<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended October 1, 1995
or
/ / Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
----- ----
Commission File Number 1-8472
--------------------
HEXCEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-1109521
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5794 W. Las Positas Boulevard
Pleasanton, California 94588-8781
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
Registrant's telephone number, including area code: (510) 847-9500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--------- ---------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
of reorganization confirmed by a U.S. Bankruptcy Court.
Yes X No
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The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 3, 1995
------------ -------------------------------
COMMON STOCK 18,093,903
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<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
- Condensed Consolidated Statements of
Operations -- The Quarter and Year-to-Date
Ended October 1, 1995 and October 2, 1994 2
- Condensed Consolidated Balance Sheets --
October 1, 1995 and December 31, 1994 3
- Condensed Consolidated Statements of
Cash Flows -- The Year-to-Date
Ended October 1, 1995 and October 2, 1994 4
- Notes to Condensed Consolidated
Financial Statements 5
- Management Discussion and Analysis
of Financial Condition and Results of
Operations 11
PART II. OTHER INFORMATION 17
SIGNATURES 18
EXHIBIT 19
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
UNAUDITED
- ----------------------------------------------------------------------------------------------------
THE QUARTER ENDED THE YEAR-TO-DATE ENDED
------------------------- -------------------------
OCTOBER 1, October 2, OCTOBER 1, October 2,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 81,366 $ 74,434 $ 257,544 $ 237,080
Cost of sales (65,478) (62,833) (208,806) (199,631)
- ----------------------------------------------------------------------------------------------------
Gross margin 15,888 11,601 48,738 37,449
Marketing, general and
administrative expenses (11,358) (10,850) (35,630) (34,441)
Other income (expenses) 600 (8,033) 600 (8,146)
- ----------------------------------------------------------------------------------------------------
Operating income (loss) 5,130 (7,282) 13,708 (5,138)
Interest expenses (2,260) (2,336) (6,702) (7,086)
Bankruptcy reorganization expenses (410) (5,036) (3,361) (11,945)
- ----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 2,460 (14,654) 3,645 (24,169)
Provision for income taxes (899) (665) (2,503) (1,369)
- ----------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 1,561 (15,319) 1,142 (25,538)
Discontinued operations:
Income from operations, net of provision
for income taxes of $126 and $441
for the quarter and year-to-date
ended October 2, 1994, respectively - 216 - 989
Losses during phase-out period (171) (2,836) (468) (2,836)
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 1,390 $ (17,939) $ 674 $ (27,385)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Net income (loss) per share and
equivalent share:
Primary and fully diluted:
Continuing operations $ 0.09 $ (2.09) $ 0.08 $ (3.50)
Discontinued operations (0.01) (0.36) (0.03) (0.25)
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 0.08 $ (2.45) $ 0.05 $ (3.75)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Weighted average shares and equivalent
shares 18,094 7,310 14,958 7,310
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- ----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
UNAUDITED
-------------------------
OCTOBER 1, December 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ - $ 931
Receivables from asset sales - 29,340
Accounts receivable 66,207 64,136
Inventories 55,155 47,364
Prepaid expenses 2,725 3,581
Net assets of discontinued operations 1,984 3,000
- --------------------------------------------------------------------------------
Total current assets 126,071 148,352
- --------------------------------------------------------------------------------
Property, plant and equipment 198,414 186,328
Less accumulated depreciation 114,888 103,215
- --------------------------------------------------------------------------------
Net property, plant and equipment 83,526 83,113
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Investments and other assets 15,462 11,992
- --------------------------------------------------------------------------------
Total assets $ 225,059 $ 243,457
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- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities of
long-term liabilities $ 45,532 $ 12,720
Accounts payable 22,303 18,163
Accrued liabilities 42,339 43,399
Liabilities subject to disposition in
bankruptcy reorganization - 97,025
- --------------------------------------------------------------------------------
Total current liabilities 110,174 171,307
- --------------------------------------------------------------------------------
Long-term liabilities, less current
maturities 68,226 37,283
Liabilities subject to disposition in
bankruptcy reorganization - 40,752
- --------------------------------------------------------------------------------
Shareholders' equity (deficit):
Common stock, $0.01 par value, authorized 40,000
shares, shares issued and outstanding of
18,094 in 1995 and 7,301 in 1994 181 73
Additional paid-in capital 111,257 62,626
Accumulated deficit (72,040) (72,714)
Minimum pension obligation adjustment (137) (137)
Cumulative currency translation adjustment 7,398 4,267
- --------------------------------------------------------------------------------
Total shareholders' equity (deficit) 46,659 (5,885)
- --------------------------------------------------------------------------------
Total liabilities and shareholders'
equity (deficit) $ 225,059 $ 243,457
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
UNAUDITED
----------------------------
OCTOBER 1, October 2,
THE YEAR-TO-DATE ENDED (IN THOUSANDS) 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income (loss) from continuing operations $ 1,142 $ (25,538)
Reconciliation to net cash used by continuing operations:
Depreciation and amortization 8,691 10,522
Cash used in restructuring activities (6,593) (7,672)
Working capital changes and other (12,363) 17,883
- ---------------------------------------------------------------------------------------------------------
Net cash used by continuing operations (9,123) (4,805)
Net cash provided (used) by discontinued operations 548 (2,436)
- ---------------------------------------------------------------------------------------------------------
Net cash used by operating activities (8,575) (7,241)
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (6,836) (3,057)
Proceeds from equipment sold 17 41
Proceeds from sale of Chandler, Arizona manufacturing facility and
certain related assets and technology 26,694 -
Proceeds from sale of discontinued European resins business 2,602 -
- ---------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 22,477 (3,016)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 4,117 -
Payments of long-term debt (7,507) (7,832)
Proceeds (payments) of short-term debt, net 18,612 8,039
Proceeds from issuance of common stock 48,739 -
Payments of allowed claims pursuant to the Reorganization Plan (78,144) -
- ---------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (14,183) 207
- ---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and equivalents (650) (199)
- ---------------------------------------------------------------------------------------------------------
Net decrease in cash and equivalents (931) (10,249)
Cash and equivalents at beginning of year 931 11,348
- ---------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ - $ 1,099
- ---------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF ACCOUNTING
The accompanying condensed consolidated financial statements have been
prepared from the unaudited records of Hexcel Corporation and subsidiaries (the
"Company") in accordance with generally accepted accounting principles, and, in
the opinion of management, include all adjustments necessary to present fairly
the balance sheet of the Company as of October 1, 1995, and the results of
operations for the quarters and year-to-date periods ended October 1, 1995 and
October 2, 1994, and the cash flows for the year-to-date periods ended October
1, 1995 and October 2, 1994. The condensed consolidated balance sheet of the
Company as of December 31, 1994 was derived from the audited 1994 consolidated
balance sheet. Certain information and footnote disclosures normally included
in financial statements have been omitted pursuant to rules and regulations of
the Securities and Exchange Commission. Certain prior quarter amounts in the
condensed consolidated financial statements have been reclassified to conform to
the 1995 presentation. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 1994 Annual Report on Form 10-K. See
Management Discussion and Analysis of Financial Condition and Results of
Operations beginning on page 11.
As discussed in Note 5, Hexcel Corporation (a Delaware corporation,
"Hexcel") operated as a debtor-in-possession under the provisions of Chapter 11
of the federal bankruptcy laws from December 6, 1993 until February 9, 1995,
when the First Amended Plan of Reorganization (the "Reorganization Plan")
proposed by Hexcel and the Official Committee of Equity Security Holders (the
"Equity Committee") became effective. Consequently, the condensed consolidated
balance sheet as of December 31, 1994 has been prepared in accordance with
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," issued by the American Institute of Certified Public
Accountants in November 1990 ("SOP 90-7"). Hexcel did not meet the criteria set
forth in SOP 90-7 for "fresh-start reporting" upon emerging from bankruptcy
reorganization proceedings.
NOTE 2 - PROPOSED ACQUISITION OF THE CIBA COMPOSITES BUSINESS
On September 29, 1995, the Company entered into a definitive agreement (the
"Strategic Alliance Agreement") with Ciba-Geigy Limited, a Swiss corporation
("Ciba"), and Ciba-Geigy Corporation, a New York corporation ("CGC"), to acquire
Ciba's global Composites Division (the "Ciba Composites Business"). The Ciba
Composites Business includes Ciba's composites, structures and interiors,
fabrics, laminates, prepregs, adhesive films, honeycomb core, sandwich panels
and fabricated components businesses. The terms of the Strategic Alliance
Agreement are consistent with the previously announced Letter of Intent entered
into on July 11, 1995 between the Company and Ciba. Pursuant to the Strategic
Alliance Agreement, the Company will acquire the assets (including the stock of
certain of Ciba's non-U.S. subsidiaries) and assume the liabilities of the Ciba
Composites Business (other than certain excluded assets and liabilities), in
5
<PAGE>
exchange for which Ciba and CGC will receive, in the aggregate: (a) newly
issued shares of the Company's common stock representing 49.9% of its
outstanding common stock after giving effect to such issuance; (b) $25,000 in
cash; and (c) senior subordinated debt in an aggregate principal amount to be
determined after closing (the amount of which is currently estimated to be
approximately $45,000 to $50,000, subject to adjustment based on certain non-
operating liabilities of the Company in excess of such amounts carried on the
balance sheet of the Ciba Composites Business, changes in the working capital of
the Company and the Ciba Composites Business prior to closing, and certain other
valuation factors).
Consummation of the transaction is subject to significant conditions,
including, among others: (a) certain antitrust and security clearance
approvals; (b) approval by the Company's stockholders of the issuance of the
Company's common stock to Ciba and an amendment to the Company's certificate of
incorporation increasing the number of authorized shares of common stock from
40,000 to 100,000; (c) listing of the shares of the Company's common stock to be
issued to Ciba on the New York Stock Exchange; (d) the Company's receipt of
adequate financing on commercially reasonable terms; (e) the absence of any
material adverse change in the business or financial condition of the Company or
the Ciba Composites Business; and (f) the execution and delivery of certain
ancillary agreements. The waiting period under the Hart-Scott-Rodino Act with
respect to the transaction expired on September 25, 1995.
The Strategic Alliance Agreement contemplates that the Company and Ciba
will enter into a governance agreement (the "Governance Agreement") at closing.
The Governance Agreement will contain certain standstill and governance
provisions designed to restrict Ciba's ability to control the Company and to
protect the Company's public stockholders. Pursuant to such provisions, the
Company's Board of Directors will consist of 10 directors, initially including
four directors designated by Ciba ("Ciba Directors"), John J. Lee (the Company's
current Chief Executive Officer, who will become Chairman of the Board), Juergen
Habermeier (the current President of the Ciba Composites Business, who will
become the Company's President and Chief Operating Officer) and four additional
directors who are independent of Ciba. Such provisions also: (a) require the
approval of at least one non-Ciba director for the taking of any action by the
Board of Directors; (b) limit Ciba's ability to dispose of or acquire additional
shares of the Company's common stock; and (c) provide certain protections to the
Company's public stockholders in connection with any future acquisition of the
Company. The Governance Agreement also provides initially that: (a) the
approval of at least one Ciba Director is required for the Company's Board of
Directors to take any action; and (b) the approval of a majority of the Ciba
Directors is required for the taking of certain significant actions. The
Governance Agreement further provides Ciba with certain preemptive rights upon
certain issuances of equity securities by the Company.
NOTE 3 - PROCEEDS FROM THE CHANDLER TRANSACTION
The Company sold its Chandler, Arizona manufacturing facility and certain
related assets and technology to Northrop Grumman Corporation ("Northrop") in
the fourth quarter of 1994. The transaction generated net cash proceeds of
$28,988, of which $2,294 was received in 1994 and $26,694 was received in the
first quarter of 1995. The net proceeds received in the first quarter
6
<PAGE>
of 1995 have been reflected in "receivables from asset sales" in the condensed
consolidated balance sheet as of December 31, 1994.
Under the terms of the Chandler transaction, the Company retained a
royalty-free, non-exclusive license to use the technology sold in non-military
applications and will receive royalties from Northrop on certain applications of
that technology. In addition, the Company may receive up to an additional
$2,300 pursuant to the terms of the transaction, when certain conditions are
satisfied. Of this amount, $600 was received in the third quarter of 1995 and
has been reflected in "other income" in the accompanying condensed consolidated
statements of operations for the quarter and year-to-date periods ended October
1, 1995. The payment of all or a portion of the remaining $1,700 will result in
the recognition of additional income, when such amount is received.
NOTE 4 - DIVESTITURE OF THE RESINS BUSINESS
The Company intensified its efforts to sell the resins business, comprised
of operations in Europe and the U.S., during 1994. As a result of those
efforts, the Company sold its European resins operations to Axson S.A., a French
corporation, in the fourth quarter of 1994. The sale and related settlement
transactions generated net cash proceeds of $8,727, of which $6,125 was received
in the fourth quarter of 1994 and $2,602 was received in the first quarter of
1995. The net proceeds received in the first quarter of 1995 have been
reflected in "receivables from asset sales" in the condensed consolidated
balance sheet as of December 31, 1994.
The Company sold its U.S. resins operations to Fiber-Resin Corporation, a
wholly owned subsidiary of H.B. Fuller Company, on October 30, 1995. The
estimated net proceeds from the sale are expected to approximate the net book
value of the assets sold. The sale of the Company's U.S. resins operations
completes the divestiture of the resins business, which has been accounted for
as a discontinued operation in the accompanying condensed consolidated financial
statements for all periods presented.
Net sales of the discontinued resins business were $2,100 and $7,684 for
the third quarters of 1995 and 1994, respectively, and $6,275 and $23,843 for
the year-to-date periods ended October 1, 1995 and October 2, 1994,
respectively.
Net assets of the discontinued resins business as of October 1, 1995 and
December 31, 1994 were:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
10/1/95 12/31/94
- -------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 3,110 $ 3,970
Current liabilities (4,577) (4,591)
Non-current assets 3,451 3,621
Long-term liabilities -- --
- -------------------------------------------------------------------------------
Net assets $ 1,984 $ 3,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
NOTE 5 - BANKRUPTCY REORGANIZATION
BANKRUPTCY REORGANIZATION PROCEEDINGS
On January 12, 1995, the United States Bankruptcy Court for the Northern
District of California (the "Bankruptcy Court") entered an order dated January
10, 1995 confirming the Reorganization Plan proposed by Hexcel and the Equity
Committee. On February 9, 1995, the Reorganization Plan became effective and
Hexcel emerged from bankruptcy reorganization proceedings. Those proceedings
had begun on December 6, 1993, when Hexcel filed a voluntary petition for relief
under the provisions of Chapter 11 of the federal bankruptcy laws. Hexcel
operated as a debtor-in-possession under the supervision of the Bankruptcy Court
for the duration of those proceedings and, as such, was prohibited from paying
prepetition liabilities or engaging in transactions outside of the ordinary
course of business without the approval of the Bankruptcy Court. The joint
ventures and European subsidiaries of Hexcel were not included in the bankruptcy
proceedings and were not subject to the provisions of the federal bankruptcy
laws or the supervision of the Bankruptcy Court.
THE REORGANIZATION PLAN
The Reorganization Plan which became effective on February 9, 1995 provided
for: (a) the replacement of a debtor-in-possession credit facility with a new
revolving credit facility (the "Revolving Credit Facility") of up to $45,000;
(b) the creation of an amended reimbursement agreement with respect to the
letters of credit which support certain industrial development revenue bonds;
(c) the completion of the first closing under a standby purchase commitment
whereby Mutual Series Fund Inc. ("Mutual Series") purchased 1,946 shares of new
common stock for $9,000 and loaned the Company $41,000 as an advance against the
proceeds of a subscription rights offering for additional shares of new common
stock; and (d) the reinstatement or payment in full, with interest, of all
allowed claims, including prepetition accounts payable and notes payable.
The Revolving Credit Facility is a three-year facility which is available
to fund distributions to creditors under the Reorganization Plan as well as
related transaction costs, and to provide for the ongoing working capital needs
of the Company and other general corporate purposes. The amount available for
borrowing is based primarily on eligible U.S. assets, as defined in the
agreement, and is secured by substantially all of the U.S. assets of Hexcel, as
well as the majority of its shares in the capital stock of the Company's
European subsidiaries. In addition, the Revolving Credit Facility is subject to
a number of financial covenants and other restrictions.
The letters of credit which guarantee certain industrial development
revenue bonds were reinstated, in accordance with the terms of an amended
reimbursement agreement with the issuing bank, and extended until December 31,
1998. The amended reimbursement agreement is subject to certain industrial
development revenue bond redemption requirements, as well as a number of
financial covenants and other restrictions which are similar, although less
restrictive, to those of the Revolving Credit Facility.
The subscription rights offering concluded on March 27, 1995, with the
issuance of an additional 7,156 shares of new common stock. The resulting cash
proceeds of $33,098 were used to reduce the outstanding balance of the loan from
Mutual Series. The second closing under the standby purchase agreement was
completed on April 6, 1995, with the issuance of an
8
<PAGE>
additional 1,590 shares of new common stock to Mutual Series, the issuance of an
additional 108 shares of new common stock to John J. Lee, the Company's Chief
Executive Officer, and the retirement of the remaining balance of the Mutual
Series loan. Following the second closing under the standby purchase agreement
on April 6, 1995, the Company had a total of 18,101 shares of common stock
issued and outstanding.
The Reorganization Plan also provided for the settlement of certain claims
by the issuance of an additional $200 of new common stock, valued at a price
equal to the average of the daily average prices of the Company's common stock
for the 20 trading days beginning April 26, 1995. The issuance of these 40
shares had not yet occurred as of October 1, 1995.
On February 9, 1995, the Company paid $78,144 in prepetition claims and
interest, and reinstated another $60,575 in prepetition liabilities. Reinstated
liabilities have been reclassified from "liabilities subject to disposition in
bankruptcy reorganization" to the appropriate liability captions of the
condensed consolidated balance sheet as of October 1, 1995. The payment of
claims and interest on February 9, 1995 was financed with: (a) cash proceeds of
$26,694 received in the first quarter of 1995 from the sale of the Company's
Chandler, Arizona manufacturing facility and certain related assets and
technology; (b) cash proceeds of $2,602 received in the first quarter of 1995
from the sale of the Company's European resins business; (c) the $50,000 in cash
received from Mutual Series in connection with the standby purchase commitment;
and (d) borrowings under the Revolving Credit Facility.
BANKRUPTCY REORGANIZATION EXPENSES
Professional fees and other costs directly related to bankruptcy
proceedings were expensed as incurred, and have been reflected in the condensed
consolidated statements of operations as "bankruptcy reorganization expenses."
Bankruptcy reorganization expenses have consisted primarily of professional fees
paid to legal and financial advisors of the Company, the Equity Committee and
the Official Committee of Unsecured Creditors. In addition, these expenses have
included incentives for employees to remain with the Company for the duration of
bankruptcy proceedings and the write-off of previously capitalized costs related
to the issuance of prepetition debt, as required by SOP 90-7. The resolution of
certain bankruptcy-related issues, including the final settlement of disputed
claims and professional fees, resulted in expenses being incurred after the
effective date of the Reorganization Plan. The Company does not expect to incur
any bankruptcy-related expenses subsequent to October 1, 1995.
NOTE 6 - INVENTORIES
Inventories as of October 1, 1995 and December 31, 1994 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
10/1/95 12/31/94
- -------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 21,754 $ 18,846
Work in progress 13,981 11,182
Finished goods 17,870 16,270
Supplies 1,550 1,066
- -------------------------------------------------------------------------------
Total inventories $ 55,155 $ 47,364
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
NOTE 7 - NOTES PAYABLE
Notes payable and capital lease obligations as of October 1, 1995 and
December 31, 1994 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
10/1/95 12/31/94
- -------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility (see Note 5) $ 26,085 --
Debtor-in-possession credit facility -- $ 4,189
Prepetition revolving credit agreement -- 12,000
10.12% senior notes originally due 1998 -- 30,000
7% convertible subordinated debentures due 2011 25,625 25,625
Obligations under IDRB variable rate demand
notes due through 2024, net 11,810 13,310
Various U.S. notes payable and capital lease
obligations 2,895 4,296
Various notes payable and capital lease
obligations of European subsidiaries 19,107 20,119
- -------------------------------------------------------------------------------
Total notes payable and capital lease
obligations 85,522 109,539
Less amount subject to disposition in
bankruptcy reorganization -- (80,815)
- -------------------------------------------------------------------------------
Total notes payable and capital lease
obligations, net $ 85,522 $ 28,724
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10/1/95 12/31/94
- -------------------------------------------------------------------------------
Notes payable and current maturities of
long-term liabilities, net $ 45,532 $ 12,720
Long-term notes payable and capital lease
obligations, net 39,990 16,004
- -------------------------------------------------------------------------------
Total notes payable and capital lease
obligations, net $ 85,522 $ 28,724
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
NOTE 8 - INCOME TAXES
During late 1993, substantial uncertainty developed as to the realization
of the Company's deferred income tax assets. Consequently, those assets were
fully reserved as of December 31, 1993. The Company continued to reserve for
the deferred income tax assets generated by the pre-tax losses incurred during
1994 and 1995. Primarily as a result of state income taxes and taxable income
for certain European entities, the Company recorded provisions for income taxes
of $899 and $665 for the third quarters of 1995 and 1994, respectively, and
$2,503 and $1,369 for the year-to-date periods ended October 1, 1995 and October
2, 1994, respectively.
10
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER
Net income for the third quarter of 1995 was $1.4 million or $0.08 per
share. This compares with a net loss for the third quarter of 1994 of $17.9
million or $2.45 per share. The net loss for the third quarter of 1994 includes
other expenses of $8.0 million related to the Company's joint venture in Japan,
bankruptcy reorganization expenses of $5.0 million, and a loss from discontinued
operations of $2.6 million. There were approximately 18.1 million shares
outstanding during the third quarter of 1995, versus 7.3 million shares in the
third quarter of 1994.
Net sales were $81.4 million for the third quarter of 1995, a 9% increase
over net sales of $74.4 million for the third quarter of 1994. Gross margin was
$15.9 million for the 1995 quarter, or 19.5% of sales, compared with $11.6
million for the 1994 quarter, or 15.6% of sales. The increase in third quarter
sales and gross margin follows similar increases in the first and second
quarters of the year. Sales of advanced composites and reinforcement fabrics
remained above 1994 levels, with much of the improvement coming from the
recreation and general industrial markets in both the U.S. and Europe.
Honeycomb sales were down slightly, reflecting the sale of the Chandler, Arizona
manufacturing facility in the fourth quarter of 1994. Changes in currency
exchange rates also contributed to higher sales, as over 40% of the Company's
sales are to international markets. The increase in gross margin is the result
of both higher sales and reduced costs. Gross margin improved in each of the
Company's businesses, although the gross margin of the honeycomb business did
not improve as much as anticipated.
Operating income was $5.1 million for the 1995 quarter compared with an
operating loss of $7.3 million for the same period of 1994. The difference is
primarily attributable to the $8.0 million joint venture provision recorded in
the third quarter of 1994, and to higher sales and gross margin in the third
quarter of 1995. In addition, the 1995 quarter includes $0.6 million of other
income received in connection with last year's sale of the Chandler, Arizona
manufacturing facility.
Income from continuing operations for the third quarter of 1995 was $1.6
million or $0.09 per share, including $2.3 million of interest expenses, $0.4
million of bankruptcy reorganization expenses, and a $0.9 million provision for
income taxes. The loss from continuing operations for the third quarter of 1994
was $15.3 million or $2.09 per share, including interest expenses of $2.3
million and a provision for income taxes of $0.7 million, as well as the
expenses of bankruptcy proceedings. Hexcel emerged from bankruptcy
reorganization proceedings on February 9, 1995, and the Company does not expect
to incur any further bankruptcy-related expenses. The 1995 and 1994 quarterly
tax provisions are primarily the result of taxable income for certain European
entities and state income taxes.
11
<PAGE>
YEAR-TO-DATE
Net income for the year-to-date ended October 1, 1995 was $0.7 million or
$0.05 per share, including other income of $0.6 million, bankruptcy
reorganization expenses of $3.4 million, and a loss from discontinued operations
of $0.5 million. The net loss for the comparable period of 1994 was $27.4
million or $3.75 per share, including other expenses of $8.1 million, bankruptcy
reorganization expenses of $11.9 million, and a loss from discontinued
operations of $1.8 million. There were 15.0 million weighted average shares and
equivalent shares during the 1995 period, compared with 7.3 million during the
1994 period.
For the first three quarters of 1995, net sales were $257.5 million,
compared with $237.1 million for the first three quarters of 1994. The 1995
year-to-date gross margin was $48.7 million, or 18.9% of sales. Gross margin
for the same period of 1994 was $37.4 million, or 15.8% of sales. The year-to-
date increases in sales and gross margin reflect improvements in each of the
first three quarters of 1995 over the same quarters of 1994, and are
attributable to the same factors noted above.
Operating income was $13.7 million for the year-to-date ended October 1,
1995, versus an operating loss of $5.1 million for the same period of 1994. The
1994 loss includes the $8.0 million provision related to the Company's Japanese
joint venture. Income from continuing operations was $1.1 million or $0.08 per
share for the 1995 period, compared with a loss from continuing operations of
$25.5 million or $3.50 per share for the comparable period of 1994. The
improvement from 1994 to 1995 is largely due to higher operating income and a
substantial reduction in bankruptcy reorganization expenses.
In connection with the subscription rights offering pursuant to Hexcel's
Reorganization Plan, the Company disseminated an information statement (the
"Information Statement") dated February 15, 1995 to stockholders of record as of
February 9, 1995. The Information Statement contained certain projected
financial information with respect to the Company, including projected net
income for the year ending December 31, 1995 of approximately $4.6 million.
This projection of 1995 net income reflected numerous assumptions which the
Company considered reasonable in light of the circumstances at that time. As a
result of slower than anticipated improvement in the operating results of the
Company's honeycomb business, lower than expected income in connection with the
sale of the Company's Chandler, Arizona manufacturing facility, and higher than
expected bankruptcy reorganization costs, the Company does not expect to earn
the $4.6 million in net income that had been projected back in February. The
Company currently anticipates 1995 net income to be approximately $2.5 million,
excluding any impact of the Company's proposed acquisition of the Ciba
Composites Business.
PROPOSED ACQUISITION OF THE CIBA COMPOSITES BUSINESS
On September 29, 1995, the Company entered into the Strategic Alliance
Agreement with Ciba and CGC, to acquire the Ciba Composites Business. The Ciba
Composites Business includes Ciba's composites, structures and interiors,
fabrics, laminates, prepregs, adhesive films, honeycomb core, sandwich panels
and fabricated components businesses. The terms of the Strategic Alliance
Agreement are consistent with the previously announced Letter of Intent entered
into on July 11, 1995 between the Company and Ciba. Pursuant to the Strategic
Alliance
12
<PAGE>
Agreement, the Company will acquire the assets (including the stock of
certain of Ciba's non-U.S. subsidiaries) and assume the liabilities of the
Ciba Composites Business (other than certain excluded assets and
liabilities), in exchange for which Ciba and CGC will receive, in the
aggregate: (a) newly issued shares of the Company's common stock
representing 49.9% of its outstanding common stock after giving effect to
such issuance; (b) $25.0 million in cash; and (c) senior subordinated debt in
an aggregate principal amount to be determined after closing (the amount of
which is currently estimated to be approximately $45.0 to $50.0 million,
subject to adjustment based on certain non-operating liabilities of the
Company in excess of such amounts carried on the balance sheet of the Ciba
Composites Business, changes in the working capital of the Company and the
Ciba Composites Business prior to closing, and certain other valuation
factors).
Consummation of the transaction is subject to significant conditions,
including, among others: (a) certain antitrust and security clearance
approvals; (b) approval by the Company's stockholders of the issuance of the
Company's common stock to Ciba and an amendment to the Company's certificate
of incorporation increasing the number of authorized shares of Hexcel common
stock from 40.0 million to 100.0 million; (c) listing of the shares of the
Company's common stock to be issued to Ciba on the New York Stock Exchange;
(d) the Company's receipt of adequate financing on commercially reasonable
terms; (e) the absence of any material adverse change in the business or
financial condition of the Company or the Ciba Composites Business; and (f)
the execution and delivery of certain ancillary agreements. The waiting
period under the Hart-Scott-Rodino Act with respect to the transaction
expired on September 25, 1995.
The Strategic Alliance Agreement contemplates that the Company and Ciba
will enter into the Governance Agreement at closing. The Governance Agreement
will contain certain standstill and governance provisions designed to restrict
Ciba's ability to control the Company and to protect the Company's public
stockholders. Pursuant to such provisions, the Company's Board of Directors
will consists of 10 directors, initially including four Ciba Directors, John J.
Lee (the Company's current Chief Executive Officer, who will become Chairman of
the Board), Juergen Habermeier (the current President of the Ciba Composites
Business, who will become the Company's President and Chief Operating Officer)
and four additional directors who are independent of Ciba. Such provisions
also: (a) require the approval of at least one non-Ciba director for the taking
of any action by the Board of Directors; (b) limit Ciba's ability to dispose of
or acquire additional shares of the Company's common stock; and (c) provide
certain protections to the Company's public stockholders in connection with any
future acquisition of the Company. The Governance Agreement also provides
initially that: (a) the approval of at least one Ciba Director is required for
the Company's Board of Directors to take any action; and (b) the approval of a
majority of the Ciba Directors is required for the taking of certain significant
actions. The Governance Agreement further provides Ciba with certain preemptive
rights upon certain issuances of equity securities by the Company.
The Ciba Composites Business supplies lightweight, high-strength materials
and structures to the aerospace and other industries. The Ciba Composites
Business, which operates in more than 20 countries, had 1994 worldwide sales of
approximately $293.0 million. The acquisition of the Ciba Composites Business,
if consummated, would expand the Company's range of product lines and increase
its presence in international markets.
13
<PAGE>
The Company has fixed November 27, 1995 as the record date for determining
stockholders entitled to notice of and to vote at an annual meeting of
stockholders for purposes of electing directors and approving, among other
things, certain matters relating to the Company's proposed acquisition of the
Ciba Composites Business. While a meeting date has not yet been set, the
Company intends to hold the meeting during the last week of December 1995,
subject to the completion by the Securities and Exchange Commission of its
review of the proxy materials to be used by the Company in connection with the
meeting.
BANKRUPTCY REORGANIZATION
On February 9, 1995, the Company's Reorganization Plan became effective and
Hexcel emerged from bankruptcy reorganization proceedings. The Reorganization
Plan provided for: (a) the replacement of a debtor-in-possession credit facility
with a new revolving credit facility of up to $45.0 million; (b) the creation of
an amended reimbursement agreement with respect to the letters of credit which
support certain industrial development revenue bonds; (c) the completion of the
first closing under a standby purchase commitment whereby Mutual Series
purchased 1.9 million shares of new common stock for $9.0 million and loaned the
Company $41.0 million as an advance against the proceeds of a subscription
rights offering for additional shares of new common stock; and (d) the
reinstatement or payment in full, with interest, of all allowed claims,
including prepetition accounts payable and notes payable.
The subscription rights offering concluded on March 27, 1995, with the
issuance of an additional 7.2 million shares of new common stock. The resulting
cash proceeds of $33.1 million were used to reduce the outstanding balance of
the loan from Mutual Series. The second closing under the standby purchase
agreement was completed on April 6, 1995, with the issuance of an additional 1.6
million shares of new common stock to Mutual Series, the issuance of an
additional 0.1 million shares of new common stock to John J. Lee, and the
retirement of the remaining balance of the Mutual Series loan. Following the
second closing under the standby purchase agreement on April 6, 1995, the
Company had a total of 18.1 million shares of common stock issued and
outstanding.
CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL RESOURCES
In connection with the Reorganization Plan which became effective on
February 9, 1995, the Company obtained a new revolving credit facility of up to
$45.0 million. The Revolving Credit Facility is a three-year facility which is
available to provide for the ongoing working capital needs of the Company and
other general corporate purposes, including restructuring activities. The
amount available for borrowing is based primarily on eligible U.S. assets, as
defined in the agreement, and is secured by substantially all of the U.S. assets
of Hexcel, as well as the majority of its shares in the capital stock of the
Company's European subsidiaries. In addition, the Revolving Credit Facility is
subject to a number of financial covenants and other restrictions. As of
October 1, 1995, the amount available for borrowing was $45.0 million, and the
amount utilized totaled $27.7 million.
14
<PAGE>
The Company's European subsidiaries also possess various credit facilities
which are available to finance the activities of those subsidiaries but are
generally unavailable to finance the Company's U.S. operations. These credit
facilities totaled $30.6 million as of October 1, 1995, and outstanding
borrowings under these facilities totaled $19.1 million at that date.
The proceeds from the subscription rights offering and standby purchase
agreement with Mutual Series, the Chandler and European resins transactions, and
the Revolving Credit Facility were utilized to fund distributions to creditors
under the Reorganization Plan during the first quarter of 1995. Management
expects that the financial resources of the Company, including the Revolving
Credit Facility and credit facilities available to European subsidiaries, will
be sufficient to finance the Company's present operations and restructuring
activities. However, in order to comply with certain financial ratio covenants
of the Revolving Credit Facility the Company is required to achieve certain
higher levels of financial performance. The Company has been in compliance with
the terms of the Revolving Credit Facility through the third quarter of 1995,
and management believes that continued compliance will be achieved.
The proposed acquisition of the Ciba Composites Business will require
additional funding and is contingent upon, among other things, the Company's
receipt of adequate financing on commercially reasonable terms. This is
expected to involve the replacement of certain of the Company's existing credit
facilities, including the Revolving Credit Facility, with new financing
sufficient to fund the cash consideration to be paid to Ciba, the expanded
working capital requirements of the combined company, and the expected costs of
consolidating the Ciba Composites Business into the Company's existing
operations.
CASH FLOWS AND WORKING CAPITAL
During the first three quarters of 1995, the Company's continuing operating
activities used $9.1 million of cash. Earnings before interest, taxes,
depreciation and amortization were $22.4 million, but the Company incurred $6.7
million in interest expenses and $3.4 million of bankruptcy reorganization
expenses. In addition, the Company paid $6.6 million in restructuring costs and
experienced a net increase in accounts receivable and inventories totaling $9.9
million, largely as a result of higher sales levels. The primary restructuring
activities during the period were the consolidation of certain honeycomb
manufacturing operations at the Company's Casa Grande, Arizona facility, which
is now largely complete, and continued implementation of a new management
information system in the U.S.
The Company's continuing operating activities used $4.8 million of cash in
the first three quarters of 1994. Earnings before interest, taxes, depreciation
and amortization were $5.4 million, but cash payments for restructuring costs
and bankruptcy reorganization expenses, along with interest expenses and working
capital changes, resulted in a net use of cash.
Working capital was $15.9 million as of October 1, 1995, compared with an
excess of current liabilities over current assets of $23.0 million at December
31, 1994. The change reflects the payment of allowed claims pursuant to the
Reorganization Plan and increases in accounts receivable and inventories,
partially offset by the collection of receivables arising from the Chandler and
European resins transactions. The cash generated by these transactions was used
to fund distributions to creditors under the Reorganization Plan.
15
<PAGE>
CAPITAL EXPENDITURES
Capital expenditures were $6.8 million for the first three quarters of
1995, compared with $3.1 million for the same period of 1994. The increase is
due to purchases of equipment necessary to improve manufacturing processes, and
to the deferral of expenditures during 1994 in connection with bankruptcy
reorganization proceedings. The Company expects that capital expenditures will
continue to increase above 1994 levels.
16
<PAGE>
PART II. OTHER INFORMATION
HEXCEL CORPORATION AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11. Statement Regarding Computation of Per Share Earnings
27. Financial Data Schedules (electronic filing only)
(b) Reports on Form 8-K:
Current report on Form 8-K dated July 14, 1995 relating to
the Company's proposed acquisition of the Ciba Composites
Business.
Current report on Form 8-K dated October 13, 1995 relating
to the Company's proposed acquisition of the Ciba Composites
Business.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, and in the capacity indicated.
HEXCEL CORPORATION
(Registrant)
November 13, 1995 /s/ Wayne C. Pensky
----------------------- ----------------------
(Date) Wayne C. Pensky, Controller
Chief Accounting Officer
Authorized Officer
18
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS - UNAUDITED
The Company reports net income (loss) per share data on primary and fully
diluted bases. Primary net income (loss) per share is based upon the weighted
average number of outstanding common shares and common equivalent shares from
stock options. Fully diluted net income (loss) per share is based upon (a) the
weighted average number of outstanding common shares and common equivalent
shares from stock options and adjusted for the assumed conversion of the 7%
convertible subordinated debentures and (b) net income (loss) increased by the
expenses on the debentures. Computations of net income (loss) per share on the
primary and fully diluted bases for the third quarter and first three quarters
of 1995 and 1994 were:
<TABLE>
<CAPTION>
THE QUARTER ENDED THE YEAR-TO-DATE ENDED
---------------------------- ----------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
PRIMARY NET INCOME (LOSS) PER SHARE AND EQUIVALENT SHARE
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 1,561 $ (15,319) $ 1,142 $ (25,538)
Loss from discontinued operations (171) (2,620) (468) (1,847)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,390 $ (17,939) $ 674 $ (27,385)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 18,094 7,310 14,958 7,310
Weighted average common equivalent shares from stock options - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and equivalent shares 18,094 7,310 14,958 7,310
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Primary net income (loss) per share and equivalent share from (1):
Continuing operations $ 0.09 $ (2.09) $ 0.08 $ (3.50)
Discontinued operations (0.01) (0.36) (0.03) (0.25)
- -----------------------------------------------------------------------------------------------------------------------------------
Primary net income (loss) per share and equivalent share (1) $ 0.08 $ (2.45) $ 0.05 $ (3.75)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED NET INCOME (LOSS) PER SHARE AND EQUIVALENT SHARE
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 1,561 $ (15,319) $ 1,142 $ (25,538)
Loss from discontinued operations (171) (2,620) (468) (1,847)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 1,390 (17,939) 674 (27,385)
Debenture interest and issuance costs 295 300 889 904
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $ 1,685 $ (17,639) $ 1,563 $ (26,481)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 18,094 7,310 14,958 7,310
Weighted average common equivalent shares
Stock options - - - -
7% convertible debentures 834 804 834 804
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and equivalent shares 18,928 8,114 15,792 8,114
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Fully diluted net income (loss) per share and equivalent
share from (1):
Continuing operations $ 0.09 $ (2.09) $ 0.08 $ (3.50)
Discontinued operations (0.01) (0.36) (0.03) (0.25)
- -----------------------------------------------------------------------------------------------------------------------------------
Fully diluted net income (loss) per share and equivalent share (1) $ 0.08 $ (2.45) $ 0.05 $ (3.75)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the third quarter and first three quarters of 1995 and 1994, the
primary and fully diluted net income (loss) per share were the same because
the fully diluted computation was antidilutive.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> OCT-01-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 68,554
<ALLOWANCES> 2,347
<INVENTORY> 55,155
<CURRENT-ASSETS> 126,071
<PP&E> 198,414
<DEPRECIATION> 114,888
<TOTAL-ASSETS> 225,059
<CURRENT-LIABILITIES> 110,174
<BONDS> 39,990
<COMMON> 181
0
0
<OTHER-SE> 46,478
<TOTAL-LIABILITY-AND-EQUITY> 225,059
<SALES> 257,544
<TOTAL-REVENUES> 257,544
<CGS> 208,806
<TOTAL-COSTS> 208,806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,702
<INCOME-PRETAX> 3,645
<INCOME-TAX> 2,503
<INCOME-CONTINUING> 1,142
<DISCONTINUED> (468)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 674
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
