Delphi debtor seeks court OK to stop manufacturing for sole customer, close Houston facility

By Caroline Salls

Pittsburgh, Nov. 10 - Delphi Corp. debtor Delphi Medical Systems Texas Corp. requested court approval to amend it manufacturing agreement to allow it to stop manufacturing products for sole customer Applera Corp. and close its Houston facility, according to a Thursday filing with the U.S. Bankruptcy Court for the Southern District of New York.

According to the motion, before Delphi's bankruptcy filing and in connection with the purchase of Applera's Houston operations, Delphi Medical Texas entered into a contract manufacturing agreement with Applera for the manufacture and sale of medical, analytical and testing devices to Applera.

Under the agreement, Delphi Medical Texas agreed to use the operations at Applera's Houston facility to manufacture and sell the products and Applera agreed to purchase the products exclusively from Delphi Medical Texas on a three-year basis.

In addition, as part of the transaction, Applera assigned to Delphi its interest in the lease for the Houston facility and Applera's work force at the Houston facility was transitioned to Delphi Medical Texas.

However, Delphi said manufacturing the products for Applera proved unprofitable at the agreed prices, and alternative uses for the excess capacity at the facility did not develop as planned.

As a result, the Delphi Medical Texas entity, which was created to operate the Houston facility and whose sole function to date was to perform under the agreement, has suffered losses at the rate of $2.5 million per year.

Because of ongoing losses and the anticipation that those losses might increase through the term of the agreement, Delphi Medical Texas has decided that it is necessary to seek an earlier termination of the agreement and wind down operations at the Houston facility.

The agreement currently expires on June 6, 2008.

Proposed amendments to the agreement include price increases that will result in $1.3 million in reduced losses through 2007 and Applera's purchase of remaining inventory upon the closure of the Houston facility, thus saving Delphi Medical Texas the necessity of liquidating roughly $5 million worth of otherwise excess inventory.

Also under the amendment, Applera will pay Delphi Medical Texas $547,000 as a success fee for closing the Houston facility and relocating manufacturing operations.

Of this amount, $250,000 will be allocated to defray the expense of employee severances and $297,000 will be allocated as retroactive price increases.

To close the Houston facility, Delphi Medical Texas said it will be required to terminate or relocate all 35 of its employees.

After applying the $250,000 provided by Applera for this expense, the net cost to Delphi Medical Texas for severance expenses will be about $100,000.

Delphi Medical Texas will also be required to spend about $250,000 to satisfy its remaining obligations under the lease for the Houston facility.

The total cost to Delphi Medical Texas in closing its operations at the Houston facility will be $350,000.

Following the closure of the Houston facility, Delphi Medical Texas said it will be left with no assets and no further business purpose.

Applera will purchase any remaining equipment for $50,000.

A hearing is scheduled for Nov. 30.

Delphi, a Troy, Mich.-based automotive electronics manufacturer, filed for bankruptcy on Oct. 8, 2005. Its Chapter 11 case number is 05-44481.

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