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Delphi CFO Resigns, to Restate Results

Delphi Corp. (DPH), which last year launched an accounting probe, said Friday it may restate results from the last six years and its chief financial officer had resigned under pressure from its audit committee.

Delphi, whose shares fell 14 percent to an all-time low, said the ongoing probe found accounting errors for transactions from 1999 to 2004 that will force it to rework an as-yet undetermined number of financial statements.

CFO Alan Dawes resigned effective Friday after losing the confidence of the audit committee, Delphi said. Delphi, the largest U.S. parts maker, was spun off from General Motors Corp. (GM) in 1999.

Dawes' departure adds to the upheaval in Delphi's management ranks. The company is already looking for a successor to Chairman and Chief Executive J.T. Battenberg, who said in February that he planned to retire later in 2005.

"In the short term, it is going to create more disruption at the company," said Tim Ghriskey, chief investment officer of Solaris Asset Management. "Clearly it is a good thing to clean house of all the management problems and bring in a new team to try to turn this company around."

The departures of Dawes and Battenberg give Delphi an opportunity to bring in a restructuring specialist for one of those top positions, Ghriskey said. Ghriskey does not own Delphi shares but he has owned them in the past and may again in the future, he said.

Delphi warned in January of a tough start to 2005 and a full-year net loss because of GM production cuts, rising commodity costs and the uncertain pace of planned job cuts.

Industry analysts expect Delphi to warn of deeper losses after GM said it would cut first-quarter output deeper than previously planned and said it expects to produce 10 percent fewer vehicles in North America in the second quarter than it did a year earlier.

The investigation confirmed previously disclosed errors in accounting for transactions with Electronic Data Systems Corp. (EDS) and identified others from 1999 to 2004, Delphi said.

Delphi said it overstated cash flow from operations by $200 million in 2000 because of errors in accounting for off-balance-sheet financing and it overstated pretax income by $61 million in 2001 because of improper accounting for rebates.

As a result, financial statements from 2001 onward cannot be relied upon, Delphi said. Delphi has not determined which prior results will have to be restated, but it expects to complete the changes by June 30.

Delphi's internal investigation is ongoing and it continues to cooperate fully with a U.S. Securities and Exchange Commission inquiry into the accounting treatment of Delphi's agreements with EDS.

The independent directors are also reviewing the conduct of other present and former officers and executives, Delphi said.

The audit committee is also examining Delphi's accounting for $237 million in cash payments it made to GM in 2000 to release it from pre-separation warranty claims and future post-retirement health care obligations, and $85 million in related credits Delphi received from GM in 2001.

John Sheehan, chief accounting officer and controller, has been named acting CFO. Sheehan will keep his chief accounting officer and controller duties, which he assumed in July 2002.

Sheehan's predecessor in the accounting post, Paul Free -- who was most recently in a non-officer position at Delphi -- has left the company, Delphi said.

Fitch cut its debt rating on Delphi to junk and Moody's Investors Service warned that it may cut its long-term Delphi rating to junk. A downgrade to junk status can increase a company's borrowing costs dramatically.

Dawes' abrupt departure heightens concerns that other irregularities could be found, Calyon Securities analyst Joseph Amaturo said in a note. He has a "sell" rating on Delphi.

Amaturo expects Delphi to reduce or eliminate its dividend and expects it to further lower its 2005 earnings outlook.

Delphi shares fell 91 cents, or 14.3 percent, to $5.46 on the New York Stock Exchange. Delphi's notes with a 6.5 percent coupon, due 2009, fell compared to Treasuries on Friday.

The spreads, or the extra yield over Treasuries that investors demand for taking on a company's credit risk, rose 0.62 percentage point to 3.44 points, according to MarketAxess.

Eight days ago, these notes traded at spreads closer to 2.36 percentage points, a significantly lower risk premium.