<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1999
REGISTRATION NO. 333-67333
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
THE SECURITIES ACT OF 1933
------------------------
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
3714
(Primary Standard Industrial
Classification Code Number)
38-3430473
(IRS Employer
Identification Number)
5725 Delphi Drive
Troy, Michigan 48098
(248) 813-2000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
Alan S. Dawes
Chief Financial Officer
and Vice President
5725 Delphi Drive
Troy, Michigan 48098
(248) 813-2000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C> <C> <C>
Jill Sugar Factor Warren G. Andersen Logan G. Robinson Frank Morison
Robert S. Osborne, P.C. General Motors Delphi Automotive Sarah Beshar
Kirkland & Ellis Corporation Systems Corporation Davis Polk & Wardwell
200 East Randolph Drive 3031 West Grand Boulevard 5725 Delphi Drive 450 Lexington Avenue
Chicago, Illinois 60601 Detroit, Michigan 48232 Troy, Michigan 48098 New York, New York 10017
(312) 861-2000 (313) 974-1528 (248) 813-2000 (212) 450-4000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States and Canada of an
aggregate of 85,000,000 shares of common stock (the "U.S. Offering"). The second
prospectus relates to a concurrent offering outside the United States and Canada
of an aggregate of 15,000,000 shares of common stock (the "International
Offering"). The prospectuses for each of the U.S. Offering and the International
Offering will be identical with the exception of an alternate front cover page
for the International Offering. Such alternate page appears in this Registration
Statement immediately following the complete prospectus for the U.S. Offering.
<PAGE> 3
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued February 2, 1999
100,000,000 Shares
[LOGO]
Delphi Automotive Systems Corporation
COMMON STOCK
------------------------
DELPHI AUTOMOTIVE SYSTEMS CORPORATION IS OFFERING 100,000,000 SHARES OF ITS
COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET EXISTS
FOR OUR SHARES. WE ESTIMATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE
BETWEEN $15 AND $18 PER SHARE.
------------------------
OUR COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE TRADING SYMBOL "DPH," SUBJECT TO NOTICE OF ISSUANCE.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 12.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS DELPHI
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................... $ $ $
Total........................ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Delphi has granted the U.S. underwriters an option to purchase an additional
15,000,000 shares to cover over-allotments. Morgan Stanley & Co. Incorporated
expects to deliver the shares to purchasers on , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO. MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE SCHRODER & CO. INC.
, 1999
<PAGE> 4
PROSPECTUS COVER GATEFOLD
INSIDE FRONT - PAGE 1
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
(DPH)
A global automotive supplier.
WORLDWIDE LOCATIONS
[WORLD MAP]
North America: India Europe: Romania
Canada Indonesia Austria Russia
Mexico Japan Belgium Spain
United States Malaysia Czech Republic Sweden
South America: Saudi Arabia France United Kingdom
Argentina Singapore Germany
Brazil South Korea Hungary Africa:
Venezuela Taiwan Ireland Morocco
Thailand Luxembourg South Africa
Asia: Turkey Poland Tunisia
China Portugal
Australia
[PEOPLE - DELPHI BUILDING IN BACKGROUND]
OPERATIONS PEOPLE/FACILITIES
Headquartered in Troy, Delphi operates 169
Michigan, USA, Delphi manufacturing sites,
Automotive Systems 27 technical centers
has operations in 36 and 51 customer service
countries. We have centers and sales
regional headquarters in activity offices
Sao Paulo, Brazil; Paris, around the world.
France; and Tokyo, We employ over 200,000
Japan. individuals and are
engaged in 40 joint
ventures.
<PAGE> 5
PROSPECTUS COVER GATEFOLD
INSIDE FRONT - PAGE 2
DELPHI IS THE WORLD'S LARGEST
AND MOST DIVERSIFIED SUPPLIER OF
COMPONENTS, INTEGRATED
SYSTEMS AND MODULES TO THE
AUTOMOTIVE INDUSTRY.
[AUTOMOBILE WITH HIGHLIGHTED DIAGRAM OF COMPONENT PARTS VISIBLE]
SAFETY, THERMAL &
ELECTRICAL ARCHITECTURE
- - Interior Products
Safety/Airbag Systems
Door Modules
Power Product Systems
Modular Cockpits
- - Thermal Products
Thermal Management Systems
Climate Control Systems
HVAC Systems and Modules
Powertrain Cooling Systems
Front End Modules
- - Power and Signal Distribution
Products ELECTRONICS & MOBILE
Electrical/Electronic (E/E) Systems COMMUNICATION
Centers Audio Systems
Connection Systems Communication Systems
Electronic Products Advanced Controllers
Advanced Data Communication Powertrain and Engine
Systems Control Modules
Fiber Optic Lighting Systems Collision Warning
Ignition Wiring Systems Systems
Sensors Security Systems
Switch Products Safety Systems
<PAGE> 6
PROSPECTUS COVER GATEFOLD
INSIDE FRONT - PAGE 3
[AUTOMOBILE WITH HIGHLIGHTED DIAGRAM OF COMPONENT PARTS VISIBLE]
DYNAMICS & PROPULSION
- - Energy and Engine Management
Products
Air/Fuel Management
Energy Storage and Conversion
Valve Train
Exhaust After-Treatment
Sensors and Solenoids
Ignition
Fuel Handling
Controls
Advanced Propulsion Systems
- - Chassis Products
Intelligent Chassis Control
Systems
Advanced Ride Control
Suspension Systems
Chassis Systems and Modules
Brake Systems
Suspension and Brake
Components
- - Steering Products
Steering Systems
Columns and Intermediate
Shafts
Driveline Systems
Fuel Efficiency and
Performance Steering
Systems
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 12
Delphi and Its Separation from
General Motors..................... 26
Use of Proceeds...................... 30
Dividends............................ 30
Capitalization....................... 31
Selected Financial Data.............. 32
Unaudited Pro Forma Condensed
Consolidated Financial
Statements......................... 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 39
Business of Delphi................... 63
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management........................... 94
Arrangements Between Delphi and
General Motors..................... 112
Principal Stockholder................ 134
Description of Capital Stock......... 135
Shares Eligible for Future Sale...... 145
Material United States Federal Tax
Consequences to Non-United States
Holders............................ 147
Underwriters......................... 150
Legal Matters........................ 154
Experts.............................. 154
Where You Can Find More Information.. 154
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
-------------------------
In this prospectus, "Delphi," the "company," "we," "us" and "our" each
refers to Delphi Automotive Systems Corporation and "General Motors" and "GM"
each refers to General Motors Corporation.
-------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
-------------------------
Until , 1999, all dealers that buy, sell or trade Delphi's
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
3
<PAGE> 8
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information that you should consider
before deciding to invest in our common stock. We urge you to read this entire
prospectus carefully, including the "Risk Factors" section and the consolidated
financial statements and the notes to those statements.
DELPHI
OUR COMPANY
Delphi is the world's largest and most diversified supplier of automotive
parts, with 1997 revenues of $31.4 billion. Based on the latest Fortune 500
survey, Delphi on an independent basis would have ranked as the 25th largest
industrial corporation in the United States based on 1997 revenues.
As an automotive parts supplier, Delphi manufactures and sells individual
component parts for automotive vehicles as well as groups of components that are
arranged either as modules based on physical proximity within a vehicle, such as
an instrument panel, or as integrated systems that operate throughout a vehicle
to provide a specific function, such as audio and braking. We sell these
components, systems and modules to automotive vehicle manufacturers, including
General Motors, which is the world's largest manufacturer of automotive vehicles
and by far our largest customer.
Let us tell you more about our company:
- RELATIONSHIP WITH GM. 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. General
Motors currently owns all of our stock. After this offering, GM will own
about 82.3% of our common stock and will continue to control our company.
GM has announced that it intends to complete its divestiture of our
company later in 1999, which we believe will enhance our ability to
increase sales to other vehicle manufacturers over time.
- EXPANDED CUSTOMER BASE. Several years ago, we began to transform our
company from a North America-based, captive 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. Our sales to customers other than GM have
grown from 13.3% of our total sales in 1993 to 18.3% in 1997. As used in
this calculation, our "total sales" include all sales by entities in
which we have a minority interest.
- GLOBAL PRESENCE. We have 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 59% 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 September 30, 1998. About 30% of our total 1997 sales were derived
from products manufactured at sites located outside the United States and
Canada.
- VEHICLE KNOWLEDGE. Through our experience with GM, 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.
4
<PAGE> 9
- PRODUCTS. We are primarily a "Tier 1" supplier, providing our products
directly to vehicle manufacturers. We believe that we are one of the
leading Tier 1 suppliers in each of our major product sectors:
- 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.
We also supply our products to the worldwide aftermarket for replacement
parts and to customers other than vehicle manufacturers.
OUR INDUSTRY
We operate in the highly competitive global automotive parts industry. Many
vehicle manufacturers are continuing to reduce their reliance on their own
internal captive component operations and are moving towards a competitive
sourcing process for automotive parts. As a result, independent suppliers are
becoming a more important part of the automotive parts industry and many captive
suppliers no longer sell their products exclusively to their parent company. The
global automotive parts industry is being further reshaped by a number of other
key trends, including the following:
- Suppliers are becoming increasingly involved in vehicle design and
assembly processes as customers source more fully-engineered, integrated
systems and modules.
- Suppliers are establishing a broader geographic presence to satisfy the
needs of customers as they produce and sell more vehicles on a global
basis.
- The electronic content of vehicles is increasing in response to changing
regulatory requirements and consumer demand.
- Suppliers are consolidating globally as they seek to achieve operating
synergies, shift production to lower-cost manufacturing locations and
acquire complementary technologies. Consolidation also enables suppliers
to build new customer relationships and to follow their customers as they
expand around the world.
- Product development cycles are becoming shorter as vehicle manufacturers
seek to respond more quickly to changes in regulatory requirements and
consumer preferences.
OUR BUSINESS OBJECTIVE
Our core business objective is to increase our earnings by expanding our
sales globally while improving our operating performance. We have entered into a
supply agreement with General Motors that we believe will provide us with a
substantial base of future business well into the next decade. We will strive to
maintain our important relationship with GM and expect that it will remain our
largest customer for a significant period of time. However, we expect that our
sales to GM's North American operations will decline over time, and our strategy
accordingly focuses on increasing sales to other customers. We believe that our
ability to achieve this sales growth over the long term will be enhanced by our
complete separation from GM.
Our business objective emphasizes continuing operational improvements.
Since 1991, when GM organized its various automotive parts operations into a
separate business group, we have been evolving from a
5
<PAGE> 10
fully captive collection of automotive parts operations into an independently
managed supplier of components, integrated systems and modules to GM and all of
the other major vehicle manufacturers. During this transitional period, our
financial results have at times been adversely affected by a variety of factors
which we are continuing to address through initiatives to improve our operating
performance. These adverse factors include significant price reductions as GM
implemented its global sourcing initiative, labor disruptions at both GM and
Delphi, and certain unprofitable manufacturing operations.
OUR STRATEGY
Our business strategy is designed to leverage our competitive strengths and
capitalize on key trends in the global automotive parts industry. The key
elements of our business strategy are:
- SUPPLY HIGH-QUALITY, INNOVATIVE COMPONENTS, SYSTEMS AND MODULES. We
believe that our technical expertise, breadth of product offerings and
manufacturing scale allow us to compete successfully on a component,
system and module basis. We have developed significant system and module
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. In addition, we believe
that our substantial in-house electronics integration capabilities give
us a significant competitive advantage across all our product areas,
particularly since we believe that electronics integration will drive the
next generation of successful products in our industry.
- PURSUE BUSINESS WITH CUSTOMERS OTHER THAN GM-NORTH AMERICA. We believe
that our product portfolio, global presence and customer responsiveness
will allow us to increase our sales to customers other than GM-North
America. We have established customer-supplier relationships with all of
the major vehicle manufacturers. However, we believe that our status as a
captive supplier to GM has historically been a major impediment to the
expansion of our business with other customers, as they have shown
varying degrees of reluctance to source from a supplier owned by a major
competitor. We believe that, as an independent company no longer owned by
General Motors, we will have significant opportunities to expand our
business with other customers around the world.
- LEVERAGE GLOBAL PRESENCE. Our operations, including joint ventures, in 36
countries position us well to pursue new business, especially as vehicle
manufacturers increasingly favor suppliers that can deliver products with
consistent technology and quality for vehicles which are manufactured and
sold in markets around the world. We also believe that our global
presence allows us to leverage sales to a customer in one location or for
one product into sales to that customer in other locations and for other
products.
- IMPROVE OPERATING PERFORMANCE. We are executing several strategic
initiatives to improve our operating performance. These include our
Delphi Manufacturing System, which focuses on achieving lean operations
through operating flexibility, as well as a management process aimed at
streamlining our product portfolio, a "fix/sell/close" plant-by-plant
analysis through which we seek to improve our cost competitiveness, and
various other sourcing, labor and cost reduction initiatives.
- COMPLETE STRATEGIC ACQUISITIONS, JOINT VENTURES AND ALLIANCES. We pursue
strategic acquisitions and alliances to complement or fill gaps in our
product portfolio, enhance our design, engineering and manufacturing
capabilities, improve our geographic presence and increase our access to
new customers. We believe that our separation from GM will provide us
with greater planning flexibility, the ability to use our stock for
acquisitions and the opportunity to form alliances with companies not
willing to partner with a supplier owned by GM.
Our ability to implement our business strategy is subject to a number of
uncertainties and risks. In particular, we cannot assure you that we will
capture significant business with customers other than GM, that we will realize
the labor relations benefits that we expect from the separation or that we will
be able to continue to improve our operating performance. For more information,
see "Risk Factors--Risk Factors Relating to Separating Our Company from General
Motors" and "--Risk Factors Relating to Our Business."
6
<PAGE> 11
RELATIONSHIP WITH GENERAL MOTORS
We are currently a wholly owned subsidiary of General Motors. After the
completion of this offering, GM will own about 82.3% of the outstanding shares
of our common stock, or about 80.2% if the U.S. underwriters exercise their
over-allotment option in full. GM has announced that it currently plans to
complete its divestiture of Delphi later in 1999 by distributing all of its
shares of Delphi common stock to the holders of GM's $1 2/3 common stock. GM
expects to accomplish this distribution through the following:
- 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
- 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
- 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 its distribution of our common stock. 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 Delphi 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. For a discussion
of the risks associated with GM not completing the divestiture, see "Risk
Factors--Risk Factors Relating to Separating Our Company from General Motors--
Our Business May Be Adversely Affected if General Motors Does Not Complete Its
Divestiture of Our Company."
We have entered into agreements with GM that provide for the separation of
our business operations from GM. These agreements are not conditioned on the
divestiture and provide for, among other things, the transfer from GM to Delphi
of assets comprising the business of Delphi and the assumption by Delphi of
liabilities relating to its business. Substantially all of these transfers have
been or will be completed prior to the closing of this offering.
The agreements between us and GM also govern our various interim and
ongoing relationships. In particular, our supply agreement with GM is intended
to provide us with a substantial base of business with GM well into the next
decade. All of the agreements providing for our separation from GM 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. See "Risk Factors--Risk Factors Relating to Separating Our
Company from General Motors" and "Arrangements Between Delphi and General
Motors."
------------------
Our principal executive offices are located at 5725 Delphi Drive, Troy,
Michigan 48098 and our telephone number is (248) 813-2000.
7
<PAGE> 12
THE OFFERING
<TABLE>
<S> <C>
Common stock offered:
U.S. offering.................................... 85,000,000 shares
International offering........................... 15,000,000 shares
-----------
Total......................................... 100,000,000 shares
===========
Common stock to be outstanding immediately after
the offering..................................... 565,000,000 shares
Common stock to be held by General Motors
immediately after the offering................... 465,000,000 shares
Use of proceeds.................................... We estimate that our net proceeds from the
offering will be about $1.573 billion, based on
an assumed initial public offering price of
$16.50 per share. We will use the net proceeds
from the offering for general corporate
purposes, including working capital and the
temporary pay-down of amounts borrowed under our
revolving credit facilities. See "Use of
Proceeds."
Dividends.......................................... Subject to our financial results and action by
our board of directors, we currently intend to
pay dividends on a quarterly basis, at an
initial rate of $0.07 per share, commencing with
the first declaration in June 1999 for payment
in July 1999. See "Dividends."
Proposed NYSE symbol............................... DPH
Preferred share purchase rights.................... One preferred share purchase right will be
attached to each share of common stock sold in
the offering and thus the rights are also being
offered hereby. The rights would cause
substantial dilution to any person or group who
attempts to acquire a significant interest in
our company without advance approval from our
board of directors and thus could make an
acquisition of control of our company more
difficult. See "Description of Capital
Stock--Rights Plan."
</TABLE>
Unless we specifically state otherwise, the information in this prospectus
does not take into account the issuance of up to 15,000,000 shares of common
stock which the U.S. underwriters have the option to purchase solely to cover
over-allotments. If the U.S. underwriters exercise their over-allotment option
in full, 580,000,000 shares of common stock will be outstanding after the
offering.
The number of shares of our common stock to be outstanding immediately
after the offering listed above does not take into account about 26,000,000
shares of our common stock that will be issuable upon exercise by our employees
of "founders grant" stock options and restricted stock units and about
23,718,000 shares of our common stock that will be issuable upon exercise by our
employees of stock options that will be substituted for GM stock options at the
time of GM's divestiture of its shares of our common stock. The actual number of
substituted awards will be determined at the time of such divestiture, primarily
based on the ratio of the price of our common stock to the price of GM's stock.
For a discussion of these stock options and employee benefits awards, see
"Management--Incentive Plans--Founders Grants" and "Arrangements Between Delphi
and General Motors--Employee Matters--Shares of Delphi's Common Stock Subject to
Substitute Awards."
8
<PAGE> 13
SUMMARY FINANCIAL AND OPERATING DATA
The following table presents summary financial and operating data for our
company, including our Delco Electronics Corporation subsidiary, the electronics
and mobile communication business that GM transferred to us in December 1997.
The data presented in this table are derived from "Selected Financial Data,"
"Unaudited Pro Forma Condensed Consolidated Financial Statements," and the
consolidated financial statements and notes thereto which are included elsewhere
in this prospectus. You should read those sections for a further explanation of
the financial data summarized here. You should also read "Risk Factors--Risk
Factors Relating to Separating Our Company from General Motors--Our Historical
Financial Information May Not Be Representative of Our Results As a Separate
Company." You should also 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.
The summary pro forma condensed financial data are derived from the
application of pro forma adjustments related to this offering and the terms of
the agreements governing our separation from GM. The pro forma balance sheet
data give effect to:
- this offering;
- a change in intracompany accounts receivable payment terms from GM prior
to the separation; and
- the settlement of certain GM intracompany accounts receivable and an
intracompany note payable.
The pro forma statement of income data give effect to:
- this offering;
- decreased employee benefit costs due to GM's retention of certain benefit
obligations; and
- certain incremental costs associated with operating Delphi as a separate,
public company.
For a more detailed explanation of the calculation of the pro forma amounts
in this table, see "Unaudited Pro Forma Condensed Consolidated Financial
Statements." The pro forma operating results and financial position shown in
this table are not necessarily indicative of what our results or financial
position would have been had the separation of our business from GM been
completed and had this offering occurred at the beginning of the earliest pro
forma period presented or on September 30, 1998, as applicable.
9
<PAGE> 14
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- ---------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1996 1997 1997 1997 1998 1998
---- ---- ---- ---- ---- ----- ---- ---- -----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................... $29,327 $31,044 $31,661 $31,032 $31,447 $31,447 $23,368 $20,679 $20,679
Operating income (loss)..... 1,763 2,084 2,138 1,273 352 687 1,229 (284) (201)
Net income (loss)........... 948 975 1,307 853 215 423 736 (181) (130)
Basic and diluted earnings
(loss) per share.......... 2.04 2.10 2.81 1.83 0.46 0.75 1.58 (0.39) (0.23)
STATEMENT OF CASH FLOWS DATA:
Cash provided by (used in)
operating activities...... n/a n/a 1,370 2,701 2,918 n/a 1,812 (51) n/a
Cash used in investing
activities................ n/a n/a (1,141) (995) (1,320) n/a (860) (699) n/a
Cash (used in) provided by
financing activities...... n/a n/a (263) (1,686) (1,549) n/a (903) 741 n/a
OTHER FINANCIAL DATA:
EBITDA...................... 2,378 2,603 2,959 2,182 2,459 2,794 1,877 530 613
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales per employee (U.S.)............................. $185,000 $206,000 $237,000 $234,000 $247,000
Customer rejected/returned parts per million.............. n/a n/a 812 462 355
Lost work day cases per hundred employees................. 3.29 3.04 2.27 1.62 1.24
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT DECEMBER 31, -----------------------------
----------------------------------------------- PRO FORMA
1993 1994 1995 1996 1997 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................. $14,803 $14,494 $15,635 $15,390 $15,026 $15,863 $14,930 $18,003
Total debt................... 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500
Equity (deficit)............. (476) 120 1,354 922 (413) 816 (39) 3,034
</TABLE>
We 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. For information on special items
impacting 1996 through 1998 operating results, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Special Items and Work Stoppages."
"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.
Net sales per employee data for 1993 and 1994 do not include sales or
headcount information for our Delco Electronics subsidiary.
10
<PAGE> 15
SUMMARY RECENT FINANCIAL RESULTS
We reported consolidated net income of $88 million for the fourth quarter
of 1998 and a net loss of $93 million for the year ended December 31, 1998. Our
fourth quarter 1998 results include a charge of $310 million, or $192 million
after-tax, recorded as a result of our ongoing evaluation of the competitiveness
of our business. The charge primarily related to underperforming assets,
voluntary early retirements and the closure of certain unprofitable joint
ventures. In addition, our full year results were impacted by other special
items, including work stoppages. Excluding the charge associated with the
ongoing evaluation of our business, income was $280 million for the fourth
quarter of 1998. Excluding special items and work stoppages, our income was $820
million for the year ended December 31, 1998. For more information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview--Recent Financial Results."
11
<PAGE> 16
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information set forth in this prospectus before deciding to invest in
shares of our common stock. Some of the following risks relate principally to
our company's separation from General Motors. Other risks relate principally to
our business in general and the industry in which we operate. Finally, other
risks relate principally to the securities markets and ownership of our stock,
including limitations on our ability to complete certain business combinations
and change of control transactions. The risks and uncertainties described below
are not the only ones facing our company. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial may also
adversely affect our business.
If any of the following risks and uncertainties develop into actual events,
our business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
the risks faced by us described below and elsewhere in this prospectus.
RISK FACTORS RELATING TO SEPARATING OUR COMPANY FROM GENERAL MOTORS
We are subject to the following risks in connection with our separation
from General Motors.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF GENERAL MOTORS DOES NOT COMPLETE
ITS DIVESTITURE OF OUR COMPANY
If General Motors fails to complete its divestiture of our company
substantially within the time contemplated, our business would be adversely
affected. Specifically, we would likely not realize the increased non-GM sales,
improved labor relations, capital planning flexibility and other benefits we
expect to achieve in connection with the divestiture, all of which are important
to our business strategy. Although GM has advised us that it currently plans to
complete its divestiture of our company later in 1999, it is not obligated to do
so and we cannot assure you as to whether or when the divestiture will occur.
This means that we cannot assure you that we will obtain the expected benefits
or as to the timing of any such benefits. For information about GM's plan to
divest Delphi and the benefits we expect to achieve in connection with the
divestiture, see "Delphi and Its Separation from General Motors--Separation from
General Motors."
In addition, until the divestiture occurs, the risks discussed below
relating to GM's control of our company, the potential business conflicts of
interest between our company and GM and the potential conflicts of interest of
the three members of our board of directors who are also directors or executive
officers of GM will continue to be relevant to our stockholders.
OUR CLOSE RELATIONSHIP WITH GENERAL MOTORS COULD LIMIT OUR POTENTIAL TO DO
BUSINESS WITH ITS COMPETITORS
We cannot assure you that we will realize the benefits of the increased
non-GM sales that we expect from our separation from GM. GM will remain our
largest customer for a significant period of time and we will continue to have a
variety of contractual relationships with GM, including the supply agreement
that we have entered into with GM in connection with our separation. We believe
that some of GM's competitors have been concerned that awarding contracts to us
would benefit GM and that GM might obtain access through us to confidential
information regarding their vehicle design and manufacturing processes. Whether
or not GM completes its divestiture of our common stock, our close relationship
with GM will continue for a significant period of time. Accordingly, we cannot
assure you as to the amount or timing of our sales to customers other than GM.
In addition, although we have had discussions with all of our major non-GM
customers regarding our separation from GM, we do not currently intend to seek
consent from such customers to the assignment of
12
<PAGE> 17
their existing contracts from GM to us or to enter into new contracts to replace
these existing contracts. See "Business of Delphi--Customers--Other VMs."
WE MAY BE UNABLE TO INCREASE OUR COMPETITIVENESS IF WE FAIL TO IMPROVE OUR
LABOR RELATIONS AND ESTABLISH MORE FLEXIBLE LOCAL WORK RULES AND PRACTICES
FOLLOWING OUR SEPARATION FROM GENERAL MOTORS
One of the principal benefits that we expect to achieve from our separation
from General Motors is increased competitiveness over time as a result of
improving our labor relations and establishing more flexible local work rules
and practices, which are very important to our business because our workforce is
highly unionized. However, we cannot assure you as to when or the extent to
which we will be able to achieve these benefits. In this regard, our largest
union, the UAW, which represents about 29% of our unionized employees, has
stated that it is on record as opposing the separation of Delphi from GM and
that, should GM decide to proceed with the transaction, the UAW can and will
aggressively work to protect the rights and interests of its members who would
be impacted by GM's distribution of Delphi common stock to the holders of its
$1 2/3 common stock. Since that time, GM and the UAW have agreed that any of our
employees who are members of the UAW and who retire on or before October 1, 1999
will be treated as GM retirees. GM and Delphi have been working with the UAW and
the other unions representing our employees to address the best interests of
their members regarding these matters. However, we cannot assure you as to the
outcome of these efforts to work with the unions. See "Business of
Delphi--Strategy--Improve Operating Performance--Labor Relations."
WE MAY INCUR MATERIAL COSTS IN CONNECTION WITH OUR SEPARATION FROM GENERAL
MOTORS
We may incur costs and expenses, potentially including additional taxes and
employee costs, greater than those we have planned for in connection with our
separation from GM. We cannot assure you that these costs will not be material
to our business. See "--Risk Factors Relating to Our Business--Making Payments
of Pensions and Other Postretirement Employee Benefits Could Adversely Affect
Our Liquidity" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
WE WILL BE CONTROLLED BY GENERAL MOTORS AS LONG AS IT OWNS A MAJORITY OF
OUR COMMON STOCK AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME
OF STOCKHOLDER VOTING DURING SUCH TIME
After the completion of this offering, GM will own about 82.3% of our
outstanding shares of common stock, or about 80.2% if the U.S. underwriters
exercise their over-allotment option in full. As long as GM owns a majority of
our outstanding common stock, GM will continue to be able to elect our entire
board of directors and to remove any director, with or without cause, and
generally to determine the outcome of all corporate actions requiring
stockholder approval. As a result, GM will be in a position to continue to
control all matters affecting our company, including:
- the composition of our board of directors and, through it, any
determination with respect to the direction and policies of our company,
including the appointment and removal of officers;
- any determinations with respect to mergers or other business combinations
involving our company;
- the acquisition or disposition of assets by our company;
- future issuances of common stock or other securities of our company;
- the incurrence of debt by our company;
- amendments, waivers and modifications to our supply agreement with GM and
other agreements providing for our separation from GM;
- the payment of dividends on our common stock; and
13
<PAGE> 18
- certain determinations with respect to treatment of items in those of our
tax returns which are consolidated or combined with GM's tax returns.
After the closing of this offering, we expect that three of our eleven
directors will be directors and/or officers of GM. Under our certificate of
incorporation, our bylaws and board policies established thereunder, so long as
GM owns at least a majority of our outstanding common stock, many actions by our
board of directors require the approval of 80% of all our directors. Thus, in
order to take any such action, the approval of one or more of our directors who
are also directors and/or officers of GM will be required. See "Description of
Capital Stock--Certain Provisions of the Restated Certificate of Incorporation
and Bylaws."
THREE OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OR EXECUTIVE OFFICERS OF GENERAL MOTORS
We currently anticipate that, until after GM's divestiture of our common
stock, three members of our board of directors will be executive officers of GM.
Two of these GM officers are also directors of GM. Our directors who are also
directors or executive officers of GM will have obligations to both companies
and may have conflicts of interest with respect to matters potentially or
actually involving or affecting us, such as acquisitions, financings and other
corporate opportunities that may be suitable for both us and GM. Our certificate
of incorporation contains provisions designed to facilitate resolution of these
potential conflicts which we believe will assist the directors of our company in
fulfilling their fiduciary duties to our stockholders. These provisions do not,
however, alter the fiduciary duty of loyalty of our directors under applicable
Delaware law. Subject to applicable Delaware law, by becoming a stockholder in
our company, you will be deemed to have notice of and have consented to these
provisions of our certificate of incorporation. Although these provisions are
designed to resolve such conflicts between us and General Motors fairly, we
cannot assure you that any conflicts will be so resolved. See "Description of
Capital Stock--Certain Provisions of the Restated Certificate of Incorporation
and Bylaws."
FIVE OF OUR DIRECTORS AND MANY OF OUR EXECUTIVE OFFICERS MAY HAVE CONFLICTS
OF INTEREST BECAUSE OF THEIR OWNERSHIP OF GENERAL MOTORS STOCK
Five of our directors and many of our executive officers own substantial
amounts of GM stock and options on GM stock because of their relationships with
General Motors prior to the separation of our company from GM. Such ownership
could create, or appear to create, potential conflicts of interest when
directors and officers are faced with decisions that could have different
implications for our company and GM. See "Management--Stock Ownership of
Directors and Executive Officers."
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH GENERAL MOTORS
WITH RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS
GM will continue to be our largest customer for a significant period of
time. Unless and until GM completes its divestiture of our common stock, it will
continue to be our controlling stockholder. In addition, we currently have, and
after this offering and the divestiture will continue to have, contractual
arrangements with GM which require GM and its affiliates to provide various
transitional and other services to us. As a result, conflicts of interest may
arise between us and GM in a number of areas relating to our past and ongoing
relationships, including:
- the nature, quality and pricing of products and services we provide to
GM;
- the nature, quality and pricing of transitional services GM has agreed to
provide us;
- labor, tax, employee benefit and other matters arising from the
separation of our company from GM;
- the incurrence of debt by our company and major business combinations by
our company;
- sales or distributions by GM of all or any portion of its ownership
interest in our company;
14
<PAGE> 19
- business opportunities that may be attractive to both GM and our company;
and
- GM's ability to control the management and affairs of our company.
We cannot assure you that we will be able to resolve any potential conflicts or
that, if resolved, we would not be able to receive more favorable resolution if
we were dealing with an unaffiliated party. Our supply agreement with GM and the
other agreements we have entered into with GM may be amended from time to time
upon agreement between the parties. For so long as we are controlled by GM, we
cannot assure you that GM would not require us to agree to an amendment to the
supply agreement or any other agreement that may be more or less favorable to us
than the current terms of the agreement. Furthermore, our ability to eliminate
product lines, close plants and divest businesses is subject to certain
restrictions set forth in our supply agreement with General Motors as described
elsewhere in this prospectus. In addition, our ability to incur indebtedness,
make acquisitions and dispositions and issue stock is subject to the terms of
another agreement that we have entered into with General Motors described
elsewhere herein. See "Arrangements Between Delphi and General Motors--IPO and
Distribution Agreement" and "--Supply Agreement."
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR
RESULTS AS A SEPARATE COMPANY
The historical financial information we have included in this prospectus
may not reflect what our results of operations, financial position and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented or what our results of operations, financial position and cash
flows will be in the future. This is because:
- we have made certain adjustments and allocations since GM did not account
for us as, and we were not operated as, a single stand-alone business for
all periods presented; and
- the information does not reflect many significant changes that will occur
in our funding and operations as a result of our separation from General
Motors, including employee and tax matters.
We cannot assure you that the adjustments and allocations we have made in
preparing our historical consolidated financial statements appropriately reflect
our operations during such period as if we had in fact operated as a stand-alone
entity or what the actual effect of our separation from GM will be. Accordingly,
we cannot assure you that our historical results of operations are indicative of
our future operating or financial performance. For additional information, see
"Selected Financial Data," "Unaudited Pro Forma Condensed Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL AND LIQUIDITY REQUIREMENTS
A substantial portion of our cash flows from operations will be dedicated
to meet our pension funding obligations and to the payment of principal and
interest on our indebtedness from time to time. As a result of these
obligations, our liquidity position may be adversely affected if we fail to
realize our expected cash flows from operations. In addition, under our supply
agreement with GM, the timing of payments from GM to us under existing contracts
changed as of January 1, 1999. For a discussion of these and other factors
affecting our liquidity, you should read "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." See also "--Risk Factors Relating to Our Business--Making Payments
of Pensions and Other Postretirement Employee Benefits Could Adversely Affect
Our Liquidity."
Our working capital requirements and cash flow provided by operating
activities can vary greatly from quarter to quarter, depending on the volume of
production, the payment terms with our customers and suppliers and the build-up
of inventories. We cannot assure you that we will be able to meet our future
capital requirements in the same manner and on the same terms as we did when we
were a part of GM. Until recently, our working capital needs were managed by GM
pursuant to its company-wide cash management policies. However, effective
January 1, 1999, General Motors stopped providing funds to finance our
15
<PAGE> 20
operations and we began to manage our own working capital needs. Since our
credit rating is lower than GM's, we expect that we will not be able to obtain
financing with interest rates and terms as favorable as those obtained by GM.
WE ARE SUBJECT TO CERTAIN CONTRACTUAL LIMITATIONS WHICH COULD LIMIT THE
CONDUCT OF OUR BUSINESS AND OUR ABILITY TO PURSUE OUR BUSINESS OBJECTIVE
In connection with this offering, we have entered into an agreement with
General Motors that contains a number of restrictive covenants that,
individually or in the aggregate, could materially limit the way in which we
conduct our business and our ability to pursue our business objective. These
covenants will, among other things, limit our ability to complete acquisitions
and divestitures, incur indebtedness and issue capital stock. These covenants
generally expire either at such time, if any, as GM completes its divestiture of
our common stock or two years after the divestiture. In addition, our supply
agreement with GM limits our ability to eliminate product lines, close plants
and divest businesses. These restrictions could have a material adverse effect
on our company and your investment in our company. For more information about
these restrictions, see "Arrangements Between Delphi and General Motors--IPO and
Distribution Agreement" and "--Supply Agreement."
THE TRANSITIONAL SERVICES BEING PROVIDED TO US BY GENERAL MOTORS MAY NOT BE
SUFFICIENT TO MEET OUR NEEDS
We have never operated as a stand-alone company. While General Motors is
contractually obligated to provide us with certain transitional services, we
cannot assure you that such services will be sustained at the same level as when
we were part of General Motors or that we will obtain the same benefits. We will
also lease and sub-lease certain office and manufacturing facilities from GM. We
cannot assure you that, after the expiration of these various arrangements, we
will be able to replace the transitional services or enter into appropriate
leases in a timely manner or on terms and conditions, including cost, as
favorable as those we will receive from GM.
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. For more information about these arrangements, see "Arrangements
Between Delphi and General Motors."
RISK FACTORS RELATING TO OUR BUSINESS
Our business is subject to the following risks, which include risks
relating to the industry in which we operate. These risks do not principally
relate to our separation from General Motors.
WE ARE DEPENDENT ON MAINTAINING OUR CURRENT BUSINESS AND WINNING FUTURE
BUSINESS WITH GENERAL MOTORS
We are highly dependent on GM as our largest customer. GM accounted for
about 84.1%, 83.5% and 81.7% of our total sales in 1995, 1996 and 1997,
respectively. For this purpose, total sales include all of the sales from joint
ventures and other investments in which we own a minority interest that are not
reflected in our consolidated sales. Although we expect that GM will continue to
be our largest customer for a significant period of time, our ability to realize
future sales to GM is subject to a number of risks. These risks include
uncertainties relating to our business under the supply agreement that we have
entered into with GM. In addition, the uncertainties that we identify in this
prospectus as being generally applicable to supplier-customer relationships in
our industry will be heightened in the case of our relationship with GM because
it is our largest customer. Accordingly, we cannot assure you as to the amount
of our future business with GM. See "--We May Be Unable to Realize All of the
Sales Represented by Our Awarded Business."
Under the terms of our supply agreement with GM, our existing contracts
with GM as of January 1, 1999 will generally remain in effect, although GM has
certain rights to move business from us to other suppliers. The supply agreement
also requires GM to provide us the opportunity to supply on competitive terms
the first
16
<PAGE> 21
replacement cycle of certain product programs. However, in order to utilize this
ability to secure next generation business, we must be competitive in a number
of areas. 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 overall economic effect of such package
proposals in assessing our competitiveness. For information about our supply
agreement with GM, see "Arrangements Between Delphi and General Motors--Supply
Agreement."
Except for the arrangements with respect to the first replacement cycle of
certain product programs, if we elect to bid for GM's business, we will do so on
the same basis as all other suppliers. While we intend to continue to focus on
retaining and winning GM's business and we believe that we will continue to be
able to compete effectively for this business, we cannot assure you in this
regard. See "Business of Delphi--Customers--General Motors."
OUR BUSINESS MAY BE ADVERSELY IMPACTED BY WORK STOPPAGES AND OTHER LABOR
RELATIONS MATTERS
We are subject to a risk of work stoppages and other labor relations
matters because our hourly workforce is highly unionized. These work stoppages
have historically had significant adverse impacts on our net income. As of
September 30, 1998, about 96% of our hourly workforce was represented by unions.
These employees are represented by about 53 unions, including the UAW, which is
our largest union. The national labor agreements negotiated by GM with the
unions currently apply to our workforce and will continue to apply to our
workforce after the offering. This means that, in the United States, the
majority of our workers are currently paid at hourly wage rates similar to those
paid to GM workers rather than the lower rates we believe are generally
prevailing in the automotive parts industry. We will assume the terms of these
national agreements for our employees in connection with GM's distribution of
its shares of our common stock to the holders of its $1 2/3 common stock.
We experienced work stoppages at certain of our facilities in each of 1996,
1997 and 1998. The 1996 and 1998 work stoppages each had a significant adverse
impact on our net income. These work stoppages and work stoppages at GM's
facilities had an unfavorable impact of $281 million on our 1996 net income and
$560 million on our net income for the nine months ended September 30, 1998. The
1997 work stoppage lasted only one day. We cannot assure you that issues with
our labor unions will be resolved favorably to us in the future, that we will
not experience significant work stoppages in future years or that we will not
record significant charges related to those work stoppages.
In the past we have been adversely affected by work stoppages that have led
to the shutdown of GM's assembly plants. Strikes by the UAW, including at one of
our facilities, led to the shutdown of most of GM's North American assembly
plants in June and July 1998. In the event that one or more of our customers,
including GM, experiences a material work stoppage, such work stoppage may have
a resulting effect on our company, including the possible shutdown of our
production lines related to such customers, which could have a material adverse
effect on our business.
For more information about our labor relations, see "--Risk Factors
Relating to Separating Our Company from General Motors--We May Be Unable to
Realize the Labor Benefits We Expect from Our Separation from General Motors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business of Delphi--Employees; Union Representation."
WE MAY BE UNABLE TO REALIZE ALL OF THE SALES REPRESENTED BY OUR AWARDED
BUSINESS
We believe that we currently have a solid foundation of future business
that has been awarded to us by GM and other customers at various stages of the
vehicle development cycle. However, the realization of future sales from awarded
business is inherently subject to a number of important risks and uncertainties,
including as to the number of vehicles that our customers will actually produce,
the timing of that production and the mix of options that our customers and
consumers may choose. In addition, our customers generally have the right to
replace us with another supplier at any time for a variety of reasons.
Accordingly, we cannot assure you that we will in fact realize any or all of the
future sales represented by our awarded business. For more
17
<PAGE> 22
information, see "Business of Delphi--Overview--Our Sales and Awarded Business"
and "--Industry--Awarded Business."
WE MAY BE UNABLE TO INCREASE OUR SALES TO VEHICLE MANUFACTURERS OTHER THAN
GM-NORTH AMERICA
An important part of our business strategy is to increase our sales to
vehicle manufacturers other than GM's North American operations, including,
among others, GM's international operations. We will need to do this in order to
offset the expected decline in our sales to GM's North American operations.
While we believe that our complete separation from GM will enhance our ability
to expand our revenue base through additional sales to customers other than GM,
we cannot assure you that this will happen. Our ability to achieve significant
growth through sales to these customers will depend on the success of our
separation from GM and on several other factors, including:
- our ability to provide high-quality products at competitive prices,
including integrated components, systems and modules, which vehicle
manufacturers are increasingly seeking from their suppliers;
- our ability to develop technologically advanced products;
- our ability to develop new products to meet changing regulatory
requirements and consumer preferences;
- our ability to exploit and expand our global presence to meet vehicle
manufacturers' needs for products in many geographic markets around the
world;
- our ability to meet changing vehicle manufacturer supply requirements on
a timely and cost-efficient basis through lean, flexible operations; and
- other vehicle manufacturers' willingness to share with us confidential
information necessary for us to provide them with more fully-engineered,
integrated systems and modules that require longer lead times to design
and manufacture.
Even if we successfully increase our sales to other customers, such sales, if
any, will likely not be realized, if at all, for several years because the
majority of vehicle manufacturer parts purchases for the next several years have
already been sourced.
WE MAY BE UNABLE TO REALIZE OUR BUSINESS STRATEGY OF IMPROVING OUR
OPERATING PERFORMANCE
We have implemented several important strategic initiatives designed to
improve our operating performance. We cannot assure you that we will be able to
successfully implement or realize the expected benefits of any of these
initiatives or that we will be able to sustain improvements made to date. Such
failure could have a material adverse effect on our business, particularly since
we rely on these initiatives to offset pricing pressures from our customers.
These initiatives are subject in many cases to participation by labor unions and
other third parties, including GM, which under our agreements has certain
contractual rights with respect to our plant closures, product line eliminations
and divestitures of businesses. See "Business of Delphi--Strategy--Improve
Operating Performance."
WE MAY BE UNABLE TO COMPETE FAVORABLY IN THE HIGHLY COMPETITIVE AUTOMOTIVE
PARTS INDUSTRY
The automotive parts industry is highly competitive. We compete with a
number of independent automotive parts suppliers and units of major vehicle
manufacturers in the United States and internationally that produce components,
systems and modules for sale to vehicle manufacturers and in the aftermarket as
replacement parts. Although the overall number of our competitors has decreased
due to ongoing industry consolidation, we face significant competition within
each of our major product areas, including some competitors which have
substantial size and scale and some of which have lower cost structures,
particularly lower hourly wage structures, than our company. In addition, there
is no contractual prohibition preventing GM from competing with us in the
future. For more information about the automotive parts industry and our
competitors, see "Business of Delphi--Industry" and "--Competition."
18
<PAGE> 23
We principally compete for business at the beginning of the sourcing
process for vehicle models that vehicle manufacturers plan to introduce to the
market in later years and upon the redesign of existing vehicle models. Vehicle
manufacturers 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. We cannot assure you that we will be able to compete
favorably based on these or other criteria or that increased competition in our
markets will not have a material adverse effect on our business.
THE CYCLICALITY OF AUTOMOTIVE PRODUCTION AND SALES COULD ADVERSELY AFFECT
OUR BUSINESS
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 economic decline which resulted in a reduction in
automotive production and sales by our customers would have a material adverse
effect on our business.
REGIONAL ECONOMIC ISSUES COULD ADVERSELY AFFECT OUR BUSINESS
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 a reduction in demand for automotive vehicles and their component parts
in those areas and has had an adverse effect on our financial results in 1998.
To the extent that these conditions continue or worsen, or spread to other
regions, particularly the United States, our business will continue to be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Recent Financial Results" and
"--Results of Operations."
MAKING PAYMENTS OF PENSIONS AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS
COULD ADVERSELY AFFECT OUR LIQUIDITY
In connection with our separation from General Motors, we have agreed to
assume certain obligations relating to pensions and other postretirement
employee benefits--principally medical benefits--for our employees as well as
for certain employees associated with prior divestitures. We expect that our
pension contributions will be material to our results of operations and
financial condition, and, under certain circumstances, we could be required to
make a significant payment to GM in connection with the allocation of other
postretirement employee benefits.
We will receive from GM certain assets and liabilities related to GM
salaried and hourly pension plans. Our pension obligations are based on these
pension plans' assets, the expected investment return on those assets and the
plans' expected liabilities. Under current economic conditions and the financial
assumptions required by federal government regulations, our pension obligations
would be considered to be "underfunded." Because of the underfunded nature of
our pension plans, federal regulations will require that our contributions over
time meet certain minimum funding requirements. In addition, although we are not
required to do so, we have commenced discussions with the Pension Benefit
Guaranty Corporation regarding the underfunded nature of our pension plans. In
connection with these discussions, the Pension Benefit Guaranty Corporation may
request that we take actions in excess of federal regulatory minimum
requirements. The outcome of these discussions is as yet uncertain, 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. In any event, regardless of the outcome of our
discussions with the Pension Benefit Guaranty Corporation, we expect these
contributions to be material to our results of operations and financial
condition, and they are discussed in greater detail under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Our
Other Postretirement Employee Benefits and Underfunded Pension Obligations."
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In addition, we and GM have agreed with two of our principal unions 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. 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 GM's divestiture of our company. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and "--Our
Other Postretirement Employee Benefits and Underfunded Pension Obligations."
OUR GROSS MARGINS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO OFFSET ALL
OF THE COST REDUCTIONS WE MUST PROVIDE TO OUR CUSTOMERS
There is substantial and continuing pressure from vehicle manufacturers to
reduce costs, including the cost of products purchased from outside suppliers
such as our company. As a result, we are forced to reduce prices both in the
initial bidding process and during the term of the contractual arrangements. We
cannot assure you that we will be able 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. As a result, our gross margins could be adversely
affected.
Certain of our products are sold under long-term agreements that require us
to provide certain percentage cost reductions each year. These annual cost
reductions are made directly through price reductions and/or indirectly through
suggestions regarding manufacturing efficiencies or other cost savings. Our
contracts with General Motors generally contain these types of provisions. Price
reductions as a percentage of net sales were 1.8%, 3.0% and 2.3% in 1995, 1996
and 1997, respectively. Also, vehicle manufacturers often seek further price
reductions on existing contracts with a supplier in the context of awarding new
business to that supplier. In addition, our ability to pass increased raw
material costs on to our customers is limited, with cost recovery generally less
than 100% and often on a delayed basis. For more information, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview--Net Sales."
WE ARE SUBJECT TO CERTAIN RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We have significant operations outside the United States, including joint
ventures and other strategic alliances. Certain risks are inherent in
international operations, including:
- the difficulty of enforcing agreements and collecting receivables through
certain foreign legal systems;
- foreign customers may have longer payment cycles than customers in the
United States;
- tax rates in certain foreign countries may exceed those of the United
States and foreign earnings may be subject to withholding requirements or
the imposition of tariffs, exchange controls or other restrictions;
- general economic and political conditions in the countries where we
operate may have an adverse effect on our operations in those countries;
- the difficulties associated with managing a large organization spread
throughout various countries;
- required compliance with a variety of foreign laws and regulations; and
- the potential difficulty in enforcing intellectual property rights in
certain foreign countries.
As we continue to expand our business globally, our success will be dependent,
in part, on our ability to anticipate and effectively manage these and other
risks. We cannot assure you that these and other factors will not have a
material adverse effect on our international operations or on our business as a
whole.
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EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
As a result of our international operations, we generate a significant
portion of our revenues and incur a significant portion of our expenses in
currencies other than U.S. dollars. To the extent we are unable to match
revenues received in foreign currencies with costs paid in the same currency,
exchange rate fluctuations in any such currency could have a material adverse
effect on our business. For example, in Mexico, we have significantly more costs
than revenues generated in Mexican pesos since much of our production in Mexico
is sold in the United States. In contrast, in many European countries, we have
more revenues denominated in local currencies than costs. Thus, we are at risk
with respect to our Mexican operations in the event of the depreciation of the
U.S. dollar against the Mexican peso and with respect to our European operations
in the event of the appreciation of the U.S. dollar against various local
currencies or the euro. We seek to mitigate the effect of exchange rate
fluctuations through the use of foreign currency borrowings and derivative
financial instruments, such as forward exchange contracts, although we have not
engaged in any hedging transactions with respect to the Mexican peso. We cannot
assure you that our efforts to mitigate these effects will be successful in the
future. At present, fluctuations in the U.S. dollar, Mexican peso, French franc,
Spanish peseta, German mark and South Korean won have the greatest impact on our
financial performance. As our business grows in China and other countries, we
will become subject to greater risks related to the local currencies. The impact
on our financial performance is affected not only by the currency fluctuations
but also by the terms of our agreements with customers and any joint venture
partners. In many foreign jurisdictions, we have minority interests and other
investments such that the financial results of our activities are not
consolidated in our financial statements.
The financial condition and results of operations of certain of our
operating entities are reported in various foreign currencies and then
translated into U.S. dollars at the applicable exchange rate for inclusion in
our consolidated financial statements. As a result, appreciation of the U.S.
dollar against these foreign currencies will have a negative impact on our
reported revenues and operating profits. Conversely, depreciation of the U.S.
dollar against these foreign currencies will have a positive impact on our
reported revenues and operating profit. We generally do not seek to mitigate
this translation effect through the use of derivative financial instruments. For
information about the impact of foreign currency translation on our financial
condition, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 to our audited consolidated financial
statements included elsewhere in this prospectus.
WE MAY BE UNABLE TO REALIZE OUR BUSINESS STRATEGY OF COMPLETING STRATEGIC
ACQUISITIONS, JOINT VENTURES AND ALLIANCES
There are risks associated with our business strategy to acquire, make
investments in, or enter into joint ventures or other strategic alliances with,
companies whose businesses complement our business. We may not be able to
identify suitable candidates to acquire or enter into joint ventures or other
arrangements with or we may not be able to obtain financing on satisfactory
terms for such activities. In addition, if we acquire a company, we could have
difficulty assimilating the personnel and operations of the acquired company,
which would prevent us from realizing expected synergies. This could disrupt our
ongoing business and distract our management and other resources. We cannot
assure you that we would succeed in overcoming these risks or any other problems
in connection with any acquisitions we may make or joint ventures we may enter
into.
For a period generally ending two years after such time, if any, as GM
completes its divestiture of our common stock, we are subject to certain
contractual restrictions which may limit our ability to make acquisitions or
enter into joint ventures or other strategic alliances. In addition, in
connection with several of our past divestitures, we have entered into covenants
not to compete in areas generally related to the divested product line for
limited periods of time. For a discussion of the principal contractual
restrictions to which we are subject, see "Arrangements Between Delphi and
General Motors--IPO and Distribution Agreement--Preservation of the Tax-Free
Status of the Distribution" and "--Other Delphi Covenants."
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WE MAY INCUR MATERIAL LOSSES AND COSTS AS A RESULT OF PRODUCT LIABILITY
CLAIMS THAT MAY BE BROUGHT AGAINST US
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 bodily injury and/or property damage. We cannot assure you that we will not
experience any material product liability losses in the future or that we will
not incur significant costs to defend such claims. We are currently covered by
GM's insurance against product liability claims, which coverage will continue
until the earlier of GM's divestiture of our common stock and January 1, 2000.
We expect to purchase product liability insurance coverage to be effective at
the time such GM coverage ceases. However, we cannot assure you that such
coverage will be adequate for liabilities ultimately incurred or that it will
continue to be available on terms acceptable to us. In addition, if any of our
products are or are alleged to be defective, we may be required to participate
in a recall involving such products. Each vehicle manufacturer 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,
vehicle manufacturers are increasingly looking to their suppliers for
contribution when faced with product liability claims. A successful claim
brought against us in excess of our available insurance coverage or a
requirement to participate in a product recall may have a material adverse
effect on our business.
Although General Motors has agreed to retain all product liability
responsibility for 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 or sell in the future to customers other than GM. In addition,
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. For more information, see "Arrangements
Between Delphi and General Motors--Separation Agreement--Claims and
Litigation--Product Liability."
WE MAY INCUR MATERIAL PRODUCT WARRANTY COSTS
Vehicle manufacturers are increasingly requiring their outside suppliers to
guarantee or warrant their products and to bear the costs of repair and
replacement of such products under new vehicle warranties. 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. See "Business of Delphi--Legal Proceedings." For a
description of our warranty arrangements with GM with respect to both existing
contracts and new business, see "Arrangements Between Delphi and General
Motors--Warranty Matters."
WE MAY BE ADVERSELY AFFECTED BY THE ENVIRONMENTAL AND SAFETY REGULATIONS TO
WHICH WE ARE SUBJECT
We are subject to the requirements of federal, state and local
environmental and occupational safety and health laws and regulations in the
United States and other countries. We cannot assure you that we have been or
will be at all times in complete compliance with all such requirements or that
we will not incur material costs or liabilities in connection with such
requirements in excess of amounts we have reserved. In addition, these
requirements are complex, change frequently and have tended to become more
stringent over time, and we cannot assure you that these requirements will not
change in the future in a manner that could have a material adverse effect on
our business. We have made and will continue to make capital and other
expenditures to comply with environmental requirements. For more information
about our environmental compliance and potential environmental liabilities, see
"Business of Delphi--Environmental Matters."
WE MAY BE ADVERSELY AFFECTED IF OUR YEAR 2000 REMEDIATION EFFORTS ARE NOT
SUCCESSFUL
Our business could be adversely impacted by information technology issues
related to the Year 2000. We use software and related computer technologies
essential to our operations that use two digits rather than four
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to specify the year, which could result in a date recognition problem with the
transition to the year 2000. We have established a plan to identify and
remediate potential Year 2000 problems in our business information systems,
infrastructure and production and manufacturing sites. We have substantially
completed an inventory of potentially date-sensitive systems and we are
currently focused on the remediation and testing phases of our Year 2000
program. We have also begun surveying our suppliers and service providers for
Year 2000 compliance. The implementation of new enterprise software that will
avoid the need for remediation of certain software is not scheduled to be
completed until July 1999 at one of our principal product group sites. For more
information regarding our Year 2000 program, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000."
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 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.
There is still uncertainty about the broader scope of the Year 2000 issue
as it may affect our company and third parties, including our suppliers and
customers, that are critical to our 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 our ability to carry on our normal operations in
the area or areas so affected. In the event that we are unable to complete our
remedial actions and are unable to implement adequate contingency plans in the
event that problems are encountered, there could be a material adverse effect on
our business, results of operations or financial condition.
WE MAY BE UNABLE TO SUCCESSFULLY IMPLEMENT OR REALIZE COST SAVINGS FROM OUR
NEW ENTERPRISE SOFTWARE SYSTEM
We are in the process of implementing throughout our global operations on
an incremental basis a new enterprise software system that will replace our
existing software systems. We believe this new system will provide us
opportunities to realize cost savings throughout our operations and we expect
multi-phase implementation of this system to be completed within about five
years. In the event we are unable to successfully implement this new system, it
could have a material adverse effect on our business. Also, we cannot assure you
that we will be able to achieve the cost savings we expect to result from the
implementation of this new software system. For more information about this new
software system, see "Business of Delphi--Information Technology."
RISK FACTORS RELATING TO SECURITIES MARKETS
There are risks relating to securities markets that you should consider in
connection with your investment in and ownership of our stock. These risks
include limitations on our ability to execute certain business combinations and
change of control transactions.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE ADVERSELY AFFECTED BY SALES
OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC MARKET
Sales by GM or others of substantial amounts of our common stock in the
public market or the perception that such sales might occur could have a
material adverse effect on the price of our common stock.
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After this offering, GM will own 465,000,000 shares of our common stock. If GM
distributes these shares to the holders of its $1 2/3 common stock, they would
be eligible for immediate resale in the public market, other than any shares
held by affiliates of Delphi. We cannot predict whether substantial amounts of
our common stock will be sold in the open market in anticipation of, or
following, any distribution of our shares by GM to holders of its $1 2/3 common
stock. GM has the sole discretion to determine the timing, structure and all
terms of its distribution of our common stock, all of which may also affect the
level of market transactions in our common stock. In addition, if GM does not
distribute to the holders of its $1 2/3 common stock all of the shares of Delphi
common stock that GM owns, GM and its transferees will have the right to require
us to register such shares of our common stock under the U.S. federal securities
laws for sale into the public market. See "Arrangements Between Delphi and
General Motors--Registration Rights Agreement."
PROVISIONS IN OUR CORPORATE DOCUMENTS AND DELAWARE LAW COULD DELAY OR
PREVENT A CHANGE IN CONTROL OF OUR COMPANY, WHICH COULD ADVERSELY AFFECT THE
PRICE OF OUR COMMON STOCK
The existence of some provisions in our corporate documents and Delaware
law could delay or prevent a change in control of our company, which could
adversely affect the price of our common stock. Our certificate of incorporation
and bylaws contain some provisions that may make the acquisition of control of
our company more difficult, including provisions relating to the nomination,
election and removal of directors, limitations on actions by our stockholders
and restrictions on business combinations with 10% stockholders. In addition,
our preferred share purchase rights would cause substantial dilution to any
person or group who attempts to acquire a significant interest in our company
without advance approval from our board of directors. Delaware law also imposes
some restrictions on mergers and other business combinations between us and any
holder of 15% or more of our outstanding common stock. General Motors is
generally exempted from these provisions and will have special rights so long as
it owns at least a majority of our outstanding common stock. Also, in connection
with this offering, Delphi intends to enter into change in control agreements
with some of its officers that will provide such officers with monetary
compensation and other benefits upon a change in control of our company and the
occurrence of one of several events specified in the agreements within three
years of the change in control. For a description of these provisions and
agreements, see "Management--Change in Control Agreements" and "Description of
Capital Stock."
OUR SUPPLY AGREEMENT AND SOME OF OUR UNDERLYING CONTRACTS WITH GENERAL
MOTORS MAY BE TERMINATED IF THERE IS A CHANGE IN CONTROL OF OUR COMPANY
Our supply agreement with General Motors may be terminated by General
Motors if 35% or more of our company becomes owned or controlled by a competitor
of General Motors in the business of manufacturing automotive vehicles.
Termination of the supply agreement, upon which we rely for a substantial
portion of our future sales, would likely have a material adverse effect on our
company. For more information, see "Arrangements Between Delphi and General
Motors--Supply Agreement."
In addition to any consequences under our supply agreement with GM, some of
our underlying contracts with GM allow GM to terminate these contracts for
convenience at any time for any reason. This right could be exercised by GM in
connection with any change in control of Delphi. The majority of the contracts
including termination for convenience provisions are shorter-term purchase
orders. 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.
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY FOLLOWING THE OFFERING AND YOU
COULD LOSE ALL OR PART OF YOUR INVESTMENT AS A RESULT
The market price of our common stock could be subject to significant
fluctuations in response to our operating results, changes in earnings estimated
by securities analysts or our ability to meet those estimates, publicity
regarding the automotive industry in general or any of our significant
customers, including General Motors, and other factors. Some or all of these
factors may be beyond our control. In particular, the realization
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of any of the risks described in these "Risk Factors," including the possibility
of substantial sales of our common stock and the timing, structure and terms of
GM's divestiture of its shares of our common stock could have a significant and
adverse impact on the market price of our common stock. In addition, the stock
market in general has experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our common stock.
In particular, we cannot assure you that you will be able to resell your shares
at or above the initial public offering price, which will be determined through
negotiations among us, GM and the underwriters. You should read the
"Underwriters--Pricing of the Offering" section of this prospectus for a more
complete discussion of the factors to be considered in determining the initial
public offering price.
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DELPHI AND ITS SEPARATION FROM GENERAL MOTORS
DELPHI'S HISTORY
We are currently a wholly owned subsidiary of General Motors. Our company
was incorporated in Delaware in late 1998 in preparation for this initial public
offering of our common stock (the "Offering") and our separation from General
Motors. Effective as of January 1, 1999, we acquired those assets, and assumed
those liabilities, comprising the business of the Delphi Automotive Systems
business sector of GM, in each case to the extent agreed to by GM and us and
described elsewhere in this prospectus.
Before 1991, Delphi's business was conducted by many separate automotive
parts operations which GM had acquired over time, beginning in the early
twentieth century, as it increased its vertical integration. GM acquired these
operations principally to assure itself of a sufficient and high-quality supply
of automotive parts for the vehicles it produced. 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. 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 to its Delphi Automotive
Systems business sector 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 our Delco Electronics subsidiary. From 1986 through 1997, Delco
Electronics was operated by GM's Hughes Electronics Corporation subsidiary,
which is a leader in satellite and wireless communications and space technology
and was at that time also a leading defense electronics company. Unless we have
indicated otherwise, the information contained in this prospectus assumes that
Delco Electronics has been a part of our company for all periods presented.
SEPARATION FROM GENERAL MOTORS
GM'S PLAN TO DIVEST DELPHI. After completion of the Offering, GM will own
about 82.3% of the outstanding shares of our common stock, or about 80.2% if the
U.S. underwriters exercise their over-allotment option in full. GM has announced
that it currently plans to complete its divestiture of our company later in 1999
by distributing all of its shares of Delphi common stock to the holders of GM's
$1 2/3 common stock. GM expects to accomplish this through a split-off, a
spin-off or some combination of both transactions. We refer to this
distribution, in whatever form it may take, as the "Distribution." For more
information, see "Prospectus Summary--Relationship With General Motors."
GM has advised us that it has not yet determined definitively either when
it expects to complete the Distribution or the structure or terms on which it
would accomplish the Distribution. However, GM has advised us that it believes
it would be desirable to have an intervening period of several months between
the Offering and the Distribution, and that GM accordingly does not currently
expect that it would complete the Distribution prior to mid-1999.
GM has also advised us that, based on its current plans, in the event it
decides to effect the Distribution through a split-off exchange offer and not
enough of its $1 2/3 common stockholders tender their shares to enable GM to
divest itself of all of its shares of our common stock, it would distribute its
remaining shares of Delphi common stock to the holders of GM's $1 2/3 common
stock in a spin-off.
As noted above, GM is not obligated to complete the Distribution and we
cannot assure you as to whether or when it will occur. See "Risk Factors--Risk
Factors Relating to Separating Our Company from General
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Motors--Our Business May Be Adversely Affected if General Motors Does Not
Complete Its Divestiture of Our Company."
GM has also advised us that it would not complete the Distribution if its
Board of Directors determines that the Distribution is no longer in the best
interests of General Motors and its stockholders. GM has further advised us that
it currently expects that the principal factors that it would consider in making
this determination, as well as the principal factors that it would consider in
making the determination as to the timing, structure and terms of the
Distribution, would be:
- the market price of the Delphi common stock;
- the market price of GM's $1 2/3 common stock;
- satisfaction that the Distribution will be tax-free to GM and its
stockholders and as to the other tax consequences of the transactions;
- the absence of any court orders or regulations prohibiting or restricting
the completion of the Distribution; and
- other conditions affecting the businesses of Delphi or GM that make it no
longer in the best interests of such businesses to be fully separated.
On January 13, 1999, GM received a private letter ruling from the IRS to the
effect that the Distribution would be tax-free to GM and its stockholders for
U.S. federal income tax purposes.
BACKGROUND OF THE SEPARATION. Historically, many large automotive vehicle
manufacturers, which we sometimes refer to as "VMs," have relied on in-house
components divisions to fill their supply needs. Over the past few decades,
however, the automotive industry has moved away from such vertical integration.
Instead, VMs have moved towards sourcing a substantial portion of a vehicle's
parts from independent suppliers and purchasing more fully-engineered,
integrated systems and modules rather than individual components. As a result,
VMs are now requiring their suppliers to perform many of the design, engineering
and assembly functions traditionally executed by VMs. The degree to which VMs
source from independent, outside suppliers varies by VM.
General Motors began reducing its vertical integration several years ago by
adopting a global sourcing program. We believe that this initiative was designed
to leverage GM's purchasing power and reduce its purchasing costs by enhancing
competition for its business among its suppliers on the basis of quality,
service, technology and price. As a result of the completion of the
Distribution, GM would substantially reduce its vertical integration.
BENEFITS OF THE SEPARATION. We believe that we will realize certain
benefits from our complete separation from General Motors. As an independent
company, we expect to be better able to expand our revenue base through sales to
major VM customers other than GM. We also believe that, as a fully independent
company after the completion of the Distribution, we will be better able, over
time, to establish more flexible local work rules and practices through improved
labor relations, thereby increasing our competitiveness. These and other
benefits of the separation are discussed further below.
- Increased Non-GM Sales. We believe that one of the most significant
limitations on our ability to expand our sales to major VMs other than GM
is a general reluctance by such VMs to source from a supplier owned by
GM. Other major VMs have shown varying degrees of reluctance to source
extensively from a supplier owned by GM since GM, one of their major
competitors, may be strengthened by the related profits. In addition, we
believe that many major VMs remain reluctant to source from us because
they fear that GM might obtain access through us to confidential
information regarding their vehicle designs and manufacturing processes.
This is particularly important as suppliers are increasingly performing
more of the vehicle design and assembly functions traditionally executed
by VMs and are thus involved earlier in the design and development stages
of vehicles.
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Notwithstanding our strict confidentiality pledge and procedures to
preserve customer confidentiality, which to our knowledge have never been
breached, we believe that we will remain at a competitive disadvantage in
pursuing sales opportunities with major VMs other than GM while we are
owned by GM. We believe that if we are established as a fully independent
company, we will, over time, be able to substantially grow our sales to
VMs other than GM. See "Risk Factors--Risk Factors Relating to Separating
Our Company from General Motors--Our Close Relationship with General
Motors Could Limit Our Potential to Do Business with Its Competitors" and
"--Risk Factors Relating to Our Business--We May Be Unable to Increase Our
Sales to Vehicle Manufacturers Other Than GM-North America."
- Improved Labor Relations. We believe that our complete separation from
General Motors will provide us with the opportunity to improve our labor
relations and, over time, establish more flexible 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. As a fully independent company with control of
our own labor relations after the Distribution, we believe that we would
have the right to negotiate regarding our own national and local labor
agreements directly with the unions representing our employees. Our
intent is to base such negotiations on a management-union relationship
focused on sharing information, growing non-GM revenues and satisfying
the automotive parts supply requirements of multiple VMs around the
world. We further anticipate that by having control of our labor
relations we will, over time, be able to negotiate local work rules and
practices and other terms more consistent with those generally prevailing
in the automotive parts industry. We believe that this would enhance our
overall operational competitiveness. However, we cannot assure you as to
when or the extent to which we will realize these benefits.
GM has informed us that it has satisfactorily completed discussions
with the International Union of Electronic, Electrical, Salaried, Machine
& Furniture Workers AFL-CIO (the "IUE"), one of the principal unions
representing our employees, regarding the effects of the separation on its
members. As a result of these discussions, the IUE has recognized that,
upon Delphi's separation from GM, Delphi will be an independent company
with its own national and local agreements with the IUE. GM has informed
us that initial discussions with the United Steel Workers of America (the
"USW") regarding the effects of the separation on its members were held on
December 8, 1998 and that further discussions will be held with the USW.
Similar discussions are expected to occur with the other unions
representing our employees, but we cannot assure you as to when they will
occur or as to the outcome. In this regard, our largest union, the
International Union, United Automobile, Aerospace and Agricultural
Implement Workers of America (the "UAW"), which represents about 29% of
our unionized employees, has stated that it is on record as opposing the
separation of Delphi from GM and that, should GM decide to proceed with
the transactions, the UAW can and will aggressively work to protect the
rights and interests of its members who would be impacted by the
Distribution. Since that time, GM and the UAW have agreed that any of our
employees who are members of the UAW and who retire on or before October
1, 1999 will be treated as GM retirees. GM and Delphi have been working
with the UAW to address its concerns and will continue to do so. We intend
to cooperate with GM in working together with the UAW, the IUE, the USW
and the other unions representing our employees to address the best
interests of their members regarding these matters. See "Risk Factors--
Risk Factors Relating to Separating Our Company from General Motors--We
May Be Unable to Increase Our Competitiveness if We Fail to Improve Our
Labor Relations and Establish More Flexible Work Rules and Practices
Following Our Separation from General Motors."
- Capital Financing Flexibility. A separation of our company from General
Motors would also benefit our company by enhancing our capital planning
flexibility. For example, we would be able to use our own stock to
facilitate growth through acquisitions. Also, we would no longer have to
compete with other sectors of GM for funding from GM. However, we have
entered into certain agreements in connection with our separation from GM
that contain covenants which restrict our ability to issue stock and
incur indebtedness, including in connection with acquisitions. For a
description of these covenants, see "Arrangements Between Delphi and
General Motors--IPO and Distribution Agreement."
28
<PAGE> 33
- Incentivized Management. Our management's focus would also be
strengthened by incentive programs tied to the market performance of our
common stock.
- Simplified Internal Structure. A separation would allow our management to
implement simplified organizational and internal reporting structures.
SEPARATION AND TRANSITIONAL ARRANGEMENTS. We and General Motors, and, in
some cases, our respective affiliates, have entered into or will enter into,
prior to the completion of the Offering, certain agreements providing for the
separation of our business from General Motors, including a Master Separation
Agreement to which we and GM are parties (as amended from time to time, the
"Separation Agreement"). These agreements generally became effective as of
January 1, 1999 and provide for, among other things, the transfer from GM to
Delphi of those assets comprising the business of Delphi and the assumption by
Delphi of those liabilities relating to its business, in each case to the extent
agreed to by GM and Delphi and described elsewhere in this prospectus. These
agreements also govern various interim and ongoing relationships between the
parties. In particular, GM and Delphi have entered into a Component Supply
Agreement (as amended from time to time, the "Supply Agreement"), which is
intended to provide Delphi with a substantial base of business with GM well into
the next decade. In addition, pursuant to such agreements, GM will provide
certain transitional services to us. While GM is contractually obligated to
provide us with such transitional services, we cannot assure you that such
services will be sustained at the same level as when we were a part of GM or
that we will obtain the same benefits.
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 other terms may be more or less favorable than those we could
negotiate with unaffiliated third parties. In addition, although we believe that
the terms and conditions of our Supply Agreement with GM generally reflect terms
and conditions comparable to those in purchase contracts negotiated between a
supplier and an unaffiliated VM, the Supply Agreement was negotiated in a
similar context and we cannot assure you that its terms are more or less
favorable than those we could negotiate with an unaffiliated third party.
On January 1, 1999, General Motors initiated the process of separating
Delphi by transferring to Delphi the assets and liabilities related to Delphi's
business, in each case to the extent agreed to by GM and Delphi and described
elsewhere in this prospectus. Delphi believes that the transfers of
substantially all of these assets and liabilities have been or will be completed
before the closing of the Offering. Certain international, intellectual property
and real property assets relating primarily to the business of Delphi may still
be held by GM or its affiliates at the time of the completion of 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 Delphi. In
addition, certain information technology assets relating primarily to the
business of Delphi may still be held by GM or its affiliates at the time of the
completion of the Offering, 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 at the time of the Distribution.
For more information regarding the separation arrangements, including the
Supply Agreement between us and GM, see "Arrangements Between Delphi and General
Motors."
29
<PAGE> 34
USE OF PROCEEDS
We estimate that we will receive net proceeds from the Offering of about
$1.573 billion, or about $1.809 billion if the U.S. underwriters exercise their
over-allotment option in full. For purposes of this calculation, we have assumed
an initial public offering price of $16.50 per share. We intend to use such
proceeds for general corporate purposes, including our working capital
requirements which have been impacted by the change in payment terms we have
granted to GM pursuant to the Supply Agreement. For a description of these new
payment terms and their effect on our liquidity, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Pending use of the net proceeds for other general corporate purposes, we
may manage our cash position by using a substantial portion of the net proceeds
to temporarily pay down a portion of our borrowings under our revolving credit
facilities. Our borrowings under these credit facilities, which have due dates
of January 3, 2000 and January 3, 2004, were about $2 billion as of February 1,
1999. As of February 1, 1999, the interest rates on our borrowings under the
credit facilities ranged between about 5.3% and 5.45%. We expect to reborrow
substantially all amounts repaid under such facilities in the ordinary course
shortly following such repayment. For more information about our credit
facilities, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Debt Capitalization and
Available Financing Resources."
DIVIDENDS
Following the Offering, our dividend practices with respect to our stock
will be determined and may be changed from time to time by our Board of
Directors. Under Delaware law and our Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation"), the Board is not
required to declare dividends on our common stock. We currently intend to pay
dividends on a quarterly basis, at an initial rate of $0.07 per share,
commencing with the first declaration in June 1999 for payment in July 1999. Our
Board is free to change our dividend practices at any time and from time to time
and to decrease or increase the dividend paid, or to not 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.
30
<PAGE> 35
CAPITALIZATION
Set forth below is the historical capitalization of our company at
September 30, 1998 and as adjusted to give effect to certain pro forma
adjustments described in "Unaudited Pro Forma Condensed Consolidated Financial
Statements," including the Offering. This information assumes an initial public
offering price of $16.50 per share. You should read the information set forth
below in conjunction with "Selected Financial Data," "Unaudited Pro Forma
Condensed Consolidated Financial Statements," our historical consolidated
financial statements, including the notes thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" which appear
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
--------------------------------------------
(UNAUDITED)
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
DEBT:
Notes payable and current portion of long-term
debt............................................. $ 206 $ -- $ 206
Long-term debt..................................... 3,294 (3,100)
3,100 3,294
------ ------- ------
Total debt............................... 3,500 -- 3,500
EQUITY (DEFICIT):
Common stock....................................... -- 1 1
Additional paid-in capital......................... -- 1,572
1,498 3,070
General Motors' net investment..................... (2) 1,500
(1,498) --
Accumulated translation adjustments................ (37) -- (37)
------ ------- ------
Total equity (deficit)................... (39) 3,073 3,034
------ ------- ------
Total capitalization................ $3,461 $ 3,073 $6,534
====== ======= ======
</TABLE>
Certain items above reflect the settlement of a $3.1 billion intracompany
note payable to General Motors and a $1.5 billion increase in GM's net
investment in Delphi after considering the $1.6 billion settlement of
intracompany accounts receivable immediately prior to the time of the
transactions contemplated by the Separation Agreement. It is expected that
during the first half of 1999, Delphi will finance its operations through
third-party credit sources, with borrowings that will increase to about $3.1
billion. In addition, certain other items above reflect the proceeds from the
Offering and adjustments to equity to reclassify GM's net investment to
additional paid-in capital.
31
<PAGE> 36
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 income 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 Offering. The historical
consolidated balance sheet data set forth below reflect the assets and
liabilities that are expected to be 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, "Unaudited Pro Forma Condensed Consolidated
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this prospectus. The consolidated
statement of income and cash flow data set forth below for each of the three
years in the period ended December 31, 1997, and the consolidated balance sheet
data as of December 31, 1996 and 1997 are derived from, and qualified by
reference to, the audited consolidated financial statements included elsewhere
in this prospectus, and should be read in conjunction with those consolidated
financial statements and the notes thereto. The consolidated statement of income
and cash flow data for each of the years ended December 31, 1993 and 1994 and
the consolidated balance sheet data as of December 31, 1993, 1994 and 1995 are
derived from unaudited consolidated financial statements not included in this
prospectus, which in our opinion include all adjustments, consisting unless
otherwise disclosed of only normal recurring adjustments necessary for a fair
presentation of the results for such periods. The consolidated statement of
income and cash flow data for the nine months ended September 30, 1997 and 1998
and the consolidated balance sheet data as of September 30, 1998 are derived
from, and should be read in conjunction with, the unaudited consolidated
financial statements included elsewhere in this prospectus, 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. Results for the nine months
ended September 30, 1998 are not necessarily indicative of results that may be
expected for the entire year. See "Risk Factors--Risk Factors Relating to
Separating Our Company from General Motors--Our Historical Financial Information
May Not Be Representative of Our Results As a Separate Company." You should also
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.
32
<PAGE> 37
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................. $29,327 $31,044 $31,661 $31,032 $31,447 $23,368 $20,679
Operating expenses:
Cost of sales, excluding items
listed below..................... 25,754 27,081 27,384 27,471 27,710 20,507 19,220
Selling, general and
administrative................... 1,033 1,157 1,366 1,445 1,415 1,011 1,012
Depreciation and amortization....... 777 722 773 843 1,970 621 731
------- ------- ------- ------- ------- ------- -------
Operating income (loss)............... 1,763 2,084 2,138 1,273 352 1,229 (284)
Interest expense...................... (384) (310) (293) (276) (287) (206) (199)
Other (loss) income, net.............. (124) 103 101 115 194 65 124
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes..... 1,255 1,877 1,946 1,112 259 1,088 (359)
Income taxes (tax benefit)............ 307 644 639 259 44 352 (178)
------- ------- ------- ------- ------- ------- -------
Income (loss) before cumulative effect
of change in accounting principle... 948 1,233 1,307 853 215 736 (181)
Cumulative effect of change in
accounting principle, net of tax.... -- (258) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... $ 948 $ 975 $ 1,307 $ 853 $ 215 $ 736 $ (181)
======= ======= ======= ======= ======= ======= =======
Basic and diluted earnings (loss) per
share................................. $ 2.04 $ 2.10 $ 2.81 $ 1.83 $ 0.46 $ 1.58 $ (0.39)
======= ======= ======= ======= ======= ======= =======
STATEMENT OF CASH FLOWS DATA:
Cash provided by (used in) operating
activities.......................... n/a n/a $ 1,370 $ 2,701 $ 2,918 $ 1,812 $ (51)
Cash used in investing activities..... n/a n/a (1,141) (995) (1,320) (860) (699)
Cash (used in) provided by financing
activities.......................... n/a n/a (263) (1,686) (1,549) (903) 741
OTHER FINANCIAL DATA:
EBITDA................................ $ 2,378 $ 2,603 2,959 2,182 2,459 1,877 530
</TABLE>
<TABLE>
<CAPTION>
AT
AT DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $14,803 $14,494 $15,635 $15,390 $15,026 $15,863 $14,930
Total debt............................ 3,500 3,500 3,500 3,500 3,500 3,500 3,500
Equity (deficit)...................... (476) 120 1,354 922 (413) 816 (39)
</TABLE>
We adopted 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 cumulative effect of the change in accounting
principle was $2.65 per share. The cumulative effect of the change in accounting
principle was $0.55 per share. For information on special items impacting 1996
through 1998 operating results, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Special
Items and Work Stoppages."
"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.
33
<PAGE> 38
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements of
Delphi were derived from the application of pro forma adjustments to our
historical consolidated financial statements and give effect to the Offering and
the terms of the Separation Agreement, exclusive of terms relating to the
transfer of the assets and liabilities to Delphi, as such terms were considered
in preparing the historical consolidated balance sheets. The unaudited pro forma
condensed consolidated statements of income data for the year ended December 31,
1997 and for the nine months ended September 30, 1998 have been prepared as if
our separation from GM had been completed and the Offering had occurred at the
beginning of the earliest pro forma period presented. The unaudited pro forma
condensed consolidated balance sheet data as of September 30, 1998 have been
prepared as if our separation from GM had been completed and the Offering had
occurred as of September 30, 1998.
The unaudited pro forma condensed consolidated financial statements 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 audited and unaudited consolidated financial statements and notes thereto
included elsewhere in this prospectus.
The unaudited pro forma condensed consolidated balance sheet data are not
necessarily indicative of what our financial position would have been had the
separation of our business from GM been completed and had the Offering occurred
on September 30, 1998. The unaudited pro forma condensed consolidated statements
of income data are not necessarily indicative of what our results of operations
would have been had the separation of our business from GM been completed and
had the Offering occurred at the beginning of the earliest pro forma period
presented. In addition, our results for the nine months ended September 30, 1998
are not necessarily indicative of results that may be expected for the entire
year.
The summary pro forma condensed consolidated financial data are derived
from the application of pro forma adjustments related to the Offering and the
terms of the Separation Agreement. The unaudited pro forma condensed
consolidated balance sheet data give effect to:
- the Offering;
- a change in GM's intracompany accounts receivable payment terms; and
- the settlement of certain GM intracompany accounts receivable and the
intracompany note payable.
The unaudited pro forma condensed consolidated statement of income data give
effect to:
- the Offering;
- decreased employee benefit costs due to GM's retention of certain benefit
obligations; and
- certain incremental costs associated with operating Delphi as a
stand-alone publicly traded company.
34
<PAGE> 39
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME DATA
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales......................................... $31,447 -- $31,447
Operating expenses:
Cost of sales, excluding items listed below..... 27,710 $(463)(1) 27,247
Selling, general and administrative............. 1,415 (19)(1)
147(2) 1,543
Depreciation and amortization................... 1,970 -- 1,970
------- ----- -------
Total operating expenses..................... 31,095 (335) 30,760
------- ----- -------
Operating income.................................. 352 335 687
Interest expense.................................. (287)(3) -- (287)
Other income, net................................. 194 -- 194
------- ----- -------
Income before income taxes........................ 259 335 594
Income taxes...................................... 44 127(4) 171
------- ----- -------
Net income........................................ $ 215 $ 208 $ 423
======= ===== =======
Basic and diluted earnings per share
Historical--based on 465,000,000 shares
outstanding.................................. $ 0.46
=======
Pro forma--based on 565,000,000 shares
outstanding.................................. $ 0.75(5)
=======
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales......................................... $20,679 -- $20,679
Operating expenses:
Cost of sales, excluding items listed below..... 19,220 $ (186)(1) 19,034
Selling, general and administrative............. 1,012 (8)(1)
111(2) 1,115
Depreciation and amortization................... 731 -- 731
------- ------ -------
Total operating expenses..................... 20,963 (83) 20,880
------- ------ -------
Operating loss.................................... (284) 83 (201)
Interest expense.................................. (199)(3) -- (199)
Other income, net................................. 124 -- 124
------- ------ -------
Loss before income taxes.......................... (359) 83 (276)
Income tax benefit................................ (178) 32(4) (146)
------- ------ -------
Net loss.......................................... $ (181) $ 51 $ (130)
======= ====== =======
Basic and diluted loss per share
Historical--based on 465,000,000 shares
outstanding.................................. $ (0.39)
=======
Pro forma--based on 565,000,000 shares
outstanding.................................. $ (0.23)(5)
=======
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
35
<PAGE> 40
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DATA
AS OF SEPTEMBER 30, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and marketable securities...................... $ 1,000 $ 1,573(6)
(2,100)(7)
3,100(8)
(1,600)(9) $ 1,973
Accounts receivable, net:
General Motors and affiliates.................... 1,962 2,100(7)
(1,600)(8)
1,600(9) 4,062
Other customers.................................. 1,288 -- 1,288
Inventories, net.................................... 1,807 -- 1,807
Deferred income taxes............................... 206 -- 206
Prepaid expenses and other assets................... 96 -- 96
------- ------- -------
Total current assets............................. 6,359 3,073 9,432
Property, net......................................... 4,878 -- 4,878
Deferred income taxes................................. 2,552 -- 2,552
Other assets.......................................... 1,141 -- 1,141
------- ------- -------
Total assets.......................................... $14,930 $ 3,073 $18,003
======= ======= =======
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term
debt............................................. $ 206 $ -- $ 206
Accounts payable:
General Motors and affiliates.................... 91 -- 91
Other suppliers.................................. 1,977 -- 1,977
Accrued liabilities................................. 1,557 -- 1,557
------- ------- -------
Total current liabilities........................ 3,831 -- 3,831
Long-term debt........................................ 3,294 (3,100)(8)
3,100(8) 3,294
Pension benefits...................................... 1,897 -- 1,897
Postretirement benefits other than pensions........... 4,523 -- 4,523
Other liabilities..................................... 1,424 -- 1,424
------- ------- -------
Total liabilities................................ 14,969 -- 14,969
Equity (deficit):
Common stock........................................ -- 1(6) 1
Additional paid-in capital.......................... -- 1,572(6)
1,498(10) 3,070
General Motors' net investment...................... (2) 1,500(8)
(1,498)(10) --
Accumulated translation adjustments................. (37) -- (37)
------- ------- -------
Total equity (deficit)........................... (39) 3,073 3,034
------- ------- -------
Total liabilities and equity (deficit)................ $14,930 $ 3,073 $18,003
======= ======= =======
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
36
<PAGE> 41
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma adjustments were made to reflect the terms of the
Separation Agreement and the Offering:
(1) As set forth under "Arrangements Between Delphi and General
Motors--Employee Matters," Delphi and General Motors have entered into
agreements regarding certain employee benefit obligations. The pro forma
adjustments for the year ended December 31, 1997 and the nine months ended
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN MILLIONS)
<S> <C> <C>
Pension related costs.......................... $ 84 $ 158
Postretirement benefits other than pensions.... (569) (357)
Other employee benefits........................ 3 5
----- -----
Total........................................ $(482) $(194)
===== =====
Portion attributable to cost of sales.......... $(463) $(186)
===== =====
Portion attributable to selling, general and
administrative............................... $ (19) $ (8)
===== =====
</TABLE>
(2) Reflects the estimated incremental selling, general and administrative
costs associated with operating Delphi as a stand-alone publicly traded
company. The pro forma adjustments for the year ended December 31, 1997 and
the nine months ended September 30, 1998 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN MILLIONS)
<S> <C> <C>
Incremental insurance and risk
management......................... $ 34 $ 26
Incremental corporate costs*......... 48 36
Taxes other than income.............. 50 38
Other................................ 15 11
---- ----
Total.............................. $147 $111
==== ====
</TABLE>
* Incremental corporate costs include additional personnel and systems costs
that will be required to operate as a stand-alone entity, and reflect
transitional service arrangements with General Motors at terms provided in
the Separation Agreement. Other costs include certain sales tax expenses
associated with separation.
(3) Historical interest expense was calculated using an estimated blend of
short-term and long-term weighted-average interest rates commensurate with
the anticipated overall credit risk of Delphi as a stand-alone entity. See
Note 1 to our audited consolidated financial statements included elsewhere
in this prospectus for additional information. A 1/8% change in interest
rates would have an impact of about $4 million and $3 million on historical
interest expense for the year ended December 31, 1997 and the nine months
ended September 30, 1998, respectively.
(4) Income taxes were determined in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes." Once our company is a stand-alone
entity and is no longer included in GM's
37
<PAGE> 42
consolidated income tax return, we will no longer benefit from GM's consolidated
income tax environment. As a result, we expect our effective income tax rates in
future periods generally to be higher than our 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%.
(5) Reflects the sale of 100,000,000 shares of common stock in the Offering. It
does not include up to 15,000,000 shares of common stock which the U.S.
underwriters have the option to purchase solely to cover over-allotments.
If the U.S. underwriters exercise their over-allotment option in full, the
pro forma earnings per share for the year ended December 31, 1997 would be
$0.73 and the pro forma loss per share for the nine months ended September
30, 1998 would be $0.22.
(6) Reflects the sale of 100,000,000 shares of common stock in the Offering
assuming an initial public offering price of $16.50 per share. As set forth
under "Use of Proceeds," Delphi expects to use the proceeds of the Offering
for general corporate purposes, including working capital requirements
which have been impacted by the change in General Motors accounts
receivable payment terms described in note (7) below and the temporary
pay-down of amounts borrowed under Delphi's revolving credit facilities.
(7) Reflects the change in payment terms for intracompany accounts receivable
from General Motors in accordance with the terms of the Separation
Agreement. As set forth under "Arrangements Between Delphi and General
Motors--Supply Agreement--Payment Terms," payment terms, which generally
called for payment in the month following shipment by Delphi, have been
modified to require payment by General Motors on the second day of the
second month following shipment by Delphi.
(8) Reflects the settlement of certain intracompany accounts receivable from GM
with the intracompany note payable to GM. Immediately prior to the
transactions contemplated by the Separation Agreement, certain intracompany
accounts receivable from GM estimated at $1.6 billion will be 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. We
expect that during the first half of 1999, Delphi will finance its
operations through a combination of $3.1 billion in borrowings under
revolving credit facilities, commercial paper, the issuance of long-term
debt, structured financing and other short-term financing measures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
(9) Reflects the required adjustment, subsequent to the settlement of
intracompany accounts receivable described in note (8) above, to adjust
cash and accounts receivable balances to levels that are indicative of
amounts associated with on-going operations.
(10) Reflects the adjustment to equity to reclassify GM's net investment as
additional paid-in capital.
38
<PAGE> 43
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 Automotive Systems business sector 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 Offering. The historical consolidated balance sheets
reflect the assets and liabilities that are expected to be transferred to our
company in accordance with the transactions contemplated by the Separation
Agreement. 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 audited consolidated financial statements included elsewhere in this
prospectus for a summary of our organization and significant factors reflected
in our historical financial statements. See "--Results of Operations" and
"--Liquidity and Capital Resources" for details on changes in our operations and
funding that are expected to result in connection with our separation from GM
and the Offering.
SEPARATION FROM GENERAL MOTORS
General Motors and Delphi, and, in some cases, their respective affiliates,
have entered into or will enter into, prior to the completion of the Offering,
certain agreements providing for the separation of our business from General
Motors and the Distribution, including the Separation Agreement. For more
information regarding the terms of our separation from GM, including the Supply
Agreement between the companies, and the Distribution, see "Delphi and Its
Separation from General Motors--Separation from General Motors" and
"Arrangements Between Delphi and General Motors."
NET SALES
Our consolidated net sales increased from $29.3 billion in 1993 to $31.4
billion in 1997, despite the divestiture of various businesses having annual
sales of about $6 billion. In addition, annual net sales for recent periods have
been unfavorably impacted by increasing price pressures from our VM customers as
well as work stoppages. Price reductions, as a percentage of net sales, were
3.0%, 2.3% and 1.6% for the years ended December 31, 1996 and 1997 and the nine
months ended September 30, 1998, respectively, reflecting an overall decline in
price concessions. We believe that price reductions in 1998 are more indicative
of future price pressures from VMs, although we cannot assure you in this
regard. See "Risk Factors--Risk Factors Relating to Our Business--Our Gross
Margins Will Be Adversely Affected if We Are Unable to Offset All of the Cost
Reductions We Must Provide to Our Customers." Although net sales for all of our
product sectors were impacted by price reductions, the percentage impact was the
largest for our Electronics & Mobile Communication product sector, reflecting
the overall decline in prices throughout the electronics industry. Our net sales
can be impacted by a variety of factors, including divestitures, price
pressures, actual volume and timing of vehicle production and the mix of options
on vehicles that are produced. Within this "Overview" section, we have included
certain information that breaks down our consolidated net sales by product
sector and by principal geographic region. For additional information on our
consolidated net sales and such break downs, see "--Results of Operations."
39
<PAGE> 44
Our consolidated net sales by product sector and in total were as follows
for each respective period:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
PRODUCT SECTOR 1995 1996 1997 1997 1998
-------------- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Electronics & Mobile Communication............. $ 5,479 $ 5,315 $ 5,539 $ 4,096 $ 3,412
Safety, Thermal & Electrical Architecture...... 13,433 12,942 12,728 9,424 8,366
Dynamics & Propulsion.......................... 13,142 13,293 13,733 10,208 9,222
Eliminations................................... (393) (518) (553) (360) (321)
------- ------- ------- ------- -------
Consolidated net sales....................... $31,661 $31,032 $31,447 $23,368 $20,679
======= ======= ======= ======= =======
</TABLE>
Our net sales by product sector include certain inter-sector sales, which
we eliminate for purposes of determining our total net sales. The following
table shows the approximate composition by product sector of our net sales for
the periods presented, after adjusting to account for these eliminations:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ----------------
PRODUCT SECTOR 1995 1996 1997 1997 1998
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Electronics & Mobile Communication................ 16.5% 16.2% 16.5% 16.6% 15.6%
Safety, Thermal & Electrical Architecture......... 42.0 41.1 39.9 39.7 39.8
Dynamics & Propulsion............................. 41.5 42.7 43.6 43.7 44.6
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Net Sales by Principal Geographic Region. We have established an expansive
global presence, with sales in every major region of the world. Based on the
location of the operations producing the sale, our consolidated net sales by
principal geographic region and in total were as follows for the years ended
December 31, 1995, 1996 and 1997:
CONSOLIDATED NET SALES BY GEOGRAPHIC REGION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
GEOGRAPHIC REGION $ % $ % $ %
----------------- - - - - - -
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
United States............................. $23,387 73.9% $22,139 71.3% $21,925 69.7%
Europe.................................... 4,240 13.4 4,655 15.0 4,220 13.4
Mexico.................................... 2,272 7.2 2,714 8.8 3,448 11.0
Canada.................................... 1,211 3.8 719 2.3 806 2.6
South America............................. 238 0.7 442 1.4 662 2.1
Other..................................... 313 1.0 363 1.2 386 1.2
------- ----- ------- ----- ------- -----
Consolidated net sales............. $31,661 100.0% $31,032 100.0% $31,447 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
40
<PAGE> 45
OPERATING COSTS
Our operating costs include structural costs and material costs. Structural
costs generally consist of our fixed costs, including selling, general and
administrative and other commercial costs, engineering costs and labor and other
manufacturing costs. Generally, our structural costs are not impacted by
incremental volume changes in the short-run; however, we continue to focus on
long-term reductions in our overall structural costs and increasing our
manufacturing efficiency and flexibility. Material costs generally reflect
direct materials used in producing our products. Such costs generally vary based
on the volume of production for any given period.
Since 1991, when GM organized its various component operations into a
separate business group, we have been evolving from a fully captive, yet
separately managed, collection of component operations into an independently
managed supplier of components, systems and modules to GM and all of the other
major VMs. During this transitional period, our financial results have at times
been adversely affected by a variety of factors, such as significant price
reductions, labor disruptions at both GM and Delphi and certain unprofitable
manufacturing operations. See "--Results of Operations--Special Items and Work
Stoppages." In response to these and other factors, we have developed, and are
implementing, a number of initiatives designed to improve our operating
performance. See "Business of Delphi--Strategy--Improve Operating Performance"
for a description of these initiatives.
Although we have made substantial progress in implementing these
initiatives, we believe that in many cases the full impact of these initiatives
has not yet been realized. We believe that as we fully implement these
initiatives throughout our operations and complete our separation from GM, we
will be able to realize additional benefits. The realization of these benefits
is important to our ability to realize our business objectives. See "Risk
Factors--Risk Factors Relating to Our Business--We May Be Unable to Realize Our
Business Strategy of Improving Our Operating Performance."
RECENT FINANCIAL RESULTS
Our consolidated financial results for the three months and years ended
December 31, 1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------- -----------------
1997 1998 1997 1998
---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales................................ $8,079 $7,800 $31,447 $28,479
Operating (loss) income.................. (877) 63 352 (221)
Net (loss) income........................ (521) 88 215 (93)
Basic and diluted (loss) earnings per
share.................................. (1.12) 0.19 0.46 (0.20)
</TABLE>
Net Sales. Net sales for the fourth quarter of 1998 decreased $279 million
compared to the fourth quarter of 1997. The decrease reflects lost volume
associated with the divestiture of our seating, lighting and coil spring
operations during the third quarter of 1998. The sales volume lost from divested
businesses was partially offset by the impact of improved production volumes for
GM-North America and non-GM customers during the fourth quarter of 1998. In
addition, our sales continue to be impacted by price reductions which amounted
to about $125 million, or 1.6% of net sales, in the fourth quarter of 1998. Net
sales for the year ended December 31, 1998 decreased $3.0 billion compared to
the year ended December 31, 1997. The decrease reflects unfavorable volumes
associated with work stoppages, divested businesses and economic conditions in
Asia and Latin America as well as the impact of price reductions during 1998.
Operating (Loss) Income. Operating income was $63 million for the fourth
quarter of 1998 compared to an operating loss of $877 million for the fourth
quarter of 1997. Our operating loss for the year ended
41
<PAGE> 46
December 31, 1998 was $221 million compared to operating income of $352 million
for the year ended December 31, 1997. As part of our ongoing evaluation of the
competitiveness of our business, we recorded a 1998 fourth quarter charge of
$310 million, or $192 million after-tax. The charge primarily related to
underperforming assets, voluntary early retirements and the closure of certain
unprofitable joint ventures. For additional information on other special items
and work stoppages which impacted our operating results in prior periods, see
"--Results of Operations--Special Items and Work Stoppages."
Operating income, excluding charges associated with the ongoing evaluation
of the competitiveness of our business, was $485 million and $373 million for
the fourth quarters of 1997 and 1998, respectively. Our 1998 fourth quarter
results were unfavorably impacted by continuing worldwide price pressures, the
economic downturn in Latin America and unfavorable design costs and product mix.
These unfavorable items were significantly offset by the impact of our
aggressive cost reduction efforts. Operating income, excluding the impact of
special items and work stoppages, was $1.9 billion and $1.2 billion for the
years ended December 31, 1997 and 1998, respectively. The reduction in operating
income for the 1998 year, excluding the impact of special items and work
stoppages, reflects lower volume and the unfavorable impact of economic
conditions in Asia and Latin America. For the 1998 year, material and
manufacturing cost savings exceeded the impact of price reductions and
unrecovered design costs and partially offset the unfavorable impact of lower
volume.
Net (Loss) Income. Our net income totaled $88 million for the fourth
quarter of 1998 compared to a net loss of $521 million for the comparable period
of 1997. Excluding charges associated with the ongoing evaluation of the
competitiveness of our business and other special items, our income was $280
million and $325 million for the fourth quarter of 1998 and 1997, respectively.
Our net loss was $93 million for the year ended December 31, 1998 compared to
net income of $215 million in 1997. Excluding the impact of special items and
work stoppages, our income was $820 million and $1.17 billion for the years
ended December 31, 1998 and 1997, respectively.
Net income, as reported, 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 and excluding charges associated
with the ongoing evaluation of the competitiveness of our business and other
special items, our income would have been $298 million for the fourth quarter of
1998 compared to $377 million for the fourth quarter of 1997. Our income,
excluding the impact of special items and work stoppages, for the years ended
December 31, 1997 and 1998 would have been $1.38 billion and $889 million,
respectively, after giving effect to the terms of the Separation Agreement. For
additional information on our pro forma results of operations, see "Unaudited
Pro Forma Condensed Consolidated Financial Statements" and "--Results of
Operations--Pro forma 1997 versus pro forma nine months ended September 30,
1998."
Our consolidated financial results for the three months ended December 31,
1997 and 1998 and the year ended December 31, 1998 are unaudited and, in the
opinion of management, include all adjustments, consisting unless otherwise
disclosed of only normal recurring items which are necessary for a fair
presentation. The results for interim periods are not necessarily indicative of
results which may be expected for any other interim period or for the full year.
42
<PAGE> 47
RESULTS OF OPERATIONS
To facilitate analysis, the following table sets forth consolidated
statement of income data as a percentage of net sales for each of the periods
presented:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET SALES.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales, excluding items listed
below................................. 86.5 88.5 88.1 87.8 92.9
Selling, general and administrative...... 4.3 4.7 4.5 4.3 4.9
Depreciation and amortization............ 2.4 2.7 6.3 2.7 3.5
----- ----- ----- ----- -----
OPERATING INCOME (LOSS).................... 6.8 4.1 1.1 5.2 (1.3)
Interest expense........................... (0.9) (0.9) (0.9) (0.9) (1.0)
Other income, net.......................... 0.3 0.4 0.6 0.3 0.6
----- ----- ----- ----- -----
Income (loss) before income taxes.......... 6.2 3.6 0.8 4.6 (1.7)
Income taxes (tax benefit)................. 2.0 0.8 0.1 1.5 (0.8)
----- ----- ----- ----- -----
NET INCOME (LOSS).......................... 4.2% 2.8% 0.7% 3.1% (0.9)%
===== ===== ===== ===== =====
</TABLE>
In order to more fully understand the fluctuations in the consolidated
statement of income data, you should consider the impact of special items and
work stoppages as discussed below.
SPECIAL ITEMS AND WORK STOPPAGES
The global automotive parts industry has become increasingly competitive
and is currently undergoing significant restructuring and consolidation
activities. All of the major industry competitors are continuing to increase
their focus on efficiency and cost improvements, while facing increasing price
pressures from VM customers. As a result, we initiated a study in 1997 to
evaluate the long-term competitiveness of all facets of our businesses (the
"Competitiveness Study"). This study was performed in conjunction with the
business planning cycle and was substantially completed in December 1997.
Additional information regarding the Competitiveness Study is included below and
in Note 3 to our audited consolidated financial statements included elsewhere in
this prospectus.
Our operating results for the periods presented were also impacted by
special items which management views as non-recurring in nature. Such special
items included divestiture and plant closing charges as well as the impact of
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 various factors that impacted our
operating results during the periods presented:
1998
- During the third quarter of 1998, we recorded an operating 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.
- Work stoppages at GM and Delphi 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
43
<PAGE> 48
second and third quarters of 1998, respectively, after considering partial
recovery of lost production in the third quarter.
1997
- During the first quarter of 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.
- 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, before considering partial recovery of lost production
in the third quarter of 1997. 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.
- 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.
- During the fourth quarter of 1997, we recorded a $1.4 billion charge, or
$870 million after-tax, relating to the Competitiveness Study. Overall,
the charge had the effect of increasing 1997 fourth quarter and full year
cost of sales and depreciation and amortization by $262 million and $1.1
billion, respectively.
1996
- During the fourth quarter of 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 1996 cost of sales and depreciation and
amortization by $167 million and $80 million, respectively.
- 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. The unfavorable impact in the fourth quarter of
1996 totaled $252 million, or $156 million after-tax.
- 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.
- Other special charges totaled $50 million, or $31 million after-tax, of
which $18 million, or $11 million after-tax, was recorded in the fourth
quarter. These costs primarily reflect the sale of certain business
investments, none of which were material on an individual basis.
1995
- There were no significant special items or work stoppages during 1995.
Ongoing Evaluation. We periodically evaluate the carrying value of
long-lived assets to be held and used, when events and circumstances warrant
such review. This evaluation and review is generally performed in conjunction
with the annual business planning cycle. In this regard, the 1998 evaluation and
review, which was completed prior to December 31, 1998, resulted in a fourth
quarter 1998 charge of about $310 million, or $192 million after-tax. The charge
impacted our product sectors on a pre-tax basis as follows: Electronics & Mobile
Communication--$10 million; Safety, Thermal & Electrical Architecture--$66
million; and Dynamics & Propulsion--$234 million. See "--Overview--Recent
Financial Results" for further discussion of the charge. We will continue to
monitor the competitiveness of all aspects of our business. Accordingly,
44
<PAGE> 49
future operating results could be impacted by the sale or disposal of product
lines or production facilities as we execute our portfolio management and
"fix/sell/close" processes.
NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS ENDED SEPTEMBER 30,
1997
Net Sales. Consolidated net sales and changes in net sales by product
sector and in total for the nine months ended September 30, 1997 and 1998 were
as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, CHANGE
-------------------- ------------------
PRODUCT SECTOR 1997 1998 $ %
-------------- ---- ---- - -
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Electronics & Mobile Communication.... $ 4,096 $ 3,412 $ (684) (16.7)%
Safety, Thermal & Electrical
Architecture....................... 9,424 8,366 (1,058) (11.2)
Dynamics & Propulsion................. 10,208 9,222 (986) (9.7)
Eliminations.......................... (360) (321) 39 n/a
------- ------- ------- -----
Consolidated net sales............. $23,368 $20,679 $(2,689) (11.5)%
======= ======= ======= =====
</TABLE>
The decrease in consolidated net sales for each product sector primarily
relates to lower GM-North America vehicle production due to work stoppages at
certain GM and Delphi plants, after considering partial recovery of lost
production in subsequent periods, as well as to lower international production
due to the unfavorable impact of economic conditions in Asia and Latin America.
In addition, our net sales continue to be impacted by pricing pressures as VMs
reduce their cost structures through competitive sourcing initiatives and global
vehicle platforms. Specifically, the decrease in consolidated net sales for each
operating sector during the first nine months of 1998 reflects the impact of
price reductions required by GM and other customers amounting to about $340
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 VMs, although we cannot assure you in this regard.
Overall, price reductions had the largest impact on our Electronics & Mobile
Communication product sector, 3.0% 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 GM volumes and price reductions was partially offset
by additional sales to customers other than GM, which increased about $420
million, or 10.4%, compared to the first nine months of 1997.
Cost of Sales. Cost of sales represented 92.9% of consolidated net sales
for the first nine months of 1998 compared to 87.8% for the comparable period of
1997. The increase reflects the impact of special items and work stoppages along
with other factors which are described in greater detail in the operating income
(loss) discussion below.
Selling, General and Administrative and Depreciation and
Amortization. Selling, general and administrative expenses remained constant
during the first nine months of 1997 and 1998 while depreciation and
amortization increased by $62 million, excluding a $48 million charge related to
1998 divestitures. The increase in depreciation and amortization reflected
incremental depreciation associated with a larger fixed asset base.
Operating Income (Loss). Our operating loss was $284 million for the first
nine months of 1998 compared to operating income of $1.2 billion for the first
nine months of 1997. Excluding the impact of special items and work stoppages in
the respective nine month periods, operating income totaled $1.0 billion and
$1.5 billion for the nine months ended September 30, 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.
45
<PAGE> 50
Operating income by product sector and in total, excluding the impact of
special items and work stoppages, was as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
PRODUCT SECTOR 1997 1998
-------------- ---- ----
(IN MILLIONS)
<S> <C> <C>
Electronics & Mobile Communication......................... $ 436 $ 359
Safety, Thermal & Electrical Architecture.................. 753 641
Dynamics & Propulsion...................................... 386 298
Other...................................................... (118) (249)
------ ------
Total operating income excluding the impact of special
items and work stoppages.............................. $1,457 $1,049
====== ======
</TABLE>
The reduction in operating income, excluding the impact of special items
and work stoppages, primarily reflects lower vehicle volumes due to the timing
of production for certain of GM's new product introductions and economic
conditions in Asia and Latin America. The impact of lower customer volumes was
partially offset by cost savings as we have implemented several strategies to
reduce our cost structure and maintain our desired level of profitability. Each
of our product sectors achieved material and manufacturing cost savings which
totaled about $790 million during the first nine months of 1998, exceeding price
reductions and unrecovered design change costs by $175 million. Unrecovered
design change costs had a total unfavorable impact on operating income of about
$275 million, impacting all of our sectors. Such costs represent the cost of
required product design changes to meet changing customer requirements.
Sometimes these costs are not recoverable through changes in prices. Cost
savings achieved primarily reflect the results of our structural cost reduction
programs including continued implementation of the Delphi Manufacturing System
and global sourcing initiatives. See "--Overview--Operating Costs" for further
descriptions of these and our other initiatives.
Interest Expense. Interest expense totaled $199 million and $206 million
for the first nine months of 1998 and 1997, respectively. The decrease in
interest expense primarily reflects lower interest rates during the first nine
months of 1998 in comparison to 1997 rates.
Other Income, Net. Other income, net totaled $124 million for the first
nine months of 1998, compared to $65 million in the first nine months of 1997.
The increase is primarily due to gains on sales of assets during the first nine
months of 1998.
Taxes. The effective income tax (tax benefit) rate for the first nine
months of 1998 was (49.6%) compared with 32.4% for the first nine months of
1997. The effective tax rates for both 1998 and 1997 reflect benefits related to
research and experimentation credits. During the first nine months of 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 Income (Loss). Our net loss totaled $181 million for the first nine
months of 1998 compared to net income of $736 million for the nine months ended
September 30, 1997. Excluding special items and work stoppages, net income was
$650 million and $842 million for the nine months ended September 30, 1998 and
1997, respectively, reflecting the impact of items discussed above.
46
<PAGE> 51
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, 1996 and 1997 were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, CHANGE
------------------ -------------
PRODUCT SECTOR 1996 1997 $ %
-------------- ---- ---- - -
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Electronics & Mobile Communication............. $ 5,315 $ 5,539 $ 224 4.2%
Safety, Thermal & Electrical Architecture...... 12,942 12,728 (214) (1.7)
Dynamics & Propulsion.......................... 13,293 13,733 440 3.3
Eliminations................................... (518) (553) (35) n/a
------- ------- ----- ----
Consolidated net sales....................... $31,032 $31,447 $ 415 1.3%
======= ======= ===== ====
</TABLE>
The increase in consolidated net sales during 1997 occurred despite the
impact of the 1996 sale of four plants by our Safety, Thermal & Electrical
Architecture product sector, which had combined historical annual net sales of
about $1.0 billion. Price reductions from 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 reflect the
continuing pressures from VMs to reduce component and system costs. Price
reductions, as a percentage of sales, during 1997 were generally higher than we
anticipate in future years, although we cannot assure you in this regard. Price
reductions for our Electronics & Mobile Communication product sector, 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. The remaining change in net sales for each product sector
primarily 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.
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 the lower impact of work stoppages 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.
47
<PAGE> 52
Operating income by product sector and in total, excluding the impact of
special items and work stoppages, was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
PRODUCT SECTOR 1996 1997
-------------- ---- ----
(IN MILLIONS)
<S> <C> <C>
Electronics & Mobile Communication.......................... $ 810 $ 612
Safety, Thermal & Electrical Architecture................... 955 1,060
Dynamics & Propulsion....................................... 321 400
Other....................................................... (27) (130)
------ ------
Total operating income excluding the impact of special
items and work stoppages............................... $2,059 $1,942
====== ======
</TABLE>
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 during 1997;
however, price reductions and unrecovered design change costs, which together
totaled about $960 million, 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.
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.
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<PAGE> 53
1996 VERSUS 1995
Net Sales. Consolidated net sales and changes in net sales by product
sector and in total for the years ended December 31, 1995 and 1996 were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, CHANGE
----------------- ------------
PRODUCT SECTOR 1995 1996 $ %
-------------- ---- ---- - -
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Electronics & Mobile Communication............ $ 5,479 $ 5,315 $(164) (3.0)%
Safety, Thermal & Electrical Architecture..... 13,433 12,942 (491) (3.7)
Dynamics & Propulsion......................... 13,142 13,293 151 1.1
Eliminations.................................. (393) (518) (125) n/a
------- ------- ----- ----
Consolidated net sales...................... $31,661 $31,032 $(629) (2.0)%
======= ======= ===== ====
</TABLE>
The decrease in consolidated net sales during 1996 reflects the unfavorable
impact of price reductions of about $920 million, or 3.0% of net sales. Price
reductions reflected aggressive efforts of VMs to reduce their vehicle costs.
Such price pressures were most significant for our Electronics & Mobile
Communication product sector. Overall, price reductions as a percentage of net
sales during 1996 were generally higher than those anticipated in future years,
although we cannot assure you in this regard. Net sales for each product sector
were also negatively impacted by lower GM-North America vehicle production due
to work stoppages after considering partial recovery of lost production in
subsequent periods. The impact of price reductions and work stoppages was
partially offset by a $240 million increase in aftermarket sales and greater
penetration of non-GM customers during 1996.
Cost of Sales. Cost of sales, as a percentage of consolidated net sales,
was 88.5% in 1996 compared to 86.5% in 1995. The increase reflects the impact of
special items and work stoppages in 1996 as well as other factors which are
discussed 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 1995 and 1996, while depreciation and amortization, excluding the impact
of divestiture-related charges, declined slightly.
Operating Income. Operating income was $1.3 billion in 1996 compared to
$2.1 billion in 1995. Excluding the impact of special items and work stoppages,
operating income totaled $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 as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
PRODUCT SECTOR 1995 1996
-------------- ---- ----
(IN MILLIONS)
<S> <C> <C>
Electronics & Mobile Communication.......................... $ 871 $ 810
Safety, Thermal & Electrical Architecture................... 924 955
Dynamics & Propulsion....................................... 341 321
Other....................................................... 2 (27)
------ ------
Total operating income excluding the impact of special
items and work stoppages............................... $2,138 $2,059
====== ======
</TABLE>
49
<PAGE> 54
Our cost reduction strategies allowed us to achieve total material and
manufacturing cost savings of about $545 million during 1996. Cost savings were
realized by all of our product sectors but were more than offset by the impact
of price reductions and unrecovered design change costs, which together totaled
$1.4 billion. Unrecovered design change costs had a total unfavorable impact of
about $440 million, primarily affecting our Dynamics & Propulsion product sector
during 1996. Offsetting these reductions, our Safety, Thermal & Electrical
Architecture and Dynamics & Propulsion product sectors realized improved volumes
through additional aftermarket sales and sales to non-GM customers during 1996.
Interest Expense. Interest expense totaled $276 million and $293 million in
1996 and 1995, respectively. The decrease in 1996 interest expense reflects
lower interest rates during the year.
Other Income, Net. Other income, net totaled $115 million in 1996 compared
with $101 million in 1995. The increase is primarily due to improved earnings
from and growth in the number of nonconsolidated affiliates.
Taxes. The effective income tax rate for 1996 was 23.3% compared with 32.8%
for 1995. The effective income tax rate for 1996 reflected overall foreign tax
rates that were lower than the U.S. statutory rate and the impact of research
and experimentation credits.
Net Income. Net income totaled $853 million in 1996 and $1.3 billion in
1995. Income, excluding the impact of special items and work stoppages, totaled
$1.4 billion in 1996 and reflected the items discussed above.
PRO FORMA 1997 VERSUS PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1998
Operating income, as reported, 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 would
have been $201 million for the first nine months of 1998 compared to operating
income of $687 million for the year ended December 31, 1997. Excluding the
impact of special items and work stoppages and after giving effect to the terms
of the Separation Agreement, operating income would have been $1.1 billion for
the first nine months of 1998 compared to $2.3 billion for the year ended
December 31, 1997.
Overall, the terms of the Separation Agreement would have a favorable
impact on operating income of $83 million and $335 million for the nine months
ended September 30, 1998 and the year ended December 31, 1997, respectively. We
expect operating income to be favorably impacted by the net effect of lower
employee benefit costs and higher other costs associated with operating Delphi
as a stand-alone company.
During 1998, the net pro forma impact of employee benefit costs declined
due to changes in pension expense. Pension expense decreased in 1998 due to
lower interest expense on the pension liability and higher returns on pension
assets. The obligations and related assets for retired employees will be
retained by GM; therefore, pro forma expense in 1998 does not reflect the full
impact of these favorable trends. See "Unaudited Pro Forma Condensed
Consolidated Financial Statements" for additional information.
QUARTERLY DATA
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. Our quarterly results were impacted by a
number of special factors, including items associated with competitiveness
initiatives such as divestitures and plant closings, and work stoppages. The
following table sets forth certain unaudited quarterly historical condensed
consolidated financial data for each of the eight quarters through the period
ended September 30, 1998. This unaudited quarterly information adjusts as
reported data to exclude the impact of special items and work stoppages. The
operating results for any quarter shown are not necessarily indicative of
results for any future period. See "--Special Items and Work Stoppages" and Note
18 to the audited consolidated financial statements included elsewhere in this
50
<PAGE> 55
prospectus. The quarterly data, excluding the impact of special items and work
stoppages, does not give effect to many significant changes that are expected to
result from our separation from GM.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1997 1997 1997 1997 1998 1998 1998
-------- --------- -------- --------- -------- --------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING INCOME (LOSS):
As reported..................... $(132) $497 $587 $145 $ (877) $334 $111 $(729)
Competitiveness Study........... -- -- -- -- 1,362 -- -- --
Trenton plant closing........... -- 80 -- -- -- -- -- --
Sale of facilities/businesses... 247 -- -- -- -- -- -- 430
Work stoppages.................. 252 -- 185 (37) -- -- 468 435
Retiree lump sum payments....... 86 -- -- -- -- -- -- --
----- ---- ---- ---- ------ ---- ---- -----
OPERATING INCOME EXCLUDING THE
IMPACT OF SPECIAL ITEMS AND WORK
STOPPAGES....................... $ 453 $577 $772 $108 $ 485 $334 $579 $ 136
===== ==== ==== ==== ====== ==== ==== =====
NET INCOME (LOSS):
As reported..................... $ (93) $287 $373 $ 76 $ (521) $236 $ 83 $(500)
Competitiveness Study........... -- -- -- -- 870 -- -- --
Trenton plant closing........... -- 50 -- -- -- -- -- --
Sale of facilities/businesses... 153 -- -- -- -- -- -- 271
Work stoppages.................. 156 -- 115 (23) -- -- 290 270
Retiree lump sum payments....... 53 -- -- -- -- -- -- --
Other special items............. 11 -- (36) -- (24) -- -- --
----- ---- ---- ---- ------ ---- ---- -----
INCOME EXCLUDING THE IMPACT OF
SPECIAL ITEMS AND WORK
STOPPAGES....................... $ 280 $337 $452 $ 53 $ 325 $236 $373 $ 41
===== ==== ==== ==== ====== ==== ==== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the Cash and Debt Management Agreement and the intracompany
note payable, our historical balance sheets reflect cash and marketable
securities of $1.0 billion and short-term and long-term debt capitalization of
$3.5 billion at September 30, 1998 and December 31, 1997 and 1996. 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 reflects the
portion of GM's outstanding debt that is specifically related to our operations.
Our net liquidity was $(2.5) billion at September 30, 1998 and December 31,
1997 and 1996. Our net liquidity consists of cash and marketable securities less
the total of short-term and long-term debt. The ratio of our total debt to our
total capital, which consists of total debt plus equity, was 101% at September
30, 1998 compared to 113% at December 31, 1997 and 79% at December 31, 1996.
Ratios greater than 100% reflect the impact of a net deficit in stockholder's
equity for certain periods presented. The ratio of total debt to total capital
increased during 1997, reflecting the lower level of equity that resulted from
the Competitiveness Study charge that was recorded in 1997. The Offering and
other related transactions result in a pro forma total debt to total capital
ratio of 53.6% at September 30, 1998. If the U.S. underwriters exercise their
over-allotment option in full, the pro forma total debt to total capital ratio
would decline to 51.7%.
LIQUIDITY PRIOR TO AND UPON OUR SEPARATION FROM GM AND THE OFFERING
The following table sets forth the changes in our net liquidity, certain of
which occurred immediately prior to or upon 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
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<PAGE> 56
Systems Corporation. Consequently, these transactions were executed by the
Delphi businesses, and not by Delphi Automotive Systems Corporation.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
-----------------------------------------
CASH AND
MARKETABLE SHORT- AND NET
SECURITIES LONG-TERM DEBT LIQUIDITY
---------- -------------- ---------
(IN BILLIONS)
<S> <C> <C> <C>
As reported......................................... $ 1.0 $ 3.5 $(2.5)
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 financing................. 3.1 3.1 --
Proceeds from the Offering.......................... 1.6 -- 1.6
----- ----- -----
$ 2.0 $ 3.5 $(1.5)
===== ===== =====
</TABLE>
Each of the above changes in our net liquidity is discussed in detail in
the sections that follow.
EXTENSION OF PAYMENT TERMS
In accordance with the Supply Agreement, which became effective on January
1, 1999, payment terms for intracompany accounts receivable from GM have been
modified such that payments are generally 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 twenty-fifth day of the month following the date a shipment is
received. The difference in the terms for accounts receivable and accounts
payable results in a monthly short-term cash flow gap. Delphi expects to finance
this short-term cash flow gap through short-term borrowings, as discussed below.
For more information about the change in payment terms, see "Arrangements
Between Delphi and General Motors--Supply Agreement--Payment Terms."
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 was 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 through draw downs of
up to $3.1 billion from the $5.0 billion third party revolving credit facilities
described below.
In January 1999, we entered into two financing agreements with a syndicate
of lenders providing for an aggregate of $5 billion in revolving credit
facilities. In general, we may borrow up to $5 billion under the facilities
through January 3, 2000, after which $1.5 billion will be available through
January 3, 2004. The amount we may borrow under the facilities will be reduced
to the extent the aggregate net cash proceeds from issuances of common stock by
Delphi and our subsidiaries, excluding issuances under our regular employee,
executive and director stock option plans, exceeds $1.5 billion. This includes
the net cash proceeds from this Offering. The amount we may borrow will also be
reduced to the extent of the net cash proceeds from 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
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<PAGE> 57
$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
of 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 the revolving credit facilities, see Note 8 to the audited
consolidated financial statements included elsewhere in this prospectus.
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 $5.0 billion revolving credit facilities would be reduced to $3.0 billion in
available funds, generally split between 364-day and five-year tranches.
The factors considered in determining the initial capitalization include
our company's prospective financing requirements, expected working capital and
capital expenditure requirements, desired credit rating and the need for
adequate debt capacity to pursue strategic initiatives. In reviewing these
factors, the capitalization and credit ratings of comparable companies in the
automotive components and systems industry were also considered.
After the Offering, General Motors will continue to own 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 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. See "Arrangements Between
Delphi and General Motors--IPO and Distribution Agreement."
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 that will be the case. In addition, we expect
cash flows from operations, funding obtained through the Offering, the
establishment of the revolving credit facilities and other short-term sources to
be sufficient to satisfy future working capital, capital expenditure, 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."
CASH FLOWS
Operating Activities. Cash flows used in operating activities during the
first nine months of 1998 totaled $51 million compared to cash flows provided by
operating activities of $1.8 billion for the same period in 1997. The decrease
in 1998 resulted from the impact of work stoppages and the related overall
decline in net income. In addition, operating cash flow in 1998 reflected cash
used for other postretirement benefits, as discussed below.
Net cash provided by operating activities was $2.9 billion for the year
ended December 31, 1997 compared to $2.7 billion in 1996 and $1.4 billion in
1995. 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 changes referenced above
primarily reflected an increased volume of activity, differences in the timing
of settlements and amounts accrued in connection with the Competitiveness Study.
The increase in net cash
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<PAGE> 58
provided by operating activities in 1996 resulted from a decrease in accounts
receivable and cash contributions to GM's worldwide pension funds. Cash pension
contributions for 1996 decreased due to the improved funding of GM's U.S. hourly
pension plan.
Operating cash flow for the first nine months of 1998 and for the full year
1997 reflected contributions to a Voluntary Employees' Beneficiary Association
("VEBA") trust. The contributions, which totaled $615 million in the first nine
months of 1998 and $925 million in the fourth quarter of 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 $699
million and $860 million for the nine months ended September 30, 1998 and 1997,
respectively, and $1.3 billion, $1.0 billion and $1.1 billion for the years
ended December 31, 1997, 1996 and 1995, respectively. Overall, cash flows used
in investing activities primarily relate to our capital expenditure program,
partially offset by proceeds from asset sales. Capital expenditures by product
sector and geographic region for the periods presented were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Electronics & Mobile Communication................. $ 265 $ 195 $ 122 $100 $130
Safety, Thermal & Electrical Architecture.......... 355 418 464 313 247
Dynamics & Propulsion.............................. 532 548 778 504 486
Other.............................................. 3 16 19 6 9
------ ------ ------ ---- ----
Total Capital Expenditures....................... $1,155 $1,177 $1,383 $923 $872
====== ====== ====== ==== ====
United States...................................... $ 773 $ 809 $ 930 $682 $555
Canada & Mexico.................................... 77 65 88 26 73
Other International................................ 305 303 365 215 244
------ ------ ------ ---- ----
Total Capital Expenditures....................... $1,155 $1,177 $1,383 $923 $872
====== ====== ====== ==== ====
</TABLE>
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.
Total capital expenditures were $872 million for the nine months ended
September 30, 1998 compared to $923 million for the same period in 1997. The
lower level of spending for the first nine months of 1998 resulted primarily
from differences in the timing of project spending for new product programs. As
discussed in further detail below, full year 1998 capital expenditures totaled
$1.4 billion. Total capital expenditures for the year ended December 31, 1997
were $1.4 billion compared to $1.2 billion in each of 1996 and 1995. The
increased spending for the year ended December 31, 1997 primarily resulted from
the start-up of several new product programs, increased penetration with non-GM
customers, and expansion into new market areas primarily outside the United
States.
The decrease in capital expenditures for our Electronics & Mobile
Communication product sector in 1997, as compared to 1996 and 1995, reflected a
reduction in tooling and the timing of spending on new product programs. For
example, the introduction of product designs to ensure customer compliance with
certain governmental regulations contributed to the higher level of spending in
1995 and 1996.
The higher level of spending for our Safety, Thermal & Electrical
Architecture product sector during 1997 and 1996 primarily reflected spending to
support expansion into new market areas outside the United States.
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<PAGE> 59
The higher level of capital spending for our Dynamics & Propulsion product
sector in 1997 reflected several new major product programs that were initiated
in late 1996 and carried over to 1997. In addition, 1997 capital expenditures
were impacted by spending related to increased penetration with non-GM customers
and expansion projects, primarily in Europe and Mexico.
Our capital expenditures totaled $1.4 billion in 1998. About 42% of 1998
capital expenditures were outside the United States. The Electronics & Mobile
Communication; Safety, Thermal & Electrical Architecture; and Dynamics &
Propulsion product sectors accounted for 13.0%, 32.5% and 53.7%, respectively,
of 1998 capital expenditures.
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 Dynamics & Propulsion product sectors are expected
to account for 18.3%, 33.4% and 47.5%, respectively, of 1999 capital
expenditures.
Financing Activities. Net cash provided by financing activities for the
first nine months of 1998 totaled $741 million compared to $903 million of cash
used in financing activities during the first nine months of 1997. Net cash used
in financing activities totaled $1.5 billion in 1997 compared with $1.7 billion
and $263 million in 1996 and 1995, 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 change reflects differences in separation
adjustments for various assets and liabilities, principally pensions and other
postretirement benefits.
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. See "Arrangements Between Delphi and General Motors--Employee
Matters." 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 September 30, 1998,
Delphi's salaried and hourly other postretirement employee benefit obligation
was about $4.5 billion and the underfunded pension obligation was about $1.9
billion.
Because of the underfunded nature of our 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 our 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 may also 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
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<PAGE> 60
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. 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 the business of
Delphi and the companies that it supplies. In our capacity as principal supplier
to and wholly 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.
One of our first priorities was the analysis of microprocessors used in our
automotive components, integrated systems and modules supplied to VMs, 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 indicator light manufactured by us and provided for three 1988 and
1989 GM vehicle models prematurely indicates the need for an oil change at the
end of every decade. In addition, one trip computer module supplied by us to
another VM does not recognize 2000 as a leap year but can be reset without
affecting performance. Neither of these issues affects vehicle operation or
occupant safety or is expected to result in material costs 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.
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<PAGE> 61
The Year 2000 program is being implemented in seven phases, some of which
are being conducted concurrently:
- 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 about 1,600 business
information systems and about 300,000 infrastructure items and embedded
systems.
- 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 completed by the end of 1998.
- 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.
- 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.
- 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.
- 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.
- 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 those 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 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
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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, has distributed Year 2000
compliance questionnaires as well as numerous Year 2000 awareness and assistance
mailings to many of the about 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 of 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. Total incremental spending by
Delphi is not expected to be material to the company's operations, liquidity or
capital resources. We incurred about $7 million of Year 2000 expense during 1997
and about $16 million in the first nine months of 1998. Delphi currently expects
its total Year 2000 spending to be about $125 million, with peak spending
occurring in late 1998 and early 1999, plus approximately $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, which is 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 September 30, 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 ongoing
payments to EDS that are attributable to work being performed in connection with
Delphi's Year 2000 program is about $77 million, which is part of the estimated
$300 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 our
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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
our ability to carry on our normal operations in the area or areas so affected.
In the event that we are unable to complete our remedial actions as described
above and are unable to implement adequate contingency plans in the event that
problems are encountered, there could be a material adverse effect on our
business, results of operations or financial condition.
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 for 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, 1997, Delphi's consolidated balance sheet included a net
deferred tax asset of approximately $3.2 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 audited
consolidated financial statements included elsewhere in this prospectus. About
$1.7 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:
- Delphi's operating results over the most recent three year period and
overall financial forecasts of book and taxable income for the 1998-2003
period.
- 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.
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- The extended period of time over which the tax assets can be utilized.
Postretirement benefits become tax deductions over periods up to 50
years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Delphi is exposed to market risks from changes in foreign currency exchange
rates and certain commodity prices. In order to manage these risks, 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 have been managed on a centralized basis by GM,
foreign currency risks have historically been managed by both GM and certain
foreign locations.
A discussion of Delphi's accounting policies for derivative instruments is
included in Note 2 to the audited consolidated financial statements included
elsewhere in this prospectus and further disclosure is provided in Note 17 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
Delphi has foreign currency exposures related to buying, selling and
financing in currencies other than the local currencies in which it operates.
More specifically, Delphi is 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, Delphi's most significant foreign
currency exposures relate to Mexico, Germany, France, Spain and South Korea. As
of December 31, 1997, the net fair value liability of financial instruments with
exposure to foreign currency risk was about $49 million. The potential loss in
fair value liability for such financial instruments from a hypothetical 10%
adverse change in quoted foreign currency exchange rates would be about $5
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
Until January 1, 1999, GM entered into commodity forward and option
contracts on behalf of our company. Such contracts were 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, 1997
was about $11 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 $27 million at December 31, 1997. 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, Delphi's
historical interest rate risk was generally not significant. Subsequent to our
separation from GM, we may manage our exposure to interest rate risk through the
use of derivative instruments designed to manage risk and minimize interest
expense.
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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,
1996 and 1995 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
September 30, 1998, our reserve for such environmental investigation and cleanup
totaled about $19 million. For a description of the environmental liabilities
allocated to our business as part of our separation from General Motors, see
"Arrangements Between Delphi and General Motors--Real Estate and Environmental."
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 current amount of our 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:
- 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");
- a hedge of the exposure to variable cash flows of a forecasted
transaction (a "cash flow hedge"); or
- 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
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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.
In April 1998, the ASEC released SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 generally requires costs of start-up activities
to be expensed instead of being capitalized and amortized. We were required to
adopt the pronouncement on January 1, 1999. We have not concluded at this time
on the applicability or impact of this SOP on our consolidated financial
statements.
FORWARD-LOOKING STATEMENTS
Delphi is subject to various risks and uncertainties, many of which are
outside of its control, that could cause actual results to differ from those
expressed in forward-looking statements throughout "Management's Discussion and
Analysis of Financial Condition and Results of Operations." See "Risk Factors"
for additional information about such risks and uncertainties.
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BUSINESS OF DELPHI
OVERVIEW
OUR COMPANY. Delphi is the world's largest and most diversified supplier of
components, integrated systems and modules to the automotive industry, with 1997
revenues of $31.4 billion. Based on the latest Fortune 500 survey, Delphi on an
independent basis would have ranked as the 25th largest industrial corporation
in the United States based on 1997 revenues. 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.
About five 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
total sales to 18.3% in 1997. 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 59% 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 September 30, 1998.
About 30% of our total 1997 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.
Our core business objective is to increase our earnings by expanding our
sales globally while improving our operating performance. We believe that our
comprehensive vehicle knowledge and expansive global presence provide a solid
foundation for our continued growth, particularly as VMs increasingly seek
suppliers with technical expertise who can provide competitively-priced systems
solutions to meet consumers' requirements for ride and handling performance,
safety, security, communications, convenience and entertainment and who can
deliver products and offer customer service on a worldwide basis. Although we
expect that GM will remain our largest customer for a significant period of
time, we also expect that our sales to GM's North American operations will
decline over time. Accordingly, our strategy focuses on increasing sales to
other customers while maintaining our strong relationship with GM. We believe
that our ability to achieve this sales growth over time will be enhanced by our
complete separation from GM.
The principal elements of our business strategy are:
- to supply our customers with high-quality, innovative components, systems
and modules;
- to pursue business with customers other than GM-North America while
maintaining our significant customer-supplier relationship with GM;
- to leverage our global presence to meet our customers' needs;
- to improve our operating performance; and
- to complete strategic acquisitions, joint ventures and alliances.
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OUR SALES AND AWARDED BUSINESS. 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 Supply Agreement with GM. 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 and for the nine months ended September 30, 1997 and 1998. The
percentages for the nine months ended September 30, 1998 were affected by work
stoppages in the United States in June and July 1998.
<TABLE>
<CAPTION>
TOTAL SALES
---------------------------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
CUSTOMER 1995 1996 1997 1997 1998
-------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
GM-North America.................... 69.3% 66.6% 65.4% 66.0% 61.3%
GM-International.................... 10.3 11.7 11.2 11.6 11.5
GM-SPO.............................. 4.5 5.2 5.1 5.2 5.7
----- ----- ----- ----- -----
Total GM.......................... 84.1 83.5 81.7 82.8 78.5
Other Customers..................... 15.9 16.5 18.3 17.2 21.5
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
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 prospectus. 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
50% or more 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.
We have a substantial base of awarded business from vehicle manufacturers,
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, including the volume and
option mix of vehicles actually produced, the timing of such production, the
determination by our VM customers to delay, cancel or redesign vehicle programs
and price reductions negotiated in connection with a VM customer's sourcing of
new business with us. In addition, our VM customers generally have a contractual
right to replace us with another supplier throughout the duration of a contract
for a variety of reasons, although the impact of this contractual right is
mitigated to some extent by the substantial re-engineering costs that a VM
typically would need to incur in order to introduce a new supplier to an
established vehicle platform.
Subject to the foregoing 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
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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. In estimating our awarded business, we use our own assumptions
about the volume and timing of vehicle production and option mix and product
pricing, except that for business under the Supply Agreement with GM we have
generally used production and mix assumptions used in GM's internal business
planning process and provided to us by GM. While we believe our assumptions to
be reasonable and the methodology by which we track our awarded business to be
appropriate, we continuously evaluate and from time to time make modifications
to such assumptions and methodology. In this regard, we currently anticipate
that, following the Distribution, we will change our methodology so that in
tracking our awarded business with GM we will use our own production and mix
assumptions rather than GM's internal assumptions.
For more information about these matters, see "Risk Factors--Risk Factors
Relating to Our Business--We May Be Unable to Realize All of the Sales
Represented by Our Awarded Business" and "--Industry--Awarded Business."
REALIZATION OF OUR BUSINESS OBJECTIVE. We believe that our ability to grow
our business with major VMs other than General Motors will be significantly
enhanced by our complete separation from GM. Other VMs have been, to varying
degrees, reluctant to purchase components extensively from a supplier owned by
GM. We believe that this is attributable in part to concerns that the related
profits would strengthen GM and that GM might obtain access through Delphi to
confidential information regarding the other VMs' vehicle designs and
manufacturing processes, despite our strict confidentiality pledge and
procedures. We believe that our complete separation from GM will address these
customer concerns and thereby provide growth opportunities for our company.
However, we cannot assure you as to whether or when our complete separation from
GM will occur or as to whether we will be able to realize the benefits we expect
from separation. For more information, see "Risk Factors--Risk Factors Relating
to Separating Our Company from General Motors--Our Business May Be Adversely
Affected if General Motors Does Not Complete Its Divestiture of Our Company" and
"--Our Close Relationship with General Motors Could Limit Our Potential to Do
Business with Its Competitors" and "Delphi and Its Separation from General
Motors."
Our business objective also emphasizes continuing operational improvements.
Since 1991, when GM organized its various component operations into a separate
business group, Delphi has been evolving from a fully captive collection of
component operations into an independently managed supplier of components,
integrated systems, and modules to GM and all of the other major VMs. During
this transitional period, our financial results have at times been adversely
affected by a variety of factors. These factors include significant price
reductions, more recently with respect to our automotive electronics products,
as GM implemented its global sourcing initiative, labor disruptions at both GM
and Delphi, and certain unprofitable manufacturing operations. In response to
these and other factors, we have developed, and are implementing, initiatives to
improve our operating performance. We describe many of these initiatives below
under "--Strategy--Improve Operating Performance." Although we have made
substantial progress in implementing these initiatives, we believe that in many
cases the full impact of these initiatives has not yet been realized. We believe
that, as we fully implement these initiatives throughout our operations and
complete our separation from GM, we will be able to realize additional benefits.
See "Risk Factors--Risk Factors Relating to Separating Our Company from General
Motors--We May Be Unable to Increase Our Competitiveness if We Fail to Improve
Our Labor Relations and Establish More Flexible Work Rules and Practices
Following Our Separation from General Motors" and "--Risk Factors Relating to
Our Business--We May Be Unable to Realize Our Business Strategy of Improving Our
Operating Performance."
INDUSTRY
GENERAL. We operate in a highly competitive industry. 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.
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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:
- "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.
- "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. Over the past few decades,
however, VMs have 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:"
- "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.
- "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.
CONTRACTS FOR VM BUSINESS. Contract durations for automotive parts
generally range from one year to the entire life of the vehicle model, about
three to seven years for cars and six to ten years for trucks. Tier 1 suppliers
such as Delphi generally compete for new VM business at the beginning of the
development of new vehicle models and upon the redesign of existing vehicle
models, at which time a supplier would bid for the "replacement cycle" of an
existing product program. New vehicle model development generally begins at
least two to five years before the marketing of such models to consumers. As a
result, a significant portion of a supplier's annual sales are generated
pursuant to arrangements entered into about two to five years before the
revenues related to such arrangements begin to be realized.
The Tier 1 sourcing process for vehicle programs, which varies according to
VM, is typically initiated when a VM seeks requests for quotations from several
suppliers at least three to six years before anticipated vehicle production.
Based on these quotations, VMs in many cases then select and work with a
supplier on specific component design and development projects related to the
new vehicle program. At varying points during this process, VMs may issue
"nomination letters," letters of intent or other representations to the supplier
that, based on the supplier's quotation and subject to a number of conditions
established by the VM, the VM intends to award specific business relating to the
vehicle program to the supplier. By the time the design and development of the
vehicle program is nearly complete, the VM will typically have evaluated the
supplier's performance to date and its ability to meet the VM's specific
production and service requirements. The VM will then develop a proposed
production timetable, including current vehicle volume and option mix estimates
based on its own assumptions, and then source business with the supplier
pursuant to written contracts, purchase orders or other firm commitments,
provided that the supplier can meet the VM's designated conditions.
AWARDED BUSINESS. Awarded business generally covers the supply of all or a
portion of a VM's production and service requirements of a particular product
program rather than the supply of a specific quantity of products. Accordingly,
in estimating awarded business over the life of a contract or other commitment,
a supplier must make various assumptions as to the estimated amount of vehicles
expected to be produced, the timing of such production, the mix of options on
the vehicles produced and product pricing.
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The realization of sales based on awarded business is subject in all cases
to a number of important risks and uncertainties, which generally include the
following:
- the volume of vehicle models and specific vehicle options actually
produced by the VM, which, in turn, are subject to a number of
significant risks outlined below;
- the determination by the VM to delay or cancel a particular vehicle
program for which it has sourced business with the supplier or to change
the option mix within the program;
- the VM's contractual right to replace the supplier throughout the
duration of the contract for a variety of reasons, including if the
supplier does not remain competitive in terms of quality, service,
design, technology and, in certain circumstances, price;
- the VM's contractual right to terminate the contract altogether: although
this right varies by contract, some contracts--generally shorter-term
purchase orders--are terminable by the VM at any time for any reason;
- the VM's decision to redesign a vehicle model and not to select the
supplier to supply any or all of the same parts it was providing on the
previous vehicle model; and
- product pricing, including price reductions on existing contracts
negotiated in connection with the VM's sourcing of new business with the
supplier.
The actual production volumes and option mix of vehicles produced by VM
customers depend on a number of factors that are beyond a supplier's control.
These include:
- general economic conditions;
- consumer preferences for particular vehicles or vehicle features;
- labor difficulties or work stoppages and any related recoveries of
production; and
- capital planning and other factors specific to a particular VM.
INDUSTRY TRENDS. Delphi has been at the forefront of five key trends that
have been reshaping the automotive parts industry over the past several years:
- 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 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.
This process allows VMs to realize cost savings by reducing in-house
assembly functions and eliminating the need to maintain significant
inventory levels on an ongoing basis. As suppliers play a more integral
role in the vehicle design and manufacturing process, they typically need
greater access to confidential planning information regarding a VM's
future vehicle designs and manufacturing processes.
- 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 1997, about 70% of total
worldwide passenger vehicle production occurred outside North America,
according to Ward's 1998 Automotive Yearbook. 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. With these vehicles, VMs can better serve multiple
markets and address local consumer preferences while controlling design
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costs and taking advantage of low-cost manufacturing locations. 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.
- 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.
Electronics integration also enables VMs to offer more sophisticated
vehicle features at lower cost. Through electronics integration,
suppliers can link systems and subsystems within the vehicle to reduce
the physical mass of components and improve 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.
- 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. According to U.S. Industry and Trade Outlook 1998: Automotive
Parts, the overall number of Tier 1 suppliers worldwide decreased from
3,000 to 1,500 between 1990 and 1996, primarily due to industry
consolidation. 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.
- 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
Our core business objective is to increase our earnings by expanding our
sales globally while improving our operating performance. We believe that our
principal opportunity for future earnings growth will be increased sales to
customers other than GM-North America. Although we expect that our business with
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customers other than GM will increase, we also expect that GM-North America 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 Supply Agreement with GM. In
addition, although we have historically supplied a lower percentage of
GM-International's automotive parts requirements than the percentage we have
supplied to GM-North America, we believe that we are and will continue to be
able to compete effectively for GM-International business as a result of, among
other things, our substantially expanded global presence over the last several
years.
Our business strategy is designed to leverage our competitive strengths and
capitalize on the key trends in the global automotive parts industry. We believe
that our key competitive strengths include our system and module capabilities,
our electronics integration expertise, our global presence, our technological
innovation and our highly skilled management team. In implementing our business
strategy, we maintain a focus on our customers and product quality and strive to
enhance our competitiveness through continuous operational improvements.
The key elements of our business strategy are to supply our customers with
high-quality, innovative components, systems and modules; to pursue business
with customers other than GM-North America while maintaining our significant
customer-supplier relationship with GM; 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. Delphi
believes 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
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. As a result, we believe that we are well positioned
to be an industry leader in developing and selling high-quality electronically
integrated products capable of meeting our customers' needs.
- System and Module Capabilities and Breadth of Product Offerings. Delphi
has an extremely broad range of product lines, including substantial
system and module capabilities. Our extensive experience across a wide
portfolio of diverse products has enabled us to develop a broad base of
comprehensive vehicle knowledge and has given us many opportunities to
combine products previously sold separately, including through the
application of electronics to link systems and subsystems. We have been
the first to market with a wide variety of integrated automotive systems,
subsystems and modules. For example, we have developed TRAXXAR(TM), a
vehicle stability enhancement system which integrates all major chassis
control functions--steering, braking, suspension and powertrain--to
provide optimum ride and handling performance. We have also developed
sophisticated electrical/electronic systems which coordinate all
electrically operated, sensed, controlled or monitored functions within
the vehicle. We have developed instrument panel and cockpit modules that
offer fully integrated interior systems featuring sophisticated
electrical/electronic systems, structure and trim, steering, thermal and
safety subsystems. Our modular door system integrates door hardware
systems with various features of power and signal distribution, safety
and security, thermal control, electronic control and interior trim
systems.
- Electronics Integration Expertise. We believe that we have a significant
competitive advantage over many other suppliers by virtue of our
substantial in-house electronics integration capabilities, particularly
since we believe that electronics integration will drive the next
generation of successful products in our industry. Our Electronics &
Mobile Communication product sector is one of the global
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leaders in automotive electronics. This sector consists of the operations
of our Delco Electronics subsidiary. From 1986 through 1997, Delco
Electronics was operated by GM through its Hughes Electronics Corporation
subsidiary. Hughes Electronics is a leader in satellite and wireless
communications and space technology and was at that time also a leading
defense electronics company. In late 1997, in connection with the
spin-off of the defense electronics business of Hughes Electronics, GM
transferred Delco Electronics' operations to us in order to more closely
integrate Delco Electronics' expertise in electronics with our
capabilities in automotive components and systems. As described below
under "--Product Technology and Development," we have many product lines
currently under development which rely heavily on our technical expertise
and innovation in electronics integration, including those which we refer
to as our "Next Century Winners."
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.
PURSUE BUSINESS WITH CUSTOMERS OTHER THAN GM-NORTH AMERICA. 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 with customers other than GM-North America in order to offset the
expected decline in our sales to GM-North America and to make 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. For more information about the numerous risks and uncertainties which
could impair our ability to achieve this goal, you should read carefully each of
the "Risk Factors" set forth elsewhere in this prospectus, particularly "Risk
Factors--Risk Factors Relating to Our Business--We May Be Unable to Increase Our
Sales to Vehicle Manufacturers Other Than GM-North America."
We have made progress towards achieving this goal. Our customers now
include every major manufacturer of light vehicles in the world. Recent examples
of our successes in winning new business include our contracts with two non-GM
VMs to provide our all-electric E-STEER(R) power steering system and our
recently announced agreement to provide products featuring our Adaptive Cruise
Control technologies, which are part of our FOREWARN(TM) collision avoidance
product line, to Jaguar Cars, a unit of Ford Motor Company.
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 prospectus.
On this basis, in 1997, 65.4% of our total sales were to GM-North America and
34.6% 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 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. We believe
that this is attributable in part to concerns that the related profits would
strengthen GM and that GM might obtain access through us to confidential
information regarding the other
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VMs' vehicle designs and manufacturing processes. These concerns have persisted
even though we have given each of our customers a strict confidentiality pledge
and implemented procedures to preserve customer confidentiality. To our
knowledge, we have never experienced a breach of our confidentiality pledge or
procedures.
We believe that 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.
We believe that the quality of our products is also important to our
ability to increase sales since quality is a key criteria used by VMs in
selecting and reviewing suppliers. Since 1996, we have received 163 customer
quality and service awards, including, among others, the following awards in
1998:
<TABLE>
<CAPTION>
CUSTOMER AWARD
- -------- -----
<S> <C>
General Motors GM Worldwide Supplier of the Year Award
DaimlerChrysler AG Gold Pentastar Award
Volkswagen AG VW Formal Q Award
Toyota Motor Corp./NUMMI NUMMI Triple Crown "Gold" Award
</TABLE>
We have demonstrated a commitment to product quality by making substantial
improvements during recent years, including a significant reduction in customer
rejected/returned parts per million since 1992. We recognize that our quality
levels are important to our customers and we intend to continue to seek
substantial quality improvements in order to remain competitive, especially
through the further implementation of our operating performance initiatives
described below.
Our ability to increase our sales to customers other than GM-North America
is also enhanced by our broad geographic presence, as discussed below. In
addition, our acquisition strategy, discussed below, includes the pursuit of key
acquisitions and alliances which can increase our access to certain major non-GM
customers.
LEVERAGE GLOBAL PRESENCE. We believe that our expansive global presence
will provide us with a substantial competitive advantage as we pursue new
business around the world. 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 September 30, 1998, we had 169 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, including GM's Astra
and Corsa and Fiat's Punto/Palio. In addition, we believe that our global
presence also provides us opportunities by allowing us to leverage sales to a
customer in one location or for one product into sales in other locations and
for other products.
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From 1992 to 1997, 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 28%, 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 56%. This has had the effect of reducing our average hourly wage rate,
including benefits, from about $27 in 1992 to about $20 in 1997, representing a
decrease of about 26%. About 30% of our total 1997 sales were derived from
products manufactured at sites located outside the United States and Canada.
Excluding our joint ventures and other investments, our global presence as
of September 30, 1998 is shown below:
<TABLE>
<CAPTION>
CUSTOMER
MANUFACTURING TECHNICAL CENTERS AND TOTAL
SITES CENTERS SALES OFFICES EMPLOYMENT
------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
United States/Canada........... 48 14 11 82,794
Europe/Middle East/Africa...... 65 7 20 37,243
Mexico/South America........... 41 4 6 75,922
Asia/Pacific................... 15 2 14 4,504
--- -- -- -------
Total........................ 169 27 51 200,463
=== == == =======
</TABLE>
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 September 30, 1998 are shown below by
geographic region:
<TABLE>
<S> <C>
United States/Canada...................................... 5
Europe/Middle East/Africa................................. 7
Mexico/South America...................................... 9
Asia/Pacific.............................................. 19
---
Total................................................... 40
===
</TABLE>
For financial information regarding the principal geographic areas in which
we operate and our export sales, see Note 15 to the audited consolidated
financial statements included elsewhere in this prospectus.
IMPROVE OPERATING PERFORMANCE. We seek to maximize our operating
performance in order to enhance our financial 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. We
have implemented several important strategic initiatives in this regard:
- Delphi Manufacturing System. Delphi has achieved substantial
manufacturing efficiencies over the last several years by implementing a
number of manufacturing performance initiatives. We have also been able
to consolidate our manufacturing sites, improve inventory management and
reduce scrap. The following table shows information about the improvement
in our manufacturing performance from 1993 to 1997.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales per employee (U.S.)*.............. $185,000 $206,000 $237,000 $234,000 $247,000
Customer rejected/returned parts per
million**................................. n/a n/a 812 462 355
Lost work day cases per hundred employees... 3.29 3.04 2.27 1.62 1.24
</TABLE>
- ------------------
* Net sales per employee data for 1993 and 1994 do not include sales or
headcount information for our Delco Electronics subsidiary.
** This measurement was not tracked on a consistent basis prior to 1995.
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In 1997, we developed and began the process of implementing the Delphi
Manufacturing System throughout our global operations. This process, which
is based, in part, on the systems employed by Toyota and other world class
manufacturers, involves reorganizing the workplace and improving the
production process in order to maximize manufacturing flexibility, reduce
total manufacturing costs and achieve "leanness" in our operations. 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. By implementing the Delphi Manufacturing System, we can improve
our manufacturing productivity, increase our daily inventory turns and
reduce our production lead times.
Through implementing the Delphi Manufacturing System at many of our
facilities to date, often with the cooperation of our local unions, we
have achieved significant productivity improvements and inventory
reductions as a result of improved materials flow through our facilities.
The application of the Delphi Manufacturing System at our manufacturing
sites is resulting in substantial performance improvements at both
unionized and non-unionized facilities. These improvements are
contributing directly to our cost savings. Through the further
implementation of the Delphi Manufacturing System on a global basis,
particularly at our operations in the United States and Europe, we expect
to further reduce our manufacturing expenses, increase our productivity
and improve our inventory management.
- 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. Excluding Delco Electronics, our structural costs as
a percentage of net sales declined from about 50% in 1993 to 47% in 1997.
We have accomplished this 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 continue to realize
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.
- 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 costs by about 3% per year based on a year-to-year
actual price comparison excluding Delco Electronics.
- 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. 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
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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.
GM has informed us that it has satisfactorily completed discussions with
the IUE, one of the principal unions representing our employees,
regarding the effects of the separation on its members. As a result of
these discussions, the IUE has recognized that, upon Delphi's separation
from GM, Delphi will be an independent company with its own national and
local agreements with the IUE. GM has informed us that initial
discussions with the USW regarding the effects of the separation on its
members were held on December 8, 1998 and that further discussions will
be held with the USW. Similar discussions are expected to occur with the
other unions representing our employees, but we cannot assure you as to
when they will occur or as to the outcome. In this regard, our largest
union, the UAW, which represents about 29% of our unionized employees,
has stated that it is on record as opposing the separation of Delphi from
GM and that, should GM decide to proceed with the transaction, the UAW
can and will aggressively work to protect the rights and interests of its
members who would be impacted by the Distribution. Since that time, GM
and the UAW have agreed that any of our employees who are members of the
UAW and who retire on or before October 1, 1999 will be treated as GM
retirees. GM and Delphi have been working with the UAW to address its
concerns and will continue to do so. We intend to cooperate with GM in
working together with the UAW, the IUE, the USW and the other unions
representing our employees to address the best interests of their members
regarding these matters.
- Product Portfolio Management. Delphi has 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. This
process enables us to focus our engineering, capital and human resources
on those businesses which best fit our overall product strategy and
increase our profitability. Since 1992, our portfolio management process,
together with our "fix/sell/close" initiative described below, has
resulted in the sale of businesses with annual sales of about $6 billion,
resulting in our remaining product lines being more focused, strategic
and profitable. Excluding Delco Electronics, which was not integrated
into our company until December 1997, we streamlined our portfolio as a
result of this process to about 151 product lines in 1997, down from
about 210 in 1992. Our current product portfolio includes about 190
product lines and reflects the integration of about 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 products featuring electronics integration.
- Fix/Sell/Close Process. Delphi has adopted a "fix/sell/close" process to
improve the company's 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 prospectus.
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<PAGE> 79
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. A number of our key product areas, including chassis, thermal and
automotive electronics, represent segments of the industry that are in the midst
of global consolidation. We believe that our separation from General Motors will
provide us with increased capital planning flexibility, the ability to use our
own securities in strategic acquisitions and the opportunity to form beneficial
alliances with other leading companies not willing to partner with a supplier
owned by GM. We will be restricted from executing certain types of transactions
for a period of time following the Offering and the Distribution as a result of
covenants arising from our separation from GM as described elsewhere in this
prospectus. 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. For more information, you should read
carefully each of the "Risk Factors" set forth elsewhere in this prospectus.
MANAGEMENT
We believe that our experienced and highly skilled management team provides
us with a significant competitive advantage. Our 21 most senior managers have an
average of about 25 years of experience in the automotive industry, including in
many cases extensive experience with GM in the areas of vehicle design,
engineering and manufacturing. We have also been successful in hiring a
significant number of managers from several of our other VM and non-VM customers
as well as from our competitors, which has enhanced our understanding of and
ability to serve our customers' needs.
We have developed an organizational structure for the management of our
company which utilizes a lean, multi-functional matrix approach. Our chief
operating decision-making group is the Delphi Strategy Board, which is comprised
of the Chief Executive Officer and 20 senior executives representing all three
of our product sectors as well as our world and regional headquarters staff.
Each product sector is managed by a strategy board or equivalent managing
committee comprised of individuals that have responsibility for the
profitability and cash flow of the sector's various product lines and
businesses. Our three product sectors are managed separately because of
differences in the nature of the respective product groupings.
Our world headquarters staff, located in Troy, Michigan, consisted of 135
persons as of September 30, 1998. While we expect our staff to increase
substantially in connection with our separation from GM and the establishment of
our company as an independent organization, this will be offset partially by the
elimination of allocations of general corporate overhead expenses from GM. Our
staff is led by our Chief Executive Officer and other senior executives who have
responsibility in the areas of finance, operations, purchasing, strategic
planning, communications, production control and logistics, information systems,
legal affairs and human resources. We also have three executives responsible for
our principal geographic regions outside the United States and Canada:
Europe/Middle East/Africa, South America and Asia/Pacific. Many of our senior
managers have multiple areas of responsibility within our organization,
including with respect to the leadership of our customer service teams.
In connection with the Offering, we have established incentive plans tied
to the market performance of our common stock. We believe that these programs
will strengthen our management's focus. See "Management--Incentive Plans."
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PRODUCT TECHNOLOGY 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 have worked directly with GM's vehicle design engineers to
develop innovative products and complete automotive systems for GM's vehicles.
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.
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 September 30, 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. Over 300 patents were
awarded to our business during 1997. Our total expenditures for research,
development and engineering activities are expected to be about $1.4 billion in
1998, and were $1.5 billion in 1997 and $1.6 billion in each of 1996 and 1995.
We have introduced over 50 new products and processes during each of the last
several years.
In addition, we have been actively studying key industry trends and working
with our customers to develop several important technological capabilities for
future product offerings. We believe that our electronics integration expertise
and systems capabilities will enable us to provide innovative, systems-based
solutions for our customers in the future. Many of these capabilities are being
jointly developed by all three of our product sectors and each involves the
electronics integration expertise of our Electronics & Mobile Communication
product sector. We have started to employ some of these capabilities in our
products and expect to continue to introduce products featuring these
capabilities throughout the next decade. We refer to these technological
capabilities as our "Next Century Winners":
- Mobile Multi-Media. We are developing new systems and software products
that enable advanced communication, entertainment and information access
in vehicle cockpits. Examples include reception systems for AM/FM radio,
television and direct broadcast satellite transmission, cell phones and
global positioning systems. Other examples include advanced user
interface devices such as flat panel displays, voice recognition and head
up displays; open common standard computing platforms for navigation; and
advanced audio components such as DVD and compact disc players and
digital intelligent amplifier/speakers. All components are integrated by
Delphi's high-speed optical-fiber serial data link that provides multiple
channels of digital video and audio. Delphi has worked with one team
consisting of IBM(TM), Sun Microsystems, Netscape Communications(TM) and
Hughes Electronics and another team consisting of Microsoft, Saab
Automobile AB and Hughes Electronics to produce two vehicles
demonstrating these advanced products. One of these, the "Network
Vehicle," has received the InfoVision Award from the International
Engineering Consortium.
- Advanced Thermal Management Systems. We are developing fully integrated
thermal management systems to increase driver and passenger comfort in a
more energy efficient manner. These systems, subsystems and modules are
designed to manage and control vehicle cabin climate and powertrain
cooling at reduced costs to VMs and consumers. Our emerging technologies
include individual adaptive comfort control to achieve enhanced driver
and passenger comfort. Our thermal management
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<PAGE> 81
systems are designed to meet increasingly stringent environmental
requirements and to improve material recyclability.
- Advanced Safety Interior. We are developing technologies designed to
provide enhanced occupant protection in frontal, side and rear collisions
and vehicle rollover situations. These include anticipatory crash
detection systems, adaptive belt restraints, rollover sensing systems,
active knee bolsters, adaptive energy-absorbing pedals, adaptive load
steering columns and distributed restraint system architecture. Our
Adaptive Restraint Technologies(TM) are designed to monitor driver and
passenger characteristics and the severity of a crash in order to tailor
airbag deployment to provide optimized occupant protection.
- Collision Avoidance. We are developing collision avoidance systems
consisting of adaptive cruise control, collision warning and collision
intervention. These systems are designed to help avoid vehicle crashes
through the use of object detection sensors and automatic control of
brakes, throttle, steering and suspension.
- "X-By-Wire" Control Systems. We are developing new drive-by-wire systems
consisting of braking, steering, throttle and suspension systems designed
to provide greater vehicle control. A modular design features reduced
mass, simplified assembly and increased packaging flexibility. These
systems function without conventional mechanical hardware connections,
such as conventional steering columns mounted onto rack and pinions.
Instead, each system receives inputs such as the depression of brake
pedal or a bump in the road and then communicates that information to an
electronic control module. This control module then provides input to the
appropriate localized, motorized actuator, which performs the mechanical
function of the system such as application of brakes or engagement of
shock absorbers. The lack of direct mechanical connections allows for
increased customization of the "feel" of these systems.
- Modular Chassis Systems. We are developing modular chassis systems
featuring various levels of integration of knuckles, bearings, brakes,
suspension, steering and other components assembled into modules. Modular
product offerings include front and rear brake corner modules, front and
rear chassis corner modules, engine cradle modules, powertrain-chassis
modules and front and rear damper modules. These modular chassis systems
are intended to enable VMs to significantly reduce their assembly plant
costs and product lead time.
- Advanced Engine Management Systems. VMs typically must create many
different engine management systems to accommodate varying government
regulations, consumer preferences and driving conditions around the
world. To simplify this situation, we are developing an advanced engine
management system, which features a "building block" approach that uses
modular systems architecture, rapid algorithm development tools and
controls as a base. Depending upon a VM's requirements, we can add
interchangeable hardware, software and "plug-and-play" tools to minimize
recalibration work. This system is designed to save fuel and reduce
emissions while helping VMs cut costs and achieve fast-to-market goals.
- ENERGEN(TM) Advanced Energy Systems. We are developing advanced energy
management systems designed to enable VMs to expand vehicle electronic
content and better address global warming concerns. These systems include
a 200-volt AC induction integrated motor/generator, a multiple-voltage
battery system and high-power electronics which permit the vehicle to
operate in three different modes--internal combustion, electric or a
combination of the two. This optimization of energy is designed to
provide increased power to support advanced electrical/electronic needs,
while also delivering substantial savings in fuel economy, which is
critical to the reduction of carbon dioxide exhaust emissions.
- Integrated Vehicle Electrical/Electronic (E/E) Systems. Our integrated
E/E system combines electrical and electronic content into one system,
which includes network communications, fiber-optic data transmission,
multi-drop wiring, controllers and electronic integrated switches,
connectors, sensors and
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<PAGE> 82
actuators. These systems feature smaller, easier-to-package controllers;
smaller easier-to-install wiring harnesses and connectors; fewer
electrical interfaces; reduced mass; increased function flexibility and
system reliability; and simplified assembly.
- INTELLEK(TM) Smart Sensors and Actuators. We are developing sophisticated
sensors and actuators which feature integrated processing and digital
communication bus interfaces. These higher value sensors and actuators
are designed to offer VMs reduced mass due to fewer parts, reduced cycle
and assembly time and improved system performance, while helping VMs
lower their costs for higher content vehicles.
CUSTOMERS
GENERAL MOTORS. General Motors is our largest customer and we are its
largest automotive parts supplier. GM is the world's largest VM, having a market
share of about 16% of all light vehicles produced throughout the world in 1997
according to Standard & Poor's DRI 1998 World Car Industry Forecast Report. Most
of our sales to GM are to GM-North America, although we also sell to
GM-International and to GM-SPO. In 1997, our sales to GM accounted for about
81.7% of our total sales as set forth below. For this purpose, "total sales"
include all sales from joint ventures and other investments in which we own a
minority interest.
<TABLE>
<CAPTION>
PERCENTAGE OF DELPHI'S
CUSTOMER 1997 TOTAL SALES
-------- ----------------------
<S> <C>
GM-North America................................... 65.4%
GM-International................................... 11.2
GM-SPO............................................. 5.1
----
Total GM...................................... 81.7%
====
</TABLE>
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 over this period.
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
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have substantially expanded our global presence over the last several years. We
believe that we are and will continue to be able to compete effectively for
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. This includes existing contracts under which we have not yet begun
to supply products. However, the timing of payments from GM to us under the
existing contracts will change. For a description of these payment terms and the
effect on our liquidity, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Extension
of Payment Terms."
Under the Supply Agreement, 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 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. 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 overall economic effect of such package
proposals in assessing our competitiveness. Given the general duration of most
vehicle programs of about five to eight years, depending on the vehicle model,
we expect that this ability to secure next generation business from GM-North
America, together with our existing contracts and other commitments, will
provide us with the opportunity to maintain substantial business with GM-North
America well into the next decade. We will also have the opportunity to bid on
the same basis as other suppliers for other new GM-North America business as
well as for GM-International business. 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 timing of such production and our
continuing competitiveness. For more information about the uncertainties and
risks related to the Supply Agreement and to realizing awarded business, see
"--Industry--Awarded Business."
The Supply Agreement specifies that GM has the right to move its existing
business with us to other suppliers in the event that we are not competitive in
terms of quality, service, design or 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. For more information regarding
the terms of the Supply Agreement, see "Arrangements Between Delphi and General
Motors--Supply Agreement."
OTHER VMS. Although General Motors is by far our largest customer, we do
business with all of the other major VMs worldwide. These relationships have
enabled us to develop an understanding of global customer needs and business
opportunities. Based on 1997 worldwide market shares, the next five largest VMs
after GM are Ford Motor Company, Toyota Motor Corp., Volkswagen AG,
DaimlerChrysler AG and Fiat S.p.A., who collectively had an aggregate market
share of about 43% of all light vehicles produced throughout the world in 1997
according to Standard & Poor's DRI 1998 World Car Industry Forecast Report. We
currently do business with each of these VMs as well as all other major VMs. Our
top five VM customers other than GM accounted for about 5.8% of our total 1997
revenues, and our top ten VM customers other than GM accounted for about 8.5% of
our total 1997 revenues. 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
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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 1997, our aftermarket
revenues of $2 billion represented 6.5% of our total revenues. 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
will own 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 will 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 Delphi and General Motors--Aftermarket Sales."
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 1997 revenues. 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.
SALES AND MARKETING
Delphi has established an expansive sales and marketing organization
consisting of 25 dedicated customer service teams that provide a consistent
interface between key customers and the company. These teams are currently
staffed by Delphi sales and marketing personnel located in every major region
around the world. Nineteen of these customer teams currently focus on customers
other than GM. We maintain this extensive
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worldwide customer network in order to better represent individual customers'
interests within our organization, promote customer programs and coordinate
global customer strategies with the goal of enhancing overall customer service
and satisfaction. Our ability to support our customers around the world is
further enhanced by our expansive global presence in terms of manufacturing
sites, customer service centers and sales activity offices and technical and
engineering support.
In order to address confidentiality concerns, each customer service team
functions completely independently from the others. We believe that we have
implemented very effective procedures to preserve customer confidentiality. To
our knowledge, we have never experienced a breach of our confidentiality pledge
or procedures. Nevertheless, we believe that our complete separation from
General Motors should eliminate any remaining VM concerns about providing
confidential information to a supplier owned by one of its competitors. As noted
above, access to such information is necessary for the design, engineering and
production of integrated systems tailored to a customer's individual needs.
Our sales and marketing activities are designed to create overall
awareness, consideration and purchase of our components, integrated systems and
modules. To further this objective, we participate in international trade shows
in Paris, Frankfurt, Tokyo and Detroit. We also provide on-site technology
demonstrations at each of our major VM customers on a regular basis. We
advertise in a variety of trade publications and offer an Internet site at
http://www.delphiauto.com. Our website and the information contained therein or
connected thereto shall not be deemed to be incorporated into this prospectus or
the registration statement of which it forms a part. We also maintain a
17,000-square foot customer center at our world headquarters in Troy, Michigan,
where we have hosted over 13,000 visitors since its opening in August 1997. In
addition, we provide key products to several of the leading motorsports series
around the world, including Formula 1, NASCAR Winston Cup, Indy Racing League
and Championship Auto Racing Teams.
PRODUCTS
Delphi designs, engineers and manufactures a wide variety of components,
integrated systems and modules on a worldwide basis. We provide our VM customers
with global, single-point sourcing capability and systems tailored to meet their
specific needs. As the largest and most diversified supplier of automotive
parts, we have a diversified portfolio of products. Each of our product lines
includes many individual product offerings, most of which we can configure to
interact with specific vehicle characteristics in order to meet our customers'
needs. Given the breadth of our product portfolio and our significant systems
integration capabilities, we have focused on offering our customers highly
engineered, value-added products.
Our product offerings are organized in three product sectors: Electronics &
Mobile Communication; Safety, Thermal & Electrical Architecture; and Dynamics &
Propulsion. We believe that each of our three product sectors is a leading
supplier of automotive parts in its principal areas of focus. The following
table shows our net sales by product sector and in total for the last three
years:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
PRODUCT SECTOR 1995 1996 1997
-------------- ---- ---- ----
(IN BILLIONS)
<S> <C> <C> <C>
Electronics & Mobile Communication................. $ 5.5 $ 5.3 $ 5.5
Safety, Thermal & Electrical Architecture.......... 13.4 12.9 12.7
Dynamics & Propulsion.............................. 13.2 13.3 13.7
Eliminations....................................... (0.4) (0.5) (0.5)
----- ----- -----
Total............................................ $31.7 $31.0 $31.4
===== ===== =====
</TABLE>
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Our net sales by product sector include certain inter-sector sales, which
we eliminate for purposes of determining our total net sales. After adjusting to
account for these eliminations, the following table shows the approximate
composition by product sector and in total of our net sales for the last three
years:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
PRODUCT SECTOR 1995 1996 1997
-------------- ---- ---- ----
<S> <C> <C> <C>
Electronics & Mobile Communication................. 16.5% 16.2% 16.5%
Safety, Thermal & Electrical Architecture.......... 42.0 41.1 39.9
Dynamics & Propulsion.............................. 41.5 42.7 43.6
----- ----- -----
Total............................................ 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Many of our product offerings combine the expertise and capabilities of
more than one product sector. Since our customers increasingly seek more
fully-engineered, integrated systems and modules rather than individual
components, our significant systems integration capabilities play an
increasingly key role in the successful marketing and sales of our products. We
believe that electronics integration will drive the next generation of
successful products in our industry. All of our major vehicle systems and
subsystems utilize the electronics integration capabilities of our Electronics &
Mobile Communication product sector. Within our three product sectors, our
numerous product lines are organized into various sub-categories for which a
product sector strategy board or equivalent managing committee has principal
responsibility. For more information, see "--Management." For more information
about our product sectors, see Note 15 to the audited consolidated financial
statements included elsewhere in this prospectus.
ELECTRONICS & MOBILE COMMUNICATION. Our Electronics & Mobile Communication
product sector accounted for $5.2 billion, or 16.5%, of our 1997 net sales,
excluding inter-sector 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 Delphi's two other product sectors to produce systems, subsystems
and modules designed to enhance vehicle safety, comfort, security and
efficiency. Our principal electronics and mobile communication product lines
include the following:
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION
------------ -----------
<S> <C>
Audio Systems A wide range of audio systems and components ranging
from AM radios to integrated compact disc players,
including the Monsoon(R) Audio System, which is
customized for each vehicle.
Communication Systems A wide range of communication and information
systems, including 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 Control Modules designed to optimize engine and transmission
Modules performance while improving reliability and cost
efficiency.
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.
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION
------------ -----------
<S> <C>
Safety Systems Products include frontal inside airbag controllers,
occupant positioning, adaptive restraints and
roll-over sensing.
</TABLE>
SAFETY, THERMAL & ELECTRICAL ARCHITECTURE. Our Safety, Thermal & Electrical
Architecture product sector accounted for $12.5 billion, or 39.9%, of our 1997
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.
- Interior Products. These products accounted for $4.4 billion, or 35.2%,
of the Safety, Thermal & Electrical Architecture product sector's 1997
net sales, excluding inter-sector sales. Our principal interior product
lines include the following:
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION
------------ -----------
<S> <C>
Safety/Airbag Systems Airbag systems and modules and adaptive restraint
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 Systems include power sliding doors, power 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.
</TABLE>
- Thermal Products. These products accounted for $2.8 billion, or 22.4%, of
the Safety, Thermal & Electrical Architecture product sector's 1997 net
sales, excluding inter-sector sales. Our principal thermal product lines
include the following:
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION
------------ -----------
<S> <C>
Thermal Management Systems Systems designed to optimize total vehicle thermal
management functions, efficiently maintain passenger
comfort and powertrain cooling in all climates and
driving conditions.
Climate Control Systems Systems which include HVAC modules, compressors and
condensors and are designed to efficiently maintain
passenger comfort in all climates and weather
conditions.
HVAC Systems and Modules HVAC systems and modules regulate airflow,
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.
</TABLE>
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- Power and Signal Distribution Products. These products accounted for $5.3
billion, or 42.4%, of the Safety, Thermal & Electrical Architecture
product sector's 1997 net sales, excluding inter-sector sales. Our
principal power and signal distribution product lines include the
following:
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION
------------ -----------
<S> <C>
Electrical/Electronic ("E/E") A wide range of products and services relating to E/E
Systems Centers system design and production, including E/E centers
designed 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 Communication Products include an optical star coupler, which
Systems distributes data in real time via plastic optical
fiber throughout an expandable network; and
customized multiplex systems and components.
Fiber Optic Lighting Systems DELight(TM) fiber optic lighting systems utilize
centrally located light sources to provide lighting
throughout the vehicle.
Ignition Wiring Systems A wide range of ignition wiring systems and
components.
Sensors A wide range of 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 A wide range of pushbutton switches, elastomer
switches incorporating integrated electronics and
miscellaneous specialty switches.
</TABLE>
DYNAMICS & PROPULSION. Our Dynamics & Propulsion product sector accounted
for $13.7 billion, or 43.6%, of our 1997 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 precise
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.
- Energy and Engine Management Products. These products accounted for $6.4
billion, or 46.7%, of the Dynamics & Propulsion product sector's 1997 net
sales, excluding inter-sector sales. Our principal energy and engine
management product lines include the following:
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION
------------ -----------
<S> <C>
Air/Fuel Management Subsystems measure, control, manage and deliver a
precise combustible mixture of fuel and air to the
combustion chamber.
</TABLE>
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<PAGE> 89
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION
------------ -----------
<S> <C>
Energy Storage and Conversion The generator and battery comprise the principal
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 FREEDOM(TM) 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 After-Treatment Subsystems carry gas away from the engine and 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 precise and
robust 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 Systems New propulsion technologies include different vehicle
system approaches--from powertrain integration to
advanced electro-chemical fuel cell engines.
</TABLE>
- Chassis Products. These products accounted for $4.1 billion, or 29.9%, of
the Dynamics & Propulsion product sector's 1997 net sales, excluding
inter-sector sales. Our principal chassis product lines include the
following:
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION
------------ -----------
<S> <C>
Intelligent Chassis Control TRAXXAR(TM) vehicle stability enhancement system
Systems integrates all major chassis control
systems--steering, braking, suspension and
powertrain--to provide optimum ride and handling
performance.
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 to deliver high-quality brake balance
regardless of vehicle loading or brake pad wear.
</TABLE>
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<PAGE> 90
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION
------------ -----------
<S> <C>
Advanced Ride Control Manual Selectable Ride System is a controlled
Suspension Systems suspension system designed with two independent
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 Modules Systems and modules include complete wheel-to-wheel
modules, chassis corner modules, brake corner
modules, damper modules and bearings.
Brake Systems Anti-lock brake systems feature precision solenoid
technology and can accommodate traction control,
variable effort steering and other vehicle
enhancements.
Suspension and Brake Components Components include calipers, rotors, drums, master
cylinders, boosters, drum brake assemblies, shock
absorbers and leveling height sensors.
</TABLE>
- Steering Products. These products accounted for $3.2 billion, or 23.4%,
of the Dynamics & Propulsion product sector's 1997 net sales, excluding
inter-sector sales. Our principal steering product lines include the
following:
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION
------------ -----------
<S> <C>
Steering Systems A wide range of steering components and fully
integrated systems. Components include hydraulic
pumps, steering gears and steering hoses.
Columns and Intermediate Shafts A wide range of steering columns, including TILT
WHEEL(TM), LUXURY-TILT(TM) power adjustable wheel
function 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 Performance E-STEER(TM) Electric Power Steering is an
Steering Systems all-electric, engine independent system featuring
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.
</TABLE>
COMPETITION
GENERAL. 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.
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<PAGE> 91
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.
We also face significant competition within each of our three major product
sectors. In addition to the competitors identified above, our most significant
competitors within each product sector are described below.
ELECTRONICS & MOBILE COMMUNICATION. Our principal competitors in the
Electronics & Mobile Communication product sector include the following: Siemens
AG, Mannesman VDO AG and Motorola, Inc.
SAFETY, THERMAL & ELECTRICAL ARCHITECTURE. Our principal competitors in the
Safety, Thermal & Electrical Architecture product sector include the following:
Yazaki Corp., Valeo SA, Autoliv Inc. and TRW Inc.
DYNAMICS & PROPULSION. Our principal competitors in the Dynamics &
Propulsion product sector include the following: LucasVarity PLC, NSK Ltd.,
Siemens AG and TRW Inc.
MANUFACTURING
GLOBAL FOOTPRINT. Delphi has an extensive world manufacturing presence, as
well as the related engineering and technical support. As of September 30, 1998,
Delphi operated 169 wholly owned and leased manufacturing sites and 40 joint
ventures in 36 countries, representing every major region of the world. We also
maintain a network of technical centers, including engineers and technicians, in
every major region around the world to provide related engineering and technical
support. We believe that our manufacturing presence is one of the most expansive
in the global automotive parts industry.
DELPHI MANUFACTURING SYSTEM. Over the last several years, we have initiated
several important programs designed to increase manufacturing efficiencies and
reduce our costs. Most recently, we have developed and are currently in the
process of implementing the Delphi Manufacturing System. This lean manufacturing
system focuses on reducing total manufacturing costs and driving toward
"one-piece flow" by utilizing cell manufacturing techniques and value stream
mapping. Compared to the more traditional, less flexible mass production line
design, the Delphi Manufacturing System enables us to maintain our product
output consistent with our customers' requirements in a more efficient manner.
The lean manufacturing cells utilized under this system have enhanced our
ability to facilitate changes to product design requirements in response to
changing customer needs and regulatory requirements and to respond more quickly
to changes in our customer's volume requirements.
Our strategy for achieving company-wide lean manufacturing involves a
careful assessment of all manufacturing plants against industry benchmark
performance standards. This is followed by the creation of an action plan to
improve each facility by implementing the Delphi Manufacturing System. Lean
manufacturing concepts which have been applied to our manufacturing operations
under this system include synchronous operations, a plan to produce every part
every day, low-volume production to meet the different demands of several
customers and one-piece flow. To date, the Delphi Manufacturing System has
resulted in significant cost savings, including reduction in plant-floor costs
in many of our manufacturing facilities. We expect to continue to implement the
Delphi Manufacturing System in all of our operations on a worldwide basis. For
more information about the Delphi Manufacturing System, see "--Strategy--Improve
Operating Performance."
SUPPLY-IN-LINE SEQUENCE. Principally as a result of lean manufacturing
initiatives designed to reduce assembly costs, VMs often require their suppliers
to provide just-in-time delivery of pre-assembled systems or modules directly to
their production lines. Just-in-time delivery provides multiple, small-batch
deliveries on an as-needed basis compared to traditional large-batch deliveries
which increase inventory levels and reduce the
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<PAGE> 92
VM's assembly efficiency. Just-in-time delivery generally requires that the
supplier have a local presence where some sub-assembly functions are performed
in close proximity to the VM's manufacturing facility. As a result, the
supplier's facility becomes, in effect, an extension of the VM's manufacturing
process.
Our "supply-in-line sequence" process takes just-in-time delivery one step
further by providing our products not only when the VM needs them, but also in
the correct assembly sequence. For example, one of our supply-in-line-sequence
customers is Mercedes-Benz. Currently, we assemble and deliver cockpit modules
for the Mercedes sports utility vehicle that are sequentially unloaded from the
container, with the correct color and options, for attachment directly onto the
vehicle as it moves down the assembly line. Our supply-in-line sequence process
enables us to better service our VM customers' needs through the coordination of
our own manufacturing processes with those of our customers.
PURCHASING
We use global purchasing to obtain globally competitive prices for our
direct and indirect materials, machinery and equipment and services, as well as
for parts we purchase from other suppliers for use in our product offerings. We
believe that our size enables us to have sufficient scale and purchasing
leverage to avoid incurring incremental purchasing costs following our
separation from General Motors. In 1997, our total purchases were about $15
billion. This amount covered our purchases of parts from other suppliers for use
in our product offerings, as well as raw materials and associated freight and
production-related services.
We purchase from suppliers who offer us the best products in terms of
quality, service, technology and price. We intend to continue using certain
information technology systems used by GM's purchasing program during a
transitional period following our separation from GM. For more information, see
"Arrangements Between Delphi and General Motors--Purchasing." Our purchasing
organization is organized according to commodity groups and global regions and
focuses on global sourcing through multi-year contracts. Through leveraging our
economics of scale and global purchasing needs, we seek to develop and maintain
an extensive base of suppliers capable of servicing our supply needs on a
worldwide basis.
To ensure a consistent high-quality supply of goods and services, our
purchasing organization uses a common supplier development and quality process.
We have instituted common purchasing systems, policies and procedures throughout
our global operations to leverage our economies of scale in the purchasing area.
The organizational structure of our purchasing system includes commodity
directors responsible for purchasing strategy, purchasing directors who execute
specific purchases and regional directors to insure consistent purchasing
behavior on a global basis. We have also established purchasing creativity teams
which meet on a regular basis to evaluate and focus our available market
information to develop strategies for the team's product.
We purchase a wide variety of raw materials for use in our manufacturing
processes. The principal raw materials we purchase include platinum group
metals, copper, aluminum, steel, lead and resins. With respect to raw materials,
we typically negotiate our purchases on the terms and conditions of our standard
purchase orders or long-term contracts. Our positive relationships with our
suppliers generally allow us to schedule precise quantities and types of raw
materials on short notice, thereby enabling us to maintain relatively low
inventories.
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. Delphi has not experienced any significant shortages
of raw materials and normally does not carry inventories of raw materials or
finished products in excess of those reasonably required to meet production and
shipping schedules, except for the three to four month supply of platinum group
metals.
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<PAGE> 93
We procure a wide variety of products and machinery for use in our
manufacturing operations, including, among other things, airbags, machined
parts, active and passive electrical components, stampings, fasteners, castings,
die cuts, bearings, motors, audio and communication products, displays, sensors
and electronic assembly. We believe that we maintain strong relationships with a
sufficient number of suppliers to ensure a reliable supply of such products and
machinery to accommodate our production schedule.
We have not experienced any significant 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 a three to four month supply of platinum group
metals as described above.
INFORMATION TECHNOLOGY
In the operation of our business, we utilize information technology systems
and services to support our company's infrastructure through the management and
processing of information essential to our operations. "Information technology"
principally consists of business information systems, such as computer
application software, and infrastructure, such as personal computers, operating
systems, networks and devices like switches and routers. These information
technology systems and services manage and process information relating to a
broad range of our company's infrastructure functions, including financial,
engineering, environmental, human resources, manufacturing, legal, logistics,
purchasing, warranty and service as well as many other key functions.
We have historically relied largely on information technology systems and
services provided through General Motors. These information technology systems
utilize GM-developed computer software systems and information technology
services provided by GM's former subsidiary, Electronic Data Systems Corporation
("EDS"), pursuant to a master information technology services agreement between
GM and EDS. The systems provided through GM support our human resources,
purchasing, finance, tax, customs, planning and material management functions.
We are in the process of implementing throughout our global operations on
an incremental basis new enterprise software that will replace the existing
software systems provided through GM. This system is based on the SAP AG system.
We expect that this enterprise software will provide us with enhanced
information technology systems capabilities, including with respect to Year 2000
issues at certain of our operations. For more information about Year 2000 issues
and our remediation efforts relating thereto, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000."
We expect that the new enterprise software will enable us to run many
internal, interdependent processes contemporaneously so that we can serve our
customers in a more effective and cost-efficient manner by allowing different
computer platforms at multiple locations to share information on a real-time
basis. We believe that this will facilitate the sharing of information more
freely among our operating units and functions and thus improve our operating
performance. As a result of the full implementation of this new system, we
expect to realize cost savings throughout our operations.
Until our new enterprise software system is fully implemented, we intend to
continue to utilize certain common systems and services provided by GM pursuant
to transitional arrangements entered into in connection with our separation. For
more information, see "Arrangements Between Delphi and General
Motors--Purchasing" and "--Interim Services." As our new software system is
implemented throughout our operations, we will migrate services from the
existing GM system to the new system. In the interim, we have implemented
security measures between the GM software and our data for the purpose of
eliminating potential access by GM to confidential information, particularly
proprietary information regarding our non-GM customers. We expect the
multi-phase implementation of the new system to be completed within about five
years. We are currently in the process of completing the initial implementation
phase, which principally involves certain of our operations in Europe and North
America.
We believe that these information technology systems and services are
adequate to support our company's information infrastructure.
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<PAGE> 94
INTELLECTUAL PROPERTY
We have generated a large number of patents and trademarks in the operation
of our business. Our separation arrangements with General Motors generally
provide that we will own all 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 patents and patent applications. In addition, we and GM have agreed to
license certain of our existing patents to each other. For more information
regarding the separation arrangements relating to intellectual property, see
"Arrangements Between Delphi and General Motors--Intellectual Property." 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
were recorded in 1996 and 1997. 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).
EMPLOYEES; UNION REPRESENTATION
GENERAL. As of September 30, 1998, we employed 200,463 persons, including
33,310 salaried employees and 167,153 hourly employees. Of our hourly employees,
about 96% are represented by about 53 unions, including the UAW, the IUE and the
USW. The UAW is our largest union, representing about 29% of our unionized
employees. Our union representation by major region as of September 30, 1998 is
indicated in the table below:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
REGION UNIONS EMPLOYEES
------ --------- ---------
<S> <C> <C>
United States
UAW............................................ 1 46,032
IUE............................................ 1 14,505
USW............................................ 1 2,078
Other unions................................... 3 500
-- -------
Total United States......................... 6 63,115
-- -------
Canada........................................... 2 968
Mexico........................................... 6 58,297
Europe........................................... 32 30,558
South America.................................... 5 6,578
Asia/Pacific..................................... 2 175
-- -------
Total....................................... 53 159,691
== =======
</TABLE>
The national collective bargaining agreements negotiated by GM with the
unions currently apply to our workforce and will continue to apply to our
workforce after the Offering. 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.
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The percentage of our employees located outside the United States and
Canada has increased from about 38% in 1992 to about 56% in 1997. 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.
LABOR RELATIONS. In the past we have been adversely affected by work
stoppages that have led to the shutdown of our plants. We experienced work
stoppages at certain of our facilities in 1996, 1997 and 1998. Strikes by the
UAW at a GM metal-fabricating operation and at one of our component
manufacturing facilities led to the shutdown of most of GM's North American
assembly plants in June and July 1998. Our lost production due to this shutdown
had an unfavorable after-tax impact on our net income of about $560 million in
the nine months ended September 30, 1998. Work stoppages at GM in the United
States in 1997 and in the United States and Canada in 1996, including at one of
our facilities, had an unfavorable after-tax impact on our net income of $92
million and $281 million, respectively, after considering partial recovery of
lost production. None of these work stoppages, however, affected our deliveries
to our non-GM customers.
We also recognize that a key element of our long-term competitiveness is
developing a constructive working relationship with our unions. We emphasize the
sharing of relevant information with our local and international union
leadership worldwide and working with the unions to jointly develop local work
rules and practices. We have actively engaged our unions in major initiatives
designed to improve the viability of our operations. Both our local and
international unions have cooperated with our management in developing plans to
improve certain uncompetitive operations as part of our "fix/sell/close"
process.
As discussed above under "--Strategy--Improve Operating Performance--Labor
Relations," we believe that our separation from General Motors and establishment
as a fully independent company with control over our own labor relations will
provide us certain labor relations benefits which will enable us, over time, to
increase our competitiveness. However, we cannot assure you as to when or the
extent to which we will achieve these benefits.
See "Risk Factors--Risk Factors Relating to Separating Our Company from
General Motors--We May Be Unable to Increase Our Competitiveness if We Fail to
Improve our Labor Relations and Establish More Flexible Work Rules and Practices
Following Our Separation from General Motors" and "--Risk Factors Relating to
Our Business--Our Business May Be Adversely Impacted by Work Stoppages and Other
Labor Relations Matters."
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, pursuant to certain arrangements described under "Arrangements
Between Delphi and General Motors--Real Estate and Environmental." We expect to
purchase our headquarters upon the expiration of our agreement with GM with
respect thereto.
We also maintain regional headquarters for our Asia/Pacific region in
Tokyo, Japan, for our Europe/ Africa/Middle East 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 described under "Arrangements Between Delphi and
General Motors--International Agreements" but excludes our joint ventures and
other investments, shows our principal facilities as of September 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF TOTAL OWNED TOTAL LEASED
REGION SITES SQUARE FOOTAGE SQUARE FOOTAGE
------ --------- -------------- --------------
<S> <C> <C> <C>
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
=== ========== ==========
</TABLE>
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In some cases, several of our manufacturing sites, technical centers and/or
customer service centers and sales activity offices are located at a single
multiple-purpose site. We also maintain a limited number of miscellaneous
facilities. The following table, which gives full effect to the international
asset transfers described under "Arrangements Between Delphi and General
Motors--International Agreements," but does not reflect our joint ventures and
other investments, shows our capabilities as of September 30, 1998:
<TABLE>
<CAPTION>
CUSTOMER
MANUFACTURING TECHNICAL CENTERS AND
REGION SITES CENTERS SALES OFFICES
------ ------------- --------- -------------
<S> <C> <C> <C>
United States/Canada......... 48 14 11
Europe/Middle East/Africa.... 65 7 20
Mexico/South America......... 41 4 6
Asia/Pacific................. 15 2 14
--- -- --
Total................... 169 27 51
=== == ==
</TABLE>
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.
ENVIRONMENTAL MATTERS
Delphi is 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 complete 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.
Delphi is 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 September 30, 1998, Delphi had recorded a reserve of about
$19 million for such environmental investigation and cleanup. We cannot assure
you that our environmental cleanup costs and liabilities will not exceed the
current amount of our 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
Delphi and General Motors--Real Estate and Environmental."
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
intend to pay the penalty on behalf of GM and then seek reimbursement from GM
pursuant to the separation arrangements.
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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
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 or sell in the future
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
shall 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 be properly functioning. 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 "Arrangements Between Delphi and General
Motors--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 VM by the supplier. VMs are increasingly requiring their
outside suppliers to guarantee or warrant their products and to bear the costs
of repair and replacement of such products under new vehicle warranties. 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 an
"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 in amounts
determined at that time to be adequate, with reasonable deductibles or
self-insured retentions that will allow for the most effective financing of
predictable losses. 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.
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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, the individuals who are serving on our Board
of Directors and the individuals who are expected to be elected to our Board of
Directors in connection with the closing of the Offering. Our Board currently
has five members. Three of our directors, Messrs. Losh, Pearce and Smith, are
currently executive officers and/or directors of General Motors, and one of our
directors, Mr. Wyman, was a director of General Motors until October 1998. In
connection with the closing of the Offering, the persons listed below as
director nominees will join the Board. We expect to add an additional
independent Board member in the several months following the Offering. 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 Nominee
Virgis W. Colbert.................... 59 Director Nominee
Shoichiro Irimajiri.................. 58 Director Nominee
Susan A. McLaughlin.................. 46 Director Nominee
John D. Opie......................... 61 Director Nominee
Roger S. Penske...................... 61 Director Nominee
</TABLE>
Our Board will be divided into three classes serving staggered terms. After
an initial transition period following the Offering, 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
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of office expire. We expect that, after the Offering, Messrs. Battenberg,
Colbert and Irimajiri and Ms. McLaughlin will be designated as Class I
directors, with their terms of office expiring in 2000; Messrs. Bernardes Neto,
Opie and Penske will be designated as Class II directors, with their terms of
office expiring in 2001; and Messrs. Losh, Pearce, Smith and Wyman will be
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
appointed 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
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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.
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.
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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.
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.
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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.
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
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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.
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 1965 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 DTGP, Inc., which is a partner with Robert Bosch
Corporation in a
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partnership known as Diesel Technology Company. He is Chairman of the Board of
Penske Truck Leasing Corporation, a Director of General Electric Company and a
Director of 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.
COMMITTEES OF THE BOARD OF DIRECTORS
We will 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
public policy and corporate governance committee (the "Corporate Committee").
Messrs. Battenberg, Losh, Pearce, Smith and Wyman have been appointed as the
initial members of the Executive Committee. Mr. Wyman has been appointed as the
initial member of the Audit Committee. Messrs. Pearce, Smith and Wyman have been
appointed as the initial members of the Compensation Committee. As additional
persons join our Board in connection with and following the Offering, we expect
that membership on some of these committees will be modified and that we will
complete the appointment of other members 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 will receive no
remuneration for serving as directors or committee members. Non-employee
directors will receive compensation consisting of a cash retainer and common
stock units. Non-employee directors other than the lead independent director
will receive total compensation of $110,000 per year, equally divided between
the two components, and the lead independent director will receive total
compensation of $300,000 per year, $100,000 of which will be cash and $200,000
of which will be common stock units. Non-employee directors other than the lead
independent director will receive an additional fee of $5,000 per year for
serving as chairperson of a board committee.
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.
100
<PAGE> 105
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
All of our stock is currently owned by General Motors and thus none of our
officers, directors or director nominees own any of our common stock. 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
Offering, certain executives, including the executive officers named in the
Summary Compensation Table in the "--Executive Compensation" section below, will
be awarded options to purchase shares of Delphi common stock and will be 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 GM $1 2/3 common
stock beneficially owned on December 31, 1998 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>
SHARES
BENEFICIALLY DEFERRED TOTAL STOCK
NAME OWNED(1) STOCK UNITS(2) SHARES OPTIONS(3)
---- ------------ -------------- ------ ----------
<S> <C> <C> <C> <C>
J.T. Battenberg III........................ 22,067 14,271 36,338 159,115
Alan S. Dawes.............................. 7,926 2,812 10,738 69,876
David R. Heilman........................... 12,193 1,547 13,740 11,739
Donald L. Runkle........................... 9,250 3,247 12,497 52,792
Paul J. Tosch(4)........................... 7,331 3,547 10,878 30,015
Thomas H. Wyman............................ 1,000 6,796(5) 7,796 2,084
John F. Smith, Jr. ........................ 117,152 52,507 169,659 934,689
Harry J. Pearce............................ 29,960 23,772 53,732 321,837
J. Michael Losh............................ 25,518 13,387 38,905 312,508
Oscar De Paula Bernardes Neto.............. 0 0 0 0
Virgis W. Colbert.......................... 0 0 0 0
Shoichiro Irimajiri........................ 0 0 0 0
Susan A. McLaughlin........................ 0 0 0 0
John D. Opie............................... 0 0 0 0
Roger S. Penske............................ 0 0 0 0
All directors, director nominees and
executive officers of Delphi as a group
(31 persons)............................. 286,881 127,257 414,138 2,161,183
</TABLE>
- ------------------
(1) No individual director, director nominee or executive officer beneficially
owns 1% or more of the GM $1 2/3 common stock, nor do the directors,
director nominees and executive officers as a group.
(2) 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.
(3) Includes the number of shares of GM $1 2/3 common stock that may be acquired
through the exercise of stock options exercisable within 60 days of December
31, 1998. The shares reported in this column reflect the adjustments to the
original option grants to reflect the effect of the recapitalization of GM
in connection with transactions completed by General Motors in connection
with the 1997 spin-off of the defense electronics business of its Hughes
Electronics subsidiary and the related transfer of Delco Electronics to us
from Hughes Electronics.
(4) Data for Mr. Tosch include 2,009 shares owned by, and 3,285 shares
acquirable pursuant to options held by, his spouse.
(5) Includes amounts under the General Motors Deferred Compensation Plan for
Non-Employee Directors and the General Motors Director's Long-Term Stock
Incentive Plan. These amounts relate to compensation deferred while Mr.
Wyman was a member of the Board of Directors of GM.
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<PAGE> 106
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
chief executive officer and the four other executive officers of Delphi who,
based on salary and bonus compensation from General Motors and its subsidiaries,
were the most highly compensated officers of Delphi for the year ended December
31, 1998. All information set forth in this table reflects compensation earned
by such individuals for services with General Motors and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ---------- -------------
------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING LONG-TERM ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS INCENTIVE COMPENSATION
POSITION YEAR ($) ($)(1) ($) (#)(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.
(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 $1 2/3 common stock
and GM Class H common stock under the General Motors 1992 Performance
Achievement Plan. The performance period for such awards was 1995 through
1997 and 1996 through 1998. The awards to Mr. Battenberg vest in four equal
installments. The first installment vests on the date the final award is
determined, the second installment vests at the end of the year in which the
final award was determined, the third installment vests one year after the
second installment vests. The fourth installment of the 1996-1998 grant
vests one year after the third installment and the fourth installment of the
1995-1997 grant vests subsequent to retirement. The awards to the other
named executive officers vest in one or two equal annual installments,
depending on the value of the award payout. Dividend equivalents are paid on
unvested shares. The following table sets forth the number of GM shares of
such award that were vested and paid to the executive officers and the
number of shares that remained unvested and unpaid:
<TABLE>
<CAPTION>
FIRST AND SECOND INSTALLMENT OF
1995-97 GRANT AND THIRD
INSTALLMENT OF 1994-96 GRANT
1996-98 GRANT ----------------------------------
------------------------------ SHARES VALUE OF SHARES
SHARES VESTED SHARES VESTED UNVESTED
VESTED AS OF AS OF AS OF
JANUARY SHARES DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999(#) UNVESTED(#) 1998(#) 1998($)* 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.
102
<PAGE> 107
(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.
As a separate company, Delphi will establish 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
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
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.
103
<PAGE> 108
EXERCISES OF STOCK OPTIONS
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>
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 $71.56 on the NYSE
on December 31, 1998.
LONG TERM INCENTIVE PLAN AWARDS
The following table shows long term incentive plan awards made under the
General Motors 1997 Performance Achievement Plan in the year ended December 31,
1998 to the executive officers named in the Summary Compensation Table in the
"--Executive Compensation" section above.
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF PERFORMANCE OR NON-STOCK PRICE-BASED PLANS(1)
SHARES, UNITS OTHER PERIOD --------------------------------
OR OTHER UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS(#) OR PAYOUT ($) ($) ($)
---- ------------- ---------------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
J.T. Battenberg III................... n/a 1998-2000 320,000 800,000 1,600,000
Donald L. Runkle...................... n/a 1998-2000 84,000 210,000 420,000
David R. Heilman...................... n/a 1998-2000 80,000 200,000 400,000
Paul J. Tosch......................... n/a 1998-2000 80,000 200,000 400,000
Alan S. Dawes......................... n/a 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.
104
<PAGE> 109
CHANGE IN CONTROL AGREEMENTS
In connection with this Offering, Delphi intends to enter into change in
control agreements ("Change in Control Agreements") with certain of its officers
(each, a "Participant"). The Change in Control Agreements will 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
(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:
- all of the Participant's unvested options will vest and become
immediately exercisable in accordance with their terms;
- all of the Participant's long-term incentive awards will become payable
immediately on a pro-rated basis, calculated based on current forecasted
payouts;
- 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;
- 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
- 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:
<TABLE>
<S> <C>
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
</TABLE>
105
<PAGE> 110
In addition, at the time of the second triggering event:
- the Participant's life-insurance coverage will be continued and the
premiums will be paid for thirty-six months;
- the Participant may receive reimbursement of up to $50,000 for expenses
related to outplacement services;
- the Participant's legal fees and expenses will be paid if litigation is
required to enforce these change in control rights;
- the Participant will be able to retain his or her company car, if any,
for one year thereafter; and
- the Participant will no longer be subject to the non-competition
provisions of the Change in Control Agreement.
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 21 of our officers.
INCENTIVE PLANS
Delphi has 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 will be administered by the Compensation Committee
and the Delphi Strategy Board will administer the Classified Plan.
FOUNDERS GRANTS. In connection with the Offering, certain executives will
be awarded "founders grant" options to purchase shares of Delphi common stock
and will be awarded "founders grant" restricted stock units. In addition, other
employees of Delphi will be awarded "founders grant" options to purchase shares
of Delphi common stock. The founders grants to executives will be made pursuant
to the Stock Incentive Plan and the founders grants to other employees will be
made pursuant to the Classified Plan. Stock options awarded to executives as
founders grants will vest in equal annual installments over the four years
following the date on which they are granted and restricted stock units awarded
to executives as founders grants will vest in full four years from the date on
which they are granted. Stock options awarded to all other employees as founders
grants will vest in full two years from the date on which they are granted. The
exercise price per share for these stock options will be equal to 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 will be equal to the price per share
at which the common stock is sold in the Offering.
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.
106
<PAGE> 111
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 "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.
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
107
<PAGE> 112
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.
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
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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.
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
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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.
<TABLE>
<CAPTION>
YEARS OF PART B CREDITED SERVICE
AVERAGE ANNUAL -------------------------------------------
BASE SALARY(A) 15 25 35 45
- -------------- -- -- -- --
<S> <C> <C> <C> <C>
$ 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
</TABLE>
--------------------------------
(a) Average annual base salary means the average of the highest
five years of base salary paid during the final ten years of
service.
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
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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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ELIGIBLE YEARS OF PART B CREDITED SERVICE
TOTAL DIRECT --------------------------------------------------------
COMPENSATION(A) 15 20 25 30 35
- --------------- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 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
</TABLE>
--------------------------------
(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.
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ARRANGEMENTS BETWEEN DELPHI AND GENERAL MOTORS
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 or will enter 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 to be entered into prior to or in connection with the
closing of the Offering include, among others, agreements relating to the
Offering 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 may still be held by GM or its
affiliates at the time of the completion of 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. However, the
information included in this prospectus, including our consolidated financial
statements, assumes the completion of all such transactions. See
"--International Agreements." 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 in the section "--Separation
Agreement--Certain Definitions Relating to the Separation Agreement" below or
elsewhere herein have their respective meanings as set forth in the Separation
Agreement.
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 FORMS OF
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 WITH THE SEC AS
EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
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 is not
making 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 the Contribution Date 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 for a period of twelve months following
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the Contribution Date. 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 prior to the date that is twelve months from the Contribution Date. 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 the
Contribution Date, GM has agreed to provide such transition service to us for an
additional period not to exceed six months.
For all such 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, except as described below, 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
the Contribution Date, 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 the Financial Services Supply Agreement, the Commercial Travel Services
Supply Agreement, any real estate leases and any health care services pursuant
to the Employee Matters Agreement.
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 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
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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.
- 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.
- 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.
- 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 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
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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 of which this prospectus forms a part,
as amended at December 22, 1998, which is the date of the Separation Agreement.
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Such financial statements are substantially similar to the financial statements
for such period included elsewhere in this prospectus.
"Delphi Liabilities" means all of the Liabilities of General Motors that:
(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
GENERAL. 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 this
Offering and the Distribution, and sets forth certain covenants we have agreed
to for various periods following the Offering 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. See "Risk Factors--Risk Factors Relating to Separating
Our Company from General Motors--Our Business May Be Adversely Affected if
General Motors Does Not Complete Its Divestiture of Our Company."
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
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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 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:
- 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.
- 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.
- 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:
- 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
- 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.
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- 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:
- we will not voluntarily dissolve or liquidate; and
- 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:
- 80% or more of the total combined voting power of all outstanding shares
of voting stock of such subsidiary; and
- 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.
- Discharge 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.
These covenants will not prohibit us from implementing or complying with
our Rights Plan or any transaction permitted by an IRS ruling or a tax opinion.
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:
- 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
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- 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. After the Offering, General Motors will continue to
own 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:
- 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:
- 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:
- 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
- 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.
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"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.
- Other Covenants. For so long as GM continues to own at least 50% of our
outstanding common stock, we have agreed that:
- we 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 as described under "Description of Capital
Stock--Rights Plan;"
- we 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
- to 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.
- Financial Information. 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 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.
- 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
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
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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 OFFERING. We have generally agreed to
indemnify General Motors and its affiliates against all liabilities arising out
of any material untrue statements and omissions in this prospectus and the
registration statement of which it is a part. 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.
INDEMNIFICATION RELATING TO 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 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. In general, unless otherwise provided for in the IPO and
Distribution Agreement or any other agreement, we and GM will pay our respective
costs and expenses incurred in connection with the Contribution, the Offering
and the Distribution.
- Expenses Relating to the Offering. GM has generally agreed to pay all
costs and expenses relating to the Offering, other than the costs of
certain of our advisors. We will pay the underwriting discounts and
commissions and our internal costs and expenses. In addition, we have
agreed that GM will be entitled to all amounts received from the
underwriters for reimbursement of Offering expenses.
- Expenses Relating to the Distribution. GM has generally agreed to pay all
costs and expenses relating to 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. We cannot,
however, assure you as to whether or when the Distribution will occur. See "Risk
Factors--Risk Factors Relating to Separating Our Company from General
Motors--Our Business May Be Adversely Affected if General Motors Does Not
Complete Its Divestiture of Our Company." 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 with certain registration rights relating to the shares of our common
stock which it holds. These registration rights generally become effective at
such time as GM informs us that it no longer intends to proceed with or complete
the Distribution.
SHARES COVERED. The Registration Rights Agreement covers those shares of
our common stock that are held by GM immediately following this Offering and
continue to be held by GM on the date on which GM notifies us that it no longer
intends to proceed with or complete the Distribution.
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DEMAND REGISTRATIONS. 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.
- Terms 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.
Except for an offering described in clauses (3) and (4) above, each
Demand Registration must meet a certain minimum aggregate expected
offering price.
- Timing 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 judgement 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.
- Priority on Demand Registrations. Other parties, including Delphi, can
participate in any Demand Registration only if all of the securities GM
proposes to include in such registration are so included.
- Selection of Professionals. General Motors will select the investment
banker(s) and manager(s), subject to our reasonable objection in certain
circumstances, as well as any financial printer, solicitation and/or
exchange agent and counsel for the Offering. We will select our own
outside counsel and independent auditors.
PIGGYBACK 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").
- Priority on Piggyback Registrations. If a Piggyback Registration is being
made on our behalf and the underwriters advise us that cutbacks are
necessary, we must include in such registration:
- first, the securities we propose to offer;
- second, the securities requested to be included by GM; and
- third, any other securities requested to be included in such
registration.
If a Piggyback Registration is being made on behalf of other holders of our
securities and the underwriters advise us that cutbacks are necessary, we
must include in such registration:
- first, the securities requested to be included therein by the holders
requesting such registration and the securities requested to be included
therein by GM, pro rata among such holders and GM on the basis of the
number of securities owned by each such holder; and
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- second, any other securities requested to be included in such
registration.
- Selection of Underwriters. 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.
HOLDBACKS. The Registration Rights Agreement contains customary holdback
provisions.
REGISTRATION PROCEDURES AND EXPENSES. 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.
INDEMNIFICATION. The Registration Rights Agreement 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.
TRANSFER. GM may transfer shares covered by the Registration Rights
Agreement and the holders of such transferred shares will be entitled to the
benefits of the Registration Rights Agreement; provided that each such
transferee agrees to be bound by the terms of the Registration Rights Agreement.
Such transferees will be entitled to the rights available to GM described above;
provided, however, that the holder or holders of a majority of the shares
covered by the Registration Rights Agreement will be entitled to exercise
certain of such rights. Any successor entities to our company will be bound by
the terms of the Registration Rights Agreement.
DURATION. The registration rights under the Registration Rights Agreement
will remain in effect with respect to any shares of Delphi common stock until:
- such shares have been sold pursuant to an effective registration
statement under the Securities Act;
- such shares have been sold to the public pursuant to Rule 144 under the
Securities Act, or any successor provision;
- such shares 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 of them under the Securities Act or any similar
state law;
- such shares have ceased to be outstanding; and
- in the case of shares held by a transferee of GM, when such shares become
eligible for sale pursuant to Rule 144(k) under the Securities Act, or
any successor provision.
SUPPLY AGREEMENT
GENERAL. 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--even if we have not yet begun to supply products under such contracts,
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
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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. These
contractual commitments relate to the purchase of automotive parts by General
Motors for specific General Motors vehicle programs and fall into three
principal categories:
- short-term purchase orders, usually covering purchases for a one-year
term;
- long-term contracts, covering purchases for a period of more than one
year but less than the life of a vehicle program; and
- lifetime contracts, covering either the actual or anticipated life of the
vehicle program, which is generally five to six years for cars and seven
to eight years for trucks.
Long-term and lifetime contracts with GM typically incorporate the terms and
conditions set forth in the standard GM purchase order form, which we believe
are generally consistent with those prevailing in the automotive industry. All
existing contracts are subject to the volume and option mix of vehicles actually
produced by General Motors and other factors. See "Business of
Delphi--Industry--Awarded Business."
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
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.
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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.
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
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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 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.
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.
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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:
- material breach by the other party;
- insolvency or bankruptcy of the other party; or
- attachment, 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:
- 35% 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
- all 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
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basis, under terms no less favorable than those 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. For more information
about the status of GM's discussions with the unions, see "Business of
Delphi--Strategy--Improve Operating Performance--Labor Relations." The Employee
Matters Agreements generally provide for the following:
EMPLOYEE TRANSFERS. As of January 1, 1999, all GM salaried employees,
active and inactive, that are employees in our operations were transferred to
Delphi. GM U.S. hourly employees, active and inactive, that 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,
see "Business of Delphi--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
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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 September 30, 1998, Delphi's salaried and hourly OPEB obligation was about
$4.5 billion and the underfunded pension obligation was about $1.9 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 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 that
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.
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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:
- the 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 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 January 15, 1999, our employees held about 4,700,000 shares of GM
$1 2/3 common stock subject to options pursuant to GM Awards, about 1,738,000 of
which were exercisable as of January 15, 1999. If the Ratio were determined
using the $83.31 per share closing price of the GM $1 2/3 common stock on
January 15, 1999, as reported in The Wall Street Journal and a price of $16.50
per share of our common stock, which is the mid-point of the range set forth on
the cover page of this prospectus, the foregoing number of shares of GM $1 2/3
common stock subject to GM stock options would be replaced with options on about
23,718,000 shares of our common stock. As of January 15, 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
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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.
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 of 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.
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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:
- With 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.
- With 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.
- With 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.
- With 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.
- GM 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
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
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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:
- certain treasury, accounting, which includes accounts payable and
receivable, tax, travel, customs and payroll services;
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- certain information systems services, including financial, engineering,
environmental, human resources, manufacturing, communications, legal,
logistics, purchasing and warranty and service systems;
- a variety of employee-related administrative support services, including
human resource planning and employee placement and medical services;
- certain legal services;
- certain audit services; and
- managed 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 prospectus regarding our company and our facilities and operations,
including the information set forth in the "Business of Delphi" section and our
consolidated financial statements presented elsewhere in this prospectus,
assumes and gives effect to the completion of these transactions.
PRINCIPAL STOCKHOLDER
Prior to the Offering, all of the outstanding shares of our common stock
will be owned by General Motors. After the Offering, GM will own about 82.3%, or
about 80.2% if the U.S. underwriters exercise their over-allotment option in
full, of our outstanding common stock. Except for General Motors, we are not
aware of any person or group that will beneficially own more than 5% of the
outstanding shares of our common stock following the Offering.
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DESCRIPTION OF CAPITAL STOCK
Under Delphi's Restated Certificate of Incorporation, the authorized
capital stock of Delphi is 2,000,000,000 shares, of which 1,350,000,000 shares
are common stock, par value $0.01 per share, and 650,000,000 shares are
preferred stock, par value $0.10 per share. Immediately following the Offering,
565,000,000 shares of common stock, or 580,000,000 shares if the U.S.
underwriters exercise their over-allotment option in full, will be outstanding.
THE FOLLOWING DESCRIPTIONS ARE SUMMARIES OF THE MATERIAL TERMS OF OUR
RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS. REFERENCE IS MADE TO THE MORE
DETAILED PROVISIONS OF, AND SUCH DESCRIPTIONS ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO, THE RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS OF DELPHI,
COPIES OF WHICH ARE FILED WITH THE SEC AS EXHIBITS TO THE REGISTRATION STATEMENT
OF WHICH THIS PROSPECTUS IS A PART, AND APPLICABLE LAW.
COMMON STOCK
Holders of common stock will be entitled to one vote per share with respect
to each matter presented to our stockholders on which the holders of common
stock are entitled to vote. Except as may be provided in connection with any
preferred stock in a certificate of designation filed pursuant to the Delaware
General Corporation Law ("DGCL"), or as may otherwise be required by law or the
Restated Certificate of Incorporation, the common stock will be the only capital
stock of Delphi entitled to vote in the election of directors and on all other
matters presented to the stockholders of Delphi; provided that holders of common
stock, as such, will not be entitled to vote on any matter that solely relates
to the terms of any outstanding series of preferred stock or the number of
shares of such series and does not affect the number of authorized shares of
preferred stock or the powers, privileges and rights pertaining to the common
stock. The common stock will not have cumulative voting rights.
Subject to the prior rights of holders of preferred stock, if any, holders
of common stock are entitled to receive such dividends as may be lawfully
declared from time to time by the Board of Directors of Delphi. Upon any
liquidation, dissolution or winding up of Delphi, whether voluntary or
involuntary, holders of common stock will be entitled to receive such assets as
are available for distribution to stockholders after there shall have been paid
or set apart for payment the full amounts necessary to satisfy any preferential
or participating rights to which the holders of each outstanding series of
preferred stock are entitled by the express terms of such series.
The outstanding shares of our common stock are, and the shares of common
stock being offered hereby will be, upon payment therefor, validly issued, fully
paid and nonassessable. The common stock sold in the Offering will not have any
preemptive, subscription or conversion rights. Additional shares of authorized
common stock may be issued, as determined by the Delphi Board from time to time,
without stockholder approval, except as may be required by applicable stock
exchange requirements.
Delphi common stock has been approved for listing on the NYSE under the
symbol "DPH," subject to official notice of issuance.
PREFERRED STOCK
Our Board is empowered, without approval of the stockholders, to cause
shares of preferred stock to be issued from time to time in one or more series,
with the numbers of shares of each series and the designation, powers,
privileges, preferences and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof as fixed by our Board.
Among the specific matters that may be determined by the Board are:
- the designation of each series;
- the number of shares of each series;
- the rate of dividends, if any;
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- whether dividends, if any, shall be cumulative or non-cumulative;
- the terms of redemption, if any;
- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of Delphi;
- rights and terms of conversion or exchange, if any;
- restrictions on the issuance of shares of the same series or any other
series, if any; and
- voting rights, if any.
The Series A Preferred Stock described under "Rights Plan" below is a series of
preferred stock that has been authorized by our Board.
Although no shares of preferred stock are currently outstanding and Delphi
has no current plans to issue preferred stock, the issuance of shares of
preferred stock, or the issuance of rights to purchase such shares, could be
used to discourage an unsolicited acquisition proposal. For example, a business
combination could be impeded by the issuance of a series of preferred stock
containing class voting rights that would enable the holder or holders of such
series to block any such transaction. Alternatively, a business combination
could be facilitated by the issuance of a series of preferred stock having
sufficient voting rights to provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power and other rights of the
holders of the common stock. Although Delphi's Board is required to make any
determination to issue any such stock based on its judgment as to the best
interests of the stockholders of Delphi, it could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority,
of the stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over prevailing market
prices of such stock. Delphi's Board does not at present intend to seek
stockholder approval prior to any issuance of currently authorized stock, unless
otherwise required by law or applicable stock exchange requirements.
LIMITATION ON LIABILITY OF DIRECTORS
Delphi's Restated Certificate of Incorporation provides, as authorized by
Section 102(b)(7) of the DGCL, that a director of Delphi will not be personally
liable to Delphi or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability imposed by law, as in effect
from time to time:
- for any breach of the director's duty of loyalty to Delphi or its
stockholders;
- for any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL; or
- for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in the Restated Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
Delphi and its stockholders.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Delphi is a Delaware corporation and subject to Section 203 of the DGCL.
Generally, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested
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stockholder" for a period of three years after the time such stockholder became
an interested stockholder unless, as described below, certain conditions are
satisfied. Thus, it may make acquisition of control of our company more
difficult. See "--Certain Limitations on Changes of Control on Our Company"
below. The prohibitions in Section 203 of the DGCL do not apply if:
- prior to the time the stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote of at least 66 2/3% of
the outstanding voting stock that is not owned by the interested
stockholder.
Under Section 203 of the DGCL, a "business combination" includes:
- any merger or consolidation of the corporation with the interested
stockholder;
- any sale, lease, exchange or other disposition, except proportionately as
a stockholder of such corporation, to or with the interested stockholder
of assets of the corporation having an aggregate market value equal to
10% or more of either the aggregate market value of all the assets of the
corporation or the aggregate market value of all the outstanding stock of
the corporation;
- certain transactions resulting in the issuance or transfer by the
corporation of stock of the corporation to the interested stockholder;
- certain transactions involving the corporation which have the effect of
increasing the proportionate share of the stock of any class or series of
the corporation which is owned by the interested stockholder; or
- certain transactions in which the interested stockholder receives
financial benefits provided by the corporation.
Under Section 203 of the DGCL, an "interested stockholder" generally is
- any person that owns 15% or more of the outstanding voting stock of the
corporation;
- any person that is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period prior to the date on
which it is sought to be determined whether such person is an interested
stockholder; and
- the affiliates or associates of any such person.
Because General Motors owned more than 15% of our voting stock before we
became a public company in the Offering, Section 203 of the DGCL by its terms is
currently not applicable to business combinations with GM even though GM owns
15% or more of our outstanding stock. If any other person acquires 15% or more
of our outstanding stock, such person will be subject to the provisions of
Section 203 of the DGCL.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
Our Bylaws contain provisions requiring that advance notice be delivered to
Delphi of any business to be brought by a stockholder before an annual or
special meeting of stockholders and providing for certain procedures to be
followed by stockholders in nominating persons for election to the Delphi Board.
Generally,
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such advance notice provisions require that the stockholder must give written
notice to the Secretary of Delphi:
- in the case of an annual meeting, not less than 90 days nor more than 120
days before the first anniversary of the preceding year's annual meeting
of stockholders; and
- in the case of a special meeting, not less than 90 days, or, if later, 10
days after the first public announcement of the date of the special
meeting, nor more than 120 days prior to the scheduled date of such
special meeting.
For our first annual meeting, which will be held in 2000, notice must be given
no earlier than November 2, 1999 and no later than December 2, 1999. In each
case, the notice must set forth specific information regarding such stockholder
and each director nominee or other business proposed by the stockholder, as
applicable, as provided in the Bylaws. Notwithstanding the foregoing, any common
stockholder, including General Motors, who together with its affiliates owns
common stock entitled to exercise a majority of the voting power in an election
of directors may nominate one or more individuals for election as directors by
giving notice to Delphi not later than five days before the scheduled date for
the election of directors. Generally, only such business may be conducted at a
special meeting of stockholders as is set forth in the notice for such meeting.
Our Bylaws provide, in accordance with our Restated Certificate of
Incorporation, that except as may be provided in connection with the issuance of
any series of preferred stock, the number of directors shall be fixed from time
to time exclusively pursuant to a resolution adopted by a majority of the Whole
Board (as such term is defined in our Restated Certificate of Incorporation),
but shall not be less than three, provided that before the Trigger Date (as
defined below) such resolution shall be adopted by 80% of the Whole Board.
Delphi's Restated Certificate of Incorporation provides for a classified Board
of Directors, consisting of three classes as nearly equal in size as
practicable. Each class holds office until the third annual stockholders'
meeting for election of directors following the most recent election of such
class, except that the initial terms of the three classes expire in 2000, 2001
and 2002, respectively. See "Management--Directors, Executive Officers and Key
Employees of Delphi."
Subject to the rights of the holders of any series of preferred stock to
elect and remove additional directors under specified circumstances, on or after
the time when General Motors and its affiliates own less than a majority of
Delphi's then outstanding common stock (the "Trigger Date"), a director of
Delphi may be removed only for cause by affirmative vote of the holders of at
least a majority of the voting power of all outstanding shares of Delphi
generally entitled to vote in the election of directors (the "Voting Stock"),
voting together as a single class, and vacancies on our Board may only be filled
by the affirmative vote of a majority of the remaining directors. Prior to the
Trigger Date, subject to the rights of holders of any series of preferred stock,
a director of Delphi may be removed, with or without cause, by the affirmative
vote of the holders of at least a majority of the voting power of all Voting
Stock then outstanding, voting together as a single class, and vacancies on our
Board may be filled only by the affirmative vote of at least 80% of the
remaining directors then in office. Also, prior to the Trigger Date, the
affirmative vote of 80% of the Whole Board is required to establish committees
of the Board and to fill committee memberships.
Our Bylaws provide that our Board may establish policies with respect to
the categories of matters which require prior approval of our Board or a
committee thereof and that any such policy may provide that particular matters
require approval of up to 80% of the Whole Board. Prior to the Trigger Date, the
affirmative vote of 80% of the Whole Board is required to rescind or amend any
such policy. Pursuant to this provision of our Bylaws and policies adopted by
our Board thereunder, the approval of 80% of the Whole Board is presently
required, until the Trigger Date, for:
- significant corporate transactions, including acquisitions, divestitures,
mergers, equity injections, capital expenditures, restructurings and
reorganizations;
- significant financing transactions, including borrowings, guarantees and
other financial support arrangements;
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- all issuances, redemptions and reclassifications of Delphi securities and
any other change in the rights of holders of Delphi securities;
- declarations of dividends;
- settlements of significant patent and litigation matters; and
- approval of all budgets and business plans.
Based on the expected composition of our Board following the Offering, an
affirmative vote of 80% of the Whole Board would require the affirmative vote of
at least one of our directors who is also a director and/or officer of GM.
Our Restated Certificate of Incorporation provides that, after the Trigger
Date, stockholders may not act by written consent in lieu of a meeting. After
the Trigger Date, special meetings of the stockholders may be called only by a
majority of the Whole Board, but may not be called by stockholders. Before the
Trigger Date, Delphi's Secretary is required to call a special meeting of the
stockholders at the request of GM or its affiliates and stockholder action may
be taken by written consent in lieu of a meeting.
Our Restated Certificate of Incorporation also contains a "fair price"
provision that applies to certain business combination transactions involving
any person or group that is or has announced or publicly disclosed a plan or
intention to become the beneficial owner of at least 10% of our outstanding
Voting Stock, other than General Motors until immediately following the date on
which General Motors shall cease to be a beneficial owner of 10% of the
outstanding Voting Stock (an "Interested Stockholder"). The "fair price"
provision requires that, except as described below, the affirmative vote of the
holders of at least 66 2/3% of the Voting Stock not beneficially owned by the
Interested Stockholder is required to approve a business combination transaction
with Delphi and its subsidiaries involving or proposed by an Interested
Stockholder, or its affiliates and associates, or to approve any agreement or
other arrangement providing for any such business combination transaction. For
such purpose, "business combination" includes:
- any merger or consolidation;
- any of the following:
- sale, lease, exchange, mortgage, pledge, transfer or other disposition
of assets of Delphi or any of its subsidiaries to or for the benefit of,
- purchase by Delphi or any of its subsidiaries from,
- issuance of securities by Delphi or any of its subsidiaries to,
- investment, loan, advance, guarantee, participation or other extension
of credit by Delphi or any of its subsidiaries to, from, in or with, or
- establishment of a partnership, joint venture or other joint enterprise
with or for the benefit of, the Interested Stockholder having an
aggregate fair market value of $25 million or more;
- the adoption of any plan or proposal for the liquidation or dissolution
of Delphi; and
- certain reclassifications of securities or recapitalizations of Delphi.
This voting requirement will not apply to any transaction approved by a
majority of Delphi's Continuing Directors (as such term is defined in Delphi's
Restated Certificate of Incorporation). This voting requirement will also not
apply to any transaction involving the payment of consideration to holders of
Delphi's outstanding capital stock in which the following "fair price"
conditions, among others, are met:
- the consideration to be received by the holders of each class of capital
stock of Delphi is at least equal to the greater of:
(x) the highest per share price paid for shares of such class by the
Interested Stockholder in the two years prior to the proposed
business combination or in the transaction in which it became an
Interested Stockholder, whichever is higher, or
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(y) the fair market value of the shares of such class on the date of the
announcement of the proposed business combination or the date on which
it became an Interested Stockholder, whichever is higher; and
- the consideration to be received by the holders of each class of capital
stock of Delphi is the same form and amount as that paid by the
Interested Stockholder in connection with its acquisition of such class
of capital stock.
This provision could have the effect of delaying or preventing a change in
control of Delphi in a transaction or series of transactions that did not
satisfy the "fair price" criteria.
The provisions of our Restated Certificate of Incorporation relating to our
Board, the limitation of actions by stockholders taken by written consent, the
calling of special stockholder meetings and other stockholder actions and
proposals may be amended only by the affirmative vote of the holders of at least
80% of the Voting Stock. The "fair price" provisions of our Restated Certificate
of Incorporation may be amended by the affirmative vote of the holders of at
least 66 2/3% of the Voting Stock, excluding the Interested Stockholder, unless
such amendment is unanimously recommended by Delphi's Board of Directors, a
majority of whom are Continuing Directors.
In general, our Bylaws may be altered or repealed and new Bylaws adopted by
the holders of a majority of the Voting Stock or by a majority of the Whole
Board. However, certain provisions, including those relating to the limitation
of actions by stockholders taken by written consent, the calling of special
stockholder meetings, other stockholder actions and proposals and certain
matters related to our Board, may be amended only by the affirmative vote of
holders of at least 80% of the Voting Stock. In addition, until the Trigger
Date, the affirmative vote of 80% of the Whole Board is required to alter or
repeal the Bylaws or adopt any new Bylaw.
CERTAIN LIMITATIONS ON CHANGES OF CONTROL ON OUR COMPANY
The foregoing provisions of Delphi's Restated Certificate of Incorporation
and Bylaws, together with the stockholder rights plan described below and the
provisions of Section 203 of the DGCL, could have the following effects, among
others:
- delaying, deferring or preventing a change in control;
- delaying, deferring or preventing the removal of existing management;
- deterring potential acquirors from making an offer to Delphi's
stockholders; and
- limiting any opportunity of Delphi's stockholders to realize premiums
over prevailing market prices of Delphi's common stock in connection with
offers by potential acquirors.
This could be the case notwithstanding that a majority of Delphi's stockholders
might benefit from such a change in control or offer.
CERTAIN TRANSACTIONS AND CORPORATE OPPORTUNITIES
Our Restated Certificate of Incorporation sets forth certain provisions
which regulate and define the conduct of certain business and affairs of Delphi
from the time of the completion of the Offering until the time General Motors
ceases to be a significant stockholder of Delphi. These provisions serve to
determine and delineate the respective rights and duties of Delphi, GM,
including its Affiliated Companies, as defined in Delphi's Restated Certificate
of Incorporation, and of certain directors and/or officers of Delphi, in
anticipation that:
- directors, officers and/or employees of GM may serve as directors of
Delphi;
- GM engages in and is expected to continue to engage in lines of business
that are the same, similar or related to, overlap or compete with the
lines of business of Delphi; and
- Delphi and GM will engage in material business transactions, including,
without limitation, pursuant to the Supply Agreement.
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Delphi may, from time to time, enter into and perform agreements with
General Motors to engage in any transaction, and to agree to compete or not to
compete with each other, including to allocate, or to cause their respective
directors, officers and employees to allocate, corporate opportunities between
themselves. The Restated Certificate of Incorporation provides that no such
agreement, or the performance thereof, shall be considered contrary to any
fiduciary duty of GM, as the controlling stockholder of Delphi, or of any such
director, officer and/or employee, if:
(1) such agreement was entered into before Delphi ceased to be a wholly
owned subsidiary of General Motors and is continued in effect after
such time; or
(2) such agreement or transaction was approved, after being made aware of
the material facts of the relationship between Delphi and GM and the
material terms and facts of the agreement or transaction, by:
(a) Delphi's Board, by affirmative vote of a majority of directors who
are not Interested Persons (as defined in Delphi's Restated
Certificate of Incorporation),
(b) by a committee of Delphi's Board consisting of members who are not
Interested Persons, by affirmative vote of a majority of such
members, or
(c) by one or more officers or employees of Delphi who is not an
Interested Person and who was authorized by Delphi's Board or
committee thereof as specified in clauses (a) and (b) above or, in
the case of an employee, to whom such authority has been delegated
by an officer to whom the authority to approve such action has been
so delegated; or
(3) such agreement or transaction was fair to Delphi as of the time it was
entered into by Delphi; or
(4) such agreement or transaction was approved by affirmative vote of a
majority of the shares of capital stock entitled to vote thereon and
who do vote thereon, excluding GM and any Interested Person in respect
of such agreement or transaction.
The provisions of our Restated Certificate of Incorporation with regard to
such transactions and/or corporate opportunities shall terminate at such time as
when GM, together with its affiliates, shall cease to be the owner of Voting
Stock representing 25% or more of the votes entitled to be cast by the holders
of all the then outstanding Voting Stock; provided, however, that such
termination shall not terminate the effect of such provisions with respect to
any agreement between Delphi and GM that was entered into before such time or
any transaction entered into in the performance of such agreement, whether
entered into before or after such time, or any transaction entered into between
Delphi and GM or the allocation of any opportunity between them before such
time. These provisions do not alter the fiduciary duty of loyalty of our
directors under applicable Delaware law. Subject to applicable Delaware law, by
becoming a stockholder in our company, you will be deemed to have notice of and
have consented to these provisions of our Restated Certificate of Incorporation.
These provisions may be amended only with the affirmative vote of the holders of
at least 80% of the voting power of all shares of Voting Stock then outstanding,
voting together as a single class.
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. will serve as the Transfer Agent and Registrar for our
common stock. Shares of our common stock will be issued under the direct
registration system pursuant to which the interests of holders of our common
stock are registered with the transfer agent and registrar. Stock certificates
will not be delivered to a stockholder unless a stockholder requests such
delivery in lieu of registration.
RIGHTS PLAN
Delphi's Board has adopted a Stockholder Rights Plan (the "Rights Plan").
Pursuant to the Rights Plan, one Right (a "Right") will be issued and attached
to each outstanding share of common stock. Each Right
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will entitle the holder, in circumstances as described below, to purchase from
Delphi a unit consisting of one one-hundredth of a share of Series A Junior
Preferred Stock, par value $0.10 per share (the "Series A Preferred Stock"), at
an exercise price of $65 per Right, subject to adjustment in certain events (the
"Exercise Price"). The following description of the Rights is a summary and is
qualified in its entirety by reference to the Rights Plan, the form of which has
been filed with the SEC as an exhibit to the registration statement of which
this prospectus is a part.
Initially, the Rights will be attached to all certificates representing
outstanding shares of common stock and will be transferred with and only with
such certificates. The Rights will become exercisable and separately
certificated only upon the "Distribution Date," which will occur upon the
earlier of:
- ten days following a public announcement that a person or group (an
"Acquiring Person") other than certain exempt persons has acquired or
obtained the right to acquire beneficial ownership of 15% or more of the
outstanding shares of common stock and any other shares of capital stock
entitled to vote generally in the election of directors or together with
the common stock in respect of mergers and similar transactions ("Rights
Plan Voting Stock") then outstanding (the date of the announcement being
the "Stock Acquisition Date"); or
- ten business days, or later if determined by the Delphi Board prior to
any person becoming an Acquiring Person, following the commencement or
announcement of an intention to commence a tender offer or exchange offer
that would result in a person or group becoming an Acquiring Person.
As soon as practicable after the Distribution Date, certificates will be
mailed to holders of record of common stock as of the close of business on the
Distribution Date. From and after the Distribution Date, the separate
certificates alone will represent the Rights. Prior to the Distribution Date,
all shares of common stock issued will be issued with Rights. Shares of common
stock issued after the Distribution Date will not be issued with Rights, except
that shares issued pursuant to any of the following that exist prior to the
Distribution Date may be issued with Rights:
- the exercise of stock options;
- under employee plans or arrangements;
- upon exercise, conversion or exchange of certain securities; or
- a contractual obligation of Delphi.
The Rights will expire at the close of business on January 31, 2009 (the
"Final Expiration Date"), unless earlier redeemed or exchanged by Delphi as
described below.
In the event (a "Flip-In Event") that a person becomes an Acquiring Person,
except pursuant to any action or transaction approved by Delphi's Board before
the person becomes an Acquiring Person, (a "Permitted Offer"), each holder of a
Right other than any Acquiring Person and certain related parties, whose Rights
will automatically become null and void, will thereafter have the right to
receive, upon exercise of such Right, a number of shares of Series A Preferred
Stock, or, in certain circumstances, cash, property or other securities of
Delphi, having a "fair market value" (as defined in the Rights Plan) equal to
two times the Exercise Price of the Right.
In the event (a "Flip-Over Event") that, at any time on or after a person
becomes an Acquiring Person, Delphi effects a merger or other business
combination in which it is not the surviving entity, or any shares of its common
stock are changed into or exchanged for other securities, or 50% or more of its
assets or earning power is sold or transferred, then each holder of a Right,
except Rights owned by any Acquiring Person or certain related parties, which
will have become void as set forth above, shall thereafter have the right to
receive, upon exercise, a number of shares of common stock of the acquiring
company having a fair market value equal to two times the Exercise Price of the
Right. Flip-In Events and Flip-Over Events are collectively referred to as
"Triggering Events."
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The Exercise Price payable, and the number of units of Series A Preferred
Stock, shares of common stock or other securities or property issuable, upon
exercise of the Rights are subject to adjustment from time to time to prevent
dilution in the event of a stock dividend or distribution on the common stock, a
grant or distribution to holders of the common stock of certain subscription
rights, warrants, evidence of indebtedness, cash or other assets, or other
similar events.
No fractional units will be issued; in lieu thereof, an adjustment in cash
will be made based on the market price of the common stock on the last trading
date prior to the date of exercise. Pursuant to the Rights Plan, Delphi reserves
the right to require prior to the occurrence of a Triggering Event that, upon
any exercise of Rights, a number of Rights be exercised so that only whole
shares of Series A Preferred Stock will be issued.
Delphi will also have the option, at any time after a person becomes an
Acquiring Person and before the person becomes, or simultaneously with such
person becoming, the beneficial owner of 50% or more or the shares of Rights
Plan Voting Stock then outstanding, to exchange the Rights, other than Rights
owned by an Acquiring Person or certain related parties, which will have become
void, in whole or in part, at an exchange ratio of one share of common stock,
and/or other equity securities deemed to have the same value as one share of
common stock, per Right, subject to adjustment.
At any time prior to the close of business on the tenth day following the
Stock Acquisition Date, Delphi, by vote of a majority of our Board, may redeem
the Rights in whole, but not in part, at a price of $0.01 per Right, payable, at
the option of Delphi, in cash, shares of common stock or such other
consideration as our Board may determine. This majority of the Board is
determined as if there were no vacancies on the Board. The redemption of the
Rights may be made effective at such time after the Board's action to redeem the
Rights, and on such basis and subject to such conditions, as our Board may in
its absolute discretion establish. The Rights will terminate at the time so
designated by our Board and thereafter the only right of the holders of Rights
will be to receive the redemption price.
For as long as the Rights are redeemable, Delphi may, except with respect
to the redemption price, amend the Rights Plan in any manner, including to
extend the time period in which the Rights may be redeemed. After the time the
Rights cease to be redeemable, Delphi 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 thereof, as such, will have no
rights as a stockholder of Delphi, including, without limitation, the right to
vote or to receive dividends.
The Certificate of Designations of the Series A Preferred Stock (the
"Certificate of Designations") provides that each share of Series A Preferred
Stock that may be issued upon exercise of the Rights will be entitled to
receive, when, as and if declared, cash and non-cash dividends equal to:
(1) 100 times the aggregate per share amount of all cash and non-cash
dividends declared or paid on the common stock (the "Dividend
Multiple"); and
(2) preferential quarterly cash dividends of $16.25 per share, less any
dividends received pursuant to clause (1) above.
Holders of Series A Preferred Stock will have 100 votes per share (the
"Vote Multiple") and, except as otherwise provided by the Certificate of
Designations, our Restated Certificate of Incorporation or applicable law, shall
vote together with holders of common stock as a single class. In the event that
the preferential quarterly cash dividends are in arrears for four or more
quarterly dividend payment periods, holders of Series A Preferred Stock will
have the right to elect two additional members to our Board, to serve until the
next annual meeting of our company or until such earlier time as all accrued and
unpaid preferential quarterly cash dividends are paid in full.
In the event of the liquidation, dissolution or winding up of our company,
after provision for liabilities and any preferential amounts payable with
respect to any preferred stock ranking senior to the Series A Preferred
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Stock, the holders of any Series A Preferred Stock will be entitled to receive
liquidation payments per share in an amount equal to the greater of:
- $650 plus an amount equal to accrued and unpaid dividends and
distributions thereon to the date of payment; and
- 100 times the aggregate amount to be distributed per share to holders of
common stock (the "Liquidation Multiple").
The rights of the Series A Preferred Stock as to dividends, voting and
liquidation are protected by antidilution provisions.
In the event of a consolidation, merger or other transaction in which the
shares of common stock are exchanged, holders of shares of Series A Preferred
Stock will be entitled to receive the amount and type of consideration equal to
the per share amount received by the holders of the common stock, multiplied by
the highest of the Dividend Multiple, the Vote Multiple or the Liquidation
Multiple as in effect immediately prior to the event.
Except for the acquisition of shares of Series A Preferred Stock in any
other manner permitted by law, the Certificate of Designations or our Restated
Certificate of Incorporation, the shares of Series A Preferred Stock are not
redeemable at the option of Delphi or any holder thereof.
The Rights will have certain anti-takeover effects. The Rights will cause
substantial dilution to any person or group that attempts to acquire Delphi
without the approval of the Delphi Board. As a result, the overall effect of the
Rights may be to render more difficult or discourage any attempt to acquire
Delphi, even if such acquisition may be in the interest of Delphi's
stockholders. Because Delphi's Board can redeem the Rights or approve a
Permitted Offer, the Rights will not interfere with a merger or other business
combination approved by the Board.
The Rights Plan excludes GM and its affiliates and associates from being
considered Acquiring Persons until GM first ceases to beneficially own 15% or
more of the Rights Plan Voting Stock of Delphi then outstanding.
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
The 100,000,000 shares of our common stock sold in the Offering, or
115,000,000 shares if the U.S. underwriters exercise their over-allotment option
in full, will be freely tradable without restriction under the Securities Act,
except for any such shares which may be acquired by an "affiliate" of Delphi (an
"Affiliate") as that term is defined in Rule 144 promulgated under the
Securities Act, which shares will remain subject to the resale limitations of
Rule 144.
The shares of our common stock that will continue to be held by General
Motors after the Offering constitute "restricted securities" within the meaning
of Rule 144, and will be eligible for sale by General Motors in the open market
after the Offering, subject to certain contractual lockup provisions and the
applicable requirements of Rule 144, both of which are described below. Delphi
has granted certain registration rights to GM. See "--Registration Rights of
General Motors."
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares for at least one year will be entitled to sell on the open
market in brokers' transactions within any three month period a number of shares
that does not exceed the greater of:
- 1% of the then outstanding shares of common stock; and
- the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain post-sale notice requirements
and the availability of current public information about Delphi.
In the event that any person other than General Motors who is deemed to be
an Affiliate purchases shares of our common stock pursuant to the Offering or
acquires shares of our common stock pursuant to an employee benefit plan of
Delphi, the shares held by such person are required under Rule 144 to be sold in
brokers' transactions, subject to the volume limitations described above. Shares
properly sold in reliance upon Rule 144 to persons who are not Affiliates are
thereafter freely tradable without restriction.
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. GM has announced that it currently plans to complete its
divestiture of Delphi by distributing all of the shares of Delphi common stock
which it owns to the holders of GM's $1 2/3 common stock. See "Delphi and Its
Separation from General Motors--Separation from General Motors--GM's Plan to
Divest Delphi" and "Risk Factors--Risk Factors Relating to Separating Our
Company from General Motors--Our Business May Be Adversely Affected if General
Motors Does Not Complete Its Divestiture of Our Company." Any shares distributed
by GM will be eligible for immediate resale in the public market without
restrictions by persons other than Affiliates of Delphi. Affiliates of Delphi
would be subject to the restrictions of Rule 144 described above other than the
one-year holding period requirement.
Each of Delphi and General Motors has agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, it will not, during the period ending 180 days after the date of
this prospectus, sell or otherwise dispose of any shares of our common stock,
subject to certain exceptions. The Distribution is specifically exempted from
this agreement. See "Underwriters."
An aggregate of 111,000,000 shares of our common stock are reserved for
issuance under the Stock Incentive Plan and the Classified Plan. We intend to
file registration statements on Form S-8 covering the issuance of shares of our
common stock pursuant to the Stock Incentive Plan and the Classified Plan.
Accordingly, the shares issued pursuant to the Stock Incentive Plan and the
Classified Plan will be freely tradable, subject to the restrictions on resale
by Affiliates under Rule 144.
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REGISTRATION RIGHTS OF GENERAL MOTORS
Pursuant to the Registration Rights Agreement we have entered into with
General Motors, at any time after GM informs us that it no longer intends to
proceed with or complete the Distribution or that the Distribution was completed
without GM divesting itself of 100% of our common stock that it held, GM may
require us to register under the Securities Act all or any portion of our common
stock that it holds. Any of GM's shares of our common stock registered pursuant
to the Registration Rights Agreement would be eligible for immediate resale in
the public market without restrictions by persons other than Affiliates of
Delphi. For more information regarding the Registration Rights Agreement, see
"Arrangements Between Delphi and General Motors--Registration Rights Agreement."
Any sales of substantial amounts of our common stock in the public market,
whether as a result of the Distribution, GM's registration rights or otherwise,
or the perception that such sales might occur, could have a material adverse
effect on the market price of our common stock. See "Risk Factors--Risk Factors
Relating to Securities Markets--The Market Price of Our Common Stock Could Be
Adversely Affected by Sales of Substantial Amounts of Our Common Stock in the
Public Market."
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of common stock by
a Non-U.S. Holder. For this purpose, the term "Non-U.S. Holder" is defined as
any person or entity that is, for U.S. federal income tax purposes, a foreign
corporation, a non-resident alien individual, a foreign partnership or a foreign
estate or trust. This discussion is based on currently existing provisions of
the Code, existing, temporary and proposed Treasury regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all as in
effect or proposed on the date hereof and all of which are subject to change,
possibly with retroactive effect, or different interpretations. This discussion
is limited to Non-U.S. Holders who hold shares of common stock as capital assets
within the meaning of Section 1221 of the Code. Moreover, this discussion is for
general information only and does not address all of the tax consequences that
may be relevant to particular Non-U.S. Holders in light of their personal
circumstances, nor does it discuss certain tax provisions which may apply to
individuals who relinquish their U.S. citizenship or residence.
An individual may, subject to certain exceptions, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year. For such purposes all of the days present in the current year, one-third
of the days present in the immediately preceding year, and one-sixth of the days
present in the second preceding year are counted. Resident aliens are subject to
U.S. federal income tax as if they were U.S. citizens.
On January 13, 1999, General Motors received a private letter ruling from
the IRS to the effect that the Distribution would be tax-free to GM and its
stockholders for U.S. federal income tax purposes. This ruling does not address
the tax consequences of the purchase, ownership and disposition of Delphi common
stock.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF DELPHI COMMON STOCK AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR
OTHER TAXING JURISDICTION.
DIVIDENDS
In the event that dividends are paid on shares of common stock, dividends
paid to a Non-U.S. Holder of common stock will be subject to withholding of U.S.
federal income tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. To claim the benefit of a lower rate under an
income tax treaty, a Non-U.S. Holder of common stock must properly file with the
payor an IRS Form 1001, or successor form, claiming an exemption from or
reduction in withholding under such tax treaty.
Any dividends paid on shares of common stock to a Non-U.S. Holder will not
be subject to withholding tax, but instead are subject to U.S. federal income
tax on a net basis at applicable graduated individual or corporate rates if:
- dividends are effectively connected with the conduct of a trade or
business by the Non-U.S. Holder within the United States and, where a tax
treaty applies, will be attributable to a United States permanent
establishment of the Non-U.S. Holder; and
- an IRS Form 4224, or successor form, is filed with the payor.
Any such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional "branch profits tax" at
a rate of 30% or such lower rate as may be specified by an applicable income tax
treaty.
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Unless the payer has knowledge to the contrary, dividends paid prior to
January 1, 2000 to an address outside the United States are presumed to be paid
to a resident of such country for purposes of the withholding discussed above
and for purposes of determining the applicability of a tax treaty rate. However,
recently finalized Treasury Regulations pertaining to U.S. federal withholding
tax (the "Final Withholding Tax Regulations") provide that a Non-U.S. Holder
must comply with certification procedures, or, in the case of payments made
outside the United States with respect to an offshore account, certain
documentary evidence procedures, directly or under certain circumstances through
an intermediary, to obtain the benefits of a reduced rate under an income tax
treaty with respect to dividends paid after December 31, 1999. In addition, the
Final Withholding Tax Regulations will require a Non-U.S. Holder who provides an
IRS Form 4224 or successor form, as discussed above, also to provide its U.S.
taxpayer identification number.
A Non-U.S. Holder of common stock eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other disposition of common stock
unless:
(1) the gain is effectively connected with a trade or business of the
Non-U.S. Holder in the United States and, where a tax treaty applies,
is attributable to a United States permanent establishment of the
Non-U.S. Holder;
(2) in the case of a Non-U.S. Holder who is an individual and holds the
common stock as a capital asset, such holder is present in United
States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met; or
(3) Delphi is or has been a "U.S. real property holding corporation" (a
"USRPHC") for U.S. federal income tax purposes, as discussed below.
An individual Non-U.S. Holder who falls under clause (1) above will, unless
an applicable treaty provides otherwise, be taxed on his or her net gain derived
from the sale under regular graduated United States federal income tax rates. An
individual Non-U.S. Holder who falls under clause (2) above will be subject to a
flat 30% tax on the gain derived from the sale, which may be offset by certain
United States capital losses.
A Non-U.S. Holder that is a foreign corporation falling under clause (1)
above will be taxed on its gain under regular graduated U.S. federal income tax
rates and may be subject to an additional branch profits tax equal to 30% of its
effectively connected earnings and profits within the meaning of the Code for
the taxable year, as adjusted for certain items, unless it qualifies for a lower
rate under an applicable income tax treaty.
A corporation is a USRPHC if the fair market value of the U.S. real
property interests held by the corporation is 50% or more of the aggregate fair
market value of its U.S. and foreign real property interests and any other
assets used or held for use by the corporation in a trade or business. Based on
its current and anticipated assets, Delphi believes that it is not currently,
and is likely not to become, a USRPHC. However, since the determination of
USRPHC status is based upon the composition of the assets of Delphi from time to
time, and because there are uncertainties in the application of certain relevant
rules, there can be no assurance that Delphi will not become a USRPHC. If Delphi
were to become a USRPHC, then gain on the sale or other disposition of common
stock by a Non-U.S. Holder generally would be subject to U.S. federal income tax
unless both:
- the common stock was "regularly traded" on an established securities
market within the meaning of applicable Treasury regulations; and
- the Non-U.S. Holder actually or constructively owned 5% or less of the
common stock during the shorter of the five-year period preceding such
disposition or the Non-U.S. Holder's holding period.
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Non-U.S. Holders should consult their tax advisors concerning any U.S. tax
consequences that may arise if Delphi were to become a USRPHC.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual Non-U.S. Holder at
the time of death will be included in such holder's gross estate for U.S.
federal estate tax purposes, and may be subject to U.S. federal estate tax
unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Delphi must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty or certain other
agreements.
Backup withholding is imposed at the rate of 31% on certain payments to
persons that fail to furnish certain identifying information to the payer.
Backup withholding generally will not apply to dividends paid prior to January
1, 2000 to a Non-U.S. Holder at an address outside the United States, unless the
payer has knowledge that the payee is a U.S. person. In the case of dividends
paid after December 31, 1999, the Final Withholding Tax Regulations provide that
a Non-U.S. Holder generally will be subject to withholding tax at a 31% rate
unless certain certification procedures, or, in the case of payments made
outside the United States with respect to an offshore account, certain
documentary evidence procedures, are complied with, directly or under certain
circumstances through an intermediary. Backup withholding and information
reporting generally will also apply to dividends paid on common stock at
addresses inside the United States to Non-U.S. Holders that fail to provide
certain identifying information in the manner required. The Final Withholding
Tax Regulations provide certain presumptions under which a Non-U.S. Holder would
be subject to backup withholding and information reporting unless certification
from the holder of the Non-U.S. Holder's Non-U.S. status is provided.
Payment of the proceeds of a sale of common stock effected by or through a
U.S. office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner provides the payer with its name and
address and certifies under penalties of perjury that it is a Non-U.S. Holder,
or otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
common stock by or through a foreign office of a broker. If, however, such
broker is, for U.S. federal income tax purposes, a U.S. person, a controlled
foreign corporation, or a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States, or, in addition, for periods after December 31, 1999, a foreign
partnership that at any time during its tax year either is engaged in the
conduct of a trade or business in the United States or has as partners one or
more U.S. persons that, in the aggregate, hold more than 50% of the income or
capital interest in the partnership, such payments will be subject to
information reporting, but not backup withholding, unless such broker has
documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and certain other conditions are met or the beneficial owner otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against the Non-U.S. Holder's U.S. federal
income tax liability provided the required information is furnished in a timely
manner to the IRS.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
underwriters named below, for whom Morgan Stanley & Co. Incorporated, Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and Schroder & Co. Inc. are acting as
U.S. representatives, and the international underwriters named below for whom
Morgan Stanley & Co. International Limited, Goldman Sachs International, Merrill
Lynch International, Donaldson, Lufkin and Jenrette International and J. Henry
Schroder & Co. Limited are acting as international representatives, have
severally agreed to purchase, and Delphi has agreed to sell to them, severally,
the respective number of shares of our common stock set forth opposite the names
of such underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
U.S. underwriters:
Morgan Stanley & Co. Incorporated.........................
Goldman, Sachs & Co.......................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated........
Donaldson, Lufkin & Jenrette Securities Corporation.......
Schroder & Co. Inc........................................
-----------
Subtotal............................................... 85,000,000
-----------
International underwriters:
Morgan Stanley & Co. International Limited................
Goldman Sachs International...............................
Merrill Lynch International...............................
Donaldson, Lufkin & Jenrette International................
J. Henry Schroder & Co. Limited...........................
-----------
Subtotal............................................... 15,000,000
-----------
Total................................................ 100,000,000
===========
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively referred
to as the "underwriters" and the "representatives," respectively. The
Underwriting Agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of our common stock offered hereby
are subject to the approval of certain legal matters by their counsel and to
certain other conditions. The underwriters are obligated to take and pay for all
of the shares of our common stock offered hereby, other than those covered by
the U.S. underwriters' over-allotment option described below, if any such shares
are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. underwriter has represented and agreed that, with certain exceptions:
- it is not purchasing any shares (as defined herein) for the account of
anyone other than a United States or Canadian Person (as defined herein);
and
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- it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares outside the United States or Canada or to anyone other than a
United States or Canadian person.
Pursuant to the Agreement between U.S. and International Underwriters, each
international underwriter has represented and agreed that, with certain
exceptions:
- it is not purchasing any shares for the account of any United States or
Canadian person; and
- it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares in the United States or Canada or to any United States or Canadian
person.
With respect to any underwriter that is a U.S. underwriter and an international
underwriter, the foregoing representations and agreements made by it in its
capacity as a U.S. underwriter apply only to it in its capacity as a U.S.
underwriter and made by it in its capacity as an international underwriter apply
only to it in its capacity as an international underwriter. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions specified in the Agreement between U.S. and International
Underwriters. As used herein, "United States or Canadian person" means any
national or resident of the United States or Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof, other
than a branch located outside the United States and Canada of any United States
or Canadian person, and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian person. All shares of
common stock to be purchased by the underwriters under the Underwriting
Agreement are referred to herein as the "shares."
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. underwriters and international underwriters
of any number of shares as may be mutually agreed. The per share price of any
shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
underwriter has further agreed to send to any dealer who purchases from it any
of the shares a notice stating in substance that, by purchasing such shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
international underwriter has represented and agreed that:
- it has not offered or sold and, prior to the date six months after the
closing date for the sale of the shares to the international
underwriters, will not offer or sell, any shares to persons in the United
Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments, as principal or
agent, for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in
the United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995;
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- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares in, from or otherwise involving the United
Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
offering of the shares to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 (as amended) or is a person to whom such document
may otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
international underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
international underwriter has further agreed to send to any dealer who purchases
from it any of the shares a notice stating in substance that, by purchasing such
shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law, and that
such dealer will send to any other dealer to whom it sells any of such shares a
notice containing substantially the same statement as is contained in this
sentence.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any underwriter
may allow, and such dealers may reallow, a concession not in excess of $ a
share to other underwriters or to certain other dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives.
Delphi has granted to the U.S. underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of
15,000,000 additional shares of common stock at the public offering price set
forth on the cover page hereof, less underwriting discounts and commissions. The
U.S. underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered hereby. To the extent such option is exercised, each U.S.
underwriter will become obligated, subject to certain conditions, to purchase
about the same percentage of such additional shares of common stock as the
number set forth next to such U.S. underwriter's name in the preceding table
bears to the total number of shares of common stock set forth next to the names
of all U.S. underwriters in the preceding table. If the U.S. underwriters'
option is exercised in full, the total price to the public for this Offering
would be $ , the total underwriters' discounts and commissions would be
$ and total proceeds to Delphi would be $ .
The underwriters have informed Delphi that each principal underwriter in
this Offering may, subject to the approval of Morgan Stanley & Co. Incorporated,
sell to discretionary accounts over which such principal underwriter exercises
discretionary authority. The underwriters have further informed Delphi that they
estimate that such sales will not exceed in the aggregate five percent of the
total number of shares of common stock offered by them.
Delphi common stock has been approved for listing on the NYSE under the
symbol "DPH," subject to official notice of issuance. The underwriters intend to
sell shares of the common stock to a minimum of 2,000 beneficial owners in lots
of 100 or more so as to meet the distribution requirements of such listing.
At the request of Delphi, the underwriters will reserve up to about
8,000,000 shares of common stock to be issued by Delphi and offered hereby for
sale, at the initial public offering price, to directors, officers and
152
<PAGE> 157
employees of Delphi and others, generally in the United States, who will agree
to hold their shares for at least 180 days after the date of this prospectus.
This directed share program will be administered by Salomon Smith Barney Inc.
and Morgan Stanley & Co. Incorporated. The number of shares of common stock
available for sale to the general public will be reduced to the extent such
individuals purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby.
Each of Delphi and General Motors has agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, it will not, during the period ending 180 days after the date of
this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
- the sale of the shares to the underwriters;
- the issuance by Delphi of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
- the granting of stock options and/or restricted stock units pursuant to
existing Delphi employee benefit plans, provided that such options do not
become exercisable and such units do not vest during such 180-day period;
- transactions by any person other than Delphi relating to shares of common
stock or other securities acquired in open market or other transactions
after the completion of the Offering;
- transactions in shares of General Motors common stock;
- the Distribution; or
- the substitution of GM Awards with replacement awards under Delphi's
incentive plans and other transactions under Delphi's incentive plans.
In order to facilitate the Offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may agree to sell, or allot, more
shares than the 100,000,000 shares of common stock Delphi has agreed to sell to
them. This over-allotment would create a short position in the common stock for
the underwriters' account. To cover any over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. The underwriters have reserved the
right to reclaim selling concessions in order to encourage underwriters and
dealers to distribute the common stock for investment, rather than for
short-term profit taking. Increasing the proportion of the Offering held for
investment may reduce the supply of common stock available for short-term
trading. Any of these activities may stabilize or maintain the market price of
the
153
<PAGE> 158
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
From time to time, certain of the underwriters have provided, and may
continue to provide, investment banking services to each of Delphi and General
Motors.
General Motors has generally agreed to pay the costs and expenses relating
to the Offering. For more information, see "Arrangements Between Delphi and
General Motors--IPO and Distribution Agreement." The underwriters have agreed to
reimburse GM for certain of its expenses incurred in connection with the
Offering.
Delphi and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this Offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
among Delphi, General Motors and the U.S. representatives. Among the factors to
be considered in determining the initial public offering price will be the
future prospects of Delphi and its industry in general, sales, earnings and
certain other financial and operating information of Delphi in recent periods,
and the price-earnings ratios, price-sales ratios, market prices of securities
and certain financial and operating information of companies engaged in
activities similar to those of the company. The estimated initial public
offering price range set forth on the cover page of this prospectus is subject
to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby and certain other legal
matters will be passed upon for us by Kirkland & Ellis. Certain legal matters
will be passed upon for the underwriters by Davis Polk & Wardwell.
EXPERTS
Our financial statements as of December 31, 1996 and 1997 and for each of
the three years in the period ended December 31, 1997 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance on the
report of that firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, Washington, D.C. 20549, a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules thereto.
Certain items are omitted in accordance with the rules and regulations of the
SEC. For further information with respect to the company and its common stock,
reference is made to the registration statement and the exhibits and any
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance, if such contract or document is filed as an
exhibit, reference is made to the copy of such contract or other documents filed
as an exhibit to the registration statement, each statement being qualified in
all respects by such reference. A copy of the registration statement, including
the exhibits and schedules thereto, may be read and copied at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on
the operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC
154
<PAGE> 159
maintains an Internet site at http://www.sec.gov, from which interested persons
can electronically access the registration statement, including the exhibits and
any schedules thereto.
As a result of the Offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
shareholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain an Internet
site at http://www.delphiauto.com. Our website and the information contained
therein or connected thereto shall not be deemed to be incorporated into this
prospectus or the registration statement of which it forms a part.
155
<PAGE> 160
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<PAGE> 161
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1997 and
September 30, 1998 (Unaudited)........................ F-2
Consolidated Statements of Income (Unaudited) for the
nine months ended September 30, 1997 and 1998......... F-3
Consolidated Statements of Equity (Deficit) for the
year ended December 31, 1997 and the nine months ended
September 30, 1998 (Unaudited)........................ F-4
Consolidated Statements of Cash Flows (Unaudited) for
the nine months ended September 30, 1997 and 1998..... F-5
Notes to Interim Consolidated Financial Statements
(Unaudited)........................................... F-6
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report........................... F-11
Consolidated Balance Sheets at December 31, 1996 and
1997.................................................. F-12
Consolidated Statements of Income for each of the three
years in the period ended December 31, 1997........... F-13
Consolidated Statements of Equity (Deficit) and
Comprehensive Income for each of the three years in
the period ended December 31, 1997.................... F-14
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1997..... F-15
Notes to Consolidated Financial Statements............. F-16
</TABLE>
F-1
<PAGE> 162
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 989 $ 980
Other marketable securities............................... 11 20
------- -------
Total cash and marketable securities................. 1,000 1,000
Accounts receivable, net:
General Motors and affiliates.......................... 2,284 1,962
Other customers........................................ 982 1,288
Inventories, net (Note 3)................................. 1,868 1,807
Deferred income taxes..................................... 183 206
Prepaid expenses and other assets......................... 61 96
------- -------
Total current assets................................. 6,378 6,359
Property, net............................................... 4,600 4,878
Deferred income taxes....................................... 3,007 2,552
Other assets................................................ 1,041 1,141
------- -------
Total assets................................................ $15,026 $14,930
======= =======
LIABILITIES AND DEFICIT
Current liabilities:
Notes payable and current portion of long-term debt....... $ 159 $ 206
Accounts payable:
General Motors and affiliates.......................... 86 91
Other suppliers........................................ 2,157 1,977
Accrued liabilities....................................... 1,664 1,557
------- -------
Total current liabilities............................ 4,066 3,831
Long-term debt, including intracompany note payable with
General Motors............................................ 3,341 3,294
Pension benefits............................................ 1,799 1,897
Postretirement benefits other than pensions................. 4,788 4,523
Other liabilities........................................... 1,445 1,424
------- -------
Total liabilities.................................... 15,439 14,969
------- -------
Commitments and contingencies (Note 7)
Deficit:
General Motors' net investment............................ (335) (2)
Accumulated translation adjustments....................... (78) (37)
------- -------
Total deficit........................................ (413) (39)
------- -------
Total liabilities and deficit............................... $15,026 $14,930
======= =======
</TABLE>
See notes to interim consolidated financial statements.
F-2
<PAGE> 163
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1998
---- ----
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales:
General Motors and affiliates............................. $19,307 $16,195
Other customers........................................... 4,061 4,484
------- -------
Total net sales........................................ 23,368 20,679
------- -------
Operating expenses:
Cost of sales, excluding items listed below............... 20,507 19,220
Selling, general and administrative....................... 1,011 1,012
Depreciation and amortization............................. 621 731
------- -------
Total operating expenses............................... 22,139 20,963
------- -------
Operating income (loss)..................................... 1,229 (284)
Interest expense............................................ (206) (199)
Other income, net........................................... 65 124
------- -------
Income (loss) before income taxes........................... 1,088 (359)
Income taxes (tax benefit).................................. 352 (178)
------- -------
Net income (loss)........................................... $ 736 $ (181)
======= =======
Earnings (loss) per share (Note 4):
Basic and diluted......................................... $ 1.58 $ (0.39)
======= =======
</TABLE>
See notes to interim consolidated financial statements.
F-3
<PAGE> 164
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED GENERAL TOTAL
TRANSLATION MOTORS' NET EQUITY
ADJUSTMENTS INVESTMENT (DEFICIT)
----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at January 1, 1997.............................. $ 5 $ 917 $ 922
Net income............................................ 215 215
Foreign currency translation adjustments.............. (83) (83)
Net effect of assets and liabilities transferred to
General Motors..................................... -- (1,467) (1,467)
---- ------- -------
Balance at December 31, 1997............................ (78) (335) (413)
Net loss.............................................. (181) (181)
Foreign currency translation adjustments.............. 41 41
Net effect of assets and liabilities transferred from
General Motors..................................... -- 514 514
---- ------- -------
Balance at September 30, 1998........................... $(37) $ (2) $ (39)
==== ======= =======
</TABLE>
See notes to interim consolidated financial statements.
F-4
<PAGE> 165
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 736 $(181)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 621 731
Pension expense, net of contributions.................. (154) (67)
Postretirement benefits other than pensions, net of
payments and VEBA contributions....................... 305 (388)
Deferred income taxes.................................. 399 75
Pre-tax loss on disposal of business units (Note 2).... -- 430
Changes in operating assets and liabilities:
Accounts receivable, net............................... (378) 101
Inventories, net....................................... (26) 266
Prepaid expenses and other assets...................... 102 (32)
Accounts payable....................................... 92 (299)
Accrued liabilities.................................... 58 (159)
Other liabilities...................................... 42 (328)
Other..................................................... 15 (200)
------ -----
Net cash provided by (used in) operating
activities.......................................... 1,812 (51)
------ -----
Cash flows from investing activities:
Capital expenditures...................................... (923) (872)
Investment in joint ventures and affiliates, net of cash
acquired............................................... (3) (152)
Proceeds from disposal of business units (Note 2)......... -- 217
Acquisition of marketable securities...................... (27) (531)
Liquidation of marketable securities...................... 46 522
Other..................................................... 47 117
------ -----
Net cash used in investing activities................ (860) (699)
------ -----
Cash flows from financing activities:
Cash effect of assets and liabilities transferred (to)
from General Motors.................................... (903) 741
------ -----
Net cash (used in) provided by financing
activities.......................................... (903) 741
------ -----
Effect of exchange rate fluctuations on cash and cash
equivalents............................................... (30) --
------ -----
Increase (decrease) in cash and cash equivalents:........... 19 (9)
Cash and cash equivalents at beginning of period.......... 971 989
------ -----
Cash and cash equivalents at end of period................ $ 990 $ 980
====== =====
</TABLE>
See notes to interim consolidated financial statements.
F-5
<PAGE> 166
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND--Delphi Automotive Systems Corporation ("Delphi") was
incorporated in late 1998 and is currently a wholly owned subsidiary of General
Motors Corporation ("GM"). During 1998, GM announced its intention to create 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 expected to occur in two
stages, the first of which involves an offering to the public of approximately
100 million common shares of Delphi currently held by GM (the "Offering"). The
second stage involves GM distributing to holders of its $1 2/3 common stock in
1999, all of its interest in Delphi (the "Distribution") through one of the
following transactions:
- 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
- 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
- Some combination of the above.
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 during each respective
period; however, 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
Offering. The historical consolidated balance sheets reflect the assets and
liabilities that are expected to be transferred to Delphi in accordance with the
terms of the Master Separation Agreement (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
- Delphi has operated under a Cash and Debt Management Agreement with GM,
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 is $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 reflects the portion of GM's outstanding debt that is
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, 1997 and September 30, 1998.
- 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.
F-6
<PAGE> 167
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
EMPLOYEE BENEFITS ARRANGEMENTS
- 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 will establish and administer defined benefit pension 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 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 vary depending on
factors such as discount rates, asset returns, contribution levels and
other factors. On December 31, 1997, the obligations attributable to
Delphi were $1.7 billion. Delphi intends to work with GM to ensure that
any plan transfers are accomplished in accordance with applicable laws
and regulations.
- 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.
- The liabilities set forth in Delphi's consolidated financial statements
include employee benefit obligations related to its active and inactive
employees only; however, the consolidated statements of income 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
- 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 costs 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 are not indicative of the costs that
would have been incurred if Delphi had been a stand-alone entity.
INCOME TAXES
- 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.
F-7
<PAGE> 168
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
CASH FLOWS
- 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 exceeded the net equity effect of such adjustments by
approximately $128 million and $227 million for the nine months ended
September 30, 1997 and 1998, respectively. This was caused by changes
during these periods in separation adjustments for various assets and
liabilities, principally pension and other postretirement benefits, which
affected net equity, but did not necessarily affect cash.
In the opinion of management, all adjustments, consisting of only normal
recurring items, except those disclosed in Note 2, which are necessary for a
fair presentation have been included. The results for interim periods are not
necessarily indicative of results which may be expected for any other interim
period or for the full year and may not necessarily reflect the consolidated
results of operations, financial position, changes in equity 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. COMPETITIVENESS INITIATIVES
The global automotive parts industry has become increasingly competitive
and is currently undergoing significant restructuring and consolidation
activities. All of the major industry competitors are continuing to increase
their focus on efficiency and cost improvements, while facing continuing price
pressures.
Accordingly, during 1997, Delphi recognized a charge to cost of sales of
$80 million, or $50 million after-tax, 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. During the third quarter of 1998,
Delphi signed divestiture agreements for its seating, lighting and coil spring
businesses resulting in a loss of $430 million, or $271 million after-tax. The
loss had the effect of increasing cost of sales and depreciation and
amortization by $382 million and $48 million, respectively.
3. INVENTORIES, NET
Inventories, net consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN MILLIONS)
<S> <C> <C>
Productive material, work-in-process and
supplies....................................... $2,035 $1,942
Finished goods................................... 264 285
------ ------
Total inventories at FIFO................... 2,299 2,227
Less allowances to adjust the carrying value of
certain inventories to LIFO.................... (431) (420)
------ ------
Total inventories, net...................... $1,868 $1,807
====== ======
</TABLE>
F-8
<PAGE> 169
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
4. EARNINGS PER SHARE
Basic and diluted earnings (loss) per share attributable to Delphi common
stock was determined based on net income (loss) divided by the 465 million
shares outstanding prior to the Offering. For purposes of the earnings (loss)
per share calculation, the shares outstanding prior to the Offering are treated
as outstanding for all periods presented. There were no potentially dilutive
securities outstanding during the periods presented.
5. COMPREHENSIVE INCOME (LOSS)
Delphi's comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
1997 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Net income (loss)........................................... $736 $(181)
Other comprehensive income (loss)--foreign currency
translation adjustments, net of tax....................... (67) 41
---- -----
Comprehensive income (loss)................................. $669 $(140)
==== =====
</TABLE>
6. SEGMENT REPORTING
Selected information regarding Delphi's product sectors is as follows:
<TABLE>
<CAPTION>
SAFETY,
ELECTRONICS & THERMAL &
MOBILE ELECTRICAL DYNAMICS &
COMMUNICATION ARCHITECTURE PROPULSION OTHER(A) TOTAL
------------- ------------ ---------- -------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
For the Nine Months Ended:
September 30, 1997
Net sales to GM and
affiliates................... $3,463 $7,276 $ 8,568 $ -- $19,307
Net sales to other customers.... 419 2,008 1,634 -- 4,061
Inter-sector net sales.......... 214 140 6 (360) --
------ ------ ------- ----- -------
Total net sales.............. $4,096 $9,424 $10,208 $(360) $23,368
====== ====== ======= ===== =======
Operating income (loss)......... $ 388 $ 625 $ 334 $(118) $ 1,229
====== ====== ======= ===== =======
September 30, 1998
Net sales to GM and
affiliates................... $2,764 $6,030 $ 7,401 $ -- $16,195
Net sales to other customers.... 467 2,202 1,815 -- 4,484
Inter-sector net sales.......... 181 134 6 (321) --
------ ------ ------- ----- -------
Total net sales.............. $3,412 $8,366 $ 9,222 $(321) $20,679
====== ====== ======= ===== =======
Operating income (loss)......... $ 178 $ (108) $ (105) $(249) $ (284)
====== ====== ======= ===== =======
</TABLE>
- ------------------
(a) Other includes activity not allocated to the product sectors and the
elimination of inter-sector transactions.
F-9
<PAGE> 170
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
7. COMMITMENTS AND CONTINGENCIES
Delphi is from time to time subject to various legal actions and claims
incidental to its business, including those arising out of alleged defects,
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.
8. 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:
- 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");
- a hedge of the exposure to variable cash flows of a forecasted
transaction (a "cash flow hedge"); or
- 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.
In April 1998, the ASEC released SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 generally requires costs of start-up activities
to be expensed instead of being capitalized and amortized. Delphi was required
to adopt the pronouncement on January 1, 1999. Delphi management has not
concluded at this time on the applicability or impact of this SOP on Delphi's
consolidated financial statements.
F-10
<PAGE> 171
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, 1996 and 1997, and the related consolidated
statements of income, of equity (deficit) and comprehensive income, and of cash
flows for each of the three years in the period ended December 31, 1997. 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, 1996
and 1997 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
January 14, 1999
F-11
<PAGE> 172
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 971 $ 989
Other marketable securities............................... 29 11
------- -------
Total cash and marketable securities................. 1,000 1,000
Accounts receivable, net:
General Motors and affiliates.......................... 1,872 2,284
Other customers........................................ 980 982
Inventories, net (Note 4)................................. 2,013 1,868
Deferred income taxes (Note 5)............................ 175 183
Prepaid expenses and other assets......................... 164 61
------- -------
Total current assets................................. 6,204 6,378
Property, net (Note 6)...................................... 5,241 4,600
Deferred income taxes (Note 5).............................. 2,560 3,007
Other assets................................................ 1,385 1,041
------- -------
Total assets................................................ $15,390 $15,026
======= =======
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt
(Note 8)............................................... $ 148 $ 159
Accounts payable:
General Motors and affiliates.......................... 102 86
Other suppliers........................................ 2,101 2,157
Accrued liabilities (Note 7).............................. 1,404 1,664
------- -------
Total current liabilities............................ 3,755 4,066
Long-term debt, including intracompany note payable with
General Motors (Note 8)................................... 3,352 3,341
Pension benefits (Note 9)................................... 1,526 1,799
Postretirement benefits other than pensions (Note 10)....... 4,649 4,788
Other liabilities........................................... 1,186 1,445
------- -------
Total liabilities.................................... 14,468 15,439
------- -------
Commitments and contingencies (Note 11)
Equity (deficit):
General Motors' net investment............................ 917 (335)
Accumulated translation adjustments....................... 5 (78)
------- -------
Total equity (deficit)............................... 922 (413)
------- -------
Total liabilities and equity (deficit)...................... $15,390 $15,026
======= =======
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE> 173
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales:
General Motors and affiliates............................. $26,656 $25,748 $25,907
Other customers........................................... 5,005 5,284 5,540
------- ------- -------
Total net sales........................................ 31,661 31,032 31,447
------- ------- -------
Operating expenses:
Cost of sales, excluding items listed below............... 27,384 27,471 27,710
Selling, general and administrative....................... 1,366 1,445 1,415
Depreciation and amortization............................. 773 843 1,970
------- ------- -------
Total operating expenses............................... 29,523 29,759 31,095
------- ------- -------
Operating income............................................ 2,138 1,273 352
Interest expense (Note 8)................................... (293) (276) (287)
Other income, net (Note 13)................................. 101 115 194
------- ------- -------
Income before income taxes.................................. 1,946 1,112 259
Income taxes................................................ 639 259 44
------- ------- -------
Net income.................................................. $ 1,307 $ 853 $ 215
======= ======= =======
Earnings per share (Note 2):
Basic and diluted......................................... $ 2.81 $ 1.83 $ 0.46
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE> 174
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
ACCUMULATED GENERAL TOTAL
COMPREHENSIVE TRANSLATION MOTORS' NET EQUITY
INCOME ADJUSTMENTS INVESTMENT (DEFICIT)
------------- ----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balance at January 1, 1995................ $ 10 $ 110 $ 120
Comprehensive income:
Net income.............................. $1,307 1,307 1,307
Other comprehensive income (Note 12):
Foreign currency translation
adjustments........................ 26 26 26
------
Comprehensive income...................... $1,333
======
Net effect of assets and liabilities
transferred to General Motors........... (99) (99)
---- ------- -------
Balance at December 31, 1995.............. 36 1,318 1,354
Comprehensive income:
Net income.............................. $ 853 853 853
Other comprehensive loss (Note 12):
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 12):
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)
==== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE> 175
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,307 $ 853 $ 215
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 773 843 1,970
Pension expense, net of contributions.................. (778) 94 (29)
Postretirement benefits other than pensions, net of
payments and VEBA contributions...................... 466 403 (551)
Deferred income taxes.................................. 298 391 196
Changes in operating assets and liabilities:
Accounts receivable, net............................... (243) 688 (557)
Inventories, net....................................... (170) (67) 92
Prepaid expenses and other assets...................... 12 (19) 95
Accounts payable....................................... (424) (361) 149
Accrued liabilities.................................... (633) 138 618
Other liabilities...................................... 439 (506) 1,038
Other..................................................... 323 244 (318)
------- ------- -------
Net cash provided by operating activities............ 1,370 2,701 2,918
------- ------- -------
Cash flows from investing activities:
Capital expenditures...................................... (1,155) (1,177) (1,383)
Investment in joint ventures and affiliates, net of cash
acquired............................................... (136) (54) (24)
Acquisition of marketable securities...................... (152) (153) (303)
Liquidation of marketable securities...................... 124 168 321
Other..................................................... 178 221 69
------- ------- -------
Net cash used in investing activities................ (1,141) (995) (1,320)
------- ------- -------
Cash flows from financing activities:
Cash effect of assets and liabilities transferred to
General Motors......................................... (263) (1,686) (1,549)
------- ------- -------
Net cash used in financing activities................ (263) (1,686) (1,549)
------- ------- -------
Effect of exchange rate fluctuations on cash and cash
equivalents............................................... 6 (5) (31)
------- ------- -------
Increase (decrease) in cash and cash equivalents:........... (28) 15 18
Cash and cash equivalents at beginning of year............ 984 956 971
------- ------- -------
Cash and cash equivalents at end of year.................. $ 956 $ 971 $ 989
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE> 176
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 and is currently a wholly owned subsidiary of General
Motors Corporation ("GM"). During 1998, GM announced its intention to create 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 expected to occur in two
stages, the first of which involves an offering to the public of approximately
100,000,000 million common shares of Delphi currently held by GM (the
"Offering"). The second stage involves GM distributing to holders of its $1 2/3
common stock in 1999, all of its interest in Delphi (the "Distribution") through
one of the following transactions:
- 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
- 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
- Some combination of the above.
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 during each respective
period; however, 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
Offering. The historical consolidated balance sheets reflect the assets and
liabilities that are expected to be transferred to Delphi in accordance with the
terms of the Master Separation Agreement (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
- Delphi has operated under a Cash and Debt Management Agreement with GM,
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 is $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 reflects the portion of GM's outstanding debt that is
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, 1996 and 1997.
- 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.
EMPLOYEE BENEFITS ARRANGEMENTS
- 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 will establish and administer defined benefit pension plans for
its salaried employees under the
F-16
<PAGE> 177
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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 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 vary depending on factors such as discount rates, asset
returns, contribution levels and other factors. On December 31, 1996, the
obligations attributable to Delphi were $1.5 billion. On December 31,
1997 the amount was $1.7 billion. Delphi intends to work with GM to
ensure that any plan transfers are accomplished in accordance with
applicable laws and regulations.
- 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.
- The liabilities set forth in Delphi's consolidated financial statements
include employee benefit obligations related to its active and inactive
employees only; however, the consolidated statements of income 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
- 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 costs amounted to $111 million, $124 million and
$130 million in 1995, 1996 and 1997, 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 are not
indicative of the costs that would have been incurred if Delphi had been
a stand-alone entity.
INCOME TAXES
- 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
- 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 exceeded the net
F-17
<PAGE> 178
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
equity effect of such adjustments by approximately $164 million, $432
million and $82 million in 1995, 1996 and 1997, 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.
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 associates, 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 was determined based on net income divided
by the 465 million shares outstanding prior to the Offering. For purposes of the
earnings per share calculation, the shares outstanding prior to the Offering 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 recognized by Delphi were $1.6 billion in each of 1995 and 1996, and
$1.5 billion in 1997.
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
provides Delphi access to cash and cash equivalents in an amount which
fluctuates 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 $719 million and $132 million in 1995 and 1996, respectively. Income
taxes paid during 1997 were not significant. Interest paid by Delphi totaled
$296 million, $267 million and $299 million in 1995, 1996 and 1997,
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 $124 million, $168 million and $321 million in 1995, 1996 and
1997, respectively. The gross gains and losses related to sales of marketable
securities were not significant to Delphi.
F-18
<PAGE> 179
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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 $47 million, $21 million, and $73
million, in 1995, 1996 and 1997, respectively.
DEPRECIATION AND AMORTIZATION--Depreciation is provided based on 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.
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 will be
responsible for environmental liabilities at the GM facilities that are not
transferred to Delphi, including all facilities closed or sold prior to January
1, 1999, except that Delphi will be responsible for any environmental
liabilities at such facilities that Delphi causes after January 1, 1999. Delphi
will be responsible for environmental liabilities at the facilities that are
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 will
retain 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 will not, however, be
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 the 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
F-19
<PAGE> 180
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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 $55 million during 1995, and increased net income by $21 million and $68
million during 1996 and 1997, 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.
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 will assume management of its exposure
to fluctuations in foreign exchange rates, interest rates, and certain commodity
prices. GM will assign 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 will not alter the original terms of the
contracts being transferred. In
F-20
<PAGE> 181
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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 will be 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 agreement representing approximately
96% of its hourly workforce. Of these represented employees, a significant
number of hourly employees are working under agreements that will expire in
1999. Certain customers of Delphi also have represented work forces. Future work
stoppages by Delphi's employees or by employees of Delphi's customers could
disrupt Delphi's production of automotive components and systems.
During the years ended December 31, 1996 and 1997, work stoppages at
certain GM and Delphi facilities had an estimated unfavorable impact on net
income of $281 million and $92 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, 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.
F-21
<PAGE> 182
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
SFAS No. 133 provides that, if certain conditions are met, a derivative may
be specifically designated as:
- 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");
- a hedge of the exposure to variable cash flows of a forecasted
transaction (a "cash flow hedge"); or
- 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.
In April 1998, the ASEC released SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 generally requires costs of start-up activities
to be expensed instead of being capitalized and amortized. Delphi was required
to adopt the pronouncement on January 1, 1999. Delphi management has not
concluded at this time on the applicability or impact of this SOP on Delphi's
consolidated financial statements.
3. COMPETITIVENESS INITIATIVES
The global automotive parts industry has become increasingly competitive
and is currently undergoing significant restructuring and consolidation
activities. All of the major industry competitors are continuing to increase
their focus on efficiency and cost improvements, while facing continuing price
pressures. As a result, Delphi initiated a study in 1997 to evaluate the
long-term competitiveness of all facets of its business ("Competitiveness
Study"). This study was performed in conjunction with the business planning
cycle and was substantially completed in December 1997.
Based on the results of the Competitiveness Study, Delphi recorded a charge
of approximately $1.4 billion, or $870 million after-tax, during the fourth
quarter of 1997. This charge was comprised of the following:
<TABLE>
<CAPTION>
PRE-TAX AFTER-TAX
------- ---------
<C> <C> <S>
$791 million $506 million Underperforming assets
$55 million $34 million Capacity reductions
$516 million $330 million Assets held for disposal
</TABLE>
F-22
<PAGE> 183
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Overall, these charges had the effect of increasing cost of sales and
depreciation and amortization by $262 million and $1.1 billion, respectively.
The amount included for underperforming assets represents charges pursuant
to Delphi's policy for the valuation of long-lived assets. Delphi re-evaluated
the carrying value of its long-lived assets as events and circumstances of the
industry changed. The re-evaluation was performed using product specific cash
flow information refined in connection with the separation of Delphi from GM's
North American Automotive Operations and the transfer of Delco Electronics to
Delphi in December 1997. As a result, the carrying values of certain long-lived
assets 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.
Assets held for disposal primarily relate 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 of the assets.
Separately, during 1997 Delphi recognized a charge to cost of sales of $80
million, or $50 million after-tax, 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
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.
4. INVENTORIES, NET
Inventories, net consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Productive material, work-in-process and supplies........... $2,274 $2,035
Finished goods.............................................. 243 264
------ ------
Total inventories at FIFO.............................. 2,517 2,299
Less allowance to adjust the carrying value of certain
inventories to LIFO....................................... (504) (431)
------ ------
Total inventories, net................................. $2,013 $1,868
====== ======
</TABLE>
F-23
<PAGE> 184
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
5. INCOME TAXES
Income before income taxes for U.S. and foreign operations was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
U.S. income (loss)................................... $1,293 $ 584 $(99)
Foreign income....................................... 653 528 358
------ ------ ----
Total........................................... $1,946 $1,112 $259
====== ====== ====
</TABLE>
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Income taxes estimated to be payable (refundable):
U.S. federal....................................... $ 54 $(107) $ 849
Foreign............................................ 191 108 203
U.S. state and local............................... (8) 50 32
---- ----- -------
Total payable currently......................... 237 51 1,084
Deferred income tax expense (benefit), net
U.S. federal....................................... 346 244 (915)
Foreign............................................ (3) (3) (47)
U.S. state and local............................... 66 (26) (71)
---- ----- -------
Total deferred.................................. 409 215 (1,033)
Investment tax credits............................... (7) (7) (7)
---- ----- -------
Total income tax provision...................... $639 $ 259 $ 44
==== ===== =======
</TABLE>
A reconciliation of the provision for income taxes compared with the
amounts at the U.S. federal statutory rate was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Tax at U.S. federal statutory income tax rate........ $681 $389 $ 91
U.S. state and local income taxes.................... 58 25 (39)
Foreign rates other than 35%......................... (41) (80) 31
Research and experimentation credits................. -- (49) (50)
Other adjustments.................................... (59) (26) 11
---- ---- ----
Total income tax provision...................... $639 $259 $ 44
==== ==== ====
</TABLE>
Deferred income tax assets and liabilities for 1996 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.
F-24
<PAGE> 185
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Temporary differences that gave rise to deferred tax assets and liabilities
included the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1997
----------------------- -----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Postretirement benefits other than
pensions............................ $1,626 $ -- $1,677 $ --
Postemployment benefits............... 175 -- 170 --
Depreciation.......................... -- 289 54 83
Employee benefits..................... 701 29 886 --
Tax on unremitted profits............. -- 165 -- 36
U.S. state and local taxes............ 176 -- 134 --
Other U.S. ........................... 82 99 247 57
Other foreign......................... -- 90 45 85
------ ---- ------ ----
Total............................ 2,760 672 3,213 261
Valuation allowances.................. (25) -- (23) --
------ ---- ------ ----
Total deferred taxes............. $2,735 $672 $3,190 $261
====== ==== ====== ====
</TABLE>
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 $30 million
at December 31, 1997. Quantification of the deferred tax liability, if any,
associated with permanently reinvested earnings is not practicable.
F-25
<PAGE> 186
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
6. PROPERTY, NET
Property, net consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED USEFUL ------------------
LIVES (YEARS) 1996 1997
---------------- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Land......................................... -- $ 69 $ 66
Land and leasehold improvements.............. 3-30 248 249
Buildings.................................... 29-45 2,067 2,114
Machinery and equipment...................... 3-30 9,754 10,159
Furniture and office equipment............... 3-20 149 153
Construction in progress..................... -- 705 762
------- -------
Total................................... 12,992 13,503
Less accumulated depreciation and
amortization............................... (7,751) (8,903)
------- -------
Total property, net.......................... $ 5,241 $ 4,600
======= =======
</TABLE>
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Payroll related obligations................................. $ 861 $ 636
Income taxes payable........................................ -- 671
Other....................................................... 543 357
------ ------
Total.................................................. $1,404 $1,664
====== ======
</TABLE>
8. INTRACOMPANY NOTE PAYABLE AND LONG-TERM DEBT
Pursuant to a Cash and Debt Management Agreement, Delphi's financial
statements reflect an outstanding intracompany note payable with the automotive
and corporate sectors of GM of $3.1 billion at both December 31, 1996 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 7.4%, 7.3% and 7.2% in 1995, 1996 and 1997,
respectively. The intracompany note payable matures on January 1, 2000, and is
not subject to any collateral or covenant requirements.
Delphi has certain other long-term debt outstanding, principally at certain
international subsidiaries. The amount of the intracompany note payable is
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, 1997 was as follows:
1998--$159 million; 1999--$9 million; 2000--$3.3 billion; 2001--$1 million;
2002--$3 million; 2003 and thereafter--$55 million.
In January 1999, Delphi entered into two financing agreements with a
syndicate of lenders providing for an aggregate of $5 billion in revolving
credit facilities. In general, borrowings of up to $5 billion are available
under the facilities through January 3, 2000, after which $1.5 billion will be
available through January 3, 2004. The amount Delphi may borrow under the
facilities will be reduced to the extent the
F-26
<PAGE> 187
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
aggregate net cash proceeds from issuances of common stock by Delphi and its
subsidiaries, excluding issuances under its regular employee, executive and
director stock option plans, exceeds $1.5 billion. This includes the net cash
proceeds from this offering. The amount Delphi may borrow will also be reduced
to the extent of the net cash proceeds from 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 BENEFITS
During the periods presented, substantially all of Delphi's U.S. employees
participated in GM's defined benefit pension plans. 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
retire with 30 years of service 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. GM's funding policy with respect to its qualified plans
is to contribute annually, not less than the minimum required by applicable laws
and regulations.
Certain of Delphi's international subsidiaries sponsor defined benefit
pension plans, which provide benefits based on negotiated amounts for each year
of service. The unfunded plans have projected benefit obligations of
approximately $80 million and $76 million at December 31, 1996 and 1997,
respectively. The funded plans have assets in excess of projected benefit
obligations of approximately $45 million and $25 million at December 31, 1996
and 1997, respectively.
During the periods presented, Delphi participated in GM's U.S. defined
benefit pension plans for hourly and salaried employees. GM charged Delphi
approximately $421 million, $337 million and $433 million, in 1995, 1996 and
1997, respectively, related to Delphi hourly employees and retirees in the U.S.,
and approximately $33 million, $27 million and $(11) million in these respective
years for U.S. salaried employees and retirees.
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 will establish
and administer defined benefit pension 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 assets
related to employees retired as of 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. Delphi is
responsible for assuming the unfunded hourly pension liability associated with
Delphi hourly employees either through the
F-27
<PAGE> 188
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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 $1.5 billion and $1.7
billion at December 31, 1996 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 funded status related to the pension obligation for Delphi's salaried
employees at December 31 is set forth below. The measurement date utilized for
such disclosures is December 31.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
ASSETS ASSETS
EXCEED EXCEED
ACCUMULATED ACCUMULATED
BENEFITS BENEFITS
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of:
Vested benefits.................................... $1,388 $1,543
Nonvested benefits................................. 345 384
------ ------
Accumulated benefit obligation....................... 1,733 1,927
Effect of projected benefits......................... 412 459
------ ------
Total projected benefit obligation (PBO)............. 2,145 2,386
Plan assets at fair value............................ 2,218 2,475
------ ------
PBO less than plan assets............................ 73 89
Unamortized net loss................................. 344 267
Unamortized prior service cost....................... 139 129
Unrecognized asset at date of adoption............... (54) (40)
------ ------
Net pension asset.................................... $ 502 $ 445
====== ======
</TABLE>
The following assumptions were used to determine the pension expense and
the actuarial value of the PBO for the U.S. plans in which Delphi's salaried
employees participate:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Weighted-average discount rate.............................. 7.5% 7.0%
Rate of increase in future compensation levels.............. 5.0% 5.0%
Expected long-term rate of return on plan assets............ 10.0% 10.0%
</TABLE>
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Substantially all of Delphi's U.S. employees participate in GM's 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. Certain of Delphi's non-U.S.
subsidiaries have postretirement plans, although most participants are covered
by government sponsored or administered programs. The cost of such programs
generally is not significant to Delphi.
F-28
<PAGE> 189
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Delphi's postretirement benefit costs were determined based on actuarial
methods and include costs related to Delphi's salaried and hourly employees and
retirees for all periods presented.
Postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost........................................ $ 172 $ 185 $ 175
Interest cost....................................... 902 859 896
Net amortization.................................... (34) (26) (24)
Curtailments........................................ (10) (3) --
------ ------ ------
Total postretirement benefit cost.............. $1,030 $1,015 $1,047
====== ====== ======
</TABLE>
The Separation Agreement provides, in general, that GM will assume
responsibility for postretirement benefit costs related to U.S. salaried and
U.S. hourly retired employees. The postretirement benefit obligation for Delphi
based on such terms of the Separation Agreement is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Fully eligible active plan participants................... $1,348 $1,373
Other active plan participants............................ 2,959 3,237
------ ------
APBO........................................................ 4,307 4,610
Unamortized prior service costs due to plan changes......... 79 64
Unamortized net amount resulting from changes in plan
experience and actuarial assumptions...................... 263 114
------ ------
Net postretirement benefit obligation(1).................... $4,649 $4,788
====== ======
</TABLE>
- ------------------
(1) During 1997, Delphi contributed $925 million 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 post-retirement
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 benefit liability does not reflect an allocation of the VEBA
trust assets.
F-29
<PAGE> 190
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The principal assumptions used were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rate.......................... 7.5% 7.8% 7.2%
Weighted-average rate of increase in future compensation
levels related to pay-related life insurance.......... 4.3% 4.4% 4.4%
Base weighted-average health care cost trend rate(a).... 6.5% 6.5% 5.5%
Ultimate sustained weighted-average health care cost
trend rate in 2004(b)................................. 5.0% 5.0% 5.0%
</TABLE>
- ------------------
(a) Current year trend rate assumed at beginning of year was adjusted to actual
to determine year-end obligations.
(b) Rate increases to 6.0% in 1999 and then decreases 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 1997 by $139 million, and would have
increased the APBO by $725 million as of and for the year ended December 31,
1997.
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.
11. COMMITMENTS AND CONTINGENCIES
Rental expense totaled $82 million, $98 million and $99 million for the
years ended December 31, 1995, 1996 and 1997, respectively. Delphi had minimum
lease commitments under noncancelable operating leases at December 31, 1997
totaling $329 million which become due as follows: 1998--$54 million; 1999--$54
million; 2000--$49 million; 2001--$45 million; 2002--$45 million and
thereafter--$82 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,
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.
F-30
<PAGE> 191
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
12. OTHER COMPREHENSIVE INCOME (LOSS)
The change in other comprehensive income (loss), net of related tax effect,
is as follows at December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
PRE-TAX TAX EFFECT NET
AMOUNT (CREDIT) AMOUNT
------- ---------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Other comprehensive income (loss)--foreign
currency translation adjustments:
1995....................................... $ 42 $(16) $ 26
1996....................................... (50) 19 (31)
1997....................................... (134) 51 (83)
</TABLE>
13. OTHER INCOME, NET
Other income, net included the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Claims and commissions................................ $ 53 $ 76 $ 80
Gain (loss) on disposition of assets, net............. 39 (44) 52
Interest income....................................... 53 49 57
Earnings of non-consolidated affiliates............... 47 57 27
Other expense......................................... (91) (23) (22)
---- ---- ----
Other income, net..................................... $101 $115 $194
==== ==== ====
</TABLE>
14. 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 are likely to
be converted to equivalent stock options on Delphi common stock subject to the
terms of the Separation Agreement.
15. 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
F-31
<PAGE> 192
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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 segregated by reportable product sectors is as
follows:
<TABLE>
<CAPTION>
SAFETY,
ELECTRONICS & THERMAL
MOBILE & ELECTRICAL DYNAMICS &
1995 COMMUNICATION ARCHITECTURE PROPULSION OTHER(A) TOTAL
- ---- ------------- ------------ ---------- -------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales to GM and
affiliates................... $4,714 $10,967 $10,975 $ -- $26,656
Net sales to other customers... 519 2,344 2,142 -- 5,005
Inter-sector net sales......... 246 122 25 (393) --
------ ------- ------- ----- -------
Total net sales........... $5,479 $13,433 $13,142 $(393) $31,661
====== ======= ======= ===== =======
Depreciation and
amortization................. $ 151 $ 267 $ 355 $ -- $ 773
Interest expense............... 48 108 127 10 293
Income taxes (tax benefit)..... 236 296 161 (54) 639
Net income (loss)(b)........... 482 605 330 (110) 1,307
Sector assets.................. 2,556 5,734 6,761 584 15,635
Capital expenditures........... 265 355 532 3 1,155
</TABLE>
F-32
<PAGE> 193
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
<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 taxes (tax 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>
<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 taxes (tax 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>
- ------------------
(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, 1996 and 1997 were
impacted by a number of special items, including the Competitiveness Study,
divestitures and plant closings (see Note 3), as well as work stoppages at
certain GM and Delphi facilities (see Note 2). The net unfavorable impact on
net income for each product sector was as follows:
<TABLE>
<CAPTION>
SAFETY,
ELECTRONICS & THERMAL &
YEAR ENDED MOBILE ELECTRICAL DYNAMICS &
DECEMBER 31, COMMUNICATION ARCHITECTURE PROPULSION TOTAL
------------ ------------- ------------ ---------- -----
(IN MILLIONS, NET OF RELATED TAXES)
<S> <C> <C> <C> <C>
1996................................. $ 98 $282 $138 $518
1997................................. $239 $271 $442 $952
</TABLE>
F-33
<PAGE> 194
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Information concerning principal geographic areas, net sales data is for
the year ended December 31 and net property data as of December 31, is as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- -------------------
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.......... $23,387 $3,578 $22,139 $3,777 $21,925 $3,186
Canada................. 1,211 88 719 9 806 14
Mexico................. 2,272 266 2,714 264 3,448 263
------- ------ ------- ------ ------- ------
Total North
America........... 26,870 3,932 25,572 4,050 26,179 3,463
Europe:
France................. 661 254 713 284 645 267
Germany................ 1,297 197 1,502 211 1,365 181
Spain.................. 572 147 637 145 575 131
United Kingdom......... 331 34 349 47 324 7
Other.................. 1,379 263 1,454 261 1,311 234
------- ------ ------- ------ ------- ------
Total Europe........ 4,240 895 4,655 948 4,220 820
South America:
Brazil................. 235 73 399 91 598 91
Other.................. 3 4 43 13 64 26
------- ------ ------- ------ ------- ------
Total South
America........... 238 77 442 104 662 117
All Other................ 313 98 363 139 386 200
------- ------ ------- ------ ------- ------
Total............... $31,661 $5,002 $31,032 $5,241 $31,447 $4,600
======= ====== ======= ====== ======= ======
</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 materially adversely affect Delphi's operating results.
16. 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 will
assume 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,
1996 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 $177
million and $230 million, at December 31, 1996 and 1997, respectively, the
related fair value approximated $179 million and $232 million. For all other
financial instruments recorded at December 31, 1996 and 1997, fair value
approximates book value.
F-34
<PAGE> 195
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
17. 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, 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
Mexico, Germany, France, Spain and South Korea. The magnitude of these exposures
varies over time, depending on the strength of local automotive markets.
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 components and fixed assets.
As a general practice, GM has not hedged 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 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, 1996 and 1997, GM held foreign exchange forward contracts
related to Delphi totaling $11 million and $31 million, respectively. The
foreign exchange options contracts related to Delphi were not significant at
December 31, 1996 and 1997. Forward contracts and options related to Delphi's
business at the time of the Separation will be 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, 1996
and 1997. Such deferred amounts will be included in the cost of such 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 income. 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.
F-35
<PAGE> 196
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------- YEAR ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------- -------- ------------- ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1996
Total net sales............. $7,389 $8,773 $7,564 $7,306 $31,032
Cost of sales, excluding
items listed below........ 6,575 7,464 6,636 6,796 27,471
Selling, general and
administrative............ 303 357 359 426 1,445
Depreciation and
amortization.............. 194 190 243 216 843
------ ------ ------ ------ -------
Operating income (loss)..... 317 762 326 (132) 1,273
Interest expense............ (70) (71) (67) (68) (276)
Other income, net........... 27 41 46 1 115
------ ------ ------ ------ -------
Income (loss) before income
taxes..................... 274 732 305 (199) 1,112
Income taxes (benefit)...... 102 258 5 (106) 259
------ ------ ------ ------ -------
Net income (loss)........... $ 172 $ 474 $ 300 $ (93) $ 853
====== ====== ====== ====== =======
1997
Total 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 taxes (benefit)...... 137 206 9 (308) 44
------ ------ ------ ------ -------
Net income (loss)........... $ 287 $ 373 $ 76 $ (521) $ 215
====== ====== ====== ====== =======
</TABLE>
F-36
<PAGE> 197
(This page intentionally left blank)
<PAGE> 198
PROSPECTUS COVER GATEFOLD
INSIDE BACK
A LONG, PROUD HISTORY OF INNOVATION.
[VIEW OF VEHICLE INSTRUMENT PANEL]
YESTERDAY:
Delphi Automotive Systems has been providing innovative technology to General
Motors for almost a century. Some of our technologies include:
First electric self-starter
First in-dash radio
First turn signal
First catalytic converter
First airbag
First steering column
First independent front-
wheel suspension
First energy-absorbing
steering column
First electric power
sliding door
First integrated child
safety seat
TODAY:
Because of Delphi's diverse technologies, we have the ability to integrate
components into modules and systems. This allows us to provide comprehensive
systems-based solutions for our customers.
[CAR IN LANDSCAPE]
TOMORROW:
With its broad vehicle knowledge and system capabilities, Delphi is
strategically positioned to develop automotive products for the 21st century.
We call them our Next Century Winners and they include:
ADVANCED SAFETY INTERIOR - Our Occupant Protection Systems of tomorrow will
tailor airbag deployment based on whether a seat is occupied, the size of the
occupant, the distance an individual is from an air bag, whether a seat belt is
being used and the severity of a collision.
[CRYSTAL BALL IN HAND]
MOBILE MULTI-MEDIA - Delphi's Network Vehicle received the "InfoVision Award"
from the International Engineering Consortium. In the future we expect to bring
satellite communications, E-mail, the World Wide Web, movies, games and more
into the vehicle you drive.
[INTERIOR VIEW OF NETWORK VEHICLE]
<PAGE> 199
PROSPECTUS COVER GATEFOLD
OUTSIDE BACK
[DELPHI AUTOMOTIVE SYSTEMS LOGO]
<PAGE> 200
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued February 2, 1999
100,000,000 Shares
[LOGO]
Delphi Automotive Systems Corporation
COMMON STOCK
------------------------
DELPHI AUTOMOTIVE SYSTEMS CORPORATION IS OFFERING 100,000,000 SHARES OF ITS
COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET EXISTS
FOR OUR SHARES. WE ESTIMATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE
BETWEEN $15 AND $18 PER SHARE.
------------------------
OUR COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE TRADING SYMBOL "DPH," SUBJECT TO NOTICE OF ISSUANCE
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 12.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS DELPHI
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................... $ $ $
Total........................ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Delphi has granted the U.S. underwriters an option to purchase an additional
15,000,000 shares to cover over-allotments. Morgan Stanley & Co. Incorporated
expects to deliver the shares to purchasers on , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
GOLDMAN SACHS INTERNATIONAL MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE SCHRODERS
, 1999
<PAGE> 201
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
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 being registered. 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 Offering.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ------
<S> <C>
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
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
GENERAL CORPORATION LAW
Delphi is incorporated under the laws of the State of Delaware. Section 145
("Section 145") of the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended (the "General Corporation Law"), inter
alia, provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
were or threatened to be made, a party to any threatened, pending or completed
action or suit by or in the right of the corporation by reasons of the fact that
such person was a director, officer, employee or agent of such corporation, or
is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer, director,
employee or agent is adjudged to be liable to the corporation. Where an officer,
director, employee or agent is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director has actually and reasonably
incurred.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
II-1
<PAGE> 202
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
CERTIFICATE OF INCORPORATION
Delphi's Restated Certificate of Incorporation and Bylaws provide for the
indemnification of officers and directors to the fullest extent permitted by the
General Corporation Law.
All of Delphi's directors and officers will be covered by insurance
policies maintained by Delphi against certain liabilities for actions taken in
their capacities as such, including liabilities under the Securities Act of
1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its incorporation and organization, on September 16,
1998, Delphi issued 10 shares of common stock to General Motors Corporation.
Delphi believes that this issuance was exempt from registration under Section
4(2) of the Securities Act as a transaction not involving any public offering.
In connection with this Offering, Delphi will declare a stock dividend pursuant
to which an additional 464,999,990 shares of our common stock will be issued to
General Motors.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
1.2 Form of Letter Agreement Relating to Directed Share
Program.*
3.1 Amended and Restated Certificate of Incorporation of Delphi.
3.2 Bylaws of Delphi.*
4.1 Form of Delphi Common Stock certificate.*
4.2 Form of Rights Agreement relating to Delphi's Stockholder
Rights Plan.*
5.1 Opinion of Kirkland & Ellis re: legality of shares being
registered.*
10.1 Master Separation Agreement among General Motors, Delphi,
Delphi Automotive Systems, LLC, Delphi Technologies, Inc.
and Delphi Automotive Systems (Holding), Inc.*
10.2 Component Supply Agreement between Delphi and General
Motors.*
10.3 Delphi/SPO Business Relationship Agreement.*
10.4 U.S. Employee Matters Agreement between Delphi and General
Motors.*
10.5 Agreement for the Allocation of United States Federal, State
and Local Income Taxes between General Motors and Delphi.*
10.6 Amended and Restated Agreement for the Allocation of United
States Federal, State and Local Income Taxes between General
Motors and Delphi.*
10.7 Form of IPO and Distribution Agreement between Delphi and
General Motors.*
10.8 Form of Registration Rights Agreement between Delphi and
General Motors.*
10.9 Form of Change in Control Agreement between Delphi and
certain of its officers and other executives.*
10.10 Delphi Automotive Systems Corporation Stock Incentive Plan.*
10.11 Delphi Automotive Systems Corporation Performance
Achievement Plan.*
10.12 Delphi Automotive Systems Corporation Annual Incentive
Plan.*
</TABLE>
II-2
<PAGE> 203
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.13 Delphi Automotive Systems Corporation Deferred Compensation
Plan for Non-Employee Directors.*
10.14 $3.5 Billion Competitive Advance and Revolving Credit
Facility among Delphi and the lenders named therein.*
10.15 $1.5 Billion Competitive Advance and Revolving Credit
Facility among Delphi and the lenders named therein.*
10.16 First Amendment to $3.5 Billion Competitive Advance and
Revolving Credit Facility among Delphi and the lenders named
therein.*
21.1 Subsidiaries of Delphi.*
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).*
24.1 Power of Attorney.*
27.1 Financial Data Schedule (1995).*
27.2 Financial Data Schedule (1996).*
27.3 Financial Data Schedule (1997).*
27.4 Financial Data Schedule (September 30, 1997).*
27.5 Financial Data Schedule (September 30, 1998).*
99.1 Consent of Virgis W. Colbert to be named as a director
nominee.*
99.2 Consent of Shoichiro Irimajiri to be named as a director
nominee.*
99.3 Consent of Oscar De Paula Bernardes Neto to be named as a
director nominee.*
99.4 Consent of John D. Opie to be named as a director nominee.*
99.5 Consent of Roger S. Penske to be named as a director
nominee.*
99.6 Consent of Susan A. McLaughlin to be named as a director
nominee.*
</TABLE>
- ------------------
* Previously filed.
(b) 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.
II-3
<PAGE> 204
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 may be permitted as to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 14, or otherwise,
the Registrant has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payments by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective;
and
(2) for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE> 205
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Troy, State
of Michigan, on February 2, 1999.
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
By: /s/ J.T. BATTENBERG III
------------------------------------
J.T. Battenberg III
Chairman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons on
February 2, 1999 in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ J.T. BATTENBERG III Chairman of the Board, Chief Executive Officer and
- --------------------------------------------------- President
J.T. Battenberg III (Principal Executive Officer)
* Chief Financial Officer and Vice President
- --------------------------------------------------- (Principal Financial Officer)
Alan S. Dawes
* Chief Accounting Officer and
- --------------------------------------------------- Controller
Paul R. Free (Principal Accounting Officer)
* Director
- ---------------------------------------------------
Thomas H. Wyman
* Director
- ---------------------------------------------------
John F. Smith, Jr.
* Director
- ---------------------------------------------------
Harry J. Pearce
* Director
- ---------------------------------------------------
J. Michael Losh
</TABLE>
- ------------------
* The undersigned, by signing his name hereto, does hereby execute this
amendment to the registration statement on behalf of the officers and
directors of the registrant listed above pursuant to the Powers of Attorney
previously filed with the Commission.
<TABLE>
<C> <S>
/s/ J.T. BATTENBERG III
- ---------------------------------------------------
J.T. Battenberg III, Attorney in Fact
</TABLE>
II-5
<PAGE> 206
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
1.2 Form of Letter Agreement Relating to Directed Share
Program.*
3.1 Amended and Restated Certificate of Incorporation of Delphi.
3.2 Bylaws of Delphi.*
4.1 Form of Delphi Common Stock certificate.*
4.2 Form of Rights Agreement relating to Delphi's Stockholder
Rights Plan.*
5.1 Opinion of Kirkland & Ellis re: legality of shares being
registered.*
10.1 Master Separation Agreement among General Motors, Delphi,
Delphi Automotive Systems, LLC, Delphi Technologies, Inc.
and Delphi Automotive Systems (Holding), Inc.*
10.2 Component Supply Agreement between Delphi and General
Motors.*
10.3 Delphi/SPO Business Relationship Agreement.*
10.4 U.S. Employee Matters Agreement between Delphi and General
Motors.*
10.5 Agreement for the Allocation of United States Federal, State
and Local Income Taxes between General Motors and Delphi.*
10.6 Amended and Restated Agreement for the Allocation of United
States Federal, State and Local Income Taxes between General
Motors and Delphi.*
10.7 Form of IPO and Distribution Agreement between Delphi and
General Motors.*
10.8 Form of Registration Rights Agreement between Delphi and
General Motors.*
10.9 Form of Change in Control Agreement between Delphi and
certain of its officers and other executives.*
10.10 Delphi Automotive Systems Corporation Stock Incentive Plan.*
10.11 Delphi Automotive Systems Corporation Performance
Achievement Plan.*
10.12 Delphi Automotive Systems Corporation Annual Incentive
Plan.*
10.13 Delphi Automotive Systems Corporation Deferred Compensation
Plan for Non-Employee Directors.*
10.14 $3.5 Billion Competitive Advance and Revolving Credit
Facility among Delphi and the lenders named therein.*
10.15 $1.5 Billion Competitive Advance and Revolving Credit
Facility among Delphi and lenders named therein.*
10.16 First Amendment to $3.5 Billion Competitive Advance and
Revolving Credit Facility among Delphi and the lenders named
therein.*
21.1 Subsidiaries of Delphi.*
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).*
24.1 Powers of Attorney.*
27.1 Financial Data Schedule (1995).*
27.2 Financial Data Schedule (1996).*
27.3 Financial Data Schedule (1997).*
27.4 Financial Data Schedule (September 30, 1997).*
27.5 Financial Data Schedule (September 30, 1998).*
99.1 Consent of Virgis W. Colbert to be named as a director
nominee.*
99.2 Consent of Shoichiro Irimajiri to be named as a director
nominee.*
99.3 Consent of Oscar De Paula Bernardes Neto to be named as a
director nominee.*
99.4 Consent of John D. Opie to be named as a director nominee.*
99.5 Consent of Roger S. Penske to be named as a director
nominee.*
99.6 Consent of Susan A. McLaughlin to be named as a director
nominee.*
</TABLE>
- ------------------
* Filed previously.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
The name of the corporation is Delphi Automotive Systems Corporation.
The original certificate of incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on September, 16, 1998.
This Amended and Restated Certificate of Incorporation amends and, as
amended, restates in its entirety the corporation's certificate of incorporation
and has been duly proposed by resolutions adopted and declared advisable by the
Board of Directors of the Corporation, duly adopted by the sole stockholder of
the Corporation and duly executed and acknowledged by the officers of the
Corporation in accordance with Sections 103, 242 and 245 of the General
Corporation Law of the State of Delaware. In connection with such amendment, and
simultaneously with the effectiveness thereof, the par value of all shares of
stock of the corporation (both outstanding shares and authorized but unissued or
treasury shares) shall be decreased from $0.10 per share to $0.01 per share and
such shares shall be designated as shares of Common Stock of such par value, as
authorized by this Amended and Restated Certificate of Incorporation.
The text of the certificate of incorporation of the corporation is
hereby amended and restated to read in its entirety as follows:
ARTICLE I
NAME
The name of the corporation (hereinafter referred to as the
"CORPORATION") is Delphi Automotive Systems Corporation.
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office in the State of
Delaware is The Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be
<PAGE> 2
incorporated under the General Corporation Law of the State of Delaware, as from
time to time in effect (the "DGCL").
ARTICLE IV
CAPITAL STOCK
Section 1. Authorized Stock. The Corporation shall be authorized to
issue two billion (2,000,000,000) shares of capital stock, of which one billion
three hundred and fifty million (1,350,000,000) shares shall be shares of Common
Stock, $0.01 par value per share ("COMMON STOCK"), and six hundred and fifty
million (650,000,000) shares shall be shares of Preferred Stock, $0.10 par value
per share ("PREFERRED STOCK").
Section 2. Designation of Preferred Stock Terms. The Preferred Stock
may be issued from time to time in one or more series. The Board of Directors is
hereby authorized to provide for the issuance of shares of Preferred Stock in
series and, by filing a certificate pursuant to the DGCL (hereinafter referred
to as a "PREFERRED STOCK DESIGNATION"), to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, privileges, preferences and rights of the shares of each such series and
the qualifications, limitations and restrictions thereon. The authority of the
Board of Directors with respect to each series shall include, but not be limited
to, determination of the following:
(a) the designation of the series, which may be by distinguishing
number, letter or title;
(b) the number of shares of the series, which number the Board of
Directors may thereafter (except where otherwise provided in the Preferred Stock
Designation) increase or decrease (but not below the number of shares thereof
then outstanding) in the manner permitted by law;
(c) the rate of any dividends (or method of determining the
dividends) payable to the holders of the shares of such series, any conditions
upon which such dividends shall be paid and the date or dates or the method for
determining the date or dates upon which such dividends shall be payable;
(d) whether dividends, if any, shall be cumulative or
noncumulative, and, in the case of shares of any series having cumulative
dividend rights, the date or dates or
2
<PAGE> 3
method of determining the date or dates from which dividends on the shares of
such series shall cumulate;
(e) if the shares of such series may be redeemed by the
Corporation, the price or prices (or method of determining such price or prices)
at which, the form of payment of such price or prices (which may be cash,
property or rights, including securities of the Corporation or of another
corporation or other entity) for which, the period or periods within which and
the other terms and conditions upon which the shares of such series may be
redeemed, in whole or in part, at the option of the Corporation or at the option
of the holder or holders thereof or upon the happening of a specified event or
events, if any, including the obligation, if any, of the Corporation to purchase
or redeem shares of such series pursuant to a sinking fund or otherwise;
(f) the amount payable out of the assets of the Corporation to
the holders of shares of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation;
(g) provisions, if any, for the conversion or exchange of the
shares of such series, at any time or times, at the option of the holder or
holders thereof or at the option of the Corporation or upon the happening of a
specified event or events, into shares of any other class or classes or any
other series of the same class of capital stock of the Corporation or into any
other security of the Corporation, or into the stock or other securities of any
other corporation or other entity, and the price or prices or rate or rates of
conversion or exchange and any adjustments applicable thereto, and all other
terms and conditions upon which such conversion or exchange may be made;
(h) restrictions on the issuance of shares of the same series or
of any other class or series of capital stock of the Corporation, if any; and
(i) the voting rights and powers, if any, of the holders of
shares of the series.
Section 3. Powers, Privileges and Rights Pertaining to the Common
Stock. The powers, privileges and rights pertaining to the Common Stock shall be
subject to the powers, privileges, preferences and rights pertaining to the
Preferred Stock and any and all series thereof. The holders of shares of Common
Stock shall be entitled to one vote for each such share upon all matters and
proposals presented to the stockholders on which the
3
<PAGE> 4
holders of Common Stock are entitled to vote. Except as otherwise provided by
law or by another provision of the certificate of incorporation of the
Corporation or by a Preferred Stock Designation, the Common Stock shall have the
exclusive right to vote for the election of directors and on all other matters
or proposals presented to the stockholders; provided, however, that the holders
of shares of Common Stock, as such, shall not be entitled to vote on any
amendment of the certificate of incorporation of the Corporation (including any
amendment of any provision of a Preferred Stock Designation) that solely relates
to the powers, privileges, preferences or rights pertaining to one or more
outstanding series of Preferred Stock, or the number of shares of any such
series, and does not affect the number of authorized shares of Preferred Stock
or the powers, privileges and rights pertaining to the Common Stock, if the
holders of any of such series of Preferred Stock are entitled, separately or
together with the holders of any other series of Preferred Stock, to vote
thereon pursuant to the certificate of incorporation of the Corporation
(including any Preferred Stock Designation) or pursuant to the DGCL, unless a
vote of holders of shares of Common Stock is otherwise required by any provision
of the Preferred Stock Designation for any such series or any other provision of
the certificate of incorporation of the Corporation fixing the powers,
privileges, powers and rights of any such series or the qualifications,
limitations or restrictions thereon or is otherwise required by law. Holders of
shares of Preferred Stock (of any series) shall not be entitled to receive
notice of any meeting of stockholders at which they are not entitled to vote,
except as may be explicitly provided by any Preferred Stock Designation. The
number of authorized shares of Preferred Stock may be increased or decreased
(but not below the number of shares thereof then outstanding) by the affirmative
vote of the holders of a majority of the outstanding shares of Common Stock,
without a vote of the holders of the Preferred Stock, or of any series thereof,
unless a vote of any such holders is required pursuant to another provision of
the certificate of incorporation of the Corporation (including any Preferred
Stock Designation).
ARTICLE V
BYLAWS
Bylaws for the Corporation may be adopted, consistent with law and the
provisions of the certificate of incorporation of the Corporation (including any
Preferred Stock Designation), and, once adopted, any Bylaw may be altered or
repealed: (i) by the affirmative vote of the holders of a majority of the voting
power of the capital stock issued and outstanding and entitled to
4
<PAGE> 5
vote thereon; provided, however, that any proposed alteration or repeal of, or
the adoption of any Bylaw inconsistent with, Section 2.2, 2.7 or 2.10 of Article
II or Section 3.1, 3.2 or 3.12 of Article III or Section 8.6 of Article VIII or
Article IX of the Bylaws in effect on, and as the same may be amended from time
to time in accordance herewith after, the date of the effectiveness of this
Amended and Restated Certificate of Incorporation, shall require the affirmative
vote of the holders of at least 80% of the voting power of all shares of capital
stock of the Corporation entitled generally to vote on the election of directors
of the Corporation ("VOTING STOCK") then outstanding, voting together as a
single class; and provided, further, however, that in the case of any such
stockholder action at a special meeting of stockholders, notice of the proposed
alteration, repeal or adoption of the new Bylaw or Bylaws must be contained in
the notice of such special meeting, or (ii) by the affirmative vote of a
majority of the total number of directors which the Corporation would have if
there were no vacancies on the Board of Directors (the "WHOLE BOARD"); provided,
however, that any amendment of the Bylaws by action of the Board of Directors
shall require the affirmative vote of a greater number of the directors if so
provided by the Bylaws (as from time to time amended and in effect from time to
time). Notwithstanding anything to the contrary elsewhere contained in the
certificate of incorporation of the Corporation, the affirmative vote of the
holders of at least 80% of the voting power of all Voting Stock then
outstanding, voting together as a single class, shall be required to alter,
amend or repeal, or to adopt any provision inconsistent with, this Article.
ARTICLE VI
STOCKHOLDER ACTION
Section 1. Action By Consent In Lieu of a Meeting. Effective upon and
commencing as of the day following the day on which General Motors Corporation,
a Delaware corporation ("GM"), and any company that is directly or indirectly
controlled by GM and of which at least a majority of the equity interests
therein are directly or indirectly beneficially owned by GM shall first cease to
be the owner, in the aggregate, of at least a majority of the then outstanding
shares of Common Stock (the "TRIGGER DATE"), and except as otherwise provided
pursuant to provisions of the certificate of incorporation of the Corporation
(including any Preferred Stock Designation) fixing the powers, privileges or
rights of any class or series of stock other than the Common Stock in respect of
action by written consent of the holders of such class or series of stock, any
action required or permitted
5
<PAGE> 6
to be taken by the stockholders of the Corporation must be effected at a duly
called annual or special meeting of such holders and may not be effected by any
consent in writing by such holders.
Section 2. Special Meetings. Effective upon and commencing as of the
Trigger Date, except as otherwise required by law and subject to the rights of
the holders of any class or series of stock having a preference over the Common
Stock as to dividends or distributions upon liquidation, special meetings of
stockholders of the Corporation of any class or series for any purpose or
purposes may be called only by the Board of Directors pursuant to a resolution
stating the purpose or purposes thereof approved by a majority of the Whole
Board and, effective as of the Trigger Date, any power of stockholders to call a
special meeting is specifically denied. No business other than that stated in
the notice shall be transacted at any special meeting.
Section 3. Stockholder Nomination of Director Candidates and Other
Stockholder Proposals. Advance notice of stockholder nominations for the
election of directors and of the proposal by stockholders of any other action to
be taken by the stockholders shall be given in such manner as shall be provided
in the Bylaws of the Corporation (as amended and in effect from time to time).
Section 4. Amendment of this Article. Notwithstanding anything to the
contrary contained in the certificate of incorporation of the Corporation, the
affirmative vote of the holders of at least 80% of the voting power of all
shares of Voting Stock then outstanding, voting together as a single class,
shall be required to alter, amend or repeal, or to adopt any provision
inconsistent with, this Article.
ARTICLE VII
BOARD OF DIRECTORS
Section 1. Powers of the Board of Directors. The business and affairs
of the Corporation shall be managed by or under the direction of the Board of
Directors, which shall be constituted as provided in this Article and as
provided by law.
Section 2. Number, Election and Term of Office. Except in respect of
the election of additional directors as otherwise provided for by or pursuant to
the provisions of the certificate of incorporation of the Corporation (including
any Preferred Stock Designation) pertaining to any class or series of
6
<PAGE> 7
stock having a preference over the Common Stock as to dividends or distributions
upon liquidation, the number of the directors of the Corporation shall be fixed
from time to time (and may be changed) exclusively pursuant to a resolution
adopted by a majority of the Whole Board, but shall not be less than three;
provided, however, that (i) no reduction in the number of directors shall end
the term of office of any incumbent director prior to the date such director's
term of office would otherwise end, and (ii) the Bylaws may provide that the
vote of a greater number of the directors may be required for action of the
Board of Directors changing the size of the Board of Directors. The directors,
other than those who may be elected by the holders of any class or series of
stock having a preference over the Common Stock as to dividends or distributions
upon liquidation, shall be classified, by the Board of Directors with respect to
the time for which they severally hold office, into three classes, as nearly
equal in number as possible, one class to be originally elected for a term
expiring at the annual meeting of stockholders to be held in 2000, another class
to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 2001, and another class to be originally elected for
a term expiring at the annual meeting of stockholders to be held in 2002, with
each director to hold office until his or her successor is duly elected and
qualified, such classification to be effective upon the date shares of Common
Stock are first publicly held. At each succeeding annual meeting of
stockholders, directors elected to succeed those directors whose terms then
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each director to hold
office until his or her successor shall have been duly elected and qualified.
Section 3. Written Ballot Not Required. Unless and except to the extent
that the Bylaws of the Corporation shall so require, the election of directors
of the Corporation need not be by written ballot.
Section 4. Newly Created Directorships and Vacancies. Except for the
election of one or more directors as provided for by or pursuant to the
provisions of the certificate of incorporation of the Corporation (including any
Preferred Stock Designation) pertaining to any class or series of stock having a
preference over the Common Stock as to dividends or distributions upon
liquidation and except as the stockholders shall otherwise be entitled to elect
directors as provided by law, newly created directorships resulting from any
increase in the number of directors constituting the Board of Directors and any
vacancies on the Board of Directors occurring for any reason shall be
7
<PAGE> 8
filled only by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors, and
not by the stockholders; provided, however, that the Bylaws may provide that the
vote of a greater number of the directors may be required for action of the
Board of Directors to fill any vacancy on the Board of Directors and may provide
that any vacancy on the Board of Directors may be filled by vote of the
stockholders. Any director elected to fill a vacancy on the Board of Directors
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or in which the vacancy occurred and
until such director's successor shall have been duly elected and qualified.
Section 5. Removal. Subject to the rights of any class of Preferred
Stock or series thereof to elect and remove additional directors under specified
circumstances, (i) prior to the Trigger Date, any director may be removed from
office, with or without cause, by the affirmative vote of the holders of at
least a majority of the voting power of all Voting Stock then outstanding,
voting together as a single class and, (ii) on and after the Trigger Date, any
director may be removed from office only for cause by the affirmative vote of
the holders of at least a majority of the voting power of all Voting Stock then
outstanding, voting together as a single class.
Section 6. Amendment of this Article. Notwithstanding anything to the
contrary elsewhere contained in the certificate of incorporation of the
Corporation, the affirmative vote of the holders of at least 80% of the voting
power of all shares of Voting Stock then outstanding, voting together as a
single class, shall be required to alter, amend or repeal, or to adopt any
provision inconsistent with, this Article.
ARTICLE VIII
LIMITATIONS ON LIABILITY OF AND INDEMNIFICATION OF
DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
Section 1. Limited Liability of Directors. A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for any liability imposed by law (as in effect from time to time) (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for any act or omission not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL, or (iv) for any
8
<PAGE> 9
transaction from which the director derived an improper personal benefit.
Neither the amendment nor the repeal of this Section 1 of this Article shall
eliminate or reduce the effect thereof in respect of any matter occurring, or
any cause of action, suit or claim that, but for this Section 1 of this Article
would accrue or arise, prior to such amendment or repeal.
Section 2. Indemnification.
(a) Indemnification of Directors, Officers, Employees or Agents.
Each person who was or is made a party or is threatened to be made a party to or
is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative in nature, including any appeal (hereinafter a
"PROCEEDING"), by reason of the fact that such person (or a person of whom such
person is the legal representative) is or was a director, officer, employee or
agent of the Corporation or, while a director, officer, employee or agent of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, trustee, partner, member, employee, other fiduciary or agent of another
corporation or of a partnership, joint venture, limited liability company, trust
or other enterprise, including service with respect to employee benefit plans or
public service or charitable organizations, whether the basis of such claim or
proceeding is alleged actions or omissions in any such capacity or in any other
capacity while serving as a director, officer, trustee, partner, member,
employee, other fiduciary or agent thereof, may be indemnified and held harmless
by the Corporation to the fullest extent permitted by the DGCL, against all
expense and liability (including without limitation, attorneys' fees and
disbursements, court costs, damages, fines, amounts paid or to be paid in
settlement, and excise taxes or penalties) reasonably incurred or suffered by
such person in connection therewith and such indemnification may continue as to
a person who has ceased to be a director, officer, employee or agent of the
Corporation and may inure to the benefit of such person's heirs, executors and
administrators. The Corporation, by provisions in its Bylaws or by agreement,
may accord to any current or former director, officer, employee or agent of the
Corporation the right to, or regulate the manner of providing to any current or
former director, officer, employee or agent of the Corporation, indemnification
to the fullest extent permitted by the DGCL.
(b) Advance of Expenses. The Corporation to the fullest extent
permitted by the DGCL may advance to any person who is or was a director,
officer, employee or agent of the Corporation (or to the legal representative
thereof) any and all
9
<PAGE> 10
expenses (including, without limitation, attorneys fees and disbursements and
court costs) reasonably incurred by such person in respect of any proceeding to
which such person (or a person of whom such person is a legal representative) is
made a party or threatened to be made a party by reason of the fact that such
person is or was a director, officer, employee or agent of the Corporation or,
while a director, officer, employee or agent of the Corporation, is or was
serving at the request of the Corporation as a director, officer, trustee,
partner, member, employee, other fiduciary or agent of another corporation or a
partnership, joint venture, limited liability company, trust or other
enterprise, including service with respect to employee benefit plans or public
service or charitable organizations; provided, however, that, to the extent the
DGCL requires, the payment of such expenses in advance of the final disposition
of the proceeding shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such person, to repay all amounts so advanced if
it shall ultimately be determined that such person is not entitled to be
indemnified against such expense under this Section 2 or otherwise. The
Corporation by provisions in its Bylaws or by agreement may accord any such
person the right to, or regulate the manner of providing to any such person,
such advancement of expenses to the fullest extent permitted by the DGCL.
(c) Non-Exclusivity of Rights. Any right to indemnification and
advancement of expenses conferred as permitted by this Section 2 shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute (including the DGCL), any other provision of the certificate
of incorporation of the Corporation, any agreement, any vote of stockholders or
the Board of Directors or otherwise.
Section 3. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or of another corporation or a partnership, joint venture, limited
liability company, trust or other enterprise against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the DGCL.
Section 4. Severability. If any provision or provisions of this Article
shall be held to be invalid, illegal or unenforceable as applied to any
circumstance for any reason whatsoever: (a) the validity, legality and
enforceability of such provisions in any other circumstance and of the remaining
provisions of this Article (including, without limitation, each
10
<PAGE> 11
portion of any paragraph of this Article containing any such provision held to
be invalid, illegal or unenforceable that is not itself held to be invalid,
illegal or unenforceable) shall not in any way be affected or impaired thereby
and (b) to the fullest extent possible, the provisions of this Article
(including, without limitation, each such portion of any paragraph of this
Article containing any such provision held to be invalid, illegal or
unenforceable) shall be construed so as to permit the Corporation to protect its
directors, officers, employees and agents from personal liability in respect of
their good faith service to or for the benefit of the Corporation to the fullest
extent permitted by law.
ARTICLE IX
CERTAIN BUSINESS COMBINATIONS
Section 1. Vote Required for Certain Business Combinations. In addition
to any affirmative vote required by law or the certificate of incorporation or
the Bylaws of the Corporation, and except as otherwise expressly provided in
Section 2 of this Article, a Business Combination (as hereinafter defined)
involving as a party, or proposed by or on behalf of, an Interested Stockholder
(as hereinafter defined) or an Affiliate or Associate (as hereinafter defined)
of an Interested Stockholder or a person who upon consummation of such Business
Combination would become an Affiliate or Associate of an Interested Stockholder
shall, except as otherwise prohibited by applicable law, require the affirmative
vote of not less than 66- 2/3% of the votes entitled to be cast by the holders
of all the then outstanding shares of Voting Stock, voting together as a single
class, excluding Voting Stock Beneficially Owned (as hereinafter defined) by any
Interested Stockholder. Such affirmative vote shall be required notwithstanding
the fact that no vote may be required, or that a lesser percentage affirmative
vote or the vote of any other class of stockholders may otherwise be required,
by law or otherwise.
Section 2. Exceptions to Vote Required by Section 1. The provisions of
Section 1 of this Article shall not be applicable to any particular Business
Combination, and such Business Combination shall require only such stockholder
vote, if any, as is required by law or by any other provision of the certificate
of incorporation or Bylaws of the Corporation, if all of the conditions
specified in either of the following paragraphs (a) or (b) are met or, in the
case of a Business Combination not involving the payment of consideration to the
holders of the
11
<PAGE> 12
Corporation's outstanding capital stock, if the condition specified in the
following paragraph (a) is met:
(a) Continuing Director Approval. The Business Combination shall
have been approved, either specifically or as a transaction which is within an
approved category of transactions, by a majority of the Continuing Directors (as
hereinafter defined), whether such approval is given prior to or subsequent to
the acquisition of, or announcement or public disclosure of the intention to
acquire, Beneficial Ownership of Voting Stock that caused the Interested
Stockholder to become an Interested Stockholder.
(b) Other Conditions. All of the following conditions shall have
been met:
(i) the aggregate amount of cash and the Fair Market Value
(as hereinafter defined), as of the date of the consummation of the Business
Combination, of consideration other than cash to be received per share by
holders of Common Stock in such Business Combination shall be at least equal to
the highest amount determined under clauses (A) and (B) below:
(A) if applicable, the highest per share price
(including any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by or on behalf of the Interested Stockholder for any share of Common
Stock in connection with the acquisition by the Interested Stockholder of
Beneficial Ownership of shares of Common Stock (x) within the two-year period
immediately prior to the first public announcement of the proposed Business
Combination (the "ANNOUNCEMENT DATE") or (y) in the transaction in which it
became an Interested Stockholder, whichever is higher, in either case as
adjusted for any subsequent stock split, stock dividend, subdivision or
reclassification with respect to Common Stock; and
(B) the Fair Market Value per share of Common Stock on
the Announcement Date or on the date on which the Interested Stockholder became
an Interested Stockholder (the "DETERMINATION DATE"), whichever is higher, as
adjusted for any subsequent stock split, stock dividend, subdivision or
reclassification with respect to Common Stock.
(ii) The aggregate amount of cash and the Fair Market Value,
as of the date of the consummation of the Business Combination, of consideration
other than cash to be received per share by holders of shares of any class or
series of outstanding capital stock, other than Common Stock, shall be at least
equal
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to the highest amount determined under clauses (A), (B), (C) and (D) below:
(A) if applicable, the highest per share price
(including any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by or on behalf of the Interested Stockholder for any share of such
class or series of capital stock in connection with the acquisition by the
Interested Stockholder of Beneficial Ownership of shares of such class or series
of capital stock (x) within the two-year period immediately prior to the
Announcement Date or (y) in the transaction in which it became an Interested
Stockholder, whichever is higher, in either case as adjusted for any subsequent
stock split, stock dividend, subdivision or reclassification with respect to
such class or series of capital stock;
(B) the Fair Market Value per share of such class or
series of capital stock on the Announcement Date or on the Determination Date,
whichever is higher, as adjusted for any subsequent stock split, stock dividend,
subdivision or reclassification with respect to such class or series of capital
stock;
(C) if applicable, the price per share equal to the
Fair Market Value per share of such class or series of capital stock determined
pursuant to the immediately preceding clause (B), multiplied by the ratio of (x)
the highest per share price (including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder
for any share of such class or series of capital stock in connection with the
acquisition by the Interested Stockholder of Beneficial Ownership of shares of
such class or series of capital stock within the two-year period immediately
prior to the Announcement Date, as adjusted for any subsequent stock split,
stock dividend, subdivision or reclassification with respect to such class or
series of capital stock to (y) the Fair Market Value per share of such class or
series of capital stock on the first day in such two-year period on which the
Interested Stockholder acquired Beneficial Ownership of any share of such class
or series of capital stock, as adjusted for any subsequent stock split, stock
dividend, subdivision or reclassification with respect to such class or series
of capital stock; and
(D) if applicable, the highest preferential amount per
share to which the holders of shares of such class or series of capital stock
would be entitled in the event of any voluntary or involuntary liquidation,
dissolution or winding up
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of the affairs of the Corporation, regardless of whether the Business
Combination to be consummated constitutes such an event.
The provisions of this paragraph (b) shall be required to be met with respect to
every class or series of outstanding capital stock, whether or not the
Interested Stockholder has previously acquired Beneficial Ownership of any
shares of a particular class or series of capital stock.
(iii) The consideration to be received by holders of a
particular class or series of outstanding capital stock shall be in cash or in
the same form as previously has been paid by or on behalf of the Interested
Stockholder in connection with its direct or indirect acquisition of Beneficial
Ownership of shares of such class or series of capital stock. If the
consideration so paid for shares of any class or series of capital stock varied
as to form, the form of consideration for such class or series of capital stock
shall be either cash or the form used to acquire Beneficial Ownership of the
largest number of shares of such class or series of capital stock previously
acquired by the Interested Stockholder.
(iv) After the Determination Date and prior to the
consummation of such Business Combination: (A) except as approved by a majority
of the Continuing Directors, there shall have been no failure to declare and pay
at the regular date therefor any full quarterly dividends (whether or not
cumulative) payable in accordance with the terms of any outstanding capital
stock; (B) there shall have been no reduction in the annual rate of dividends
paid on the Common Stock (except as necessary to reflect any stock split, stock
dividend, subdivision or reclassification with respect to the Common Stock),
except as approved by a majority of the Continuing Directors; (C) there shall
have been an increase in the annual rate of dividends paid on the Common Stock
as necessary to reflect any reclassification (including any reverse stock
split), recapitalization, reorganization or any similar transaction that has the
effect of reducing the number of outstanding shares of Common Stock, unless the
failure so to increase such annual rate is approved by a majority of the
Continuing Directors; and (D) such Interested Stockholder shall not have become
the beneficial owner of any additional shares of capital stock except as part of
the transaction that results in such Interested Stockholder becoming an
Interested Stockholder and except in a transaction that, after giving effect
thereto, would not result in any increase in the Interested Stockholder's
percentage Beneficial Ownership of any class or series of capital stock.
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(v) A proxy or information statement describing the
proposed Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations thereunder (the
"ACT") (or any subsequent provisions replacing such Act, rules or regulations)
shall be mailed to all stockholders of the Corporation at least 20 business days
prior to the consummation of such Business Combination (whether or not such
proxy or information statement is required to be mailed pursuant to such Act or
subsequent provisions). The proxy or information statement shall contain on the
first page thereof, in a prominent place, any statement as to the advisability
(or inadvisability) of the Business Combination that the Continuing Directors,
or any of them, may choose to make and, if deemed advisable by a majority of the
Continuing Directors, the opinion of an investment banking firm selected by a
majority of the Continuing Directors as to the fairness (or not) of the terms of
the Business Combination from a financial point of view to the holders of the
outstanding shares of capital stock other than the Interested Stockholder and
its Affiliates or Associates, such investment banking firm to be paid by the
Corporation a reasonable fee for its services.
(vi) Neither such Interested Stockholder nor any
Affiliate or Associate of such Interested Stockholder shall have acted on behalf
of the Corporation or any Subsidiary (as hereinafter defined) to cause any
material change in the business or equity capital structure of the Corporation
or a Subsidiary without the approval of a majority of the Continuing Directors.
Section 3. Certain Definitions. For purposes of this Article, the
following definitions shall apply:
(a) The term "BUSINESS COMBINATION" shall mean:
(i) any merger or consolidation of the Corporation or any
Subsidiary with (A) any Interested Stockholder or (B) any other company (whether
or not itself an Interested Stockholder) which is or after such merger or
consolidation would be an Affiliate or Associate of an Interested Stockholder;
or
(ii) any (A) sale, lease, exchange, mortgage, pledge,
transfer or other disposition or hypothecation of assets of the Corporation or
of any Subsidiary (whether or not in connection with the dissolution of the
Corporation) to or for the benefit of, or (B) purchase by the Corporation or any
Subsidiary from or (C) issuance by the Corporation or any Subsidiary of
securities to or (D) investment, loan, advance, guarantee, participation or
other extension of credit by the Corporation or
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any Subsidiary to, from, in or with or (E) establishment of a partnership, joint
venture or other joint enterprise with or for the benefit of, in each case, any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder which transaction, alone or taken together with any related
transaction or transactions, has an aggregate Fair Market Value and/or involves
aggregate commitments of $25,000,000 or more or any arrangement, whether as
employee, consultant or otherwise (other than service as a director) pursuant to
which any Interested Stockholder or any Affiliate or Associate thereof shall,
directly or indirectly, attain any control over or responsibility for the
management of any aspect of the business or affairs of the Corporation which
involves assets which have an aggregate Fair Market Value of $25,000,000 or
more; or
(iii) the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation; or
(iv) any (A) reclassification of securities (including any
reverse stock split), or (B) recapitalization of the Corporation (including any
change to or exchange of securities of the Corporation), or (C) any merger or
consolidation of the Corporation with any of its Subsidiaries or (D) any other
transaction (whether or not with or otherwise involving as a party an Interested
Stockholder) that, in each case, has the effect, directly or indirectly, of
increasing the proportionate share of any class or series of capital stock, or
any securities convertible into or exchangeable for capital stock or other
equity securities, of the Corporation or any Subsidiary that is Beneficially
Owned by any Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder, or
(v) any agreement, contract or other arrangement providing
for any one or more of the actions specified in the foregoing clauses (i)
through (iv).
(b) The term "PERSON" shall mean any individual, firm, company or
other entity and shall include any group comprised of any person and any other
person with whom such person or any Affiliate or Associate of such person has
any agreement, arrangement or understanding, directly or indirectly, for the
purpose of acquiring, holding, voting or disposing of capital stock.
(c) The term "INTERESTED STOCKHOLDER" shall mean any person
(other than (i) the Corporation or any Subsidiary, any profit-sharing, employee
stock ownership or other employee benefit plan of the Corporation or any
Subsidiary or any trustee
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or fiduciary with respect to any such plan or holding Voting Stock for the
purpose of funding any such plan or funding other employee benefits for
employees of the Corporation or any Subsidiary when acting in such capacity and
(ii) until immediately following the date on which GM and any Affiliate or
Associate thereof shall first cease to Beneficially Own shares of Voting Stock
representing ten percent or more of the votes entitled to be cast by the holders
of all then outstanding shares of Voting Stock, GM or any company directly or
indirectly controlled by GM and of which at least a majority of the equity
interests therein are directly or indirectly beneficially owned by GM) who is,
or has announced or publicly disclosed a plan or intention to become, the
Beneficial Owner of Voting Stock representing ten percent or more of the votes
entitled to be cast by the holders of all then outstanding shares of Voting
Stock.
(d) A person shall be a "BENEFICIAL OWNER" of any capital stock or
other securities of the Corporation: (i) which such person or any of its
Affiliates or Associates owns or has the economic benefit of ownership of,
directly or indirectly; (ii) which such person or any of its Affiliates or
Associates has, directly or indirectly, (A) the right to acquire (whether such
right is exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise, or (B)
the right to vote pursuant to any agreement, arrangement or understanding; or
(iii) any other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of capital stock, owns or
has the economic benefit of ownership of. For the purposes of determining
whether a person is an Interested Stockholder pursuant to paragraph (c) of this
Section 3, the number of shares of capital stock of the Corporation deemed to be
outstanding shall include shares deemed beneficially owned by such person
through application of this paragraph (d) of this Section 3, but shall not
include any other shares of capital stock that may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise. Notwithstanding the foregoing, for purposes
of this Article, a person shall not be deemed a "Beneficial Owner" of any
capital stock which such person has the right to acquire upon exercise of the
Rights issued pursuant to the Rights Agreement, dated as of February 1, 1999,
between the Corporation and BankBoston, N.A., as Rights Agent (including any
successor rights plan thereto), if such person would not be deemed the
beneficial
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owner of such capital stock under the terms of such Rights Agreement.
(e) The term "AFFILIATE" in respect of a person means any person
controlling, controlled by or under common control with such person.
(f) The term "ASSOCIATE" in respect of an individual means (i) any
corporation or other organization of which such person is an officer or partner
or otherwise participates in a material way in the management or policy-making
thereof or is the Beneficial Owner of ten percent (10%) or more of any class of
equity security, (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as a trustee
or in a similar fiduciary capacity and (iii) any parent or lineal descendant of
such person or the spouse of such person or any relative of such person who has
the same home as such person or who is a director, officer, partner, limited
liability company member, trustee or other fiduciary of any organization of
which such person is also a director, officer, partner, limited liability
company member, trustee or other fiduciary or substantial beneficiary. The term
"ASSOCIATE" in respect of any company means (i) any director, officer or trustee
of such company or in the case of a limited liability company any manager or
managing member or in the case of a partnership any general partner, (ii) any
other person who participates in a material way in the management or
policy-making of such company and (iii) any person who is the Beneficial Owner
of ten percent (10%) or more of any class of equity security of such company.
(g) The term "SUBSIDIARY" means any company of which a majority of any
class of equity securities are directly or indirectly owned by the Corporation.
(h) The term "CONTINUING DIRECTOR" with respect to an Interested
Stockholder means any member of the Board of Directors (while such person is a
member of the Board of Directors) who is not an Affiliate or Associate or
representative of such Interested Stockholder and who was a member of the Board
of Directors prior to the time that such Interested Stockholder became an
Interested Stockholder, and any successor of a Continuing Director (while such
successor is a member of the Board of Directors) who is not an Affiliate or
Associate or representative of such Interested Stockholder and is recommended or
elected to succeed the Continuing Director by a majority of the Continuing
Directors.
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(i) The term "FAIR MARKET VALUE" means: (i) in the case of cash, the
amount of such cash; (ii) in the case of stock, the highest closing sale price
during the 30-day period immediately preceding the date in question of a share
of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks,
or, if such stock is not quoted on the Composite Tape, on the New York Stock
Exchange, or, if such stock is not listed on such Exchange, on the principal
United States securities exchange registered under the Act on which such stock
is listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the 30-day
period preceding the date in question on The Nasdaq Stock Market or any similar
system then in use, or if no such quotations are available, the fair market
value on the date in question of a share of such stock as determined by a
majority of the Continuing Directors in good faith; and (iii) in the case of
property other than cash or stock, the fair market value of such property on the
date in question as determined in good faith by a majority of the Continuing
Directors.
(j) In the event of any Business Combination in which the Corporation
survives the transaction as a juridic entity, the phrase "consideration other
than cash to be received" as used in clause (i) of paragraph (b) of Section 2 of
this Article shall include the shares of Common Stock and/or the shares of any
other class or series of capital stock retained by the holders of such shares.
Section 4. Certain Determinations. A majority of the Continuing
Directors shall have the power and duty to determine for the purposes of this
Article, on the basis of information known to them after reasonable inquiry, all
questions arising under this Article, including, without limitation, (a) whether
a person is an Interested Stockholder, (b) the number of shares of capital stock
or other securities Beneficially Owned by any person, (c) whether a person is an
Affiliate or Associate of another person, (d) whether a Business Combination is
proposed by or on behalf of an Interested Stockholder or an Affiliate or
Associate of an Interested Stockholder or a person who upon consummation of such
Business Combination would become an Affiliate or Associate of such Interested
Stockholder, (e) whether the assets that are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $25,000,000 or more, and (f)
the application of any other term used in this Article. Any such determination
made
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in good faith shall be binding and conclusive on the Corporation, all of its
stockholders and all other parties.
Section 5. No Effect on Fiduciary Obligations of Interested
Stockholders. Nothing contained in this Article shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
Section 6. Compliance with Section 2 Does Not Obligate or Limit Board
of Directors. The fact that any Business Combination complies with the
provisions of Section 2 of this Article shall not be construed to impose any
fiduciary duty, obligation or responsibility on the Board of Directors, or any
member thereof, to approve such Business Combination or recommend its adoption
or approval to the stockholders of the Corporation, nor shall such compliance
limit, prohibit or otherwise restrict in any manner the Board of Directors, or
any member thereof, with respect to evaluations of or actions and responses
taken with respect to such Business Combination.
Section 7. Business Combination Proposed By an Interested Stockholder.
For the purposes of this Article, a Business Combination shall be presumed to
have been proposed by or on behalf of an Interested Stockholder or an Affiliate
or Associate of an Interested Stockholder or a person who upon consummation of
such Business Combination would become an Affiliate or Associate of an
Interested Stockholder if, after such Interested Stockholder became such, the
Business Combination is proposed following the election of any director of the
Corporation who with respect to such Interested Stockholder would not qualify to
serve as a Continuing Director.
Section 8. Amendment of this Article. Notwithstanding anything to the
contrary elsewhere contained in the certificate of incorporation of the
Corporation, any proposal to alter, amend or repeal, or to adopt any provision
inconsistent with, this Article shall require the affirmative vote of the
holders of not less than 66-2/3% of the votes entitled to be cast by the holders
of all the then outstanding shares of Voting Stock, voting together as a single
class, excluding Voting Stock beneficially owned by any Interested Stockholder;
provided, however, that this Section 8 shall not apply to, and such 66-2/3% vote
shall not be required for, any alteration, amendment or repeal of, or the
adoption of any provision inconsistent with, this Article unanimously
recommended by the Board of Directors if a majority of the directors are persons
who are Continuing Directors with respect to any Interested Stockholder.
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ARTICLE X
CERTAIN TRANSACTIONS WITH STOCKHOLDERS AND CORPORATE
OPPORTUNITIES
Section 1. Certain Acknowledgements. In recognition and anticipation
that (i) the Corporation will cease to be a wholly-owned subsidiary of GM but
that GM will remain, for a period of time, a significant stockholder of the
Corporation, (ii) that directors, officers and/or employees of GM or of
Affiliated Companies (as defined below in this Article) of GM may serve as
directors and/or officers of the Corporation, (iii) that GM and Affiliated
Companies thereof engage and are expected to continue to engage in the same,
similar or related lines of business as those in which the Corporation, directly
or indirectly, may engage and/or other business activities that overlap with or
compete with those in which the Corporation, directly or indirectly, may engage,
(iv) that the Corporation and Affiliated Companies thereof will engage in
material business transactions with GM and Affiliated Companies thereof,
including (without limitation) being a significant supplier of GM and Affiliated
Companies thereof, and that the Corporation is expected to benefit therefrom,
and (v) that, as a consequence of the foregoing, it is in the best interests of
the Corporation that the respective rights and duties of the Corporation and of
GM and Affiliated Companies of GM, and the duties of any directors or officers
of the Corporation who are also directors, officers or employees of GM or
Affiliated Companies thereof, be determined and delineated in respect of any
transactions between, or opportunities that may be suitable for both, the
Corporation and Affiliated Companies thereof, on the one hand, and GM and
Affiliated Companies thereof, on the other hand, the provisions of this Article
shall regulate and define the conduct of certain of the business and affairs of
the Corporation in relation to GM and Affiliated Companies thereof.
Section 2. Certain Agreements and Transactions Permitted; Certain
Fiduciary Duties of Certain Stockholders, Directors and Officers. The
Corporation may from time to time enter into and perform, and cause or permit
any Affiliated Company of the Corporation to enter into and perform, one or more
agreements (or modifications or supplements to pre-existing agreements) with GM
or Affiliated Companies thereof pursuant to which the Corporation or an
Affiliated Company thereof, on the one hand, and GM or an Affiliated Company
thereof, on the other hand, agree to engage in transactions of any kind or
nature with each other or with Affiliated Companies thereof and/or agree to
compete, or to refrain from competing or to limit or restrict
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their competition, with each other, including to allocate and to cause their
respective directors, officers and employees (including any who are directors,
officers or employees of both) to allocate opportunities between or to refer
opportunities to each other. Subject to Section 4 of this Article, no such
agreement, or the performance thereof by the Corporation or GM, or any
Affiliated Company thereof, shall be considered contrary to (i) any fiduciary
duty that GM or any Affiliated Company thereof may owe to the Corporation or any
Affiliated Company thereof or to any stockholder or other owner of an equity
interest in the Corporation or any Affiliated Company thereof by reason of GM or
any Affiliated Company thereof being a controlling stockholder of the
Corporation or participating in the control of the Corporation or of any
Affiliated Company thereof or (ii) any fiduciary duty of any director or officer
of the Corporation or of any Affiliated Company thereof who is also a director,
officer or employee of GM or any Affiliated Company thereof to the Corporation
or such Affiliated Company, or to any stockholder thereof, if any of the
following conditions shall have been satisfied:
(A) such agreement shall have been entered into before the Corporation
ceased to be a wholly-owned subsidiary of GM and continued in
effect in respect of any such transaction or opportunity after
such time; or
(B) such agreement shall have been approved (I) by the Board of
Directors of the Corporation by the affirmative vote of a majority
of the members (even though less than a quorum) who are not
Interested Persons (as defined below in this Article) in respect
of such agreement or (II) by a committee of the Board of Directors
of the Corporation constituted solely of members who are not
Interested Persons in respect of such agreement by the affirmative
vote of a majority of the members of such committee or (III) by
one or more officers or employees of the Corporation (including
officers or employees of the Corporation acting as directors,
officers, trustees, partners or members of, or in any similar
capacity on behalf of, any Affiliated Company of the Corporation)
who in each case is not an Interested Person in respect of such
agreement and to whom the authority to approve such agreement has
been delegated either by the Board of Directors by the same
affirmative vote
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required by subclause (I) of this subparagraph for approval of
such agreement by the Board of Directors or by a committee of the
Board of Directors constituted as provided by and acting by the
same affirmative vote as required by subclause (II) of this
subparagraph for approval of such agreement by such committee or,
in the case of an employee, to whom such authority has been
delegated by an officer to whom authority to approve such
agreement has been so delegated; provided, however, that, before
approval of such agreement, the material facts of the relationship
between the Corporation or such Affiliated Company thereof, on the
one hand, and GM or such Affiliated Company thereof, on the other
hand, and the material terms and facts as to such agreement were
disclosed to or were known by the members of the Board of
Directors or of such committee or the officer or officers or
employee or employees who acted on approval of such agreement, as
the case may be; or
(C) such agreement was fair to the Corporation as of the time it was
entered into by the Corporation; or
(D) such agreement was approved by the affirmative vote of the holders
of a majority of the shares of capital stock of the Corporation
entitled to vote thereon and who do vote thereon, exclusive of GM
and any Affiliated Company thereof and any Interested Person in
respect of such agreement; or
(E) in the case of any such transaction that was not entered into in
the performance of an agreement that satisfied the requirements of
clause (A), (B), (C) or (D) of this sentence, such transaction
shall have been approved or ratified by (I) the Board of Directors
of the Corporation by the affirmative vote of a majority of the
members (even though less than a quorum) who are not Interested
Persons in respect of such transaction or (II) by a committee of
the Board of Directors of the Corporation constituted solely of
members who are not Interested Persons in respect of such
transaction by the affirmative vote of a majority of the members
of such committee or (III) by one or more officers or employees of
the Corporation
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(including officers or employees of the Corporation acting as
directors, officers, trustees, partners or members of, or in any
similar capacity on behalf of, any Affiliated Company of the
Corporation) who in each case is not an Interested Person in
respect of such transaction and to whom the authority to approve
such transaction has been delegated either by the Board of
Directors by the same affirmative vote required by subclause (I)
of this subparagraph for approval of such transaction by the Board
of Directors or a committee of the Board of Directors constituted
as provided by and acting by the same affirmative vote as required
by subclause (II) of this subparagraph for approval of such
transaction by such committee or, in the case of an employee, to
whom such authority has been delegated by an officer to whom
authority to approve such transaction has been so delegated;
provided, however, that, before such approval or ratification, the
material facts of the relationship between the Corporation or such
Affiliated Company thereof, on the one hand, and GM or such
Affiliated Company thereof, on the other hand, and the material
facts as to such transaction were disclosed to or were known by
the members of the Board of Directors or of such committee or the
officer or officers or employee or employees who acted on approval
or ratification of such transaction, as the case may be; or
(F) in the case of any such transaction that was not entered into in
the performance of an agreement that satisfied the requirements of
clause (A), (B), (C) or (D) of this sentence, such transaction was
fair to the Corporation as of the time it was entered into by the
Corporation; or
(G) in case of any such transaction that was not entered into in the
performance of an agreement that satisfied the requirements of
clause (A), (B), (C) or (D) of this sentence, such transaction was
approved or ratified by the affirmative vote of the holders of a
majority of the shares of capital stock of the Corporation
entitled to vote thereon and who do vote thereon, exclusive of GM
and any Affiliated Company thereof and any Interested Person in
respect of such transaction.
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Subject to Section 4 of this Article, neither GM nor any Affiliated Company
thereof, as a stockholder of the Corporation or participant in control of the
Corporation, shall have or be under any fiduciary duty to refrain from entering
into any agreement or participating in any transaction that meets the
requirements of any of clauses (A), (B), (C), (D), (E), (F) or (G) of the
immediately preceding sentence and no director, officer or employee of the
Corporation who is also a director, officer or employee of GM or any Affiliated
Company thereof shall have or be under any fiduciary duty to the Corporation to
refrain from acting on behalf of the Corporation or any Affiliated Company
thereof in respect of any such agreement or transaction or performing any such
agreement in accordance with its terms. Any person purchasing or otherwise
acquiring any shares of capital stock of the Corporation, or any interest
therein, shall be deemed to have notice of and to have consented to the
provisions of this Article. The failure of any agreement or transaction between
the Corporation or an Affiliated Company thereof, on the one hand, and GM or an
Affiliated Company thereof, on the other hand, to satisfy the requirements of
this Section shall not, by itself, cause such agreement or transaction to
constitute any breach of any fiduciary duty to the Corporation or to any
Affiliated Company thereof, or, any to stockholder or other owner of an equity
interest therein, by any controlling stockholder of the Corporation or such
Affiliated Company thereof or by any director or officer of the Corporation.
Section 3. Certain Definitions. For purposes of this Article, the
following definitions shall apply:
(a) "AFFILIATED COMPANY" shall mean in respect of GM any company which
is controlled by GM, controls GM or is under common control with
GM (other than the Corporation and any company that is controlled
by the Corporation) and in respect of the Corporation shall mean
any company controlled by the Corporation.
(b) "INTERESTED PERSON" in respect of an agreement or transaction
referred to in Section 2 of this Article shall mean any director,
officer or employee of GM or an Affiliated Company thereof and any
person who has a financial interest that is material to such
person in GM or such Affiliated Company or otherwise has a
personal financial interest that is material to such person in
such agreement or transaction; provided, however, that no
such financial interest shall be
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considered material by reason of a person's ownership of
securities of GM or an Affiliated Company thereof, if such
ownership of securities has been determined in good faith not to
be reasonably likely to influence such individual's decision on
behalf of the Corporation or an Affiliated Company thereof in
respect of the agreement or transaction either in the specific
instance by, or pursuant to a policy adopted by, the Board of
Directors of the Corporation by the affirmative vote of a majority
of the members (even though less than a quorum) who are not
directors, officers or employees of GM or any Affiliated Company
thereof or a committee of the Board of Directors of the
Corporation constituted solely of members who are not directors,
officers or employees of GM or any Affiliated Company thereof by
the affirmative vote of a majority of such committee.
Section 4. Termination. The provisions of this Article shall have no
further force or effect at such time as GM and any company controlling,
controlled by or under common control with GM shall first cease to be the owner,
in the aggregate, of Voting Stock representing twenty-five percent (25%) or more
of the votes entitled to be cast by the holders of all the then outstanding
shares of Voting Stock; provided, however, that such termination shall not
terminate the effect of such provisions with respect to (i) any agreement
between the Corporation or an Affiliated Company thereof and GM or an Affiliated
Company thereof that was entered into before such time or any transaction
entered into in the performance of such agreement, whether entered into before
or after such time, or (ii) any transaction entered into between the Corporation
or an Affiliated Company thereof and GM or an Affiliated Company thereof or the
allocation of any opportunity between them before such time.
Section 5. Amendment of this Article. Notwithstanding anything
to the contrary elsewhere contained in the certificate of incorporation of the
Corporation, the affirmative vote of the holders of at least 80% of the voting
power of all shares of Voting Stock then outstanding, voting together as a
single class, shall be required to alter, amend or repeal, or to adopt any
provision inconsistent with, this Article.
26
<PAGE> 27
ARTICLE XI
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right at any time and from time to time to
amend, alter, change or repeal any provision contained in the certificate of
incorporation of the Corporation, as from time to time in effect, and to add
thereto any other provision authorized by the laws of the State of Delaware at
the time in force, and, except as may otherwise be explicitly provided by any
provision of the certificate of incorporation of the Corporation, all rights,
preferences and privileges of whatsoever nature conferred upon stockholders,
directors or officers of the Corporation or any other person whomsoever by and
pursuant to the certificate of incorporation of the Corporation in its present
form, or as hereafter amended, are granted subject to the right reserved in this
Article. Any provision of the certificate of incorporation of the Corporation
may be altered, amended or repealed, and any inconsistent provision may be
added, by such action (if any) of the Board of Directors and the stockholders,
and otherwise in such manner, as is provided by law; provided, however, that, in
addition to any other vote of stockholders (if any) required by law and
notwithstanding that a lower vote (or no vote) of stockholders otherwise would
be required, (a) if any provision of the certificate of incorporation of the
Corporation other than this Article requires a particular vote of stockholders
in order to alter, amend or repeal, or adopt any provision inconsistent with,
any provision of the certificate of incorporation of the Corporation, then such
vote of stockholders shall be required for such change and (b) the vote of
stockholders required to alter, amend or repeal, or adopt any provision
inconsistent with, this proviso shall be the affirmative vote of the holders of
at least 80% of the Voting Stock then outstanding, voting together as a single
class.
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be duly executed this 26th day of
January __, 1999.
DELPHI AUTOMOTIVE SYSTEMS CORPORATION
By: /s/ Logan G. Robinson
-----------------------------------
Name: Logan G. Robinson
Title: Vice President and
General Counsel
27
<PAGE> 28
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> 29
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 hereinafter 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> 30
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 adjust ment
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 distribu tion on the Common
Stock in respect of which a Dividend is required to be paid. No cash or non-cash
dividend or distribu tion 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> 31
Dividend Payment Date next preceding the date of issuance of any shares of
Series A Preferred Stock. Accrued but unpaid Preferen tial 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 quar terly 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> 32
by the Amended and Restated Certificate of Incorporation or the authorizing
resolutions included in any Certificate of Desig nations 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
out standing 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> 33
(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> 34
(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 can celled 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 liquida tion, 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> 35
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> 36
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 addi tional
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> 37
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 addi tional voting rights as equal the Vote Multiple in effect
immedi ately 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 contem plated 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 denom inator 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> 38
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
reclassifica tion 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 securi ties 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> 39
Section 8. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, com bination 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
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<PAGE> 40
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 Pre ferred Stock, voting together as a single class.
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<PAGE> 41
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.
/s/ Logan G. Robinson
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Name: Logan G. Robinson
Title: Vice President and General Counsel
ATTEST:
/s/ Diane L. Kaye
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<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 5 to Registration Statement No.
333-67333 relating to 100,000,000 shares of Common Stock of Delphi Automotive
Systems Corporation on Form S-1 of our report dated January 14, 1999, appearing
in the prospectus, which is a part of this Registration Statement, and to the
reference to us under the heading "Experts" in such prospectus.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
February 2, 1999
