Stock issuable upon exercise of the
Rights and Exercise Price of the Rights are subject to certain adjustments from
time to time in the event of a stock dividend on, or a subdivision or
combination of, the Common Stock. The Exercise Price for the Rights also is
subject to adjustment in the event of
3
<PAGE> 53
extraordinary distributions of cash or other property to holders of Common
Stock.
Unless the Rights are earlier redeemed or exchanged, in the event
that, after the time that a Person becomes an Acquiring Person, the Corporation
were to be acquired in a merger or other business combination (in which any
shares of Common Stock are changed into or exchanged for other securities or
assets) or more than 50% of the assets or earning power of the Corporation and
its subsidiaries (taken as a whole) were to be sold or transferred in one or a
series of related transactions, the Rights Agreement provides that proper
provision will be made so that each holder of record of a Right will from and
after such date have the right to receive, upon payment of the Exercise Price,
that number of shares of common stock of the acquiring company having a market
value at the time of such transaction equal to two times the Exercise Price.
In addition, unless the Rights are earlier redeemed, in the event that
a person or group becomes an Acquiring Person, the Rights Agreement provides
that proper provisions will be made so that each holder of record of a Right,
other than the Acquiring Person (whose Rights will thereupon become null and
void), will thereafter have the right to receive, upon payment of the Exercise
Price, that number of shares of the Preferred Stock having a market value at the
time of the transaction equal to two times the Exercise Price (such market value
to be determined with reference to the market value of the Corporation's Common
Stock as provided in the Rights Agreement).
At any time after any person or group becomes an Acquiring Person and
prior to, or simultaneously with, the acquisition by such person or group of 50%
or more of the outstanding voting stock, the Board of Directors of the
Corporation may exchange the Rights (other than Rights owned by such person or
group which will have become void), in whole or in part, at an exchange ratio of
one share of Common Stock per Right (subject to adjustment).
Fractions of shares of Preferred Stock (other than fractions which are
integral multiples of one one-hundredth of a share) may, at the election of the
Corporation, be evidenced by depositary receipts. The Corporation may also issue
cash in lieu of fractional shares which are not integral multiples of one
one-hundredth of a share.
4
<PAGE> 54
At any time prior to the close of business on the tenth day after
there has been a public announcement that a person has become an Acquiring
Person, the Corporation may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (the "Redemption Price"). Immediately upon the effective
time of the action of the Board of Directors of the Corporation authorizing
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
For as long as the Rights are then redeemable, the Corporation may,
except with respect to the Redemption Price, amend the Rights in any manner,
including an amendment to extend the time period in which the Rights may be
redeemed. At any time when the Rights are not then redeemable, the Corporation
may amend the Rights in any manner that does not materially adversely affect the
interests of holders of the Rights as such.
Until a Right is exercised, the holder, as such, will have no rights
as a stockholder of the Corporation, including, without limitation, the right to
vote or to receive dividends.
A copy of the form of Rights Agreement has been filed with the
Securities and Exchange Commission as an Exhibit to the Corporation's
Registration Statement on Form S-1 (Registration No. 333-67333). A copy of the
Rights Agreement is available free of charge from the Corporation. This summary
description of the Rights does not purport to be complete and is qualified in
its entirety by reference to the Rights Agreement which is incorporated in this
summary description herein by reference.
5
<PAGE> 55
EXHIBIT B
[Form of Right Certificate]
Certificate No. W- ______ Rights
NOT EXERCISABLE AFTER JANUARY 31, 2009 OR EARLIER IF EXCHANGED OR
REDEEMED. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
CORPORATION AND UNDER CERTAIN OTHER CIRCUMSTANCES, AT $.01 PER RIGHT
(SUBJECT TO ADJUSTMENT), ON THE TERMS SET FORTH OR REFERRED TO IN THE
RIGHTS AGREEMENT. AS PROVIDED IN THE RIGHTS AGREEMENT (AS REFERRED TO
BELOW), RIGHTS ISSUED TO OR BENEFICIALLY OWNED BY ACQUIRING PERSONS OR
THEIR AFFILIATES OR ASSOCIATES (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT) OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS SHALL BE NULL AND
VOID AND MAY NOT BE EXERCISED OR TRANSFERRED TO ANY PERSON.
Right Certificate
This certifies that , or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement dated as of February 1, 1999 (the "Rights Agreement") by
and between Delphi Automotive Systems Corporation, a Delaware corporation (the
"Corporation"), and BankBoston, N.A., a national banking association (the
"Rights Agent"), to purchase from the Corporation at any time after the
Distribution Date (as such term is defined in the Rights Agreement) and prior to
5:00 P.M. (Eastern time) on January 31, 2009 at the office of the Rights Agent
designated in the Rights Agreement for such purpose, or its successor as Rights
Agent, one one-hundredth (1/100) of a fully paid nonassessable share of Series A
Junior Preferred Stock (the "Preferred Stock") of the Corporation at a purchase
price of $65, as the same may from time to time be adjusted in accordance with
the Rights Agreement (the "Exercise Price"), upon presentation and surrender of
this Right Certificate with the Form of Election to Purchase attached hereto
duly executed.
As provided in the Rights Agreement, the Exercise Price and the number
of shares of Preferred Stock which may be purchased upon the exercise of the
Rights evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events and, upon
<PAGE> 56
the happening of certain events, securities other than shares of Preferred
Stock, or other property, may be acquired upon exercise of the Rights evidenced
by this Right Certificate, as provided in the Rights Agreement.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
incorporated herein by reference and made a part hereof and to which Rights
Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities of the Rights Agent,
the Corporation and the holders of record of Right Certificates. Copies of the
Rights Agreement are on file at the principal executive office of the
Corporation.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office of the Rights Agent designated in the Rights Agreement
for such purpose, may be exchanged for another Right Certificate or Right
Certificates of like tenor and date evidencing Rights entitling the holder of
record to purchase a like aggregate number of shares of Preferred Stock as the
Rights evidenced by the Right Certificate or Right Certificates surrendered
shall have entitled such holder to purchase. If this Right Certificate shall be
exercised in part, the holder shall be entitled to receive upon surrender
hereof, another Right Certificate or Right Certificates for the number of whole
Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Corporation at its option or under
certain other circumstances at a redemption price of $.01 per Right.
No fractional shares of Preferred Stock (other than fractions which are
integral multiples of one one-hundredth (1/100) of a share) are required to be
issued upon the exercise of any Right or Rights evidenced hereby, and in lieu
thereof the Corporation may cause depositary receipts to be issued and/or a cash
payment may be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of Preferred Stock
or of any other securities of the Corporation which may at any time be issuable
on the exercise hereof, nor shall anything
2
<PAGE> 57
contained in the Rights Agreement or herein be construed to confer upon the
holder hereof, as such, any of the rights of a stockholder of the Corporation or
any right to vote for the election of directors or upon any matter submitted to
stockholders at meeting thereof, or to give or withhold consent to any corporate
action or to receive notice of meetings or other actions affecting stockholders
(except as provided in the Rights Agreement), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights evidenced by this
Right Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Corporation and its corporate seal. Dated as of
---------------- -----, --------
ATTEST: DELPHI AUTOMOTIVE SYSTEMS
CORPORATION
By
- ------------------------------- ------------------------------
[Assistant] Secretary Title:
Countersigned:
BANKBOSTON, N.A.
By
---------------------------
Authorized Signature
3
<PAGE> 58
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Right Certificates.)
FOR VALUE RECEIVED
------------------------------------------
hereby sells, assigns and transfers unto
---------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
- --------------------------------------------------------------------------------
Rights evidenced by this Right Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and
appoint__________________________ Attorney to transfer the within Right
Certificate on the books of the within-named Corporation, with full power of
substitution.
Dated:
---------------------- -----, -------
-------------------------------------
Signature
Signature Guaranteed:
4
<PAGE> 59
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Right Certificate [ ] is [ ] is not being sold, assigned or
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Associate or an Affiliate thereof (as such terms are defined in the Rights
Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement).
Dated:
------------------ -----, ---------- ----------------------------
Signature
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
5
<PAGE> 60
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if registered holder
desires to exercise the Right Certificate.)
TO
-------------------------:
The undersigned hereby irrevocably elects to exercise
----------------
Rights represented by this Right Certificate to purchase the shares of Preferred
Stock issuable upon the exercise of such Rights and requests that certificates
for such share(s) be issued in the following name:
Please insert social security
or other identifying number:
---------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number:
---------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
Dated:
-------------- -----, ---------
----------------------------------------
Signature
(Signature must conform in all
respects to name of holder as
specified on the face of this
Right Certificate)
Signature Guaranteed:
6
<PAGE> 61
EXHIBIT C
FORM OF
CERTIFICATE OF DESIGNATIONS
OF
SERIES A JUNIOR PREFERRED STOCK
OF
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
Pursuant to Section 151 of the Delaware
General Corporation Law
I, Logan Robinson, Vice President of Delphi Automotive Systems
Corporation, a corporation organized and existing under the Delaware General
Corporation Law (the "CORPORATION"), in accordance with the provisions of
Section 151 of such law, DO HEREBY CERTIFY that pursuant to the authority
conferred upon the IPO Committee of the Board of Directors by Board of Directors
and upon the Board of Directors by the Amended and Restated Certificate of
Incorporation of the Corporation, the IPO Committee of the Board of Directors on
February 1, 1999, adopted the following resolution which creates a series of
shares of Preferred Stock designated as Series A Junior Preferred Stock, as
follows:
RESOLVED, that pursuant to Section 151(g) of the Delaware
General Corporation Law and the authority vested in the Board of Directors of
the Corporation in accordance with the provisions of ARTICLE FOURTH of the
Amended and Restated Certificate of Incorporation of the Corporation and
delegated to the IPO Committee by the Board of Directors, a series of Preferred
Stock of the Corporation be, and hereby is, created, and the powers,
designations, preferences and relative,
<PAGE> 62
participating, optional or other special rights of the shares of such series,
and the qualifications, limitations or restrictions thereof, be, and hereby are,
as follows:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Preferred Stock" (the "SERIES A
PREFERRED STOCK") and the number of shares constituting such series shall be
8,700,000.
Section 2. Dividends and Distributions.
(A) Subject to the provisions for adjustment here inafter set
forth, and subject to the rights of the holders of any shares of any series of
Preferred Stock ranking prior and superior to the Series A Preferred Stock with
respect to dividends, the holders of shares of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, (i) cash dividends in an amount per
share (rounded to the nearest cent) equal to 100 times the aggregate per share
amount of all cash dividends declared or paid on the Common Stock, $0.01 par
value per share, of the Corporation (the "COMMON STOCK") and (ii) a preferential
cash dividend (the "PREFERENTIAL DIVIDENDS"), if any, in preference to the
holders of Common Stock, on the first day of January, April, July and October of
each year (each a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Preferred Stock, payable in an amount (except in the case
of the first Quarterly Dividend Payment if the date of the first issuance of
Series A Preferred Stock is a date other than a Quarterly Dividend Payment date,
in which case such payment shall be a prorated amount of such amount) equal to
$16.25 per share of Series A Preferred Stock less the per share amount of all
cash dividends declared on the Series A Preferred Stock pursuant to clause (i)
of this sentence since the immediately preceding Quarterly Dividend Payment
Date or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred Stock.
In the event the Corporation shall, at any time after the issuance of any share
or fraction of a share of Series A Preferred Stock, make any distribution on the
shares of Common Stock of the Corporation, whether by way of a dividend or a
reclassification of stock, a recapitalization, reorganization or partial
liquidation of the Corporation or otherwise, which is payable in cash or any
debt security, debt instrument, real or personal property
2
<PAGE> 63
or any other property (other than cash dividends subject to the immediately
preceding sentence, a distribution of shares of Common Stock or other capital
stock of the Corporation or a distribution of rights or warrants to acquire any
such share, including any debt security convertible into or exchangeable for any
such share, at a price less than the Fair Market Value (as hereinafter defined)
of such share), then, and in each such event, the Corporation shall
simultaneously pay on each then outstanding share of Series A Preferred Stock of
the Corporation a distribution, in like kind, of 100 times such distribution
paid on a share of Common Stock (subject to the provisions for adjustment
hereinafter set forth). The dividends and distributions on the Series A
Preferred Stock to which holders thereof are entitled pursuant to clause (i) of
the first sentence of this paragraph and pursuant to the second sentence of this
paragraph are hereinafter referred to as "DIVIDENDS" and the multiple of such
cash and non-cash dividends on the Common Stock applicable to the determination
of the Dividends, which shall be 100 initially but shall be adjusted from time
to time as hereinafter provided, is hereinafter referred to as the "DIVIDEND
MULTIPLE". In the event the Corporation shall at any time after the date shares
of Common Stock are first publicly held declare or pay any dividend or make any
distribution on Common Stock payable in shares of Common Stock, or effect a
subdivision or split or a combination, consolidation or reverse split of the
outstanding shares of Common Stock into a greater or lesser number of shares of
Common Stock, then in each such case the Dividend Multiple thereafter applicable
to the determination of the amount of Dividends which holders of shares of
Series A Preferred Stock shall be entitled to receive shall be the Dividend
Multiple applicable immediately prior to such event multiplied by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare each Dividend at the same
time it declares any cash or non-cash dividend or distribution on the Common
Stock in respect of which a Dividend is required to be paid. No cash or non-cash
dividend or distribution on the Common Stock in respect of which a Dividend is
required to be paid shall be paid or set aside for payment on the Common Stock
unless a Dividend in respect of such dividend or distribution on the Common
Stock shall be simultaneously paid, or set aside for payment, on the Series A
Preferred Stock.
(C) Preferential Dividends shall begin to accrue on
outstanding shares of Series A Preferred Stock from the Quarterly
3
<PAGE> 64
Dividend Payment Date next preceding the date of issuance of any shares of
Series A Preferred Stock. Accrued but unpaid Preferential Dividends shall
cumulate but shall not bear interest. Preferential Dividends paid on the shares
of Series A Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
Section 3. Voting Rights. The holders of shares of
Series A Preferred Stock shall have the following voting rights:
(A) Subject to the provisions for adjustment herein after set
forth, each share of Series A Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the holders of the Common
Stock. The number of votes which a holder of Series A Preferred Stock is
entitled to cast, as the same may be adjusted from time to time as herein after
provided, is hereinafter referred to as the "VOTE MULTIPLE". In the event the
Corporation shall at any time after shares of Common Stock are first publicly
held declare or pay any dividend on Common Stock payable in shares of Common
Stock, or effect a subdivision or split or a combination, consolidation or
reverse split of the outstanding shares of Common Stock into a greater or lesser
number of shares of Common Stock, then in each such case the Vote Multiple
thereafter applicable to the determination of the number of votes per share to
which holders of shares of Series A Preferred Stock shall be entitled after such
event shall be the Vote Multiple immediately prior to such event multiplied by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(B) Except as otherwise provided herein, in the Amended and
Restated Certificate of Incorporation or by law, the holders of shares of Series
A Preferred Stock and the holders of shares of Common Stock shall vote together
as one class on all matters submitted to a vote of stockholders of the
Corporation.
(C) In the event that the Preferential Dividends accrued on
the Series A Preferred Stock for four or more quarterly dividend periods,
whether consecutive or not, shall not have been declared and paid or irrevocably
set aside for payment, the holders of record of Preferred Stock of the
Corporation of all series (including the Series A Preferred Stock), other than
any series in respect of which such right is expressly withheld
4
<PAGE> 65
by the Amended and Restated Certificate of Incorporation or the authorizing
resolutions included in any Certificate of Designations therefor, shall have
the right, at the next meeting of stockholders called for the election of
directors, to elect two members to the Board of Directors, which directors shall
be in addition to the number required prior to such event, to serve until the
next Annual Meeting and until their successors are elected and qualified or
their earlier resignation, removal or incapacity or until such earlier time as
all accrued and unpaid Preferential Dividends upon the outstanding shares of
Series A Preferred Stock shall have been paid (or irrevocably set aside for
payment) in full. The holders of shares of Series A Preferred Stock shall
continue to have the right to elect directors as provided by the immediately
preceding sentence until all accrued and unpaid Preferential Dividends upon the
outstanding shares of Series A Preferred Stock shall have been paid (or set
aside for payment) in full. Such directors may be removed and replaced by such
stockholders, and vacancies in such directorships may be filled only by such
stockholders (or by the remaining director elected by such stockholders, if
there be one) in the manner permitted by law; provided, however, that any such
action by stockholders shall be taken at a meeting of stock holders and shall
not be taken by written consent thereto.
(D) Except as otherwise required by the Amended and Restated
Certificate of Incorporation or by law or set forth herein, holders of Series A
Preferred Stock shall have no other special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for the taking of any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever Preferential Dividends or Dividends are in
arrears or the Corporation shall be in default of payment thereof, thereafter
and until all accrued and unpaid Preferential Dividends and Dividends, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid or set irrevocably aside for payment in full, and in addition to any
and all other rights which any holder of shares of Series A Preferred Stock may
have in such circumstances, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration, any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
5
<PAGE> 66
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity as to
dividends with the Series A Preferred Stock, unless dividends are paid
ratably on the Series A Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled if
the full dividends accrued thereon were to be paid;
(iii) except as permitted by subparagraph (iv) of this
paragraph 4(A), redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, provided that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any such parity stock
in exchange for shares of any stock of the Corporation ranking junior
(both as to dividends and upon liquidation, dissolution or winding up)
to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock (either as to dividends or
upon liquidation, dissolution or winding up), except in accordance with
a purchase offer made to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(B) The Corporation shall not permit any Subsidiary (as
hereinafter defined) of the Corporation to purchase or other wise acquire for
consideration any shares of stock of the Corporation unless the Corporation
could, under paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner. A "SUBSIDIARY" of the Corporation shall
mean any corporation or other entity of which securities or other ownership
interests having ordinary voting power sufficient to elect a majority of the
board of directors of such corporation or other entity or other persons
performing similar functions are beneficially owned, directly or indirectly, by
the Corporation or by any corporation or other entity that is otherwise
controlled by the Corporation.
6
<PAGE> 67
(C) The Corporation shall not issue any shares of Series A
Preferred Stock except upon exercise of Rights issued pursuant to that certain
Rights Agreement dated as of February 1, 1999 between the Corporation and
BankBoston, N.A., as Rights Agent, as it may be amended from time to time, a
copy of which is on file with the Secretary of the Corporation at its principal
executive office and shall be made available to stockholders of record without
charge upon written request therefor addressed to said Secretary.
Notwithstanding the foregoing sentence, nothing contained in the provisions
hereof shall prohibit or restrict the Corporation from issuing for any purpose
any series of Preferred Stock with rights and privileges similar to, different
from, or greater than, those of the Series A Preferred Stock.
Section 5. Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares upon their retirement and cancellation shall become
authorized but unissued shares of Preferred Stock, without designation as to
series, and such shares may be reissued as part of a new series of Preferred
Stock to be created by resolution or resolutions of the Board of Directors.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (i) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless the holders of shares of
Series A Preferred Stock shall have received for each share of Series A
Preferred Stock, subject to adjustment as hereinafter provided, (A) $650 plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment or, (B) if greater than the amount
specified in clause (i)(A) of this sentence, an amount equal to 100 times the
aggregate amount to be distributed per share to holders of Common Stock, as the
same may be adjusted as hereinafter provided and (ii) to the holders of stock
ranking on a parity upon liquidation, dissolution or winding up with the Series
A Preferred Stock, unless simultaneously therewith distributions are made
ratably on the Series A Preferred Stock and all other shares of such parity
stock in proportion to the total amounts to which the holders of shares of
Series A Preferred Stock are entitled under clause (i)(A) of this sentence and
to which the holders of such parity shares are entitled, in each case upon such
liquidation, dissolution
7
<PAGE> 68
or winding up. The amount to which holders of Series A Preferred Stock may be
entitled upon liquidation, dissolution or winding up of the Corporation pursuant
to clause (i)(B) of the foregoing sentence is hereinafter referred to as the
"PARTICIPATING LIQUIDATION AMOUNT" and the multiple of the amount to be
distributed to holders of shares of Common Stock upon the liquidation,
dissolution or winding up of the Corporation applicable pursuant to said clause
to the determination of the Participating Liquidation Amount, as said multiple
may be adjusted from time to time as hereinafter provided, is hereinafter
referred to as the "LIQUIDATION MULTIPLE". In the event the Corporation shall at
any time after the date shares of Common Stock are first publicly held declare
or pay any dividend on Common Stock payable in shares of Common Stock, or effect
a subdivision or split or a combination, consolidation or reverse split of the
outstanding shares of Common Stock into a greater or lesser number of shares of
Common Stock, then, in each such case, the Liquidation Multiple thereafter
applicable to the determination of the Participating Liquidation Amount to which
holders of Series A Preferred Stock shall be entitled after such event shall be
the Liquidation Multiple applicable immediately prior to such event multiplied
by a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Certain Reclassifications and Other Events.
(A) In the event that holders of shares of Common Stock of the
Corporation receive after the date shares of Common Stock are first publicly
held, in respect of their shares of Common Stock any share of capital stock of
the Corporation (other than any share of Common Stock of the Corporation),
whether by way of reclassification, recapitalization, reorganization, dividend
or other distribution or otherwise (a "TRANSACTION"), then, and in each such
event, the dividend rights, voting rights and rights upon the liquidation,
dissolution or winding up of the Corporation of the shares of Series A Preferred
Stock shall be adjusted so that after such event the holders of Series A
Preferred Stock shall be entitled, in respect of each share of Series A
Preferred Stock held, in addition to such rights in respect thereof to which
such holder was entitled immediately prior to such adjustment, to (i) such
additional dividends as equal the Dividend Multiple in effect immediately prior
to such Transaction multiplied by the additional dividends which the holder of a
share of Common Stock shall be entitled to receive by virtue of the receipt in
the Transaction of such capital stock, (ii) such additional voting rights as
equal the Vote Multiple in effect immediately prior to such Transaction
multiplied by the additional voting rights which the holder of a share of Common
8
<PAGE> 69
Stock shall be entitled to receive by virtue of the receipt in the Transaction
of such capital stock and (iii) such additional distributions upon liquidation,
dissolution or winding up of the Corporation as equal the Liquidation Multiple
in effect immediately prior to such Transaction multiplied by the additional
amount which the holder of a share of Common Stock shall be entitled to receive
upon liquidation, dissolution or winding up of the Corporation by virtue of the
receipt in the Transaction of such capital stock, as the case may be, all as
provided by the terms of such capital stock.
(B) In the event that holders of shares of Common Stock of the
Corporation receive after the date shares of Common Stock are first publicly
held, in respect of their shares of Common Stock any right or warrant to
purchase Common Stock (including as such a right, for all purposes of this
paragraph, any security convertible into or exchangeable for Common Stock) at a
purchase price per share less than the Fair Market Value of a share of Common
Stock on the date of issuance of such right or warrant, then and in each such
event the dividend rights, voting rights and rights upon the liquidation,
dissolution or winding up of the Corporation of the shares of Series A Preferred
Stock shall each be adjusted so that after such event the Dividend Multiple, the
Vote Multiple and the Liquidation Multiple shall each be the product of the
Dividend Multiple, the Vote Multiple and the Liquidation Multiple, as the case
may be, in effect immediately prior to such event multiplied by a fraction the
numerator of which shall be the number of shares of Common Stock outstanding
immediately before such issuance of rights or warrants plus the maximum number
of shares of Common Stock which could be acquired upon exercise in full of all
such rights or warrants and the denominator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the number of shares of Common Stock which could be purchased, at
the Fair Market Value of the Common Stock at the time of such issuance, by the
maximum aggregate consideration payable upon exercise in full of all such rights
or warrants.
(C) In the event that holders of shares of Common Stock of the
Corporation receive after the date shares of Common Stock are first publicly
held, in respect of their shares of Common Stock any right or warrant to
purchase capital stock of the Corporation (other than shares of Common Stock),
including as such a right, for all purposes of this paragraph, any security
convertible into or exchangeable for capital stock of the Corporation (other
than Common Stock), at a purchase price per share less than the Fair Market
Value of such shares of capital
9
<PAGE> 70
stock on the date of issuance of such right or warrant, then and in each such
event the dividend rights, voting rights and rights upon liquidation,
dissolution or winding up of the Corporation of the shares of Series A Preferred
Stock shall each be adjusted so that after such event each holder of a share of
Series A Preferred Stock shall be entitled, in respect of each share of Series A
Preferred Stock held, in addition to such rights in respect thereof to which
such holder was entitled immediately prior to such event, to receive (i) such
additional dividends as equal the Dividend Multiple in effect immediately prior
to such event multiplied, first, by the additional dividends to which the holder
of a share of Common Stock shall be entitled upon exercise of such right or
warrant by virtue of the capital stock which could be acquired upon such
exercise and multiplied again by the Discount Fraction (as hereinafter defined)
and (ii) such additional voting rights as equal the Vote Multiple in effect
immediately prior to such event multiplied, first, by the additional voting
rights to which the holder of a share of Common Stock shall be entitled upon
exercise of such right or warrant by virtue of the capital stock which could be
acquired upon such exercise and multiplied again by the Discount Fraction and
(iii) such additional distributions upon liquidation, dissolution or winding up
of the Corporation as equal the Liquidation Multiple in effect immediately prior
to such event multiplied, first, by the additional amount which the holder of a
share of Common Stock shall be entitled to receive upon liquidation, dissolution
or winding up of the Corporation upon exercise of such right or warrant by
virtue of the capital stock which could be acquired upon such exercise and
multiplied again by the Discount Fraction. For purposes of this paragraph, the
"DISCOUNT FRACTION" shall be a fraction the numerator of which shall be the
difference between the Fair Market Value of a share of the capital stock subject
to a right or warrant distributed to holders of shares of Common Stock of the
Corporation as contemplated by this paragraph immediately after the
distribution thereof and the purchase price per share for such share of capital
stock pursuant to such right or warrant and the denominator of which shall be
the Fair Market Value of a share of such capital stock immediately after the
distribution of such right or warrant.
(D) For purposes of this Certificate of Designations, the
"FAIR MARKET VALUE" of a share of capital stock of the Corporation (including a
share of Common Stock) on any date shall be deemed to be the average of the
daily closing price per share thereof over the 30 consecutive Trading Days (as
such term is hereinafter defined) immediately prior to such date; provided,
however, that, in the event that such Fair Market Value of any
10
<PAGE> 71
such share of capital stock is determined during a period which includes any
date that is within 30 Trading Days after (i) the ex-dividend date for a
dividend or distribution on stock payable in shares of such stock or securities
convertible into shares of such stock, or (ii) the effective date of any
subdivision, split, combination, consolidation, reverse stock split or
reclassification of such stock, then, and in each such case, the Fair Market
Value shall be appropriately adjusted by the Board of Directors of the
Corporation to take into account ex-dividend or post-effective date trading. The
closing price for any day shall be the last sale price, regular way, or, in
case, no such sale takes place on such day, the average of the closing bid and
asked prices, regular way (in either case, as reported in the applicable
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange), or, if the shares are not listed or
admitted to trading on the New York Stock Exchange, as reported in the
applicable transaction reporting system with respect to securities listed on the
principal national securities exchange on which the shares are listed or
admitted to trading or, if the shares are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") or such other system then in use, or if on any such
date the shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the shares selected by the Board of Directors of the Corporation.
The term "TRADING DAY" shall mean a day on which the principal national
securities exchange on which the shares are listed or admitted to trading is
open for the transaction of business or, if the shares are not listed or
admitted to trading on any national securities exchange, on which the New York
Stock Exchange or such other national securities exchange as may be selected by
the Board of Directors of the Corporation is open. If the shares are not
publicly held or not so listed or traded on any day within the period of 30
Trading Days applicable to the determination of Fair Market Value thereof as
aforesaid, "FAIR MARKET VALUE" shall mean the fair market value thereof per
share as determined in good faith by the Board of Directors of the Corporation.
In either case referred to in the foregoing sentence, the determination of Fair
Market Value shall be described in a statement filed with the Secretary of the
Corporation.
11
<PAGE> 72
Section 8. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case each
outstanding share of Series A Preferred Stock shall at the same time be
similarly exchanged for or changed into the aggregate amount of stock,
securities, cash and/or other property (payable in like kind), as the case may
be, for which or into which each share of Common Stock is changed or exchanged
multiplied by the highest of the Vote Multiple, the Dividend Multiple or the
Liquidation Multiple in effect immediately prior to such event.
Section 9. Effective Time of Adjustments.
(A) Adjustments to the Series A Preferred Stock required by
the provisions hereof shall be effective as of the time at which the event
requiring such adjustments occurs.
(B) The Corporation shall give prompt written notice to each
holder of a share of Series A Preferred Stock of the effect of any adjustment to
the voting rights, dividend rights or rights upon liquidation, dissolution or
winding up of the Corporation of such shares required by the provisions hereof.
Notwithstanding the foregoing sentence, the failure of the Corporation to give
such notice shall not affect the validity of or the force or effect of or the
requirement for such adjustment.
Section 10. No Redemption. The shares of Series A Preferred
Stock shall not be redeemable at the option of the Corporation or any holder
thereof. Notwithstanding the foregoing sentence of this Section, the Corporation
may acquire shares of Series A Preferred Stock in any other manner permitted by
law, the provisions hereof and the Amended and Restated Certificate of
Incorporation of the Corporation.
Section 11. Ranking. Unless otherwise provided in the Amended
and Restated Certificate of Incorporation of the Corporation or a Certificate of
Designations relating to a subsequent series of preferred stock of the
Corporation, the Series A Preferred Stock shall rank junior to all other series
of the Corporation's preferred stock as to the payment of dividends and the
distribution of assets on liquidation, dissolution or winding up and senior to
the Common Stock.
Section 12. Amendment. The provisions hereof and the Amended
and Restated Certificate of Incorporation of the Corporation shall not be
amended in any manner which would
12
<PAGE> 73
adversely affect the rights, privileges or powers of the Series A Preferred
Stock without, in addition to any other vote of stock holders required by law,
the affirmative vote of the holders of two-thirds or more of the outstanding
shares of Series A Preferred Stock, voting together as a single class.
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<PAGE> 74
IN WITNESS WHEREOF, I have executed and subscribed this
Certificate of Designations and do affirm the foregoing as true under the
penalties of perjury this 1st day of February, 1999.
-----------------------------------------
Name:
Title:
ATTEST:
- --------------------------------
<PAGE> 1
Exhibit 10g
INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT,
DATED AS OF FEBRUARY 1, 1999,
BY AND BETWEEN
GENERAL MOTORS CORPORATION
AND
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Definitions..............................................................................................2
2. The Initial Public Offering and the Distribution.........................................................9
2.1 The Initial Public Offering.....................................................................9
2.2 The Distribution................................................................................9
2.3 Certain Stockholder Matters.....................................................................9
2.4 Prior Relationship.............................................................................10
2.5 Further Assurances Regarding the Distribution..................................................10
2.6 Abandonment of the Distribution................................................................10
3. Expenses................................................................................................11
3.1 General........................................................................................11
3.2 Certain Expenses Relating to the Initial Public Offering.......................................11
3.3 Certain Expenses Relating to the Distribution..................................................11
4. Covenants To Preserve Tax-Free Status of the Distribution and the Qualification of the
Contribution as a D Reorganization......................................................................11
4.1 Representations and Warranties.................................................................11
4.2 Restrictions on Delphi.........................................................................12
4.3 Cooperation and Other Covenants................................................................15
4.4 Indemnification for Tax Liabilities............................................................17
4.5 Procedure for Indemnification for Tax Liabilities..............................................17
4.6 Arbitration....................................................................................18
4.7 Exclusive Remedies.............................................................................19
5. Certain Other Covenants.................................................................................19
5.1 Financial and Other Information................................................................19
5.2 Other Covenants................................................................................25
5.3 Covenants Regarding the Incurrence of Indebtedness.............................................26
6. Indemnification.........................................................................................28
6.1 Indemnification by Delphi......................................................................28
6.2 Indemnification by GM..........................................................................28
6.3 Other Liabilities..............................................................................29
6.4 Tax Effects of Indemnification.................................................................29
6.5 Effect of Insurance Upon Indemnification.......................................................30
6.6 Procedure for Indemnification Involving Third-Party Claims.....................................30
6.7 Procedure for Indemnification Not Involving Third-Party Claims.................................32
6.8 Exclusive Remedies.............................................................................32
</TABLE>
- i -
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
7. Miscellaneous...........................................................................................32
7.1 Dispute Resolution.............................................................................32
7.2 Survival.......................................................................................32
7.3 Complete Agreement.............................................................................32
7.4 Authority......................................................................................32
7.5 Governing Law..................................................................................33
7.6 Consent to Exclusive Jurisdiction..............................................................33
7.7 Notices........................................................................................33
7.8 Amendment and Modification.....................................................................35
7.9 Binding Effect; Assignment.....................................................................35
7.10 Third Party Beneficiaries......................................................................35
7.11 Counterparts...................................................................................35
7.12 Waiver.........................................................................................35
7.13 Severability...................................................................................36
7.14 Remedies.......................................................................................36
7.15 Performance....................................................................................36
7.16 References; Construction.......................................................................36
Exhibits
Agreements Subject to Section 5.2(c)......................................................................Exhibit A
</TABLE>
- ii -
<PAGE> 4
INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT
This INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT (the
"Agreement") is made and entered into as of February 1, 1999, by and between
General Motors Corporation, a Delaware corporation ("GM"), and Delphi Automotive
Systems Corporation, a Delaware corporation and a wholly owned subsidiary of GM
("Delphi"). Certain capitalized terms used herein are defined in Section 1 of
this Agreement.
RECITALS
WHEREAS, the Board of Directors of GM has determined that it would be
appropriate and desirable to completely separate the Delphi Automotive Systems
Business from GM;
WHEREAS, GM has caused Delphi to be incorporated in order to effect
such separation;
WHEREAS, GM and Delphi have previously entered into the Separation
Agreement and the Ancillary Agreements (other than this Agreement and the
Registration Rights Agreement), each effective as of January 1, 1999, pursuant
to which GM has contributed and transferred to Delphi, and Delphi has received
and assumed, the assets and liabilities then associated with the Delphi Business
as described therein;
WHEREAS, GM and Delphi intend that the Contribution qualify as a
tax-free reorganization under Section 368(a)(1)(D) of the Code;
WHEREAS, GM currently owns all of the issued and outstanding Delphi
Common Stock;
WHEREAS, Delphi has previously filed the IPO Registration Statement
with the SEC but it has not yet become effective;
WHEREAS, the parties currently contemplate that, reasonably promptly
following the execution of this Agreement, Delphi shall consummate the Initial
Public Offering;
WHEREAS, immediately following the consummation of the Initial Public
Offering, GM shall own approximately 82.3% of the outstanding shares of Delphi
Common Stock (or approximately 80.2% if the underwriters exercise their
over-allotment option in full in accordance with the Underwriting Agreement);
WHEREAS, concurrently with the execution of this Agreement, GM and
Delphi are entering into the Registration Rights Agreement;
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WHEREAS, GM currently intends to divest itself of its entire ownership
of Delphi during 1999 by distributing in the Distribution all of its shares of
Delphi Common Stock to the holders of GM $1 2/3 Common Stock;
WHEREAS, GM currently expects to accomplish the Distribution by means
of a split-off, a spin-off or some combination of both transactions;
WHEREAS, GM and Delphi intend that the Distribution will be tax-free to
GM and its stockholders under Section 355 of the Code;
WHEREAS, the parties intend in this Agreement to set forth the
principal arrangements between them regarding the Initial Public Offering and
the Distribution; and
WHEREAS, the parties hereto have determined that in order to accomplish
the objectives of the Initial Public Offering and the Distribution and to
facilitate the consummation thereof, it is necessary and desirable to
restructure certain intercompany relationships, allocate certain liabilities and
provide for certain indemnification, all as set forth herein;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements herein contained, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereby agree as follows:
1. DEFINITIONS.
"Abandonment Notice" has the meaning set forth in Section 2.6.
"Acquisition Target" has the meaning set forth in Section 5.3(a)(i).
"Active Trade or Business" means the active conduct of the trade or
business (as defined in Section 355(b)(2) of the Code) conducted by Delphi
immediately prior to the applicable Distribution Date.
"Adjusted Delphi Indebtedness" has the meaning set forth in
Section 5.3.
"Affiliate" means a Delphi Affiliate or a GM Affiliate, as the case may
be.
"Agreement" has the meaning set forth in the Preamble.
"Ancillary Agreements" has the meaning ascribed to such term in the
Separation Agreement.
"Annual Financial Statements" has the meaning set forth in Section 5.1
(a)(vi).
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"Business" means the Delphi Business or the GM Business, as the case
may be.
"Business Day" means any day other than a Saturday, a Sunday, or a day
on which banking institutions located in the State of New York or Michigan are
authorized or obligated by law or executive order to close.
"Claim" has the meaning set forth in Section 6.7.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, together with the rules and regulations promulgated thereunder.
"Contribution" means the transfer of certain assets by GM to Delphi
(and the assumption by Delphi of certain liabilities) as contemplated by the
Separation Agreement.
"Control" means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
"CPR Rules" means the Rules for Non-Administered Arbitration of
Business Disputes promulgated by the Center for Public Resources, as in effect
on the date hereof.
"D Reorganization" means a transaction qualifying as a reorganization
under Section 368(a)(1)(D) of the Code.
"Delphi" has the meaning set forth in the Preamble.
"Delphi Affiliate" means a Person that, after giving effect to the
Distribution, directly or indirectly through one or more intermediaries, is
Controlled by, or is under common Control with Delphi.
"Delphi Automotive Systems Business" has the meaning ascribed to such
term in the Separation Agreement.
"Delphi Business" means any business or operations of Delphi or any
Delphi Affiliates, including, in all cases, any predecessor entities (including,
without limitation, the Delphi Automotive Systems Business).
"Delphi Capital Stock" means all classes or series of capital stock of
Delphi.
"Delphi Common Stock" means the Common Stock, par value $0.01 per
share, of Delphi.
"Delphi Indebtedness" has the meaning set forth in Section 5.3.
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<PAGE> 7
"Delphi Public Documents" has the meaning set forth in Section
5.1(a)(ix).
"Delphi Transfer Agent" means BankBoston, N.A., in its capacity as the
transfer agent and registrar for the Delphi Common Stock.
"Delphi's Auditors" has the meaning set forth in Section 5.1(b)(i).
"Dispute Notice" means written notice of any dispute between GM and
Delphi arising out of or relating to this Agreement, which shall set forth, in
reasonable detail, the nature of the dispute.
"Distribution" means the distribution of Delphi Common Stock by GM in
one or more transactions occurring after the Initial Public Offering that
collectively have the effect that all shares of Delphi Common Stock held by GM
are distributed to GM stockholders, whenever such transaction(s) shall occur.
"Distribution Date" means any date or dates, as the case may be,
determined by GM, in its sole and absolute discretion, to be a date on which
shares of Delphi Common Stock held by GM are distributed in connection with the
Distribution.
"Distribution Registration Statement" means any and all registration
statements, information statements or other documents filed by any party with
the SEC in connection with any transaction constituting part of the
Distribution, in each case as supplemented or amended from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, together with the rules and regulations promulgated
thereunder.
"FFO to Debt Ratio" has the meaning set forth in Section 5.3(c).
"GAAP" means generally accepted accounting principles, consistently
applied.
"GM" has the meaning set forth in the Preamble.
"GM Affiliate" means a Person that, after giving effect to the
Distribution, directly or indirectly through one or more intermediaries, is
Controlled by GM.
"GM Annual Statements" has the meaning set forth in Section 5.1(b)(ii).
"GM Business" means any business or operations of GM or any GM
Affiliates other than the Delphi Business.
"GM Disclosure Portions" means all material set forth in, or
incorporated by reference into, either the IPO Registration Statement or the
Distribution Registration Statement, as applicable, to the extent relating
exclusively to (i) GM and the GM Affiliates (excluding Delphi and the Delphi
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<PAGE> 8
Affiliates), (ii) the GM Business, (iii) GM's intentions with respect to the
Distribution or (iv) the terms of the Distribution, including, without
limitation, 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.
"GM Public Filings" has the meaning set forth in Section 5.1(a)(xiii).
"GM Transfer Agent" means BankBoston, N.A., in its capacity as the
transfer agent and registrar for the GM $1 2/3 Common Stock.
"GM $1 2/3 Common Stock" means the Common Stock, par value $1 2/3 per
share, of GM.
"GM's Auditors" has the meaning set forth in Section 5.1(b)(ii).
"Indemnifying Party" means a Person that is obligated to provide
indemnification under this Agreement.
"Indemnitee" means a Person that is entitled to seek indemnification
under this Agreement.
"Indemnity Payment" means an amount that an Indemnifying Party is
required to pay to an Indemnitee under this Agreement.
"Initial Public Offering" means the initial public offering by Delphi
of shares of Delphi Common Stock as contemplated by the IPO Registration
Statement.
"Insurance Proceeds" means the payment received by an insured from an
insurance carrier or paid by an insurance carrier on behalf of the insured, net
of any applicable premium adjustment and tax effect.
"IPO Registration Statement" means the Registration Statement on Form
S-1, Registration No. 333-67333, of Delphi, as supplemented and amended from
time to time.
"IRS" means Internal Revenue Service of the U.S. Department of Treasury
or any successor agency.
"Losses" means all losses, liabilities, claims, obligations, demands,
judgments, damages, dues, penalties, assessments, fines (civil or criminal),
costs, liens, expenses, forfeitures, settlements, or fees, reasonable attorneys'
fees and court costs, of any nature or kind, whether or not the same would
properly be reflected on a balance sheet, and "Loss" means any of these.
"Negotiation Period" means the period of 20 Business Days following the
initial meeting of the representatives of GM and Delphi following the receipt of
a Dispute Notice.
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<PAGE> 9
"Notice" means any notice, request, claim, demand, or other
communication under this Agreement.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Pre-Distribution Period" means the period of time from the date hereof
until the completion of the Distribution.
"Proposed Acquisition Transaction" means a transaction or series of
transactions as a result of which any Person or any group of related Persons
would (directly or indirectly) acquire, or have the right to acquire, from
Delphi or one or more holders of outstanding shares of Delphi Capital Stock, a
number of shares of Delphi Capital Stock that would comprise 50% or more of (A)
the value of all outstanding shares of Delphi Capital Stock as of the date of
such transaction, or in the case of a series of transactions, the date of the
last transaction of such series, or (B) the total combined voting power of all
outstanding shares of Voting Stock of Delphi as of the date of such transaction,
or in the case of a series of transactions, the date of the last transaction of
such series.
"Quarterly Financial Statements" has the meaning set forth in Section
5.1(a)(v).
"Registration Rights Agreement" means the Registration Rights Agreement
to be entered into between GM and Delphi concurrently with the execution and
delivery of this Agreement.
"Regulation S-K" means Regulation S-K of the General Rules and
Regulations promulgated by the SEC.
"Regulation S-X" means Regulation S-X of the General Rules and
Regulations promulgated by the SEC.
"Representation Date" means any date on which Delphi makes any
representation (i) to the IRS or to counsel selected by GM for the purpose of
obtaining a Subsequent Tax Opinion/Ruling, or (ii) to GM for the purpose of any
determination required to be made by GM pursuant to Section 4.2.
"Representation Letters" means the representation letters and any other
materials (including, without limitation, the ruling request and the related
supplemental submissions to the IRS) delivered or deliverable by GM and others
in connection with the rendering by Tax Counsel and the issuance by the IRS of
the Tax Opinions/Rulings, which to the extent related to Delphi shall be in form
and substance reasonably satisfactory to Delphi.
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<PAGE> 10
"Representative" means, with respect to any Person, any of such
Person's directors, officers, employees, agents, consultants, advisors,
accountants or attorneys.
"Request" has the meaning set forth in Section 6.7.
"Rights Plan" means the Agreement by and between Delphi and BankBoston,
N.A., as Rights Agent, as amended from time to time.
"SEC" means the United States Securities and Exchange Commission or any
successor agency.
"Securities Act" means the Securities Act of 1933, as amended from time
to time, together with the rules and regulations promulgated thereunder.
"Separate Counsel" has the meaning set forth in Section 6.6(b).
"Separation Agreement" means the Master Separation Agreement by and
among GM, Delphi, Delphi Automotive Systems LLC, a Delaware limited liability
company and a wholly owned subsidiary of GM, Delphi Technologies, Inc., a
Delaware corporation and a wholly owned subsidiary of GM, and Delphi Automotive
Systems (Holding), Inc., a Delaware corporation and a wholly owned subsidiary of
GM, dated as of December 22, 1998, as amended from time to time.
"Service Agent" means (i) for GM, The Corporation Trust Company, with
offices on the date hereof at 1209 Orange Street, Wilmington, County of New
Castle, Delaware 19801; and (ii) for Delphi, The Corporation Trust Company, with
offices on the date hereof at 1209 Orange Street, Wilmington, County of New
Castle, Delaware 19801.
"Subsequent Tax Opinion/Ruling" means either (i) an opinion of counsel
selected by GM, in its sole and absolute discretion, confirming, in form and
substance reasonably satisfactory to GM, that, as a consequence of the
consummation of a subsequent transaction, no income, gain or loss for U.S.
federal income tax purposes will be recognized by GM, the stockholders or former
stockholders of GM, or any GM Affiliate with respect to the Distribution, or
(ii) an IRS private letter ruling to the same effect.
"Subsidiary" means with respect to any specified Person, any
corporation or other legal entity of which such Person or any of its
Subsidiaries Controls or owns, directly or indirectly, more than 50% of the
stock or other equity interest entitled to vote with respect to the election of
members to the board of directors or similar governing body; provided, however,
that for the purposes of this Agreement, neither Delphi nor any of the
Subsidiaries of Delphi shall be deemed to be Subsidiaries of GM or of any of the
Subsidiaries of GM.
"Tax" means (i) any income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits,
environmental (including taxes under Section 59A of
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<PAGE> 11
the Code), customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on, minimum, estimated, or other tax, assessment, or governmental charge of
any kind whatsoever imposed by any governmental authority, including any
interest, penalty, or addition thereto, whether disputed or not; (ii) liability
for the payment of any amounts of the type described in clause (i) above arising
as a result of being (or having been) a member of any group or being (or having
been) included or required to be included in any Tax Return related thereto; and
(iii) liability for the payment of any amounts of the type described in clause
(i) above as a result of any express or implied obligation to indemnify or
otherwise assume or succeed to the liability of any other Person.
"Tax Agreements" means, collectively, the (i) Agreement for the
Allocation of United States Federal, State and Local Income Taxes between GM and
Delphi, dated as of December 16, 1998, as amended from time to time; (ii)
Agreement for the Indemnification of United States Federal, State and Local
Non-Income Taxes between GM and Delphi, dated as of December 16, 1998, as
amended from time to time; (iii) Amended and Restated Agreement for the
Allocation of United States Federal, State and Local Income Taxes between GM and
Delphi, dated as of December 16, 1998, as amended from time to time; (iv)
Customs Consulting Agreement between GM and Delphi, dated as of December 16,
1998, as amended from time to time; and (v) Tax Compliance and Planning Services
Agreement by and between GM and Delphi, dated as of December 16, 1998, as
amended from time to time.
"Tax Control" means, with respect to Delphi, ownership of Delphi
Capital Stock which constitutes at least 80% of both (i) the total combined
voting power of all outstanding shares of Voting Stock of Delphi and (ii) each
class and series of Delphi Capital Stock other than Voting Stock of Delphi.
"Tax Counsel" means the law firm of Kirkland & Ellis.
"Tax-Free Status of the Distribution" means the nonrecognition of
taxable gain or loss for U.S. federal income tax purposes to GM, GM Affiliates
and GM's stockholders in connection with the Distribution.
"Tax Opinions/Rulings" means the opinions of Tax Counsel and the
rulings by the IRS deliverable to GM in connection with the Contribution and the
Distribution.
"Tax-Related Losses" means (i) all federal, state and local Taxes
(including interest and penalties thereon) imposed pursuant to any settlement,
final determination, judgment or otherwise; (ii) all accounting, legal and other
professional fees, and court costs incurred in connection with such taxes; and
(iii) all costs and expenses that may result from adverse tax consequences to GM
or GM's stockholders (including all costs, expenses and damages associated with
stockholder litigation or controversies) payable by GM or GM Affiliates.
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<PAGE> 12
"Third-Party Claim" means any claim, suit, arbitration, inquiry,
proceeding or investigation by or before any court, governmental or other
regulatory or administrative agency or commission or any arbitration tribunal
asserted by a Person other than GM or any GM Affiliate or Delphi or any Delphi
Affiliate which gives rise to a right of indemnification hereunder.
"Underwriting Agreement" means the Underwriting Agreement between
Delphi and the underwriters relating to the Initial Public Offering, as amended
from time to time.
"Value" means with respect to any trade or business (or portion
thereof), the fair market value of the assets constituting such trade or
business, less the current liabilities associated with such trade or business,
in each case determined as of the applicable Distribution Date.
"Voting Stock" means with respect to any Person, all classes and series
of the capital stock of such Person entitled to vote generally in the election
of directors.
2. THE INITIAL PUBLIC OFFERING AND THE DISTRIBUTION.
2.1 THE INITIAL PUBLIC OFFERING. Delphi shall consult with, and
cooperate in all respects with, GM in connection with the pricing of the Delphi
Common Stock to be offered in the Initial Public Offering and shall, at GM's
direction, promptly take any and all actions necessary or desirable to
consummate the Initial Public Offering as contemplated by the IPO Registration
Statement and the Underwriting Agreement.
2.2 THE DISTRIBUTION. GM currently intends, following the consummation
of the Initial Public Offering, to complete the Distribution during 1999 by
means of a split-off, a spin-off or some combination of both transactions. GM
shall, in its sole and absolute discretion, determine whether to proceed with
all or part of the Distribution and all terms of the Distribution, including,
without limitation, 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 addition, GM may at any time and from time
to time until the completion of the Distribution modify or change the terms of
the Distribution, including, without limitation, by accelerating or delaying the
timing of the consummation of all or part of the Distribution. Delphi shall
cooperate with GM in all respects to accomplish the Distribution and shall, at
GM's direction, promptly take any and all actions necessary or desirable to
effect the Distribution, including, without limitation, the registration under
the Securities Act of Delphi Common Stock on an appropriate registration form or
forms to be designated by GM. GM shall select any investment banker(s) and
manager(s) in connection with the Distribution, as well as any financial
printer, solicitation and/or exchange agent and outside counsel for GM; provided
that nothing herein shall prohibit Delphi from engaging (at its own expense) its
own financial, legal, accounting and other advisors in connection with the
Distribution.
2.3 CERTAIN STOCKHOLDER MATTERS. From and after the distribution of
Delphi Common Stock in connection with any transaction(s) included as part of
the Distribution and until such Delphi Common Stock is duly transferred in
accordance with applicable law, Delphi shall regard the
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<PAGE> 13
Persons receiving Delphi Common Stock in such transaction(s) as record holders
of Delphi Common Stock in accordance with the terms of such transaction(s)
without requiring any action on the part of such Persons. Delphi agrees that,
subject to any transfers of such stock, (a) each such holder shall be entitled
to receive all dividends payable on, and exercise voting rights and all other
rights and privileges with respect to, the shares of Delphi Common Stock then
held by such holder and (b) each such holder shall be entitled, without any
action on the part of such holder, to receive one or more certificates
representing, or other evidence of ownership of, the shares of Delphi Common
Stock then held by such holder. GM shall cooperate, and shall instruct the GM
Transfer Agent to cooperate, with Delphi and the Delphi Transfer Agent, and
Delphi shall cooperate, and shall instruct the Delphi Transfer Agent to
cooperate, with GM and the GM Transfer Agent, in connection with all aspects of
the Distribution and all other matters relating to the issuance and delivery of
certificates representing, or other evidence of ownership of, the shares of
Delphi Common Stock distributed to the holders of GM $1-2/3 Common Stock in
connection with any transaction(s) included as part of the Distribution.
Following the Distribution, GM shall instruct the GM Transfer Agent to deliver
to the Delphi Transfer Agent true, correct and complete copies of the stock and
transfer records reflecting the holders of GM $1-2/3 Common Stock receiving
shares of Delphi Common Stock in connection with any transaction(s) included as
part of the Distribution.
2.4 PRIOR RELATIONSHIP. Delphi, with respect to Delphi and all of the
Delphi Affiliates, and GM, with respect to GM and all of the GM Affiliates,
agree to take all commercially reasonable action to discontinue their respective
uses as promptly as is commercially reasonable of any printed material that
indicates an ownership or other relationship between or among GM and Delphi or
any of their respective Affiliates that has changed as a result of the Initial
Public Offering, the Distribution or any other transactions contemplated hereby;
provided that this Section 2.4 shall not prohibit the use of printed material
containing appropriate and accurate references to such relationship.
2.5 FURTHER ASSURANCES REGARDING THE DISTRIBUTION. In addition to the
actions specifically provided for elsewhere in this Agreement, Delphi shall, at
GM's direction, use all commercially reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all things commercially
reasonably necessary, proper or expeditious under applicable laws, regulations
and agreements in order to consummate and make effective the Distribution as
promptly as reasonably practicable. Without limiting the generality of the
foregoing, Delphi shall, at GM's direction, cooperate with GM, and execute and
deliver, or use all commercially reasonable efforts to cause to have executed
and delivered, all instruments, including instruments of conveyance, assignment
and transfer, and to make all filings with, and to obtain all consents,
approvals or authorizations of, any domestic or foreign governmental or
regulatory authority requested by GM in order to consummate and make effective
the Distribution.
2.6 ABANDONMENT OF THE DISTRIBUTION. The parties expressly acknowledge
and agree that GM is not obligated in any respect to proceed with or complete
the Distribution and that GM may, in its sole and absolute discretion, at any
time abandon its plans to proceed with or complete the Distribution. In the
event that GM so determines that it no longer intends to proceed with or
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<PAGE> 14
complete the Distribution, GM shall provide to Delphi a written notification of
such determination (an "Abandonment Notice"). Effective as of the date of the
Abandonment Notice, (a) provided that no Distribution Date has yet occurred,
Sections 4.2 and 4.3 of this Agreement shall terminate, become null and void and
have no further force and effect (it being expressly understood and agreed by
the parties that such Sections shall remain in full force and effect in the
event that a Distribution Date has occurred on or prior to the date of the
Abandonment Notice) and (b) GM's rights, and Delphi's obligations, set forth in
the Registration Rights Agreement shall immediately become effective.
3. EXPENSES.
3.1 GENERAL. Except as otherwise provided in this Agreement, the
Separation Agreement, any of the other Ancillary Agreements or any other
agreement between the parties relating to the Contribution, the Initial Public
Offering or the Distribution, all costs and expenses of either party hereto in
connection with the Contribution, the Initial Public Offering and the
Distribution shall be paid by the party that incurs such costs and expenses.
3.2 CERTAIN EXPENSES RELATING TO THE INITIAL PUBLIC OFFERING. GM shall
be responsible for the payment of all costs, fees and expenses relating to the
Initial Public Offering; provided that Delphi shall be responsible for the
payment of (a) the costs, fees and expenses of all of Delphi's financial, legal,
accounting and other advisors incurred in connection with the Initial Public
Offering and (b) any internal fees, costs and expenses incurred by Delphi or any
Delphi Affiliate in connection with the Initial Public Offering. GM shall be
entitled to any and all amounts received from the underwriters relating to
reimbursement for any costs, fees and expenses relating to the Initial Public
Offering.
3.3 CERTAIN EXPENSES RELATING TO THE DISTRIBUTION. GM shall generally
be responsible for the payment of all costs, fees and expenses relating to the
Distribution; provided that Delphi shall be responsible for the payment of (a)
the costs, fees and expenses of all of Delphi's financial, legal, accounting and
other advisors incurred in connection with the Distribution and (b) any internal
fees, costs and expenses incurred by Delphi or any Delphi Affiliate in
connection with the Distribution.
4. COVENANTS TO PRESERVE TAX-FREE STATUS OF THE DISTRIBUTION AND THE
QUALIFICATION OF THE CONTRIBUTION AS A D REORGANIZATION. Delphi and GM
hereby represent and warrant to, and covenant and agree with, each
other as follows:
4.1 REPRESENTATIONS AND WARRANTIES.
(a) Delphi. Delphi hereby represents and warrants that (i) it
has examined the Tax Opinions/Rulings and the Representation Letters,
and (ii) the facts presented and the representations made therein, to
the extent descriptive of Delphi or the Delphi Business (including,
without limitation, the business purposes for the Distribution, the
representations in the Representation Letters and Tax Opinions/Rulings
to the extent that they relate to
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<PAGE> 15
Delphi or the Delphi Business, and the plans, proposals, intentions and
policies of Delphi), are true, correct and complete in all material
respects.
(b) GM. GM hereby represents and warrants that (i) it has
examined the Tax Opinions/Rulings and the Representation Letters, and
(ii) the facts presented and the representations made therein, to the
extent descriptive of GM or the GM Business (including, without
limitation, the business purposes for the Distribution, the
representations in the Representation Letters and Tax Opinions/Rulings
to the extent that they relate to GM or the GM Business, and the plans,
proposals, intentions and policies of GM), are true, correct and
complete in all material respects.
4.2 RESTRICTIONS ON DELPHI.
(a) Pre-Distribution Period. Delphi shall not take any action
(such action to include, if relevant, the issuance of Delphi Capital
Stock upon the exercise by the holders thereof of all options or
convertible securities issued by Delphi) during the Pre-Distribution
Period if, as a result of taking such action, Delphi would issue a
number of shares of Delphi Capital Stock (including by way of the
exercise of stock options or the issuance of restricted stock) that
would cause GM to cease to have Tax Control of Delphi, unless prior to
the consummation of such transaction GM has determined, in its sole and
absolute discretion, which discretion shall be exercised in good faith
solely to preserve the Tax-Free Status of the Distribution, that such
transaction would not jeopardize the Tax-Free Status of the
Distribution. Notwithstanding the foregoing provisions of this Section
4.2(a), Delphi shall be permitted to issue stock options and restricted
stock awards to its employees so long as (i) Delphi repurchases
sufficient shares of issued and outstanding Delphi Capital Stock on or
prior to the date such options are exercisable or restricted stock is
vested (or deemed vested) to insure that, assuming the exercise of all
exercisable options and vesting of such restricted stock, GM would not
cease to have Tax Control of Delphi and (ii) Delphi provides GM with
prior written notification of the procedures by which Delphi intends to
comply with its obligation described in clause (i) above and GM
approves of such procedures (which approval shall not be unreasonably
withheld). All of the restrictions on Delphi contained in this Section
4.2 shall apply to Delphi during the Pre-Distribution Period as well as
the other periods specified in this Section 4.2.
(b) Proposed Acquisition Transactions. Until the first day
after the two-year anniversary of the latest Distribution Date, Delphi
shall not enter into any Proposed Acquisition Transaction or, to the
extent Delphi has the right to prohibit any Proposed Acquisition
Transaction, permit any Proposed Acquisition Transaction to occur
unless prior to the consummation of such Proposed Acquisition
Transaction GM has determined, in its sole and absolute discretion,
which discretion shall be exercised in good faith solely to preserve
the Tax-Free Status of the Distribution, that such Proposed Acquisition
Transaction would not jeopardize the Tax-Free Status of the
Distribution.
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<PAGE> 16
The foregoing shall not prohibit Delphi from entering into a contract
or agreement to consummate any Proposed Acquisition Transaction if such
contract or agreement requires satisfaction of the above-described
requirement prior to the consummation of such Proposed Acquisition
Transaction, such requirement to be satisfied through the cooperation
of the parties as described in Section 4.3(b)(ii).
(c) Continuation of Active Trade or Business. Until the
first day after the two-year anniversary of the latest Distribution
Date,
(i) Delphi shall continue to conduct the Active
Trade or Business.
(ii) Subject to clause (c)(iii) below, Delphi shall
not (A) liquidate, dispose of, or otherwise discontinue the
conduct of any portion of the Active Trade or Business with a
Value in excess of $2.0 billion or (B) dispose of any business
or assets that would cause Delphi to be operated in a manner
inconsistent in any material respect with the business
purposes for the Distribution as set forth in the
Representation Letters and Tax Opinions/Rulings, in each case
unless GM has determined, in its sole and absolute discretion,
which discretion shall be exercised in good faith solely to
preserve the Tax-Free Status of the Distribution, that such
liquidation, disposition, or discontinuance would not
jeopardize the Tax-Free Status of the Distribution.
(iii) Delphi shall not under any circumstances
liquidate, dispose of, or otherwise discontinue the conduct of
any portion of the Active Trade or Business if such
liquidation, disposition or discontinuance would breach
Section 4.2(d). Delphi shall continue the active conduct of
the Active Trade or Business primarily through officers and
employees of Delphi or its Subsidiaries (and not primarily
through independent contractors) who are not also officers or
employees of GM or of any GM Affiliates. Notwithstanding the
foregoing, (A) except with respect to any corporation or other
entity the status of which as the direct owner of an active
trade or business is material to the Tax-Free Status of the
Distribution, liquidations of any of Delphi's Subsidiaries
(including Delphi Automotive Systems LLC) into Delphi or one
or more Subsidiaries directly or indirectly controlled by
Delphi shall not be deemed to breach this Section 4.2(c) and
(B) Delphi shall not be prohibited from liquidating, disposing
of or otherwise discontinuing the conduct of one or more
trades or businesses that constituted part of the Active Trade
or Business, or any portion thereof, provided that, in the
case of this clause (B), the aggregate Value of such trades or
businesses, or portions thereof, so liquidated, disposed of or
discontinued shall not exceed $2.0 billion. For purposes of
the preceding sentence and clause (c)(ii) above, asset
retirements, sale-leaseback arrangements and discontinuances
of product lines within a trade or business the active conduct
of which is continued shall not be deemed a liquidation,
disposition or discontinuance of a trade or business or
portion thereof.
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<PAGE> 17
(iv) Solely for purposes of this Section 4.2(c),
Delphi shall not be treated as directly or indirectly
controlling a Subsidiary unless Delphi owns, directly or
indirectly, shares of capital stock of such Subsidiary
constituting (i) 80% or more of the total combined voting
power of all outstanding shares of Voting Stock of such
Subsidiary and (ii) 80% or more of the total number of
outstanding shares of each class or series of capital stock of
such Subsidiary other than Voting Stock.
(d) Continuity of Business.
(i) Until the first day after the two-year
anniversary of the latest Distribution Date, (A) Delphi shall
not voluntarily dissolve or liquidate, and (B) except in the
ordinary course of business, neither Delphi nor any
Subsidiaries directly or indirectly controlled by Delphi shall
sell, transfer, or otherwise dispose of or agree to dispose of
assets (including, for such purpose, any shares of capital
stock of such Subsidiaries) that, in the aggregate, constitute
more than (x) 60% of the gross assets of Delphi or (y) 60% of
the consolidated gross assets of Delphi (including Delphi
Automotive Systems LLC) and such Subsidiaries, unless prior to
the consummation of such transaction GM has determined, in its
sole and absolute discretion, which discretion shall be
exercised in good faith solely to preserve the Tax-Free Status
of the Distribution, that such transaction would not
jeopardize the Tax-Free Status of the Distribution. The amount
of gross assets of Delphi and such Subsidiaries shall be based
on the fair market value of each such asset as of the
applicable Distribution Date.
(ii) Sales, transfers or other dispositions by
Delphi or any of its Subsidiaries to Delphi or one or more
Subsidiaries directly or indirectly controlled by Delphi shall
not be included in any determinations under this Section
4.2(d) of whether such 60% or more of the gross assets of
Delphi or 60% of the consolidated gross assets of Delphi and
such Subsidiaries have been sold, transferred or otherwise
disposed of.
(iii) Solely for purposes of this Section 4.2(d),
Delphi shall not be treated as directly or indirectly
controlling a Subsidiary unless Delphi owns, directly or
indirectly, shares of capital stock of such Subsidiary
constituting (A) 80% or more of the total combined voting
power of all outstanding shares of Voting Stock of such
Subsidiary and (B) 80% or more of the total number of
outstanding shares of each class or series of capital stock of
such Subsidiary other than Voting Stock.
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<PAGE> 18
(e) Discharge of Intracompany Indebtedness. Prior to the first
Distribution Date, Delphi shall fully discharge and satisfy all of the
then existing indebtedness owed to GM or any GM Affiliate (other than
payables incurred in the ordinary course of the business). From such
date until the first day after the two-year anniversary of the latest
Distribution Date, Delphi shall not, and shall not permit any of its
Subsidiaries to, create, incur, assume or allow to exist any such
indebtedness with GM or any GM Affiliate.
(f) Miscellaneous. Until the first day after the two-year
anniversary of the latest Distribution Date, Delphi shall not take, or
permit any of its Subsidiaries to take, any other actions or enter into
any transaction or series of transactions or agree to enter into any
other 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 in the Representation Letters, unless prior to the
consummation of such action or transaction GM has determined, in its
sole and absolute discretion, which discretion shall be exercised in
good faith solely to preserve the Tax-Free Status of the Distribution
and the qualification of the Contribution as a D Reorganization, 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. Notwithstanding the foregoing, if and to the extent
that any action or transaction is described in and permitted pursuant
to Sections 4.2(a), (b), (c), (d) and (e) such action or transaction
shall not be prohibited by this Section 4.2(f).
(g) Permitted Actions and Transactions. Notwithstanding the
foregoing, the provisions of Section 4.2 shall not prohibit Delphi from (i)
implementing, or otherwise complying with the provisions of, the Rights Plan
(or any successor stockholders rights plan of Delphi), and (ii) implementing any
transaction upon which the IRS has granted a favorable ruling in, or which is
described in reasonable detail in, any Tax Opinions/Rulings.
4.3 COOPERATION AND OTHER COVENANTS.
(a) Notice of Subsequent Delphi Actions. Each of Delphi and GM
shall furnish the other with a copy of any ruling requests or other
documents delivered to the IRS that relates to the Distribution or that
could otherwise be reasonably expected to have an impact on the
Tax-Free Status of the Distribution or the qualification of the
Contribution as a D Reorganization.
(b) Cooperation.
(i) Each of Delphi and GM shall cooperate with the other
and shall take (or refrain from taking) all such actions as
the other may reasonably request in connection with obtaining
any GM determination referred to in Section 4.2. Such
cooperation shall include, without limitation, providing any
information and/or representations reasonably requested by
the other to enable either party (or counsel
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<PAGE> 19
for such party) to obtain and maintain any Subsequent Tax
Opinion/Ruling that would permit any action described in
Section 4.2 to be taken by Delphi or a Delphi Affiliate. From
and after any Representation Date in connection with obtaining
any such determination or the receipt of a Subsequent Tax
Opinion/Ruling and until the first day after the two-year
anniversary of the date of such determination or receipt,
neither party shall take (nor shall it refrain from taking)
any action that would have caused such representation to be
untrue unless the other party has determined, in its sole and
absolute discretion, which discretion shall be exercised in
good faith solely to preserve the Tax-Free Status of the
Distribution and the qualification of the Contribution as a D
Reorganization, that such action would not jeopardize the
Tax-Free Status of the Distribution or the qualification of
the Contribution as a D Reorganization.
(ii) In the event that Delphi notifies GM that it
desires to take one of the actions described in Section 4.2
and GM concludes that such action might jeopardize the
Tax-Free Status of the Distribution or the qualification of
the Contribution as a D Reorganization, GM shall, at the
request of Delphi, elect either to (i) use all commercially
reasonable efforts to obtain a Subsequent Tax Opinion/Ruling
that would permit Delphi to take the specified action, and
Delphi shall cooperate in connection with such efforts, or
(ii) provide all reasonable cooperation to Delphi in
connection with Delphi obtaining such a Subsequent Tax
Opinion/Ruling in form and substance reasonably satisfactory
to GM; provided, however, that the reasonable costs and
expenses incurred by GM of obtaining any such Subsequent Tax
Opinion/Ruling shall be borne by GM.
(c) Notice.
(i) Until all restrictions set forth in Section 4.2
have expired, Delphi shall give GM written notice of any
intention to effect or permit an action or transaction
described in Section 4.2 and which is prohibited thereunder at
such time within a period of time reasonably sufficient to
enable GM (A) to make the determination referred to in Section
4.2 or (B) to prepare and seek any Subsequent Tax Opinion/
Ruling in connection with such proposed action or transaction.
Each such notice by Delphi shall set forth the terms and
conditions of the proposed action or transaction, including,
without limitation, as applicable, the nature of any related
action proposed to be taken by the Board of Directors of
Delphi, the approximate number of shares of Delphi Capital
Stock proposed to be transferred or issued, the approximate
Value of Delphi's assets (or assets of any of Delphi's
Subsidiaries) proposed to be transferred, the proposed
timetable for such action or transaction, and the number of
shares of Delphi Capital Stock otherwise then owned by the
other party to the proposed action or transaction, all with
sufficient particularity to enable GM to make any such
required determination, including information required to
prepare and seek a Subsequent Tax Opinion/Ruling in connection
with such proposed action or
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<PAGE> 20
transaction. All information provided by Delphi to GM pursuant
to this Section 4.3 shall be deemed subject to the
confidentiality obligations of Article 6 of the Separation
Agreement.
(ii) Promptly, but in any event within 15 Business
Days, after GM receives such written notice from Delphi, GM
shall evaluate such information and notify Delphi in writing
of (A) such determination or (B) of GM's intent to seek a
Subsequent Tax Opinion/Ruling and the proposed date for
submission of the request therefor, which date shall not be
more than 45 days after the date GM so notifies Delphi of GM's
intent to seek a Subsequent Tax Opinion/Ruling, provided that
such 45-day period shall be appropriately extended for any
period of noncompliance by Delphi with Section 4.3(b). If GM
makes a determination that an action or transaction described
in Section 4.2 would jeopardize the Tax-Free Status of the
Distribution or the qualification of the Contribution as a D
Reorganization, such notice to Delphi shall set forth, in
reasonable detail, the reasons therefor. GM shall notify
Delphi promptly, but in any event within two Business Days,
after the receipt of a Subsequent Tax Opinion/Ruling.
4.4 INDEMNIFICATION FOR TAX LIABILITIES.
(a) General. Notwithstanding any other provision of this
Agreement or any provision of any of the Tax Agreements to the contrary
but subject to Section 4.4(b), Delphi shall indemnify, defend and hold
harmless GM and each GM Affiliate (or any successor to any of them)
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
Delphi of any of its representations, warranties or covenants made
pursuant to this Agreement. All interest or penalties incurred in
connection with such Tax-Related Losses shall be computed for the time
period up to and including the date that Delphi pays its
indemnification obligation in full.
(b) Exceptions to Delphi's Indemnification. If GM (i) makes a
determination pursuant to any clause of Section 4.2, on the basis of a
Subsequent Tax Opinion/Ruling or otherwise, and (ii) delivers to Delphi
written notice of such determination pursuant to Section 4.3(c), Delphi
shall have no obligation pursuant to Section 4.4(a), except to the
extent that any Tax-Related Losses so incurred resulted from the
inaccuracy, incorrectness or incompleteness of any representation
provided by Delphi upon which such Subsequent Tax Opinion/Ruling and/or
determination was based.
(c) Timing and Method of Tax Indemnification Payments. Delphi
shall pay any amount due and payable to GM pursuant to this Section 4.4
on or before the 90th day following the earlier of agreement or
determination that such amount is due and payable to GM. All payments
pursuant to this Section 4.4 shall be made by wire transfer to the bank
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<PAGE> 21
account designated by GM for such purpose, and on the date of such wire
transfer Delphi shall give GM notice of the transfer.
4.5 PROCEDURE FOR INDEMNIFICATION FOR TAX LIABILITIES.
(a) Notice of Claim. If GM receives notice of the assertion of
any Third-Party Claim with respect to which Delphi may be obligated
under Section 4.4 to provide indemnification, GM shall give Delphi
notice thereof (together with a copy of such Third- Party Claim,
process or other legal pleading) promptly after becoming aware of such
Third- Party Claim; provided, however, that the failure of GM to give
notice as provided in this Section shall not relieve Delphi of its
obligations under Section 4.4, except to the extent that Delphi is
actually prejudiced by such failure to give notice. Such notice shall
describe such Third-Party Claim in reasonable detail.
(b) Obligation of Indemnifying Party.
(i) GM and Delphi shall jointly control the defense
of, and cooperate with each other with respect to defending,
any Third-Party Claim with respect to which Delphi is
obligated under Section 4.4 to provide indemnification,
provided that Delphi shall forfeit such joint control right
with respect to a particular Third-Party Claim if Delphi or
any Delphi Affiliate makes any public statement or filing, or
takes any action (including, but not limited to, the filing of
any submission or pleading, or the giving of a deposition or
production of documents, in any administrative or court
proceeding) in connection with such Third-Party Claim that is
inconsistent in a material respect with any representation or
warranty made by Delphi in this Agreement, the Tax
Opinions/Rulings, or the Representation Letters.
(ii) Delphi and GM shall exercise their rights to
jointly control the defense of any such Third-Party Claim
solely for the purpose of defeating such Third-Party Claim
and, unless required by applicable law, neither Delphi nor GM
shall make any statements or take any actions that could
reasonably result in the shifting of liability for any Losses
arising out of such Third-Party Claim from the party making
such statement or taking such action (or any of its
Affiliates) to the other party (or any of its Affiliates).
(iii) Statements made or actions taken by either
Delphi or GM in connection with the defense of any such
Third-Party Claim shall not prejudice the rights of such party
in any subsequent action or proceeding between the parties.
(iv) If either GM or Delphi fails to jointly defend
any such Third-Party Claim, the other party shall solely
defend such Third-Party Claim and the party failing to jointly
defend shall use commercially reasonable efforts to cooperate
with the other party in its defense of such Third-Party Claim;
provided, however, that GM
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<PAGE> 22
may not compromise or settle any such Third-Party Claim
without the prior written consent of Delphi, which consent
shall not be unreasonably withheld or delayed. All costs and
expenses of either party in connection with, and during the
course of, the joint control of the defense of any such
Third-Party Claim shall be initially paid by the party that
incurs such costs and expenses. Such costs and expenses shall
be reallocated and reimbursed in accordance with the
respective indemnification obligations of the parties at the
conclusion of the defense of such Third-Party Claim.
4.6 ARBITRATION. Any dispute between the parties arising out of or
relating to this Section 4, including the interpretation of this Section 4, or
any actual or purported breach of this Section 4, shall be resolved only in
accordance with the following provisions:
(a) Negotiation. GM and Delphi shall attempt in good faith to
resolve any such dispute promptly through negotiations of the parties.
In the event of any such dispute, either party may deliver a Dispute
Notice to the other party, and within 20 Business Days after the
receipt of such Dispute Notice, the appropriate representatives of GM
and Delphi shall meet to attempt to resolve such dispute. If such
dispute has not been resolved within the Negotiation Period, or if one
of the parties fails or refuses to negotiate such dispute, the issue
shall be settled by arbitration pursuant to Section 4.6(b). The results
of such arbitration shall be final and binding on the parties.
(b) Arbitration Procedure. Either party may initiate
arbitration with regard to such dispute by giving the other party
written notice either (i) at any time following the end of the
Negotiation Period, or (ii) if the parties do not meet within 20
Business Days of the receipt of the Dispute Notice, at any time
thereafter. The arbitration shall be conducted by three arbitrators in
accordance with the CPR Rules, except as otherwise provided in this
Section 4.6. Within 20 days following receipt of the written notice of
arbitration, GM and Delphi shall each appoint one arbitrator. The two
arbitrators so appointed shall appoint the third arbitrator. If either
GM or Delphi shall fail to appoint an arbitrator within such 20-day
period, the arbitration shall be by the sole arbitrator appointed by
the other party. Whether selected by GM and Delphi or otherwise, each
arbitrator selected to resolve such dispute shall be a tax attorney or
tax accountant who is generally recognized in the tax community as a
qualified and competent tax practitioner with experience in the tax
area involved in the issue or issues to be resolved. Such arbitrators
shall be empowered to determine whether Delphi is required to indemnify
GM pursuant to Section 4.4 and to determine the amount of the related
indemnification payment. Each of GM and Delphi shall bear 50% of the
aggregate expenses of the arbitrators. The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. ss.ss.1-14. The
place of arbitration shall be New York, New York. The final decision of
the arbitrators shall be rendered no later than one year from the date
of the written notice of arbitration.
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<PAGE> 23
4.7 EXCLUSIVE REMEDIES. Except for the right to pursue equitable
remedies, the remedies provided in this Section 4 shall be deemed the sole and
exclusive remedies of the parties with respect to the subject matters of the
indemnification provisions of Section 4.4.
5. CERTAIN OTHER COVENANTS.
5.1 FINANCIAL AND OTHER INFORMATION.
(a) Financial Information. Delphi agrees that, for so long as
GM is required to consolidate Delphi's results of operations and
financial position or to account for its investment in Delphi under the
equity method of accounting (determined in accordance with generally
accepted accounting principles consistently applied):
(i) Delphi shall, and shall cause each of its
Subsidiaries to, maintain a system of internal accounting
controls that will provide reasonable assurance that: (A)
Delphi's and such Subsidiaries' books, records and accounts
fairly reflect all transactions and dispositions of assets and
(B) the specific objectives of accounting control are
achieved.
(ii) Delphi shall, and shall cause each of its
Subsidiaries (other than Delphi Automotive Systems India
Limited) to, maintain a fiscal year which commences on January
1 and ends on December 31 of each calendar year.
(iii) Delphi shall deliver to GM a trial balance
submission, which shall include amounts relating to each of
its Subsidiaries, in such format and detail as GM may request,
(A) with respect to each month (other than the last month of
each fiscal year), within four Business Days following the
last day of each such month, and (B) with respect to each
fiscal year, within five Business Days following December 31
of each such year.
(iv) As soon as practicable, and in any event within
seven Business Days after the end of each of the first three
fiscal quarters in each fiscal year of Delphi and within 14
Business Days after the end of each such fiscal year, Delphi
shall deliver to GM a consolidated income statement and
balance sheet for Delphi and its Subsidiaries for such fiscal
quarter or year, as the case may be.
(v) As soon as practicable, and in any event within 35
days after the end of each of the first three fiscal quarters
in each fiscal year of Delphi and no later than five days
before Delphi intends to file its Quarterly Financial
Statements (as defined below) with the SEC, Delphi shall
deliver to GM drafts of (A) the consolidated financial
statements of Delphi and its Subsidiaries (and notes thereto)
for such periods and for the period from the beginning of the
current fiscal year to the end of such quarter, setting forth
in each case in comparative form for each such fiscal
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<PAGE> 24
quarter of Delphi the consolidated figures (and notes thereto)
for the corresponding quarter and periods of the previous
fiscal year and all in reasonable detail and prepared in
accordance with Article 10 of Regulation S-X, and (B) a
discussion and analysis by management of Delphi's and its
Subsidiaries' financial condition and results of operations
for such fiscal period, including, without limitation, an
explanation of any material adverse change, all in reasonable
detail and prepared in accordance with Item 303(b) of
Regulation S-K. The information set forth in (A) and (B) above
is herein referred to as the "Quarterly Financial Statements."
No later than the earlier of (x) two Business Days prior to
the date Delphi publicly files the Quarterly Financial
Statements with the SEC or otherwise makes such Quarterly
Financial Statements publicly available or (y) two Business
Days prior to the date on which GM has notified Delphi that it
intends to file its quarterly financial statements with the
SEC, Delphi shall deliver to GM the final form of the
Quarterly Financial Statements certified by the chief
financial officer of Delphi as presenting fairly, in all
material respects, the financial condition and results of
operations of Delphi and its Subsidiaries; provided that
Delphi may continue to revise such Quarterly Financial
Statements prior to the filing thereof in order to make
corrections and non-substantive changes which corrections and
changes shall be delivered by Delphi to GM as soon as
practicable, and in any event within eight hours thereafter;
and, provided, further, that GM and Delphi financial
representatives shall actively consult with each other
regarding any changes (whether or not substantive) which
Delphi may consider making to its Quarterly Financial
Statements and related disclosures during the three Business
Days immediately prior to any anticipated filing with the SEC,
and Delphi shall obtain GM's consent prior to making any
change to Delphi's Quarterly Financial Statements or related
disclosures which would have an effect upon GM's financial
statements or related disclosures. In addition to the
foregoing, no Quarterly Financial Statement or any other
document which refers, or contains information with respect,
to the ownership of Delphi by GM, the separation of Delphi
from GM or the Distribution shall be filed with the SEC or
otherwise made public by Delphi or any of its Subsidiaries
without the prior written consent of GM.
(vi) Delphi shall deliver to GM as soon as practicable,
and in any event within 45 days after the end of each fiscal
year of Delphi and no later than 10 days before Delphi intends
to file its Annual Financial Statements (as defined below)
with the SEC, (A) drafts of the consolidated financial
statements of Delphi (and notes thereto) for such year,
setting forth in each case in comparative form the
consolidated figures (and notes thereto) for the previous
fiscal year and all in reasonable detail and prepared in
accordance with Regulation S-X and (B) a discussion and
analysis by management of Delphi's and its Subsidiaries'
financial condition and results of operations for such year,
including, without limitation, an explanation of any material
adverse change, all in reasonable detail and prepared in
accordance with Item 303(a) of Regulation S-K. The information
set forth in (A) and (B) above is herein referred to as the
"Annual Financial Statements." Delphi shall deliver to GM all
revisions to
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<PAGE> 25
such drafts as soon as any such revisions are prepared or
made. No later than the earlier of (1) five Business Days
prior to the date Delphi publicly files the Annual Financial
Statements with the SEC or otherwise makes such Annual
Financial Statements publicly available or (2) five Business
Days prior to the date on which GM has notified Delphi that it
intends to file its annual financial statements with the SEC,
Delphi shall deliver to GM the final form of the Annual
Financial Statements certified by the chief financial officer
of Delphi as presenting fairly, in all material respects, the
financial condition and results of operations of Delphi and
its Subsidiaries; provided that Delphi may continue to revise
such Annual Financial Statements prior to the filing thereof
in order to make corrections and non-substantive changes which
corrections and changes shall be delivered by Delphi to GM as
soon as practicable, and in any event within eight hours
thereafter; and, provided, further, that GM and Delphi
financial representatives shall actively consult with each
other regarding any changes (whether or not substantive) which
Delphi may consider making to its Annual Financial Statements
and related disclosures during the three Business Days
immediately prior to any anticipated filing with the SEC, and
Delphi shall obtain GM's consent prior to making any change to
Delphi's Annual Financial Statements or related disclosures
which would have an effect upon GM's financial statements or
related disclosures. In addition to the foregoing, no Annual
Financial Statement or any other document which refers, or
contains information with respect, to the ownership of Delphi
by GM, the separation of Delphi from GM or the Distribution
shall be filed with the SEC or otherwise made public by Delphi
or any of its Subsidiaries without the prior written consent
of GM. In any event, Delphi shall deliver to GM, no later than
80 days after the end of each fiscal year of Delphi, the final
form of the Annual Financial Statements accompanied by an
opinion thereon by Delphi's independent certified public
accountants.
(vii) Delphi shall deliver to GM all Quarterly and Annual
Financial Statements of each Subsidiary of Delphi which is
itself required to file financial statements with the SEC or
otherwise make such financial statements publicly available,
with such financial statements to be provided in the same
manner and detail and on the same time schedule as those
financial statements of Delphi required to be delivered to GM
pursuant to this Section 5.1.
(viii) All information provided by Delphi or any of its
Subsidiaries to GM pursuant to Sections 5.1(a)(iii) through
(vii) inclusive shall be consistent in terms of format and
detail and otherwise with the procedures in effect on the date
hereof with respect to the provision of such financial
information by the Delphi Automotive Systems Business and/or
Delphi and its Subsidiaries, as applicable, to GM (and, where
appropriate, as presently presented in financial reports to
GM's Board of Directors), with such changes therein as may be
requested by GM from time to time consistent with changes in
reporting by sectors and Subsidiaries of GM.
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<PAGE> 26
(ix) Delphi and each of its Subsidiaries which files
information with the SEC shall deliver to GM: (A) as soon as
the same are prepared, substantially final drafts of: (x) all
reports, notices and proxy and information statements to be
sent or made available by Delphi or any of its Subsidiaries to
their security holders, (y) all regular, periodic and other
reports to be filed under Sections 13, 14 and 15 of the
Exchange Act (including Reports on Forms 10-K, 10-Q and 8-K
and Annual Reports to Shareholders), and (z) all registration
statements and prospectuses to be filed by Delphi or any of
its Subsidiaries with the SEC or any securities exchange
pursuant to the listed company manual (or similar
requirements) of such exchange (collectively, the documents
identified in clauses (x), (y) and (z) are referred to herein
as "Delphi Public Documents"), and (B) as soon as practicable,
but in no event later than four Business Days prior to the
date the same are printed, sent or filed, whichever is
earliest, final copies of all such Delphi Public Documents;
provided that Delphi may continue to revise such Delphi Public
Documents prior to the filing thereof in order to make
corrections and non-substantive changes which corrections and
changes shall be delivered by Delphi to GM as soon as
practicable, and in any event within eight hours thereafter;
and, provided, further, that GM and Delphi financial
representatives shall actively consult with each other
regarding any changes (whether or not substantive) which
Delphi may consider making to any of its Delphi Public
Documents and related disclosures prior to any anticipated
filing with the SEC, and Delphi shall obtain GM's consent
prior to making any change to its Delphi Public Documents or
related disclosures which would have an effect upon GM's
financial statements or related disclosures. In addition to
the foregoing, no Delphi Public Document or any other document
which refers, or contains information with respect, to the
ownership of Delphi by GM, the separation of Delphi from GM or
the Distribution shall be filed with the SEC or otherwise made
public by Delphi or any of its Subsidiaries without the prior
written consent of GM.
(x) Delphi shall, as promptly as practicable, deliver to
GM copies of all annual and other budgets and financial
projections (consistent in terms of format and detail and
otherwise with the procedures in effect on the date hereof)
relating to Delphi or any of its Subsidiaries and shall
provide GM an opportunity to meet with management of Delphi to
discuss such budgets and projections.
(xi) With reasonable promptness, Delphi shall deliver to
GM such additional financial and other information and data
with respect to Delphi and its Subsidiaries and their
business, properties, financial positions, results of
operations and prospects as from time to time may be
reasonably requested by GM.
(xii) Prior to issuance, Delphi shall deliver to GM copies
of substantially final drafts of all press releases and other
statements to be made available by Delphi or any of its
Subsidiaries to employees of Delphi or any of its Subsidiaries
or to the public concerning material developments in the
business, properties, earnings, results
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<PAGE> 27
of operations, financial condition or prospects of Delphi or
any of its Subsidiaries or the relationship between (A) Delphi
or any of its Subsidiaries and (B) GM or any of its
Affiliates. In addition, prior to the issuance of any such
press release or public statement, Delphi shall consult with
GM regarding any changes (other than typographical or other
similar minor changes) to such substantially final drafts.
Immediately following the issuance thereof, Delphi shall
deliver to GM copies of final drafts of all press releases and
other public statements. Delphi and GM will consult with each
other as to the timing of their annual and quarterly earnings
releases and will give each other an opportunity to review the
information therein relating to Delphi and its Subsidiaries
and to comment thereon.
(xiii) Delphi shall cooperate fully, and cause its
accountants to cooperate fully, with GM to the extent
requested by GM in the preparation of GM's public earnings
releases, quarterly reports on Form 10-Q, Annual Reports to
Shareholders, Annual Reports on Form 10-K, any Current Reports
on Form 8-K and any other proxy, information and registration
statements, reports, notices, prospectuses and any other
filings made by GM with the SEC, any national securities
exchange or otherwise made publicly available (collectively,
"GM Public Filings"). Delphi agrees to provide to GM all
information that GM reasonably requests in connection with any
GM Public Filings or that, in the judgment of GM's Legal
Staff, is required to be disclosed or incorporated by
reference therein under any law, rule or regulation. Such
information shall be provided by Delphi in a timely manner on
the dates requested by GM (which may be earlier than the dates
on which Delphi otherwise would be required hereunder to have
such information available) to enable GM to prepare, print and
release all GM Public Filings on such dates as GM shall
determine. Delphi shall cause its accountants to consent to
any reference to them as experts in any GM Public Filings
required under any law, rule or regulation. If and to the
extent requested by GM, Delphi shall diligently and promptly
review all drafts of such GM Public Filings and prepare in a
diligent and timely fashion any portion of such GM Public
Filing pertaining to Delphi. Prior to any printing or public
release of any GM Public Filing, an appropriate executive
officer of Delphi shall, if requested by GM, certify that the
information relating to Delphi, any Delphi Affiliate or the
Delphi Business in such GM Public Filing is accurate, true and
correct in all material respects. Unless required by law, rule
or regulation, Delphi shall not publicly release any financial
or other information which conflicts with the information with
respect to Delphi, any Delphi Affiliate or the Delphi Business
that is included in any GM Public Filing without GM's prior
written consent. Prior to the release or filing thereof, GM
shall provide Delphi with a draft of any portion of a GM
Public Filing containing information relating to Delphi and
its Subsidiaries and shall give Delphi an opportunity to
review such information and comment thereon; provided that GM
shall determine in its sole discretion the final form and
content of all GM Public Filings.
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(b) Auditors and Audits; Annual Statements and Accounting.
Delphi agrees that, for so long as GM is required to consolidate
Delphi's results of operations and financial position or to account for
its investment in Delphi under the equity method of accounting (in
accordance with generally accepted accounting principles):
(i) Delphi shall not select a different accounting firm
than Deloitte & Touche, LLP to serve as its (and its
Subsidiaries') independent certified public accountants
("Delphi's Auditors") without GM's prior written consent
(which shall not be unreasonably withheld).
(ii) Delphi shall use its best efforts to enable the
Delphi Auditors to complete their audit such that they will
date their opinion on Delphi's audited annual financial
statements on the same date that GM's independent certified
public accountants ("GM's Auditors") date their opinion on
GM's audited annual financial statements (the "GM Annual
Statements"), and to enable GM to meet its timetable for the
printing, filing and public dissemination of the GM Annual
Statements.
(iii) Delphi shall provide to GM on a timely basis all
information that GM reasonably requires to meet its schedule
for the preparation, printing, filing, and public
dissemination of the GM Annual Statements. Without limiting
the generality of the foregoing, Delphi will provide all
required financial information with respect to Delphi and its
Subsidiaries to Delphi's Auditors in a sufficient and
reasonable time and in sufficient detail to permit Delphi's
Auditors to take all steps and perform all reviews necessary
to provide sufficient assistance to GM's Auditors with respect
to information to be included or contained in the GM Annual
Statements.
(iv) Delphi shall authorize Delphi's Auditors to make
available to GM's Auditors both the personnel who performed or
are performing the annual audit of Delphi and work papers
related to the annual audit of Delphi, in all cases within a
reasonable time prior to Delphi's Auditors' opinion date, so
that GM's Auditors are able to perform the procedures they
consider necessary to take responsibility for the work of
Delphi's Auditors as it relates to GM's Auditors' report on
GM's statements, all within sufficient time to enable GM to
meet its timetable for the printing, filing and public
dissemination of the GM Annual Statements.
(v) Delphi shall provide GM's internal auditors access
to Delphi's and its Subsidiaries, books and records so that GM
may conduct reasonable audits relating to the financial
statements provided by Delphi pursuant hereto as well as to
the internal accounting controls and operations of Delphi and
its Subsidiaries.
(vi) Delphi shall give GM as much prior notice as
reasonably practical of any proposed determination of, or any
significant changes in, its accounting estimates or accounting
principles from those in effect on the date hereof. Delphi
will consult
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with GM and, if requested by GM, Delphi will consult with GM's
independent public accountants with respect thereto. Delphi
will not make any such determination or changes without GM's
prior written consent if such a determination or a change
would be sufficiently material to be required to be disclosed
in Delphi's financial statements as filed with the SEC or
otherwise publicly disclosed therein.
(vii) Notwithstanding clause (vi) above, Delphi shall make
any changes in its accounting estimates or accounting
principles that are requested by GM in order for Delphi's
accounting estimates and principles to be consistent with
those of GM.
Nothing in this Section 5.1 shall require Delphi to violate any
agreement with any of its customers regarding the confidentiality of
commercially sensitive information relating to that customer or its
business; provided that in the event that Delphi is required under this
Section 5.1 to disclose any such information, Delphi shall use all
commercially reasonable efforts to seek to obtain such customer's
consent to the disclosure of such information.
5.2 OTHER COVENANTS. Delphi hereby covenants and agrees that, for
so long as GM beneficially owns at least 50% of the outstanding shares of Delphi
Common Stock:
(a) Delphi shall not, without the prior written consent of GM
(which it may withhold in its sole and absolute discretion), take, or
cause to be taken, directly or indirectly, any action, including making
or failing to make any election under the law of any state, which has
the effect, directly or indirectly, of restricting or limiting the
ability of GM to freely sell, transfer, assign, pledge or otherwise
dispose of shares of Delphi Common Stock or, other than as provided in
the Rights Plan, would restrict or limit the rights of any transferee
of GM as a holder of Delphi Common Stock. Without limiting the
generality of the foregoing, Delphi shall not, without the prior
written consent of GM (which it may withhold in its sole and absolute
discretion), (i) amend, supplement, restate, modify or alter the Rights
Plan or any successor stockholder rights plan in any manner that would
result in (A) the ownership of Delphi Common Stock by GM causing the
rights thereunder to detach or become exercisable and/or (B) GM and its
transferees not being entitled to the same rights thereunder as other
holders of Delphi Common Stock or (ii) take any action, or take any
action to recommend to its stockholders any action, which would among
other things, limit the legal rights of, or deny any benefit to, GM as
a Delphi stockholder in a manner not applicable to Delphi stockholders
generally.
(b) Delphi shall not, without the prior written consent of GM
(which it may withhold in its sole and absolute discretion), issue any
shares of Delphi Capital Stock or any rights, warrants or options to
acquire Delphi Capital Stock (including, without limitation, securities
convertible or exchangeable for Delphi Capital Stock), if after giving
effect to such issuances and considering all of the shares of Delphi
Capital Stock acquirable pursuant to such rights, warrants and options
to be outstanding on the date of such issuance (whether or
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<PAGE> 30
not then exercisable), GM would own less than 50% of the then
outstanding shares of Delphi Common Stock.
(c) To the extent that GM is a party to any contracts or
agreements that provide that certain actions of GM's Subsidiaries may
result in GM being in breach of or in default under such agreements and
GM has advised Delphi of the existence, and has furnished Delphi with
copies, of such contracts or agreements (or the relevant portions
thereof), Delphi shall not take any actions that reasonably could
result in GM being in breach of or in default under any such contract
or agreement. As of the date hereof, the contracts and agreements (or
relevant portions thereof) applicable to this covenant are set forth on
Exhibit A attached hereto. Delphi hereby acknowledges and agrees that
GM has furnished it with copies of each contract or agreement (or the
relevant portion thereof) listed on Exhibit A. The parties acknowledge
and agree that, after the date hereof, GM may in good faith (and not
solely with the intention of imposing restrictions on Delphi pursuant
to this covenant) enter into additional contracts or agreements that
provide that certain actions of GM's Subsidiaries may result in GM
being in breach of or in default under such agreements. In such event,
Exhibit A shall be deemed to be automatically amended to reflect the
addition of any other contracts or agreements (or relevant portions
thereof) of which GM advises Delphi after the date hereof in accordance
with this Section 5.2(c). Delphi agrees to keep confidential and not to
disclose any information provided to it pursuant to this Section
5.2(c).
5.3 COVENANTS REGARDING THE INCURRENCE OF INDEBTEDNESS.
(a) Delphi hereby covenants and agrees that, for so long as GM
continues to beneficially own at least 50% of the outstanding shares of
Delphi Common Stock, Delphi shall not, and shall not permit any of its
Subsidiaries to, without GM's prior written consent (which it may
withhold in its sole and absolute discretion), take any of the
following actions:
(i) create, incur, assume or suffer to exist any Delphi
Indebtedness in excess of an aggregate of $5.0 billion
outstanding at any time; provided, however, that Delphi may
consummate, or agree to consummate, any acquisition or other
similar transaction or series of related transactions
involving Delphi or any of its Subsidiaries acquiring Control
of any Person (an "Acquisition Target") as a result of which
the Delphi Indebtedness would exceed $5.0 billion so long as
both (A) the Acquisition Target has an FFO to Debt Ratio equal
to or greater than 20% and (B) the Delphi Indebtedness after
giving effect to such transaction(s) (including, without
duplication, any Delphi Indebtedness incurred in connection
therewith and any Target Indebtedness that will become Delphi
Indebtedness as a result of such transaction(s)) would not
exceed $6.0 billion; and
(ii) consummate, or agree to consummate, any acquisition
or other similar transaction or series of related transactions
involving Delphi or any of its Subsidiaries acquiring Control
of any Acquisition Target with an FFO to Debt Ratio
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less than 20% unless the Adjusted Delphi Indebtedness would
not exceed $5.0 billion.
(b) In order to implement this Section 5.3, Delphi shall
notify GM in writing at least 15 Business Days prior to the time it or
any of its Subsidiaries contemplates incurring any Delphi Indebtedness
or agreeing to acquire Control of an Acquisition Target of its
intention to do so and shall either (i) demonstrate to GM's
satisfaction that this Section 5.3 shall not be violated by such
proposed additional Delphi Indebtedness or acquisition or (ii) obtain
GM's prior written consent to such proposed additional Delphi
Indebtedness or acquisition. Any such written notification from Delphi
to GM shall include documentation of any existing Delphi Indebtedness
and estimated Delphi Indebtedness after giving effect to such proposed
incurrence of additional Delphi Indebtedness or acquisition and, if
delivered in connection with any transaction(s) involving an
Acquisition Target, (A) documentation of the Acquisition Target's
Target Indebtedness, (B) calculations of the Acquisition Target's FFO
to Debt Ratio and (C) calculations of compliance with this Section 5.3,
including the Adjusted Delphi Indebtedness, if applicable. GM shall
have the right to verify the accuracy of such information and Delphi
shall cooperate fully with GM in such effort (including, without
limitation, by providing GM with access to the working papers and
underlying documentation related to any calculations used in
determining such information).
(c) For purposes of this Section 5.3, the following terms
shall have the following meanings:
"Adjusted Delphi Indebtedness" means, with respect to any
proposed transaction(s) involving an Acquisition Target, the sum of (i)
the Delphi Indebtedness immediately after giving effect to such
transaction(s) (including, without duplication, any Delphi Indebtedness
incurred in connection therewith and any Target Indebtedness that will
become Delphi Indebtedness as a result of such transaction(s)) and (ii)
the amount by which the number described in clause (ii) of the
definition of "FFO to Debt Ratio" set forth in this Section 5.3 would
need to be reduced in order for the Acquisition Target's FFO to Debt
Ratio to equal 20%.
"Delphi Indebtedness" means the sum of (i) the aggregate
principal amount of total liabilities (whether long-term or short-term)
for borrowed money (including capitalized leases) of Delphi and its
Subsidiaries, as determined for purposes of its consolidated financial
statements prepared in accordance with GAAP, and (ii) the aggregate
amount attributable to all factoring or securitization of receivables
and other financial assets by Delphi and its Subsidiaries in excess of
$1.2 billion.
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<PAGE> 32
"FFO to Debt Ratio" means, for any Acquisition Target, as of
immediately prior to Delphi acquiring Control of such Acquisition
Target in the proposed transaction(s), the percentage determined by
dividing (i) 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
prepared in accordance with GAAP, by (ii) the additional Delphi
Indebtedness that would be incurred in connection with such proposed
transaction(s), including, without limitation, any Target Indebtedness
that will become Delphi Indebtedness as a result of such proposed
transaction(s).
"Target Indebtedness" means, with respect to any proposed
transaction(s) involving an Acquisition Target, such Acquisition
Target's total obligations (whether short-term or long-term) for
borrowed money (including capitalized leases) as of immediately prior
to Delphi acquiring Control of such Acquisition Target in such proposed
transaction(s).
6. INDEMNIFICATION.
6.1 INDEMNIFICATION BY DELPHI. Subject to Section 6.3, Delphi shall
indemnify, defend and hold harmless GM, all GM Affiliates and each of their
respective directors, officers and employees (in their capacities as such), from
and against:
(a) all Losses relating to, arising out of, or due to,
directly or indirectly, any breach by Delphi or any Delphi Affiliate of
any of the provisions of this Agreement;
(b) all Losses relating to, arising out of, or due to,
directly or indirectly, any incorrect, inaccurate or incomplete
financial and other information provided by Delphi or any Delphi
Affiliate to GM pursuant to Section 5.1 of this Agreement;
(c) all Losses relating to, arising out of, or due to any
untrue statement or alleged untrue statement of a material fact
contained in, or incorporated by reference into, the IPO Registration
Statement or the omission or alleged omission to state (whether
pursuant to direct statement or incorporation by reference) in the IPO
Registration Statement a material fact required to be stated therein or
necessary to make the statements therein not misleading other than with
respect to the GM Disclosure Portions; and
(d) all Losses relating to, arising out of, or due to any
untrue statement or alleged untrue statement of a material fact
contained in, or incorporated by reference into, the Distribution
Registration Statement or the omission or alleged omission to state
(whether pursuant to direct statement or incorporation by reference) in
the Distribution Registration Statement a material fact required to be
stated therein or necessary to make the statements therein not
misleading other than with respect to the GM Disclosure Portions.
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<PAGE> 33
6.2 INDEMNIFICATION BY GM. Subject to Section 6.3, GM shall indemnify,
defend, and hold harmless Delphi, all Delphi Affiliates, and each of their
respective directors, officers and employees (in their capacities as such), from
and against:
(a) all Losses relating to, arising out of, or due to,
directly or indirectly, any breach by GM or any GM Affiliate of any of
the provisions of this Agreement;
(b) all Losses relating to, arising out of, or due to any
untrue statement or alleged untrue statement of a material fact
contained in, or incorporated by reference into, the GM Disclosure
Portions of the IPO Registration Statement or the omission or alleged
omission to state (whether pursuant to direct statement or
incorporation by reference) in the GM Disclosure Portions of the IPO
Registration Statement a material fact required to be stated therein or
necessary to make the statements therein not misleading; and
(c) all Losses relating to, arising out of, or due to any
untrue statement or alleged untrue statement of a material fact
contained in, or incorporated by reference into, the GM Disclosure
Portions of the Distribution Registration Statement or the omission or
alleged omission to state (whether pursuant to direct statement or
incorporation by reference) in the GM Disclosure Portions of the
Distribution Registration Statement a material fact required to be
stated therein or necessary to make the statements therein not
misleading.
6.3 OTHER LIABILITIES.
(a) Except as provided in Section 6.4, this Section 6 shall
not be applicable to any Tax-Related Losses, which shall be governed by
Section 4 of this Agreement.
(b) This Section 6 shall not be applicable to any Losses
relating to, arising out of, or due to any breach of the provisions of
any other contract, agreement or understanding between GM or any GM
Affiliate and Delphi or any Delphi Affiliate, including, without
limitation, the Separation Agreement and any of the other Ancillary
Agreements, which Losses shall be governed by the terms of such
contract, agreement or understanding.
6.4 TAX EFFECTS OF INDEMNIFICATION.
(a) Any indemnification payment made under this Agreement
shall be characterized for tax purposes as if such payment were made
immediately prior to the latest Distribution Date, and shall therefore
be treated, to the extent permitted by law, as either (i) a
distribution from Delphi to GM or (ii) a capital contribution from GM
to Delphi.
(b) The amount of any Loss or Tax-Related Losses for which
indemnification is provided under this Agreement shall be (i) increased
to take account of net Tax cost, if any, incurred by the Indemnitee
arising from the receipt or accrual of an Indemnity Payment hereunder
(grossed up for such increase) and (ii) reduced to take account of net
Tax benefit,
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if any, realized by the Indemnitee arising from incurring or paying
such Loss or Tax-Related Losses. In computing the amount of any such
Tax cost or Tax benefit, the Indemnitee shall be deemed to recognize
all other items of income, gain, loss, deduction or credit before
recognizing any item arising from the receipt or accrual of any
Indemnity Payment hereunder or incurring or paying any indemnified Loss
or Tax-Related Losses. Any Indemnity Payment hereunder shall initially
be made without regard to this Section 6.4 and shall be increased or
reduced to reflect any such net Tax cost (including gross-up) or net
Tax benefit only after the Indemnitee has actually realized such cost
or benefit. For purposes of this Agreement, an Indemnitee shall be
deemed to have "actually realized" a net Tax cost or a net Tax benefit
to the extent that, and at such time as, the amount of Taxes payable by
such Indemnitee is increased above or reduced below, as the case may
be, the amount of Taxes that such Indemnitee would be required to pay
but for the receipt or accrual of the Indemnity Payment or the
incurrence or payment of such Loss or Tax-Related Losses, as the case
may be. The amount of any increase or reduction hereunder shall be
adjusted to reflect any final determination (which shall include the
execution of Form 870-AD or successor form) with respect to the
Indemnitee's liability for Taxes, and payments between GM and Delphi to
reflect such adjustment shall be made if necessary.
6.5 EFFECT OF INSURANCE UPON INDEMNIFICATION. The amount which an
Indemnifying Party is required to pay to any Indemnitee pursuant to this Section
6 shall be reduced (including retroactively) by any Insurance Proceeds and other
amounts actually recovered by such Indemnitee in reduction of the related Loss,
it being understood and agreed that each of Delphi and GM shall use commercially
reasonable efforts to collect any such proceeds or other amounts to which it or
any of its Affiliates is entitled, without regard to whether it is the
Indemnifying Party hereunder. No Indemnitee shall be required, however, to
collect any such proceeds or other amounts prior to being entitled to
indemnification from an Indemnifying Party hereunder. If an Indemnitee receives
an Indemnity Payment in respect of a Loss and subsequently receives Insurance
Proceeds or other amounts in respect of such Loss, then such Indemnitee shall
pay to such Indemnifying Party an amount equal to the difference between (a) the
sum of the amount of such Indemnity Payment and the amount of such Insurance
Proceeds or other amounts actually received and (b) the amount of such Loss, in
each case adjusted (at such time as appropriate adjustment can be determined) to
reflect any premium adjustment attributable to such claim.
6.6 PROCEDURE FOR INDEMNIFICATION INVOLVING THIRD-PARTY CLAIMS.
(a) Notice of Claim. If any Indemnitee receives notice of the
assertion of any Third-Party Claim with respect to which an
Indemnifying Party is obligated under this Agreement to provide
indemnification (other than pursuant to Section 4), such Indemnitee
shall give such Indemnifying Party notice thereof (together with a copy
of such Third-Party Claim, process or other legal pleading) promptly
after becoming aware of such Third-Party Claim; provided, however, that
the failure of any Indemnitee to give notice as provided in this
Section shall not relieve any Indemnifying Party of its obligations
under this Section 6,
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except to the extent that such Indemnifying Party is actually
prejudiced by such failure to give notice. Such notice shall describe
such Third-Party Claim in reasonable detail.
(b) Obligation of Indemnifying Party. An Indemnifying Party,
at such Indemnifying Party's own expense and through counsel chosen by
such Indemnifying Party (which counsel shall be reasonably acceptable
to the Indemnitee), may elect to defend any Third-Party Claim. If an
Indemnifying Party elects to defend a Third-Party Claim, then, within
ten Business Days after receiving notice of such Third-Party Claim (or
sooner, if the nature of such Third-Party Claim so requires), such
Indemnifying Party shall notify the Indemnitee of its intent to do so,
and such Indemnitee shall cooperate in the defense of such Third-Party
Claim. Such Indemnifying Party shall pay such Indemnitee's reasonable
out-of-pocket expenses incurred in connection with such cooperation.
Such Indemnifying Party shall keep the Indemnitee reasonably informed
as to the status of the defense of such Third-Party Claim. After notice
from an Indemnifying Party to an Indemnitee of its election to assume
the defense of a Third-Party Claim, such Indemnifying Party shall not
be liable to such Indemnitee under this Section 6 for any legal or
other expenses subsequently incurred by such Indemnitee in connection
with the defense thereof other than those expenses referred to in the
preceding sentence; provided, however, that such Indemnitee shall have
the right to employ one law firm as counsel, together with a separate
local law firm in each applicable jurisdiction ("Separate Counsel"), to
represent such Indemnitee in any action or group of related actions
(which firm or firms shall be reasonably acceptable to the Indemnifying
Party) if, in such Indemnitee's reasonable judgment at any time, either
a conflict of interest between such Indemnitee and such Indemnifying
Party exists in respect of such claim, or there may be defenses
available to such Indemnitee which are different from or in addition to
those available to such Indemnifying Party and the representation of
both parties by the same counsel would be inappropriate, and in that
event (i) the reasonable fees and expenses of such Separate Counsel
shall be paid by such Indemnifying Party (it being understood, however,
that the Indemnifying Party shall not be liable for the expenses of
more than one Separate Counsel (excluding local counsel) with respect
to any Third-Party Claim (even if against multiple Indemnitees)) and
(ii) each of such Indemnifying Party and such Indemnitee shall have the
right to conduct its own defense in respect of such claim. If an
Indemnifying Party elects not to defend against a Third-Party Claim, or
fails to notify an Indemnitee of its election as provided in this
Section 6 within the period of ten Business Days described above, the
Indemnitee may defend, compromise, and settle such Third-Party Claim
and shall be entitled to indemnification hereunder (to the extent
permitted hereunder); provided, however, that no such Indemnitee may
compromise or settle any such Third-Party Claim without the prior
written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld or delayed. Notwithstanding the foregoing, the
Indemnifying Party shall not, without the prior written consent of the
Indemnitee, (i) settle or compromise any Third-Party Claim or consent
to the entry of any judgment which does not include as an unconditional
term thereof the delivery by the claimant or plaintiff to the
Indemnitee of a written release from all liability in respect of such
Third-Party Claim or (ii) settle or
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<PAGE> 36
compromise any Third-Party Claim in any manner that would be reasonably
likely to have a material adverse effect on the Indemnitee.
(c) Joint Defense of Certain Claims. Notwithstanding the
provisions of Section 6.6(b), GM and Delphi shall jointly control the
defense of, and cooperate with each other with respect to defending,
any Third-Party Claim with respect to which each party is claiming that
it is entitled to indemnification under Section 6.1 or 6.2. If either
GM or Delphi fails to defend jointly any such Third-Party Claim, the
other party shall solely defend such Third-Party Claim and the party
failing to defend jointly shall use all commercially reasonable efforts
to cooperate with the other party in its defense of such Third-Party
Claim; provided, however, that neither party may compromise or settle
any such Third-Party Claim without the prior written consent of the
other party, which consent shall not be unreasonably withheld or
delayed. All costs and expenses of either party in connection with, and
during the course of, the joint control of the defense of any such
Third-Party Claim shall be initially paid by the party that incurs such
costs and expenses. Such costs and expenses shall be reallocated and
reimbursed in accordance with the respective indemnification
obligations of the parties at the conclusion of the defense of such
Third-Party Claim.
6.7 PROCEDURE FOR INDEMNIFICATION NOT INVOLVING THIRD-PARTY
CLAIMS. If any Indemnitee desires to assert against an Indemnifying Party any
claim for indemnification under this Section 6 other than a Third-Party Claim (a
"Claim"), the Indemnitee shall deliver to the Indemnifying Party notice of its
demand for satisfaction of such Claim (a "Request"), specifying in reasonable
detail the amount of such Claim and the basis for asserting such Claim. Within
30 days after the Indemnifying Party has been given a Request, the Indemnifying
Party shall either (i) satisfy the Claim requested to be satisfied in such
Request by delivering to the Indemnitee payment by wire transfer or a certified
or bank cashier's check payable to the Indemnified Party in immediately
available funds in an amount equal to the amount of such Claim, or (ii) notify
the Indemnitee that the Indemnifying Party contests such Claim by delivering to
the Indemnitee a Dispute Notice, stating that the Indemnifying Party objects to
such Claim and specifying in reasonable detail the basis for contesting such
Claim. Any dispute described in clause (ii) of this Section 6.7 shall be subject
to the provisions of Section 7.1.
6.8 EXCLUSIVE REMEDIES. Except for the right to pursue equitable
remedies, the remedies provided in this Section 6 shall be deemed the sole and
exclusive remedies of the parties with respect to the subject matters of the
indemnification provisions of this Section 6.
7. MISCELLANEOUS.
7.1 DISPUTE RESOLUTION. GM and Delphi shall attempt in good faith
to resolve any dispute between the parties arising out of or relating to this
Agreement promptly through negotiations of the parties prior to seeking any
other legal or equitable remedy.
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7.2 SURVIVAL. The representations and warranties contained in this
Agreement shall survive the execution and delivery hereof and all Distribution
Dates until the expiration of all applicable statutes of limitations.
7.3 COMPLETE AGREEMENT. Except as otherwise set forth in this
Agreement, this Agreement and the exhibits hereto shall constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and shall supersede all prior agreements and understandings, whether written or
oral, between the parties with respect to such subject matter.
7.4 AUTHORITY. Each of the parties hereto represents to the other that
(a) it has the corporate power and authority to execute, deliver and perform
each of this Agreement and the Registration Rights Agreement, (b) the execution,
delivery and performance of each of this Agreement and the Registration Rights
Agreement by it has been duly authorized by all necessary corporate action, (c)
it has duly and validly executed and delivered each of this Agreement and the
Registration Rights Agreement, and (d) each of this Agreement and the
Registration Rights Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.
7.5 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (other than the laws regarding
conflicts of laws) as to all matters, including matters of validity,
construction, effect, performance and remedies.
7.6 CONSENT TO EXCLUSIVE JURISDICTION. Any action, suit or proceeding
arising out of any claim that the parties cannot settle through good faith
negotiations (except any claim to which Section 4.6 applies) shall be litigated
exclusively in the state courts of Delaware. Each of the parties hereto hereby
irrevocably and unconditionally (a) submits to the jurisdiction of the state
courts of Delaware for any such action, suit or proceeding, (b) agrees not to
commence any such action, suit or proceeding except in the state courts of
Delaware, (c) waives, and agrees not to plead or to make, any objection to the
venue of any such action, suit or proceeding in the state courts of Delaware,
(d) waives, and agrees not to plead or to make, any claim that any such action,
suit or proceeding brought in the state courts of Delaware has been brought in
an improper or otherwise inconvenient forum, (e) waives, and agrees not to plead
or to make, any claim that the state courts of Delaware lack personal
jurisdiction over it, and (f) waives its right to remove any such action, suit
or proceeding to the federal courts except when such courts are vested with sole
and exclusive jurisdiction by statute. GM and Delphi shall cooperate with each
other in connection with any such action, suit or proceeding to obtain reliable
assurances that confidential treatment will be accorded any information that
either party shall reasonably deem to be confidential or proprietary. Each of
the parties hereto irrevocably designates and appoints its respective Service
Agent as its agent to receive service of process in any such action, suit or
proceeding. Each of the parties hereto further covenants and agrees that, until
the expiration of all applicable statutes of limitations relating to potential
claims under this Agreement, each such party shall maintain a duly appointed
agent for the service of summonses and other legal process in the State of
Delaware, and shall promptly notify
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<PAGE> 38
the other party hereto of any change in the name or address of its Service Agent
and the name and address of any replacement for its Service Agent, if such agent
is no longer the Service Agent named herein. This Section 7.6 is meant to comply
with 6 Del. C. Section 2708. Notwithstanding anything contained in this Section
7.6, all claims for indemnification under Section 6 shall be governed by the
provisions thereof.
7.7 NOTICES. All Notices shall be in writing and shall be deemed given
upon (a) a transmitter's confirmation of a receipt of a facsimile transmission
(but only if followed by confirmed delivery of a standard overnight courier the
following Business Day or if delivered by hand the following Business Day), or
(b) confirmed delivery of a standard overnight courier or delivered by hand, to
the parties at the following addresses:
if to GM to:
General Motors Corporation
767 Fifth Avenue
New York, NY 10153
Attention: Treasurer
Telecopy No.: (212) 418-3630
with a copy to:
General Motors Corporation
3031 West Grand Boulevard
Detroit, MI 48202
Attention: Warren G. Andersen, Esq.
Telecopy No.: (313) 974-0685
with a copy to:
General Motors Corporation
100 Renaissance Center
Detroit, MI 48243
Attention: Chief Financial Officer
Telecopy No.: (313) 667-3122
and, if delivered pursuant to Section 4, with a copy to:
General Motors Corporation
3044 West Grand Boulevard
Detroit, MI 48202
Attention: Chief Tax Officer
Telecopy No.: (313) 556-1552
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<PAGE> 39
if to Delphi, to:
Delphi Automotive Systems Corporation
5725 Delphi Drive
Troy, MI 48098
Attention: General Counsel
Telecopy No.: (248) 813-2523
with a copy to:
Delphi Automotive Systems Corporation
5725 Delphi Drive
Troy, MI 48098
Attention: Chief Financial Officer
Telecopy No.: (248) 813-2590
and, if delivered pursuant to Section 4, with a copy to:
Delphi Automotive Systems Corporation
5725 Delphi Drive
Troy, MI 48098
Attention: Chief Tax Officer
Telecopy No.: (248) 813-2590
or to such other address as either party hereto may have furnished to the other
party by a Notice in writing in accordance with this Section 7.7.
7.8 AMENDMENT AND MODIFICATION. This Agreement may not be amended or
modified in any respect except by a written agreement signed by both of the
parties hereto.
7.9 BINDING EFFECT; ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon the parties hereto and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Except with respect to a merger of either party with another Person,
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by either party hereto without the prior written consent of
the other party, which consent shall not be unreasonably withheld or delayed.
7.10 THIRD PARTY BENEFICIARIES. The Indemnitees and their respective
successors shall be third party beneficiaries of the indemnification provisions
of Sections 4 and 6, as applicable, and shall be entitled to enforce those
provisions and in connection with such enforcement shall be subject to Section
7.6, in each such case as fully and to the same extent as if they were parties
to this Agreement. Except as provided in the previous sentence, nothing in this
Agreement, express or implied, is intended to or shall confer upon any Person
any legal or equitable right, benefit or remedy
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<PAGE> 40
of any nature whatsoever under or by reason of this Agreement, and no Person
(other than as provided in the previous sentence) shall be deemed a third party
beneficiary under or by reason of this Agreement.
7.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. The Agreement may be
executed by facsimile signature.
7.12 WAIVER. The observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) by the party entitled to enforce such term, but such waiver shall
be effective only if it is in writing signed by the party against which such
waiver is to be asserted. Unless otherwise expressly provided in this Agreement,
no delay or omission on the part of any party in exercising any right or
privilege under this Agreement shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any right or privilege under this Agreement
operate as a waiver of any other right or privilege under this Agreement nor
shall any single or partial exercise of any right or privilege preclude any
other or further exercise thereof or the exercise of any other right or
privilege under this Agreement. No failure by either party to take any action or
assert any right or privilege hereunder shall be deemed to be a waiver of such
right or privilege in the event of the continuation or repetition of the
circumstances giving rise to such right unless expressly waived in writing by
the party against whom the existence of such waiver is asserted.
7.13 SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
7.14 REMEDIES. Each of GM and Delphi shall be entitled to enforce its
rights under this Agreement specifically, to recover damages and costs
(including reasonable attorneys' fees) caused by any breach of any provision of
this Agreement and to exercise all other rights existing in its favor. Each of
GM and Delphi acknowledges and agrees that under certain circumstances the
breach by GM or any of its Affiliates or Delphi or any of its Affiliates of a
term or provision of this Agreement will materially and irreparably harm the
other party, that money damages will accordingly not be an adequate remedy for
such breach and that the non-defaulting party, in its sole discretion and in
addition to its rights under this Agreement and any other remedies it may have
at law or in equity, may apply to any court of law or equity of competent
jurisdiction (without posting any bond or deposit) for specific performance
and/or other injunctive relief in order to enforce or prevent any breach of the
provisions of this Agreement.
7.15 PERFORMANCE. Each of the parties hereto shall use all commercially
reasonable efforts to cause to be performed all actions, agreements and
obligations set forth herein to be performed by any Affiliate of such party.
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<PAGE> 41
7.16 REFERENCES; CONSTRUCTION. The table of contents and the section
and other headings and subheadings contained in this Agreement and the exhibits
hereto are solely for the purpose of reference, are not part of the agreement of
the parties hereto, and shall not in any way affect the meaning or
interpretation of this Agreement or any exhibit hereto. All references to days
or months shall be deemed references to calendar days or months. All references
to "$" shall be deemed references to United States dollars. Unless the context
otherwise requires, any reference to a "Section" or an "Exhibit" shall be deemed
to refer to a section of this Agreement or an exhibit to this Agreement, as
applicable. The words "hereof," "herein" and "hereunder" and words of similar
import referring to this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, unless otherwise
specifically provided, they shall be deemed to be followed by the words "without
limitation." This Agreement shall be construed without regard to any presumption
or rule requiring construction or interpretation against the party drafting or
causing the document to be drafted.
* * * * * *
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<PAGE> 42
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first written above.
GENERAL MOTORS CORPORATION
By: /s/ E.A. Feldstein
-------------------------------------------
Name: E.A. Feldstein
Its: Vice President and Treasurer
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
By: /s/ Logan G. Robinson
-------------------------------------------
Name: Logan G. Robinson
Its: Vice President and General Counsel
<PAGE> 43
EXHIBIT A
AGREEMENTS SUBJECT TO SECTION 5.2(C)
1. GM is a party to various agreements containing the covenants described
on the pages attached hereto as Schedule A-1. Such covenants shall be
subject to Section 5.2(c) of the IPO and Distribution Agreement.
<PAGE> 1
EXHIBIT 10h
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made and
entered into as of February 1, 1999, between General Motors Corporation, a
Delaware corporation ("GM"), and Delphi Automotive Systems Corporation, a
Delaware corporation and a wholly owned subsidiary of GM (the "Company").
WHEREAS, the Board of Directors of GM has determined that it would be
appropriate and desirable to completely separate the Company's business from GM;
WHEREAS, GM has caused the Company to be incorporated in order to
effect such separation;
WHEREAS, GM and Delphi have previously entered into a Master Separation
Agreement and certain ancillary agreements, each effective as of January 1,
1999, pursuant to which GM has contributed and transferred to the Company, and
the Company has received and assumed, the assets and liabilities then associated
with the Company's business as described therein;
WHEREAS, GM and Delphi intend that this contribution qualify as a
tax-free reorganization under Section 368(a)(1)(D) of the Internal Revenue Code;
WHEREAS, GM currently owns all of the issued and outstanding shares of
the Company's common stock (the "Common Stock");
WHEREAS, the Company is offering and selling to the public (the "IPO")
by means of a Registration Statement (File No. 333-67333) initially filed with
the Securities and Exchange Commission (the "SEC") on Form S-1 on November 16,
1998 (the "Registration Statement") shares of its Common Stock;
WHEREAS, immediately following the consummation of the IPO, GM shall
own approximately 82.3% of the outstanding shares of Common Stock (or
approximately 80.2% if the underwriters exercise their over-allotment option in
full in accordance with the underwriting agreement relating to the IPO);
WHEREAS, following the IPO, GM currently intends to divest itself of
its entire ownership of the Company during 1999 through one or more tax-free
distributions or exchanges to the holders of GM $1-2/3 common stock (the
"Distribution");
WHEREAS, GM currently expects to accomplish the Distribution by means
of a split-off, a spin-off or some combination of both transactions;
<PAGE> 2
WHEREAS, GM and Delphi intend that the Distribution will be tax-free to
GM and its stockholders under Section 355 of the Code; and
WHEREAS, concurrently with the execution of this Agreement, GM and the
Company are entering into an Initial Public Offering and Distribution Agreement
to set forth certain agreements with respect to the IPO and the Distribution;
and
WHEREAS, if GM determines not to complete the Distribution, or the
Distribution is abandoned without GM divesting itself of 100% of the Common
Stock it owns, GM and the Company desire to make certain arrangements to provide
GM with registration rights with respect to shares of Common Stock it then
holds;
NOW THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged and intending to be legally bound
hereby, the parties hereby agree as follows:
Section 1. Effectiveness of Agreement; Term.
1.1 Effective Date. This Agreement shall become effective upon the
date that GM provides to the Company written notice (the "Abandonment Notice")
that it no longer intends to proceed with or complete the Distribution (the
"Effective Date").
1.2 Shares Covered. This Agreement covers those shares of Common Stock
that are held by GM immediately following the IPO and continue to be held by GM
as of the date of the Abandonment Notice (subject to the provisions of Section
7, the "Shares"). The "Shares" shall include any securities issued or issuable
with respect to the Shares by way of a stock dividend or a stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. The "Shares" shall not include any shares of Common
Stock acquired by GM after the completion of the IPO.
GM and any Permitted Transferees (as defined in Section 2.5) are each
referred to herein as a "Holder" and collectively as the "Holders" and the
Holders of Shares proposed to be included in any registration under this
Agreement are each referred to herein as a "Selling Holder" and collectively as
the "Selling Holders."
Section 2. Demand Registration.
2.1 Notice. Upon the terms and subject to the conditions set forth
herein, upon written notice of any Holder requesting that the Company effect the
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of any or all of the Shares held by it, which notice shall specify the
intended method or methods of disposition of such Shares (which methods may
include, without limitation, a Shelf Registration, a Convertible Registration or
an Exchange Registration (as
2
<PAGE> 3
such terms are defined in Section 2.6)), the Company will promptly give written
notice of the proposed registration to all other Holders and will use its best
efforts to effect (at the earliest reasonable date) the registration under the
Securities Act of such Shares (and the Shares of any other Holders joining in
such request as are specified in a written notice received by the Company within
20 days after receipt of the Company's written notice of the proposed
registration) for disposition in accordance with the intended method or methods
of disposition stated in such request (each registration request pursuant to
this Section 2.1 is sometimes referred to herein as a "Demand Registration");
provided, however, that:
(a) the Company shall not be obligated to effect registration
with respect to Shares pursuant to this Section 2 within 90 days after the
effective date of a previous registration, other than a Shelf Registration,
effected with respect to Shares pursuant to this Section 2;
(b) if, while a registration request is pending pursuant to this
Section 2, the Company determines in the good faith judgment of the general
counsel of the Company that such registration would reasonably be expected to
have a material adverse effect on any existing proposal or plans by the Company
or any of its subsidiaries to engage in any material acquisition, merger,
consolidation, tender offer, other business combination, reorganization,
securities offering or other material transaction, the Company may postpone for
up to 90 days the filing or effectiveness of such registration; provided,
however, that the Company may delay a Demand Registration hereunder only once in
any 12 month period;
(c) except in the case of a Convertible Registration or an
Exchange Registration, the number of the Shares registered pursuant to any
registration requested pursuant to this Section 2 shall have an aggregate
expected offering price of at least $250 million; and
(d) if a Demand Registration is an underwritten offering and the
managing underwriters advise the Company in writing that in their opinion the
number of Shares requested to be included in such offering exceeds the number of
Shares which can be sold in an orderly manner in such offering within a price
range acceptable to the Holders of a majority of the Shares initially requesting
such registration or without materially adversely affecting the market for the
Common Stock, the Company shall include in such registration the number of
Shares requested to be included therein which in the opinion of such
underwriters can be sold in an orderly manner within the price range of such
offering and without materially adversely affecting the market for the Common
Stock, pro rata among the respective Holders thereof on the basis of the amount
of Shares owned by each Holder requesting inclusion of Shares in such
registration.
2.2 Registration Expenses. All Registration Expenses (as defined in
Section 8) for any registration requested pursuant to this Section 2 (including
any registration that is delayed or withdrawn) shall be paid by the Company.
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<PAGE> 4
2.3 Selection of Professionals. The Holders of a majority of the
Shares included in any Demand Registration shall have the right to select the
investment banker(s) and manager(s) to administer the offering; provided,
however, that if such Holders select an investment banker or manager that was
not one of the managers of the IPO, such investment banker or manager shall not
administer such offering if the Company reasonably objects thereto. The Holders
of a majority of the Shares included in any Demand Registration shall have the
right to select the financial printer, the solicitation and/or exchange agent
(if any) and one counsel for the Selling Holders. The Company shall select its
own outside counsel and independent auditors.
2.4 Third Person Shares. The Company shall have the right to cause the
registration of securities for sale for the account of any Person (including the
Company) other than the Selling Holders (the "Third Person Shares") in any
registration of the Shares requested pursuant to this Section 2 so long as the
Third Person Shares are disposed of in accordance with the intended method or
methods of disposition requested pursuant to this Section 2; provided, however,
that the Company shall not have the right to cause the registration of such
securities of such other Persons if the registration requested pursuant to this
Section 2 is a Convertible Registration or an Exchange Registration.
If a Demand Registration in which the Company proposes to include Third
Person Shares is an underwritten offering and the managing underwriters advise
the Company in writing that in their opinion the number of Shares and Third
Person Shares requested to be included in such offering exceeds the number of
Shares and Third Person Shares which can be sold in an orderly manner in such
offering within a price range acceptable to the Holders of a majority of the
Shares initially requesting such registration or without materially adversely
affecting the market for the Common Stock, the Company shall not include in such
registration any Third Person Shares unless all of the Shares initially
requested to be included therein are so included.
2.5 Permitted Transferees. As used in this Agreement, "Permitted
Transferees" shall mean any transferee, whether direct or indirect, of Shares
designated by GM (or a subsequent holder) in a written notice to the Company as
provided for in Section 9.7. Any Permitted Transferees of the Shares shall be
subject to and bound by all of the terms and conditions herein applicable to
Holders. The notice required by this Section 2.5 shall be signed by both the
transferring Holder and the Permitted Transferees so designated and shall
include an undertaking by the Permitted Transferees to comply with the terms and
conditions of this Agreement applicable to Holders.
2.6 Shelf Registration; Convertible Registration; Exchange
Registration. With respect to any Demand Registration, the requesting Holders
may request the Company to effect a registration of the Shares (a) under a
registration statement pursuant to Rule 415 under the Securities Act (or any
successor rule) (a "Shelf Registration"); (b) in connection with such Holders'
registration under the Securities Act of securities (the "Convertible
Securities") convertible into, exercisable for or otherwise related to the
Shares (a "Convertible Registration"); or (c) in connection with such
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<PAGE> 5
Holders' offer to exchange the Shares for any debt or equity securities of such
Holders, a subsidiary or affiliate thereof or any other Person (an "Exchange
Registration").
2.7 SEC Form. The Company shall use its best efforts to cause Demand
Registrations to be registered on Form S-3 (or any successor form), and if the
Company is not then eligible under the Securities Act to use Form S-3, Demand
Registrations shall be registered on Form S-1 (or any successor form). If a
Demand Registration is a Convertible Registration or an Exchange Registration,
the Company shall effect such registration on the appropriate Form under the
Securities Act for such registrations. The Company shall use its best efforts to
become eligible to use Form S-3 and, after becoming eligible to use Form S-3,
shall use its best efforts to remain so eligible.
2.8 Other Registration Rights. The Company shall not grant to any
Persons the right to request the Company to register any equity securities of
the Company, or any securities convertible or exchangeable into or exercisable
for such securities unless such rights are consistent with the rights granted
under this Agreement.
Section 3. Piggyback Registrations.
3.1 Notice and Registration. If the Company proposes to register any
of its securities for public sale under the Securities Act (whether proposed to
be offered for sale by the Company or any other Person), on a form and in a
manner which would permit registration of the Shares for sale to the public
under the Securities Act (a "Piggyback Registration"), it will give prompt
written notice to the Holders of its intention to do so, and upon the written
request of any or all of the Holders delivered to the Company within 20 days
after the giving of any such notice (which request shall specify the Shares
intended to be disposed of by such Holders), the Company will use its best
efforts to effect, in connection with the registration of such other securities,
the registration under the Securities Act of all of the Shares which the Company
has been so requested to register by such Holders (which shall then become
Selling Holders), to the extent required to permit the disposition (in
accordance with the same method of disposition as the Company proposes to use to
dispose of the other securities) of the Shares to be so registered; provided,
however, that:
(a) if, at any time after giving such written notice of its
intention to register any of its other securities and prior to the effective
date of the registration statement filed in connection with such registration,
the Company shall determine for any reason not to register such other
securities, the Company may, at its election, give written notice of such
determination to the Selling Holders (or, if prior to delivery of the Holders'
written request described above in this Section 3.1, the Holders) and thereupon
the Company shall be relieved of its obligation to register such Shares in
connection with the registration of such other securities (but not from its
obligation to pay Registration Expenses to the extent incurred in connection
therewith as provided in Section 3.3), without prejudice, however, to the rights
(if any) of any Selling Holders immediately to request (subject to the terms and
conditions of Section 2) that such registration be effected as a registration
under Section 2;
5
<PAGE> 6
(b) the Company shall not be required to effect any registration
of the Shares under this Section 3 incidental to the registration of any of its
securities in connection with mergers, acquisitions, exchange offers,
subscription offers, dividend reinvestment plans or stock option or other
employee benefit plans of the Company;
(c) if a Piggyback Registration is an underwritten primary
registration on behalf of the Company and the managing underwriters advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in such
offering without materially adversely affecting the marketability of the
offering or the market for the Common Stock, the Company shall include in such
registration (i) first, the securities the Company proposes to sell, (ii)
second, the Shares requested to be included in such registration, pro rata among
the Holders of such Shares on the basis of the number of Shares owned by each
such Holder, and (iii) third, any other securities requested to be included in
such registration; and
(d) if a Piggyback Registration is an underwritten secondary
registration on behalf of holders of the Company's securities entitled to demand
registration thereof and the managing underwriters advise the Company in writing
that in their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
materially adversely affecting the marketability of the offering or the market
for the Common Stock, the Company shall include in such registration (i) first,
the securities requested to be included therein by the holders requesting such
registration and the Shares requested to be included in such registration, pro
rata among the holders of such securities on the basis of the number of
securities owned by each such holder, and (ii) second, any other securities
requested to be included in such registration.
No registration of the Shares effected under this Section 3 shall relieve the
Company of its obligation to effect a registration of Shares pursuant to
Section 2.
3.2 Selection of Professionals. If any Piggyback Registration is an
underwritten offering and any of the investment banker(s) or manager(s) selected
to administer the offering was not one of the managers of the IPO, such
investment banker or manager shall not administer such offering if the Holders
of a majority of the Shares included in such Piggyback Registration reasonably
object thereto. The Holders of a majority of the Shares included in any
Piggyback Registration shall have the right to select one counsel for the
Selling Holders. The Company shall select its own outside counsel and
independent auditors.
3.3 Registration Expenses. The Company will pay all of the
Registration Expenses in connection with any registration pursuant to this
Section 3.
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<PAGE> 7
Section 4. Registration Procedures.
4.1 Registration and Qualification. If and whenever the Company is
required to use its best efforts to effect the registration of any of the Shares
under the Securities Act as provided in Sections 2 and 3, including an
underwritten offering pursuant to a Shelf Registration, the Company will as
promptly as is practicable:
(a) prepare and file with the SEC a registration statement with
respect to such Shares and use its best efforts to cause such registration
statement to become effective (provided that before filing a registration
statement or prospectus or any amendments or supplement thereto, the Company
shall furnish to the counsel selected by the Holders of a majority of the Shares
covered by such registration statement copies of all such documents proposed to
be filed (which documents shall be subject to the review and comment of such
counsel);
(b) except in the case of a Shelf Registration, Convertible
Registration or Exchange Registration, prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act with
respect to the disposition of all of the Shares until the earlier of (i) such
time as all of such Shares have been disposed of in accordance with the intended
methods of disposition set forth in such registration statement or (ii) the
expiration of nine months after such registration statement becomes effective;
(c) in the case of a Shelf Registration (but not including any
Convertible Registration), prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all Shares subject thereto for a period ending on the earlier of
(i) 18 months after the effective date of such registration statement and (ii)
the date on which all the Shares subject thereto have been sold pursuant to such
registration statement (the "Shelf Effective Period");
(d) in the case of a Convertible Registration or an Exchange
Registration, prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
of the Shares subject thereto until such time as the rules, regulations and
requirements of the Securities Act and the terms of the Convertible Securities
no longer require such Shares to be registered under the Securities Act (the
"Convertible Effective Period");
(e) furnish to the Selling Holders and to any underwriter of such
Shares such number of conformed copies of such registration statement and of
each such amendment and supplement thereto (in each case including all
exhibits), such number of copies of the prospectus
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<PAGE> 8
included in such registration statement (including each preliminary prospectus
and any summary prospectus), in conformity with the requirements of the
Securities Act, such documents incorporated by reference in such registration
statement or prospectus, and such other documents as the Selling Holders or such
underwriter may reasonably request;
(f) use its best efforts to register or qualify all of the Shares
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as the Selling Holders or any underwriter of such
Shares shall reasonably request, and do any and all other acts and things which
may be necessary or advisable to enable the Selling Holders or any underwriter
to consummate the disposition in such jurisdictions of the Shares covered by
such registration statement, except that the Company shall not for any such
purpose be required to qualify generally to do business as a foreign corporation
in any jurisdiction where it is not so qualified, or to subject itself to
taxation in any such jurisdiction, or to consent to general service of process
in any such jurisdiction;
(g) (i) furnish to the Selling Holders, addressed to them, an
opinion of counsel for the Company and (ii) use its best efforts to furnish to
the Selling Holders, addressed to them, a "cold comfort" letter signed by the
independent public accountants who have certified the Company's financial
statements included in such registration statement, covering substantially the
same matters with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities and such other
matters as the Selling Holders may reasonably request, in each case, in form and
substance and as of the dates reasonably satisfactory to the Selling Holders;
(h) immediately notify the Selling Holders, at any time when a
prospectus relating to a registration pursuant to Section 2 or 3 is required to
be delivered under the Securities Act, of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and at the request of the Selling Holders prepare and furnish to the
Selling Holders a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading.
(i) permit any Selling Holder which Selling Holder, in its sole
and exclusive judgment, might be deemed to be an underwriter or a controlling
person of the Company, to participate in the preparation of such registration or
comparable statement and to require the insertion
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<PAGE> 9
therein of material, furnished to the Company in writing, which in the
reasonable judgment of such Holder and its counsel should be included;
(j) to make available members of management of the Company, as
selected by the Holders of a majority of the Shares included in such
registration, for assistance in the selling effort relating to the Shares
covered by such registration, including, but not limited to, the participation
of such members of the Company's management in road show presentations.
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any securities included in such registration statement for sale in any
jurisdiction, the Company shall use it best efforts promptly to obtain the
withdrawal of such order; and
(l) use its best efforts to cause Shares covered by such
registration statement to be registered with or approved by such other
government agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Shares.
The Company may require the Selling Holders to furnish the Company with
such information regarding the Selling Holders and the distribution of such
Shares as the Company may from time to time reasonably request in writing and as
shall be required by law, the SEC or any securities exchange on which any shares
of Common Stock are then listed for trading in connection with any registration.
4.2 Underwriting. If requested by the underwriters for any
underwritten offering in connection with a registration requested hereunder
(including any registration under Section 3 which involves, in whole or in part,
an underwritten offering), the Company will enter into an underwriting agreement
with such underwriters for such offering, such agreement to contain such
representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, indemnities and
contribution to the effect and to the extent provided in Section 6 and the
provision of opinions of counsel and accountants' letters to the effect and to
the extent provided in Section 4.1(g). The Company may require that the Shares
requested to be registered pursuant to Section 3 be included in such
underwriting on the same terms and conditions as shall be applicable to the
Other Securities being sold through underwriters under such registration;
provided, however, that no Selling Holder shall be required to make any
representations or warranties to the Company or the underwriters (other than
representations and warranties regarding such Holder and such Holder's intended
method of distribution) or to undertake any indemnification obligations to the
Company or the underwriters with respect thereto, except as otherwise provided
in Section 6 hereof. The Selling Holders shall be parties to any such
underwriting agreement, and the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such Selling Holders.
9
<PAGE> 10
4.3 Blackout Periods for Shelf Registrations.
(a) At any time when a Shelf Registration effected pursuant to
Section 2 relating to the Shares is effective, upon written notice from the
Company to the Selling Holders that the Company determines in the good faith
judgment of the general counsel of the Company that the Selling Holders' sale of
the Shares pursuant to the Shelf Registration would require disclosure of
material information which the Company has a bona fide business purpose for
preserving as confidential and the disclosure of which would have a material
adverse effect on the Company or the Company is unable to comply with SEC
requirements (an "Information Blackout"), the Selling Holders shall suspend
sales of the Shares pursuant to such Shelf Registration until the earlier of (i)
the date upon which such material information is disclosed to the public or
ceases to be material, (ii) 90 days after the general counsel of the Company
makes such good faith determination or (iii) such time as the Company notifies
the Selling Holders that sales pursuant to such Shelf Registration may be
resumed (the number of days from such suspension of sales of the Selling Holders
until the day when such sales may be resumed hereunder is hereinafter called a
"Sales Blackout Period").
(b) If there is an Information Blackout and the Selling Holders
do not notify the Company in writing of their desire to cancel such Shelf
Registration, the period set forth in Section 4.1(c)(i) shall be extended for a
number of days equal to the number of days in the Sales Blackout Period.
4.4 Listing. In connection with the registration of any offering of
the Shares pursuant to this Agreement, the Company agrees to use its best
efforts to effect the listing of such Shares on any securities exchange on which
any shares of the Common Stock are then listed or otherwise facilitate the
public trading of such Shares.
4.5 Holdback Agreements.
(a) The Company shall not effect any public sale or distribution
of its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any registration statement in
connection with a Demand Registration (other than a Shelf Registration) or a
Piggyback Registration, except pursuant to registrations on Form S-8 or any
successor form or unless the underwriters managing any such public offering
otherwise agree.
(b) If the Holders of Shares notify the Company in writing that
they intend to effect an underwritten sale of Shares registered pursuant to a
Shelf Registration pursuant to Section 2 hereof, the Company shall not effect
any public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for its equity securities,
during the seven days prior to and during the 90-day period beginning on the
date such notice is received, except pursuant to registrations on Form S-8 or
any successor form or unless the underwriters managing any such public offering
otherwise agree.
10
<PAGE> 11
(c) If the Company completes an underwritten registration with
respect to any of its securities (whether offered for sale by the Company or any
other Person) on a form and in a manner that would have permitted registration
of the Shares and no Holder requested the inclusion of any Shares in such
registration, the Holders shall not effect any public sales or distributions of
equity securities of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, until the termination of the
holdback period required from the Company by any underwriters in connection with
such previous registration, but in no event more than 90 days from the effective
date of such registration.
Section 5. Preparation; Reasonable Investigation. In connection with
the preparation and filing of each registration statement registering the Shares
under the Securities Act and each sale of the Shares thereunder, the Company
will give the Selling Holders and the underwriters, if any, and their respective
counsel and accountants, access to its financial and other records, pertinent
corporate documents and properties of the Company and such opportunities to
discuss the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of the Selling Holders and such underwriters or their respective
counsel, to conduct a reasonable investigation within the meaning of the
Securities Act.
Section 6. Indemnification and Contribution.
(a) In the event of any registration of any of the Shares
hereunder, the Company will enter into customary indemnification arrangements to
indemnify and hold harmless each of the Selling Holders, each of their
respective directors and officers, each Person (as defined in (e) below) who
participates as an underwriter in the offering or sale of such securities, each
officer and director of each underwriter, and each Person, if any, who controls
each such Selling Holder or any such underwriter within the meaning of the
Securities Act (collectively, the "Covered Persons") against any losses, claims,
damages, liabilities and expenses, joint or several, to which such Person may be
subject under the Securities Act or otherwise insofar as such losses, claims,
damages, liabilities or expenses (or actions or proceedings in respect thereof)
arise out of are based upon (i) any untrue statement or alleged untrue statement
of any material fact contained in any related registration statement filed under
the Securities Act, any preliminary prospectus or final prospectus included
therein, or any amendment or supplement thereto, or any document incorporated by
reference therein, or (ii) any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and the Company will reimburse each such Covered Person,
as incurred, for any legal or any other expenses reasonably incurred by such
Covered Person in connection with investigating or defending any such loss,
claim, liability, action or proceeding; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, any such
preliminary prospectus or final prospectus, amendment or supplement in reliance
upon and in conformity with written information furnished to the Company by such
Selling Holder or such underwriter specifically for use in the
11
<PAGE> 12
preparation thereof. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of any such Covered Person
and shall survive the transfer of such securities by the Selling Holders. The
Company also shall agree to provide for contribution as shall reasonably be
requested by the Selling Holders or any underwriters in circumstances where such
indemnity is held unenforceable.
(b) Each of the Selling Holders, by virtue of exercising its
respective registration rights hereunder, agree and undertake to enter into
customary indemnification arrangements to indemnify and hold harmless (in the
same manner and to the same extent as set forth in clause (a) of this Section 6)
the Company, its directors and officers, each Person who participates as an
underwriter in the offering or sale of such securities, each officer and
director of each underwriter, and each Person, if any, who controls the Company
or any such underwriter within the meaning of the Securities Act, with respect
to any statement in or omission from such registration statement, any
preliminary prospectus or final prospectus included therein, or any amendment or
supplement thereto, if such statement or omission is contained in written
information furnished by such Selling Holder to the Company specifically for
inclusion in such registration statement or prospectus; provided, however, that
the obligation to indemnify shall be individual, not joint and several, for each
Selling Holder and shall be limited to the net amount of proceeds received by
such Selling Holder from the sale of Shares pursuant to such registration
statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of the Company or any such director,
officer or Person and shall survive the transfer of the registered securities by
the Selling Holders.
(c) Any Person entitled to indemnification hereunder shall (i)
give prompt written notice to the indemnifying party of any claim with respect
to which it seeks indemnification (provided, however, that the failure to give
prompt notice shall not impair any Person's rights to indemnification hereunder
to the extent such failure has not prejudiced the indemnifying party) and (ii)
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with respect to such
claim, permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party. If such defense is
assumed, the indemnifying party shall not be subject to any liability for any
settlement made by the indemnified party without its consent (but such consent
shall not be unreasonably withheld). An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim shall not be obligated to
pay the fees and expenses of more than one counsel for all parties indemnified
by such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) Indemnification and contribution similar to that specified in
the preceding subdivisions of this Section 6 (with appropriate modifications)
shall be given by the Company and the Selling Holders with respect to any
required registration or other qualification of such Shares under any federal or
state law or regulation of governmental authority other than the Securities Act.
12
<PAGE> 13
(e) "Person" means an individual, a partnership, a corporation,
a limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity, or any
department, agency or political subdivision thereof.
Section 7. Benefits and Termination of Registration Rights. The
Holders may exercise the registration rights granted hereunder in such manner
and proportions as they shall agree among themselves. The registration rights
hereunder shall cease to apply to any particular Shares and such securities
shall cease to be Shares when: (a) a registration statement with respect to the
sale of such Shares shall have become effective under the Securities Act and
such Shares shall have been disposed of in accordance with such registration
statement; (b) such Shares shall have been sold to the public pursuant to Rule
144 under the Securities Act (or any successor provision); (c) such Shares shall
have been otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company and
subsequent public distribution of them shall not require registration or
qualification of them under the Securities Act or any similar state law then in
force; (d) such Shares shall have ceased to be outstanding and (e) in the case
of Shares held by a Permitted Transferee, when such Shares become eligible for
sale pursuant to Rule 144(k) under the Securities Act (or any successor
provision).
Section 8. Registration Expenses. As used in this Agreement, the term
"Registration Expenses" means all expenses incident to the Company's performance
of or compliance with the registration requirements set forth in this Agreement
including, without limitation, the following: (a) all registration and filing
fees; (b) the fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Shares to be disposed of
under the Securities Act; (c) the fees, disbursements and expenses of the
Selling Holders' counsel and advisors in connection with the registration of the
Shares to be disposed of under the Securities Act; (d) all expenses in
connection with the preparation, printing and filing of the registration
statement, any preliminary prospectus or final prospectus, any other offering
document and amendments and supplements thereto and the mailing and delivering
of copies thereof to the underwriters and dealers and directly to
securityholders in the case of an Exchange Registration; (e) the cost of
printing and producing any agreements among underwriters, underwriting
agreements, and blue sky or legal investment memoranda, any selling agreements
and any amendments thereto or other documents in connection with the offering,
sale or delivery of the Shares to be disposed of; (f) all expenses in connection
with the qualification of the Shares to be disposed of for offering and sale
under state securities laws, including the fees and disbursements of counsel for
the underwriters in connection with such qualification and in connection with
any blue sky and legal investment surveys; (g) the filing fees incident to
securing any required review by the New York Stock Exchange and any other
securities exchange on which the Common Stock is then traded or listed of the
terms of the sale of the Shares to be disposed of and the trading or listing of
all such Shares on each such exchange; (h) the costs of preparing stock
certificates; (i) the costs and charges of the Company's transfer agent and
registrar; and (j) the fees and disbursements of any custodians, solicitation
agents, information agents and/or exchange agents. Registration Expenses shall
not include underwriting discounts and
13
<PAGE> 14
underwriters' commissions attributable to the Shares being registered for sale
on behalf of the Selling Holders, which shall be paid by the Selling Holders.
Section 9. Miscellaneous.
9.1 No Inconsistent Agreements. The Company shall not on or
after the date of this Agreement enter into any agreement with respect to its
securities that violates or subordinates the rights expressly granted to the
Holders in this Agreement. The Company shall not take any action, or permit any
change to occur, with respect to its securities which would adversely affect the
ability of the Holders of Shares to include such Shares in a registration
undertaken pursuant to this Agreement.
9.2 Complete Agreement. Except as otherwise set forth in this
Agreement, this Agreement shall constitute the entire agreement between the
parties hereto with respect to the subject matter hereof and shall supersede all
prior agreements and understandings, whether written or oral, between the
parties with respect to such subject matter.
9.3 Authority. Each of the parties hereto represents to the other that
(i) it has the corporate power and authority to execute, deliver and perform
this Agreement, (ii) the execution, delivery and performance of this Agreement
by it has been duly authorized by all necessary corporate action, (iii) it has
duly and validly executed and delivered this Agreement, and (iv) this Agreement
is a legal, valid and binding obligation, enforceable against it in accordance
with its terms subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and
general equity principles.
9.4 Assignment. This Agreement shall be binding on and inure to the
benefit of and be enforceable by the parties hereto and with respect to the
Company, its respective successors and assigns, and any Permitted Transferees.
9.5 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware (other than the laws
regarding conflicts of laws) as to all matters of validity, construction,
effect, performance and remedies, executed in and to be performed in that State.
9.6 Severability. In the event that any part of this Agreement is
declared by a court or other judicial or administrative body to be null, void or
unenforceable, said provision shall survive to the extent it is not so declared,
and all of the other provisions of this Agreement shall remain in full force and
effect.
9.7 Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given: (i) on the date of service if served personally on the party to whom
notice is to be given; (ii) on the day of transmission
14
<PAGE> 15
if sent via facsimile transmission to the facsimile number given below, and
telephonic confirmation of receipt is obtained promptly after completion of
transmission; (iii) on the day after delivery to Federal Express or similar
overnight courier or the Express Mail service maintained by the United States
Postal Service; or (iv) on the fifth day after mailing, if mailed to the party
to whom notice is to be given, by first class mail, registered or certified,
postage prepaid and properly addressed, to the party as follows:
If to GM:
General Motors Corporation
767 Fifth Avenue
New York, New York 10153
Attn: Treasurer
Facsimile: (212) 418-3630
with a copy to:
General Motors Corporation
3031 West Grand Boulevard
Detroit, Michigan 48202
Attn: Warren G. Andersen, Esq.
Facsimile: (313) 974-0685
If to any other Holder, the address indicated for such Holder in the
Company's stock transfer records
with a copy, so long as GM owns any Shares, to:
General Motors Corporation
3031 West Grand Boulevard
Detroit, Michigan 48202
Attn: Warren G. Andersen, Esq.
Facsimile: (313) 974-0685
If to the Company:
Delphi Automotive Systems Corporation
5725 Delphi Drive
Troy, Michigan 48098
Attn: General Counsel
Facsimile: (248) 813-2523
15
<PAGE> 16
Any party may change its address for the purpose of this Section 9.7 by
giving the other party written notice of its new address in the manner set forth
above.
9.8 Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
9.9 Remedies. Each of GM and the Company shall be entitled to enforce
its rights under this Agreement specifically, to recover damages and costs
(including reasonable attorneys' fees) caused by any breach of any provision of
this Agreement and to exercise all other rights existing in its favor. Each of
GM and the Company acknowledges and agrees that under certain circumstances the
breach by GM or any of its affiliates or the Company or any of its affiliates of
a term or provision of this Agreement will materially and irreparably harm the
other party, that money damages will accordingly not be an adequate remedy for
such breach and that the non-defaulting party, in its sole discretion and in
addition to its rights under this Agreement and any other remedies it may have
at law or in equity, may apply to any court of law or equity of competent
jurisdiction (without posting any bond or deposit) for specific performance
and/or other injunctive relief in order to enforce or prevent any breach of the
provisions of this Agreement.
9.10 Waivers. The observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively) by the party entitled to enforce such term, but such waiver shall
be effective only if it is in writing signed by the Company and the Holders of a
majority of the Shares. Unless otherwise expressly provided in this Agreement,
no delay or omission on the part of any party in exercising any right or
privilege under this Agreement shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any right or privilege under this Agreement
operate as a waiver of any other right or privilege under this Agreement nor
shall any single or partial exercise of any right or privilege preclude any
other or further exercise thereof or the exercise of any other right or
privilege under this Agreement. No failure by either party to take any action or
assert any right or privilege hereunder shall be deemed to be a waiver of such
right or privilege in the event of the continuation or repetition of the
circumstances giving rise to such right unless expressly waived in writing by
the party against whom the existence of such waiver is asserted.
9.11 Amendment and Modification. This Agreement may not be amended or
modified in any respect except by a written agreement signed by the Company and
the Holders of a majority of the Shares.
9.12 Section and Paragraph Headings. The section and paragraph headings
in this Agreement are for reference purposes only, are not part of the agreement
of the parties hereto, and shall not affect the meaning or interpretation of
this Agreement. All references to days or months
16
<PAGE> 17
shall be deemed references to calendar days or months. All references to "$"
shall be deemed references to United States dollars. Unless the context
otherwise requires, any reference to a "Section" shall be deemed to refer to a
section of this Agreement. The words "hereof," "herein" and "hereunder" and
words of similar import referring to this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, unless
otherwise specifically provided, they shall be deemed to be followed by the
words "without limitation." This Agreement shall be construed without regard to
any presumption or rule requiring construction or interpretation against the
party drafting or causing the document to be drafted.
9.13 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may be
executed by facsimile signature.
* * *
17
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the date and year first written above.
GENERAL MOTORS CORPORATION
By /s/ E.A. Feldstein
----------------------------------
Name: E.A. Feldstein
----------------------------------
Title: Vice President and Treasurer
----------------------------------
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
By /s/ Logan G. Robinson
----------------------------------
Name: Logan G. Robinson
----------------------------------
Title: Vice President and General Counsel
----------------------------------
EXHIBIT 12
DELPHI AUTOMOTIVE SYSTEMS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Pre tax (loss) income $ (266) $ 259 $ 1,112 $ 1,946 $ 1,877
Earnings of non-consolidated
affiliates (55) (27) (57) (47) (36)
Cash dividends received from
non-consolidated affiliates 1 12 11 3 1
Portion of rentals deemed to
be interest 37 42 43 36 32
Interest and related charges
on debt 277 287 276 293 310
------- ----- ------- ------- -------
Earnings available for
fixed charges $ (6) $ 573 $ 1,385 $ 2,231 $ 2,184
====== ===== ======= ======= =======
Fixed charges:
Portion of rentals deemed to
be interest $ 37 $ 42 $ 43 $ 36 $ 32
Interest and related charges
on debt 277 287 276 293 310
------ ----- ------- ------- --------
Total fixed charges $ 314 $ 329 $ 319 $ 329 $ 342
====== ===== ======= ======= ========
Ratio of earnings to
fixed charges N/A 1.7 4.3 6.8 6.4
====== ===== ======= ======= ========
</TABLE>
Fixed charges exceeded earnings by $320 million for the year ended
December 31, 1998, resulting in a ratio of less than one.
Our earnings available for fixed charges for the years ended December 31,
1998, 1997 and 1996 were impacted by a number of special items which management
views as non-recurring in nature. The special items included charges associated
with our evaluation of the competitiveness of our business, divestitures and
plant closing charges as well as work stoppages at certain GM and Delphi
locations. Excluding the impact of these special items, our ratio of earnings to
fixed charges would have been 4.6, 6.3 and 7.0 for the years ended December 31,
1998, 1997 and 1996, respectively. For more information on special items and
work stoppages, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Results of Operations-Special Items and Work
Stoppages" and Note 3 to our consolidated financial statements elsewhere in this
report.
EXHIBIT 21
SUBSIDIARIES OF DELPHI AUTOMOTIVE SYSTEMS CORPORATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SUBSIDIARY JURISDICTION OF FORMATION
- -------------------------------------------------------------------------------
<S> <C>
Delphi Automotive Systems LLC Delaware
- -------------------------------------------------------------------------------
Delco Electronics Corporation Delaware
- -------------------------------------------------------------------------------
Delphi Automotive Systems (Holding), Inc. Delaware
- -------------------------------------------------------------------------------
</TABLE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated January 20,
1999 (February 5, 1999 as to Note 17) appearing in this Annual Report on Form
10-K of Delphi Automotive Systems Corporation for the year ended December 31,
1998, in the following Registration Statements:
Registration
Form Statement No. Description
S-8 333-71961 Delphi Automotive Systems Corporation Classified
Salary and Hourly Stock Option Plan
S-8 333-71899 Delphi Automotive Systems Corporation Stock
Incentive Plan
/s/ Deloitte & Touche LLP
Detroit, Michigan
March 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001072342
<NAME> DELPHI AUTOMOTIVE SYSTEMS CORP
<MULTIPLIER> 1,000,000
<CURRENCY> US dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1,000
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 3,213
<ALLOWANCES> 23
<INVENTORY> 1,770
<CURRENT-ASSETS> 6,405
<PP&E> 13,153
<DEPRECIATION> 8,188
<TOTAL-ASSETS> 15,506
<CURRENT-LIABILITIES> 4,061
<BONDS> 3,137
0
0
<COMMON> 0
<OTHER-SE> (9)
<TOTAL-LIABILITY-AND-EQUITY> 15,506
<SALES> 28,479
<TOTAL-REVENUES> 0
<CGS> 26,135
<TOTAL-COSTS> 28,700
<OTHER-EXPENSES> (232)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 277
<INCOME-PRETAX> (266)
<INCOME-TAX> (173)
<INCOME-CONTINUING> (93)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (93)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
