<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 1996
REGISTRATION NO. 333-05821
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HEXCEL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 94-1109521
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
------------------------------
TWO STAMFORD PLAZA
281 TRESSER BOULEVARD
STAMFORD, CONNECTICUT 06901-3238
(203) 969-0666
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
STEPHEN C. FORSYTH
SENIOR VICE PRESIDENT OF FINANCE AND ADMINISTRATION
HEXCEL CORPORATION
TWO STAMFORD PLAZA
281 TRESSER BOULEVARD
STAMFORD, CONNECTICUT 06901-3238
(203) 969-0666
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES TO:
<TABLE>
<S> <C>
GREGORY A. FERNICOLA, ESQ. KRIS F. HEINZELMAN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM CRAVATH, SWAINE & MOORE
919 THIRD AVENUE WORLDWIDE PLAZA
NEW YORK, NEW YORK 10022 825 EIGHTH AVENUE
(212) 735-3000 NEW YORK, NEW YORK 10019
(212) 474-1000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, 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, please 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(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 delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 18, 1996
$100,000,000
[HEXCEL LOGO]
% Convertible Subordinated Notes Due 2003
INTEREST PAYABLE AND DUE , 2003
--------------
THE % CONVERTIBLE SUBORDINATED NOTES DUE 2003 (THE "NOTES") ARE CONVERTIBLE
INTO COMMON STOCK OF HEXCEL CORPORATION (THE "COMPANY") AT ANY TIME ON OR
BEFORE , 2003, UNLESS PREVIOUSLY REDEEMED, AT A CONVERSION
PRICE OF $ PER SHARE, SUBJECT TO ADJUSTMENT IN CERTAIN EVENTS. SEE
"DESCRIPTION OF NOTES -- CONVERSION RIGHTS." ON JULY 17, 1996, THE
LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE WAS $13 1/8 PER SHARE.
THE NOTES ARE REDEEMABLE, IN WHOLE OR IN PART, AT THE OPTION OF THE COMPANY AT
ANY TIME ON OR AFTER , 1999, AT THE REDEMPTION PRICES SET FORTH
HEREIN PLUS ACCRUED INTEREST. UPON A CHANGE OF CONTROL (AS DEFINED), EACH
HOLDER OF NOTES WILL HAVE THE RIGHT, SUBJECT TO CERTAIN CONDITIONS AND
RESTRICTIONS, TO REQUIRE THE COMPANY TO REPURCHASE ANY OR ALL OUTSTANDING
NOTES OWNED BY SUCH HOLDER AT 100% OF THEIR PRINCIPAL AMOUNT PLUS
ACCRUED INTEREST. SEE "DESCRIPTION OF NOTES." THE NOTES ARE
SUBORDINATED TO ALL PRESENT AND FUTURE SENIOR INDEBTEDNESS (AS
DEFINED) OF THE COMPANY. AS OF MARCH 31, 1996, AFTER GIVING PRO
FORMA EFFECT TO THE OFFERING OF THE NOTES CONTEMPLATED HEREBY AND
THE APPLICATION OF THE NET PROCEEDS THEREFROM, THE COMPANY WOULD
HAVE HAD OUTSTANDING APPROXIMATELY $175.7 MILLION OF SENIOR
INDEBTEDNESS. APPLICATION HAS BEEN MADE TO LIST THE NOTES ON
THE NEW YORK STOCK EXCHANGE AND THE UNDERLYING SHARES OF
COMMON STOCK ON THE NEW YORK STOCK EXCHANGE AND THE
PACIFIC STOCK EXCHANGE. IF SO APPROVED, TRADING OF THE
NOTES IS EXPECTED TO COMMENCE WITHIN A 30-DAY PERIOD
AFTER COMMENCEMENT OF THE OFFERING OF THE NOTES.
--------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 13.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS COMPANY(1)(2)
----------------- ----------------- -----------------
<S> <C> <C> <C>
PER NOTE.............................................. % % %
TOTAL (3)............................................. $ $ $
</TABLE>
(1) PLUS ACCRUED INTEREST, IF ANY, FROM , 1996.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $700,000.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS AN OPTION, EXERCISABLE FOR 30 DAYS
FROM THE DATE OF THE INITIAL PUBLIC OFFERING OF THE NOTES, TO PURCHASE A
MAXIMUM OF $15,000,000 ADDITIONAL PRINCIPAL AMOUNT OF NOTES TO COVER
OVER-ALLOTMENTS. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO
PUBLIC WILL BE $ , UNDERWRITING DISCOUNTS AND COMMISSIONS WILL BE
$ AND PROCEEDS TO COMPANY WILL BE $ . SEE "UNDERWRITING".
--------------
THE NOTES ARE OFFERED BY THE SEVERAL UNDERWRITERS WHEN, AS AND IF ISSUED BY
THE COMPANY, DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO THEIR
RIGHT TO REJECT ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
NOTES, IN DEFINITIVE FULLY REGISTERED FORM, WILL BE MADE ON OR ABOUT ,
1996 AGAINST PAYMENT IN IMMEDIATELY AVAILABLE FUNDS.
CS First Boston Bear, Stearns & Co. Inc.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
[GRAPHICAL REPRESENTATION OF HEXCEL'S PRODUCTS]
Hexcel is a leading manufacturer of high performance composite materials for the
aerospace, defense, recreation and general industrial markets.
<PAGE>
--------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE NOTES OFFERED
HEREBY AND THE COMMON STOCK OF THE COMPANY AT LEVELS ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NEW YORK STOCK EXCHANGE, THE PACIFIC STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE NOTES PURSUANT TO EXEMPTIONS FROM RULES 10b-6, 10b-7
AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT").
No person has been authorized in connection with any offering made hereby to
give any information or to make any representations other than those contained
in this Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company or any
underwriter or agent. This Prospectus does not constitute an offer to sell or
the solicitation of an offer to buy any securities other than the securities to
which it relates or any offer to sell or the solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale hereunder or
thereunder shall, under any circumstances, create any implication that the
information contained herein or therein is correct as of any time subsequent to
the date hereof and thereof.
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
Registration Statement, including the exhibits and schedules thereto, as well as
such reports, proxy statements and other information filed by the Company with
the Commission, may be inspected and copied at the public reference facilities
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, reports, proxy
statements and other information concerning the Company may be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005, and at the offices of the Pacific Stock Exchange Incorporated, 301
Pine Street, San Francisco, California 94104.
This Prospectus constitutes part of a Registration Statement filed by the
Company under the Securities Act of 1933, as amended (the "Securities Act").
This Prospectus omits certain of the information contained in the Registration
Statement, and the exhibits and schedules thereto, in accordance with the rules
and regulations of the Commission. For further information regarding the Company
and the Notes offered hereby, reference is made to the Registration Statement
and the exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the provisions of any contract, agreement or other document
referred to herein are not necessarily complete, and in each instance, reference
is made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed with the Commission by the Company
(Commission File No. 1-8472) pursuant to the Exchange Act and are, as of their
respective dates, incorporated by reference in and made a part of this
Prospectus:
(1)the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995;
(2)the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1996;
(3)the Company's Proxy Statement for the Meeting of Stockholders held on
February 21, 1996;
(4)the Company's Proxy Statement for the Meeting of Stockholders held on May
23, 1996;
(5)the Company's Current Report on Form 8-K dated March 15, 1996, as amended
on Form 8-K/A dated April 1, 1996;
(6)the Company's Current Report on Form 8-K dated July 12, 1996; and
(7)the description of the Company's common stock, par value $.01 per share
(the "Common Stock"), contained in the Company's Registration Statement
on Form 8-B, dated March 31, 1983, including any amendment or report
filed for the purpose of updating such description.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Notes hereunder
shall be deemed to be incorporated by reference herein and shall be a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents which are incorporated by reference herein (other
than exhibits to such documents not specifically incorporated by reference) will
be provided without charge to each person to whom this Prospectus is delivered,
upon written or oral request. Such requests should be directed to Hexcel
Corporation, Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut
06901, Attention: Corporate Secretary, telephone number (203) 969-0666.
The Company's principal executive offices are located at Two Stamford Plaza,
281 Tresser Boulevard, Stamford, Connecticut 06901. The Company's telephone
number is (203) 969-0666.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. AS USED IN
THIS PROSPECTUS, REFERENCES TO THE "COMPANY" AND "HEXCEL" REFER TO THE BUSINESS
OF HEXCEL CORPORATION (INCLUDING ITS OPERATING DIVISIONS AND, UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE CIBA COMPOSITES BUSINESS (AS DEFINED) ACQUIRED ON
FEBRUARY 29, 1996 AND THE HERCULES COMPOSITES BUSINESS (AS DEFINED) ACQUIRED ON
JUNE 27, 1996) AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, INDUSTRY DATA
CONTAINED HEREIN IS DERIVED FROM PUBLICLY AVAILABLE INDUSTRY SOURCES, WHICH THE
COMPANY HAS NOT INDEPENDENTLY VERIFIED. SEE "GLOSSARY OF TERMS" FOR AN
EXPLANATION OF CERTAIN TERMS USED IN THIS PROSPECTUS. SUCH TERMS APPEAR HEREIN
IN BOLD TYPE THE FIRST TIME THEY ARE USED. UNLESS OTHERWISE INDICATED, ALL
INFORMATION INCLUDED IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IS NOT EXERCISED. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS DUE TO, AMONG OTHER THINGS, CERTAIN FACTORS SET FORTH UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
GENERAL
Hexcel is a leading international manufacturer and marketer of lightweight,
high performance COMPOSITE MATERIALS, parts and STRUCTURES for the aerospace,
defense, recreation and general industrial markets. The Company's products
include CARBON FIBER, woven synthetic fabrics, HONEYCOMB, PREPREGS, ADHESIVES,
and a wide variety of lightweight, high strength semi-finished and finished
structural components. With 19 manufacturing facilities in the United States and
Europe, management believes that Hexcel is positioned to take advantage of
opportunities for growth worldwide. The Company's manufacturing capabilities are
integrated across product lines enabling it to offer a breadth of products
spanning the composites industry. The Company operates through the following
five core businesses, presented in order of manufacturing integration from raw
materials to finished products:
- FIBERS. The Company manufactures PAN based carbon fibers primarily for
sale to customers and also for use in its Fabrics and Composite Materials
businesses. The Company supplies high performance carbon fibers for a wide
variety of applications in the commercial aerospace, space and defense,
recreation and general industrial markets predominantly in the United
States. The principal end uses for carbon fibers are as raw materials for
prepregs and fabrics, in FILAMENT WINDING for various space and defense
and industrial applications and in fiber placement to produce composite
structures.
- FABRICS. The Company is a leading manufacturer of woven FIBERGLASS,
carbon and ARAMID fiber REINFORCEMENTS for composite materials and other
applications worldwide. In the United States, the Company is a leading
weaver of aramid fibers and, in Europe, the Company is a leading weaver of
high performance fiberglass fabrics. The principal end uses for fabrics
are in composite materials, printed circuit boards, window blinds,
insulation and soft body armor such as bulletproof vests.
- COMPOSITE MATERIALS. The Company is an innovative leader worldwide in the
manufacture of honeycomb, prepregs, film adhesive products and SANDWICH
PANEL products. Although each of these products is sold primarily to the
commercial aerospace and space and defense markets, the Company has led
the development of new applications for composite materials in the
recreation market and is developing additional applications for use in the
transit, marine and other industrial markets. The principal end uses for
composite materials are components for commercial and military aircraft,
munitions, high-speed and mass transit trains and recreation applications,
including golf clubs, skis and snowboards.
5
<PAGE>
- SPECIAL PROCESS. The Company engineers, manufactures and markets machined
and fabricated honeycomb parts for use in commercial aerospace, space and
defense, automotive and other applications to meet customers' specific
design requirements. This core business provides value-added processing to
standard honeycomb manufactured by the Company by contouring and machining
it into complex shapes. The principal end uses for SPECIAL PROCESS
products are semi-finished aerospace components and aircraft control
surfaces such as flaps and wing tips.
- STRUCTURES AND INTERIORS. The Company manufactures and markets
lightweight, high strength structures and INTERIORS primarily for use in
the aerospace industry. The principal end uses for structures and
interiors are wing-to-body FAIRINGS, flap track fairings, RADOMES, engine
COWLS and interior systems such as overhead stowage bins for aircraft.
STRATEGIC REPOSITIONING
BACKGROUND
During the mid to late 1980's, composite materials companies, including
Hexcel, the Ciba Composites Business and the Hercules Composites Business,
invested in rapid capacity expansion to respond to the anticipated growth in
both military procurement programs and the commercial aircraft industry. With
the end of the Cold War in 1989 and the resulting rapid reduction in defense
procurement expenditures in the United States and Europe, sales to the military
aerospace and defense sectors declined rapidly. In addition, under the influence
of deregulation and various other factors including a general economic downturn
and the Gulf War, the commercial airline industry experienced significant losses
in the early 1990's, which in turn led to reduced investment in new aircraft.
These changes in the principal markets for composite materials left significant
excess capacity in the industry, resulting in significant losses for industry
participants, including the Company.
As a result of these market circumstances, as well as debt incurred to build
capacity in the late 1980's, the Company experienced a liquidity crisis in 1993
and sought protection under chapter 11 of the U.S. Bankruptcy Code ("Chapter
11") by filing a voluntary petition for relief in December 1993. Under the
leadership of John J. Lee, who joined the Company as Chairman of the Board and
Co-Chief Executive Officer shortly before the Chapter 11 filing, the Company
adopted and executed a plan to reposition itself by consolidating facilities,
divesting non-core businesses and reducing costs in an attempt to restore
profitability and positive cash flow. In connection with this repositioning, the
Company successfully implemented a consolidation of its operations, restructured
its balance sheet and obtained new equity and debt financing. When Hexcel
emerged from Chapter 11 all creditors' claims were reinstated or paid in full,
including interest.
STRATEGIC ACQUISITIONS
Upon emerging from Chapter 11 in February 1995, the Company began to
implement a strategy to lead the consolidation of the composite materials
industry by removing excess capacity and, in the process, diversifying and
strengthening its existing businesses. On February 29, 1996, Hexcel acquired the
Ciba Composites Business (the "Ciba Acquisition") for aggregate consideration of
approximately $203.1 million, subject to post-closing adjustments, and on June
27, 1996, Hexcel acquired the Hercules Composites Business (the "Hercules
Acquisition") for a cash purchase price of approximately $135 million,
(excluding transaction costs) subject to post-closing adjustments. The Ciba
Acquisition combined two of the world's leading and most technically advanced
composite materials companies, broadening the Company's range of products and
markets, enhancing its research, development and technological capabilities and
balancing the geographical scope of its business. As a result of the Ciba
Acquisition, Ciba-Geigy Limited ("Ciba") became the beneficial owner of
approximately 49.7% of the Company's outstanding Common Stock. The Hercules
Acquisition combined two leading prepreg manufacturers, with few overlapping
products and QUALIFICATIONS between their product lines, and provided the
Company with the capability to manufacture one of its significant raw materials,
PAN based carbon fibers.
6
<PAGE>
STRUCTURAL REORGANIZATION AND CONSOLIDATION PROGRAM
In May 1996, the Company announced a program to consolidate its operations
over a period of approximately three years. The total cost of this program,
which excludes additional costs and expenses that may be incurred due to
modifications to the program that may result from the Hercules Acquisition, is
estimated to be approximately $49 million. This estimate includes $5.2 million
of expenses incurred in the first quarter of 1996, an estimated $29 million
charge against earnings expected to be incurred in the second quarter of 1996
and approximately $15 million to be recognized thereafter. Cash expenditures
necessary to complete the program are estimated to total approximately $44
million, net of expected proceeds from asset sales. Management estimates that
the program will result in annual cost savings of approximately $28 million when
it is fully implemented in 1999, and that for the period 1996 through 1998,
costs associated with the program (net of estimated proceeds from asset sales)
are expected to equal the incremental cash savings generated by the program. The
foregoing estimates of total cost of the consolidation program, cash
expenditures and annual cost savings constitute forward-looking information. The
failure of any of the assumptions underlying such estimates to be realized may
cause the actual amounts to differ materially from the estimates set forth
above. For a discussion of these assumptions and other important factors that
will affect actual amounts, see "Risk Factors -- Forward-Looking Statements;
Consolidation Program."
COMPETITIVE ADVANTAGES
The Company believes that the recent measures undertaken to reorganize its
operations, reduce costs and increase geographic, market and product diversity
enhance the Company's key competitive advantages:
- MARKET LEADER. The Company has long been a leading international
manufacturer of lightweight, high strength fabrics, composite materials
and parts and structures. Management believes the Company is the largest
integrated producer of diversified composite materials in the world based
on pro forma net sales of approximately $771 million for the year ended
December 31, 1995. See "Pro Forma Financial Information."
- BROADEST RANGE OF QUALIFICATIONS IN THE AEROSPACE INDUSTRY. Management
believes Hexcel has the broadest range of qualifications of any composite
materials manufacturer in the aerospace industry and is QUALIFIED on
several programs which have significant opportunities for growth. Such
programs include the Boeing 777 and 737x, the Airbus A320 series
(including A319 and A321) and A330 and the McDonnell Douglas C-17
transport. Before composite materials may be utilized in aerospace and
military applications, they must be qualified, which is both expensive and
time consuming. See "Business -- Markets and Customers." The Company
believes its extensive qualifications position it to remain a leading
supplier of composite materials to the aerospace industry.
- VERTICAL INTEGRATION. Management believes the Company is the most
vertically integrated composite materials manufacturer in the world.
Vertical integration provides the Company with a greater ability to
control the cost, quality and delivery of its products. Moreover, the
Company has the unique ability to manufacture and sell products from
various points in its manufacturing process, thereby providing overall
materials solutions to its customers and strengthening its competitive
position. See "Business -- Manufacturing Process and Raw Materials."
- MARKET AND GEOGRAPHIC DIVERSITY. Approximately 53% of Hexcel's pro forma
net sales for the year ended December 31, 1995 were derived from the
commercial aerospace industry, 11% from space and defense, 12% from
recreation products (including golf shafts, skis, snowboards, fishing rods
and tennis rackets) and 24% from general industrial markets (including
printed circuit boards, window blinds and high-speed and mass transit
trains). Management believes that this market and product mix reduces the
Company's exposure to business cycles in the commercial aerospace
industry. In addition, the Ciba Acquisition enabled the Company to
7
<PAGE>
balance the geographic scope of its business between North America and
Europe, providing it with an increased presence at Airbus, and to build a
presence in the rapidly growing Asia-Pacific aerospace market. See
"Business -- Core Businesses" and "-- Sales and Marketing."
- STRONG TECHNICAL SUPPORT. The Company has been a leader in the
development of technology and commercial application for composite
materials for over 50 years. The Company's technically oriented sales
force works with new and existing customers to identify and engineer
solutions to meet customers' needs, particularly by identifying areas
where composite materials may beneficially replace traditional materials.
Through both its research and technology function and its proprietary
skills in resin formulation and woven reinforcement, the Company has the
technical capability to provide its customers with "make to order" custom
products. A recent example of the Company's ability to engineer solutions
for its customers is the development of carbon core honeycomb for jet
engine NACELLES. This product replaces traditional aluminum materials,
that can corrode in the extreme environment of an aircraft engine, with a
material that is both stronger and lighter and conducts heat away from the
engine.
BUSINESS STRATEGY
To maintain its position as a leading worldwide manufacturer of composite
materials, parts and structures, the Company has adopted the following
strategies:
- CAPITALIZE ON GROWTH IN THE AEROSPACE INDUSTRY. The Company believes that
demand for commercial aircraft, and therefore composite materials, should
be favorably influenced by the following trends that have been identified
in industry reports: (i) a significant increase in air travel over the
next ten years, (ii) the higher utilization of composite materials on
state-of-the-art aircraft, such as the Boeing 777, (iii) the acceleration
of new aircraft deliveries as a result of government noise regulations and
(iv) expected increases in aircraft fleet size during the next decade. The
Company expects to capitalize on these trends by continuing to produce a
wide variety of composite materials for use in the manufacture of
virtually every commercial aircraft in the western world. See "Business --
Markets and Customers."
- CONTINUE TO CONTROL COSTS AND IMPROVE MANUFACTURING
EFFICIENCIES. Management is committed to reducing costs and improving
manufacturing efficiencies through consolidation and structural
reorganization. Prior to giving effect to the Ciba and Hercules
Acquisitions, the Company (i) consolidated operations by closing one
plant, partially closing a second one and selling a third, (ii) sold its
non-core resins and specialty chemicals businesses, (iii) reduced the
number of its employees by approximately 30%, and (iv) reduced selling,
general and administrative costs from $62 million in 1992 to $49 million
in 1995. In addition, in the first half of 1996, the Company reorganized
its organizational structure into five core businesses focused on key
products and markets, and the Company announced a business consolidation
program which is expected to result in continued cost reductions and
manufacturing efficiencies. See "Business -- Strategic Repositioning."
- STRATEGIC ACQUISITIONS AND ALLIANCES. In order to (i) enhance Hexcel's
integrated manufacturing capabilities, (ii) expand its geographic base and
(iii) optimize its portfolio of products and businesses, the Company
intends to continue to complement its product lines through strategic
acquisitions or alliances. As a result of the Ciba Acquisition, the
Company is positioned to take advantage of the trend towards outsourcing
production of structures and interiors through alliances. The Company
reviews its portfolio of products and businesses regularly in connection
with its efforts to identify appropriate strategic opportunities. See
"Risk Factors -- Acquisition and Alliance Strategy."
- ENHANCE CUSTOMER SERVICE. The Company continually seeks to strengthen and
expand its relationships with customers by capitalizing on its vertically
integrated manufacturing capabilities and technical support. As a highly
integrated manufacturer of composite materials, Hexcel has the flexibility
and capability to meet the various needs of its customers. The Company
also
8
<PAGE>
has the technical capability to assist customers in the design and
manufacture of composite materials for specialty applications, thereby
further strengthening customer relationships. For example, Hexcel
engineers work with Reebok-Registered Trademark- to develop composite
supports for athletic shoes and with a customer's engineers to design
composite turbofan blades for aircraft engines. Hexcel intends to leverage
its integrated capabilities to serve a customer base which is increasingly
favoring suppliers who have the ability to satisfy all of their composite
materials requirements.
- PENETRATE NEW MARKETS. The Company strives to maintain its leadership
position in the development of innovative composite materials applications
in an attempt to expand its revenue base. Although commercial aerospace
remains the largest market for composite materials, the Company continues
to penetrate recreation and general industrial markets, providing
composite materials for a variety of applications, and plans to continue
developing applications for new markets. See "Business -- Competitive
Advantages -- Market and Geographic Diversity." The Company also expects
to take advantage of developing markets by expanding its operations in the
rapidly growing Asia-Pacific region.
9
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Notes Offered........... $100,000,000 aggregate principal amount ($115,000,000 if the
over- allotment option is exercised in full) of % Convertible
Subordinated Notes Due 2003.
Maturity Date........... , 2003.
Interest Payment Dates.. and of each year commencing , 1997.
Conversion Rights....... The Notes are convertible, at the holder's option, into shares of
Common Stock, at any time at or prior to maturity unless
previously redeemed, at a conversion price of $ per share,
subject to adjustment in certain events as described herein. See
"Description of Notes -- Conversion Rights."
Optional Redemption..... The Notes are not redeemable prior to , 1999.
Thereafter, the Notes are redeemable, in whole or in part, at the
option of the Company, at the redemption prices set forth herein,
plus accrued and unpaid interest to the date of redemption. See
"Description of Notes -- Redemption at the Option of the
Company."
Change of Control....... Upon a Change of Control, each holder of a Note (a "Holder" or a
"Noteholder") may require the Company to repurchase the Notes
held by such Holder at 100% of the principal amount thereof plus
accrued interest to the date of repurchase. See "Description of
Notes -- Repurchase of Notes at the Option of the Holder Upon a
Change of Control."
Subordination........... The Notes will constitute general unsecured obligations of the
Company and will be subordinated to all Senior Indebtedness of
the Company. As of March 31, 1996, after giving pro forma effect
to the Offering and the application of the net proceeds
therefrom, the Company would have had approximately $175.7
million of Senior Indebtedness outstanding. See "Capitalization."
The Indenture (as defined) will not restrict the Company or any
of its subsidiaries from incurring additional indebtedness
(including Senior Indebtedness) or other obligations. See
"Description of Notes -- Subordination of Notes."
Sinking Fund............ None.
Use of Proceeds......... The net proceeds of the Offering are estimated to be $96.6
million ($111.1 million if the Underwriters' over-allotment
option is exercised in full). The Company intends to use the net
proceeds to repay outstanding borrowings under the Credit
Facility (as defined). See "Use of Proceeds."
Listing................. Application has been made to list the Notes on the New York Stock
Exchange (the "NYSE") and the underlying shares of Common Stock
on the NYSE and the Pacific Stock Exchange ("PSE").
Common Stock Symbol..... The Common Stock is listed on the NYSE and the PSE under the
symbol "HXL."
</TABLE>
RISK FACTORS
Prospective purchasers of the Notes should consider carefully all the
information set forth in this Prospectus and, in particular, should evaluate the
specific factors set forth under the caption "Risk Factors" before making any
investment in the Notes.
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables present summary financial and other data with respect
to the Company, the Ciba Composites Business and the Hercules Composites
Business and have been derived from (i) the audited consolidated financial
statements of the Company as of and for the four years ended December 31, 1995,
and from the unaudited condensed consolidated financial statements of the
Company as of and for the quarters ended March 31, 1996 and April 2, 1995, (ii)
the audited combined financial statements of the Ciba Composites Business as of
and for the three years ended December 31, 1995, (iii) the audited financial
statements of the Hercules Composites Business as of and for the three years
ended December 31, 1995 and (iv) the pro forma financial statements included
elsewhere in this Prospectus which give effect to (a) the Ciba Acquisition
(including the Danutec Closing (as defined)), (b) the initial borrowings under
the Credit Facility, (c) the Offering and the application of the net proceeds
therefrom to repay borrowings under the Credit Facility and (d) the Hercules
Acquisition. The summary financial and other data for the Company as of and for
the quarters ended March 31, 1996 and April 2, 1995 are derived from unaudited
financial statements which, in the opinion of the Company's management, include
all adjustments necessary for the fair presentation of such information. The
information set forth below should be read together with the other information
contained under the captions "Capitalization," "Selected Consolidated Financial
Information," "Pro Forma Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
consolidated financial statements and the related notes thereto, included
elsewhere in this Prospectus.
THE COMPANY
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------------------------------
FOR THE QUARTER ENDED
--------------------- FOR THE YEAR ENDED DECEMBER 31,
MARCH 31, APRIL 2, ------------------------------------------------------
1996 (A) 1995 1995 1994 1993 1992
--------- --------- --------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............ $126,418 $ 85,155 $ 350,238 $ 313,795 $ 310,635 $ 352,987
Gross margin......... 26,783 14,795 67,090 48,428 47,545 67,899
Gross margin
percentage.......... 21.2% 17.4% 19.2% 15.4% 15.3% 19.2%
Business acquisition
and consolidation
expenses (b)........ (5,211) -- -- -- (46,600) (23,000)
Other income
(expense)........... 2,697 -- 791 4,861 (12,780) 2,992
Operating income
(loss).............. 6,787 2,629 18,557 7,504 (64,345) (14,162)
Bankruptcy
reorganization
expenses............ -- (2,125) (3,361) (20,152) (641) --
Income (loss) from
continuing
operations.......... 1,848 (2,369) 3,201 (28,080) (79,872) (15,983)
Income (loss) per
share from
continuing
operations.......... $ 0.07 $ (0.27) $ 0.20 $ (3.84) $ (10.89) $ (2.20)
BALANCE SHEET DATA (AT
PERIOD END):
Working capital...... $137,599 $ 22,627 $ 61,570 $ (22,955) $ 61,745 $ 80,696
Total assets......... 485,725 231,626 230,602 243,457 263,242 310,660
Short-term debt
(including current
portion of long-term
debt)............... 6,809 33,616 1,802 56,918 24,596 22,216
Long-term debt....... 138,281 54,841 88,342 52,621 92,540 95,145
Shareholders' equity
(deficit)........... 195,416 36,856 48,374 (5,885) 20,753 106,149
OTHER DATA:
EBITDA (c)........... $ 11,241 $ 3,312 $ 26,819 $ 1,582 $ (50,106) $ 574
Adjusted EBITDA
(c)................. 13,755 5,437 29,389 16,873 9,915 20,582
Capital
expenditures........ 2,285 2,090 12,144 8,362 6,264 16,220
Ratio of earnings to
fixed charges (d)... 1.81x -- 1.68x -- -- --
Total debt as a
percentage of total
capitalization (at
period end)......... 42.6% 70.6% 65.1% 105.7% 84.9% 52.5%
(SEE FOOTNOTES ON FOLLOWING PAGE)
<CAPTION>
PRO FORMA
---------------------------
FOR THE FOR THE
QUARTER YEAR
ENDED ENDED
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............ $198,923 $771,325
Gross margin......... 40,729 141,527
Gross margin
percentage.......... 20.5% 18.3%
Business acquisition
and consolidation
expenses (b)........ (5,211) (2,362)
Other income
(expense)........... 1,573 80
Operating income
(loss).............. 10,669 24,671
Bankruptcy
reorganization
expenses............ -- (3,361)
Income (loss) from
continuing
operations.......... 2,410 (7,558)
Income (loss) per
share from
continuing
operations.......... $ 0.07 $ (0.22)
BALANCE SHEET DATA (AT
PERIOD END):
Working capital...... $175,521
Total assets......... 662,296
Short-term debt
(including current
portion of long-term
debt)............... 11,728
Long-term debt....... 289,590
Shareholders' equity
(deficit)........... 193,616
OTHER DATA:
EBITDA (c)........... $ 20,470 $ 56,257
Adjusted EBITDA
(c)................. 24,108 61,900
Capital
expenditures........ 3,918 33,901
Ratio of earnings to
fixed charges (d)... 1.60x(e) 1.04x(e)
Total debt as a
percentage of total
capitalization (at
period end)......... 60.9%
</TABLE>
11
<PAGE>
- ------------------------------
(a) Amounts include the March operating results of the acquired portions of the
Ciba Composites Business, which did not include Danutec (as defined).
(b) Business acquisition and consolidation expenses also include amounts
previously reported as "Restructuring expenses."
(c) "EBITDA" is defined as income from continuing operations before interest,
taxes, depreciation and amortization. "Adjusted EBITDA" is defined as EBITDA
plus business acquisition and consolidation expenses, other income (expense)
and bankruptcy reorganization expenses. The Company believes that EBITDA and
Adjusted EBITDA provide useful information regarding the Company's ability
to service its indebtedness, but should not be considered in isolation or as
a substitute for operating income or cash flow from operations (in each case
as determined in accordance with generally accepted accounting principles)
as an indicator of the Company's operating performance or as a measure of
the Company's liquidity.
(d) Earnings consist of income (loss) from continuing operations before fixed
charges and income taxes. Fixed charges consist of interest expense,
amortization of fees related to debt financing and rent expense deemed to be
interest. For the quarter ended April 2, 1995 and years ended December 31,
1994, 1993 and 1992, earnings were insufficient to cover fixed charges by
approximately $1.9 million, $24.5 million, $73.8 million and $22.4 million,
respectively.
(e) If pro forma earnings for the quarter ended March 31, 1996 and for the year
ended December 31, 1995 were adjusted to exclude business acquisition and
consolidation expenses, other income (expense) and bankruptcy reorganization
expenses, the pro forma ratio of earnings to fixed charges for such periods
would be 2.13x and 1.29x, respectively.
THE CIBA COMPOSITES BUSINESS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................................... $ 331,073 $ 292,611 $ 271,258
Gross profit........................................................ 57,076 42,894 27,011
Gross profit percentage............................................. 17.2% 14.7% 10.0%
Restructuring expenses.............................................. (2,362) (1,600) (7,722)
Operating loss...................................................... (11,284) (19,363) (40,399)
Loss before cumulative effect of accounting changes................. (18,543) (24,290) (41,918)
Net loss............................................................ (18,543) (24,290) (48,995)
BALANCE SHEET DATA (AT PERIOD END):
Working capital..................................................... $ 69,851 $ 73,847
Total assets........................................................ 340,294 352,420
Short-term debt (including current portion of long-term debt)....... 10,469 8,867
Long-term debt...................................................... 15,097 43,640
Minority interest................................................... 6,968 5,048
Owner's equity...................................................... 236,949 226,136
OTHER DATA:
EBITDA.............................................................. $ 8,865 $ 5,833 $ (14,946)
Adjusted EBITDA..................................................... 12,329 4,454 (6,983)
Capital expenditures................................................ 13,214 7,685 12,280
</TABLE>
THE HERCULES COMPOSITES BUSINESS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................................... $ 100,449 $ 100,113 $ 101,448
Gross profit........................................................ 16,701 5,327 9,150
Gross profit percentage............................................. 16.6% 5.3% 9.0%
Income (loss) before effect of changes in accounting principles..... 5,556 (7,759) (4,985)
Net income (loss)................................................... 5,556 (7,759) (8,901)
BALANCE SHEET DATA (AT PERIOD END):
Working capital..................................................... $ 33,026 $ 47,680
Total assets........................................................ 140,584 158,318
Short-term debt (including current portion of long-term debt)....... -- --
Long-term debt...................................................... -- --
Minority interest................................................... -- 12,000
Division equity..................................................... 128,029 132,319
OTHER DATA:
EBITDA.............................................................. $ 14,951 $ 1,693 $ 4,537
Adjusted EBITDA (a)................................................. 14,560 3,363 6,292
Capital expenditures................................................ 8,543 1,871 1,740
</TABLE>
- ------------------------------
(a) Adjusted EBITDA excluding allocated selling, general and administrative
expenses from Hercules would have been approximately $21.6 million in 1995,
$9.4 million in 1994 and $12.6 million in 1993.
12
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes should consider carefully all the
information set forth in this Prospectus and, in particular, the following
considerations before making any investment in the Notes.
OPERATING LOSSES
For the years ended December 31, 1994 and 1993, the Company reported losses
from continuing operations of approximately $28.1 million and $79.9 million,
respectively. The Company had income from continuing operations of approximately
$3.2 million for the year ended December 31, 1995 and approximately $1.8 million
for the quarter ended March 31, 1996. For the fiscal years ended December 31,
1995, 1994 and 1993, the Ciba Composites Business, which was acquired by the
Company in February 1996, reported losses before cumulative effect of acounting
changes of approximately $18.5 million, $24.3 million and $41.9 million,
respectively. After giving pro forma effect to the Ciba and Hercules
Acquisitions, the Company would have had a loss from continuing operations of
approximately $7.6 million for the year ended December 31, 1995 and income from
continuing operations of approximately $2.4 million for the quarter ended March
31, 1996. The ability of the Company to be profitable in the future will be
dependent upon a number of factors, including, among others, the successful
implementation of the Company's cost reduction and consolidation efforts, the
Company's ability to continue to develop and market commercially viable product
applications, the successful integration of the Ciba and Hercules Composites
Businesses and various other factors, many of which are beyond the Company's
control such as future conditions in the commercial aerospace and defense
markets, potential regulatory requirements and restraints and certain activities
of the Company's competitors. There can be no assurance that the Company will
achieve profitability in the future or be able to generate earnings sufficient
to meet its interest and principal payment obligations. See "-- Substantial
Leverage; Ability to Service Debt", "-- Forward-Looking Statements;
Consolidation Program" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
At March 31, 1996, after giving pro forma effect to the Offering and the
application of the net proceeds therefrom to repay outstanding borrowings under
the Credit Facility, the Company would have had approximately $301.3 million of
outstanding indebtedness and the Company's total debt as a percentage of total
capitalization would have been 60.9%. See "Capitalization." This high level of
indebtedness will have important consequences to holders of the Notes, including
the following: (i) the ability of the Company to obtain additional financing in
the future for working capital, acquisitions, capital expenditures, repayment of
debt or other purposes may be impaired; (ii) a significant amount of the
Company's anticipated cash flow from operations will be required for the payment
of interest and principal; (iii) the Company is required to comply with certain
financial covenants and other restrictions contained in the Credit Facility and
the Ciba Indenture (as defined); and (iv) the Company may be more vulnerable to
downturns in general economic conditions.
The ability of the Company to meet its debt service obligations will depend
on the future operating performance, debt levels and financial results of the
Company, which will be subject in part to factors beyond the Company's control.
Although management believes that the Company's cash flows will be adequate to
meet its interest and principal payment obligations in the foreseeable future,
there can be no assurance that the Company will generate earnings in the future
sufficient to cover its fixed charges. If the Company is unable to generate
earnings in the future sufficient to cover its fixed charges and is unable to
borrow sufficient funds under either the Credit Facility or from other sources,
it may be required to refinance all or a portion of its existing debt (including
the Notes) or to sell all or a portion of its assets. There can be no assurance
that a refinancing would be possible, nor can there be any assurance as to the
timing of any asset sales or the proceeds which the Company could realize
therefrom. In addition, the terms of the Credit Facility and the Ciba Indenture
restrict the Company's
13
<PAGE>
ability to sell assets and the Company's use of the proceeds therefrom. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Hexcel -- Liquidity and Capital Resources."
If, for any reason, the Company were unable to meet its debt service
obligations, it would be in default under the terms of its indebtedness. In the
event of such a default, the holders of such indebtedness could elect to declare
all such indebtedness immediately due and payable, including accrued and unpaid
interest, and to terminate their commitments (if any) with respect to future
funding obligations. In addition, such holders could proceed against their
collateral (if any) which, in the case of certain indebtedness, consists of all
of the capital stock of certain domestic subsidiaries of the Company and 65% of
the capital stock of certain foreign subsidiaries of the Company. Any default
with respect to any of the Company's indebtedness could result in a default
under other indebtedness. Such defaults could result in a default under the
Indenture and could delay or preclude payment of principal of, or interest on,
Notes. See "-- Subordination" and "Description of Notes -- Subordination of
Notes."
RISKS ASSOCIATED WITH THE CIBA AND HERCULES ACQUISITIONS
The Company's future success will depend in part on its ability to integrate
the Ciba and Hercules Composites Businesses (together, the "Acquired Businesses"
or the "Acquisitions"), to manage the manufacturing operations of such Acquired
Businesses (these Acquisitions added ten additional manufacturing facilities to
the Company's nine existing manufacturing facilities), to integrate the
workforces of the Acquired Businesses into Hexcel's workforce, to eliminate
redundancies and excess costs and to consolidate the sales and marketing
activities, research and development activities, management information systems
and other activities of the Acquired Businesses. There can be no assurance that
the Company can successfully integrate the operations and workforces of the
Acquired Businesses into its operations or establish comparable wage and benefit
programs for Acquired Business employees, and any failure or any inability to do
so may have a material adverse effect on the Company's results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Hexcel" and "Business -- Employees."
Although the Company expects that, in the long term, it will realize certain
cost savings and other business synergies as a result of the Acquisitions, such
cost savings and other business synergies could be affected by various factors
beyond the Company's control, such as future conditions in the commercial
aerospace and defense markets, potential regulatory requirements and restraints
and certain activities of the Company's competitors. Moreover, the current
business and regulatory environment in Europe could impede or prevent the
implementation of the Company's consolidation and other cost saving activities
abroad, particularly its ability to reduce the size of its workforce. As a
result, there can be no assurance that the Company will achieve expected cost
savings or other business synergies. See "-- Forward-Looking Statements;
Consolidation Program."
VOLATILITY OF THE COMMERCIAL AEROSPACE INDUSTRY; RELIANCE ON SIGNIFICANT
CUSTOMERS
Approximately 53% of the Company's pro forma net sales during the fiscal
year ended December 31, 1995 were derived from sales to the commercial aerospace
industry, which primarily consisted of sales to a limited number of customers.
The commercial aerospace industry purchases many of the Company's higher
value-added products, is cyclical in nature and is subject to change based on
general economic conditions and airline profitability. From 1992 through 1994,
domestic airlines suffered significant operating losses. As a result of these
losses, as well as the high levels of debt incurred to purchase new aircraft and
the excess capacity within the commercial airline sector generally, the
commercial aerospace industry experienced a reduction in new orders for
commercial aircraft and related spare parts and deferrals, and in some cases,
cancellations of deliveries of previously ordered aircraft. While orders for
commercial aircraft increased in 1995 and the first quarter of 1996, aircraft
deliveries remain below levels achieved during the past decade. Although it
appears that the health of the commercial aerospace industry is improving based
on increases in airline profitability and build rates, there can be no assurance
that any improvement in this industry will be substantial or that improved
conditions will be sustained. See "Business -- Markets and Customers."
14
<PAGE>
The Boeing Company and Boeing subcontractors, which have been significant
customers of the Company for many years, accounted for approximately 21% of the
Company's net sales for the year ended December 31, 1995. In addition, the
Airbus consortium and its subcontractors accounted for approximately 12% of the
Company's pro forma net sales for the year ended December 31, 1995 after giving
effect to the Ciba and Hercules Acquisitions. The loss of, or significant
reduction in purchases by, such major customers could materially and adversely
affect the Company's business, operating results, prospects or financial
condition. See "Business -- Markets and Customers."
REDUCTIONS IN DEFENSE SPENDING
Approximately 11% of the Company's pro forma net sales during fiscal year
ended December 31, 1995 were derived from the space and defense industry, an
industry that also purchases some of the Company's highest margin products, and
is dependent upon government defense budgets, particularly the United States'
defense budget. In general, defense budgets in the United States have been
declining in recent years, resulting in reduced demand for new aircraft and
spare parts. Although the effect of United States defense budget reductions may
be offset in part by foreign military sales, such sales are affected by United
States governmental regulation, regulation by the purchasing government and
political uncertainties in the United States and abroad. There can be no
assurance that the United States defense budgets and the related demand for
defense related equipment will not continue to decline or that sales of defense
related equipment to foreign governments will continue at present levels. See
"Business -- Markets and Customers."
FORWARD-LOOKING STATEMENTS; CONSOLIDATION PROGRAM
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this Prospectus constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; industry
capacity; changes in customer preferences; demographic changes; competition;
changes in methods of distribution and technology; changes in political, social
and economic conditions and local regulations, particularly in Europe and Asia;
the assimilation of the Ciba Composites Business; the assimilation of the
Hercules Composites Business; the loss of any significant customers; changes in
business strategy or development plans; the indebtedness of the Company; quality
of management, business abilities and judgment of the Company's personnel;
availability of qualified personnel; the availability, terms and deployment of
capital; changes in, or the failure to comply with, government regulations; and
various other factors referenced in this Prospectus.
The forward-looking information referred to above includes, but is not
limited to, the estimated total cost of the Company's consolidation program, the
estimated amount of cash expenditures to complete the program and the estimated
annual cost savings resulting from the consolidation program (in each case as
described under "Prospectus Summary -- Strategic Repositioning -- Structural
Reorganization and Consolidation Program," "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Hexcel -- General" and
"Business -- Strategic Repositioning -- Structural Reorganization and
Consolidation Program"). In addition to the risks, uncertainties and other
factors referred to above which may cause actual amounts to differ materially
from estimated amounts, such estimates of total costs, cash expenditures and
annual costs savings are based on various factors and were derived utilizing
numerous important assumptions, including: (i) achieving estimated reductions in
the number of total employees within anticipated time frames and at currently
projected severance cost levels, while maintaining work flow in the business
areas affected, (ii) the ability to maintain manufacturing know-how with respect
to production processes conducted at facilities that will be closed or at which
the number of employees will be reduced, including cooperation by employees who
will be terminated, (iii) the assimilation and integration of the Ciba
15
<PAGE>
Composites Business with the Company's operations without disruption to
manufacturing, marketing and distribution activities, (iv) the assimilation of
the production processes at closed facilities with production at other Company
facilities without undue disruption to the manufacturing, marketing and
distribution functions, including the cooperation of customers in connection
with requalifying the subject products for various customer and government
programs and (v) selling vacated facilities within anticipated time frames at
anticipated selling prices. The failure of these assumptions to be realized may
cause the actual total cost of the consolidation program, the actual amount of
cash expenditures to complete the program and the actual annual cost savings
resulting from the program to differ materially from the estimates.
COMPETITION
Most of the markets in which the Company operates are highly competitive.
The Company believes that product quality, product performance, customer service
and price are the principal factors considered by customers in each of the
Company's business segments. In addition, other companies compete aggressively
for sole source or limited source qualifications in the commercial and military
aerospace markets. Some of these competitors may have lower costs, newer
technology or more favorable operating conditions than the Company and could
replace the Company as the holder of sole source or limited source
qualifications or become an additional qualified source of materials for the
commercial aerospace and space and defense markets. There can be no assurance
that the Company will be able to compete successfully with either existing or
new competitors or that competitive pressures faced by the Company or the loss
of sole source or limited source qualifications will not materially and
adversely affect its business, operating results, prospects or financial
condition. See "Business -- Competition."
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The Credit Facility and the Ciba Indenture (as defined) contain a number of
significant covenants that, among other things, will restrict the ability of the
Company and its subsidiaries to dispose of assets, incur additional
indebtedness, repay other indebtedness, pay dividends, make certain investments
or acquisitions, repurchase or redeem capital stock, engage in mergers or
consolidations, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict certain corporate activities. There can be no
assurance that such restrictions will not adversely affect the Company's ability
to finance its future operations or capital needs or engage in other business
activities that may be in the best interest of the Company. In addition, the
Credit Facility requires the Company to maintain compliance with certain
financial ratios. The ability of the Company to comply with such ratios may be
affected by events beyond the Company's control. A breach of any of these
covenants or the inability of the Company to comply with the covenants regarding
required financial ratios could result in an event of default under the Credit
Facility or the Ciba Indenture. In the event of any such default, the lenders
under the Credit Facility and the Ciba Indenture could elect to declare all
borrowings outstanding thereunder, together with accrued interest and other
fees, to be due and payable, to require the Company to apply all of its
available cash to repay such borrowings or to prevent the Company from making
debt service payments on the Notes. If the Company were unable to repay any such
borrowings when due, the lenders could proceed against their collateral. If the
indebtedness under the Credit Facility, the Ciba Indenture or the Notes were to
be accelerated, there could be no assurance that the assets of the Company would
be sufficient to repay such indebtedness in full.
LIMITATION ON CHANGE OF CONTROL
The Indenture requires the Company, in the event of a Change of Control, to
make an offer to purchase all outstanding Notes at a price equal to 100% of the
principal amount thereof, plus accrued interest to the date of repurchase. The
Credit Facility includes certain restrictions on payments by the Company in
respect of its subordinated indebtedness, including the Notes. The Credit
Facility provides that certain change of control events with respect to the
Company and/or certain of its subsidiaries would constitute a default
thereunder. Any future credit agreements or other agreements relating to
indebtedness to which the Company becomes a party may contain similar
restrictions and provisions. In the event that a Change of Control occurs at a
time when the Company is prohibited from
16
<PAGE>
repurchasing Notes, the Company could seek the consent of the lenders to the
repurchase of the Notes or could attempt to refinance the borrowings that
contain such prohibitions. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from repurchasing
Notes. The Company's failure to repurchase tendered Notes at a time when such
repurchase is required by the Indenture would constitute an event of default
thereunder which, in turn, would constitute a default under the Credit Facility.
In such circumstances, the subordination provisions in the Indenture would
likely restrict payments to the holders of the Notes. There can be no assurance
that the Company will have the financial resources necessary to repurchase the
Notes upon a Change of Control. See "Description of Notes -- Repurchase of Notes
at the Option of the Holder Upon a Change of Control."
INFLUENCE OF SIGNIFICANT STOCKHOLDER
Ciba currently beneficially owns approximately 49.7% of the Company's
outstanding common stock. Pursuant to a governance agreement between Ciba and
Hexcel (the "Governance Agreement"), Ciba is entitled to designate a certain
number of members of the Company's Board of Directors and a certain number of
committee members on each committee of the Board of Directors, based upon Ciba's
percentage ownership of the total voting power of the outstanding voting
securities of the Company. In addition, the Governance Agreement provides that
the Board of Directors will not authorize, approve or ratify certain actions,
transactions and stock issuances without the approval of a certain number of the
Ciba designees depending upon the level of Ciba's percentage ownership of the
total voting power of the outstanding voting securities of the Company and the
nature of the action. Consequently, Ciba will have the ability to influence
certain affairs of the Company so long as it maintains ownership of certain
percentages of the total voting power of the outstanding voting securities the
Company. For a more complete discussion of the Governance Agreement, see the
Company's Proxy Statement for the Meeting of Stockholders held on February 21,
1996, which is incorporated by reference in this Prospectus.
SUBORDINATION
The indebtedness evidenced by the Notes is subordinate to the prior payment
in full of all Senior Indebtedness. As of March 31, 1996, after giving pro forma
effect to the Offering and the application of the net proceeds therefrom to
repay outstanding borrowings under the Credit Facility, the Company would have
had approximately $175.7 million of Senior Indebtedness outstanding. The
Indenture will not limit the amount of future indebtedness, including Senior
Indebtedness, that the Company may incur, assume or guarantee. By reason of the
subordination provisions of the Notes, in the event of the Company's liquidation
or dissolution, holders of Senior Indebtedness may receive more, ratably, and
holders of the Notes may receive less, ratably, than the other creditors of the
Company. See "Description of Notes -- Subordination of Notes."
The Company conducts a portion of its operations through its subsidiaries.
Claims of creditors of any subsidiaries, including trade creditors, secured
creditors and creditors holding indebtedness and guarantees issued by such
subsidiaries, and claims of preferred stockholders (if any) of such subsidiaries
will generally have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of the Company, including holders of
the Notes, even if such obligations do not constitute Senior Indebtedness. As of
March 31, 1996, the Company's subsidiaries had approximately $49.6 million of
pro forma indebtedness outstanding.
FOREIGN OPERATIONS, COUNTRY RISKS AND EXCHANGE RATE FLUCTUATIONS
Approximately 50% of the Company's pro forma net sales for the fiscal year
ended December 31, 1995 were derived from operations conducted outside of the
United States at facilities located in Austria, Belgium, England, France, Italy
and Spain, as well as through sales offices in Asia, Australia, Germany and
South America. The Company is also a partner in a joint venture that
manufactures and sells composite materials in Asia. The Company's international
operations are subject to a number of special risks, including currency exchange
rate fluctuations, trade barriers, exchange controls, national labor strikes,
political risks and risks of increases in duties, taxes and governmental
royalties, as well as changes in laws and policies governing operations of
foreign-based companies. In addition,
17
<PAGE>
earnings of the Company's foreign subsidiaries and intercompany payments are
subject to foreign income tax rules that may reduce cash flows available to meet
required debt service and other obligations of the Company.
The Company engages in limited hedging activities, including the purchase
and sale of foreign currency options and forward contracts, to protect expected
proceeds from transactions and minimize the ongoing exposure to foreign currency
exchange risk. In addition, because the Company has manufacturing operations in
foreign locations, it is hedged to some extent from foreign currency exchange
risks because of its ability to purchase, borrow, manufacture and sell in the
local currency of such foreign jurisdictions. There can be no assurance,
however, that the Company's operations will not be materially affected by
foreign currency exchange rate fluctuations.
LIMITED SUPPLY OF RAW MATERIALS
The Company's profitability depends largely on the price and continuity of
supply of its raw materials, including carbon fiber, fiberglass,
NOMEX-REGISTERED TRADEMARK- and KEVLAR-REGISTERED TRADEMARK-, which are supplied
by a limited number of sources and have, from time to time, been subject to
increased demand and/or limited supply in recent years. The Company's ability to
pass on increases in the costs of such raw materials is, to a large extent,
dependent on market conditions, including the extent to which the Company's
customers would switch to alternative materials not produced by the Company in
the event of an increase in the prices of the Company's products. Because the
Company purchases large volumes of such raw materials, any decrease in the
supply or increase in the cost of the Company's raw materials could have a
material adverse effect on the Company.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
Prior to the Offering, there has been no public market for the Notes. There
can be no assurance that any active public market for the Notes will develop or
as to the price at which the Notes may trade from time to time. The absence of
an active trading market for the Notes would adversely affect the liquidity of
the Notes and could adversely affect the price at which the Notes may trade.
POSSIBLE VOLATILITY OF TRADING PRICES
The trading prices of the Notes and the Company's Common Stock could be
subject to significant fluctuations in response to, among other factors,
variations in operating results, developments in the industries in which the
Company does business, general economic conditions and changes in securities
analysts' recommendations regarding the Company's securities. Such volatility
may adversely affect the market price of the Notes and the Common Stock.
ACQUISITION AND ALLIANCE STRATEGY
In pursuit of its strategic objective to consolidate through strategic
acquisitions and/or alliances, the Company recently acquired the Ciba and
Hercules Composites Businesses. The Company also continually monitors each of
its businesses in the context of the changing business environment and assesses
conditions for acquisitions, alliances or dispositions. The Company's
acquisition and alliance strategy entails the potential risks inherent in
assessing the value, strengths, weaknesses, contingent or other liabilities and
potential profitability of acquisition and/or alliance candidates and in
integrating the operations of acquired businesses. There can be no assurance
that acquisition and/or alliance opportunities will continue to be available,
that the Company will have access to the capital required to finance potential
acquisitions and/or alliances, that the Company will continue to acquire
businesses and/or enter into alliance agreements or that any business acquired
or alliance entered into will be integrated successfully or prove profitable.
The Company has made and expects it will continue to make acquisitions and
to obtain contracts in Europe and the Asia-Pacific region. While these
activities may provide important opportunities for the Company to offer its
products and services internationally, they also entail the risks associated
with conducting business internationally, including the risk of currency
exchange rate fluctuations and social, political and economic instability.
18
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Notes offered hereby are estimated to
be approximately $96.6 million (approximately $111.1 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use such net proceeds to repay a portion of the borrowings outstanding under
the Company's revolving credit facility (the "Credit Facility"), which provides
for up to $310 million of borrowings at variable rates. Pursuant to the terms of
the Credit Facility, the amount available for borrowing thereunder will be
reduced by 50% of the net cash proceeds of the Notes issued upon the
consummation of the Offering. Therefore, upon completion of the Offering,
availability under the Credit Facility will be limited to approximately $260
million. The Credit Facility currently bears interest at a rate of 5.75% per
annum and expires in February 1999. The outstanding borrowings under the Credit
Facility were incurred to replace approximately $70.1 million of outstanding
borrowings under the Company's $175 million revolving credit facility (the "Old
Credit Facility"), which was terminated on June 27 and 28, 1996 and to finance
the Hercules Acquisition. The Old Credit Facility bore interest at a weighted
average interest rate of 5.41% per annum and was scheduled to expire in February
1999. Borrowings under the Old Credit Facility were used (i) to refinance $31.4
million of indebtedness under a revolving credit facility that has since been
terminated; (ii) to finance $25 million of the purchase price of the Ciba
Acquisition; (iii) to refinance $12.7 million of foreign borrowings; (iv) to
repay $3.9 million of other indebtedness; and (v) for working capital and other
general corporate purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Hexcel -- Liquidity and Capital
Resources."
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 and as adjusted to give pro forma effect to the initial borrowings
under the Credit Facility, the Hercules Acquisition, the Danutec Closing and the
Offering and the application of the net proceeds therefrom, in each case as if
they had occurred on March 31, 1996. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF MARCH 31,
1996
-------------------
ACTUAL PRO FORMA
-------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Current debt:
Notes payable and current maturities of long-term debt................... $ 6,809 $ 11,728
-------- ---------
Long-term debt:
Credit Facility.......................................................... 69,836(a) 111,736
% Convertible Subordinated Notes Due 2003............................... -- 100,000
Senior Subordinated Notes Payable to Ciba, net of discount............... 26,170(b) 30,828
7% Convertible Subordinated Debentures Due 2011.......................... 25,625(c) 25,625
IDRB variable rate demand notes due 2024................................. 11,990 11,990
Other long-term debt, net of current maturities.......................... 4,660 9,411
-------- ---------
Total long-term debt................................................... 138,281 289,590
-------- ---------
Total debt............................................................. 145,090 301,318
-------- ---------
Shareholders' equity:
Common stock ($.01 par value) and paid-in capital
100,000,000 shares authorized, 36,119,000 shares issued and
outstanding........................................................... 257,563 257,563
Accumulated deficit...................................................... (68,133) (69,933)
Minimum pension obligation adjustment.................................... (535) (535)
Cumulative currency translation adjustment............................... 6,521 6,521
-------- ---------
Total shareholders' equity............................................. 195,416 193,616
-------- ---------
Total capitalization................................................... $340,506 $ 494,934
-------- ---------
-------- ---------
</TABLE>
- ------------------------
(a) Represents borrowings outstanding under the Old Credit Facility as of March
31, 1996. On June 27 and 28, 1996, the Old Credit Facility was terminated
and borrowings thereunder were replaced with borrowings under the Credit
Facility. See "Use of Proceeds" and "Pro Forma Financial Information."
(b) Represents senior subordinated notes payable to Ciba (the "Ciba Notes")
which are to be issued in connection with the Ciba Acquisition pursuant to
an indenture (the "Ciba Indenture") (excluding the notes to be issued in
connection with the Danutec Closing) following the determination of certain
post-closing adjustments.
(c) Represents convertible subordinated debentures that were reinstated pursuant
to the Company's plan of reorganization under Chapter 11. Mandatory
redemption is scheduled to begin in 2002 through annual sinking fund
requirements. The debentures are convertible prior to maturity into Common
Stock at $30.72 per share subject to adjustment under certain circumstances.
20
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the NYSE and the PSE under the symbol "HXL."
The following table sets forth for the fiscal periods indicated the high and low
last reported sales prices per share of the Common Stock as reported by the
NYSE. No dividends on the Common Stock were declared or paid during such
periods. From December 6, 1993 to February 9, 1995, Hexcel operated as a
debtor-in-possession under the protection of Chapter 11.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal year ended December 31, 1994:
First Quarter............................................. $ 4 1/4 $ 2 3/4
Second Quarter............................................ 4 3
Third Quarter............................................. 6 3
Fourth Quarter............................................ 5 3/4 4
Fiscal year ended December 31, 1995:
First Quarter............................................. 6 5/8 4 1/4
Second Quarter............................................ 7 1/4 4 1/2
Third Quarter............................................. 12 1/4 7 1/4
Fourth Quarter............................................ 11 1/4 8 1/4
Fiscal year ending December 31, 1996:
First Quarter............................................. 13 1/8 10 5/8
Second Quarter............................................ 16 11 7/8
Third Quarter (through July 17, 1996)..................... 15 13 1/8
</TABLE>
On July 17, 1996, the last reported sales price of the Common Stock on the
NYSE was $13 1/8 per share.
The Company has not declared or paid any cash dividends on the Common Stock
since December 1992. The payment of cash dividends in the future will depend on
the Company's earnings, financial condition, capital needs, and other factors
deemed pertinent by the Company's Board of Directors, including the limitations
on the payments of dividends under state law and the Credit Facility (or any
other then-existing credit agreement). Currently, the Credit Facility prohibits
the payment of cash dividends on the Common Stock. It is also the current policy
of the Company's Board of Directors to retain earnings, if any, to finance the
operations and expansion of the Company's business.
21
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined balance sheet for the quarter
ended March 31, 1996 was prepared to illustrate the effects of (i) the
acquisition of Danutec Werkstoff AG ("Danutec"), a subsidiary of Ciba, by the
Company on May 30, 1996 as part of the Ciba Acquisition (the "Danutec Closing"),
(ii) the initial borrowings under the Credit Facility, (iii) the Hercules
Acquisition and (iv) the Offering and the use of net proceeds therefrom to repay
borrowings under the Credit Facility (collectively, the "Pro Forma
Transactions"), as if the Pro Forma Transactions had occurred on March 31, 1996.
The following unaudited pro forma combined statements of operations for the
quarter ended March 31, 1996 and the year ended December 31, 1995 were prepared
to illustrate the estimated effects of the Pro Forma Transactions as if they had
occurred at the beginning of the periods presented.
The unaudited pro forma financial information presented below is derived
from the audited financial statements of the Company, the Ciba Composites
Business and the Hercules Composites Business as of and for the year ended
December 31, 1995 and the unaudited financial statements of the Company, the
Ciba Composites Business, Danutec and the Hercules Composites Business as of and
for the quarter ended March 31, 1996. The Ciba Acquisition (including Danutec)
and the Hercules Acquisition are accounted for using the purchase method of
accounting. Accordingly, the total purchase price for each such acquisition has
been allocated to the assets acquired and the liabilities assumed based upon
their estimated relative fair market values, subject to revision when additional
information concerning asset and liability valuations is obtained.
The following unaudited pro forma financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements of each of the Company,
the Ciba Composites Business (which include for the periods presented Ciba's
interest in Danutec) and the Hercules Composites Business and the notes thereto
appearing elsewhere in this Prospectus. The unaudited pro forma financial
information is not necessarily indicative of the results of operations or
financial condition that would have been reported had the events assumed therein
occurred on the dates indicated, nor is it necessarily indicative of results of
operations or financial position that may be achieved in the future.
On May 9, 1996, Hexcel announced that its Board of Directors had approved a
plan for consolidating the Company's operations following the Ciba Acquisition.
Management currently estimates that the business consolidation program will
result in an increase in "excess of purchase price over net assets acquired" by
approximately $11 million. The following unaudited pro forma financial
information does not give effect to any of the charges or expenses expected to
be incurred in the future in connection with the business consolidation program
or to the operating, financial and other benefits that may be realized from the
business consolidation program. See "Risk Factors -- Forward-Looking Statements;
Consolidation Program" and "Business -- Strategic Repositioning -- Structural
Reorganization and Consolidation Program."
22
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
OFFERING, THE
PRO FORMA FOR THE DANUTEC CREDIT
HISTORICAL CLOSING HISTORICAL FACILITY AND
--------------------- ------------------------- HERCULES THE HERCULES
DANUTEC ADJUSTMENTS COMPOSITES ACQUISITION PRO FORMA
HEXCEL (NOTE 1) (NOTE 2) COMBINED BUSINESS (NOTE 3) COMBINED
---------- --------- ------------- ---------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents......... $ 4,675 $ 3,426 $ (196)(d) $ 7,905 $ 603 $ (603)(g) $ 7,905
Accounts receivable, net..... 132,076 6,504 -- 138,580 16,061 (613)(h) 154,028
Inventories.................. 111,123 6,225 300(a) 117,648 28,614 1,425(i) 147,687
Prepaid expenses and other
assets...................... 1,656 51 -- 1,707 -- -- 1,707
---------- --------- ------------- ---------- ----------- -------------- ----------
Total current assets....... 249,530 16,206 104 265,840 45,278 209 311,327
---------- --------- ------------- ---------- ----------- -------------- ----------
Net property, plant and
equipment..................... 192,229 12,919 (314)(b) 204,834 93,061 7,173(j) 305,068
Excess of purchase price over
net assets acquired........... 29,230 -- 270 29,500 -- -- 29,500
Investments and other assets... 14,736 1,071 (4,533)(c) 11,274 1,027 4,100(m) 16,401
---------- --------- ------------- ---------- ----------- -------------- ----------
Total assets............... $ 485,725 $ 30,196 $ (4,473) $ 511,448 $ 139,366 $ 11,482 $ 662,296
---------- --------- ------------- ---------- ----------- -------------- ----------
---------- --------- ------------- ---------- ----------- -------------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current
maturities of long-term
liabilities................. $ 6,809 $ 1,689 $ 3,230(d) $ 11,728 $ -- $ -- $ 11,728
Accounts payable............. 50,385 3,473 -- 53,858 3,979 (613)(h) 57,224
Accrued liabilities.......... 54,737 5,848 -- 60,585 6,269 -- 66,854
---------- --------- ------------- ---------- ----------- -------------- ----------
Total current liabilities.. 111,931 11,010 3,230 126,171 10,248 (613) 135,806
---------- --------- ------------- ---------- ----------- -------------- ----------
Credit facility................ 69,836 -- -- 69,836 -- 41,900(l) 111,736
% Convertible Subordinated
Notes Due 2003................ -- -- -- -- -- 100,000(l) 100,000
Other long-term debt, less
current maturities............ 68,445 4,628 4,781(e) 77,854 -- -- 77,854
Deferred liabilities........... 40,097 2,074 -- 42,171 1,113 -- 43,284
---------- --------- ------------- ---------- ----------- -------------- ----------
Shareholders' equity:
Common stock & paid-in
capital..................... 257,563 12,484 (12,484)(f) 257,563 -- -- 257,563
Accumulated deficit.......... (68,133) -- -- (68,133) -- (1,800)(m) (69,933)
Minimum pension obligation
adjustment.................. (535) -- -- (535) -- -- (535)
Cumulative currency
translation adjustment...... 6,521 -- -- 6,521 -- -- 6,521
Invested capital............. -- -- -- -- 128,005 (128,005)(k) --
---------- --------- ------------- ---------- ----------- -------------- ----------
Total shareholders'
equity.................... 195,416 12,484 (12,484) 195,416 128,005 (129,805) 193,616
---------- --------- ------------- ---------- ----------- -------------- ----------
Total liabilities and
shareholders' equity...... $ 485,725 $ 30,196 $ (4,473) $ 511,448 $ 139,366 $ 11,482 $ 662,296
---------- --------- ------------- ---------- ----------- -------------- ----------
---------- --------- ------------- ---------- ----------- -------------- ----------
</TABLE>
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
NOTE 1 -- DANUTEC CLOSING
The historical unaudited condensed consolidated balance sheet of the Company
excludes Danutec as of March 31, 1996 because the Danutec Closing did not occur
until May 30, 1996.
NOTE 2 -- DANUTEC PRO FORMA ADJUSTMENTS
(a) Adjustment to record acquired inventories at estimated fair value.
(b) Adjustment to record acquired property, plant and equipment at estimated
fair value.
(c) As of March 31, 1996, the Company recorded as an investment an advance of
approximately $4.5 million towards the purchase price of Danutec. This
adjustment is to eliminate the advance.
(d) Adjustment to reflect the issuance of the senior demand notes payable to
Ciba in an amount equal to the cash and equivalents on hand at Danutec on
the date of the Danutec Closing.
(e) Adjustment to reflect the issuance of the Ciba Notes attributable to the
Danutec Closing, the amount of which is subject to post-closing adjustments.
(f) Adjustment to eliminate Danutec's equity.
NOTE 3 -- PRO FORMA ADJUSTMENTS
PURCHASE PRICE ALLOCATION
The total purchase price for the Hercules Composites Business is comprised
of the purchase price of $135 million plus an estimated $1.0 million for related
transaction costs, subject to post-closing adjustments. The purchase price for
the Hercules Acquisition was financed with borrowings under the Credit Facility.
The preliminary allocation of the total purchase price to the net assets of
the Hercules Composites Business is based upon the estimated fair values of the
net assets acquired, and is summarized as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Accounts receivable (1).................................................................. $ 15,448
Inventories (2).......................................................................... 30,039
Net property, plant and equipment (3).................................................... 100,234
Investments and other assets (1)......................................................... 1,027
Accounts payable (4)..................................................................... (3,366)
Accrued liabilities (4).................................................................. (6,269)
Deferred liabilities (4)................................................................. (1,113)
-------------
Total purchase price................................................................... $ 136,000
-------------
-------------
</TABLE>
(1) The fair value of accounts receivable, investments and other assets is
estimated to equal respective net book value.
(2) The fair value of inventory is estimated to equal aggregate current sales
value less estimated selling costs.
(3) The Company's current estimate is that the fair value of the property, plant
and equipment is greater than the net book value. Accordingly, the excess of
purchase price over all other net assets (estimated at $7.2 million) has
been allocated to property, plant and equipment. The Company's estimate is
subject to modification based on further analysis.
(4) The fair value of the current and long-term liabilities is estimated to
equal net book value.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
NOTE 3 -- PRO FORMA ADJUSTMENTS (CONTINUED)
HERCULES COMPOSITES BUSINESS PRO FORMA ADJUSTMENTS
(g) Adjustment to eliminate cash and equivalents held by the Hercules Composites
Business, which were not acquired in the Hercules Acquisition.
(h) Adjustment to eliminate the trade accounts receivable and payable balances
between the Hercules Composites Business and Hexcel.
(i) Adjustment to record acquired inventories of the Hercules Composites
Business at estimated fair value.
(j) Adjustment to record acquired property, plant and equipment at estimated
fair value.
(k) Adjustment to eliminate Hercules Composites Business' equity.
OFFERING AND CREDIT FACILITY PRO FORMA ADJUSTMENTS
(l) Adjustment to reflect the following:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Credit Facility Borrowings:
Purchase price for Hercules Composites Business........................................ $ 135,000
Hercules Acquisition transaction costs................................................. 1,000
Credit Facility issuance costs......................................................... 2,500
Notes issuance costs................................................................... 3,400
Less: Gross proceeds from issuance of the Notes........................................ (100,000)
-------------
$ 41,900
-------------
-------------
Issuance of the Notes.................................................................... $ 100,000
-------------
-------------
</TABLE>
(m) Adjustment to reflect the capitalization and write-off of issuance costs:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
-------------
<S> <C>
Notes issuance costs................................................................... $ 3,400
Credit Facility issuance costs......................................................... 2,500
Less: Write-off of capitalized debt issuance costs
related to the Old Credit Facility................................................ (1,800)
-------------
$ 4,100
-------------
-------------
</TABLE>
25
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
HISTORICAL OFFERING, THE
(NOTE 1) PRO FORMA FOR THE CIBA CREDIT
----------------------- ACQUISITION HISTORICAL FACILITY AND
CIBA -------------------------- HERCULES THE HERCULES
COMPOSITES ADJUSTMENTS COMPOSITES ACQUISITION PRO FORMA
HEXCEL BUSINESS (NOTE 2) COMBINED BUSINESS (NOTE 2) COMBINED
---------- ----------- ------------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $ 126,418 $ 51,668 $ (75)(a) $ 178,011 $ 22,342 $ (1,430)(i) $ 198,923
Cost of sales.............. (99,635) (42,587) 529(b) (141,693) (17,303) 802(j) (158,194)
---------- ----------- ------------- ----------- ----------- ------- -----------
Gross margin............... 26,783 9,081 454 36,318 5,039 (628) 40,729
Selling, general and
administrative expenses... (17,093) (7,735) -- (24,828) (2,425) 1,351(k) (25,902)
Amortization of intangible
assets.................... (389) (572) 441(c) (520) -- -- (520)
Business acquisition and
consolidation expenses.... (5,211) -- -- (5,211) -- -- (5,211)
Other income (expense),
net....................... 2,697 (1,404) 500(d) 1,793 (220) -- 1,573
---------- ----------- ------------- ----------- ----------- ------- -----------
Operating income (loss).... 6,787 (630) 1,395 7,552 2,394 723 10,669
Interest expense........... (3,633) (154) (228)(e) (4,015) -- (2,465)(l) (6,480)
Minority interest.......... -- (147) 147(f) -- -- -- --
---------- ----------- ------------- ----------- ----------- ------- -----------
Income (loss) from
continuing operations
before income taxes....... 3,154 (931) 1,314 3,537 2,394 (1,742) 4,189
Provision for income
taxes..................... (1,306) (473) -- (g) (1,779) -- -- (g) (1,779)
---------- ----------- ------------- ----------- ----------- ------- -----------
Net income (loss)........ $ 1,848 $ (1,404) $ 1,314 $ 1,758 $ 2,394 $ (1,742) $ 2,410
---------- ----------- ------------- ----------- ----------- ------- -----------
---------- ----------- ------------- ----------- ----------- ------- -----------
Net income per share and
equivalent share (Note
3)........................ $ 0.07 $ 0.05 $ 0.07
---------- ----------- -----------
---------- ----------- -----------
Weighted average shares and
equivalent shares......... 24,685 36,493 36,493
---------- ----------- -----------
---------- ----------- -----------
Ratio of earnings to fixed
charges (Note 4).......... 1.60x
EBITDA (A)................. $ 20,470
-----------
-----------
Adjusted EBITDA (A)........ $ 24,108
-----------
-----------
</TABLE>
- --------------------------
(A) See "Selected Consolidated Financial Information" for definitions of EBITDA
and Adjusted EBITDA.
26
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
HISTORICAL OFFERING, THE
(NOTE 1) PRO FORMA FOR THE CREDIT FACILITY
--------------------------- CIBA ACQUISITION HISTORICAL AND THE
CIBA ---------------------------- HERCULES HERCULES
COMPOSITES ADJUSTMENTS COMPOSITES ACQUISITION PRO FORMA
HEXCEL BUSINESS (NOTE 2) COMBINED BUSINESS (NOTE 2) COMBINED
------------ ------------- -------------- ------------ ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $ 350,238 $ 331,073 $ (3,207)(a) $ 678,104 $ 100,449 $ (7,228)(i) $ 771,325
Cost of sales.............. (283,148) (273,997) 5,502(b) (551,643) (83,748) 5,593(j) (629,798)
------------ ------------- -------------- ------------ ------------ --------------- -----------
Gross margin............... 67,090 57,076 2,295 126,461 16,701 (1,635) 141,527
Selling, general and
administrative expenses... (49,324) (57,966) -- (107,290) (11,536) 5,727(k) (113,099)
Amortization and write-
downs of intangible
assets.................... -- (6,930) 5,455(c) (1,475) -- -- (1,475)
Business acquisition and
consolidation expenses.... -- (2,362) -- (2,362) -- -- (2,362)
Other income (expense),
net....................... 791 (1,102) -- (311) 391 -- 80
------------ ------------- -------------- ------------ ------------ --------------- -----------
Operating income (loss).... 18,557 (11,284) 7,750 15,023 5,556 4,092 24,671
Interest expense........... (8,682) (668) (1,367) (e) (10,717) -- (9,753)(l) (20,470)
Bankruptcy reorganization
expenses.................. (3,361)(h) -- -- (3,361) -- -- (3,361)
Minority interest.......... -- (1,506) 1,506(f) -- -- -- --
------------ ------------- -------------- ------------ ------------ --------------- -----------
Income (loss) from
continuing operations
before income taxes....... 6,514 (13,458) 7,889 945 5,556 (5,661) 840
Provision for income
taxes..................... (3,313) (5,085) -- (g) (8,398) -- -- (g) (8,398)
------------ ------------- -------------- ------------ ------------ --------------- -----------
Income (loss) from
continuing
operations.......... 3,201 (18,543) 7,889 (7,453) 5,556 (5,661) (7,558)
Loss from discontinued
operations................ (468) -- -- (468) -- -- (468)
------------ ------------- -------------- ------------ ------------ --------------- -----------
Net income (loss).... $ 2,733 $ (18,543) $ 7,889 $ (7,921) $ 5,556 $ (5,661) $ (8,026)
------------ ------------- -------------- ------------ ------------ --------------- -----------
------------ ------------- -------------- ------------ ------------ --------------- -----------
Net income (loss) per
share and equivalent
share (Note 3):
Continuing
operations............ $ 0.20 $ (0.22) $ (0.22)
Discontinued
operations............ (0.03) (0.01) (0.01)
------------ ------------ -----------
Net income (loss)...... $ 0.17 $ (0.23) $ (0.23)
------------ ------------ -----------
------------ ------------ -----------
Weighted average shares and
equivalent shares......... 15,742 33,764 33,764
------------ ------------ -----------
------------ ------------ -----------
Ratio of earnings to fixed
charges (Note 4).......... 1.04 x
EBITDA (A)................. $ 56,257
-----------
-----------
Adjusted EBITDA (A)........ $ 61,900
-----------
-----------
</TABLE>
- ----------------------------------
(A) See "Selected Consolidated Financial Information" for definitions of EBITDA
and Adjusted EBITDA.
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
NOTE 1 -- PRESENTATION OF HISTORICAL AMOUNTS
The condensed consolidated financial statements of Hexcel for the quarter
ended March 31, 1996 include the results of operations of the acquired portion
of the Ciba Composites Business from March 1, 1996, to March 31, 1996, and
exclude Danutec for the period then ended. The condensed combined financial
statements of Ciba Composites Business for the quarter ended March 31, 1996
include the results of operations of Danutec for the quarter and the results of
operations of the acquired portion of the Ciba Composites Business from January
1, 1996 to February 29, 1996 (the date of the Ciba Acquisition), which include
sales to Ciba Composites international distribution operations as if such sales
were third-party sales. Such international distribution operations may be
transferred to the Company at the Company's option by February 28, 1997.
The condensed combined financial statements of the Ciba Composites Business
for the year ended December 31, 1995 include the results of operations of the
Ciba Composites Business, including Danutec.
NOTE 2 -- PRO FORMA ADJUSTMENTS
CIBA COMPOSITES BUSINESS PRO FORMA ADJUSTMENTS
<TABLE>
<CAPTION>
THE THE
YEAR QUARTER
ENDED ENDED
12/31/95 3/31/96
--------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
(a) Adjustment to eliminate net sales between the Ciba Composites Business and Hexcel....... $ (3,207) $ (75)
--------- -----------
--------- -----------
(b) Adjustment to reflect the following:
Elimination of cost of sales between the Ciba Composites Business and Hexcel............ $ 2,708 $ 63
Reduction in depreciation costs resulting from the restatement at fair value of the net
property, plant and equipment of the Ciba Composites Business.......................... 2,794 466
--------- -----------
Net adjustment.......................................................................... $ 5,502 $ 529
--------- -----------
--------- -----------
(c) Adjustment to reflect the following:
Reduction in amortization expense and write-downs of intangible assets resulting from
the elimination of the intangible assets of the Ciba Composites Business in connection
with the purchase price allocation..................................................... $ 6,930 $ 687
Amortization of the excess of purchase price over net assets acquired (20 year
amortization period)................................................................... (1,475) (246)
--------- -----------
Net adjustment.......................................................................... $ 5,455 $ 441
--------- -----------
--------- -----------
(d) Adjustment to eliminate acquisition related costs that were reimbursed by Ciba and not
part of the ongoing Ciba Composites Business........................................... $ 500
-----------
-----------
(e) Adjustment to reflect the following:
Elimination of interest expense on liabilities of the Ciba Composites Business which are
not assumed by Hexcel.................................................................. $ 1,032 $ 172
Net reduction in interest expense resulting from the refinancing of certain credit
facilities with the Old Credit Facility................................................ 992 165
Estimated interest expense on the Ciba Notes............................................ (3,391) (565)
--------- -----------
Net adjustment.......................................................................... $ (1,367) $ (228)
--------- -----------
--------- -----------
(f) Adjustment to eliminate the minority interest in the operating results of the Ciba Composites Business.
</TABLE>
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS (CONTINUED)
NOTE 2 -- PRO FORMA ADJUSTMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
(g) The income tax consequences of the cumulative pro forma adjustments are estimated to be zero. This is due to the
fact that the Company has sufficient net operating loss carryforwards and other deductions for income tax
purposes to substantially eliminate any tax liabilities arising from pro forma adjustments.
(h) On February 9, 1995, Hexcel emerged from bankruptcy reorganization proceedings which had begun on December 6,
1993. In connection with those proceedings, Hexcel incurred bankruptcy reorganization expenses of approximately
$3.4 million during the year ended December 31, 1995. Although the resolution of certain bankruptcy-related
issues, including the final settlement of disputed claims and professional fees, resulted in expenses being
incurred after February 9, 1995, Hexcel has not incurred any significant bankruptcy-related expenses since
October 1, 1995.
</TABLE>
HERCULES COMPOSITES BUSINESS PRO FORMA ADJUSTMENTS
<TABLE>
<S> <C> <C> <C>
(i) Adjustment to eliminate net sales between the Hercules Composites Business and Hexcel.
(j) Adjustment to reflect the following:
</TABLE>
<TABLE>
<CAPTION>
THE THE
YEAR QUARTER
ENDED ENDED
12/31/95 3/31/96
--------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Change in accounting method from LIFO to FIFO......................................... $ (231) $ (460)
Elimination of cost of sales between the Hercules Composites Business and Hexcel...... 6,283 1,411
Increase in depreciation costs resulting from the restatement at fair value of the net
property, plant and equipment of the Hercules Composites Business.................... (459) (149)
--------- ---------
Net adjustment........................................................................ $ 5,593 $ 802
--------- ---------
--------- ---------
(k) Adjustment to eliminate Hercules' allocations to the Hercules Composites Business that management believes
are not part of the ongoing business.
(l) Adjustment to reflect the following:
Interest expense on $41.9 million of borrowings under the Credit Facility at an
assumed rate of 6.0% per annum....................................................... $ (2,514) $ (629)
Interest expense on the Notes at an assumed rate of 6 1/4% per annum.................. (6,250) (1,562)
Amortization of debt issuance costs related to the Credit Facility.................... (833) (208)
Amortization of debt issuance costs related to the Notes.............................. (486) (122)
Elimination of amortization of prior debt issuance costs.............................. 330 56
--------- ---------
Net adjustment........................................................................ $ (9,753) $ (2,465)
--------- ---------
--------- ---------
For every 1/4% point change in the assumed interest rate with respect to the Notes, the annual interest
expense on the Notes would change by $250,000.
</TABLE>
NOTE 3 -- PER SHARE AMOUNTS
Primary and fully diluted net income (loss) per share for all periods
presented were the same because the fully diluted computation was antidilutive.
If the Notes were converted, pro forma income (loss) from continuing operations
per share would be $0.09 for the quarter ended March 31, 1996 and ($0.03) for
the year ended December 31, 1995.
NOTE 4 -- RATIO OF EARNINGS TO FIXED CHARGES
If pro forma earnings for the quarter ended March 31, 1996 were adjusted to
exclude business consolidation and acquisition expenses, other income (expense)
and bankruptcy reorganization expenses, the ratio of earnings to fixed charges
for such period would be 2.13x. If pro forma earnings for the year ended
December 31, 1995 were adjusted to exclude these nonrecurring items, the ratio
of earnings to fixed charges for such period would be 1.29x.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
THE COMPANY
The selected historical financial information of the Company set forth below
has been derived from the audited consolidated financial statements of the
Company as of and for the five years ended December 31, 1995 and from the
unaudited condensed consolidated financial statements of the Company as of and
for the quarters ended March 31, 1996 and April 2, 1995. The selected historical
financial information as of and for the quarters ended March 31, 1996 and April
2, 1995 is derived from unaudited financial statements which, in the opinion of
the Company's management, include all adjustments necessary for the fair
presentation of such information. Results for interim periods are not
necessarily indicative of results for the full year. The following selected
financial information is qualified in its entirety by, and should be read in
conjunction with, the Company's consolidated financial statements and the
related notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
------------------------ FOR THE YEAR ENDED DECEMBER 31,
MARCH 31, APRIL 2, ------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- ------------ --------- ------------ ------------ ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $126,418 $ 85,155 $ 350,238 $ 313,795 $ 310,635 $ 352,987 $ 355,601
Cost of sales.......... (99,635) (70,360) (283,148) (265,367) (263,090) (285,088) (284,875)
--------- ------------ --------- ------------ ------------ ------------ ---------
Gross margin......... 26,783 14,795 67,090 48,428 47,545 67,899 70,726
Selling, general &
administrative
expenses.............. (17,482) (12,166) (49,324) (45,785) (52,510) (62,053) (54,797)
Business acquisition
and consolidation
expenses (a).......... (5,211) -- -- -- (46,600) (23,000) --
Other income (expense),
net................... 2,697 -- 791 4,861 (12,780) 2,992 --
--------- ------------ --------- ------------ ------------ ------------ ---------
Operating income
(loss).............. 6,787 2,629 18,557 7,504 (64,345) (14,162) 15,929
Interest expense....... (3,633) (2,363) (8,682) (11,846) (8,862) (8,196) (10,870)
Bankruptcy
reorganization
expenses.............. -- (2,125) (3,361) (20,152) (641) -- --
--------- ------------ --------- ------------ ------------ ------------ ---------
Income (loss) from
continuing
operations before
income taxes........ 3,154 (1,859) 6,514 (24,494) (73,848) (22,358) 5,059
Benefit (provision) for
income taxes.......... (1,306) (510) (3,313) (3,586) (6,024) 6,375 54
--------- ------------ --------- ------------ ------------ ------------ ---------
Income (loss) from
continuing
operations.......... $ 1,848 $ (2,369) $ 3,201 $ (28,080) $ (79,872) $ (15,983) $ 5,113
--------- ------------ --------- ------------ ------------ ------------ ---------
--------- ------------ --------- ------------ ------------ ------------ ---------
Income (loss) per
share from
continuing
operations (b)...... $ 0.07 $ (0.27) $ 0.20 $ (3.84) $ (10.89) $ (2.20) $ 0.72
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $137,599 $ 22,627 $ 61,570 $ (22,955) $ 61,745 $ 80,696 $ 135,154
Property, plant and
equipment, net........ 192,229 85,661 85,955 83,113 107,726 130,758 131,252
Total assets........... 485,725 231,626 230,602 243,457 263,242 310,660 359,974
Short-term debt
(including current
portion of long-term
debt)................. 6,809 33,616 1,802 56,918 24,596 22,216 23,822
Long-term debt......... 138,281 54,841 88,342 52,621 92,540 95,145 117,841
Shareholders' equity
(deficit)............. 195,416 36,856 48,374 (5,885) 20,753 106,149 144,323
OTHER DATA:
EBITDA (c)............. $ 11,241 $ 3,312 $ 26,819 $ 1,582 $ (50,106) $ 574 $ 31,350
Adjusted EBITDA (c).... 13,755 5,437 29,389 16,873 9,915 20,582 31,350
Capital expenditures... 2,285 2,090 12,144 8,362 6,264 16,220 13,451
Ratio of earnings to
fixed charges (d)..... 1.81x -- 1.68x -- -- -- 1.41x
Percentage of total
debt to total
capitalization (at
period end)........... 42.6% 70.6% 65.1% 105.7% 84.9% 52.5% 49.5%
</TABLE>
- ------------------------------
(a) Business acquisition and consolidation expenses include amounts previously
reported as "Restructuring expenses."
(b) Primary and fully diluted net income (loss) per share from continuing
operations for all periods presented were the same because the fully
diluted computation was antidilutive.
(c) "EBITDA" is defined as income from continuing operations before interest,
taxes and depreciation and amortization. "Adjusted EBITDA" is defined as
EBITDA plus business acquisition and consolidation expenses, other income
(expense) and bankruptcy reorganization expenses. The Company believes that
EBITDA and Adjusted EBITDA provide useful information regarding the
Company's ability to service its indebtedness, but it should not be
considered in isolation or as a substitute for operating income or cash
flow from operations (in each case as determined in accordance with
generally accepted accounting principles) as an indicator of the Company's
operating performance or as a measure of the Company's liquidity.
(d) Earnings consist of income (loss) from continuing operations before fixed
charges and income taxes. Fixed charges consist of interest expense,
amortization of fees related to debt financing and rent expense deemed to
be interest. For the quarter ended April 2, 1995 and the years ended
December 31, 1994, 1993 and 1992, earnings were insufficient to cover fixed
charges by approximately $1.9 million, $24.5 million, $73.8 million and
$22.4 million, respectively.
30
<PAGE>
THE CIBA COMPOSITES BUSINESS
The selected historical financial information of the Ciba Composites
Business set forth below has been derived from the audited combined financial
statements of the Ciba Composites Business as of and for the three years ended
December 31, 1995. The following selected financial information is qualified in
its entirety by, and should be read in conjunction with, the combined financial
statements of the Ciba Composites Business and the related notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (A):
Net sales.......................................................... $ 331,073 $ 292,611 $ 271,258
Cost of sales...................................................... (273,997) (249,717) (244,247)
------------- ------------- -------------
Gross profit..................................................... 57,076 42,894 27,011
Selling, general and administrative and research and development
expenses.......................................................... (57,966) (53,417) (53,713)
Amortization and write-downs of intangible assets.................. (6,930) (10,219) (5,734)
Restructuring expenses............................................. (2,362) (1,600) (7,722)
Other income (expense)............................................. (1,102) 2,979 (241)
------------- ------------- -------------
Operating loss................................................... (11,284) (19,363) (40,399)
Interest expense................................................... (668) (1,193) (2,236)
Minority interest.................................................. (1,506) (891) (245)
Benefit (provision) for income taxes............................... (5,085) (2,843) 962
------------- ------------- -------------
Loss before cumulative effect of accounting changes.............. (18,543) (24,290) (41,918)
Cumulative effect of accounting changes............................ -- -- (7,077)
------------- ------------- -------------
Net loss......................................................... $ (18,543) $ (24,290) $ (48,995)
------------- ------------- -------------
------------- ------------- -------------
BALANCE SHEET DATA (AT PERIOD END):
Working capital.................................................... $ 69,851 $ 73,847
Property, plant and equipment, net................................. 156,364 161,153
Total assets....................................................... 340,294 352,420
Short-term debt (including current portion of long-term debt)...... 10,469 8,867
Long-term debt..................................................... 15,097 43,640
Minority interest.................................................. 6,968 5,048
Owner's equity..................................................... 236,949 226,136
OTHER DATA:
EBITDA............................................................. $ 8,865 $ 5,833 $ (14,946)
Adjusted EBITDA.................................................... 12,329 4,454 (6,983)
Capital expenditures............................................... 13,214 7,685 12,280
</TABLE>
- ------------------------
(a) The Ciba Composites Business was a combination of wholly owned divisions and
subsidiaries of Ciba during all the periods for which selected historical
financial information is presented. Consequently, per share data is not
applicable and has not been presented.
31
<PAGE>
THE HERCULES COMPOSITES BUSINESS
The selected historical financial information of the Hercules Composites
Business set forth below has been derived from the audited financial statements
of the Hercules Composites Business as of and for the three years ended December
31, 1995. The following selected financial information is qualified in its
entirety by, and should be read in conjunction with, the financial statements of
the Hercules Composites Business and the related notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (A):
Net sales................................................................ $ 100,449 $ 100,113 $ 101,448
Cost of sales............................................................ (83,748) (94,786) (92,298)
----------- ----------- -----------
Gross profit............................................................. 16,701 5,327 9,150
Selling, general and administrative expenses............................. (4,450) (5,369) (6,044)
Allocated selling, general and administrative expenses (b)............... (7,086) (6,047) (6,336)
Other operating income (expense), net.................................... 391 (1,670) (1,755)
----------- ----------- -----------
Income (loss) before taxes and effect of changes in accounting
principles............................................................ 5,556 (7,759) (4,985)
Provision for taxes on income............................................ -- -- --
----------- ----------- -----------
Income (loss) before effect of changes in accounting principles........ 5,556 (7,759) (4,985)
Effect of changes in accounting principles............................... -- -- (3,916)
----------- ----------- -----------
Net income (loss)...................................................... $ 5,556 $ (7,759) $ (8,901)
----------- ----------- -----------
----------- ----------- -----------
BALANCE SHEET DATA (AT PERIOD END):
Working capital.......................................................... $ 33,026 $ 47,680
Property, plant and equipment, net....................................... 95,015 96,780
Total assets............................................................. 140,584 158,318
Short-term debt (including current portion of long-term debt)............ -- --
Long-term debt........................................................... -- --
Minority interest........................................................ -- 12,000
Division equity.......................................................... 128,029 132,319
OTHER DATA:
EBITDA................................................................... $ 14,951 $ 1,693 $ 4,537
Adjusted EBITDA (c)...................................................... 14,560 3,363 6,292
Capital expenditures..................................................... 8,543 1,871 1,740
</TABLE>
- ------------------------
(a) The Hercules Composites Business was a combination of divisions and
subsidiaries of Hercules during all of the periods for which selected
historical financial information is presented. Consequently, per share data
is not applicable and has not been presented.
(b) Represents allocated selling, general and administrative expenses incurred
by Hercules and allocated to the Hercules Composites Business. These
allocations may not represent the cost of similar activities on a separate
entity basis.
(c) Adjusted EBITDA excluding allocated selling, general and administrative
expenses from Hercules would have been approximately $21.6 million in 1995,
$9.4 million in 1994 and $12.6 million in 1993.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS RELATES TO THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF (I) HEXCEL FOR THE QUARTERS ENDED MARCH 31, 1996
(INCLUDING THE FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS OF THE CIBA
COMPOSITES BUSINESS ACQUIRED ON FEBRUARY 29, 1996 OTHER THAN DANUTEC WHICH WAS
ACQUIRED ON MAY 30, 1996) AND APRIL 2, 1995 AND THE THREE YEARS ENDED DECEMBER
31, 1995 AND (II) THE CIBA COMPOSITES BUSINESS FOR THE THREE YEARS ENDED
DECEMBER 31, 1995. THE DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE SELECTED CONSOLIDATED FINANCIAL INFORMATION AND THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE CIBA COMPOSITES BUSINESS AND THE
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
HEXCEL
GENERAL
CIBA ACQUISITION AND CONSOLIDATION
On February 29, 1996, the Company acquired the worldwide composites division
(the "Ciba Composites Business") of Ciba and Ciba-Geigy Corporation ("CGC"). The
Ciba Acquisition was consummated pursuant to a Strategic Alliance Agreement
dated as of September 29, 1995 among Ciba, CGC, and the Company, as amended (the
"Strategic Alliance Agreement"). Under the Strategic Alliance Agreement, the
Company acquired the Ciba Composites Business in exchange for: (i) approximately
18 million newly issued shares of Common Stock; (ii) $25 million in cash; and
(iii) undertakings to deliver to Ciba and/or one or more of its subsidiaries,
following completion of certain post-closing adjustment procedures contemplated
by the Strategic Alliance Agreement, the Ciba Notes in an aggregate principal
amount of approximately $43 million, subject to certain adjustments , and senior
demand notes in a principal amount equal to the cash on hand at certain of the
non-U.S. subsidiaries included in the Ciba Composites Business. On a pro forma
basis as of March 31, 1996, the aggregate principal amount of the Ciba Notes,
determined in accordance with the formula included in the Strategic Alliance
Agreement, was estimated at approximately $33.4 million. However, the actual
aggregate principal amount of the Ciba Notes is expected to exceed $33.4
million, as a result of the pending acquisition of certain other assets of the
Ciba Composites Business that have not yet been transferred to the Company.
In May 1996, Hexcel announced a program to consolidate its operations over a
period of approximately three years. The total cost of this program, which
excludes additional costs and expenses that may be incurred due to modifications
to the program that may result from the Hercules Acquisition, is estimated to be
approximately $49 million. This estimate includes $5.2 million of expenses
incurred in the first quarter of 1996, an estimated $29 million charge against
earnings expected to be incurred in the second quarter of 1996 and approximately
$15 million to be recognized thereafter. Cash expenditures necessary to complete
the business consolidation program are expected to total approximately $44
million, net of estimated proceeds from asset sales. Management estimates that
the program will result in annual cost savings of approximately $28 million when
it is fully implemented in 1999, and that for the period 1996 through 1998,
costs associated with the program (estimated net of proceeds from asset sales)
are expected to equal the incremental cash savings generated by the program. The
foregoing estimates of total cost of the consolidation program, cash
expenditures and annual cost savings constitute forward-looking information. The
failure of any of these assumptions underlying such estimates to be realized may
cause the actual amounts to differ materially from the estimates set forth
above. For a discussion of the assumptions and other important factors that will
affect actual amounts, see "Risk Factors -- Forward-Looking Statements;
Consolidation Program."
The objective of this program is to integrate acquired assets and operations
into the Company, reorganize and rationalize the Company's research and
manufacturing activities around strategic centers dedicated to select product
technologies, eliminate excess manufacturing capacity and rationalize redundant
sales and marketing functions. Specific actions contemplated by the
consolidation program include the previously announced closure of the Anaheim,
California facility acquired from
33
<PAGE>
Ciba, the closure of a portion of the Welkenraedt, Belgium facility, the
reorganization of the Company's manufacturing operations in France, the
consolidation of the Company's United States Special Process manufacturing
activities and the integration of sales and marketing resources.
HERCULES ACQUISITION
On June 27, 1996, the Company acquired the composite products division of
Hercules Incorporated ("Hercules"), which includes the assets of HISPAN
Corporation and Hercules' carbon fibers and prepreg business units and the stock
of Hercules Aerospace Espana, S.A. ("HAESA") (collectively, the "Hercules
Composites Business") for approximately $135.0 million in cash (excluding
transaction costs and subject to post-closing adjustments). Hexcel and Hercules
have agreed that in the event applicable Spanish antitrust authorities were to
take certain adverse actions in respect of Hexcel's acquisition of HAESA, Hexcel
would have the option to sell its interest in HAESA (which had sales
representing approximately 19% of the total sales of the Hercules Composites
Business in 1995) back to Hercules for the allocated purchase price Hexcel paid
for HAESA on June 27, 1996. The Hercules Composites Business is engaged in the
manufacture and marketing of prepregs and carbon fiber for aerospace and other
markets. See "Business -- Strategic Repositioning -- Strategic Acquisitions."
SUMMARY OF RESULTS
The following table is derived from the Company's Consolidated Statements of
Operations for the periods indicated and presents the historical results of
operations as a percentage of net sales:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------- YEAR ENDED DECEMBER 31,
MARCH 31, APRIL 2, -------------------------------------
1996 1995 1995 1994 1993
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin.............................................. 21.2 17.4 19.2 15.4 15.3
Selling, general and administrative expenses.............. (13.8) (14.3) (14.1) (14.6) (16.9)
Business acquisition and consolidation expenses (a)....... (4.1) -- -- -- (15.0)
Other income (expense).................................... 2.1 -- 0.2 1.6 (4.1)
----- ----- ----- ----- -----
Operating income (loss)................................... 5.4% 3.1% 5.3% 2.4% (20.7)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Income (loss) from continuing operations.................. 1.5% (2.8)% 0.9% (8.9)% (25.7)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
- ------------------------
(a) Business acquisition and consolidation expenses include amounts previously
reported as "Restructuring expenses."
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED APRIL 2, 1995
NET SALES. Net sales increased from $85.2 million to $126.4 million, an
increase of $41.2 million, or 48.4%. Approximately $27.6 million of the increase
represents the former Ciba Composites Business sales for the period from March
1, 1996 through March 31, 1996. Net sales increased 16.0% before considering the
impact of the Ciba Acquisition. The increase in net sales primarily reflects an
increase in demand for certain products used in the commercial aerospace market,
further penetration of selected recreation and general industrial markets
(particularly printed circuit boards) and continued improvement in the overall
economic environment in both the U.S. and Europe. Sales were higher in both the
U.S. and Europe. Due to the highly competitive nature of most of the markets in
which the Company competes, product price changes were not a significant factor
in first quarter 1996 sales growth.
GROSS MARGIN. Gross margin increased from $14.8 million to $26.8 million,
an increase of $12.0 million, or 81.1%. Approximately $4.5 million of the
increase was attributable to the Ciba Acquisition. Gross margin as a percentage
of net sales also increased from 17.4% to 21.2%. Gross margins improved in the
Company's reinforcement fabrics, composite materials and special process
businesses. The improvement in reinforcement fabrics and special process was due
to a combination of increased sales volumes and more efficient manufacturing.
The improvement in gross margin on sales
34
<PAGE>
of composite materials also reflected the benefits of higher sales volume and
the benefits from completing the consolidation of selected honeycomb production
activities into the Casa Grande, Arizona location.
OPERATING INCOME. Operating income was $6.8 million for the first quarter
of 1996, a $4.2 million increase over the same period of 1995. This increase
reflects the $12.0 million improvement in gross margin and the $2.7 million of
other income noted below, which was partially offset by an additional $5.3
million of selling, general and administrative expenses, and $5.2 million of
business acquisition and consolidation expenses. The increase in selling,
general and administrative expenses was largely attributable to the Ciba
Composites Business.
Business acquisition and consolidation expenses were comprised of $3.6
million in compensation expense resulting from stock options that were granted
in 1995 subject to stockholder approval and stock options which vested in
connection with the Ciba Acquisition, as well as $1.6 million of other
acquisition-related costs. Other income was attributable to the receipt of an
additional $1.6 million of cash in connection with the disposition of the
Chandler, Arizona manufacturing facility and certain related assets and
technology in 1994, and to the partial settlement for $1.1 million of a claim
arising from the sale of certain assets in 1991. The results for the 1996
quarter also include $1.6 million of interest expense attributable to the
write-off of capitalized debt financing costs as a result of the refinancing of
certain credit facilities in connection with the Ciba Acquisition.
The results for the 1995 quarter include bankruptcy reorganization expenses
of $2.1 million.
NET INCOME. Net income for the first quarter of 1996 was $1.8 million or
$0.07 per share, compared with a net loss for the first quarter of 1995 of $2.5
million or $0.28 per share. The results for the 1996 quarter include the results
of the Ciba Composites Business for the period from March 1, 1996 through March
31, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales increased from $313.8 million to $350.2 million, an
increase of $36.4 million, or 11.6%. The improvement in sales is attributable to
increased sales of prepregs and reinforcement fabrics, which were partially
offset by decreased sales of honeycomb. Sales of prepregs to commercial
aerospace and general industrial markets were higher, as were sales of
reinforcement fabrics for use in the recreation and general industrial
(primarily printed circuit boards and ballistics) markets. In addition, the
Company benefited from a significant military contract for prepregs, and
improved sales of honeycomb to the commercial aerospace market. The overall
decrease in honeycomb sales is attributable to the divestiture of the Chandler
facility and the related reduction in military aerospace sales. The Chandler
facility and certain related assets and technology were sold to the Northrop
Grumman Corporation in December 1994. Due to the highly competitive nature of
most of the markets in which the Company competes, product price changes were
not a significant factor in 1995 sales growth.
U.S. sales increased from $171.5 million to $179.5 million, an increase of
$8.0 million, or 4.7%. This increase is primarily attributable to a significant
military contract for prepregs and improved sales of reinforcement fabrics to
general industrial and other markets. The reduction in honeycomb sales
attributable to the divestiture of the Chandler facility was partially offset by
increased sales of honeycomb to commercial aerospace and other markets.
International sales increased from $142.3 million to $170.7 million, an
increase of $28.4 million, or 20.0%. This increase reflects higher sales of
prepregs and reinforcement fabrics to recreation and general industrial markets
(primarily printed circuit boards), as well as increased sales of prepregs to
certain European commercial aerospace customers. Changes in currency exchange
rates were also a factor in the increase. During 1995, the U.S. dollar declined
against most of the major European currencies, including the Belgian and French
francs. Accordingly, sales from Hexcel's primary international subsidiaries
increased when translated into U.S. dollars.
35
<PAGE>
Commercial Aerospace Sales -- Worldwide sales of prepregs and honeycomb to
the commercial aerospace market increased from $147.5 million to $159.0 million,
an increase of $11.5 million, or 7.8%. This increase is attributable to both
modest improvements in the build rates for certain commercial aircraft, as well
as increased sales of selected products. In addition, the Company benefited from
the improved economic environment in Europe.
Space and Defense Sales -- Worldwide sales increased from $34.9 million to
$37.3 million, an increase of $2.4 million, or 6.9%. The increase is
attributable to a significant military contract for prepregs, partially offset
by a decline in honeycomb sales. The decline in honeycomb sales reflects the
divestiture of the Chandler facility and the related reduction in military
aerospace sales.
Recreation and General Industrial Sales -- Worldwide sales increased from
$131.4 million to $153.9 million, an increase of $22.5 million, or 17.1%. Sales
of new products introduced within the past few years continued to grow, and the
Company benefited from strong European demand for printed circuit boards. In
addition, sales of lightweight, high strength materials for use in athletic
shoes, golf club shafts, energy absorption products and certain automotive and
mass transit components remained strong.
GROSS MARGIN. Gross margin increased from $48.4 million to $67.1 million,
an increase of $18.7 million, or 38.6%. Gross margin as a percentage of net
sales increased from 15.4% to 19.2% primarily due to higher sales, as well as
certain manufacturing cost reductions. Cost reductions included the closure of
the Graham, Texas plant, the sale of the Chandler facility and the consolidation
of selected honeycomb production activities into Hexcel's site at Casa Grande,
Arizona. Although these measures were initially undertaken in 1993 and 1994, the
transfer of certain production processes from Graham and Chandler to Casa Grande
was not completed until the middle of 1995. Consequently, the beneficial impact
of these facility reductions and the consolidation of honeycomb production
activities began to be realized during 1995.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses
increased from $45.8 million to $49.3 million, an increase of $3.5 million, or
7.6%. However, SG&A expenses as a percentage of net sales decreased from 14.6%
to 14.1%. The increase in SG&A expenses is largely attributable to higher
selling expenses, certain costs incurred in connection with the Ciba Acquisition
and changes in currency exchange rates. SG&A expenses include research and
technology expenses of $7.6 million in 1995 and $8.2 million in 1994.
INTEREST EXPENSE. Interest expense decreased from $11.8 million to $8.7
million, a decrease of $3.1 million, or 26.3%. The 1994 total includes accrued
interest on prepetition accounts payable and notes payable as well as $2.5
million for bankruptcy claims and working capital financing. The decline also
reflects the payment of various debt obligations with proceeds from the
subscription rights offering in February 1995 and the Chandler transaction.
INCOME TAXES. As of December 31, 1995, the Company had net operating loss
("NOL") carryforwards for U.S. federal income tax purposes of approximately $65
million and approximately $5 million for international income tax purposes. The
U.S. NOL carryforwards, which are available to offset future taxable income,
expire at various dates through the year 2010. As a result of the ownership
changes which occurred in connection with the emergence from Chapter 11 and the
acquisition of the Ciba Composites Business, utilization of the U.S. NOL
carryforwards is subject to certain annual limitations.
Both the 1995 and 1994 income tax provisions of $3.3 million and $3.6
million resulted primarily from state income taxes and taxable income for
certain European subsidiaries. In addition, the 1994 provision includes the
impact of settling various tax audits. The Company fully reserved the income tax
assets generated by the pre-tax losses of certain subsidiaries in 1995 and 1994,
due to uncertainty as to the realization of those assets.
NET INCOME. The Company generated income from continuing operations of $3.2
million in 1995, compared with losses from continuing operations of $28.1
million in 1994. The Company earned
36
<PAGE>
net income of $2.7 million in 1995, compared with a net loss of $30.0 million in
1994. The 1994 results include $20.2 million of bankruptcy reorganization
expenses, as well as interest expenses for bankruptcy claims and working capital
financing of $2.5 million, and a provision for the settlement of various tax
audits of $1.8 million.
Results for 1995 include other income of $0.8 million and bankruptcy
reorganization expenses of $3.4 million. Other income relates primarily to a
contingent payment received in connection with the sale of the Chandler, Arizona
manufacturing facility and certain related assets and technology.
Losses from discontinued operations totaled $0.5 million and $1.9 million in
1995 and 1994, respectively. These losses reflect the results of the
discontinued resins business, including provisions to write down the net assets
of that business by $2.8 million in 1994. The divestiture of the resins business
was completed in October 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET SALES. Net sales increased from $310.6 million to $313.8 million, an
increase of $3.2 million, or 1.0%. The slight improvement in sales is primarily
attributable to increased sales of prepregs and reinforcement fabrics in Europe,
partially offset by decreased U.S. sales of honeycomb. Sales of prepregs to
commercial aerospace and general industrial markets were higher, as were sales
of reinforcement fabrics for use in the recreation and general industrial
(primarily electrical printed circuit boards and ballistics) markets. The
overall decrease in honeycomb sales is attributable to the reduction in military
aerospace sales.
U.S. sales decreased from $185.2 million to $171.5 million, a decrease of
$13.7 million, or 7.4%. The decrease in U.S. sales was mainly due to reduced
sales of prepregs and honeycomb to commercial and military aerospace markets,
which were partially offset by improved sales of prepregs to general industrial
and other markets.
International sales increased from $125.4 million to $142.3 million, an
increase of $16.9 million, or 13.5%. The increase in international sales
reflects higher sales of prepregs and reinforcement fabrics to recreation and
general industrial (primarily electrical printed circuit boards) markets, as
well as increased sales of prepregs to certain European aerospace customers. A
portion of the increase is also attributable to changes in currency exchange
rates. The U.S. dollar declined relative to the Belgian and French francs in
1994.
Commercial Aerospace Sales -- Worldwide sales increased from $131.4 million
to $147.5 million, an increase of $16.1 million, or 12.3%. The increase is
attributable to the improved economic environment in Europe and introduction of
new products. Nonetheless, while sales of individual products such as graphite
honeycomb and certain prepreg products increased in 1994 in response to the
production of new wide-bodied aircraft, the Company continued to face intense
competition for many of the products it sells to the commercial aerospace
market. Due to the highly competitive nature of most of the markets in which the
Company competes, product price changes were not a significant factor in 1994
sales growth.
Space and Defense Sales -- Worldwide sales decreased from $55.3 million to
$34.9 million, a decrease of $20.4 million, or 36.9%. The decline is a result of
reduced honeycomb sales due to the reduction in military aerospace sales. The
reduction in space and defense sales reflects the Company's declining volumes
associated with the B-2 program as well as the general decline in U.S. military
spending.
Recreation and General Industrial Sales -- Worldwide sales increased from
$123.9 million to $131.4 million, an increase of $7.5 million, or 6.1%. Sales of
new products introduced within the past few years continued to grow, and the
Company benefited from strong European demand for printed circuit boards. In
addition, sales of lightweight, high strength materials for use in athletic
shoes, golf club shafts, energy absorption products and certain automotive and
mass transit components remained relatively strong.
37
<PAGE>
GROSS MARGIN. Gross margin increased from $47.5 million to $48.4 million,
an increase of $0.9 million, or 1.9%. Gross margin as a percentage of net sales
increased slightly from 15.3% to 15.4%. While the Company undertook several cost
cutting measures in 1994 and 1993, the benefits were not significantly realized
until 1995.
SG&A EXPENSES. SG&A expenses decreased from $52.5 million to $45.8 million,
a decrease of $6.7 million, or 12.8%. The decrease was mainly due to significant
headcount reductions made during 1993 and the first quarter of 1994. These
headcount reductions were achieved through a reorganization of sales, marketing
and administrative functions to reduce redundancies and inefficiencies. SG&A
expenses included research and technology expenses of $8.2 million and $8.0
million in 1994 and 1993, respectively.
INTEREST EXPENSE. Interest expense increased from $8.9 million to $11.8
million, an increase of $2.9 million, or 32.6%. The increase reflects the
accrual of interest on bankruptcy claims beginning December 6, 1993, the cost of
a debtor-in-possession credit facility and higher interest rates on certain
variable rate obligations. These factors were partially offset by reduced levels
of borrowing by the Company's European subsidiaries.
NET INCOME. The Company incurred losses from continuing operations of $28.1
million in 1994, or $3.84 per share, compared with losses from continuing
operations of $79.9 million, or $10.89 per share, in 1993. The Company incurred
net losses of $30.0 million and $86.0 million in 1994 and 1993, respectively.
Operating results for 1994 included other income of $4.9 million, which was
largely comprised of $15.9 million in income related to the Chandler
transaction, less an $8.0 million provision to reflect the estimated cost of
restructuring a joint venture and a $2.9 million provision for bankruptcy claim
adjustments. The 1994 loss from continuing operations also included bankruptcy
reorganization expenses of $20.2 million, as well as interest expenses for
bankruptcy claims and working capital financing of $2.5 million and a provision
for the settlement of various tax audits of $1.8 million.
Operating results from 1993 included restructuring charges of $46.6 million
(approximately $27 million was for non-cash items) for a major expansion of the
restructuring program begun in December 1992. The 1993 loss from continuing
operations also included other expenses of $12.8 million for the write-down of
certain assets and increases in reserves for warranties and environmental
matters on property previously owned. The impairment of assets was due primarily
to the bankruptcy proceedings, changes in business conditions, and depressed
real estate prices on property held for sale. In addition, the Company recorded
a $10.9 million provision in 1993 to reflect the adverse impact of bankruptcy
proceedings and substantial operating losses on the potential realization of
deferred income tax benefits.
Losses from discontinued operations totaled $1.9 million and $10.6 million
in 1994 and 1993, respectively. These losses reflected the results of the
discontinued resins business, including provisions to write-down the net assets
of this business by $2.8 million in 1994 and $6.0 million in 1993. The
divestiture of the resins business was completed in October 1995. The 1993
losses from discontinued operations also reflected the results of the
discontinued specialty chemicals business, including a provision to write-down
the net assets of this business by $2.8 million in 1993. The divestiture of the
specialty chemicals business was completed in January 1994.
In 1993, the Company recorded a one-time, cumulative benefit of $4.5 million
from the adoption of a new accounting standard for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
During the quarters ended March 31, 1996 and April 2, 1995 net cash provided
by (used in) operating activities was $0.1 million and ($8.4) million,
respectively. The cash provided by operating activities in the first quarter of
1996 primarily reflects increased levels of profitability which were offset by
an increase in accounts receivable. The increase in accounts receivable resulted
primarily
38
<PAGE>
from strong March sales. Other components of operating cash flow included the
payment of interest and a net increase in accounts payable. Changes in working
capital attributable to the Ciba Acquisition are not an element of operating
cash flow.
During the first quarter of 1995, net cash used by operating activities was
primarily attributable to the payment of interest, bankruptcy reorganization
expenses, expenditures for restructuring activities, and a net increase in
working capital as a result of higher sales levels.
Cash flows from investing and financing activities for the first quarter of
1996 included the cash components of the Ciba Acquisition. As noted above, a
substantial portion of the consideration paid for the Ciba Composites Business
was comprised of Common Stock and the Ciba Notes.
Cash flows from investing and financing activities for the first quarter of
1995 included the proceeds from the sale of certain assets, the proceeds from
the sale of Common Stock pursuant to a subscription rights offering and standby
purchase agreement, and the payment of allowed claims pursuant to the Company's
reorganization plan.
During the three years ended December 31, 1995, 1994 and 1993, net cash
provided by (used in) operations was ($2.5) million, ($1.1) million and $11.5
million, respectively. The decline in cash provided by operating activities in
1995 is due primarily to the payment of prepetition accounts payable and accrued
liabilities that had been reinstated on February 9, 1995 and the payment of
accrued restructuring costs. In addition, the Company incurred $8.7 million of
interest expense, $3.4 million of bankruptcy reorganization expenses, and
financed a $9.9 million increase in accounts receivable and inventories
resulting from higher sales levels. However, the Company benefited from a $19.4
million increase in postpetition accounts payable and accrued liabilities,
reflecting both higher production levels and a return to normal credit terms
with most vendors.
The 1994 amount reflected the Company's loss for the year, including $20.2
million of bankruptcy reorganization expenses, which were offset by a comparable
increase in accounts payable and accrued liabilities (including liabilities
subject to disposition in bankruptcy reorganization). The increase in accounts
payable and accrued liabilities was primarily attributable to the accrual of
interest on prepetition obligations, adjustments to allowed claims and a return
to payment terms with some vendors. In addition, the Company paid approximately
$10.1 million in restructuring costs and financed a $7.4 million increase in
accounts receivable and inventories.
FINANCIAL RESOURCES
In connection with the Ciba Acquisition, Hexcel entered into the Old Credit
Facility which provided for up to $175 million of loans to (a) fund the cash
component of the purchase price, (b) refinance outstanding indebtedness under
certain U.S. and European credit facilities and (c) fund ongoing working capital
and other financing requirements of the Company, including business
consolidation activities. As of March 31, 1996, outstanding borrowings under the
Old Credit Facility totaled $69.8 million.
In connection with the Hercules Acquisition, the Company entered into the
Credit Facility which provides for up to $310 million in loans. The Company's
initial borrowings under the Credit Facility were incurred to replace
approximately $70.1 million of outstanding borrowings under the Old Credit
Facility, which has been terminated, and to finance the Hercules Acquisition.
Borrowings under the Credit Facility are also available for ongoing working
capital and other financing requirements of the Company, including business
consolidation activities. As described under "Use of Proceeds," the net proceeds
from the sale of the Notes will be used to repay outstanding borrowings under
the Credit Facility.
Management currently expects that cash flows from operations and borrowings
under the Credit Facility will be sufficient to fund the Company's worldwide
operations.
39
<PAGE>
CAPITAL EXPENDITURES
Capital expenditures in recent years have been primarily focused on
essential maintenance and process improvement projects. Capital expenditures
were $2.1 million in the first quarter of 1995 and $2.3 million in the first
quarter of 1996. In connection with the Ciba Acquisition and the commencement of
the business consolidation program, management expects that capital expenditures
will increase significantly above first quarter levels in the remaining three
quarters of 1996. Such expenditures will be financed with cash generated from
operations and borrowings under available credit facilities.
Capital expenditures increased from $8.4 million in 1994 to $12.1 million in
1995, an increase of $3.7 million, or 44.0%. The increase is due to purchases of
equipment necessary to improve manufacturing processes, and to the deferral of
expenditures during bankruptcy reorganization proceedings. Further increases in
capital spending are expected in 1996, partially as a result of the
Acquisitions. Such expenditures will be financed with cash generated from
operations and borrowings under available credit facilities.
Capital expenditures increased from $6.3 million in 1993 to $8.4 million in
1994, an increase of $2.1 million, or 33.3%. Cash expenditures on restructuring
activities totaled approximately $10.1 million in 1994, compared with $17.2
million in 1993.
THE CIBA COMPOSITES BUSINESS
GENERAL
The discussion and tables that follow relate to the historical statements of
operations for the Ciba Composites Business on a worldwide basis for the years
ended December 31, 1995, 1994 and 1993. The historical financial statements for
each such period have been prepared on a basis which reflects the historical
financial statements of the Ciba Composites Business as if it were a stand-alone
company owning certain assets, liabilities and subsidiaries, notwithstanding
that during the foregoing three year period, the Ciba Composites Business was
operated as a division by each of Ciba and CGC, and in several European
jurisdictions on a stand-alone basis through certain foreign subsidiaries of
Ciba.
SUMMARY OF RESULTS
The following table is derived from the Ciba Composite Business' historical
financial statements of operations for the periods indicated and presents the
results of operations as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Gross profit................................................ 17.2 14.7 10.0
SG&A (a).................................................... (17.5) (18.3) (19.8)
Amortization and write-downs of purchased intangibles....... (2.1) (3.5) (2.1)
Restructuring expense....................................... (0.7) (0.5) (2.9)
Other, net.................................................. (0.3) 1.0 (0.1)
----- ----- -----
Operating loss.............................................. (3.4)% (6.6)% (14.9)%
----- ----- -----
----- ----- -----
Net loss.................................................... (5.6)% (8.3)% (18.1)%
----- ----- -----
----- ----- -----
</TABLE>
- ------------------------
(a) Includes research and development expense.
40
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales increased from $292.6 million in fiscal 1994 to $331.1
million in fiscal 1995, an increase of $38.5 million, or 13%. This sales growth
reflected an increase in sales in both the aerospace, including space and
defense and non-aerospace industrial markets. Sales to the aerospace market
increased from $213 million in 1994 to $231 million in 1995, or 8%. This
increase was due mainly to a recovery in sales to traditional customers and
ongoing revenue related to the acquisition from BP Chemicals, Inc. in August
1994 of certain structures programs for the U.S. market previously conducted by
BP Chemicals' Advanced Materials Division ("BPAM"). Sales to the non-aerospace
industrial markets increased from $79 million for fiscal 1994 to $100 million
for fiscal 1995, or 27%, with the largest growth being attributable to the
sports and leisure markets in Europe and Asia. Other segments of the
non-aerospace industrial market that showed improvement over this period
included the fabrics, transport and energy sectors.
Selling prices over the period were relatively flat. Net sales also
increased due to exchange rate fluctuations. See "-- Impact of Foreign Exchange
Fluctuations."
NET SALES BY GEOGRAPHIC REGION.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
United States.................................. $148,919 45% $139,831 48%
Europe......................................... 171,235 52 143,071 49
Other Countries................................ 10,919 3 9,709 3
-------- ----- -------- -----
$331,073 100% $292,611 100%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
The shift in regional net sales between fiscal 1994 and fiscal 1995 resulted
from a 7% improvement in the United States, a 20% improvement in Europe and a
12% improvement in other countries. The build-rate reduction in the American
aerospace market affected a greater amount of net sales in the United States.
The same did not happen in European and other countries, where almost 50% of net
sales were in the non-aerospace industrial markets.
Most of Ciba's foreign sales took place in Western Europe and other
developed economies. This is consistent with the fact that a large portion of
the sales were to aerospace original equipment manufacturers ("OEMs") or major
subcontractors. As a result, Ciba was exposed to normal business risks
associated with doing business in highly developed industrial nations. These
risks were managed in the same way similar risks were managed in the United
States.
IMPACT OF FOREIGN EXCHANGE FLUCTUATIONS. Due to the fact that half of the
Ciba Composites Business' net sales occur outside the United States, the sales
trends, as noted above, were also influenced by exchange rate fluctuations over
the period. In 1995, the dollar yearly average weakened against most European
currencies resulting in a net positive effect in the year ended December 31,
1995 relative to 1994 of approximately $14.1 million.
The Ciba Composites Business does not hedge currency risks. While Ciba does
engage in certain currency hedging, the effects of such hedging are not
reflected in the Ciba Composites Business financial statements because neither
the costs nor benefits of such activities are allocated to the Ciba Composites
Business.
GROSS PROFIT. Gross profit increased from $42.9 million to $57.1 million,
an increase of 33.1%. This increase was due to the combination of stronger sales
and cost reductions.
SG&A EXPENSES. SG&A expenses increased from $45.5 million in 1994 to $47.5
million in 1995, or 4%. As a percentage of sales, these expenses showed a
positive trend over the period, decreasing from 16% of sales in 1994 to 14% in
1995. This trend reflected the improvement in sales as well as the impact of
restructuring activities.
41
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased from $7.9 million in 1994 to $10.4 million in 1995, or 32%. For these
periods, expenses, as a percentage of sales, were 2.7% and 3.1%, respectively.
This increase in research and development expenses was due to investments in
research and development to develop products and retain new customers for new
non-aerospace industrial markets, such as the transport and energy markets.
AMORTIZATION AND WRITE-DOWN OF PURCHASED INTANGIBLES. Intangible assets
arose from the purchase of Reliable Manufacturing Co. in 1979 and Heath Tecna
Aerospace Co. in 1988. Impairment losses of $2.8 million and $5.1 million were
recognized in 1995 and 1994, respectively, on contract manufacturing programs
due to reductions in aircraft build rates.
RESTRUCTURING EXPENSES. In 1995 and 1994, the Ciba Composites Business
reduced its workforce substantially in anticipation of lower sales to aerospace
customers and in an effort to reduce administrative overhead, resulting in
reductions of 52 people in 1995 and 121 people in 1994. In the United States,
additional business units were formed for aerospace and industrial structures
and aerospace interiors, for the purpose of achieving more efficient operations
better sized to serve the weaker aerospace market. Restructuring costs covered
personnel expenses (including severance, relocation, etc.) of $2.4 million in
1995 and equipment and facility expenses (relocation costs and write-offs) of
$1.6 million in 1994.
INTEREST EXPENSE. Interest expense decreased from $1.2 million in 1994 to
$0.7 million in 1995, or 41.7%. These expenses were comprised of interest on
mortgage debt which matures in 1999 and interest on certain long-term debt to
affiliates based on three and six month French and Italian LIBOR rates.
INCOME TAXES. Income taxes have been presented in the financial statements
as if the Ciba Composites Business were a separate taxable entity. The tax
effect of the resulting operating loss carryforwards has been reflected as
deferred tax assets with related valuation allowances, based upon management's
assessment of the Ciba Composites Business' likelihood of realizing the benefit
of such operating loss carryforwards through future stand-alone taxable income.
In actual practice, the Ciba Composites Business has not operated as a separate
taxable entity and the operating loss carryforwards of the Ciba Composites
Business have generally been utilized to offset taxable income of Ciba and its
respective local group companies in various countries in the year incurred. As
of December 31, 1995, net operating loss carryforwards of approximately $6.2
million and $0.6 million were available to offset certain future taxable income
in Italy and France, respectively. For the periods ended December 31, 1995 and
December 31, 1994, the losses of the Ciba Composites Business before income
taxes generated a provision for income taxes of $5.1 million and $2.8 million,
respectively, due to certain profitable foreign operations.
MINORITY INTEREST IN DANUTEC. Ciba owned 51% of Danutec, which has
headquarters in Linz, Austria until February of 1996 when it acquired the
remaining 49.0%. Ciba sold Danutec to Hexcel pursuant to the Strategic Alliance
Agreement in May 1996.
NET LOSS. The Ciba Composites Business incurred net losses of $24.3 million
in 1994 on net sales of $292.6 million compared with losses of $18.5 million on
net sales of $331.1 million in 1995. This decrease in net losses was primarily
attributable to the overall increase in net sales and improved gross profits as
described above and lower write-offs of intangibles, partially offset by higher
selling, general and administrative expenses and research and development
expenses. Additionally, net losses in 1994 reflected a $2.7 million gain on the
sale by the Ciba Composites Business of its honeycomb core facility in Miami.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET SALES. Net sales increased from $271.3 million in fiscal 1993 to $292.6
million in fiscal 1994, an increase of $21.3 million, or 8%. This improvement in
net sales was due primarily to the acquisition of BPAM and also to gains in the
non-aerospace industrial market, such as the sports and leisure markets in
Europe and Asia and the energy market in Europe. These positive factors more
than offset
42
<PAGE>
a decline in the Ciba Composites Business' net sales to the aerospace market for
fiscal 1994. The decline in aerospace sales resulted from a continuing reduction
in build rates for the Ciba Composites Business' largest customer (Boeing). This
decline was somewhat offset by an increase in sales to some of Ciba Composites
Business' other aerospace customers and non-aerospace customers.
Selling prices over the period were relatively flat. Net sales for the years
ended December 31, 1994 also increased from the immediately preceding year due
to exchange rate fluctuations. See "-- Impact of Foreign Exchange Fluctuations."
NET SALES BY GEOGRAPHIC REGION.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
United States........................... $139,831 48% $136,141 50%
Europe.................................. 143,071 49 127,469 47
Other Countries......................... 9,709 3 7,648 3
-------- ----- -------- -----
$292,611 100% $271,258 100%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
The shift in regional net sales between the year ended December 31, 1993 and
the year ended December 31, 1994 resulted from a 12% improvement in net sales in
Europe and 26% in other countries, against a smaller improvement of 3% in the
United States. The build-rate reduction in the American aerospace market
affected a greater amount of net sales in the United States. The same did not
happen in European and other countries, where almost 50% of net sales were in
the non-aerospace industrial markets.
IMPACT OF FOREIGN EXCHANGE FLUCTUATIONS. In 1994, the dollar yearly average
weakened against most European currencies. The net positive effect to net sales
relative to 1993, due to the general weakening of the exchange rate, was $2.9
million.
GROSS PROFIT. Gross profits increased from $27.0 million in 1993 to $42.9
million in 1994, or 59.0%. This increase was due to cost reductions and an 8%
increase in sales. In 1993, gross profit was negatively affected by a low level
of sales and certain production inefficiencies resulting from restructuring of
personnel at manufacturing facilities.
SG&A EXPENSES. SG&A expenses decreased from $47.8 million in 1993 to $45.5
million in 1994, or 5%. As a percentage of sales, these expenses showed a
positive trend over the period, going from 18% of sales in 1993 down to 16% of
sales in 1994. This trend reflected the improvement in sales as well as the
impact of restructuring activities.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased from $5.9 million in 1993 to $7.9 million in 1994, or 34%. For these
periods, expense, as a percentage of sales, was 2.2% and 2.7%, respectively.
This increase in research and development expenses was due to investments in
research and development to develop products and retain new customers for new
non-aerospace industrial markets, such as the transport and energy markets.
AMORTIZATION AND WRITE DOWN OF PURCHASED INTANGIBLES. Impairment losses of
$5.1 million were recognized in 1994 on the contract manufacturing programs due
to reductions in aircraft build rates.
RESTRUCTURING EXPENSES. In 1994 and 1993, the Ciba Composites Business
reduced its workforce substantially in anticipation of lower sales to aerospace
customers and in an effort to reduce administrative overhead, resulting in
reductions of 121 people in 1994 and 558 people in 1993. In addition, in 1993,
the Ciba Composites Business began consolidating its production facilities in
Europe and formed a separate European business unit to focus on the requirements
of European customers in both aerospace and non-aerospace industrial markets. In
the United States, additional business units were also formed in 1994 for
aerospace and industrial structures and aerospace interiors, for the purpose of
achieving more efficient operations better sized to serve the weaker aerospace
market.
43
<PAGE>
Restructuring costs covered personnel expenses (involving severance, relocation,
etc.) of $5.9 million in 1993 and equipment and facility expenses (relocation
costs and write-offs) of $1.6 million in 1994 and $1.8 million in 1993.
INTEREST EXPENSE. Interest expense decreased from $2.2 million in 1993 to
$1.2 million in 1994, or 46%. These expenses were comprised of interest on
mortgage debt which matures in 1999 and certain long term debt to affiliates
based on three and six month French and Italian LIBOR rates.
INCOME TAXES. Income taxes have been presented in the financial statements
as if the Ciba Composites Business were a separate taxable entity. The tax
effect of the resulting operating loss carryforwards has been reflected as
deferred tax assets with related valuation allowances, based upon management's
assessment of the Ciba Composites Business' likelihood of realizing the benefit
of such operating loss carryforwards through future stand-alone taxable income.
In actual practice, the Ciba Composites Business has not operated as a separate
taxable entity and the operating loss carryforwards of the Ciba Composites
Business have generally been utilized to offset taxable income of Ciba and its
respective local group companies in various countries in the year incurred. For
the period ended December 31, 1994, the losses of the Ciba Composites Business
before income taxes generated a provision for income taxes of $2.8 million, due
to certain profitable foreign operations. Losses generated for the period ended
December 31, 1993 resulted in a tax benefit of $1.0 million.
NET LOSS. The Ciba Composites Business' net loss for the year declined from
$49.0 million in 1993 to $24.3 million in 1994, driven by a combination of
higher sales, successful cost containment efforts (largely realized from earlier
restructurings) and a gain of $2.7 million realized from the sale of its
honeycomb core facility in Miami. There were also charges of $7.1 million
related to the adoption of new accounting standards for post employment and post
retirement benefits other than pensions, which affected 1993 profitability. The
preceding items, which caused an improvement from 1993 to 1994, were partially
offset by price increases on selected raw materials and a $5.1 million
impairment write-off of intangibles relating to acquired contract manufacturing
programs due to a reduction in aircraft build rates in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $15.4 million, $13.7 million
and $14.7 million for the years ended December 31, 1993, 1994 and 1995,
respectively. The increase in 1995 was due primarily to a decline in net losses
and inventory reductions, partially offset by increases in accounts receivable.
Higher accounts receivable at the end of 1995 and 1994 reflected primarily the
growth in sales that occurred during these periods. The $8.2 million decrease in
inventory at the end of 1995 resulted from better inventory management.
Operating cash benefited from a decrease in prepaid expenses and other current
assets of $2.1 million and $1.5 million, and a decrease in other long term
assets of $0.7 million and $3.7 million at the end of 1995 and 1994,
respectively. For the period ended December 31, 1995, although accrued
liabilities and accrued compensation increased by $1.3 million, accounts payable
decreased by $0.8 million. For the same period in 1994, cash was provided by
accounts payable of $3.8 million, an increase in accrued liabilities and accrued
compensation of $4.2 million and an increase in other long-term liabilities of
$1.3 million.
Cash used in investing activities in 1995 was affected by the Ciba
Composites Business' use of $13.2 million in cash to purchase certain property,
plant and equipment. In 1994, the Ciba Composites Business used $7.7 million in
cash for investments in certain property, plant and equipment and $4.7 million
in cash was expended for the BPAM acquisition. Proceeds of $8.0 million were
received in 1994 on the divestiture of the Ciba Composites Business' Miami
facility. Cash flow from financing activities in 1995 was affected by equity
contributions from Ciba of $29.8 million and additional borrowings of $7.8
million that largely offset loan payments of $36.6 million. In 1994, equity
contributions from Ciba of $4.7 million were offset by payments on borrowings of
$10.4 million.
The decrease in 1994 in net cash provided by operating activities was
primarily due to an increase in accounts receivable during this period
(reflecting both the increase in sales and initial longer
44
<PAGE>
payment terms extended to new European customers). Lower depreciation in 1994
was more than offset by an increase in amortization during that period due to
the recognition of a $5.1 million impairment loss for intangibles relating to
aircraft related contract manufacturing programs. In 1994, efforts to control
inventory levels resulted in a decline of $1.3 million despite an increase in
sales. In 1993, similar efforts to control assets resulted in a decrease of
$16.1 million in accounts receivable and $10 million in inventories. Operating
cash flow also benefited from a $3.2 million decrease in prepaid expenses and
other current assets in 1993 and a decrease in long term assets of $3.7 million
and $3.6 million, respectively, for 1994 and 1993. With the increase in sales in
1994, accounts payable also increased by $3.8 million. In 1994 cash provided by
operating activities increased due to an increase of $4.2 million for accrued
liabilities and accrued compensation and $1.3 million for other long term
liabilities. In 1993, a decrease of $3.5 million in other long-term liabilities
was somewhat offset by an increase of $1.1 million in accrued liabilities and
accrued compensation.
Cash used in investing activities in 1994 reflected $7.7 million used to
purchase certain property, plant and equipment and $4.7 million expended for the
BPAM acquisition offset in part by the divestiture of the Ciba Composites
Business' Miami facility for $8.0 million. Cash used in investing activities in
1993 reflected $12.3 million used to purchase certain property, plant and
equipment. In 1994, cash used in financing activities reflected payments on
borrowings of $10.4 million that significantly exceeded equity contributions
from Ciba of $4.7 million. In 1993, payments on borrowings of $3.6 million and
equity distributions to Ciba of $1.5 million were largely offset by proceeds
from borrowings of $4.3 million.
BACKLOG
Historically, the backlog of orders has ranged between $50 million and $150
million based on the timing of contract awards and completion. The backlog of
orders was $43 million at December 31, 1995. The Ciba Composites Business'
backlog has not historically been affected significantly by seasonality.
EFFECT OF INFLATION
Inflation has not had a material effect on the revenues or operating results
of the Ciba Composites Business during the periods ended December 31, 1995,
December 31, 1994 and December 31, 1993, respectively.
FINANCIAL RESOURCES
The Ciba Composites Business' capital requirements have historically been
funded through intercompany borrowings and contributions from Ciba and its
subsidiaries. Upon consummation of the Ciba Acquisition, the Ciba Composites
Business was combined with Hexcel and no longer had access to funding from Ciba
and its subsidiaries.
Historically, due to the seasonality of the Ciba Composites Business' sales
(i.e., higher net sales in the second quarter) and corresponding increased
working capital requirements to fund accounts receivable, the Ciba Composites
Business has required funding support from Ciba affiliates in the form of loans
or capital investments during the second and third quarter time frame. The peak
business cycle occured near the end of the second quarter, particularly in
Europe in anticipation of the summer slowdown. Collections in the second half of
the year allowed the Ciba Composites Business to generate positive cash flows
from operations for the full year period.
The working capital practices of the Ciba Composites Business (and much of
the composite materials industry) were tied in large part to the payment
practices of the aerospace industry in general. The Ciba Composites Business'
customers were, typically, large original equipment manufacturers. Goods were
generally built to order based on forecasted schedules generated in advance. As
a result, significant amounts of inventory were not carried to meet rapid
delivery requirements. In general, the Ciba Composites Business' customers did
not request extended payment terms of their vendors. The Ciba Composites
Business' customers generally paid in varying periods not generally in excess of
U.S. or European practice, as the case may be. Merchandise was not returnable.
45
<PAGE>
BUSINESS
GENERAL
Hexcel is a leading international manufacturer and marketer of lightweight,
high performance composite materials, parts and structures for the aerospace,
defense, recreation and general industrial markets. The Company's products,
which are described below, include carbon fiber, woven synthetic fabrics,
honeycomb, prepregs, adhesives, and a wide variety of lightweight, high strength
semi-finished and finished structural components. With 19 manufacturing
facilities in the United States and Europe, management believes that Hexcel is
positioned to take advantage of opportunities for growth worldwide. The
Company's manufacturing capabilities are integrated across product lines
enabling it to offer a breadth of products spanning the composites industry. The
Company operates through the following five core businesses, presented in order
of manufacturing integration from raw materials to finished products:
- FIBERS. The Company manufactures PAN based carbon fiber primarily for
sale to customers and also for use in its Fabrics and Composite Materials
businesses. The Company supplies high performance carbon fibers for a wide
variety of applications in the commercial aerospace, space and defense,
recreation and general industrial markets predominantly in the United
States. The principal end uses for carbon fibers are as raw materials for
prepregs and fabrics, in filament winding for various space and defense
and industrial applications and in fiber placement to produce composite
structures.
- FABRICS. The Company is a leading manufacturer of woven fiberglass,
carbon and aramid fiber reinforcements for composite materials and other
applications worldwide. In the United States, the Company is a leading
weaver of aramid fibers and, in Europe, the Company is a leading weaver of
high performance fiberglass fabrics. The principal end uses for fabrics
are in composite materials, printed circuit boards, window blinds,
insulation and soft body armor such as bulletproof vests.
- COMPOSITE MATERIALS. The Company is an innovative leader worldwide in the
manufacture of honeycomb, prepregs, film adhesive products and sandwich
panel products. Although each of these products is sold primarily to the
commercial aerospace and space and defense markets, the Company has led
the development of new applications for composite materials in the
recreation market and is developing additional applications for use in the
transit, marine and other industrial markets. The principal end uses for
composite materials are components for commercial and military aircraft,
munitions, high-speed and mass transit trains and recreation applications,
including golf clubs, skis and snowboards.
- SPECIAL PROCESS. The Company engineers, manufactures and markets machined
and fabricated honeycomb parts for use in commercial aerospace, space and
defense, automotive and other applications to meet customers' specific
design requirements. This core business provides value-added processing to
standard honeycomb manufactured by the Company by contouring and machining
it into complex shapes. The principal end uses for special process
products are semi-finished aerospace components and aircraft control
surfaces such as flaps and wing tips.
- STRUCTURES AND INTERIORS. The Company manufactures and markets
lightweight, high strength structures and interiors primarily for use in
the aerospace industry. The principal end uses for structures and
interiors are wing-to-body fairings, flap track fairings, radomes, engine
cowls and interior systems such as overhead storage bins for aircraft.
46
<PAGE>
STRATEGIC REPOSITIONING
BACKGROUND
Historically, the aerospace and defense industries have led the development
of applications for composite materials and structures due to their need for the
performance properties of these materials. During the mid to late 1980's,
composite materials companies, including Hexcel, the Ciba Composites Business
and the Hercules Composites Business invested in rapid capacity expansion to
respond to the anticipated growth in both military procurement programs and the
commercial aircraft industry. In particular, the Company built a new plant in
Chandler, Arizona for United States military programs including the B-2 bomber.
With the end of the Cold War in 1989 and the resulting rapid reduction in
defense procurement expenditures in the United States and Europe, sales to the
military aerospace and defense sectors declined rapidly. B-2 projected
procurement fell from an original 132 aircraft to 20. In addition, under the
influence of deregulation and various other factors including a general economic
downturn and the Gulf War, the commercial airline industry experienced
significant losses in the early 1990's, which in turn led to reduced investment
in new aircraft. With diminishing cash flows, orders for commercial aircraft
were canceled or delayed, resulting in a decline in deliveries by approximately
50% between 1992 and 1994. These changes in the principal markets for composite
materials left significant excess capacity in the industry, resulting in
significant losses for industry participants, including the Company.
As a result of these market circumstances, as well as debt incurred to build
capacity in the late 1980's, the Company experienced a liquidity crisis in 1993.
After attempting, but being unable to achieve a consensual out-of-court
restructuring with its creditors, Hexcel sought protection under Chapter 11 by
filing a voluntary petition for relief in December 1993. Under the leadership of
John J. Lee, who joined the Company as Chairman of the Board and Co-Chief
Executive Officer shortly before the Chapter 11 filing, the Company adopted and
executed a plan to reposition itself by consolidating facilities, divesting
non-core businesses, and reducing costs in an attempt to restore profitability
and positive cash flow.
In connection with this repositioning, the Company successfully implemented
a consolidation of its operations by (i) divesting itself of its non-strategic,
European and United States resins businesses, (ii) selling its Chandler, Arizona
plant and associated product lines, (iii) closing its Graham, Texas facility and
(iv) reducing SG&A, including R&D expenditures. The Company also reduced the
number of its employees from 3,050 at year end 1992 to 2,127 at year end 1995.
These actions enabled the Company to restructure its balance sheet and obtain
new equity and debt financing. When Hexcel emerged from Chapter 11, all
creditors' claims were reinstated or paid in full, including interest.
STRATEGIC ACQUISITIONS
Upon emerging from Chapter 11 in February 1995, the Company began to
implement a strategy to lead the consolidation of the composite materials
industry by removing excess capacity and in the process diversifying and
strengthening its existing businesses. On February 29, 1996, Hexcel acquired the
Ciba Composites Business for aggregate consideration of approximately $203.1
million, subject to post-closing adjustments. The Ciba Acquisition combined two
of the world's leading and most technically advanced composite materials
companies, broadening the Company's range of products and markets, enhancing its
research, development and technological capabilities and balancing the
geographical scope of its business. As a result of the Ciba Acquisition, Ciba
became the beneficial owner of approximately 49.7% of the Company's outstanding
Common Stock.
On June 27, 1996, the Company acquired the Hercules Composites Business for
a cash purchase price of approximately $135 million (excluding transaction
costs) subject to post-closing adjustments. The Hercules Acquisition combined
two leading prepreg manufacturers, with few overlapping products and
qualifications between their product lines, and provided the Company with the
capability to manufacture one of its significant raw materials, PAN based carbon
fibers. This acquisition further
47
<PAGE>
enhanced Hexcel's technological and integrated capabilities and provided the
Company with new products that have been qualified by customers, a financial
hedge against either increases in the price of carbon fiber or decreases in its
supply matching the Composite Materials core business' consumption of fibers
against the sales of the Fibers core business, and additional production
capacity which will aid the Company in implementing restructuring programs in
the United States and Europe.
STRUCTURAL REORGANIZATION AND CONSOLIDATION PROGRAM
The Company has reorganized its operations into five core businesses:
Fibers, Fabrics, Composite Materials, Special Process and Structures and
Interiors. See "-- Core Businesses." This reorganization positioned the Company
to better respond to the growing commercial aerospace, space and defense,
industrial and recreation markets it serves, while focusing management on cost
reduction and profitability. The new organizational structure is also expected
to improve the Company's current business performance and allow it to exploit
opportunities in emerging global markets.
In May 1996, the Company announced a program for consolidating its
operations following the Ciba Acquisition. The objective of this program, which
is expected to be completed in approximately three years, is to integrate
acquired assets and operations into Hexcel, reorganize and rationalize the
Company's research and manufacturing activities around strategic centers
dedicated to select product technologies, eliminate excess manufacturing
capacity and rationalize redundant sales and marketing functions. Specific
actions contemplated by the consolidation program include the previously
announced closure of the Anaheim, California facility acquired from Ciba, the
closure of a portion of the Welkenraedt, Belgium facility, the reorganization of
the Company's manufacturing operations in France, the consolidation of the
Company's United States special process manufacturing activities, and the
integration of sales and marketing resources. Management estimates that the
consolidation program will reduce the Company's workforce by approximately 8%
worldwide.
The total cost of this program, which excludes additional costs and expenses
that may be incurred due to modifications to the program that may result from
the Hercules Acquisition, is estimated to be approximately $49 million. This
estimate includes $5.2 million of expenses incurred in the first quarter of
1996, an estimated $29 million charge against earnings expected to be incurred
in the second quarter of 1996 and approximately $15 million to be recognized
thereafter. Cash expenditures necessary to complete the program are estimated to
total approximately $44 million, net of expected proceeds from asset sales.
Management estimates that the program will result in annual cost savings of
approximately $28 million when it is fully implemented in 1999, and that for the
period 1996 through 1998, costs associated with the program (net of estimated
proceeds from asset sales) are expected to equal the incremental cash savings
generated by the program. The foregoing estimates of total cost of the
consolidation program, cash expenditures and annual cost savings constitute
forward-looking information. The failure of any of the assumptions underlying
such estimates to be realized may cause the actual amounts to differ materially
from the estimates set forth above. For a discussion of these assumptions and
other important factors that will affect actual amounts, see "Risk Factors --
Forward-Looking Statements; Consolidation Program."
As a result of the (i) elimination of surplus facilities and manufacturing
capacity by industry participants such as the Company, (ii) exit of certain
participants from the industry and (iii) consolidation of the industry led by
the Company with the Ciba and Hercules Acquisitions, excess industry capacity
has been reduced. As a result of the anticipated upturn in the commercial
aerospace market, current industry manufacturing is beginning to move in line
with demand.
COMPETITIVE ADVANTAGES
The Company believes that the recent measures undertaken to reorganize its
operations, reduce costs and increase geographic, market and product diversity,
enhance the Company's key competitive advantages:
- MARKET LEADER. The Company has long been a leading international
manufacturer of lightweight, high strength fabrics, composite materials
and parts and structures. Management
48
<PAGE>
believes the Company is the largest integrated producer of diversified
composite materials in the world based on pro forma net sales of
approximately $771 million for the year ended December 31, 1995. See "Pro
Forma Financial Information."
- BROADEST RANGE OF QUALIFICATIONS IN THE AEROSPACE INDUSTRY. Management
believes Hexcel has the broadest range of qualifications of any composite
materials manufacturer in the aerospace industry and is qualified on
several programs which have significant opportunities for growth. Such
programs include the Boeing 777 and 737x, the Airbus A320 series
(including A319 and A321) and A330 series and the McDonnell Douglas C-17
transport. Before composite materials may be utilized in aerospace and
military applications, they must be qualified, which is both expensive and
time consuming. See "-- Markets and Customers." The Company believes its
extensive qualifications position it to remain a leading supplier of
composite materials to the aerospace industry.
- VERTICAL INTEGRATION. Management believes the Company is the most
vertically integrated composite materials manufacturer in the world.
Vertical integration provides the Company with a greater ability to
control the cost, quality and delivery of its products. Moreover, the
Company has the unique ability to manufacture and sell products from
various points in the manufacturing process, thereby providing overall
materials solutions to its customers and strengthening its competitive
position. See "-- Manufacturing Process and Raw Materials."
- MARKET AND GEOGRAPHIC DIVERSITY. Approximately 53% of Hexcel's pro forma
net sales for the year ended December 31, 1995 were derived from the
commercial aerospace industry, 11% from space and defense, 12% from
recreation products (including golf shafts, skis, snowboards, fishing rods
and tennis rackets) and 24% from general industrial markets (including
printed circuit boards, window blinds and high-speed mass transit trains).
Management believes this market and product mix reduces the Company's
exposure to business cycles in the commercial aerospace industry. In
addition, the Ciba Acquisition enabled the Company to balance the
geographic scope of its business between North America and Europe,
providing it with an increased presence at Airbus, and to build a presence
in the rapidly growing Asia-Pacific aerospace market. See "-- Core
Businesses" and "-- Sales and Marketing."
- STRONG TECHNICAL SUPPORT. The Company has been a leader in the
development of technology and commercial applications for composite
materials for over 50 years. The Company's technically oriented sales
force works with new and existing customers to identify and engineer
solutions to meet customers' needs, particularly by identifying areas
where composite materials may beneficially replace traditional materials.
Through both its research and technology function and its proprietary
skills in resin formulation and woven reinforcement, the Company has the
technical capability to provide its customers with "make to order" custom
products. A recent example of the Company's ability to engineer solutions
for its customers is the development of carbon core honeycomb for jet
engine nacelles. This product replaces traditional aluminum materials that
can corrode in the extreme environment of an aircraft engine, with a
material that is both stronger and lighter and conducts heat away from the
engine.
BUSINESS STRATEGY
To maintain its position as a leading worldwide manufacturer of composite
materials, parts and structures, the Company has adopted the following
strategies:
- CAPITALIZE ON GROWTH IN THE AEROSPACE INDUSTRY. The Company believes that
demand for commercial aircraft, and therefore composite materials, should
be favorably influenced by the following trends that have been identified
in industry reports: (i) a significant increase in air travel over the
next ten years, (ii) the higher utilization of composite materials on
state-of-the-art aircraft, such as the Boeing 777, (iii) the acceleration
of new aircraft deliveries as a result of government noise regulations and
(iv) expected increases in aircraft fleet size during the next
49
<PAGE>
decade. The Company expects to capitalize on these trends by continuing to
produce a wide variety of composite materials for use in the manufacture
of virtually every commercial aircraft in the western world. See "--
Markets and Customers."
- CONTINUE TO CONTROL COSTS AND IMPROVE MANUFACTURING
EFFICIENCIES. Management is committed to reducing costs and improving
manufacturing efficiencies through consolidation and structural
reorganization. Prior to giving effect to the Ciba and Hercules
Acquisitions, the Company (i) consolidated operations by closing one
plant, partially closing a second one and selling a third, (ii) sold its
non-core resins and specialty chemicals businesses, (iii) reduced the
number of its employees by approximately 30%, and (iv) reduced selling,
general and administrative costs from $62 million in 1992 to $49 million
in 1995. In addition, in the first half of 1996, the Company reorganized
its organizational structure into five core businesses focused on key
products and markets, and the Company announced a business consolidation
program which is expected to result in continued cost reductions and
manufacturing efficiencies. See "-- Strategic Repositioning."
- STRATEGIC ACQUISITIONS AND ALLIANCES. In order to (i) enhance Hexcel's
integrated manufacturing capabilities, (ii) expand its geographic base and
(iii) optimize its portfolio of products and businesses, the Company
intends to continue to complement its product lines through strategic
acquisitions or alliances. As a result of the Ciba Acquisition, the
Company is positioned to take advantage of the trend towards outsourcing
production of structures and interiors through alliances. The Company
reviews its portfolio of products and businesses regularly in connection
with its efforts to identify appropriate strategic opportunities. See
"Risk Factors -- Acquisition and Alliance Strategy."
- ENHANCE CUSTOMER SERVICE. The Company continually seeks to strengthen and
expand its relationships with customers by capitalizing on its vertically
integrated manufacturing capabilities and technical support. As a highly
integrated manufacturer of composite materials, Hexcel has the flexibility
and capability to meet the various needs of its customers. The Company
also has the technical capability to assist customers in the design and
manufacture of composite materials for specialty applications, thereby
further strengthening customer relationships. For example, Hexcel
engineers work with Reebok-Registered Trademark- to develop composite
supports for athletic shoes and with a customer's engineers to design
composite turbofan blades for aircraft engines. Hexcel intends to leverage
its integrated capabilities to serve a customer base which is increasingly
favoring suppliers who have the ability to satisfy all of their composite
materials requirements.
- PENETRATE NEW MARKETS. The Company strives to maintain its leadership
position in the development of innovative composite materials applications
in an attempt to expand its revenue base. Although commercial aerospace
remains the largest market for composite materials, the Company continues
to penetrate recreation and general industrial markets, providing
composite materials for a variety of applications and plans to continue
developing applications for new markets. See "Competitive Advantages --
Market and Geographic Diversity." The Company also expects to take
advantage of developing markets by expanding its operations in the rapidly
growing Asia-Pacific region.
50
<PAGE>
CORE BUSINESSES
Each of Hexcel's core businesses focuses on particular products, emphasizes
customer responsiveness and strives for improved manufacturing efficiencies and
lower operating costs. The following table identifies, by core business, the
Company's principal products and examples of their primary end uses.
<TABLE>
<CAPTION>
CORE BUSINESS PRODUCTS PRIMARY END USE
<S> <C> <C>
FIBERS PAN PRECURSOR Raw material for carbon fiber
Carbon fibers Raw materials for prepregs and fabrics
Filament winding for various space, defense and industrial applications
FABRICS Woven fiberglass, Prepregs
carbon and aramid Honeycomb
reinforcements Printed circuit boards
Window blinds
Insulation
Soft body armor
Metal and fume filtration systems
COMPOSITE MATERIALS Honeycomb Sandwich structures for:
Aircraft components
High-speed and mass transit train components
Energy absorption components for mass transit
Athletic shoe components
Prepregs Aircraft components
Recreation applications:
Fishing rods
Tennis rackets
Golf clubs
Skis and snowboards
Munitions and defense systems
Adhesives Bonding of sandwich panels - honeycomb to prepregs and aluminum
SPECIAL PROCESS Machined and Semi-finished commercial and military aerospace components:
fabricated Helicopter rotor blades
honeycomb parts Space shuttle doors
Aircraft surfaces:
Flaps
Wing tips
Elevators
Fairings
Automotive carburetor components
STRUCTURES AND Structures Wing-to-body fairings
INTERIORS Flap track fairings
Radomes
Engine cowls
Inlet ducts
Wing panels
Other aircraft components
Interiors OEM and retrofit interior systems for aircraft such as:
Overhead stowage compartments
Lavatories
Sidewalls
Ceilings
</TABLE>
51
<PAGE>
FIBERS. The Fibers business manufactures PAN based carbon fiber for sale to
customers and for use in its Fabrics and Composite Materials businesses. Carbon
fibers are woven into carbon fabrics, used as reinforcement in conjunction with
a RESIN MATRIX to produce prepreg and TOW-PREG, and used in filament winding and
advanced fiber placement to produce composite structures. The Company sells to
customers approximately 90% of the fiber it produces.
The Fibers business operates two facilities in the United States. At its
Decatur, Alabama facility, the Company produces the precursor fiber from which
it manufactures finished carbon fiber at its Bacchus, Utah facility. The Company
has the capacity to manufacture, depending on fiber type, approximately 3.5
million pounds of carbon fiber annually at its Utah facility. The Company is
currently increasing the capacity of its Alabama facility so that it can produce
at least 100% of its precursor requirements, and reduce the unit cost of the
precursor it consumes by removing its historic dependence on supplies of
precursor from Japan. The Company will expand carbon fiber capacity through
process improvements and investment when, in the Company's judgement, market
conditions favor such expansion.
FABRICS. The Fabrics business is a leading weaver of synthetic fiber
reinforcements for composite materials, fiberglass yarn for printed circuit
boards, window blinds, thermal insulation and filters and aramid fibers for soft
body armor.
The Fabrics business operates a number of plants near Lyon, France, and a
plant at Seguin, Texas. As part of the Company's business consolidation program,
the Fabrics business plans to reorganize its manufacturing operations in France
by eliminating four satellite facilities and consolidating similar weaving
operations at single sites. In the United States the Fabrics business is
expanding its fiberglass weaving and treatment capacity to enable it to produce
higher performance fiberglass for composite materials. The Fabrics business also
participates in a joint venture with Owens-Corning that makes stitchbonded and
multi-axial fabrics.
COMPOSITE MATERIALS. The Composite Materials business develops,
manufactures and sells metallic and non-metallic honeycomb core; woven prepreg,
uni-directional tape and tow prepregs; film adhesives; and standard and
customized sandwich panels. Capturing the synergies of the Ciba Composites
Business and the Hercules Composite Business, the Composite Materials business
is consolidating manufacturing operations to "right size" capacity and is
leveraging the process technology capabilities of the combined businesses.
Redundancies are also being eliminated in sales and marketing and research and
technology functions.
- PREPREGS. The Composite Materials business operates nine prepreg
manufacturing facilities. In the United States, it has four facilities
located in Anaheim and Livermore, California; Lancaster, Ohio; and
Bacchus, Utah. In Europe, it has five facilities at Duxford, England;
Welkenraedt, Belgium; two facilities near Lyon, France; Madrid, Spain; and
near Linz, Austria. As a result of the Company's business consolidation
program, the Composite Materials business will concentrate prepreg
manufacturing in seven facilities; three in the United States and four in
Europe. The Fabrics business supplies the majority of the woven fabrics
used in the manufacture of woven prepegs by the Composite Materials
business.
- HONEYCOMB. As part of its business consolidation program, the Composite
Materials business will centralize its European honeycomb manufacturing
operations at its Duxford, England, facility ceasing honeycomb
manufacturing operations at Welkenraedt, Belgium. The Company also
manufactures honeycomb in the United States at its Casa Grande, Arizona
facility. For the last two years, the Ciba Composites Business has had its
Nomex-Registered Trademark- and fiberglass honeycomb manufactured by third
party manufacturers. Manufacturing of these items is now being transferred
to the Company's Casa Grande, Arizona facility. The Composite Materials
business provides all the honeycomb used by the Special Process business
and some of the honeycomb used by the Company's Structures and Interiors
business.
52
<PAGE>
- ADHESIVES. The Composite Materials business manufactures adhesives at
Duxford, England and in Anaheim and Livermore, California. Film adhesives
are utilized in bonding honeycomb, prepregs and other materials to
fabricate sandwich panels and other composite structures.
- SANDWICH PANELS. The Composite Materials business manufactures standard
sandwich panels at Duxford, England, engineered sandwich panels used in
train, marine, and construction applications at Welkenraedt, Belgium;
engineered panels at Casa Grande, Arizona; and aircraft floor panels in
Anaheim, California. Sandwich panels are fabricated using honeycomb,
phenolic foam and balsa core materials sandwiched between prepregs,
aluminum or steel skins. Film adhesives are used to bond the skins to the
core materials.
The Composite Materials business participates in a joint venture with
Dainippon Ink & Chemicals, Inc. (the "DIC-Hexcel" joint venture) that was formed
in 1980. The joint venture operates a manufacturing facility in Japan that
produces Nomex-Registered Trademark- honeycomb, prepregs and decorative
laminates. The DIC-Hexcel venture distributes its own products as well as the
Company's composite materials in Japan. The business also participates in a
joint venture with Fyfe Associates Corporation that is developing and marketing
composite materials systems used in seismic retrofitting and preventing
environmental erosion.
SPECIAL PROCESS. The Special Process business carves, shapes and forms
honeycomb manufactured by the Composite Materials business into complex shapes
ready to be used as semi-finished components in the manufacture of composite
structures. Typical applications include helicopter rotor blades; components
used in the assembly of aircraft landing gear doors, flight control surfaces
such as flaps and wing winglets, and aircraft fairings; and airflow
directionalizers used in General Motors-Registered Trademark- carburetors. At
its Pottsville, Pennsylvania facility, the business operates the world's largest
installed base of numerically controlled, five-axis milling machines for the
milling of honeycomb. Using computer aided design tools, the Special Process
business is able to receive electronically designs of components from its
customers and convert them directly into computer based operating instructions
for its milling machines. The business is also a leader in the heat forming of
non-metallic honeycomb, producing complex shapes from flat sheets of honeycomb.
The Special Process business currently has operations in Burlington and
Bellingham, Washington; Pottsville, Arizona; Casa Grande, Arizona; Duxford,
England; and Welkenraedt, Belgium. As part of the business consolidation
program, operations will be consolidated into two United States facilities, and
the Welkenraedt, Belgium facility.
STRUCTURES AND INTERIORS. The Structures and Interiors businesses operate
facilities in Washington state under the "Heath Tecna" tradename. The Structures
business fabricates FINISHED PARTS and components manufactured from composite
materials, many supplied by the Composite Materials business. Utilizing a full
range of composite materials processing technologies, the business produces
ready to install military and commercial aircraft components such as
wing-to-body and flap-track fairings, radomes, engine cowls and wing panels
together with some truck components. It also operates a small facility in
Brindisi, Italy.
The Interiors business manufactures OEM and retrofit interior components for
commercial aircraft such as stowage bins, sidewalls, ceiling panels, lavatories,
and bulkheads. The business uses composite materials to fabricate these
ready-to-install components. The Interiors business is exploring the markets for
interior products for trains and marine applications.
The Structures and Interiors businesses are well-positioned to benefit from
the industry trend of offloading production of aircraft components and interiors
made from composite materials by the major aircraft manufacturers.
MANUFACTURING PROCESS AND RAW MATERIALS
The Company's manufacturing capabilities are integrated across all product
lines. At each level of integration, Hexcel sells a significant portion of its
products to outside customers, thus exposing each product line to market forces
and stimulating productivity and innovation so that such product lines remain
cost competitive and at the leading edge of technology. The Ciba Acquisition
provided the
53
<PAGE>
Company with additional integration opportunities between its Composite
Materials and Structures and Interiors core businesses. The Hercules Acquisition
additionally strengthened the Company's integrated manufacturing capabilities by
providing Hexcel with a PAN-based carbon fiber business. The Company intends to
continue integrating its manufacturing processes and products through internal
development and selective acquisitions. See "-- Competitive Advantages --
Vertical Integration." The following table illustrates the Company's integrated
manufacturing capabilities.
[CHART DEPICTING THE VERTICAL INTEGRATED
MANUFACTURING CAPABILITIES OF THE COMPANY]
Hexcel's production activities, and in particular its Special Process and
Structures and Interiors core businesses, are generally based on a combination
of "make-to-order" and "make-to-forecast" production requirements. The Company
coordinates closely with key suppliers in an effort to avoid raw material
shortages.
RESEARCH AND TECHNOLOGY
Hexcel's research and technology ("R&T") function supports all the Company's
core businesses worldwide. R&T maintains expertise in chemical formulation,
curatives, textile architectures, advanced composites structures, process
engineering, analysis and testing of composite materials, computational design
and prediction, and other scientific disciplines related to the Company's
worldwide business base. Additionally, R&T performs a limited amount of contract
research and development in the United States and Europe for strategically
important customers in the areas of ceramics, higher temperature polymers,
advanced textiles and composite structures manufacturing.
Each core business maintains engineering staff and facilities to support its
business operations. Worldwide investment in R&T is coordinated by a committee
consisting of the R&T managers within each of Hexcel's core businesses.
Hexcel's products rely primarily on the Company's expertise in materials
science, textiles, process engineering and polymer chemistry. Consistent with
market demand, the Company has been placing more emphasis on cost effective
product design and agile manufacturing in recent years. Towards this end, the
Company has entered into formal and informal partnerships, as well as licensing
and teaming arrangements, with several customers, suppliers, external agencies
and laboratories. Management believes that the Company possesses unique
capabilities to design, develop and
54
<PAGE>
manufacture composite materials and structures, and that these capabilities
should be protected. Management believes that the patents and know-how rights
currently owned or licensed by the Company are adequate for the conduct of the
Company's business.
MARKETS AND CUSTOMERS
Hexcel's materials are sold for a broad range of uses. The table below
displays the historical percentage distribution of net sales by market since
1991.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET SALES BY MARKET:
Commercial aerospace........................................ 45% 47% 42% 46% 47%
Space and defense........................................... 11 11 18 17 19
Recreation and general industrial........................... 44 42 40 37 34
--------- --------- --------- --------- ---------
100% 100% 100% 100% 100%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
INTERNATIONAL OPERATIONS:
International net sales (a)................................. $ 170.7 $ 142.3 $ 125.4 $ 148.9 $ 153.2
Percentage of net sales..................................... 49% 45% 40% 42% 43%
</TABLE>
- ------------------------
(a) Net sales of international subsidiaries and U.S. exports, in millions.
AEROSPACE. Historically, the commercial aerospace industry has led the
development of applications for composite materials and structures because it
has the strongest need for the performance properties of these materials, and is
well-positioned to maximize the economic benefits from their use. The demand for
composite material products, however, is closely correlated to the demand for
commercial aircraft, which is driven by, among other factors, the growth in
revenue passenger miles flown by the world's airlines and the rate of
replacement of existing aircraft. Industry studies indicate that air travel
growth is closely correlated to economic growth, the availability of airport and
air traffic control capacity, airline industry deregulation and the price of
oil. The Company believes that demand for composite materials should be
favorably influenced by the several trends that have been identified in industry
reports: (i) a significant increase in air travel over the next ten years, (ii)
the replacement of over 3,900 obsolete jets (35% of the 1995 fleet) over the
next 20 years due to, among other factors, the Stage III government noise
regulations and (iii) expected increases in aircraft fleet size during the next
decade. Moreover, aircraft manufacturers, such as Boeing, Airbus and McDonnell
Douglas, are including significantly greater quantities of composite materials
per aircraft in order to reduce the weight of commercial aircraft and make them
more fuel efficient. Nevertheless, despite the increasing usage of high
performance composite materials in commercial aircraft, the Company must
continuously demonstrate the cost benefits of its products in aerospace
applications. As aircraft manufacturers seek to be more competitive, they look
to their composite materials suppliers and sub-contractors to work with them to
reduce the cost of overall aircraft components.
SPACE AND DEFENSE. The space and defense markets have historically been
innovators in and sources of significant demand for composite materials. For
example, Hexcel honeycomb was used in the feet of the first lunar module to
cushion its landing on the moon, and composite materials made a major
contribution to the development of "stealth" technologies during the 1980's,
resulting in the F-117A "stealth fighter" and B-2 "stealth bomber." Since the
end of the Cold War, government expenditures on military procurement have
declined sharply. Statistics of the United States government's Office of
Management and Budget show that defense procurement expenditures in the United
States declined from approximately $82 billion in 1989 to an estimated $55
billion in 1995 and are projected to fall to $49 billion in 1996. Nevertheless,
there remain a number of significant military programs that utilize composite
materials such as the F-22 tactical aircraft, C-17 cargo aircraft, Comanche
helicopter and V-22 tilt-rotor aircraft. Historically, Hexcel has maintained a
greater market share in the commercial rather than the military aerospace
market. With the acquisition of the
55
<PAGE>
Hercules Composites Business, the Company will supplement its sales to military
customers by obtaining a number of product qualifications for use in both United
States and foreign military aircraft and space programs.
RECREATION. Recreation products are fast becoming the most visible markets
for composite materials. One of the largest applications in the market is the
manufacture of prepregs for graphite golf club shafts. Hexcel, which developed
the prepreg used to make the Taylor Made-Registered Trademark- bubble shaft, is
a significant supplier to golf shaft manufacturers. In addition to manufacturing
composite materials for Taylor Made-Registered Trademark-, one of the market
leaders for composite drivers, Hexcel also supplies materials used in
Callaway-Registered Trademark- golf clubs, another industry leader.
Other markets for composite materials applications include athletic shoes,
skis and snowboards. Hexcel has benefited from the growing demand for athletic
shoes through its position as a supplier of the thermoplastic honeycomb used in
many Reebok-Registered Trademark- shoes. While demand in the ski industry has
been flat during the last couple of years, the snowboard market is currently
growing rapidly. Hexcel supplies more than 50% of the prepregs, honeycomb,
polyurethane and pre-cured laminates used in Europe to produce skis and
snowboards. Other recreation applications for composite materials include tennis
rackets, fishing rods, wind surfing booms and boards, surfboards, bicycles,
hockey and lacrosse sticks, in-line skates, kayaks and paddles. Management
believes that the recreation market for composite materials will continue to
grow through the end of the decade as the demand for high performance,
lightweight recreation equipment intensifies.
GENERAL INDUSTRIAL. The Company is actively developing applications for
composite materials, parts and structures in automotive, marine, rail,
infrastructure and other industrial markets where the performance of such
materials offers economic solutions to customer needs. In the automotive market,
the Company supplies airflow controllers made from microcell aluminum honeycomb
that are incorporated into fuel injection systems of many automobiles. Hexcel
has also been working with major automobile manufacturers on the development of
honeycomb components for crash attenuation, utilizing honeycomb's energy
absorption characteristics in managing crash impacts. Given the large volume of
automobiles manufactured, even the incorporation of a small amount of composite
materials per automobile would offer the potential for substantial revenues.
Composite materials are increasingly being used in the manufacture of high speed
and mass transit trains, particularly in Europe. Custom engineered honeycomb
sandwich panels are now used as floors in the French TGV trains, doors on subway
trains, and side walls on the shuttle trains in the Channel Tunnel. The majority
of the Fabrics core business products are supplied to industrial applications.
With the rapid growth in personal computing and communications in recent years,
the Company has enjoyed double digit annual growth in the sales of its fabrics
in Europe for printed circuit boards. The Company's fabrics are used to produce
vertical blinds used in offices and exterior window blinds used in sunny
climates. Fiberglass fabrics are also utilized in thermal insulation and
industrial filters. The Company will continue to develop selected industrial
applications for its products where the use of composite materials offers
significant performance and economic advantages to a customer group.
SALES AND MARKETING
Each of the core businesses retains a staff of marketing managers, product
managers, and sales engineers who market their products directly to customers.
The Company also uses independent distributors and manufacturer representatives
for certain products, markets and regions. In the Asia-Pacific region, the
Company sells all its products through a single sales and marketing team. It is
anticipated that 30% - 40% of all commercial aircraft sold in the next decade
will be sold to the Asia-Pacific market, thereby expanding the overall demand
for the Company's products. The Company's sales and marketing teams work in
close association with its customers to identify their needs and develop
composite materials that meet their requirements.
COMPETITION
In the production and sale of its materials, Hexcel competes with numerous
United States and international companies on a worldwide basis. The broad
markets for the Company's products are
56
<PAGE>
highly competitive, and the Company has focused on both specific markets and
specialty products within markets to obtain market share. In addition to
competing directly with companies offering similar products, Hexcel materials
compete with substitute structural materials such as structural foam, wood,
metal, and concrete. Depending upon the material and markets, relevant
competitive factors include price, delivery, service, quality and product
performance. The acquisition of the Ciba and Hercules Composites Businesses
enhanced the Company's competitive position by broadening the Company's product
portfolio and strengthening the Company s position in certain geographic
regions.
ENVIRONMENTAL MATTERS
The Company is subject to numerous federal, state and foreign laws and
regulations that impose strict requirements for the control and abatement of
air, water and soil pollutants and the manufacturing, storage, handling and
disposal of hazardous substances and waste. These laws and regulations include
the Federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund"), the Clean Air Act, the Clean Water Act and the
Resource Conservation and Recovery Act. The costs of compliance, including
capital costs, with such requirements in the United States and in foreign
jurisdictions may be substantial. Moreover, regulatory standards under
environmental laws and regulations have tended to become increasingly stringent
over time.
The Company is currently a party to, or otherwise involved in, legal
proceedings in connection with several Superfund sites. Because CERCLA provides
for joint and several liability, a government plaintiff could seek to recover
all remediation costs at a waste disposal site from any one of the potentially
responsible parties ("PRPs"), including the Company. Generally, where there are
a number of financially viable PRPs, liability has been apportioned, or the
Company believes, based on its experience with such matters, that liability will
be apportioned based on the type and amount of waste disposed of by each PRP at
such disposal site and the number of financially viable PRPs, although no
assurance can be given as to any particular site.
In addition to Superfund sites, the Company is currently investigating and
remediating on-site disposal areas at certain of its current and former
facilities. There can be no assurance that the Company has identified all
off-site liability matters for which it may be responsible, all on-site
remediation matters involving its current or former facilities or that the cost
of such known or unknown remediation matters will not be material. The Company
has established financial reserves in cases where the amount of environmentally
related expenditures is reasonably estimable. As assessments and cleanups
proceed, and as additional information becomes available, these reserves amounts
are reviewed and adjusted, if necessary.
EMPLOYEES
As of March 31, 1996, Hexcel employed 4,077 full-time employees in its
continuing operations, compared with 2,127 and 2,189 as of December 31, 1995 and
1994, respectively. Approximately 13% of these employees have union
affiliations. Management believes that labor relations have been generally
satisfactory.
As a result of the Ciba Acquisition on February 29, 1996 and the Hercules
Acquisition on June 27, 1996, Hexcel added approximately 2,150 and 450
employees, respectively, to its workforce, some of whom have union affiliations.
In anticipation of the Hercules Acquisition, Hexcel made a wage and benefits
proposal to the approximately 170 workers at the former Hercules Composites
Business facility in Salt Lake City, Utah represented by the Oil, Chemical and
Atomic Workers' Union ("OCAW"), which the OCAW workers rejected. Hexcel
subsequently offered employment to virtually all the Hercules Composites
Business' 450 employees, including the OCAW workers in Salt Lake City. However,
the actual number of workers who will accept Hexcel's offer, the status of labor
relations at the Salt Lake City facility and the resultant impact on operations
at the Salt Lake City facility remain uncertain.
57
<PAGE>
PROPERTIES
Hexcel owns manufacturing facilities and leases sales offices located
throughout the United States and in other countries as noted below. The
corporate offices for the Company are located in leased facilities in Stamford,
Connecticut and Pleasanton, California. The Company's central research and
technology laboratories are located in Dublin, California.
The following table lists the manufacturing facilities of Hexcel by
geographic location, approximate square footage, and principal products
manufactured, including the facilities acquired in connection with the Ciba and
Hercules Acquisitions. The Company recently announced its decision to close the
acquired Anaheim facility, restructure its manufacturing operations in France
and scale down operations at its Welkenraedt, Belgium facility. Following the
completion of these and certain other consolidation activities, the Company
expects to have eliminated approximately 400,000 square feet (9%) of its
worldwide manufacturing space; however, management believes that the Company
will possess production capacity appropriate for the conduct of its business for
the foreseeable future. The following table does not include the manufacturing
facilities operated by the Company's joint ventures.
MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY LOCATION SQUARE FOOTAGE PRINCIPAL PRODUCTS
- -------------------------------- -------------- ---------------------------------------------------------------
<S> <C> <C>
United States:
Bacchus, Utah 362,000 Carbon Fiber; Prepregs
Decatur, Alabama 126,000 PAN Precursor
Seguin, Texas 189,000 Reinforcement Fabrics
Anaheim, California (1) 300,000 Prepregs; Honeycomb; Adhesives
Casa Grande, Arizona 320,000 Honeycomb; Special Process Honeycomb
Lancaster, Ohio 35,000 Prepregs
Livermore, California 141,000 Prepregs
Burlington, Washington 58,000 Special Process Honeycomb
Pottsville, Pennsylvania 104,000 Special Process Honeycomb
Bellingham, Washington 185,000 Interiors; Special Process Honeycomb
Kent, Washington 910,000 Interiors; Structures
International:
Les Avenieres, France 462,000 Reinforcement Fabrics; Prepregs
Lyon, France 230,000 Reinforcement Fabrics; Prepregs
Linz, Austria 187,000 Prepregs
Welkenraedt, Belgium (2) 223,000 Prepregs; Honeycomb; Special Process Honeycomb
Duxford, England 380,000 Prepregs; Honeycomb; Adhesives
Swindon, England 20,000 Special Process Honeycomb
Brindisi, Italy 110,000 Structures
Madrid, Spain 43,000 Prepregs
</TABLE>
- ------------------------
(1) Anaheim, California facility to be closed in 1998 with surplus real estate
being sold.
(2) Welkenraedt, Belgium facility to be reduced by 100,000 square feet in 1999,
with surplus real estate being sold.
58
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Prior to February 29, 1996, the Board of Directors of the Company (the
"Board of Directors") consisted of nine directors. Effective February 29, 1996,
the Board of Directors was reconstituted in accordance with the terms of the
Strategic Alliance Agreement and the Governance Agreement, to consist of 10
directors, currently including four Ciba Directors (John M.D. Cheesmond, Stanley
Sherman, Joseph T. Sullivan and Hermann Vodicka), the Chairman of the Board and
Chief Executive Officer of the Company (John J. Lee), the President and Chief
Operating Officer of the Company (Juergen Habermeier) and four additional
independent Directors (Marshall S. Geller, Martin L. Solomon, George S. Springer
and Franklin S. Wimer).
The following table sets forth certain information regarding the directors
and certain executive officers of the Company as of June 30, 1996. No family
relationship exists between any director or executive officer of the Company and
any other director or executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
John J. Lee 59 Chairman of the Board; Chief Executive Officer; Director
Juergen Habermeier 54 President; Chief Operating Officer; Director
Stephen C. Forsyth 41 Senior Vice President of Finance and Administration
David M. Wong 51 Vice President of Corporate Affairs
William P. Meehan 60 Vice President of Finance; Chief Financial Officer; Treasurer
Wayne C. Pensky 40 Corporate Controller; Chief Accounting Officer
Bruce D. Herman 40 Treasurer
Joseph H. Shaulson 30 Vice President of Corporate Development; Acting General Counsel;
Acting Secretary
John M.D. Cheesmond 46 Director
Marshall S. Geller 57 Director
Stanley Sherman 57 Director
Martin L. Solomon 59 Director
George S. Springer 62 Director
Joseph T. Sullivan 55 Director
Hermann Vodicka 53 Director
Franklin S. Wimer 60 Director
</TABLE>
JOHN J. LEE, age 59, has served as Chairman of the Board of Directors of the
Company since February 1996, Chief Executive Officer since January 1994,
Chairman and Chief Executive Officer from January 1994 to February 1995,
Chairman and Co-Chief Executive Officer of the Company from July 1993 to
December 1993 and a Director of the Company since May 1993. Mr. Lee also serves
as Chairman of the Nominating Committee and a member of the Finance Committee of
the Company. Mr. Lee served as a director of XTRA Corporation, a transportation
equipment leasing company, from 1990 to January 1996, and has served as Chairman
of the Board, President and Chief Executive Officer of Lee Development
Corporation, a merchant banking company, since 1987. Mr. Lee has been a Trustee
of Yale University and an advisor to The Clipper Group, a private investment
partnership since 1993. From July 1989 through April 1993, Mr. Lee served as
Chairman of the Board and Chief Executive Officer of Seminole Corporation, a
manufacturer and distributor of fertilizer. From April 1988 through April 1993,
Mr. Lee served as a director of Tosco Corporation, a national refiner and
marketer of petroleum products, and as President and Chief Operating Officer of
Tosco from 1990
59
<PAGE>
through April 1993. From February 1994 through June 1995, Mr. Lee served as a
director of Playtex Products Corporation. Mr. Lee is also a director of Aviva
Petroleum Corporation, and various privately held corporations.
DR. JUERGEN HABERMEIER, age 54, has served as President, Chief Operating
Officer and a Director of the Company since February 1996. Dr. Habermeier also
serves as a member of the Technology Committee of the Company. Prior to joining
the Company, Dr. Habermeier served as the President of the Ciba Composites
Business and as a Vice President of CGC since 1989. Since 1994, Dr. Habermeier
has served on the Board of Directors of RHR International. He is also a member
of the Advisory Committee of the Polymer Composites Laboratory of the University
of Washington.
STEPHEN C. FORSYTH, age 41, has served as Senior Vice President of Finance
and Administration of the Company since February 1996. Mr. Forsyth served as
Vice President of International Operations of the Company from October 1994 to
February 1996 and General Manager of the Company's Resins Business and Export
Marketing from 1989 to 1994 and held other general management positions with the
Company from 1980 to 1989. Mr. Forsyth joined the Company in 1980.
DAVID M. WONG, age 51, has served as Vice President of Corporate Affairs of
Hexcel since February 1996. Mr. Wong served as Hexcel's Director of Special
Projects from July 1993 to February 1996 and Corporate Controller and Chief
Accounting Officer of Hexcel from 1983 to 1993 and held other general management
positions from 1979 to 1983. Mr. Wong joined Hexcel in 1979.
WILLIAM P. MEEHAN, age 60, has served as Vice President of Finance and Chief
Financial Officer of the Company since September 1993 and Treasurer of the
Company since April 1994. Prior to joining the Company in 1993, Mr. Meehan
served as President and Chief Executive Officer of Thousand Trails and NACO, a
membership campground and resort business, from 1990 through 1992. From 1986
through 1989, Mr. Meehan served as Vice President of Finance and Chief Financial
Officer of Hadco Corporation.
WAYNE C. PENSKY, age 40, has served as Corporate Controller and Chief
Accounting Officer of the Company since July 1993. Prior to joining the Company
in 1993, Mr. Pensky was a partner at Arthur Andersen & Co., an accounting firm,
where he was employed from 1979.
BRUCE D. HERMAN, age 40, has served as Treasurer of the Company since April
1996. Prior to joining the Company, Mr. Herman served as Vice President of
Finance in the Transportation and Industrial Financing Division of USL Capital
Corp. (formerly U.S. Leasing, Inc.) ("USL") from 1993 to 1996, Vice President of
Finance in the Equipment Financing Group of USL from 1991 to 1993 and as Vice
President of Corporate Analysis of USL from 1988 to 1991.
JOSEPH H. SHAULSON, age 30, has served as Vice President of Corporate
Development, Acting General Counsel and Acting Secretary of the Company since
April 1996. Prior to joining the Company, Mr. Shaulson was an associate in the
law firm of Skadden, Arps, Slate, Meagher & Flom, where he was employed from
1991 to 1996.
JOHN M.D. CHEESMOND, age 46, has been a Director of the Company since
February 1996. Mr. Cheesmond also serves as Chairman of the Executive
Compensation Committee and a member of the Finance Committee of the Company. Mr.
Cheesmond has served as Senior Vice President and Head of Regional Finance and
Control of Ciba since 1994. From 1991 through 1993, Mr. Cheesmond served as Vice
President and Head of Regional Finance and Control at Ciba Vision Corporation.
MARSHALL S. GELLER, age 57, served as Co-Chairman of the Board of Directors
of the Company from February 1995 to February 1996 and has been a Director of
the Company since August 1994. Mr. Geller also serves as Chairman of the Audit
Committee and a member of the Executive Compensation Committee and the
Nominating Committee of the Company. Mr. Geller has served as Chairman of the
Board, Chief Executive Officer and founding partner at Geller & Friend Capital
Partners, Inc., a merchant banking firm, since November 1995. From 1990 to
November 1995, Mr. Geller was Senior Managing Partner of Golenberg & Geller,
Inc., a merchant banking firm. From 1988 to 1990, he was
60
<PAGE>
Vice Chairman of Gruntal & Company, an investment banking firm. From 1967 until
1988, he was a Senior Managing Director of Bear, Stearns & Co. Inc., an
investment banking firm. Mr. Geller is currently a director of Ballantyne of
Omaha, Inc., Dycam, Inc., Players International, Value Vision International,
Inc., Styles on Video, Inc. and various privately-held corporations and
charitable organizations.
STANLEY SHERMAN, age 57, has been a Director of the Company since February
1996. Mr. Sherman also serves as a member of the Finance Committee and the
Executive Compensation Committee of the Company. Mr. Sherman has served as a
director and Vice President -- Finance and Information Services of CGC since
1991. From 1986 through 1991, Mr. Sherman served as Vice President -- Corporate
Planning of CGC.
MARTIN L. SOLOMON, age 59, has been a self-employed investor since 1990.
From 1988 to 1990, Mr. Solomon served as Managing Partner of Value Equity
Associates I, L.P., an investment partnership. From 1985 to 1987, Mr. Solomon
was an investment analyst and portfolio manager of Steinhardt Partners, an
investment partnership. Mr. Solomon has also served as a director and Vice
Chairman of the Board of Directors of Great Dane Holdings, Inc., which is
engaged in the manufacture of transportation equipment, automobile stamping, the
leasing of taxis and insurance, since 1985, a director of XTRA Corporation since
1990, and a director of DLB Oil & Gas, Inc., a company engaged in oil
exploration and production, since 1995. Mr. Solomon is also a director of
various privately-held corporations and civic organizations.
DR. GEORGE S. SPRINGER, age 62, has been a Director of the Company since
January 1993. Dr. Springer also serves as Chairman of the Technology Committee
of the Company. Dr. Springer is Professor and Chairman of the Department of
Aeronautics and Astronautics and Professor of Mechanical Engineering and
Professor of Civil Engineering, at Stanford University. Dr. Springer joined
Stanford University's faculty in 1983.
DR. JOSEPH T. SULLIVAN, age 55, has been a Director of the Company since
February 1996. Dr. Sullivan also serves as a member of the Nominating Committee
of the Company. Dr. Sullivan has served as a director and Senior Vice President
of CGC since 1986.
HERMANN VODICKA, age 53, has been a Director of the Company since February
1996. Mr. Vodicka also serves as a member of the Nominating Committee and the
Technology Committee of the Company. Mr. Vodicka has served as President of the
Polymers Division and a member of the Executive Committee of Ciba since 1993.
Mr. Vodicka is currently the Chairman of the Board of Mettler-Toledo, a leading
worldwide manufacturer of scales and balances and a wholly owned subsidiary of
Ciba. From 1988 to 1993, Mr. Vodicka was President and Chief Executive Officer
of Mettler-Toledo.
FRANKLIN S. WIMER, age 60, was a Director of the Company from February 1995
through February 1996 and has been a Director since May 1996. Mr. Wimer serves
as the President and principal of UniRock Management Corporation ("UniRock"), a
private merchant banking firm. Mr. Wimer has been with UniRock since January of
1987. UniRock has acted as the Company's strategic consultant since December
1993. Mr. Wimer is currently Chairman of the Board of Vista Restaurants, Inc., a
12-unit Perkins Family Restaurant and a director of RAMI, Inc., Denver Paralegal
Institute, Stainless Fabrication Company, Inc. and Western Filter Company.
61
<PAGE>
DESCRIPTION OF NOTES
The Notes are to be issued under an Indenture, to be dated as of ,
1996 (the "Indenture"), between the Company and First Trust of California,
National Association, as trustee (the "Trustee"), a form of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Indenture, including the definitions of certain
capitalized terms used below and not otherwise defined and those terms made a
part thereof by the Trust Indenture Act of 1939, as amended. The section
references appearing below are to sections in the Indenture.
GENERAL
The Notes will be unsecured subordinated obligations of the Company, will
mature on , 2003, and will be limited to $100,000,000 aggregate
principal amount, plus an additional amount not in excess of $15,000,000 as may
be purchased by the Underwriters upon exercise of their over-allotment option.
The Notes will bear interest at the rate per annum stated on the cover page of
this Prospectus from , 1996, or from the most recent Interest Payment
Date to which interest has been paid or provided for, payable semiannually on
and in each year, commencing , 1997, to the
person in whose name such Note (or any predecessor Note) is registered at the
close of business on the or preceding such Interest
Payment Date (Sections 3.01 and 3.07). Interest will be computed based on a 360
day year comprised of twelve 30 day months.
Principal of and premium, if any, and interest on the Notes will be payable,
Notes may be presented for conversion, and transfer of the Notes will be
registrable, at the office or agency of the Company in the Borough of Manhattan,
The City of New York, or at any other office or agency maintained by the Company
for such purpose. In addition, payment of interest may be made, at the option of
the Company, by check mailed to the address of the person entitled thereto as
shown on the Security Register (Sections 3.01, 3.05, 10.02 and 12.02). The Notes
are to be registered Notes, without coupons, in denominations of $1,000 or any
integral multiple thereof (Section 3.02). No service charge will be made for any
conversion or registration of transfer or exchange of Notes, except for any tax
or other governmental charge that may be imposed in connection therewith
(Section 3.05).
CONVERSION RIGHTS
The Notes will be convertible, in whole or from time to time in part (in
denominations of $1,000 or integral multiples thereof), at the option of the
Holder thereof, into Common Stock of the Company, initially at the conversion
price stated on the cover page hereof, at any time prior to redemption or
maturity. The right to convert Notes called for redemption will terminate at the
close of business on the tenth day prior to any Redemption Date (or, if such day
is not a Business Day, on the next succeeding Business Day) and will be lost if
not exercised prior to that time, unless the Company defaults in making the
payment due upon redemption (Section 12.01).
If the Company, by dividend or otherwise, declares or makes a distribution
on its Common Stock of the type referred to in clause (iv) or (v) of the next
paragraph, the Holder of each Note, upon the conversion thereof subsequent to
the close of business on the date fixed for the determination of stockholders
entitled to receive such distribution and prior to the effectiveness of the
conversion price adjustment in respect of such distribution pursuant to clause
(iv) or (v) below, will be entitled to receive for each share of Common Stock
into which such Note is converted the portion of the evidences of indebtedness,
shares of capital stock, cash and other assets so distributed applicable to one
share of Common Stock; PROVIDED, HOWEVER, that the Company may, with respect to
all Holders so converting, in lieu of distributing any portion of such
distribution not consisting of cash or securities of the Company, pay such
Holder cash equal to the fair market value thereof, as determined in good faith
by the Board of Directors (Section 12.01).
62
<PAGE>
The conversion price will be subject to adjustment in certain events,
including: (i) the payment of dividends (and other distributions) in Common
Stock on any class of capital stock of the Company; (ii) the issuance to all
holders of Common Stock of rights, warrants or options entitling them to
subscribe for or purchase Common Stock at less than the current market price (as
defined in the Indenture); PROVIDED, HOWEVER, that if certain of such rights,
warrants or options are only exercisable upon the occurrence of certain
triggering events, then the conversion price will not be adjusted until such
triggering events occur; (iii) subdivisions, combinations and reclassifications
of Common Stock; (iv) distributions to all holders of Common Stock of evidences
of indebtedness of the Company, shares of any class of capital stock, cash or
other assets (including securities, but excluding those dividends, rights,
warrants, options and distributions referred to in clauses (i) and (ii) above
and excluding dividends and distributions paid in cash out of the current
earnings of the Company); (v) distributions consisting exclusively of cash
(excluding any cash distributions for which an adjustment has been made pursuant
to a preceding clause of this paragraph) to all holders of Common Stock in an
aggregate amount that, together with (A) other all-cash distributions made
within the preceding 12 months not triggering a conversion price adjustment and
(B) all Excess Tender Payments (as defined below) in respect of each tender or
exchange offer by the Company or any of its subsidiaries for Common Stock
concluded within the preceding 12 months not triggering a conversion price
adjustment, exceeds an amount equal to 20% of the Company's market
capitalization (being the product of the current market price (as defined in the
Indenture) of the Common Stock times the number of shares of Common Stock then
outstanding) on the date of such distribution; (vi) issuance of Common Stock to
an Affiliate for a net consideration per share less than the fair value per
share (other than issuances of Common Stock under certain employee benefits
plans); and (vii) payment of an Excess Tender Payment in respect of a tender
offer or exchange offer by the Company or any of its subsidiaries for Common
Stock, if the aggregate amount of such Excess Tender Payment, together with (A)
the aggregate amount of all-cash distributions made within the preceding 12
months not triggering a conversion price adjustment and (B) all Excess Tender
Payments in respect of each tender or exchange offer by the Company or any of
its subsidiaries for Common Stock concluded within the preceding 12 months not
triggering a conversion price adjustment, exceeds an amount equal to 20% of the
Company's market capitalization on the expiration of such tender offer or
exchange offer (Section 12.04). "Excess Tender Payment" means the excess of (A)
the aggregate of the cash and value of other consideration paid by the Company
or any of its subsidiaries with respect to the shares of Common Stock acquired
in the tender offer or exchange offer over (B) the market value of such acquired
shares after the completion of the tender or exchange offer.
In case of certain consolidations, mergers or share exchanges to which the
Company is a party or the conveyance, transfer or lease of substantially all the
assets of the Company, each Note then outstanding would, without the consent of
any Holders of Notes, become convertible only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
share exchange, conveyance, transfer or lease by a holder of the number of
shares of Common Stock into which such Note might have been converted
immediately prior to such consolidation, merger, share exchange, conveyance,
transfer or lease (assuming such holder of Common Stock is not a person with
which the Company consolidated or merged or to which such exchange, conveyance
or transfer or lease was made ("Constituent Person") or an Affiliate of a
Constituent Person and such holder failed to exercise any rights of election as
to the kind or amount of securities, cash and other property receivable upon
such consolidation, merger, share exchange, conveyance, transfer or lease,
PROVIDED that if the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, share exchange, conveyance, transfer
or lease is not the same for each share of Common Stock held immediately prior
to such consolidation, merger, conveyance, transfer or lease by other than a
Constituent Person or Affiliate thereof and in respect of which such rights of
election shall not have been exercised ("nonelecting share") then for purposes
of the provision described in this sentence the kind and amount of securities,
cash and other property receivable upon such consolidation, merger, share
exchange, conveyance, transfer or lease by each nonelecting share will be deemed
to be the kind or amount so receivable per share by a plurality of nonelecting
shares) (Section 12.11).
63
<PAGE>
No adjustments in the conversion price are required for any dividend or
distribution referred to above if the Holders may participate in the dividend or
distribution (on a basis determined in good faith to be fair by the Board of
Directors) and receive the same consideration they would have received if they
had converted the Notes immediately prior to the record date with respect to
such dividend or distribution (Section 12.13).
No adjustment of the conversion price will be required to be made until
cumulative adjustments amount to 1% or more of the conversion price as last
adjusted; PROVIDED, HOWEVER, that any adjustment that would otherwise be
required to be made will be carried forward and taken into account in any
subsequent adjustment (Section 12.04). Notwithstanding the foregoing, no
adjustment to the conversion price shall reduce the conversion price below the
then par value per share of the Common Stock, if any.
Certain adjustments in the conversion price in accordance with the foregoing
provisions could be taxable pursuant to Section 305 of the Internal Revenue Code
of 1986, as amended, as a constructive distribution of stock to Holders of the
Notes at the time of such adjustments in the conversion price. In addition to
the foregoing adjustments, the Company will be permitted to make such reductions
in the conversion price as it considers to be advisable in order that any event
treated for federal income tax purposes as a dividend of stock or stock rights
will not be taxable to the recipients (Section 12.04).
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon the market
price of the Common Stock (Section 12.03). Notes surrendered for conversion
during the period from the close of business on any Regular Record Date next
preceding any Interest Payment Date to the opening of business on such Interest
Payment Date (except Notes or portions thereof called for redemption on a
redemption date within such period between and including a Regular Record Date
and a related Interest Payment Date) must be accompanied by payment of an amount
equal to the interest thereon that the registered Holder is to receive. No other
payment or adjustment for interest or dividends is to be made upon conversion
(Sections 3.07 and 12.02).
SUBORDINATION OF NOTES
The payment of principal of and premium, if any, and interest on the Notes,
and the payment in respect of any repurchase of Notes as described below under
"Repurchase of Notes at the Option of the Holder Upon a Change of Control" are,
to the extent set forth in the Indenture, subordinated in right of payment to
the prior payment in full of all Senior Indebtedness (as defined below), whether
now outstanding or incurred in the future (Section 13.01). Upon any payment or
distribution of assets of the Company to creditors upon any dissolution, winding
up, liquidation or reorganization, the holders of all Senior Indebtedness will
be entitled to receive payment in full of all amounts due or to become due
thereon before the Holders of the Notes will be entitled to receive any payment
in respect of the principal of or premium, if any, or interest on the Notes
(Section 13.02). However, the obligation of the Company to make payments of
principal of or premium, if any, and interest on the Notes will not otherwise be
affected (Section 13.04).
No payment on account of principal of or premium, if any, or interest on the
Notes may be made and no repurchase of the Notes may be made as described herein
under "Repurchase of Notes at the Option of the Holder Upon a Change of Control"
at any time when there is a continuing default in any payment of principal of or
premium, if any, or interest or other payment obligation on any Senior
Indebtedness. In addition, no payment on account of principal of or premium, if
any, or interest on the Notes may be made and no repurchase of the Notes may be
made as described herein under "Repurchase of Notes at the Option of the Holder
Upon a Change of Control" at any time when there shall have occurred and be
continuing any event of default (other than a payment default referred to in the
immediately preceding sentence) with respect to any Senior Indebtedness, which
default would permit immediate acceleration thereof, for the period (a "Payment
Blockage Period") commencing on receipt of notice of such default by the Trustee
from a holder of Designated Senior Indebtedness (or any representative thereof)
and ending on the earlier of (i) the date such event of default has been
64
<PAGE>
cured or waived and (ii) the date 180 days after receipt of such notice (Section
13.03). Any number of such notices may be given; PROVIDED, HOWEVER, that during
any 360-day period, the aggregate Payment Blockage Periods shall not exceed 180
days and there shall be a period of at least 180 consecutive days when no
Payment Blockage Period is in effect.
The Holders of the Notes will be subrogated to the rights of the holders of
Senior Indebtedness to the extent of payments made on Senior Indebtedness upon
any distribution of assets in any such proceedings out of the distributive share
of the Notes (Section 13.02).
By reason of such subordination, in the event of insolvency of the Company,
Holders of the Notes may recover less, ratably, than other creditors of the
Company.
Senior Indebtedness is defined in the Indenture as the principal and
premium, if any, and unpaid interest on, and any reasonable fees or costs
related to, (a) indebtedness of the Company (including indebtedness of others
guaranteed by the Company) other than the Notes, whether outstanding on the date
of the Indenture or thereafter created, incurred, assumed or guaranteed (i) for
money owing to banks or their subsidiaries or their affiliates, (ii) for money
borrowed other than from banks evidenced by notes, bonds, debentures or similar
instruments or (iii) arising under a lease of property, equipment or other
assets, which indebtedness, pursuant to generally accepted accounting principles
then in effect, is classified upon the balance sheet of the Company as a
liability of the Company, unless, in each case, the instrument creating or
evidencing the same or pursuant to which the same is outstanding provides that
such indebtedness is not superior in right of payment to the Notes; (b) to the
extent not otherwise described in clause (a) above, any obligations under the
Credit Facility; and (c) renewals, extensions, modifications and refundings of
any such indebtedness; PROVIDED, HOWEVER, that Senior Indebtedness shall not
include (i) indebtedness to a subsidiary of the Company or (ii) the 7%
Convertible Subordinated Debentures Due 2011 (Section 1.01).
As of March 31, 1996, after giving pro forma effect to the Offering and the
application of the net proceeds therefrom, the Company would have had
outstanding approximately $175.2 million of Senior Indebtedness. The Company
expects from time to time to incur additional indebtedness constituting Senior
Indebtedness. The Indenture does not prohibit or limit the incurrence of Senior
Indebtedness by the Company.
REDEMPTION AT THE OPTION OF THE COMPANY
The Notes are not subject to the provisions of any sinking fund. The Notes
will be redeemable, at the Company's option, in whole or from time to time in
part (in denominations of $1,000 or integral multiples thereof), on or after
, 1999, and prior to maturity, upon not less than 20 nor more than
40 days' notice mailed to the registered Holders thereof at the redemption
prices (expressed as a percentage of the principal amount thereof) set forth
below if redeemed during the period commencing on of the years
indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------ -----------------
<S> <C>
1999.................................................................... %
2000.................................................................... %
2001.................................................................... %
2002.................................................................... %
</TABLE>
plus, in each case, accrued interest to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant Interest Payment Date) (Sections 2.03, 11.01, 11.05 and 11.07).
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
In the event of any Change of Control (as defined below), each Holder of
Notes will have the right, at the Holder's option, to require the Company to
repurchase all or any part of the Holder's Notes on the date (the "Repurchase
Date") that is 75 days after the date the Company gives notice of the Change of
Control as described below at a price (the "Repurchase Price") equal to 100% of
the
65
<PAGE>
principal amount thereof, together with accrued and unpaid interest to the
Repurchase Date. (Section 14.01). On or prior to the Repurchase Date, the
Company shall deposit with the Trustee or a Paying Agent an amount of money
sufficient to pay the Repurchase Price of the Notes that are to be repaid on the
Repurchase Date (Section 14.03).
Failure by the Company to repurchase the Notes when required under the
preceding paragraph will result in an Event of Default under the Indenture
whether or not such repurchase is permitted by the subordination provisions of
the Indenture (Section 5.01).
On or before the 15th day after the occurrence of a Change of Control, the
Company is obligated to mail to all Holders of Notes a notice of the event
constituting and the date of such Change of Control, the Repurchase Date, the
date by which the repurchase right must be exercised, the Repurchase Price for
Notes and the procedures that the Holder must follow to exercise this right. To
exercise the repurchase right, the Holder of a Note must deliver, on or before
the 10th day prior to the Repurchase Date, written notice to the Company (or an
agent designated by the Company for such purpose) of the Holder's exercise of
such right, together with the certificates evidencing the Notes with respect to
which the right is being exercised, duly endorsed for transfer (Section 14.01).
A "Change of Control" shall occur when: (i) all or substantially all the
Company's assets are sold as an entirety to any person or related group of
persons other than a Permitted Holder; (ii) there shall be consummated any
consolidation or merger of the Company other than with or into a Permitted
Holder (a) in which the Company is not the continuing or surviving corporation
(other than a consolidation or merger with a wholly owned subsidiary of the
Company in which all shares of Common Stock outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same consideration)
or (b) pursuant to which the Common Stock is converted into cash, securities or
other property, in each case other than a consolidation or merger of the Company
in which the holders of the Common Stock immediately prior to the consolidation
or merger have, directly or indirectly, at least a majority of the common stock
of the continuing or surviving corporation immediately after such consolidation
or merger; or (iii) any person, or any persons acting together that would
constitute a "group" for purposes of Section 13(d) of the Exchange Act, together
with any affiliates thereof, other than one or more Permitted Holders, shall
beneficially own (as defined in Rule 13d-3 under the Exchange Act) at least 50%
of the total voting power of all classes of capital stock of the Company
entitled to vote generally in the election of directors of the Company.
Notwithstanding clause (iii) of the foregoing definition, a Change of Control
shall not be deemed to have occurred solely by virtue of the Company, any
subsidiary of the Company, any employee stock purchase plan, stock option plan
or other stock incentive plan or program, retirement plan or automatic dividend
reinvestment plan or any substantially similar plan of the Company or any
subsidiary of the Company or any person holding securities of the Company for or
pursuant to the terms of any such employee benefit plan filing or becoming
obligated to file a report under or in response to Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report) under the Exchange Act
disclosing beneficial ownership by it of shares or securities of the Company,
whether in excess of 50% or otherwise (Sections 1.01 and 14.05). Permitted
Holder means (i) Ciba and its successors and their affiliates, (ii) any Person
formerly described in clause (i) that was spun off or otherwise distributed to
the shareholders of its parent company and (iii) any corporation owned, directly
or indirectly, by the shareholders of the Company in substantially the same
proportions as their ownership of stock of the Company.
Notwithstanding the foregoing, a Change of Control as described above shall
not be deemed to have occurred if (i) the Current Market Price of the Common
Stock is at least equal to 105% of the conversion price of the Notes in effect
immediately preceding the time of such Change of Control, or (ii) all the
consideration to the holders of Common Stock (excluding cash payments for
fractional shares) in the transaction giving rise to such Change of Control
consists of shares of common stock that are, or immediately upon issuance will
be, listed on a national securities exchange or quoted on the Nasdaq National
Market, and as a result of such transaction the Notes become convertible solely
into such common stock, or (iii) the consideration to the holders of Common
Stock in the transaction giving rise to such Change of Control consists of cash
or securities that are, or immediately upon
66
<PAGE>
issuance will be, listed on a national securities exchange or quoted on the
Nasdaq National market, or a combination of cash and such securities, and the
aggregate fair market value of such consideration (which, in the case of such
securities, shall be equal to the average of the daily Closing Prices of such
securities during the ten consecutive trading days commencing with the sixth
trading day following consummation of such transaction) is at least 105% of the
conversion price of the Notes in effect on the date immediately preceding the
closing date of such transaction (Sections 1.01 and 14.05).
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a sale or takeover of the
Company, and, thus, the removal of incumbent management. The Change of Control
repurchase feature is a result of negotiations between the Company and the
Underwriters and is not the result of management's knowledge of any specific
effort to accumulate shares of Common Stock of the Company or to obtain control
of the Company by means of a merger, tender offer, solicitation or otherwise, or
part of a plan by management to adopt a series of anti-takeover provisions.
Management has no present intention to engage in a transaction involving a
Change of Control, although it is possible that the Company would decide to do
so in the future. The Credit Facility prohibits the Company from repurchasing
any Notes prior to February 1999, and also provides that the occurrence of
certain change of control events with respect to the Company would constitute a
default thereunder. In the event a Change of Control occurs at a time when the
Company is prohibited from repurchasing Notes, the Company could seek the
consent of its lenders to the repurchase of Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such a consent or repay such borrowings, the Company will remain prohibited from
repurchasing Notes. In such case, the Company's failure to repurchase tendered
Notes would constitute an Event to Default under the Indenture which would, in
turn, constitute a default under the Credit Facility. In such circumstances, the
subordination provisions in the Indenture would likely restrict payment to the
Holders of Notes. Except as described above with respect to a Change of Control,
the Indenture does not contain provisions that permit the Holders of the Notes
to require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar restructuring. The Indenture also does not
prohibit the Company from issuing Senior Indebtedness that may include change of
control payment or repurchase obligations that must be satisfied prior to
repurchase of the Notes. Future indebtedness of the Company may contain
prohibitions on the occurrence of certain events that would constitute a Change
of Control or require such indebtedness to be repurchased upon a Change of
Control. Moreover, the exercise by the Holders of their right to require the
Company to repurchase the Notes could cause a default under such indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on the Company. Finally, the Company's ability to pay cash to
Holders of Notes following the occurrence of a Change of Control may be limited
by the Company's then existing financial resources. There can be no assurance
that sufficient funds will be available when necessary to make any required
repurchases. The provisions of the Indenture requiring the Company to make an
offer to repurchase the Notes upon a Change of Control may be waived or modified
with the consent of the Holders of a majority in principal amount of the Notes
(Section 9.02).
In the event a Change of Control occurs, the Indenture requires the Company
to comply with applicable tender offer rules under the Exchange Act, including
Rules 13e-4 and 14e-1, as then in effect, with respect to repurchase of the
Notes.
LIMITATIONS ON CONSOLIDATIONS, MERGERS AND SALES OF ASSETS
The Company may, without the consent of the Holders of the Notes,
consolidate with or merge into any other entity or convey, transfer or lease all
or substantially all its assets to any person, PROVIDED, HOWEVER, that (i) the
entity formed by such consolidation or into which the Company is merged or the
person that acquires by conveyance or transfer, or which leases, all or
substantially all its assets is a corporation, partnership or trust organized
and existing under the laws of the United States, any state thereof or the
District of Columbia, (ii) the successor entity shall expressly assume, by a
supplemental indenture executed and delivered to the Trustee, in form
satisfactory to the Trustee, the due and punctual payment of the principal of
and premium, if any, and interest on the Notes and the performance of every
covenant of the Indenture on the part of the Company to be
67
<PAGE>
performed or observed and has provided for conversion rights in accordance with
the Indenture and (iii) immediately after giving effect to such transaction, no
Event of Default, and no event that, after notice or lapse of time or both,
would become an Event of Default, shall have occurred and be continuing (Section
8.01).
Apart from the provisions described in the foregoing paragraph, the
Indenture does not contain any limitation on sales of assets by the Company.
There is no definitive test concerning what transactions would constitute a
transfer of "substantially all" the Company's assets. Rather, the question must
be analyzed in the context of a particular transaction taking into account all
relevant facts and circumstances, including the assets transferred and the
assets retained. Accordingly, enforcement of this covenant by the Trustee or the
Holders of the Notes could be difficult in the event of a dispute with the
Company concerning whether a transaction or series of transactions constitutes a
transfer of all or substantially all the Company's assets.
MODIFICATION AND WAIVER
The Company and the Trustee, without the consent of the Holders of the
Notes, may amend the Indenture for certain specified purposes, including to cure
any ambiguities, correct any inconsistencies or make any other provision with
respect to matters arising under the Indenture that are not inconsistent with
the Indenture and do not adversely affect the interests of the Holders in any
material respect (Section 9.01). In addition, modifications and amendments of
the Indenture may be made by the Company and the Trustee with the consent of the
Holders of not less than a majority in principal amount of the Outstanding
Notes; PROVIDED, HOWEVER, that no such modification or amendment may, without
the consent of the Holder of each Outstanding Note affected thereby, (i) change
the Stated Maturity of the principal of, or any installment of interest on, any
Note, (ii) reduce the principal amount of, or the premium, if any, or interest
on, any Note or price payable upon repurchase or redemption, (iii) change the
place or currency of payment of principal of, or premium, if any, or redemption
or purchase price or interest on, any Note, (iv) impair the right to institute
suit for the enforcement of any payment on or with respect to any Note, (v)
adversely affect the right to convert Notes, (vi) modify the subordination
provisions in a manner adverse to the Holders of the Notes or (vii) reduce the
percentage of aggregate principal amount of Outstanding Notes necessary for
waiver or compliance with certain provisions of the Indenture or for waiver of
certain defaults (Section 9.02).
The Holders of a majority in aggregate principal amount of the Outstanding
Notes may waive any past default under the Indenture, except that a default in
the payment of principal or premium, if any, or interest on the Notes or a
failure to comply with certain covenants of the Company may not be waived
without the consent of the Holder of each Outstanding Note (Section 5.13).
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (i) failure to
pay any interest on any Notes when due and continuance of such default for a
period of 30 days, whether or not such payment is prohibited by the
subordination provisions of the Indenture; (ii) failure to pay principal of or
premium, if any, on any Note when due, whether or not such payment is prohibited
by the subordination provisions of the Indenture; (iii) failure to pay the
redemption price on any redemption date and failure to repurchase the Notes as
provided in the Indenture, whether or not any such payment is prohibited by the
subordination provisions of the Indenture; (iv) failure to perform any other
covenant of the Company in the Indenture, which failure continues for 60 days
after written notice as provided in the Indenture; (v) default, beyond any
applicable grace period, if any, in the payment of amounts due under any
mortgage, indenture or instrument under which there is outstanding, or by which
there is secured or evidenced, any indebtedness of the Company in excess of $25
million at its stated maturity for borrowed money or representing any Senior
Indebtedness or default on any such indebtedness that results in the
acceleration of such indebtedness prior to its express maturity; and (vi)
certain events of bankruptcy, insolvency or reorganization of the Company
(Section 5.01).
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such Holders
shall have offered to the Trustee reasonable indemnity (Section 6.03). Subject
to such
68
<PAGE>
provisions for the indemnification of the Trustee, the Holders of a majority in
principal amount of the Outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee (Section
5.12).
If an Event of Default shall occur and be continuing, other than an event of
bankruptcy, insolvency or reorganization of the Company, either the Trustee or
the Holders of at least 25% in principal amount of the Outstanding Notes may
accelerate the maturity of all Notes. If an Event of Default shall occur by
reason of an event of bankruptcy, insolvency or reorganization of the Company,
the Notes shall immediately become due and payable without any act on the part
of the Trustee or any Holder. After any such acceleration but before a judgement
or decree based on acceleration, the Holders of a majority in aggregate
principal amount of Outstanding Notes may, under certain circumstances, rescind
or annul acceleration if all Events of Default, other than the nonpayment of
acceleration principal, have been cured or waived as provided in the Indenture
(Section 5.02). For information as to waiver of defaults, see "Modification and
Waiver".
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless the Holders of at least 25% in principal amount of the
Outstanding Notes shall have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding as trustee, and the
Trustee shall not have received from the Holders of a majority in principal
amount of the Outstanding Notes a direction inconsistent with such request and
shall have failed to institute such proceeding within 60 days (Section 5.07).
However, such limitations do not apply to a suit instituted by a Holder of a
Note for the enforcement or payment of the principal or premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note or of the rights to convert such Note or of the rights to convert such Note
in accordance with the Indenture (Section 5.08).
The Company will be required to furnish to the Trustee annually a statement
as to its performance of certain of its obligations under the Indenture and as
to any default in such performance (Section 10.04).
DISCHARGE OF INDENTURE; DEFEASANCE
The Company may terminate all obligations under the Indenture at any time by
delivering all outstanding Notes to the Trustee for cancellation and paying any
other sums payable under the Indenture.
The Indenture also provides that the Company may elect:
(a) to defease and be discharged from any and all obligations with
respect to the Notes and that the provisions of the Indenture will no longer
be in effect with respect to the Notes, except for the obligations to
register the transfer or exchange of the Notes, to replace temporary or
mutilated, destroyed, lost or stolen Notes, to maintain an office or agency
in respect of the Notes and to hold funds for payment in trust
("Defeasance"); or
(b) to be released from its obligations with respect to the Notes under
certain restrictive covenants of the Indenture, and that violation of such
covenants will not constitute an "Event of Default" under the Indenture
("Covenant Defeasance").
Such Defeasance or Covenant Defeasance will have no effect on the Company's
obligations under Article 12 of the Indenture, which relate to the conversion of
the Notes, at the option of the Holder thereof, into Common Stock of the
Company. Such Defeasance or Covenant Defeasance will take effect only upon the
deposit with the Trustee, in trust for such purpose, of money and/or U.S.
Government Obligations that, through the payment of principal and interest in
accordance with their terms, will provide money in an amount sufficient to pay
the principal of and premium, if any, and interest on the Notes on the dates
such payments are due, and certain other conditions are satisfied (Section
15.04).
69
<PAGE>
CONCERNING THE TRUSTEE
First Trust of California, National Association is to be the Trustee under
the Indenture and has been appointed by the Company as Registrar and Paying
Agent with regard to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
70
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock and 20,000,000 shares of preferred stock, no par value (the
"Preferred Stock"). As of July 15, 1996, 36,274,120 shares of Common Stock were
issued and outstanding and held by approximately 2,206 record holders. As of
such date, no shares of Preferred Stock were outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders and to vote on all
matters on which a vote of stockholders is taken, except as otherwise provided
by statute. Subject to the rights of holders of outstanding shares of Preferred
Stock, if any, the holders of Common stock are entitled to receive dividends, if
any, as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefore, and, upon liquidation or
dissolution of the Company, are entitled to receive all assets available for
distribution to shareholders. Holders of Common Stock other than Ciba have no
preemptive rights or other rights to subscribe for additional shares and no
conversion rights. Pursuant to the Governance Agreement, Ciba is entitled to
maintain its percentage ownership of the voting power of the Company in the
event that the Company issues additional equity securities under certain
circumstances. The Common Stock is not subject to redemption or to any sinking
fund provisions, and all outstanding shares of Common Stock are fully paid and
nonassessable. Subject to the preferential rights of the holders of shares of
any series of Preferred Stock, as the same may be designated and issued in the
future, holders of Common Stock are entitled to their pro rata share of the
assets of the Company upon liquidation.
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series
without further stockholder approval. The Board of Directors may designate the
number of shares to be issued in such series and the rights, preferences,
privileges and restrictions granted to or imposed on the holders of such shares.
If issued, such shares of Preferred Stock could have dividends and liquidation
preferences and may otherwise affect the rights of holders of Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is a Delaware corporation and is subject to Section 203 of the
General Corporation Law of the State of Delaware (the "GCL"). In general,
Section 203 of the GCL prevents a Delaware corporation from engaging in any
"business combination" (as defined below) with an "interested stockholder"
(defined as a person who, together with affiliates and associates, beneficially
owns (or within the preceding three years, did beneficially own) 15% or more of
a corporation's outstanding voting stock) for a period of three years following
the time that such person became an interested stockholder, unless (i) before
such person became an interested stockholder, the board of directors of the
corporation approved either the transaction in which the interested stockholder
became an interested stockholder or the business combination (ii) upon
consummation of the transaction that resulted in the interested 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 (excluding shares owned by persons who are both officers
and directors of the corporation and shares held by certain employee stock
plans); or (iii) on or after such time the business combination is approved by
the board and authorized at an annual meeting of stockholders, and not by
written consent, by the affirmative vote of the holders of at least 66 2/3% of
the outstanding voting stock of the corporation which is not owned by the
interested stockholder. A "business combination" generally includes mergers,
stock or asset or sales involving 10% or more of the market value of the
corporation's assets or stock, certain stock transactions and other transactions
resulting in a financial benefit to the interested stockholders or an increase
in their proportionate share of any class or series of a corporation.
71
<PAGE>
LIMITATIONS ON DIRECTORS' LIABILITY; INDEMNIFICATION
The Company's Certificate of Incorporation provides for the elimination of
personal liability of the directors of the Company to the full extent permitted
by the GCL as it currently exists or may hereafter be amended The GCL permits a
corporation to provide in its certificate of incorporation that a director shall
not be personally liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the directors' duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases and (iv) for any
transaction from which the director derived an improper personal benefit. The
effect of the provision of the Company's Certificate of Incorporation is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. The provision does not
limit or eliminate the rights of the Company or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a breach
of a directors' duty of care. In addition, the Company's Certificate of
Incorporation provides that the Company shall indemnify its directors and
officers to the full extent permitted by the GCL; PROVIDED, HOWEVER, that the
Company shall indemnify any such person seeking indemnification in connection
with a proceeding initiated by such person only if such proceeding was
authorized by the Board of Directors of the Company. The Certificate of
Incorporation further provides that the Company may, to the extent authorized
from time to time by the Board of Directors, provide rights to indemnification
similar to those provided to the directors and officers of the Company to the
employees and agents of the Company who are not directors or officers of the
Company.
The Strategic Alliance Agreement provides that the Company's Certificate of
Incorporation and Bylaws will continue to contain the provisions with respect to
indemnification of directors and officers in effect as of the date of the
Strategic Alliance Agreement, which provisions will not be amended, repealed or
otherwise modified, for a period of six years following the closing contemplated
by the Strategic Alliance Agreement (the "Ciba Closing") in any manner that
would adversely affect the rights of individuals who at any time prior to the
Ciba Closing were directors or officers of the Company in respect of actions or
omissions occurring at or prior to the Ciba Closing, except for such
modifications as are required by applicable law. In addition, the Strategic
Alliance Agreement generally requires the Company to indemnify its officers and
directors as of the date of the Strategic Alliance Agreement against all losses
(including reasonable fees and expenses of counsel) arising out of any claim
based in whole or in part on the fact that such person was a director or officer
of the Company at or prior to the Ciba Closing.
Pursuant to the Hexcel Corporation Incentive Stock Plan (the "Incentive
Stock Plan"), no member of the Executive Compensation Committee of the Board of
Directors or such other committee as may be designated by the Board of Directors
from time to time to administer the Incentive Stock Plan (as defined therein)
shall be liable for any action or determination made in good faith, and the
members of such committee shall be entitled to indemnification in the manner
provided in the Company's Certificate of Incorporation.
GOVERNANCE AGREEMENT
In connection with the Ciba Acquisition, Hexcel and Ciba entered into the
Governance Agreement, which contains various standstill, governance and other
provisions that (i) impose certain limitations on Ciba's ability to acquire or
dispose of the Company's voting securities, (ii) provide certain protections to
the Company's stockholders in connection with any future acquisition of the
Company and (iii) provide Ciba with certain preemptive rights to purchase
additional voting securities of the Company in the event the Company issues
additional voting securities for cash. See "Risk Factors -- Influence of
Significant Stockholder."
72
<PAGE>
In addition, the Company's Bylaws, which include certain provisions of the
Governance Agreement, provide that, for so long as Ciba beneficially owns 33% or
more of the total voting power of the Company, the Board of Directors shall not
authorize, approve or ratify certain mergers, consolidations, acquisitions,
business combinations, sales or transfers of assets, issuances of equity
securities or capital expenditures without the prior approval of a majority of
the directors of the Company designated by Ciba.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services.
73
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions in an Underwriting Agreement
dated , 1996 (the "Underwriting Agreement"), the Underwriters named below
(the "Underwriters") have severally but not jointly agreed to purchase from the
Company the following respective principal amounts of Notes:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER NOTES
- ---------------------------------------------------------------------------- ----------------
<S> <C>
CS First Boston Corporation................................................. $
Bear, Stearns & Co. Inc.....................................................
----------------
Total................................................................... $ 100,000,000
----------------
----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all the Notes offered hereby (other than those Notes
covered by the over-allotment option described below) if any are purchased. The
Underwriting Agreement provides that, in the event of a default by an
Underwriter, in certain circumstances the purchase commitments of the
non-defaulting Underwriter may be increased or the Underwriting Agreement may be
terminated.
The Company has granted to the Underwriters an option, expiring on the close
of business on the 30th day after the date of this Prospectus, to purchase up to
$15,000,000 principal amount of additional Notes (the "Option Notes") at the
initial public offering price less the underwriting discounts and commissions,
all as set forth on the cover page of this Prospectus. Such option may be
exercised only to cover over-allotments in the sale of the Notes. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of the
principal amount of Option Notes as it was obligated to purchase pursuant to the
Underwriting Agreement.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Notes to the public initially at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession of % of the principal amount per Note, and the
Underwriters and such dealers may allow a discount of % of such principal
amount per Note on sales to certain other dealers. After the initial public
offering, the public offering price and concession and discount to dealers may
be changed by the Underwriters.
Application has been made to list the Notes on the NYSE and the underlying
shares of Common Stock on the NYSE and the PSE.
The Company has agreed that, subject to certain limited exceptions, it will
not offer, sell, contract to sell, announce their intention to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act, relating
to any additional shares of Common Stock or securities convertible into or
exchangeable or exercisable for any shares of Common Stock without the prior
written consent of CS First Boston Corporation for a period of 90 days after the
date of this Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain civil liabilities under the Securities Act, or
contribute to certain payments which the Underwriters may be required to make in
respect thereof.
CS First Boston Corporation was engaged by Ciba to advise it in connection
with the Ciba Acquisition and was paid customary fees in connection therewith.
In addition, Credit Suisse, an affiliate of CS First Boston Corporation, in its
capacity as a lender and as an agent, is party to the Old Credit Facility and
the Credit Facility.
Bear, Stearns & Co. Inc. was engaged by the Company to advise it in
connection with the Ciba Acquisition and was paid customary fees in connection
therewith.
74
<PAGE>
Under Rule 2710(c)(8) of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"), when more than 10 percent of the net
proceeds of a public offering of debt securities, not including underwriting
compensation, are to be paid to a member of the NASD participating in such
public offering or its affiliate, the yield at which the debt securities are
distributed to the public must be no lower than that recommended by a "qualified
independent underwriter" meeting certain standards. CS First Boston Corporation
is a member of the NASD and is an affiliate of Credit Suisse, a lender under the
Credit Facility. Credit Suisse expects to receive approximately $10.9 million of
the net proceeds of the Offering, which is greater than 10 percent of such
proceeds and represents their proportionate share of the repayment by the
Company of a portion of the borrowings under the Credit Facility with the
proceeds of the Offering. See "Use of Proceeds." As a result, the Offering is
being made in compliance with Rule 2720 of the Conduct Rules of the NASD. Bear,
Stearns & Co. Inc. will act as a qualified independent underwriter in connection
with the Offering and assume the customary responsibilities of acting as a
qualified independent underwriter in pricing and conducting due diligence for
the Offering.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Notes in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Notes are effected. Accordingly, any resale of the Notes in Canada or
the underlying shares of Common Stock issued upon conversion of the Notes, must
be made in accordance with applicable securities laws which will vary depending
on the relevant jurisdiction, and which may require resales to be made in
accordance with available statutory exemptions or pursuant to a discretionary or
other exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Notes or such shares of Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Notes in Canada who receives a purchase confirmation will
be deemed to represent to the Company and the dealer from whom such purchase
confirmation is received that (i) such purchaser is entitled under applicable
provincial securities laws to purchase such Notes without the benefit of a
prospectus qualified under such securities laws, (ii) where required by law,
that such purchaser is purchasing as principal and not as agent, and (iii) such
purchaser has reviewed the text above under "Resale Restrictions".
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Notes to whom the SECURITIES ACT (British Columbia) applies
is advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any Notes acquired
by such purchaser pursuant to this offering. Such report must be in
75
<PAGE>
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from the Company. Only one such report
must be filed in respect of Notes acquired on the same date and under the same
prospectus exemption.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain anticipated United States federal
income tax consequences of the purchase, ownership and disposition of the Notes
(or Common Stock of the Company acquired upon conversion of a Note) as of the
date hereof. It deals only with Notes and Common Stock held as capital assets by
initial holders, and does not deal with special situations including those that
may apply to a particular holder such as exempt organizations, dealers in
securities, financial institutions, insurance companies and holders whose
"functional currency" is not the United States dollar. The federal income tax
considerations set forth below are based upon the Internal Revenue Code of 1986,
as amended (the "Code") and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked
or modified (possibly retroactively) so as to result in federal income tax
consequences different from those discussed below. As used herein, the term
"United States Holder" means a beneficial owner of a Note (or Common Stock of
the Company acquired upon conversion of a Note) that is for United States
federal income tax purposes (i) a citizen or resident of the United States, (ii)
a corporation created or organized in or under the laws of the United States or
of any political subdivision thereof, or (iii) a person or entity otherwise
subject to United States federal income taxation on its worldwide income. As
used herein, the term "Non-United States Holder" means a beneficial holder of a
Note (or Common Stock of the Company acquired upon conversion of a Note) that is
not a United States Holder. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING AND
DISPOSING OF THE NOTES OR COMMON STOCK OF THE COMPANY, INCLUDING THE TAX
CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN LAWS.
UNITED STATES HOLDERS
A United States Holder will not recognize gain or loss upon conversion of
the Notes solely into Common Stock of the Company (except with respect to cash
received in lieu of fractional shares). The United States Holder's basis in the
Common Stock received on conversion will be the same as the United States
Holder's adjusted tax basis in the Notes at the time of conversion (including
any gain recognized with respect to cash received in lieu of fractional shares),
and the holding period for the Common Stock received on conversion will include
the holding period of the Notes that were converted.
A United States Holder will recognize gain or loss upon the sale, redemption
or other taxable disposition of the Notes in an amount equal to the difference
between the United States Holder's adjusted tax basis in the Note and the amount
received therefor (other than amounts attributable to accrued and unpaid
interest on the Notes which will be treated as interest for federal income tax
purposes). Such gain or loss generally will be long-term capital gain or loss if
the Notes were held for more than one year.
The conversion price of the Notes is subject to adjustment under certain
circumstances. Under Section 305 of the Code and the Treasury Regulations issued
thereunder, adjustments or the failure to make such adjustments to the
Conversion Price of the Notes may result in a taxable constructive distribution
to the United States Holders of Notes, resulting in ordinary income (subject to
a possible dividends received deduction in the case of corporate holders) to the
extent of the Company's current and/or accumulated earnings and profits if, and
to the extent that, certain adjustments in the Conversion Price that may occur
in limited circumstances (particularly an adjustment to reflect a taxable
dividend to holders of Common Stock of the Company) increase the proportionate
interest in the earnings and profits or assets of the Company of a United States
Holder of a Note convertible into fully
76
<PAGE>
diluted Common Stock, whether or not the United States Holders ever converts the
Notes. Generally, a United States Holder's tax basis in a Note will be increased
by the amount of any such constructive dividend.
NON-UNITED STATES HOLDERS
Under present United States federal income and estate tax law, assuming
certain certification requirements are met (which include identification of the
beneficial owner of a Note), and subject to the discussion of backup withholding
below:
(a) Payments of interest on a Note to any Non-United States Holder will
generally not be subject to United States federal income or withholding tax,
provided that (1) the holder is not (i) a direct or indirect owner of 10% or
more of the total voting power of all voting stock of the Company, (ii) a
controlled foreign corporation related to the Company directly or indirectly by
stock ownership, (iii) a bank receiving interest pursuant to a loan agreement
entered into in the ordinary course of its trade or business or (iv) a foreign
tax-exempt organization or a foreign private foundation for United States
federal income tax purposes, (2) such interest payments are not effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder ("Effectively Connected") and (3) the holder of the
Notes certifies, under penalties of perjury, as to its status as a Non-United
States Holder and provides its name and address.
(b) A Non-United States Holder will generally not be subject to United
States federal income tax on gain recognized on a sale, redemption or other
disposition of a Note or Common Stock (including the receipt of cash in lieu of
fractional shares upon conversion of a Note into Common Stock) unless (1) the
gain is Effectively Connected, (2) in the case of a Non-United States Holder who
is a nonresident alien individual and holds the Note or Common Stock as a
capital asset, such holder is present in the United States for 183 days or more
in the taxable year of disposition and certain other requirements are met, or
(3) (i) the Company was, is or becomes a "United States real property holding
corporation" for United States federal income tax purposes, (ii) either the
holder beneficially owns 5% or more of the Common Stock of the Company or the
Common Stock is no longer regularly traded on an established securities market
and (iii) certain other requirements are met. There can be no assurance either
(1) that the Company has not been and will not be a United States real property
holding corporation or (2) that the Common Stock will continue to be regularly
traded on an established securities market.
(c) If interest on a Note is exempt from withholding of United States
federal income tax under the rules described in clause (a) above, the Note will
not generally be included in the estate of a deceased Non-United States Holder
for United States federal estate tax purposes.
(d) A Non-United States Holder will generally not be subject to United
States federal income tax on the conversion of a Note solely into Common Stock
of the Company (except as described in clause (b) above with respect to the
receipt of cash in lieu of fractional shares by certain holders upon conversion
of a Note).
(e) Dividends paid on Common Stock of the Company to a Non-United States
Holder will generally be subject to withholding of United States federal income
tax at the rate of 30% (or a lower rate prescribed by an applicable treaty)
unless such dividends are Effectively Connected.
(f) Common Stock of the Company owned by an individual who is neither a
citizen nor a resident (as defined for United States federal estate tax
purposes) of the United States at the date of death will generally be included
in such individual's estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
Income (including interest on a Note and dividends on Common Stock of the
Company as the case may be) and capital gain on the sale or other taxable
disposition of a Note or Common Stock that is Effectively Connected generally
will not be subject to withholding, but may be subject to United States federal
income tax at rates applicable to United States citizens, resident aliens and
United States
77
<PAGE>
corporations (and, in the case of corporate holders, such income and gain may
also be subject to the United States branch profits tax which is generally
imposed on a foreign corporation on the repatriation from the United States of
earnings and profits that are Effectively Connected).
An applicable income tax treaty may, however, change these rules. A
Non-United States Holder may be required to satisfy certain certification and
other requirements in order to claim treaty benefits or otherwise obtain any
reduction of or exemption from United States federal income or withholding tax
under the foregoing rules.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Company or its designated paying agent (the "payor") will, where
required, report to holders of Notes or Common Stock and the Internal Revenue
Service the amount of any interest paid on the Notes (or dividends paid with
respect to the Common Stock or other reportable payments) in each calendar year
and the amount of tax, if any, withheld with respect to such payments. The
information may also be made available to the tax authorities of the country in
which a Non-United States Holder resides under the provisions of an applicable
tax treaty.
Under current United States federal income tax law, a 31% backup withholding
tax is required with respect to certain interest, dividends and principal
payments made to, and to the proceeds of sales before maturity by, certain
United States Holders if such persons fail to furnish their taxpayer
identification numbers and other information.
Interest payments on a Note to a Non-United States Holder will not be
subject to information reporting requirements and backup withholding tax if
either the requisite certification, as described above, has been received or an
exemption has otherwise been established, provided that the payor does not have
actual knowledge that the holder is a United States Holder or that the
conditions of any other exemption are not in fact satisfied.
Payment by or through a United States office of a broker of the proceeds on
disposition of a Note or Common Stock will be subject to both backup withholding
tax and information reporting requirements, unless the Non-United States Holder
certifies under penalties of perjury as to its status as a Non-United States
Holder or otherwise establishes an exemption. Information reporting requirements
(but not backup withholding tax) will also apply to a payment of the proceeds on
disposition of a Note or Common Stock by or through a foreign office of a United
States broker, or foreign brokers with certain relationships to the United
States, unless the broker has documentary evidence in its records that the
holder is a Non-United States Holder and certain other conditions are met or the
holder otherwise establishes an exemption.
Information reporting requirements and backup withholding tax will generally
not apply to dividends paid on Common Stock of the Company to a Non-United
States Holder at an address outside the United States, unless the payor has
knowledge that the holder is a United States Holder. Dividends paid to a
Non-United States Holder at an address within the United States may be subject
to backup withholding tax if the Non-United States Holder fails to establish
that it is entitled to an exemption or to provide a correct taxpayer
identification number and other information to the payor.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the holder's
United States federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
These backup withholding and information reporting rules are under review by
the United States Treasury, and their application to the Notes and the Common
Stock could be changed in the future.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY,
78
<PAGE>
EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR TAX
CONSEQUENCES TO IT OF PURCHASING, HOLDING, AND DISPOSING OF THE NOTES AND THE
COMMON STOCK OF THE COMPANY, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE
LAWS.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Skadden, Arps, Slate, Meagher & Flom, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Cravath, Swaine &
Moore, New York, New York.
EXPERTS
Hexcel Corporation's consolidated financial statements as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
contains explanatory paragraphs regarding the confirmation of Hexcel
Corporation's plan of reorganization, the acquisition of the Ciba Composites
Business, and a change in accounting for income taxes), and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The combined financial statements of the Ciba Composites Business as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 included in this Prospectus have been audited by Coopers &
Lybrand L.L.P., independent accountants, as stated in their report appearing
herein (which report contains an explanatory paragraph regarding a change in
accounting for postretirement benefits other than pensions and for
postemployment benefits), and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of the Hercules Composites Business as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 included in this Prospectus have been audited by Coopers & Lybrand
L.L.P., independent accountants, as stated in their report appearing herein
(which report contains an explanatory paragraph regarding a change in accounting
for postretirement and postemployment benefits other than pensions), and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
79
<PAGE>
GLOSSARY OF TERMS
ADHESIVES -- A thermoset resin (e.g., epoxy, phenolic or BMI) in the form of a
thin film or paste, cured under heat and pressure to bond a wide range of
composite, metallic and honeycomb surfaces.
ARAMID -- A high strength, high stiffness fiber derived from polyamide (Nylon).
Kevlar-Registered Trademark- and Nomex-Registered Trademark- are examples of
aramids.
CARBON FIBER -- Fiber produced by heat treating precursor fibers, such as PAN
(Polyacrylonitrile), rayon and pitch, to drive off non-carbon atoms. The term is
often used interchangeably with graphite; however, carbon fibers and graphite
fibers differ. The basic differences lie in the temperatures at which the fibers
are made and heat treated, and in the resultant carbon content.
COMPOSITE MATERIALS -- Product made from combining two or more materials such
that the resultant product has exceptional structural properties not present in
either of the constituent materials.
COWLS OR COWLING -- The outside protective shell of a jet engine traditionally
made out of metal. Cowls mainly provides the engine with protection from the
elements and structural support.
FAIRINGS -- A secondary structure of an airplane providing enhanced
aerodynamics. Typically, fairings are found where the wing meets the body or at
various locations on the leading or trailing edge of the wing.
FIBER PLACEMENT -- Fabrication of complex shaped components using computer or
numerically controlled machines to place impregnated fiber tows in a
predetermined pattern.
FIBERGLASS -- An individual filament made by drawing molten glass. As a
composite materials reinforcement, it is a major material used to reinforce
plastic.
FILAMENT WINDING -- A process to manufacture composite materials components such
as mirole and rocket casings and cylinders. Fiber filaments are dipped in a
resin matrix and then wound in a predetermined pattern over a form of the
desired component that is mounted on a mandrel.
FINISHED PARTS -- Completed components that typically contain prepregs,
honeycomb, adhesive and assembled hardware. These parts are ready for direct
attachment to a structure (e.g., aircraft) or to sub-assemblies.
HONEYCOMB -- A unique, lightweight, cellular structure made from either metallic
sheet material or non-metallic materials (e.g., resin-impregnated paper or woven
fabric) and formed into hexagonal nestled cells, similar in appearance to a
cross-sectional slice of a beehive.
INLET DUCTS -- Intake passages or tubes that confine and conduct air. They are
usually located at the upstream end of an airplane engine on the engine cowling
and aid in both propulsion and engine cooling. Inlet ducts are also used to
improve aerodynamics of fighter planes and for this purpose are usually located
on the fuselage near the wings.
INTERIORS -- Finished internal aircraft components, such as overhead stowage
compartments, lavatories, sidewalls, floor panels and ceilings.
KEVLAR-REGISTERED TRADEMARK- -- An organic fiber from DuPont which is part of
the aramid family of compounds. Woven Kevlar-Registered Trademark- fabrics are
used in both ballistic and composite materials applications.
MODULUS -- The physical measurement of stiffness in a material defined as the
ratio of stress to strain in the range of elastic deformation. A high modulus
indicates a stiff material.
NACELLE -- The protective shell of a jet engine housed within the cowling
usually made out of honeycomb. Provides noise absorption, insulation and
additional structural support.
NOMEX-REGISTERED TRADEMARK- -- DuPont's registered trademark for its
high-temperature-resistant aramid papers, pressboard, staple fibers and filament
yarns. Type 412 Nomex-Registered Trademark- aramid paper is used in the
manufacture of honeycomb due to its unique combination of physical and thermal
properties.
80
<PAGE>
PAN (POLYACRYLONITRILE) -- A material used as a base or precursor material in
the manufacture of certain carbon fibers.
PRECURSOR -- For carbon or graphite, the PAN, rayon or pitch fibers from which
carbon or graphite fibers are derived.
PREPREGS (PRE-IMPREGNATED) -- A composite material made from combining high
performance reinforcement fibers or fabrics with a thermoset or thermoplastic
resin matrix. The prepreg has exceptional structural properties not present in
either of the constituent materials.
PRIMARY STRUCTURE -- A critical load bearing structure on an aircraft. If this
structure is severely damaged, the aircraft cannot fly.
PULTRUSION -- A continuous process of combining fiber and resin directly to form
a cured composite part.
QUALIFIED AND QUALIFICATIONS -- The testing and manufacturing protocols in
aerospace and military applications by which materials, such as composite
materials, are approved for production supply. To qualify a product requires the
creation of a technical database which records the performance of a product
against certain customer specifications, and the documentation of the
manufacturing equipment and process steps for production of the product. The
performance database for the product forms a basis upon which engineers can
design components and against which the manufacturer must test all future
production to ensure that the product performance is replicated consistently.
The manufacturing process and equipment documentation ensure that the future
manufacture of the product replicates product performance. Once a product is
qualified, changes to the product composition, manufacturing process or
manufacturing location and equipment can only be made with customer approval
after further testing has demonstrated that the original product performance
will be replicated. By their nature, these qualification protocols are expensive
and time consuming.
RADOMES -- The housing which protects the aircraft radar system from the
elements while allowing transmission of radar signals. Often the radome is in
the nose of an aircraft but can be found at other locations on the aircraft as
well.
REINFORCEMENTS -- A strong material incorporated into a matrix to improve its
mechanical properties. Reinforcements are usually long continuous fibers, which
may be woven. Fiberglass, aramid and carbon fibers are typical reinforcements.
REINFORCEMENT FABRICS -- Woven fiberglass, carbon or aramid fabrics used in
later production of prepregs and honeycomb.
RESIN MATRIX -- In reinforced fiber composites, a polymeric substrate material,
such as epoxy or phenolic resin, is used to bind together the reinforcement
material.
SANDWICH PANELS -- A stiff and lightweight structure consisting of thin sheets
such as aluminum or cured prepregs bonded to and separated by a low density,
rigid core material (e.g., foam or honeycomb). The face sheets of the sandwich
panel provide smooth flat surfaces.
SECONDARY STRUCTURE -- A non-critical structure on an aircraft. If damaged, the
aircraft can still fly. Fairings, access doors and some flight control surfaces
are examples of secondary structures.
SEISMIC RETROFIT -- The reinforcement of an existing structure to make it
earthquake proof. Until recently, the reinforcement was done with metal but now
can also be done with composite materials.
SPECIAL PROCESS -- The forming, shaping, machining or bonding of sheets or
blocks of honeycomb into profiled and complex shapes to ready for use as
semi-finished components in the fabrication of composite parts and structures.
STRUCTURES -- Finished components for aircraft, truck or other vehicles
constructed from composite materials. For aircraft, these may be for Primary and
Secondary Structures or Interiors. Truck applications include chassis fairings
and floors.
TOW-PREGS -- An untwisted bundle of continuous filaments impregnated with resin
used as a prepreg in the fabrication of tubes, cylinders and other shapes.
81
<PAGE>
INDEX TO FINANCIAL STATEMENTS
THE COMPANY
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Financial Statements:
Consolidated Statements of Operations -- Three years ended December 31, 1995............................. F-3
Consolidated Balance Sheets -- December 31, 1995 and 1994................................................ F-4
Consolidated Statements of Cash Flows -- Three years ended December 31, 1995............................. F-5
Consolidated Statements of Shareholders' Equity (Deficit) -- Three years ended December 31, 1995......... F-6
Notes to Consolidated Financial Statements -- December 31, 1995, 1994 and 1993........................... F-7
Condensed Consolidated Statements of Operations (unaudited) -- The quarters ended March 31, 1996 and April
2, 1995................................................................................................... F-40
Condensed Consolidated Balance Sheets (unaudited) -- March 31, 1996 and December 31, 1995.................. F-41
Condensed Consolidated Statements of Cash Flows (unaudited) -- The quarters ended March 31, 1996 and April
2, 1995................................................................................................... F-42
Notes to Condensed Consolidated Financial Statements (unaudited)........................................... F-43
THE CIBA COMPOSITES BUSINESS
Report of Independent Accountants.......................................................................... F-49
Combined Balance Sheets -- December 31, 1995 and 1994...................................................... F-50
Combined Statements of Operations -- For the years ended December 31, 1995, 1994 and 1993.................. F-51
Combined Statement of Owner's Equity -- For the years ended December 31, 1995, 1994 and 1993............... F-52
Combined Statements of Cash Flows -- For the years ended December 31, 1995, 1994 and 1993.................. F-53
Notes to Combined Financial Statements -- December 31, 1995, 1994 and 1993................................. F-54
THE HERCULES COMPOSITES BUSINESS
Report of Independent Accountants.......................................................................... F-67
Statement of Operations -- For the years ended December 31, 1995, 1994 and 1993............................ F-68
Balance Sheet -- December 31, 1995 and 1994................................................................ F-69
Statement of Cash Flows -- For the years ended December 31, 1995, 1994 and 1993............................ F-70
Statement of Changes in Division Equity -- For the years ended December 31, 1995, 1994 and 1993............ F-71
Notes to Financial Statements -- December 31, 1995, 1994 and 1993.......................................... F-72
Statement of Operations (unaudited) -- For the three months ended March 31, 1996........................... F-78
Balance Sheet (unaudited) -- March 31, 1996................................................................ F-79
Statement of Cash Flows (unaudited) -- For the three months ended March 31, 1996........................... F-80
Statement of Changes in Division Equity (unaudited) -- For the Three Months Ended March 31, 1996........... F-81
Notes to Unaudited Financial Statements (unaudited)........................................................ F-82
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Hexcel Corporation:
We have audited the accompanying consolidated balance sheets of Hexcel
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of Hexcel's management. 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 Hexcel Corporation and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, on January
12, 1995, the U.S. Bankruptcy Court entered an order dated January 10, 1995
confirming Hexcel's plan of reorganization which became effective on February 9,
1995. The terms of the plan of reorganization are more fully described in Note
4.
As discussed in Notes 2 and 3 to the consolidated financial statements, on
February 29, 1996, Hexcel acquired the Ciba Composites Business.
As discussed in Note 1 to the consolidated financial statements, Hexcel
changed its method of accounting for income taxes effective January 1, 1993 to
conform with Statement of Financial Accounting Standards No. 109.
/s/ DELOITTE & TOUCHE LLP
Oakland, California
March 1, 1996
F-2
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................................... $ 350,238 $ 313,795 $ 310,635
Cost of sales........................................................... (283,148) (265,367) (263,090)
------------ ------------ ------------
Gross Margin............................................................ 67,090 48,428 47,545
Marketing, general and administrative expenses.......................... (49,324) (45,785) (52,510)
Other income (expenses), net............................................ 791 4,861 (12,780)
Restructuring expenses.................................................. -- -- (46,600)
------------ ------------ ------------
Operating income (loss)................................................. 18,557 7,504 (64,345)
Interest expense........................................................ (8,682) (11,846) (8,862)
Bankruptcy reorganization expenses...................................... (3,361) (20,152) (641)
------------ ------------ ------------
Income (loss) from continuing operations before income taxes............ 6,514 (24,494) (73,848)
Provision for income taxes.............................................. (3,313) (3,586) (6,024)
------------ ------------ ------------
Income (loss) from continuing operations............................ 3,201 (28,080) (79,872)
Discontinued operations:
Income (loss) from operations, net of (provision) for income taxes of
($441) in 1994 and ($177) in 1993.................................... -- 989 (6,584)
Losses during phase-out period, net of benefit (provision) for income
taxes of ($136) in 1994 and $383 in 1993............................. (468) (2,879) (4,039)
------------ ------------ ------------
Income (loss) before cumulative effect of accounting change......... 2,733 (29,970) (90,495)
Cumulative effect of change in accounting for income taxes.............. -- -- 4,500
------------ ------------ ------------
Net income (loss)................................................... $ 2,733 $ (29,970) $ (85,995)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share and equivalent share:
Primary and fully diluted:
Continued operations.................................................. $ 0.20 $ (3.84) $ (10.89)
Discontinued operations............................................... (0.03) (0.26) (1.45)
Cumulative effect of change in accounting for income taxes............ -- -- 0.61
------------ ------------ ------------
Net income (loss)................................................... $ 0.17 $ (4.10) $ (11.73)
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares and equivalent shares........................... 15,742 7,310 7,330
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Current assets:
Cash and equivalents............................................................ $ 3,829 $ 931
Receivables from asset sales.................................................... -- 29,340
Accounts receivable............................................................. 65,888 64,136
Inventories..................................................................... 55,475 47,364
Prepaid expenses................................................................ 2,863 3,581
Net assets of discontinued operations........................................... -- 3,000
------------ ------------
Total current assets.......................................................... 128,055 148,352
------------ ------------
Property, plant and equipment..................................................... 203,580 186,328
Less accumulated depreciation..................................................... 117,625 103,215
------------ ------------
Net property, plant and equipment............................................... 85,955 83,113
------------ ------------
Investments and other assets...................................................... 16,592 11,992
------------ ------------
Total assets.................................................................. $ 230,602 $ 243,457
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities of long-term liabilities................... $ 1,802 $ 12,720
Accounts payable................................................................ 22,904 18,163
Accrued liabilities............................................................. 38,892 32,234
Accrued restructuring liabilities............................................... 2,887 11,165
Liabilities subject to disposition in bankruptcy reorganization................. -- 97,025
------------ ------------
Total current liabilities..................................................... 66,485 171,307
------------ ------------
Long-term notes payable and capital lease obligations............................. 88,342 16,004
Deferred liabilities.............................................................. 27,401 21,279
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 18,091 in 1995 and 7,301 in 1994................................ 181 73
Additional paid-in capital...................................................... 111,259 62,626
Accumulated deficit............................................................. (69,981) (72,714)
Minimum pension obligation adjustment........................................... (535) (137)
Cumulative currency translation adjustment...................................... 7,450 4,267
------------ ------------
Total shareholders' equity (deficit).......................................... 48,374 (5,885)
------------ ------------
Total liabilities and shareholders' equity (deficit).......................... $ 230,602 $ 243,457
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations.................................. $ 3,201 $ (28,080) $ (79,872)
Reconciliation to net cash provided (used) by continuing operations:
Depreciation and amortization........................................... 11,623 14,230 14,880
Deferred provision (benefit) for income taxes........................... (329) 3,609 4,805
Other income relating to sale of the Chandler, Arizona manufacturing
facility and related assets and technology............................. (600) (15,900) --
Provision for DIC-Hexcel Limited........................................ -- 8,000 --
Restructuring expenses.................................................. -- -- 46,600
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............................ (1,752) (1,168) 9,157
(Increase) decrease in inventories.................................... (8,111) (6,228) 3,336
(Increase) decrease in prepaid expenses............................... 718 (454) (1,775)
Increase (decrease) in accounts payable and accrued liabilities....... (10,090) 30,966 3,959
Changes in other non-current assets and long-term liabilities......... 2,346 (3,876) 9,736
---------- ---------- ----------
Net cash provided (used) by continuing operations....................... (2,994) 1,099 10,826
Net cash provided (used) by discontinued operations..................... 486 (2,206) 624
---------- ---------- ----------
Net cash provided (used) by operating activities........................ (2,508) (1,107) 11,450
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................................... (12,144) (8,362) (6,264)
Proceeds from equipment sold.............................................. 17 229 764
Deferred business acquisition costs, incurred in connection with the
acquisition of the Ciba Composites Business.............................. (4,150) -- --
Proceeds from sale of discontinued resins business........................ 4,648 6,125 --
Proceeds from sale of the Chandler, Arizona manufacturing facility and
certain related assets and technology.................................... 27,294 2,294 --
Proceeds from sale of stitchbonded fabrics business to joint venture...... -- -- 4,500
Investments in joint ventures............................................. -- -- (1,750)
Proceeds from sale of discontinued fine chemicals business................ -- -- 500
---------- ---------- ----------
Net cash provided (used) by investing activities........................ 15,665 286 (2,250)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.................................. 4,317 171 --
Payments of long-term debt................................................ (5,402) (11,413) (4,801)
Proceeds of short-term debt, net.......................................... 20,923 1,687 6,847
Proceeds from issuance of common stock.................................... 48,741 -- 270
Payments of allowed claims pursuant to the Reorganization Plan............ (78,144) -- --
---------- ---------- ----------
Net cash provided (used) by financing activities........................ (9,565) (9,555) 2,316
---------- ---------- ----------
Effect of exchange rate changes on cash and equivalents..................... (694) (41) (535)
---------- ---------- ----------
Net increase (decrease) in cash and equivalents............................. 2,898 (10,417) 10,981
Cash and equivalents at beginning of year................................... 931 11,348 367
---------- ---------- ----------
Cash and equivalents at end of year......................................... $ 3,829 $ 931 $ 11,348
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED MINIMUM CUMULATIVE TOTAL
------------------------ ADDITIONAL EARNINGS PENSION CURRENCY SHAREHOLDERS'
OUTSTANDING PAID-IN (ACCUMULATED OBLIGATION TRANSLATION EQUITY
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT ADJUSTMENT (DEFICIT)
----------- ----------- ----------- ------------ ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993.............. 7,296 $ 73 $ 62,292 $ 43,251 -- $ 533 $ 106,149
Net loss............................ -- -- -- (85,995) -- -- (85,995)
Activity under stock plans.......... 14 -- 270 -- -- -- 270
Pension obligation adjustment....... -- -- -- -- $ (646) -- (646)
Currency translation adjustment..... -- -- -- -- -- 975 975
----------- ----- ----------- ------------ ----------- ----------- -------------
BALANCE, DECEMBER 31, 1993............ 7,310 73 62,562 (42,744) (646) 1,508 20,753
Net loss............................ -- -- -- (29,970) -- -- (29,970)
Activity under stock plans.......... (9) -- 64 -- -- -- 64
Pension obligation adjustment....... -- -- -- -- 509 -- 509
Currency translation adjustment..... -- -- -- -- -- 2,759 2,759
----------- ----- ----------- ------------ ----------- ----------- -------------
BALANCE, DECEMBER 31, 1994............ 7,301 73 62,626 (72,714) (137) 4,267 (5,885)
Net income.......................... -- -- -- 2,733 -- -- 2,733
Sale of new common stock under
standby purchase commitment and
subscription rights offering....... 10,800 108 48,631 -- -- -- 48,739
Activity under stock plans.......... (10) -- 2 -- -- -- 2
Pension obligation adjustment....... -- -- -- -- (398) -- (398)
Currency translation adjustment..... -- -- -- -- -- 3,183 3,183
----------- ----- ----------- ------------ ----------- ----------- -------------
BALANCE, DECEMBER 31, 1995............ 18,091 $ 181 $ 111,259 $ (69,981) $ (535) $ 7,450 $ 48,374
----------- ----- ----------- ------------ ----------- ----------- -------------
----------- ----- ----------- ------------ ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Hexcel
Corporation and subsidiaries ("Hexcel" or the "Company"), after elimination of
intercompany transactions and accounts. Hexcel is an international developer and
manufacturer of lightweight, high-performance composite materials, parts and
structures for use in the commercial aerospace, space and defense, recreation
and general industrial markets. The Company serves international markets through
manufacturing and marketing facilities located in the United States and Europe,
as well as sales offices in Asia, Australia and South America. The Company is
also a partner in three joint ventures that manufacture and sell composite
materials in the U.S. and Asia.
As discussed in Notes 2 and 3, Hexcel acquired the worldwide composites
division of Ciba-Geigy Limited, a Swiss corporation ("Ciba"), and Ciba-Geigy
Corporation, a New York corporation ("CGC"), including Ciba's and CGC's
composite materials, parts and structures businesses (the "Ciba Composites
Business"), on February 29, 1996. The Company acquired the Ciba Composites
Business in exchange for: (a) approximately 18,022 newly issued shares of Hexcel
common stock; (b) $25,000 in cash; and (c) undertakings to deliver to Ciba
and/or one or more of its subsidiaries, following completion of certain
post-closing adjustment procedures, various senior subordinated notes and senior
demand notes. In connection with the acquisition of the Ciba Composites
Business, the Company obtained a new three-year revolving credit facility of up
to $175,000 (the "Senior Secured Credit Facility") to: (a) fund the cash
component of the purchase price; (b) refinance outstanding indebtedness under
certain U.S. and European credit facilities; and (c) provide for the ongoing
working capital and other financing requirements of the Company on a worldwide
basis (see Note 10). The acquisition of the Ciba Composites Business and related
financing activities occurred subsequent to December 31, 1995, and have not been
reflected in the historical consolidated financial statements and accompanying
notes presented herein.
As discussed in Note 4, Hexcel Corporation (a Delaware corporation) 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 consolidated financial statements as of
December 31, 1994, and for each of the three years in the period ended December
31, 1995, have 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 ("SOP 90-7").
CASH AND EQUIVALENTS
The Company invests excess cash in investments with original maturities of
less than three months. The investments consist of Eurodollar time deposits and
are stated at cost, which approximates market value. The Company considers such
investments to be cash equivalents for purposes of the statements of cash flows.
ACCOUNTS RECEIVABLE
Accounts receivable were net of reserves for doubtful accounts of $2,603 and
$1,249 as of December 31, 1995 and 1994, respectively.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
on a first-in, first-out basis.
F-7
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Repairs and maintenance
are charged to expense as incurred; replacements and betterments are
capitalized. Interest expense associated with major long-term construction
projects is capitalized. No interest was capitalized in 1995 or 1994; $227 of
interest was capitalized in 1993.
The Company depreciates property, plant and equipment over estimated useful
lives. Accelerated and straight-line methods are used for financial statement
purposes. The estimated useful lives range from 10 to 40 years for buildings and
improvements and 3 to 20 years for machinery and equipment.
CURRENCY TRANSLATION
The assets and liabilities of European subsidiaries are translated into U.S.
dollars at year-end exchange rates, and revenues and expenses are translated at
average exchange rates during the year. Cumulative currency translation
adjustments are included in shareholders' equity. Realized gains and losses from
currency exchange transactions were not material to the Company's consolidated
results of operations in 1995, 1994 or 1993.
RESEARCH AND TECHNOLOGY COSTS
Research and technology costs of $7,618 in 1995, $8,201 in 1994 and $7,971
in 1993 were expensed as incurred, and are included in "marketing, general and
administrative expenses" in the consolidated statements of operations.
ACCOUNTING CHANGE
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") (see
Note 16). The cumulative effect of this accounting change has been reflected in
the consolidated statement of operations for the year ended December 31, 1993.
EARNINGS PER SHARE
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares and dilutive common share equivalents
(stock options) outstanding during each year. The computation on the fully
diluted basis, which considers the exercise of stock options and the conversion
of the convertible subordinated debentures, was antidilutive in 1995, 1994 and
1993.
RECLASSIFICATIONS
Certain prior year amounts in the consolidated financial statements and
notes have been reclassified to conform to the 1995 presentation.
ESTIMATES AND ASSUMPTIONS
The consolidated financial statements and accompanying notes reflect
numerous estimates and assumptions made by the management of Hexcel. These
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosures with respect to contingent assets and liabilities, and the
reported amounts of revenues and expenses. Although management believes that the
estimates and assumptions used in preparing the consolidated financial
statements and accompanying notes are reasonable in light of known facts and
circumstances, actual results could differ from the estimates used.
F-8
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
Hexcel is required to adopt Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), in 1996. SFAS 121 requires that the
recoverability of long-lived assets to be held or used, including intangible
assets, be assessed when events or circumstances indicate that the value of
those assets may be impaired. That assessment, determined by reference to the
estimated undiscounted future cash flows resulting from the use of the assets,
will be based on each group of assets within each of the Company's strategic
business units. Management has not yet determined the impact, if any, that the
adoption of SFAS 121 will have on the Company's consolidated financial position
or results of operations.
Hexcel is required to adopt Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), in 1996. SFAS 123
establishes accounting and disclosure requirements using a fair value based
method of accounting for stock based employee compensation plans. Under SFAS
123, the Company may either adopt the new fair value based accounting method or
continue the intrinsic value based method and provide pro forma disclosures of
net earnings and earnings per share as if the fair value method had been
applied. The Company plans to adopt only the disclosure requirements of SFAS
123. Consequently, the adoption of SFAS 123 will have no effect on the Company's
consolidated net earnings.
NOTE 2 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS
Hexcel acquired the Ciba Composites Business of Ciba-Geigy Limited and
Ciba-Geigy Corporation on February 29, 1996. The Ciba Composites Business is
engaged in the manufacture and marketing of composite materials, parts and
structures for aerospace, recreation and general industrial markets. Product
lines include fabrics, prepregs, adhesives, honeycomb core, sandwich panels and
fabricated components, as well as structures and interiors primarily for the
commercial and military aerospace markets.
The acquisition of the Ciba Composites Business was consummated pursuant to
a Strategic Alliance Agreement dated as of September 29, 1995 among Ciba, CGC,
and Hexcel, as amended (the "Strategic Alliance Agreement"). Under the Strategic
Alliance Agreement, the Company acquired the assets (including the capital stock
of certain of Ciba's non-U.S. subsidiaries) and assumed the liabilities of the
Ciba Composites Business other than certain excluded assets and liabilities in
exchange for: (a) approximately 18,022 newly issued shares of Hexcel common
stock; (b) $25,000 in cash; and (c) undertakings to deliver to Ciba and/or one
or more of its subsidiaries, following completion of certain post-closing
adjustment procedures contemplated by the Strategic Alliance Agreement, senior
subordinated notes in an aggregate principal amount of approximately $43,000,
subject to certain adjustments (the "Senior Subordinated Notes"), and senior
demand notes in a principal amount equal to the cash on hand at certain of
Ciba's non-U.S. subsidiaries (the "Senior Demand Notes"). (The pro forma
aggregate principal amount of the Senior Subordinated Notes as of December 31,
1995 was $27,400. See Note 3.) In connection with the acquisition of the Ciba
Composites Business, the Company obtained the Senior Secured Credit Facility to:
(a) fund the cash component of the purchase price; (b) refinance outstanding
indebtedness under certain U.S. and European credit facilities; and (c) provide
for the ongoing working capital and other financing requirements of the Company
on a worldwide basis (see Note 10). The acquisition of the Ciba Composites
Business and related financing activities occurred subsequent to December 31,
1995, and have not been reflected in the historical consolidated financial
statements and accompanying notes presented herein.
F-9
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL
INFORMATION (UNAUDITED)
The following unaudited pro forma financial information combines the
condensed balance sheets and statements of operations of Hexcel and the Ciba
Composites Business after giving effect to the acquisition of the Ciba
Composites Business by the Company. The unaudited pro forma condensed combined
balance sheet as of December 31, 1995 gives effect to the acquisition as if it
had occurred on December 31, 1995. The unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1995 gives effect to the
acquisition as if it had occurred on January 1, 1995. The pro forma adjustments
account for the acquisition as a purchase of the Ciba Composites Business by the
Company, and are based upon the assumptions set forth in the accompanying
disclosures.
The following unaudited pro forma financial information is not necessarily
indicative of the financial position or operating results that would have
occurred had the acquisition of the Ciba Composites Business been consummated on
the dates indicated, nor is it necessarily indicative of future operating
results or financial position. Management expects that significant costs will be
incurred in connection with combining the operations of Hexcel and the Ciba
Composites Business, including costs of eliminating excess manufacturing
capacity and redundant administrative and research and development activities,
as well as the various costs of consolidating the information systems and other
business activities of the two companies. Some of the costs associated with
combining the two businesses, including certain costs to eliminate redundant
administrative and research and development activities, will be incurred during
1996. The anticipated resulting benefits are expected to be realized shortly
thereafter. However, other costs, including many of the costs to eliminate
excess manufacturing capacity, are expected to be incurred over a period of as
much as three years. This is attributable, in part, to aerospace industry
requirements to "qualify" specific equipment and manufacturing facilities for
the manufacture of certain products. Based on the Company's experience with
previous plant consolidations, these qualification requirements necessitate an
approach to the consolidation of manufacturing facilities that will require two
to three years to complete. Accordingly, the costs and anticipated future
benefits of eliminating excess manufacturing capacity are long-term in nature.
The Board of Directors of Hexcel has not yet approved the plan for combining
the operations of Hexcel and the Ciba Composites Business, but is expected to do
so in the second quarter of 1996. Subject to the approval of the consolidation
plan by the Board of Directors, management currently estimates that the cash
costs of combining the two businesses could range from $35,000 to $45,000, net
of expected proceeds from asset sales which are expected to be received at the
end of the consolidation process. (This range includes the estimated net cash
cost to close the Anaheim manufacturing facility of the Ciba Composites
Business. The decision to close this facility was announced in the first quarter
of 1996.) Management notes, however, that the actual cash costs of combining the
two businesses could vary from current estimates due to the fact that the
nature, timing and extent of certain consolidation activities is dependent on
numerous factors.
Management expects to record one or more charges to earnings for the
estimated costs of certain business consolidation activities. The estimated
costs of specific consolidation activities will be accrued in accordance with
generally accepted accounting principles as those activities are determined and
announced. Although the aggregate amount of the resulting charges to earnings
has not yet been determined, management currently estimates that the amount
could range from $40,000 to $50,000, including noncash charges. However, the
actual aggregate amount of such charges could vary from current estimates.
F-10
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL
INFORMATION (UNAUDITED) (CONTINUED)
The cash expenditures necessary to combine the Ciba Composites Business with
Hexcel are expected to occur over a period of as much as three years. The
nature, timing and extent of these expenditures will be determined, in part, by
management's evaluation of the probable economic and competitive benefits to be
gained from specific consolidation activities. Management anticipates that the
benefits to be realized from planned consolidation activities will be sufficient
to justify the level of associated costs. However, some of the anticipated
benefits are long-term in nature, and there can be no assurance that such
benefits will actually be realized. Accordingly, no effect has been given to the
costs of combining the two businesses, or to the operating, financial and other
benefits that may be realized from the combination, in the accompanying pro
forma financial information.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA
CIBA -------------------------
HEXCEL COMPOSITES ADJUSTMENTS COMBINED
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................................... $ 3,829 $ 8,412 $ (8,412 (a) $ 3,829
Accounts receivable...................................... 65,888 58,799 (5,805 (b) 118,882
Inventories.............................................. 55,475 60,337 (1,545 (c) 114,267
Prepaid expenses and other assets........................ 2,863 9,957 (6,019 (d) 6,801
----------- ----------- ------------ -----------
Total current assets................................... 128,055 137,505 (21,781) 243,779
----------- ----------- ------------ -----------
Net property, plant and equipment.......................... 85,955 156,364 (45,487 (e) 196,832
Excess of purchase price over net assets acquired.......... -- -- 44,300(f) 44,300
Investments and other assets............................... 16,592 46,425 (47,069 (g) 15,948
----------- ----------- ------------ -----------
Total assets........................................... $ 230,602 $ 340,294 $ (70,037) $ 500,859
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term
liabilities............................................. $ 1,802 $ 10,469 $ (9,052 (h) $ 3,219
Accounts payable......................................... 22,904 29,611 (1,208 (i) 51,307
Accrued liabilities...................................... 41,779 27,574 -- 69,353
----------- ----------- ------------ -----------
Total current liabilities.............................. 66,485 67,654 (10,260) 123,879
----------- ----------- ------------ -----------
Senior subordinated notes, payable to Ciba-Geigy........... -- -- 26,300(j) 26,300
Other long-term liabilities, less current maturities....... 115,743 28,723 18,898(k) 163,364
Minority interest.......................................... -- 6,968 (6,968 (l) --
----------- ----------- ------------ -----------
Shareholders' equity:
Common stock & additional paid-in capital................ 111,440 -- 140,600(m) 252,040
Accumulated deficit...................................... (69,981) -- (1,658 (n) (71,639)
Minimum pension obligation adjustment.................... (535) -- -- (535)
Cumulative currency translation adjustment............... 7,450 -- -- 7,450
Invested capital......................................... -- 236,949 (236,949 (o) --
----------- ----------- ------------ -----------
Total shareholders' equity............................. 48,374 236,949 (98,007) 187,316
----------- ----------- ------------ -----------
Total liabilities and shareholders' equity............. $ 230,602 $ 340,294 $ (70,037) $ 500,859
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
F-11
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL
INFORMATION (UNAUDITED) (CONTINUED)
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA
CIBA -------------------------
HEXCEL COMPOSITES ADJUSTMENTS COMBINED
----------- ----------- ------------ -----------
Net sales................................................. $ 350,238 $ 331,073 $ (3,207)(p) $ 678,104
<S> <C> <C> <C> <C>
Cost of sales............................................. (283,148) (273,997) 6,860(q) (550,285)
----------- ------------ ----------- ------------
Gross margin.............................................. 67,090 57,076 3,653 127,819
Marketing, general and administrative expenses............ (49,324) (57,966) -- (107,290)
Amortization and write-downs of intangible assets......... -- (6,930) 4,385(r) (2,545)
Other income (expenses), net.............................. 791 (1,102) -- (311)
Restructuring expenses.................................... -- (2,362) -- (2,362)
----------- ------------ ----------- ------------
Operating income (loss)................................... 18,557 (11,284) 8,038 15,311
Interest expense.......................................... (8,682) (668) (869)(s) (10,219)
Bankruptcy reorganization expenses........................ (3,361 (t) -- -- (3,361)(t)
Minority interest......................................... -- (1,506) 1,506(u) --
----------- ------------ ----------- ------------
Income (loss) from continuing operations before income
taxes.................................................... 6,514 (13,458) 8,675 1,731
Provision for income taxes................................ (3,313) (5,085) --(v) (8,398)
----------- ------------ ----------- ------------
Income (loss) from continuing operations................ 3,201 (18,543) 8,675 (6,667)
Loss from discontinued operations......................... (468) -- -- (468)
----------- ------------ ----------- ------------
Net income (loss)....................................... $ 2,733 $ (18,543) $ 8,675 $ (7,135)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Net income (loss) per share and equivalent share:
Primary and fully diluted:
Continuing operations................................... $ 0.20 $ (0.20)
Discontinued operations................................. (0.03) (0.01)
----------- ------------
Net income (loss)..................................... $ 0.17 $ (0.21)
----------- ------------
----------- ------------
Weighted average shares and equivalent shares............. 15,742 33,764
----------- ------------
----------- ------------
</TABLE>
The 1995 net loss for the Ciba Composites Business of $18,543 includes a fourth
quarter net loss of $9,537. The fourth quarter net loss includes approximately
$6,340 of costs attributable to write-downs of certain fixed and intangible
assets, severance expenses, reserves for uncollectible receivables, and
acquisition-related expenses.
PURCHASE PRICE SUMMARY AND RELATED ALLOCATION
The purchase price paid by Hexcel for the Ciba Composites Business is
comprised of the following components:
<TABLE>
<S> <C>
18,022 shares of Hexcel common stock, valued at $8.00 per share
(1)............................................................. $ 144,200
Senior Subordinated Notes payable to Ciba in 2003 (2)............ 26,300
Cash paid to Ciba (3)............................................ 25,000
Estimated fees and expenses in connection with the acquisition
(3)............................................................. 7,600
---------
Total purchase price......................................... $ 203,100
---------
---------
</TABLE>
F-12
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL
INFORMATION (UNAUDITED) (CONTINUED)
The allocation of the total purchase price to the net assets of the Ciba
Composites Business is based upon the estimated fair values of the net assets
acquired, and is summarized as follows:
<TABLE>
<S> <C>
Cash and equivalents (4)......................................... --
Accounts receivable (5).......................................... $ 53,285
Inventories (6).................................................. 58,792
Prepaid expenses (5)............................................. 3,938
Net property, plant & equipment (7).............................. 110,877
Other assets, net (8)............................................ 1,000
Investments and other assets (5)................................. 4,214
Current liabilities (9).......................................... (57,685)
Other long-term liabilities, less current maturities (9)......... (19,221)
Minority interest (10)........................................... --
Shareholders' equity (11)........................................ 3,600
Excess of purchase price over net assets acquired (12)........... 44,300
---------
Total purchase price......................................... $ 203,100
---------
---------
</TABLE>
- ------------------------
(1) The aggregate value of the Hexcel common stock issued to Ciba is determined
by multiplying the discounted market price per share by the number of shares
issued. The market price per share is determined by reference to the prices
at which Hexcel common stock was trading on the New York Stock Exchange
during a reasonable period before and after December 12, 1995, the date upon
which Hexcel and Ciba amended the aggregate amount of consideration to be
paid by Hexcel for the Ciba Composites Business by agreeing to reduce the
initial aggregate principal amount of the senior subordinated notes by
$5,000. The market price is then discounted to reflect the illiquidity of
the Hexcel common stock issued to Ciba caused by the size of Ciba's holding,
the contractual restrictions on transferring such shares and, accordingly,
limitations on the price Ciba could realize, the contractual limitation on
the price per share Ciba could realize in certain types of transactions, the
fact that such shares are "restricted securities" within the meaning of the
Securities Act of 1933, and various other factors.
For purposes of valuing the Hexcel common stock issued to Ciba, a discounted
market price of $8.00 per share is used. The discounted market price is
based on a market price of $10.00 per share during a reasonable period
before and after December 12, 1995, and a discount rate of 20%. The
discounted market price of the shares issued is used in determining the
total purchase price because the discounted market price of Hexcel common
stock is more reliably measurable than the fair value of the assets acquired
and the liabilities assumed.
(2) Based on the formula included in the Strategic Alliance Agreement, the pro
forma aggregate principal amount of the Senior Subordinated Notes as of
December 31, 1995 is approximately $27,400. (Such amount is estimated as
follows: $43,029 (a) increased by $9,000 for the price of acquiring a
minority interest in an Austrian subsidiary of the Ciba Composites Business;
(b) increased by $6,126 for the decline in the adjusted net working capital
of Hexcel from July 2, 1995 to December 31, 1995; (c) decreased by $25,378
for the decline in the adjusted net working capital of the Ciba Composites
Business from July 2, 1995 to December 31, 1995; and (d) decreased by $5,377
for certain net assets of the Ciba Composites Business retained by Ciba and
other adjustments.) However, the actual aggregate principal amount of the
Senior Subordinated Notes to be issued may be higher or lower, because the
adjustments required under the Strategic Alliance Agreement to reflect
changes in working capital and certain other items as of February 29, 1996
have not yet been determined.
F-13
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL
INFORMATION (UNAUDITED) (CONTINUED)
The fair value of the Senior Subordinated Notes as of December 31, 1995 is
estimated to be $26,300, which is $1,100 lower than the pro forma aggregate
principal amount. The $1,100 discount reflects the absence of certain call
protection provisions from the terms of the Senior Subordinated Notes and
the difference between the stated interest rate on the Senior Subordinated
Notes and the estimated market rate for debt obligations of comparable
quality and maturity (see Note 10).
(3) The cash paid to Ciba and certain estimated fees and expenses in connection
with the acquisition of the Ciba Composites Business have been financed with
the proceeds from the Senior Secured Credit Facility (see Note 10).
(4) Under the terms of the Strategic Alliance Agreement, the cash and cash
equivalents of the Ciba Composites Business, except for cash on hand at
certain of Ciba's non-U.S. subsidiaries, are retained by Ciba. The cash on
hand at certain of Ciba's non-U.S. subsidiaries was acquired in exchange for
the Senior Demand Notes. The amount of acquired cash and the corresponding
principal amount of the Senior Demand Notes, which Hexcel expects will be
presented for payment shortly after issuance, are equal and offset each
other. Accordingly, the acquisition of such cash and the issuance of the
Senior Demand Notes has not been reflected in the unaudited pro forma
condensed combined balance sheet.
(5) The fair values of accounts receivable, prepaid expenses and investments and
other assets acquired in the purchase of the Ciba Composites Business are
estimated to equal respective net book values. Under the terms of the
Strategic Alliance Agreement, a portion of the Ciba Composites Business'
accounts receivable and prepaid expenses are retained by Ciba.
(6) The fair value of inventories acquired in the purchase of the Ciba
Composites Business is estimated to equal aggregate current sales value less
estimated selling costs. Under the terms of the Strategic Alliance
Agreement, a portion of the Ciba Composites Business' inventories is
retained by Ciba.
(7) The fair value of the property, plant and equipment acquired in the purchase
of the Ciba Composites Business is estimated to be $45,000 lower than the
respective net book value. The estimated fair value, which is based on a
preliminary review of the production facilities and equipment of the Ciba
Composites Business, reflects the fact that certain of these assets are
expected to: (a) duplicate capabilities or productive capacities already
possessed by Hexcel; or (b) be in excess of the combined company's needs.
This estimate is subject to modification in connection with further
analysis. In addition, under the terms of the Strategic Alliance Agreement,
a portion of the Ciba Composites Business' property, plant and equipment is
retained by Ciba.
(8) The fair value assigned to other assets reflects the capitalization of
estimated fees and expenses incurred to secure the Senior Secured Credit
Facility in connection with the acquisition of the Ciba Composites Business.
(9) The fair values of the current and long-term liabilities assumed by Hexcel
in connection with the purchase of the Ciba Composites Business are
estimated to equal the respective net book values. Under the terms of the
Strategic Alliance Agreement, certain of the liabilities of the Ciba
Composites Business are not assumed by Hexcel.
(10) Prior to Hexcel's acquisition of the Ciba Composites Business, Ciba
eliminated the minority interest in an Austrian subsidiary of the Ciba
Composites Business ("Danutec") by purchasing that interest, subject to
certain governmental approvals which were subsequently obtained.
F-14
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL
INFORMATION (UNAUDITED) (CONTINUED)
Accordingly, the estimated pro forma purchase price and purchase price
allocation reflect the transfer of 100% of the capital stock of Danutec to
the Company, and the minority interest in Danutec has been eliminated on a
pro forma basis.
(11) The estimated fees and expenses incurred in connection with issuing the
Hexcel common stock to Ciba are deducted from shareholders' equity.
(12) The excess of purchase price over net tangible assets acquired will be
allocated to identifiable intangible assets and goodwill pursuant to an
analysis and valuation of those assets in accordance with the provisions of
Accounting Principles Board Opinion No. 16. Such analysis and valuation has
not yet been performed. Accordingly, for purposes of the unaudited pro forma
financial information, the excess of purchase price over net tangible assets
acquired has been treated as a single intangible asset, with a 20-year life.
While the values and estimated lives of various intangible assets resulting
from the final purchase allocation will vary from these pro forma
assumptions, management does not expect these variances to be material to
the unaudited pro forma financial information contained herein.
The purchase price allocation does not reflect any liabilities for the costs of
consolidating the business operations of the Ciba Composites Business and
Hexcel. Those costs, as discussed above, are expected to be significant.
F-15
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL
INFORMATION (UNAUDITED) (CONTINUED)
PRO FORMA ADJUSTMENTS -- UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
<TABLE>
<S> <C> <C>
(a) Adjustment to eliminate the cash and cash equivalents of the Ciba
Composites Business which are retained by Ciba............................ $ (8,412)
----------
(b) Adjustment to eliminate accounts receivable of the Ciba Composites Business
which are retained by Ciba, as well as trade account balances between the
Ciba Composites Business and Hexcel....................................... $ (5,805)
----------
(c) Adjustment to eliminate inventories of the Ciba Composites Business which
are retained by Ciba, and to record acquired inventories at estimated fair
value..................................................................... $ (1,545)
----------
(d) Adjustment to eliminate prepaid expenses and other assets of the Ciba
Composites Business which are retained by Ciba............................ $ (6,019)
----------
(e) Adjustment to eliminate property, plant and equipment of the Ciba
Composites Business which is retained by Ciba, and to record acquired
property, plant and equipment at estimated fair value..................... $ (45,487)
----------
(f) Adjustment to record the excess of purchase price over net assets
acquired.................................................................. $ 44,300
----------
(g) Adjustment to reflect the following:
Elimination of the intangible assets of the Ciba Composites Business....... $ (42,211)
Capitalization and reclassification of certain fees and expenses incurred
in connection with the acquisition........................................ (3,200)
Write-off of capitalized debt issuance costs in connection with the
extinguishment of certain existing debt obligations with proceeds from the
Senior Secured Credit Facility............................................ (1,658)
----------
Net adjustment............................................................. $ (47,069)
----------
(h) Adjustment to eliminate notes payable of the Ciba Composites Business which
are not assumed by Hexcel................................................. $ (9,052)
----------
(i) Adjustment to eliminate current liabilities of the Ciba Composites Business
which are not assumed by Hexcel, as well as trade balances between the
Ciba Composites Business and Hexcel....................................... $ (1,208)
----------
(j) Adjustment to reflect the issuance of the Senior Subordinated Notes payable
to Ciba................................................................... $ 26,300
----------
(k) Adjustment to reflect the following:
Elimination of long-term liabilities of the Ciba Composites Business which
are not assumed by Hexcel................................................. $ (9,502)
Net borrowings under the Senior Secured Credit Facility to finance the cash
payment to Ciba and certain fees and expenses incurred in connection with
the acquisition........................................................... 28,400
----------
Net adjustment............................................................. $ 18,898
----------
(l) Adjustment to reflect the elimination of the minority interest in
Danutec................................................................... $ (6,968)
----------
(m) Adjustment to reflect the issuance of Hexcel common stock to Ciba, net of
certain fees and expenses incurred in connection with issuing such stock.. $ 140,600
----------
(n) Adjustment to reflect the write-off of capitalized debt issuance costs in
connection with the extinguishment of certain existing debt obligations
with proceeds from the Senior Secured Credit Facility..................... $ (1,658)
----------
(o) Adjustment to eliminate Ciba's investment in the Ciba Composites
Business.................................................................. $ (236,949)
----------
</TABLE>
F-16
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL
INFORMATION (UNAUDITED) (CONTINUED)
PRO FORMA ADJUSTMENTS -- UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS
<TABLE>
<S> <C> <C>
(p) Adjustment to eliminate sales between the Ciba Composites Business and
Hexcel.................................................................... $ (3,207)
----------
(q) Adjustment to reflect the following:
Elimination of cost of sales between the Ciba Composites Business and
Hexcel.................................................................... $ 2,708
Reduction in depreciation costs resulting from the purchase price
adjustment to the net property, plant and equipment of the Ciba Composites
Business.................................................................. 4,152
----------
Net adjustment............................................................. $ 6,860
----------
(r) Adjustment to reflect the following:
Reduction in amortization expense and write-downs of intangible assets
resulting from the elimination of the intangible assets of the Ciba
Composites Business in connection with the purchase price allocation...... $ 6,930
Amortization of the excess of purchase price over net assets acquired (20
year amortization period)................................................. (2,215)
Amortization of capitalized fees and expenses incurred in connection with
securing the Senior Secured Credit Facility (3 year amortization
period)................................................................... (330)
----------
Net adjustment............................................................. $ 4,385
----------
(s) Adjustment to reflect the following:
Elimination of interest expense on liabilities of the Ciba Composites
Business which are not assumed by Hexcel.................................. $ 1,032
Net reduction in interest expense resulting from the refinancing of certain
credit facilities with the Senior Secured Credit Facility................. 992
Estimated interest expense on the Senior Subordinated Notes payable to
Ciba...................................................................... (2,893)
----------
Net adjustment............................................................. $ (869)
----------
(t) On February 9, 1995, Hexcel emerged from bankruptcy reorganization
proceedings which had begun on December 6, 1993. In connection with those
proceedings, Hexcel incurred bankruptcy reorganization expenses of $3,361
during the year ended December 31, 1995. Although the resolution of
certain bankruptcy-related issues, including the final settlement of
disputed claims and professional fees, resulted in expenses being incurred
after February 9, 1995, Hexcel has not incurred any significant
bankruptcy-related expenses since October 1, 1995.
(u) Adjustment to eliminate the minority interest in the operating results of
the Ciba Composites Business.............................................. $ 1,506
----------
(v) The income tax consequences of the cumulative pro forma adjustments are
estimated to be zero. This is due to the fact that the pro forma combined
company incurred losses from continuing operations before income taxes for
the year ended December 31, 1995, and no income tax benefits relating to
these losses have been recognized. Furthermore, the pro forma combined
company has sufficient net operating loss carryforwards for income tax
purposes to substantially eliminate any tax liabilities arising from pro
forma adjustments.
</TABLE>
F-17
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 -- BANKRUPTCY REORGANIZATION
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 the bankruptcy reorganization proceedings which 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.
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 in support of 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 Hexcel $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 was replaced by the Senior Secured Credit
Facility on February 29, 1996 (see Note 10).
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 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, Hexcel'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 provided for the reinstatement or payment in full,
with interest, of all allowed claims, including prepetition accounts payable and
notes payable. The total of all claims reinstated or paid, less the portion
representing accrued interest for the period from January 1 to February 9, 1995,
has been reflected as "liabilities subject to disposition in bankruptcy
reorganization" in the consolidated balance sheet as of December 31, 1994. On
February 9, 1995, Hexcel paid $78,144 in prepetition claims and interest, and
reinstated another $60,575 in prepetition liabilities. Reinstated liabilities
were reclassified from "liabilities subject to disposition in bankruptcy
reorganization" to the appropriate liability captions of the consolidated
balance sheet on February 9, 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 (see Note 5);
(b) cash proceeds of $2,602 received in the first quarter of 1995 from the sale
of the Company's European resins business (see Note 5); (c) the $50,000 in cash
received from Mutual Series in connection with the standby purchase agreement;
and (d) borrowings under the Revolving Credit Facility.
Professional fees and other costs directly related to bankruptcy proceedings
were expensed as incurred, and have been reflected in the consolidated
statements of operations as "bankruptcy reorganization expenses." Bankruptcy
reorganization expenses have consisted primarily of professional fees paid to
legal and financial advisors of Hexcel, the Equity Committee and the Official
Committee of Unsecured Creditors. In addition, these expenses 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. However, the Company has not incurred
any significant bankruptcy-related expenses since October 1, 1995.
F-18
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 -- RECEIVABLES FROM ASSET SALES
SALE OF CHANDLER, ARIZONA MANUFACTURING FACILITY AND CERTAIN RELATED ASSETS AND
TECHNOLOGY
Hexcel sold its Chandler, Arizona manufacturing facility and certain related
assets and technology to Northrop Grumman Corporation ("Northrop") in the fourth
quarter of 1994. In connection with the sale, the Company recognized other
income of $15,900, which includes the effects of reversing $10,000 of a
previously established restructuring reserve related to the Chandler facility
and $5,900 which represents the excess of the sales price over the carrying
value of the net assets sold. 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 of 1995
have been reflected in "receivables from asset sales" in the consolidated
balance sheet as of December 31, 1994.
Under the terms of the Chandler transaction, Hexcel 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 (expense), net" in the 1995 consolidated statement of
operations. An additional $1,560 was received in February 1996; the resulting
income will be recognized in the first quarter of 1996.
SALE OF RESINS BUSINESS
On December 29, 1994, Hexcel sold its European resins operations to Axson
S.A., a French corporation, through the sale of all of the Company's shares in
the capital stock of its European resins subsidiaries. The sale and related
settlement transactions generated net cash proceeds of approximately $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 consolidated
balance sheet as of December 31, 1994.
Hexcel 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 approximated the net book value of the
assets sold. The sale of the Company's U.S. resins operations completed the
divestiture of the resins business, which has been accounted for as a
discontinued operation in the consolidated financial statements for all periods
presented (see Note 23).
NOTE 6 -- INVENTORIES
Inventories as of December 31, 1995 and 1994 were:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Raw materials.......................................................... $ 22,257 $ 18,846
Work in progress....................................................... 13,688 12,518
Finished goods......................................................... 17,778 14,934
Supplies............................................................... 1,752 1,066
--------- ---------
Inventories............................................................ $ 55,475 $ 47,364
--------- ---------
--------- ---------
</TABLE>
F-19
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1995 and 1994 were:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Land.............................................................. $ 2,349 $ 2,213
Buildings......................................................... 46,560 36,913
Equipment......................................................... 154,671 147,202
------------ ------------
Property, plant and equipment..................................... 203,580 186,328
Less accumulated depreciation..................................... (117,625) (103,215)
------------ ------------
Net property, plant and equipment................................. $ 85,955 $ 83,113
------------ ------------
------------ ------------
</TABLE>
NOTE 8 -- INVESTMENTS AND OTHER ASSETS
Investments and other assets as of December 31, 1995 and 1994 were:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Investments in joint ventures..................................... $ 6,615 $ 6,287
Deferred business acquisition costs............................... 4,150 --
Debt financing costs, net of accumulated amortization of $529 as
of December 31, 1995............................................. 1,658 --
Other assets...................................................... 4,169 5,705
------------ ------------
Investments and other assets...................................... $ 16,592 $ 11,992
------------ ------------
------------ ------------
</TABLE>
Investments in joint ventures consist of a 50% equity interest in Knytex
Company, L.L.C. ("Knytex"), which is jointly owned and operated with
Owens-Corning Fiberglas Corporation, and a 40% equity interest in Hexcel-Fyfe,
L.L.C. ("Hexcel-Fyfe"), which is jointly owned and operated with Fyfe Associates
Corporation. The Company also owns an equity interest in DIC-Hexcel Limited, a
joint venture with Dainippon Ink and Chemicals, Inc. ("DIC"), for which there
was no recorded asset value as of December 31, 1995 or 1994 (see Note 9).
Investments in joint ventures are accounted for by the equity method. Equity in
the earnings of joint ventures were not material to the Company's consolidated
results of operations in 1995, 1994 or 1993.
Knytex was formed on June 30, 1993 when the Company sold 50% of its
stitchbonded business to Owens-Corning and contributed the remaining 50% to the
joint venture. The Company received proceeds of $4,500 and recognized a gain of
$1,541 from the sale.
Deferred business acquisition costs consists of certain transaction-related
costs incurred in connection with the acquisition of the Ciba Composites
Business through December 31, 1995. Such costs will be included in the
allocation of the total purchase price to the net assets acquired as of the
acquisition date, in accordance with the provisions of Accounting Principles
Board Opinion No. 16.
Debt financing costs are deferred and amortized over the life of the related
debt. All debt financing costs as of December 31, 1995 relate to debt
obligations that were extinguished on February 29, 1996 with proceeds from the
Senior Secured Credit Facility. Accordingly, the unamortized balance of such
costs will be written off by a charge to "interest expense" during the first
quarter of 1996.
NOTE 9 -- DIC-HEXCEL LIMITED
The Company owns an equity interest in DIC-Hexcel Limited, a joint venture
with Dainippon Ink and Chemicals, Inc. ("DIC"). The joint venture was formed in
1990 for the production and sale of Nomex honeycomb, advanced composites and
decorative laminates for the Japanese market. The joint venture owns and
operates a manufacturing facility in Komatsu, Japan.
Under the terms of the original joint venture agreement, DIC agreed to
guarantee all bank debt incurred by this venture. In turn, the Company provided
an undertaking that in the event the joint
F-20
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 -- DIC-HEXCEL LIMITED (CONTINUED)
venture went into liquidation the Company would reimburse DIC for 50% of all
guaranteed bank loans, net of any proceeds from the sale of the venture's
assets. During 1994, the economic viability of this joint venture became
questionable, and the cost of product qualification efforts and the attendant
lack of revenues were resulting in negative cash flows. During the third quarter
of 1994, DIC proposed to liquidate the joint venture. The Company responded with
a proposal to restructure the joint venture, subject to various conditions,
which DIC agreed to consider. Under either proposal, the Company would retain
responsibility for a portion of the joint venture's guaranteed bank debt.
Accordingly, the Company recorded an $8,000 provision in the third quarter of
1994 to reflect the estimated cost of restructuring or liquidating DIC-Hexcel
Limited. This provision has been included in "other income (expenses), net" in
the 1994 consolidated statement of operations, and the corresponding liability
has been included in "liabilities subject to disposition in bankruptcy
reorganization" in the consolidated balance sheet as of December 31, 1994.
On February 20, 1995, Hexcel and DIC entered into an amendment to the
original joint venture agreements which provided additional funding to permit
DIC-Hexcel Limited to complete its product qualification efforts and limited the
Company's potential liability for the venture's bank debt guaranteed by DIC to
$9,000. Under the terms of the amendment, the Company and DIC each agreed to
contribute $4,500 in cash to the venture, payable in installments of $1,438 in
the first quarter of 1995 and $438 in each of the next seven quarters. It was
agreed that such cash contributions by the Company would reduce pro-rata its
potential liability of $9,000. The amendment also provided, after taking account
to the transactions contemplated thereunder, for a reduction in the Company's
equity interest in DIC-Hexcel Limited to approximately 42% with a corresponding
increase in DIC's equity interest. After December 31, 1996, should demand be
made under the loans made to DIC-Hexcel Limited guaranteed by DIC, the Company
will be required to pay 50% of any amount DIC pays on account of its guarantees,
up to a cumulative amount of $4,500. Furthermore, the Company and DIC agreed
that they would discuss and review the prospects of the venture and its future
financing during the second half of 1996. During this period both DIC and the
Company each have the right to request the liquidation of DIC-Hexcel Limited. If
such right is exercised, the Company will be required to make payment of the
remaining contingent liability of up to $4,500. If such liquidation right is
exercise by either party, it is not anticipated that payment would be required
prior to January 1997.
Management believes that the $8,000 provision recorded in the third quarter
of 1994 remains the best estimate of the Company's total probable liability
under the amended joint venture agreement, based on the terms of that agreement
and the projected future operating results of DIC-Hexcel Limited. The Company
contributed $2,750 of cash to the joint venture during 1995, reducing the
remaining probable liability to $5,250 as of December 31, 1995. Of this amount,
$1,750 has been included in "accrued liabilities" and $3,500 has been included
in "deferred liabilities" in the consolidated balance sheet as of December 31,
1995 (see Note 17).
F-21
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- NOTES PAYABLE
Notes payable and capital lease obligations as of December 31, 1995 and 1994
were:
<TABLE>
<CAPTION>
1995
UNAUDITED
PRO FORMA
(SEE NOTE
3) 1995 1994
----------- --------- ----------
<S> <C> <C> <C>
Senior Secured Credit Facility.............................................. $ 74,605 -- --
Revolving Credit Facility................................................... -- $ 30,091 --
European credit facilities.................................................. 1,692 17,806 $ 18,128
Debtor-in-possession credit facility........................................ -- -- 4,189
Prepetition credit facility................................................. -- -- 12,000
Senior Subordinated Notes payable to Ciba-Geigy............................. 26,300 -- --
10.12% senior notes, originally due 1998.................................... -- -- 30,000
7% convertible subordinated debentures, due 2011............................ 25,625 25,625 25,625
Obligations under IDRB variable rate demand notes, due through 2024, net.... 11,990 11,990 13,310
Capital lease obligations (see Note 11)..................................... 3,217 3,217 3,234
Various notes payable, due through 2007..................................... 1,715 1,715 3,053
----------- --------- ----------
Total notes payable and capital lease obligations....................... 145,144 90,144 109,539
Less amount subject to disposition in bankruptcy reorganization............. -- -- (80,815)
----------- --------- ----------
Total notes payable and capital lease obligations, net.................. $ 145,144 $ 90,144 $ 28,724
----------- --------- ----------
----------- --------- ----------
Notes payable and current maturities of long-term liabilities, net.......... $ 1,802 $ 1,802 $ 12,720
Long-term notes payable and capital lease obligations, net.................. 143,342 88,342 16,004
----------- --------- ----------
Total notes payable and capital lease obligations, net.................. $ 145,144 $ 90,144 $ 28,724
----------- --------- ----------
----------- --------- ----------
</TABLE>
SENIOR SECURED CREDIT FACILITY
In connection with the acquisition of the Ciba Composites Business, Hexcel
obtained the Senior Secured Credit Facility on February 29, 1996. The Senior
Secured Credit Facility is a three-year revolving credit facility of up to
$175,000 which is available to: (a) fund the $25,000 cash component of the
purchase price paid for the Ciba Composites Business; (b) refinance outstanding
indebtedness under certain U.S. and European credit facilities; and (c) provide
for the ongoing working capital and other financing requirements of the Company,
including consolidation activities, on a worldwide basis. The Senior Secured
Credit Facility replaces the Revolving Credit Facility which was obtained on
February 9, 1995, in connection with Hexcel's Reorganization Plan, as well as
certain European credit facilities.
Interest on outstanding borrowings under the Senior Secured Credit Facility
is computed at an annual rate of 0.4% in excess of the applicable London
interbank rate or, at the option of Hexcel, the base rate of the administrative
agent for the lenders. In addition, the Senior Secured Credit Facility is
subject to a commitment fee of approximately 0.2% per annum on the unused
portion of the facility and a letter of credit fee of up to 0.5% per annum on
the outstanding face amount of letters of credit. The Company also paid one-time
arrangement, syndication and closing fees totaling $869, as well as certain
other costs and expenses related to the implementation of the Senior Secured
Credit Facility.
The Senior Secured Credit Facility is secured by a pledge of stock of
certain of Hexcel's subsidiaries, and is also guaranteed by the Company and
certain of its subsidiaries. In addition, the Company is subject to various
financial covenants and restrictions under the Senior Secured Credit Facility,
F-22
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- NOTES PAYABLE (CONTINUED)
including minimum levels of tangible net worth and fixed charge coverage, and
maximum levels of debt to earnings before interest, taxes, depreciation and
amortization. The Senior Secured Credit Facility also imposes certain
restrictions on incurring additional indebtedness, and generally prohibits the
Company from paying dividends or redeeming capital stock.
In addition to providing for typical events of default, including an event
of default resulting from a "change in control" (as defined) of the Company, the
Senior Secured Credit Facility provides that an event of default would occur if,
under certain circumstances, Ciba: (a) ceases to hold, directly or indirectly
through one or more wholly-owned subsidiaries, 100% of the outstanding principal
amount of the Senior Subordinated Notes, or (b) ceases to beneficially own,
directly or indirectly, at least 40% of Hexcel's voting stock. In light of the
foregoing, the Company and Ciba entered into a Retention Agreement, dated as of
February 29, 1996, pursuant to which Ciba agreed, subject to the limitations set
forth therein, to: (a) hold directly or indirectly through one or more
wholly-owned subsidiaries, 100% of the outstanding principal amount of the
Senior Subordinated Notes, and (b) beneficially own, directly or indirectly, at
least 40% of the Company's voting stock.
REVOLVING CREDIT FACILITY
The Revolving Credit Facility, which replaced the Debtor-in-possession
credit facility on February 9, 1995, was replaced by the Senior Secured Credit
Facility on February 29, 1996.
EUROPEAN CREDIT FACILITIES
Certain European credit facilities were replaced by the Senior Secured
Credit Facility on February 29, 1996.
SENIOR SUBORDINATED NOTES PAYABLE TO CIBA-GEIGY
In connection with the acquisition of the Ciba Composites Business, Hexcel
has undertaken to deliver to Ciba and/or one or more of its subsidiaries the
Senior Subordinated Notes. The Senior Subordinated Notes, which will be issued
following the completion of certain post-closing adjustment procedures
contemplated by the Strategic Alliance Agreement, will be general unsecured
obligations of the Company in an aggregate principal amount of approximately
$43,000, subject to certain adjustments. The actual aggregate principal amount
of the Senior Subordinated Notes to be issued may be higher or lower than
$43,000, because the adjustments required under the Strategic Alliance Agreement
to reflect changes in working capital and certain other items as of February 29,
1996 have not yet been determined. (The pro forma aggregate principal amount of
the Senior Subordinated Notes as of December 31, 1995 was $27,400, and the pro
forma estimated fair value of the Senior Subordinated Notes on that date was
$26,300. See Note 3.)
The Senior Subordinated Notes will bear interest for three years at a rate
of 7.5% per annum, payable semiannually, from February 29, 1996. The interest
rate will increase to 10.5% per annum on the third anniversary of the
acquisition of the Ciba Composites Business, and by an additional 0.5% per year
thereafter until the Senior Subordinated Notes mature in the year 2003. The
payment of principal and interest on the Senior Subordinated Notes will be
subordinate to the Senior Secured Credit Facility.
The Senior Subordinated Notes will be callable, in whole or in part, at the
option of Hexcel at any time without penalty, and the Company will not be
required to make mandatory redemption or sinking fund payments. Under certain
circumstances, upon a "change of control" of the Company, as defined in the
indenture governing the Senior Subordinated Notes, the holders of the Senior
Subordinated Notes (except, under certain circumstances, Ciba) will have the
right to cause the Company to
F-23
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- NOTES PAYABLE (CONTINUED)
repurchase all or any part of the Senior Subordinated Notes at a price equal to
101% of the principal amount to be repurchased plus accrued interest. Under such
indenture, the Company will be subject to various restrictions, including
restrictions on incurring additional indebtedness, paying dividends and
redeeming capital stock.
7% CONVERTIBLE SUBORDINATED DEBENTURES
The 7% convertible subordinated debentures were subject to disposition in
bankruptcy reorganization, and were reinstated on February 9, 1995, pursuant to
the Reorganization Plan. These debentures are redeemable by the Company under
certain provisions, although any such redemption is restricted by the terms of
the Senior Secured Credit Facility. Mandatory redemption is scheduled to begin
in 2002 through annual sinking fund requirements. The debentures are convertible
prior to maturity into common stock of the Company at $30.72 per share, subject
to adjustment under certain conditions.
OBLIGATIONS UNDER IDRB VARIABLE RATE DEMAND NOTES
Hexcel has various industrial development revenue bonds ("IDRBs")
outstanding, guaranteed by bank letters of credit for fees of 0.5%. These IDRBs
were subject to disposition in bankruptcy reorganization, and were reinstated on
February 9, 1995, pursuant to the Reorganization Plan. The letters of credit
which guarantee the IDRBs were also reinstated, in accordance with the terms of
an amended reimbursement agreement (the "Reimbursement Agreement") with the
issuing bank, and extended until December 31, 1998. The Reimbursement Agreement
originally provided that, commencing April 1, 1995 and every three months
thereafter for the duration of the agreement, the Company would either redeem
$600 of the guaranteed IDRBs, obtain a $600 letter of credit in favor of the
issuing bank, or deposit $600 into a sinking fund in which the issuing bank
and/or the trustees for the IDRBs will hold a first priority security interest.
However, these provisions were eliminated by an amendment to the Reimbursement
Agreement dated February 29, 1996. This amendment, which was agreed to by the
issuing bank in connection with the Company's acquisition of the Ciba Composites
Business, also eliminated certain financial covenants and other restrictions
previously contained in the Reimbursement Agreement. The interest rates on the
IDRBs are variable and averaged 6.2% in 1995, 3.9% in 1994 and 2.5% in 1993.
On November 1, 1994, Hexcel sold the property it owned in the City of
Industry, California for $2,600, which approximated net book value. Under the
terms of the sales agreement, the buyer paid the Company $260 in cash and
assumed responsibility for $2,340 of the outstanding principal of a $4,900 IDRB
related to the property. As of December 31, 1995, the outstanding balance of the
IDRB had been reduced to $4,700, of which $2,160 was an assumed obligation of
the buyer. The Company is contingently liable for that portion of the IDRB
assumed by the buyer, in the event the buyer should default on assumed payment
obligations.
INSTALLMENTS DUE ON NOTES PAYABLE
Excluding obligations extinguished with proceeds from the Senior Secured
Credit Facility, installments due on long-term notes payable are $1,489 in 1996,
$267 in 1997 and $38,966 in years after the year 2000. The Senior Secured Credit
Facility, which was used to refinance long-term debt obligations totaling
$46,205 as of December 31, 1995, expires in 1999.
AGGREGATE FAIR VALUE OF LONG-TERM DEBT
Management believes that the aggregate fair value of Hexcel's long-term
debt, excluding the 7% convertible subordinated debentures, approximates the
aggregate book value, as substantially all
F-24
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- NOTES PAYABLE (CONTINUED)
such debt is comprised of variable-rate obligations. However, there can be no
assurance that the aggregate fair value of the Company's long-term debt will not
materially vary from the aggregate book value. The fair value of the 7%
convertible subordinated debentures is estimated on the basis of quoted market
prices, although trading in the debentures is limited and may not reflect fair
value. The estimated fair value of all of the outstanding debentures was $21,781
and $15,888 as of December 31, 1995 and 1994, respectively.
INTEREST PAYMENTS
Interest payments were $8,345 in 1995, $3,909 in 1994 and $8,802 in 1993.
Hexcel was legally prohibited from paying interest on most prepetition debt
obligations in 1994.
NOTE 11 -- LEASING ARRANGEMENTS
Assets, accumulated depreciation and related liability balances under
capital leasing arrangements as of December 31, 1995 and 1994 were:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Property, plant and equipment.................................................. $ 7,205 $ 6,734
Less accumulated depreciation.................................................. (2,611) (2,246)
--------- ---------
Net property, plant and equipment.......................................... $ 4,594 $ 4,488
--------- ---------
--------- ---------
Capital lease obligations...................................................... $ 3,217 $ 3,234
Less current maturities........................................................ (313) (410)
--------- ---------
Long-term capital lease obligations, net................................... $ 2,904 $ 2,824
--------- ---------
--------- ---------
</TABLE>
Certain sales and administrative offices, data processing equipment, and
manufacturing facilities are leased under operating leases. Rental expenses
under operating leases were $2,871 in 1995, $3,675 in 1994 and $3,530 in 1993.
Future minimum lease payments as of December 31, 1995 were:
<TABLE>
<CAPTION>
TYPE OF LEASE
----------------------
PAYABLE DURING YEARS ENDING DECEMBER 31: CAPITAL OPERATING
- ------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
1996........................................................................... $ 675 $ 2,520
1997........................................................................... 675 1,975
1998........................................................................... 675 1,327
1999........................................................................... 675 1,078
2000........................................................................... 582 737
2001 and thereafter............................................................ 2,267 2,147
--------- -----------
Total minimum lease payments............................................... $ 5,549 $ 9,784
--------- -----------
--------- -----------
</TABLE>
Total minimum capital lease payments include $2,332 of imputed interest.
NOTE 12 -- ACCRUED RESTRUCTURING LIABILITIES
In December 1992, Hexcel initiated a worldwide restructuring program
designed to improve facility utilization and determine the proper workforce
requirements to support projected reduced levels of business in 1993 and beyond.
The Company recorded a charge for this program of $23,000 in the fourth quarter
of 1992.
F-25
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 -- ACCRUED RESTRUCTURING LIABILITIES (CONTINUED)
In April 1993, Hexcel announced the closing of the Graham, Texas
manufacturing facility and the consolidation of Graham operations into other
plants. The estimated costs of this closure were included in the 1992
restructuring charge. The Graham closure was substantially completed in 1994.
In September 1993, Hexcel announced plans to significantly expand the
restructuring program in response to the expected further decline in commercial
and military aerospace markets. Accordingly, the Company recorded a charge of
$44,000 in the third quarter of 1993. This expansion included deeper cuts in
overhead and further consolidation of facilities in the United States and
Europe. During the fourth quarter of 1993, an additional charge of $2,600 was
recorded in connection with the expanded restructuring program. The 1993 and
1992 restructuring charges included approximately $34,000 of non-cash
write-downs related to facility closures and the impairment of certain assets
due to declining sales and the changed business environment.
In the fourth quarter of 1994, Hexcel sold the Chandler, Arizona
manufacturing facility and certain related assets and technology (see Note 5).
Together with the closure of the Graham facility, this completed the reduction
in honeycomb production capacity contemplated by the expanded restructuring
program. The Company transferred certain assets and production processes located
at the Chandler facility, which were not included in the sale, to the Company's
facility in Casa Grande, Arizona. The estimated costs associated with this
transfer were included in the restructuring charge recorded in the third quarter
of 1993.
The total of $69,600 in restructuring charges taken in 1992 and 1993 and the
remaining balances of accrued restructuring charges as of December 31, 1995 and
1994 were:
<TABLE>
<CAPTION>
ACCRUED ACCRUED
1992 & 1993 RESTRUCTURING RESTRUCTURING
RESTRUCTURING LIABILITIES LIABILITIES
EXPENSES AT 12/31/95 AT 12/31/94
------------- ------------- -------------
<S> <C> <C> <C>
Estimated costs to close and relocate facilities:
Asset write-downs.................................................. $ 19,500 $ 500 $ 2,230
Cash costs, net of expected sales proceeds......................... 11,000 1,190 2,835
Estimated employee severance costs (excluding severance related to
the closure of facilities).......................................... 15,900 260 1,100
Asset write-downs due to changed business conditions................. 14,700 -- --
Estimated cash costs of various other restructuring actions.......... 8,500 937 5,000
------------- ------------- -------------
$ 69,600 $ 2,887 $ 11,165
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The decrease in accrued restructuring liabilities during 1995 is primarily
attributable to the consolidation of honeycomb manufacturing operations in
connection with the disposal of the Chandler facility, as well as severance
payments and implementation of a new management information system. The
consolidation of honeycomb operations reflected in the 1992 and 1993
restructuring charges is substantially complete, while implementation of the
information system will continue through 1996.
F-26
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 -- LIABILITIES SUBJECT TO DISPOSITION IN BANKRUPTCY REORGANIZATION
Liabilities subject to disposition in bankruptcy reorganization as of
December 31, 1994 were:
<TABLE>
<CAPTION>
1994
-----------
<S> <C>
Accounts payable........................................................................... $ 23,271
Accrued liabilities, including interest.................................................... 33,691
Notes payable and capital lease obligations (see Note 10).................................. 80,815
-----------
Total liabilities subject to disposition in bankruptcy reorganization.................. $ 137,777
-----------
-----------
Current liabilities subject to disposition in bankruptcy reorganization.................... $ 97,025
Long-term liabilities subject to disposition in bankruptcy reorganization.................. 40,752
-----------
Total liabilities subject to disposition in bankruptcy reorganization.................. $ 137,777
-----------
-----------
</TABLE>
The Reorganization Plan provided for the reinstatement or payment in full,
with interest, of all allowed claims, including prepetition accounts payable and
notes payable. The total of all claims reinstated or paid, less the portion
representing accrued interest for the period from January 1 to February 9, 1995,
has been reflected as "liabilities subject to disposition in bankruptcy
reorganization" in the consolidated balance sheet as of December 31, 1994.
NOTE 14 -- RETIREMENT PLANS
The Company has various retirement and profit sharing plans covering
substantially all U.S. employees and certain European employees. The net cost of
these plans was $2,768 in 1995, $2,443 in 1994 and $2,330 in 1993.
In the United States, the Company maintains a defined contribution plan and
a defined benefit pension plan. The defined contribution plan is available to
substantially all U.S. employees, and is comprised of a 401(k) savings plan and
a profit sharing plan. Under the 401(k) savings plan, the Company makes matching
contributions equal to 50% of the contributions of the employees, not to exceed
3% of employee compensation. The defined benefit pension plan is a career
average pension plan covering substantially all U.S. hourly employees. Effective
January 1, 1996, participation in the defined benefit pension plan was extended
to U.S. salaried employees as well. Benefits are based on years of service and
the annual compensation of the employee, and the Company's funding policy is to
contribute the minimum amount required by applicable regulations.
The Company also maintains a defined benefit pension plan for employees in
the United Kingdom, and defined benefit retirement plans for certain senior
executives and directors. The Company's European subsidiaries, except for those
in the United Kingdom, participate in government retirement plans which cover
all employees of those subsidiaries.
F-27
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 -- RETIREMENT PLANS (CONTINUED)
Contributions to the 401(k) savings plan were $1,290 for 1995, $1,039 for
1994 and $1,130 for 1993. There were no contributions to the profit sharing plan
for 1995, 1994 or 1993. The net cost of the Company's defined benefit pension
and retirement plans for the years ended December 31, 1995, 1994 and 1993
consisted of:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year........................ $ 661 $ 753 $ 749
Interest cost on projected benefit obligation.......................... 660 706 713
Return on assets -- actual............................................. (1,103) 33 (1,385)
Net amortization and deferral.......................................... 1,260 (88) 1,123
--------- --------- ---------
Net periodic pension cost.......................................... $ 1,478 $ 1,404 $ 1,200
--------- --------- ---------
--------- --------- ---------
</TABLE>
Assumptions used in the accounting for these defined benefit and retirement
plans were:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Discount rate.................................................................. 7.0% 8.0% 7.0%
Rate of increase in compensation............................................... 4.0% 4.0% 4.0%
Expected long-term rate of return on plan assets............................... 9.5% 9.5% 9.5%
</TABLE>
The funded status and amounts recognized for the defined benefit pension and
retirement plans as of December 31, 1995 and 1994 were:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation.............................................................. $ 8,047 $ 6,688
Non-vested benefit obligation.......................................................... 1,281 1,022
--------- ---------
Accumulated benefit obligation....................................................... $ 9,328 $ 7,710
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date................................ $ 10,985 $ 8,658
Less plan assets at fair value, primarily listed stocks and insurance contracts.......... (5,117) (3,128)
--------- ---------
Projected benefit obligation in excess of plan assets.................................... 5,868 5,530
Unrecognized net loss.................................................................... (2,176) (814)
Unrecognized prior service costs......................................................... (240) (285)
Unrecognized net transition obligation being recognized over 15 years.................... (255) (298)
Adjustment required to recognize minimum pension liability............................... 1,014 449
--------- ---------
Defined benefit pension and retirement liability......................................... 4,211 4,582
Less current portion of pension and retirement liability................................. (1,780) (1,762)
--------- ---------
Deferred pension and retirement liability (see Note 17).............................. $ 2,431 $ 2,820
--------- ---------
--------- ---------
</TABLE>
NOTE 15 -- POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides certain postretirement health care and life insurance
benefits to eligible retirees. Substantially all U.S. employees hired on or
before December 31, 1995 who retire on or after age 58 after rendering at least
15 years of service are eligible for benefits. Benefits consist of coverage of
up to 50% of the annual cost of certain health insurance plans, as well as
annual life insurance coverage equal to 65% of the final base pay of the retiree
until the age of 70. Upon reaching 70 years of age, life insurance coverage is
reduced.
F-28
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15 -- POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (CONTINUED)
The Company funds postretirement health care and life insurance benefit
costs on a pay-as-you-go basis and, for 1995, 1994 and 1993, made benefit
payments of $583, $423 and $576, respectively. Net defined postretirement
benefit costs for the years ended December 31, 1995, 1994 and 1993 were:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year........................ $ 279 $ 389 $ 400
Interest cost on accumulated postretirement benefit obligation......... 780 915 1,100
Net amortization and deferral.......................................... (201) -- --
--------- --------- ---------
Net periodic postretirement benefit cost........................... $ 858 $ 1,304 $ 1,500
--------- --------- ---------
--------- --------- ---------
</TABLE>
Defined postretirement benefit liabilities as of December 31, 1995 and 1994
were:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................... $ 6,766 $ 7,661
Fully eligible active plan participants..................................... 1,264 985
Other active plan participants.............................................. 3,726 3,211
--------- ---------
11,756 11,857
Unrecognized net gain......................................................... 2,778 2,402
--------- ---------
Defined postretirement benefit liability...................................... 14,534 14,259
Less current portion of postretirement benefit liability...................... (583) (651)
--------- ---------
Deferred postretirement benefit liability (see Note 17)................... $ 13,951 $ 13,608
--------- ---------
--------- ---------
</TABLE>
Two health care cost trend rates were used in measuring the accumulated
postretirement benefit obligation. The assumed indemnity health care cost trend
in 1996 was 11.0% for participants less than 65 years of age and 7.0% for
participants 65 years of age and older, gradually declining to 6.0% for both age
groups in the year 2001. The assumed HMO health care cost trend in 1996 was 8.0%
for participants less than 65 years of age and 5.0% for participants 65 years of
age and older, gradually declining to 6.0% and 5.0%, respectively, in the year
1998.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% in 1995 and 8.0% in 1994. The rate of
increase in compensation used in determining the obligation was 4.0% in both
1995 and 1994.
If the health care cost trend rate assumptions were increased by 1.0%, the
accumulated postretirement benefit obligation as of December 31, 1995 would be
increased by 3.6%. The effect of this change on the sum of the service cost and
interest cost would be an increase of 3.0%.
Effective January 1, 1996, Hexcel amended its postretirement benefit program
to eliminate any benefits for employees hired after December 31, 1995 (other
than certain former employees of the Ciba Composites Business hired on February
29, 1996), and to limit health care benefit coverage to selected health
insurance plans for the majority of active employees hired on or before December
31, 1995. These amendments are expected to reduce the Company's accumulated
postretirement benefit obligation by approximately $1,600, which will be
recognized as a reduction in future benefit expense on a straight line basis
over 14 years.
F-29
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- INCOME TAXES
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1995, the Company had net operating loss ("NOL")
carryforwards for U.S. federal income tax purposes of approximately $65,000 and
net operating loss carryforwards for international income tax purposes of
approximately $5,000. The U.S. NOL carryforwards, which are available to offset
future taxable income, expire at various dates through the year 2010.
As a result of the ownership change which occurred in connection with the
Reorganization Plan (see Note 4), a limitation on the utilization of NOL
carryforwards in the U.S. was created. This utilization limitation, which
applies to loss carryforwards generated prior to February 9, 1995, is estimated
to be approximately $5,000 per year. As a result of the acquisition of the Ciba
Composites Business (see Notes 2 and 3), a second successive limitation on the
utilization of NOL carryforwards in the U.S. has been created. This utilization
limitation, which applies to loss carryforwards generated between February 9,
1995 and February 29, 1996, is estimated to be approximately $12,000 per year.
Under U.S. federal tax law, NOL carryforwards are utilized in the order of
successive limitations. Consequently, the NOL carryforwards subject to the first
annual limitation may be utilized to reduce future taxable income of up to
$5,000 per year, and the NOL carryforwards subject to the second annual
limitation may then be utilized to reduce future taxable income of up to $12,000
per year. The aggregate utilization of NOL carryforwards subject to both
limitations may not exceed $12,000 annually.
PROVISION FOR INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," effective January 1, 1993. The cumulative effect
of adopting SFAS 109 was the recognition of $4,500 of income, which was recorded
in the first quarter of 1993. In connection with the adoption of SFAS 109, the
Company established a valuation allowance of $4,693 against its deferred income
tax assets.
During 1993, substantial uncertainty developed as to the realization of
Hexcel's deferred income tax assets. As a result, the Company increased the
valuation allowance against its deferred income tax assets, reducing the
recorded value of those assets to zero. The increase to the valuation allowance
reflected the Company's assessment that the bankruptcy reorganization
proceedings of Hexcel and substantial operating losses had jeopardized the
realization of deferred income tax assets.
In 1994 and 1995, Hexcel continued to reserve for the income tax assets
generated by the pre-tax losses of certain subsidiaries. As a result of
settlements of various tax audits, state income taxes and taxable income for
certain European subsidiaries, the Company recorded a provision for income taxes
of $3,586 in 1994. As a result of state income taxes and taxable income for
certain European subsidiaries, the Company recorded a provision for income taxes
of $3,313 in 1995.
F-30
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- INCOME TAXES (CONTINUED)
Income (loss) before income taxes and the tax provision for income taxes
from continuing operations for the years ended December 31, 1995, 1994 and 1993
were:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes:
United States..................................................... $ (1,027) $ (24,745) $ (58,554)
International..................................................... 7,541 251 (15,294)
--------- ---------- ----------
Total income (loss) before income taxes......................... $ 6,514 $ (24,494) $ (73,848)
--------- ---------- ----------
--------- ---------- ----------
Benefit (provision) for income taxes:
Current:
U.S............................................................... $ (197) $ (85) $ (243)
International..................................................... (3,445) 108 (976)
--------- ---------- ----------
Current benefit (provision) for income taxes.................... (3,642) 23 (1,219)
--------- ---------- ----------
Deferred:
U.S............................................................... -- (2,226) (6,590)
International..................................................... 329 (1,383) 1,785
--------- ---------- ----------
Deferred benefit (provision) for income taxes................... 329 (3,609) (4,805)
--------- ---------- ----------
Total provision for income taxes................................ $ (3,313) $ (3,586) $ (6,024)
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
A reconciliation of the tax provision to the U.S. federal statutory income
tax rate of 34% for the years ended December 31, 1995, 1994 and 1993 was:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Benefit (provision) at U.S. federal statutory rate................... $ (2,215) $ 8,328 $ 25,108
U.S. state taxes, less federal tax benefit........................... 254 (244) (104)
Impact of different international tax rates, adjustments to income
tax accruals and other.............................................. (492) (3,837) 5,471
Valuation allowance.................................................. (860) (7,833) (36,499)
--------- --------- ----------
Total provision for income taxes................................. $ (3,313) $ (3,586) $ (6,024)
--------- --------- ----------
--------- --------- ----------
</TABLE>
The Company paid income taxes of $3,864 in 1995, $253 in 1994 and $203 in
1993. The Company has made no U.S. income tax provision for approximately
$27,000 of undistributed earnings of international subsidiaries as of December
31, 1995. Such earnings are considered to be permanently reinvested. The
additional U.S. income tax on these earnings, if repatriated, would be offset in
part by foreign tax credits.
F-31
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- INCOME TAXES (CONTINUED)
DEFERRED INCOME TAXES
Deferred income taxes result from temporary differences between the
recognition of items for income tax purposes and financial reporting purposes.
Principal temporary differences as of December 31, 1995 and 1994 were:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Accelerated depreciation and amortization................................... $ 10,473 $ 15,443
Accrued restructuring charges............................................... (655) (14,382)
Net operating loss carryforwards............................................ (27,562) (10,880)
Reserves and other, net..................................................... (30,309) (37,045)
Valuation allowance......................................................... 50,006 49,146
---------- ----------
Deferred tax liability (see Note 17).................................... $ 1,953 $ 2,282
---------- ----------
---------- ----------
</TABLE>
NOTE 17 -- DEFERRED LIABILITIES
Deferred liabilities as of December 31, 1995 and 1994 were:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred DIC-Hexcel liability (see Note 9).................................... $ 3,500 --
Deferred pension and retirement liability (see Note 14)....................... 2,431 $ 2,820
Deferred postretirement benefit liability (see Note 15)....................... 13,951 13,608
Deferred tax liability (see Note 16).......................................... 1,953 2,282
Other......................................................................... 5,566 2,569
--------- ---------
Deferred liabilities...................................................... $ 27,401 $ 21,279
--------- ---------
--------- ---------
</TABLE>
NOTE 18 -- SHAREHOLDERS' EQUITY AND INCENTIVE STOCK PLAN
SHAREHOLDERS' EQUITY
On February 21, 1996, Hexcel's shareholders approved an amendment to the
Company's Certificate of Incorporation increasing the number of authorized
shares of Hexcel common stock from 40,000 to 100,000. On February 29, 1996, the
Company issued 18,022 shares of Hexcel common stock to Ciba in connection with
the acquisition of the Ciba Composites Business. As a result, Ciba owned 49.9%
of the total number of shares of Hexcel common stock issued and outstanding as
of that date.
There are 1,500 shares of Hexcel preferred stock authorized for issuance,
but no such shares have been issued.
Hexcel did not declare or pay any dividends in 1995, 1994 or 1993. The Board
of Directors suspended dividend payments beginning in 1993, and such payments
are generally prohibited by the Senior Secured Credit Facility.
INCENTIVE STOCK PLAN
On February 21, 1996, Hexcel's shareholders approved the Incentive Stock
Plan. The Incentive Stock Plan authorizes an aggregate of 3,000 shares of Hexcel
common stock for use by the Company in providing a variety of stock-based awards
to eligible employees, officers, directors and consultants. The Incentive Stock
Plan provides for grants of stock options, stock appreciation rights, restricted
shares, and other stock-based awards.
F-32
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 18 -- SHAREHOLDERS' EQUITY AND INCENTIVE STOCK PLAN (CONTINUED)
Stock option data for the two years ended December 31, 1995 were:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE PER EXPIRATION
SHARES SHARE DATES
----------- ----------------- --------------
<S> <C> <C> <C>
Options outstanding at January 1, 1994.................... 534 $ 7.56 - 32.06 1998 - 2003
Options granted........................................... -- -- --
Options exercised......................................... -- -- --
Options expired or canceled............................... (66) $10.44 - 32.06 1998 - 2003
----- ----------------- --------------
Options outstanding at December 31, 1994.................. 468 $ 7.56 - 32.06 1998 - 2003
Options granted........................................... 787 $ 4.75 - 6.38 2000 - 2005
Options exercised......................................... (1) $7.56 2000
Options expired or canceled............................... (240) $ 6.38 - 32.06 1998 - 2003
----- ----------------- --------------
Options outstanding at December 31, 1995.................. 1,014 $ 4.75 - 32.06 1998 - 2005
----- ----------------- --------------
Options exercisable at December 31, 1995.................. 251 $ 9.13 - 32.06 1998 - 2003
----- ----------------- --------------
</TABLE>
The options granted during 1995 become exercisable in increments in 1996 and
1997. An additional 1,115 options primarily at exercise prices of $12.50 per
share were granted on February 29 and March 1, 1996. Included in this total are
228 short-term options which expire 90 days after the grant date. The holders of
the short-term options are entitled to receive two additional "reload" options
for each short-term option exercised. Consequently, as many as 456 additional
options could be granted during the 90 day period beginning March 1, 1996, in
connection with the exercise of short-term options. Except for the short-term
options, the options granted on February 29 and March 1, 1996 become exercisable
in increments through 1999, and expire between 2001 and 2006.
As of December 31, 1995 and 1994, the Company had outstanding a total of 10
and 24 shares of restricted stock, respectively, which vest in increments
through 1997. The holders of these shares are entitled to vote. An additional
269 shares of performance accelerated restricted stock ("PARS") were granted in
March 1996. The PARS vest in increments through 2003, subject to accelerated
vesting under certain circumstances.
NOTE 19 -- CONTINGENCIES
Hexcel is involved in litigation, investigations and claims arising out of
the conduct of its business, including those relating to government contracts,
commercial transactions, and environmental, health and safety matters. The
Company estimates its liabilities resulting from such matters based on a variety
of factors, including outstanding legal claims and proposed settlements,
assessments by internal and external counsel of pending or threatened
litigation, and assessments by environmental engineers and consultants of
potential environmental liabilities and remediation costs. Such estimates
incorporate insignificant amounts for probable recoveries under applicable
insurance policies but exclude counterclaims against other third parties. Such
estimates are not discounted to reflect the time value of money due to the
uncertainty in estimating the timing of the expenditures, which may extend over
several years. Although it is impossible to determine the level of future
expenditures for legal, environmental and related matters with any degree of
certainty, it is management's opinion, based on available information, that it
is unlikely that these matters, individually or in the aggregate, will have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
F-33
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 19 -- CONTINGENCIES (CONTINUED)
U.S. GOVERNMENT CLAIMS
Hexcel, as a defense subcontractor, is subject to U.S. government audits and
reviews of negotiations, performance, cost classifications, accounting and
general practices relating to government contracts. The Defense Contract Audit
Agency ("DCAA") reviews cost accounting and business practices of government
contractors and subcontractors including the Company. The Company has been
engaged in discussions on a number of cost accounting issues which could result
in claims by the government. Some of these issues have already been resolved.
As part of these reviews, the DCAA has alleged that Hexcel improperly
included certain land lease costs in its indirect rates at the Chandler, Arizona
facility (the "Chandler Land Lease") and that, as a result, the Company's
subcontracts had been overpriced in an amount of approximately $1,000. The
Company has formally responded to the DCAA that it strongly disagrees with these
allegations. In February 1996, the Company received a letter from the United
States Attorney's Office, stating that it was considering filing an action
against the Company for violation of the civil False Claims Act ("FCA") based
upon the inclusion in the indirect rates of the Chandler Land Lease costs. While
the Company does not agree that there was any violation of the FCA, if the U.S.
government elects to pursue such an action and were it to prevail, it would be
entitled to three times the actual damages claimed plus penalties of between $5
and $10 for each false claim; the number of alleged false claims could be
significant.
LEGAL CLAIMS AND PROCEEDINGS
In December 1988, Lockheed employees working with epoxy resins and
composites on classified programs filed suit against Lockheed and its suppliers
(including Hexcel) claiming various injuries as a result of exposure to these
products. Plaintiffs have filed for punitive damages which may be uninsured. The
first trial of the cases of 15 pilot plaintiffs resulted in a mistrial and a
retrial resulted in the entry of judgment in favor of the plaintiffs. The
Company did not participate in the trial due to the automatic stay resulting
from the Chapter 11 filing. Some of these claims were discharged as a result of
the plaintiffs' failure to file claims in Hexcel's Chapter 11 case. As to the
claims which have not been discharged, the Company has objected to them and
intends to proceed with those objections within the Bankruptcy Court.
Hexcel / MCI, a business unit divested in 1991, performed brazing services
in the manufacture of flexures under subcontract from Ormond which supplied the
flexures to Thiokol. The flexures are used to support a rocket motor housing in
a test stand during actual firing of the rocket. Several flexures cracked under
the dead weight of a rocket motor prior to actual test firing, and Thiokol has
sued Ormond and the Company for the costs of replacing all of the flexures
purchased ($900) (THIOKOL CORPORATION V. ORMOND, HEXCEL, ET AL.). The automatic
stay in bankruptcy was lifted in April 1995 and the case was resumed in the
state court in Utah. Discovery is ongoing. There is no insurance coverage
available for an adverse court ruling or negotiated settlement.
In November 1995, Hexcel was notified that Livermore Development Corporation
("LDC") was asserting a claim for damages arising from Hexcel's recent
notification of its intent to exercise its option to purchase certain land in
Livermore, California. LDC contends that the lease was a disguised partnership
or joint venture agreement between Hexcel and LDC to develop the property for
residential use. Hexcel disputes any such agreement and seeks to enforce its
option to purchase under a written agreement. The parties are in ongoing
negotiations to resolve this claim.
As the result of the acquisition of the Ciba Composites Business in February
1996, Hexcel assumed certain liabilities including certain legal proceedings.
F-34
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 19 -- CONTINGENCIES (CONTINUED)
ENVIRONMENTAL CLAIMS AND PROCEEDINGS
Hexcel has been named as a potentially responsible party ("PRP") with
respect to several hazardous waste disposal sites that it does not own or
possess which are included on the Environmental Protection Agency's Superfund
National Priority List and/or various state equivalent lists. With respect to
its exposure relating to these sites, the Company believes its responsibility to
be de minimis. A total of 249 claims were filed in the Chapter 11 case with a
face value of over $6.7 billion. These claims were, for the most part,
duplicative as a result of the joint and several liability provisions of
applicable laws and have been categorized into claims involving 19 sites. Claims
involving 8 of the sites have been settled within the Chapter 11 case. The
Company has been named a PRP with respect to 6 sites for which no claims were
filed in the Chapter 11 case; as a result, the Company believes any further
claims to be barred. The balance of the sites and their related claims have been
passed through the bankruptcy. The Company's estimation of its exposure at these
sites is de minimis.
Also, pursuant to the New Jersey Environmental Responsibility and Clean-Up
Act, Hexcel signed an administrative consent order to pay for clean-up of a
manufacturing facility it formerly operated in Lodi, New Jersey. Hexcel has
reserved approximately $2,800 to cover such remaining costs and believes that
actual costs should not exceed the amount which has been reserved. Fine Organics
Corporation, the current owner of the Lodi site and Hexcel's former chemicals
business operated on that site, has asserted that the clean-up costs will be
significantly in excess of that amount. The ultimate cost of remediation at the
Lodi site will depend on developing circumstances.
Fine Organics Corporation filed a proof of claim and an adversary proceeding
in the Bankruptcy Court. The court has disallowed a significant portion of the
claim by denying Fine Organics claim for treble damages and certain contingent
claims. The remaining claims are for prior clean-up costs incurred by Fine
Organics and alleged contractual and tort damages relating to the original sale
of the business and site to Fine Organics totaling approximately $3,200. This
matter is proceeding in the Bankruptcy Court.
In September 1995, Ciba was named as a potentially responsible party with
respect to the removal of drums from a disposal site that it did not own or
possess, known as the Omega Chemical Corporation ("Omega Site"). The Omega Site
is a spent solvent recycling and treatment facility in Whittier, California.
Ciba has previously notified the EPA that it intends to comply with the EPA's
removal requirements and has paid its interim share of such removal costs to
date. This responsibility was assumed by the Company as a result of its
acquisition of the Ciba Composites Business, to the extent the Ciba waste
delivered to the Omega site was from the operations of the Ciba Composites
Business. This matter is under evaluation but is presently believed to be de
minimis.
PRODUCT CLAIMS
In 1993, Hexcel became aware of an aluminum honeycomb sandwich panel
delamination problem with panels produced by its wholly-owned Belgium
subsidiary, Hexcel S.A., and installed in rail cars in France and Spain. Certain
customers have alleged that Hexcel S.A. is responsible for the problem. The
Company and its insurer continue to investigate these claims. The Company is
also working with the customers to repair or replace panels when necessary, with
certain costs to be allocated upon determination of responsibility for the
delamination. While no lawsuit has been filed, two customers in France requested
that a court appoint experts to investigate the claims; to date, the experts
have not reported any conclusions. The Company's primary insurer for this matter
has agreed to fund legal representation and to provide coverage of the claim to
the extent of the policy limit for one year. The Company is
F-35
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 19 -- CONTINGENCIES (CONTINUED)
investigating additional insurance coverage. Even if additional insurance
coverage is not available, management believes that, based on available
information, it is unlikely that these claims will have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
NOTE 20 -- RAW MATERIALS; SIGNIFICANT CUSTOMERS; MARKETS
Hexcel purchases most of the raw materials used in production. Several key
materials are available from relatively few sources, and in many cases the cost
of product qualification makes it impractical to develop multiple sources of
supply. The unavailability of these materials, which the Company does not
anticipate, could have a material adverse effect on sales and earnings.
The Boeing Company and Boeing subcontractors accounted for approximately 21%
of 1995 sales, 22% of 1994 sales and 21% of 1993 sales. The loss of all or a
significant portion of this business, which Hexcel does not anticipate, could
have a material adverse effect on sales and earnings.
Net sales by market for the years ended December 31, 1995, 1994 and 1993
were:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Commercial aerospace......................................................... 45% 47% 42%
Space and defense............................................................ 11% 11% 18%
Recreation, general industrial and other..................................... 44% 42% 40%
--- --- ---
Net sales................................................................ 100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
F-36
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 21 -- BUSINESS SEGMENT DATA
The Company operates within a single business segment: composite materials,
parts and structures. The following table summarizes certain financial data for
continuing operations by geographic area as of December 31, 1995, 1994, and 1993
and for the years then ended:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
United States.................................................. $ 179,573 $ 171,536 $ 185,261
International.................................................. 170,665 142,259 125,374
----------- ----------- -----------
Consolidated................................................. $ 350,238 $ 313,795 $ 310,635
----------- ----------- -----------
----------- ----------- -----------
Income (loss) before income taxes:
United States.................................................. $ 2,912 $ (21,462) $ (55,660)
International.................................................. 3,602 (3,032) (18,188)
----------- ----------- -----------
Consolidated................................................. $ 6,514 $ (24,494) $ (73,848)
----------- ----------- -----------
----------- ----------- -----------
Identifiable assets:
United States.................................................. $ 134,972 $ 149,890 $ 166,201
International.................................................. 95,630 90,567 84,954
----------- ----------- -----------
Consolidated................................................. $ 230,602 $ 240,457 $ 251,155
----------- ----------- -----------
----------- ----------- -----------
Capital expenditures:
United States.................................................. $ 7,729 $ 6,022 $ 4,694
International.................................................. 4,415 2,340 1,570
----------- ----------- -----------
Consolidated................................................. $ 12,144 $ 8,362 $ 6,264
----------- ----------- -----------
----------- ----------- -----------
Depreciation and amortization:
United States.................................................. $ 6,528 $ 8,455 $ 9,607
International.................................................. 5,095 5,775 5,273
----------- ----------- -----------
Consolidated................................................. $ 11,623 $ 14,230 $ 14,880
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
International net sales consist of the net sales of international
subsidiaries, sold primarily in Europe, and U.S. exports. U.S. exports were
$18,902 in 1995, $14,008 in 1994 and $11,889 in 1993.
To compute income (loss) before income taxes, the Company allocated
administrative expenses to International of $3,939 in 1995, $3,283 in 1994 and
$2,894 in 1993.
NOTE 22 -- OTHER INCOME AND EXPENSES, NET
The Company recognized $791 of other income in 1995, including $600 of
income relating to the sale of the Chandler facility and related assets and
technology (see Note 5).
The Company recognized $4,861 of other income in 1994, including $15,900 of
income relating to the Chandler transaction (see Note 5), partially offset by an
$8,000 provision for the estimated cost of restructuring or liquidating
DIC-Hexcel Limited (see Note 9) and a $2,900 provision for bankruptcy claim
adjustments. The provision for bankruptcy claim adjustments resulted from the
reconciliation and settlement of certain claims as well as changes in the
estimate of assumed liabilities.
F-37
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 22 -- OTHER INCOME AND EXPENSES, NET (CONTINUED)
The Company incurred $12,780 of other expenses in 1993, primarily as a
result of write-downs of certain assets and increases in reserves for warranties
and environmental matters on property previously owned. The impairment of assets
was attributable to bankruptcy reorganization proceedings, changes in business
conditions, and depressed real estate prices on property held for sale.
NOTE 23 -- DISCONTINUED OPERATIONS
The divestiture of Hexcel's discontinued resins business was completed on
October 30, 1995 (see Note 5). The Company recorded a $2,800 provision in 1994
to write down the net assets of the resins business to expected realizable
value, following a $6,000 charge in 1993.
The divestiture of Hexcel's discontinued fine chemicals business was
completed in 1994. The Company recorded a $2,800 provision in 1993 to write down
the net assets of the fine chemicals business to expected realizable value.
Net sales of discontinued operations for the years ended December 31, 1995,
1994 and 1993 were:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Resins business.................................................. $ 6,944 $ 30,691 $ 27,933
Fine chemicals business.......................................... -- -- 5,704
----------- ----------- -----------
Total discontinued operations................................ $ 6,944 $ 30,691 $ 33,637
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Net assets of the discontinued resins business as of December 31, 1994 were:
<TABLE>
<CAPTION>
1994
---------
<S> <C>
Current assets............................................................................... $ 3,970
Current liabilities.......................................................................... (4,591)
Non-current assets........................................................................... 3,621
---------
Net assets............................................................................... $ 3,000
---------
---------
</TABLE>
F-38
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 24 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1995 and 1994
were:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
1995
Net sales......................................................... $ 85,155 $ 91,023 $ 81,366 $ 92,694
Gross margin...................................................... 14,795 18,055 15,888 18,352
Income (loss) from continuing operations.......................... (2,369) 1,950 1,561 2,059
Loss from discontinued operations................................. (112) (185) (171) --
Net income (loss)................................................. (2,481) 1,765 1,390 2,059
--------- --------- ---------- ---------
Net income (loss) per share and equivalent share:
Primary and fully diluted:
Continuing operations........................................... $ (0.27) $ 0.11 $ 0.09 $ 0.11
Discontinued operations......................................... (0.01) (0.01) (0.01) --
Net income (loss)............................................... (0.28) 0.10 0.08 0.11
--------- --------- ---------- ---------
Dividends per share............................................... -- -- -- --
Market price:
High............................................................ $ 6.63 $ 7.25 $ 12.25 $ 11.25
Low............................................................. 4.25 4.50 7.25 8.25
--------- --------- ---------- ---------
--------- --------- ---------- ---------
1994
Net sales......................................................... $ 77,682 $ 84,964 $ 74,434 $ 76,715
Gross margin...................................................... 11,683 14,165 11,601 10,979
Loss from continuing operations................................... (5,325) (4,894) (15,319) (2,542)
Income (loss) from discontinued operations........................ 301 472 (2,620) (43)
Net loss.......................................................... (5,024) (4,422) (17,939) (2,585)
--------- --------- ---------- ---------
Net income (loss) per share and equivalent share:
Primary and fully diluted:
Continuing operations........................................... $ (0.73) $ (0.67) $ (2.09) $ (0.34)
Discontinued operations......................................... 0.04 0.06 (0.36) (0.01)
Net loss........................................................ (0.69) (0.61) (2.45) (0.35)
--------- --------- ---------- ---------
Dividends per share............................................... -- -- -- --
Market price:
High............................................................ $ 4.25 $ 4.00 $ 6.00 $ 5.75
Low............................................................. 2.75 3.00 3.00 4.00
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
During the third quarter of 1995, the Company recognized other income of
$600 relating to the sale of the Chandler facility and related assets and
technology (see Notes 5 and 22).
During the third quarter of 1994, the Company recorded an $8,000 provision
for the estimated cost of restructuring or liquidating DIC-Hexcel Limited (see
Note 9), and a $2,800 provision to write down the net assets of the discontinued
resins business to expected net realizable value (see Note 23).
During the fourth quarter of 1994, the Company recognized other income of
$15,900 relating to the Chandler transaction (see Notes 5 and 22). In addition,
the Company recorded a total of approximately $10,800 in expenses for bankruptcy
claim adjustments, additional interest on allowed claims, and the settlement of
various tax audits.
F-39
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-----------------------
MARCH 31, APRIL 2,
1996 1995
----------- ----------
<S> <C> <C>
Net sales................................................................................ $ 126,418 $ 85,155
Cost of sales............................................................................ (99,635) (70,360)
----------- ----------
Gross margin............................................................................. 26,783 14,795
Selling, general and administrative expenses............................................. (17,482) (12,166)
Business acquisition and consolidation expenses.......................................... (5,211) --
Other income, net........................................................................ 2,697 --
----------- ----------
Operating income......................................................................... 6,787 2,629
Interest expense......................................................................... (3,633) (2,363)
Bankruptcy reorganization expenses....................................................... -- (2,125)
----------- ----------
Income (loss) from continuing operations before income taxes............................. 3,154 (1,859)
Provision for income taxes............................................................... (1,306) (510)
----------- ----------
Income (loss) from continuing operations............................................... 1,848 (2,369)
Discontinued operations: Loss during phase-out period.................................... -- (112)
----------- ----------
Net income (loss)...................................................................... $ 1,848 $ (2,481)
----------- ----------
----------- ----------
Net income (loss) per share and equivalent share:
Primary and fully diluted:
Continuing operations.................................................................. $ 0.07 $ (0.27)
Discontinued operations................................................................ -- (0.01)
----------- ----------
Net income (loss).................................................................... $ 0.07 $ (0.28)
----------- ----------
WEIGHTED AVERAGE SHARES AND EQUIVALENT SHARES............................................ 24,685 8,773
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-40
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents................................................................ $ 4,675 $ 3,829
Accounts receivable................................................................. 132,076 65,888
Inventories......................................................................... 111,123 55,475
Prepaid expenses.................................................................... 1,656 2,863
------------ ------------
Total current assets.............................................................. 249,530 128,055
------------ ------------
Property, plant and equipment......................................................... 311,904 203,580
Less accumulated depreciation......................................................... (119,675) (117,625)
------------ ------------
Net property, plant and equipment................................................... 192,229 85,955
------------ ------------
Intangible assets..................................................................... 29,230 1,832
Investments and other assets.......................................................... 14,736 14,760
------------ ------------
Total assets........................................................................ $ 485,725 $ 230,602
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term liabilities....................... $ 6,809 $ 1,802
Accounts payable.................................................................... 50,385 22,904
Accrued liabilities................................................................. 54,737 41,779
------------ ------------
Total current liabilities......................................................... 111,931 66,485
------------ ------------
Notes payable and capital lease obligations, less current maturities.................. 112,111 88,342
Indebtedness to related parties, less current maturities.............................. 26,170 --
Deferred liabilities.................................................................. 40,097 27,401
------------ ------------
Shareholders' equity..................................................................
Common stock, $0.01 par value, 100,000 shares authorized, shares issued and
outstanding of 36,119 in 1996 and 18,091 in 1995................................... 361 181
Additional paid-in capital.......................................................... 257,202 111,259
Accumulated deficit................................................................. (68,133) (69,981)
Minimum pension obligation adjustment............................................... (535) (535)
Cumulative currency translation adjustment.......................................... 6,521 7,450
------------ ------------
Total shareholders' equity........................................................ 195,416 48,374
------------ ------------
Total liabilities and shareholders' equity........................................ $ 485,725 $ 230,602
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-41
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------
MARCH 31, APRIL 2,
1996 1995
------------ ----------
<S> <C> <C>
Income (loss) from continuing operations................................................ $ 1,848 $ (2,369)
Reconciliation to net cash provided (used) by continuing operations:
Depreciation and amortization......................................................... 4,454 2,808
Working capital changes and other..................................................... (6,213) (9,299)
------------ ----------
Net cash provided (used) by continuing operations................................... 89 (8,860)
Net cash provided by discontinued operations........................................ -- 436
------------ ----------
Net cash provided (used) by operating activities.................................... 89 (8,424)
------------ ----------
Cash flows from investing activities:
Capital expenditures.................................................................. (2,285) (2,090)
Proceeds from equipment sold.......................................................... -- 14
Cash paid for the Acquired Business (a)............................................... (25,000) --
Proceeds from sale of Chandler, Arizona manufacturing facility and certain related
assets and technology................................................................ 1,560 26,694
Proceeds from sale of discontinued European resins business........................... -- 2,602
------------ ----------
Net cash provided (used) by investing activities.................................... (25,725) 27,220
------------ ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.............................................. 26,544 3,891
Payments of long-term debt............................................................ (1,092) (3,993)
Proceeds of short-term debt, net...................................................... 237 18,039
Proceeds from issuance of common stock................................................ 765 41,155
Payments of allowed claims pursuant to the Reorganization Plan........................ -- (78,144)
------------ ----------
Net cash provided (used) by financing activities.................................... 26,454 (19,052)
------------ ----------
Effect of exchange rate changes on cash and equivalents................................. 28 (675)
------------ ----------
Net increase (decrease) in cash and equivalents......................................... 846 (931)
Cash and equivalents at beginning of year............................................... 3,829 931
------------ ----------
Cash and equivalents at end of period................................................... $ 4,675 $ --
------------ ----------
------------ ----------
(a) Cash paid for the Acquired Business:
Purchase of working capital, other than cash......................................... $ (71,201)
Purchase of property, plant and equipment............................................ (109,149)
Purchase of other assets............................................................. (1,590)
Excess of purchase price over net assets acquired.................................... (25,913)
Assumption of long-term debt and deferred liabilities................................ 14,959
Obligation to issue Senior Subordinated Notes to seller.............................. 26,170
Issuance of 18,022 shares of common stock, net....................................... 141,724
------------
Cash paid for the Acquired Business................................................... $ (25,000)
------------
------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-42
<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
("Hexcel" or 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 March 31, 1996, and the
results of operations and cash flows for the quarters ended March 31, 1996 and
April 2, 1995. The condensed consolidated balance sheet of the Company as of
December 31, 1995 was derived from the audited 1995 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 and notes have been reclassified to conform to
the 1996 presentation. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 1995 Annual Report on Form 10-K.
As discussed in Note 2, Hexcel acquired the worldwide composites division of
Ciba-Geigy Limited, a Swiss corporation ("Ciba"), and Ciba-Geigy Corporation, a
New York corporation ("CGC"), including Ciba's and CGC's composite materials,
parts and structures businesses (the "Acquired Business"), on February 29, 1996.
Accordingly, the condensed consolidated balance sheet as of March 31, 1996
includes the financial position of the Acquired Business as of that date, and
the condensed consolidated statements of operations and cash flows for the
quarter ended March 31, 1996 include the results of operations and cash flows,
respectively, of the Acquired Business for the period from March 1, 1996 through
March 31, 1996.
NOTE 2 -- BUSINESS ACQUISITION AND CONSOLIDATION
BUSINESS ACQUISITION
Hexcel acquired the worldwide composites division of Ciba and CGC on
February 29, 1996. The Acquired Business is engaged in the manufacture and
marketing of composite materials, parts and structures for aerospace, recreation
and general industrial markets. Product lines include fabrics, prepregs,
adhesives, honeycomb core, sandwich panels and fabricated components, as well as
structures and interiors primarily for the commercial and military aerospace
markets.
The acquisition of the Acquired Business was consummated pursuant to a
Strategic Alliance Agreement dated as of September 29, 1995 among Ciba, CGC, and
Hexcel, as amended (the "Strategic Alliance Agreement"). Under the Strategic
Alliance Agreement, the Company acquired the assets (including the capital stock
of certain non-U.S. subsidiaries) and assumed the liabilities of the Acquired
Business other than certain excluded assets and liabilities in exchange for: (a)
approximately 18,022 newly issued shares of Hexcel common stock; (b) $25,000 in
cash; and (c) undertakings to deliver to Ciba and/or one or more of its
subsidiaries, following completion of certain post-closing adjustment procedures
contemplated by the Strategic Alliance Agreement, senior subordinated notes in
an aggregate principal amount of approximately $43,000, subject to certain
adjustments (the "Senior Subordinated Notes"), and senior demand notes in a
principal amount equal to the cash on hand at certain of the non-U.S.
subsidiaries included in the Acquired Business (the "Senior Demand Notes").
As of March 31, 1996, the aggregate principal amount of Senior Subordinated
Notes to be issued to Ciba, determined in accordance with the formula included
in the Strategic Alliance Agreement, was estimated at approximately $28,300.
However, the actual aggregate principal amount of the Senior Subordinated Notes
is expected to exceed $28,300, as a result of the pending acquisition from Ciba
of certain assets of the Acquired Business, including an Austrian subsidiary,
that have not yet been transferred to Hexcel. Pursuant to the terms of the
Strategic Alliance Agreement, the aggregate
F-43
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- BUSINESS ACQUISITION AND CONSOLIDATION (CONTINUED)
principal amount of the Senior Subordinated Notes will be adjusted to reflect
the acquisition of this Austrian subsidiary and certain other assets at such
time as those acquisitions are completed. The acquisition of the Austrian
subsidiary is expected to be completed in the second quarter of 1996, and would
increase the aggregate principal amount of the Senior Subordinated Notes by
$9,000, subject to certain working capital and other adjustments. The
acquisition of the remaining assets is expected to be completed from time to
time prior to February 28, 1997.
In connection with the acquisition of the Acquired Business, Hexcel obtained
a three-year revolving credit facility of up to $175,000 (the "Senior Secured
Credit Facility") to: (a) fund the cash component of the purchase price; (b)
refinance outstanding indebtedness under certain U.S. and European credit
facilities; and (c) provide for the ongoing working capital and other financing
requirements of the Company, including business consolidation activities, on a
worldwide basis.
The pro forma net sales, net income and net income per share of Hexcel for
the quarter ended March 31, 1996, giving effect to the acquisition of the
Acquired Business as if it had occurred on January 1, 1996, were:
<TABLE>
<CAPTION>
3/31/96
-----------
<S> <C>
Pro forma net sales...................................................................... $ 178,011
Pro forma net income..................................................................... 1,889
Pro forma net income per share........................................................... 0.05
-----------
-----------
</TABLE>
Comparable pro forma financial information for the quarter ended April 2,
1995 has not been presented, because information as to the Acquired Business for
this period is not available.
BUSINESS CONSOLIDATION
On May 9, 1996, Hexcel announced that its Board of Directors has approved a
plan for consolidating the Company's operations following the acquisition of the
Acquired Business. This business consolidation program, which is expected to
take up to three years to complete, will result in a 1996 second quarter charge
against earnings of approximately $32,000. The total expense of the business
consolidation program is estimated to be approximately $49,000, including $5,211
of expenses incurred in the first quarter of 1996 and additional expenses
totaling as much as $12,000 that will be recognized after the second quarter of
1996. Cash expenditures necessary to complete the business consolidation program
are expected to total approximately $44,000, net of expected proceeds from asset
sales.
The objective of the business consolidation program is to integrate acquired
assets and operations into Hexcel, and to reorganize the Company's research and
manufacturing activities around strategic centers dedicated to select product
technologies. The consolidation program is also intended to eliminate excess
manufacturing capacity and redundant administrative functions. Specific actions
contemplated by the consolidation program include the previously announced
closure of the Anaheim, California facility acquired from Ciba, the closure of a
portion of the Welkenraedt, Belgium facility, the reorganization of the
Company's manufacturing operations in France, the consolidation of the Company's
U.S. special process manufacturing activities, and the integration of sales and
marketing resources.
Management estimates that the business consolidation program will take up to
three years to complete, in part because of aerospace industry requirements to
"qualify" specific equipment and manufacturing facilities for the manufacture of
certain products. Based on Hexcel's experience with
F-44
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- BUSINESS ACQUISITION AND CONSOLIDATION (CONTINUED)
previous plant consolidations, these qualification requirements necessitate an
approach to the consolidation of manufacturing facilities that will require two
to three years to complete. The consolidation program is expected to reduce the
Company's workforce by approximately 8% worldwide.
The $5,211 of business acquisition and consolidation expenses incurred in
the first quarter of 1996 includes $3,635 of compensation expense resulting from
stock options that were granted in 1995 subject to stockholder approval and
stock options which vested in connection with the acquisition of the Acquired
Business. This compensation expense is based on the difference between the
exercise price of the stock options granted and the market price of Hexcel's
common stock on February 21, 1996, the date that the Company's stockholders
approved the incentive stock plan under which the options were granted. The
recognition of compensation expense in connection with these stock options
resulted in a corresponding $3,635 increase in the additional paid-in capital of
the Company.
NOTE 3 -- PROPOSED BUSINESS ACQUISITION
On April 16, 1996, Hexcel announced that it has executed a definitive
agreement to acquire the Composite Products Division ("CPD") of Hercules
Incorporated ("Hercules"). CPD is engaged in the manufacture and marketing of
prepregs and carbon fiber for aerospace and other markets. According to the
provisions of the definitive agreement, the Company will pay Hercules
approximately $135,000 in cash, subject to certain adjustments, in exchange for
CPD. The proposed transaction is expected to be completed by the end of the
second quarter of 1996, subject to certain conditions, including antitrust and
other regulatory clearances.
In connection with the proposed acquisition of CPD, Hexcel has entered into
a commitment letter for a new bank credit facility of up to $300,000. Borrowings
under this new credit facility are expected to be used to fund the purchase of
CPD, to refinance certain existing indebtedness, including the Senior Secured
Credit Facility, and to provide for the ongoing working capital and other
financing requirements of the Company, including business consolidation
activities.
NOTE 4 -- INVENTORIES
Inventories as of March 31, 1996 and December 31, 1995 were:
<TABLE>
<CAPTION>
3/31/96 12/31/95
----------- ---------
<S> <C> <C>
Raw materials............................................................................ $ 47,850 $ 22,257
Work in progress......................................................................... 36,098 13,688
Finished goods........................................................................... 25,682 17,778
Supplies................................................................................. 1,493 1,752
----------- ---------
Total inventories...................................................................... $ 111,123 $ 55,475
----------- ---------
----------- ---------
</TABLE>
Inventories as of March 31, 1996 included inventories of the Acquired
Business totaling approximately $54,000.
NOTE 5 -- INTANGIBLE ASSETS
Intangible assets as of March 31, 1996 are comprised primarily of goodwill
and other intangible assets attributable to the acquisition of the Acquired
Business on February 29, 1996. Substantially all such assets are subject to
amortization over a period of 20 years. The gross value of intangible assets
attributable to the acquisition of the Acquired Business is expected to increase
subsequent to March 31, 1996, primarily as a result of the pending acquisition
from Ciba of certain assets of the Acquired Business that have not yet been
transferred to Hexcel and the recognition of certain costs of the business
consolidation program.
F-45
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO RELATED
PARTIES
Notes payable, capital lease obligations and indebtedness to related parties
as of March 31, 1996 and December 31, 1995 were:
<TABLE>
<CAPTION>
3/31/96 12/31/95
----------- ---------
<S> <C> <C>
Senior Secured Credit Facility........................................................... $ 69,836 --
U.S. revolving credit facility........................................................... -- $ 30,091
European credit facilities and notes payable............................................. 4,851 18,064
Obligation to issue Senior Subordinated Notes payable to Ciba, net of discount........... 26,170 --
Obligation to issue Senior Demand Notes payable to Ciba.................................. 2,099 --
7% convertible subordinated debentures, due 2011......................................... 25,625 25,625
Obligations under IDRB variable rate demand notes, due through 2024, net................. 11,990 11,990
Capital lease obligations................................................................ 3,215 3,217
Various U.S. notes payable, due through 2007............................................. 1,304 1,157
----------- ---------
Total notes payable, capital lease obligations and indebtedness to related parties....... $ 145,090 $ 90,144
----------- ---------
----------- ---------
Notes payable and current maturities of long-term liabilities............................ $ 6,809 $ 1,802
Notes payable and capital lease obligations, less current maturities..................... 112,111 88,342
Indebtedness to related parties, less current maturities................................. 26,170 --
----------- ---------
Total notes payable, capital lease obligations and indebtedness to related parties....... $ 145,090 $ 90,144
----------- ---------
----------- ---------
</TABLE>
SENIOR SECURED CREDIT FACILITY
In connection with the acquisition of the Acquired Business, Hexcel obtained
the Senior Secured Credit Facility on February 29, 1996. The Senior Secured
Credit Facility is a three-year revolving credit facility of up to $175,000
which is available to: (a) fund the $25,000 cash component of the purchase price
paid for the Acquired Business; (b) refinance outstanding indebtedness under
certain U.S. and European credit facilities; and (c) provide for the ongoing
working capital and other financing requirements of the Company, including
business consolidation activities, on a worldwide basis. The Senior Secured
Credit Facility has replaced certain U.S. and European credit facilities that
were available to the Company and in use as of December 31, 1995.
Interest on outstanding borrowings under the Senior Secured Credit Facility
is computed at an annual rate of 0.4% in excess of the applicable London
interbank rate or, at the option of Hexcel, at the base rate of the
administrative agent for the lenders. In addition, the Senior Secured Credit
Facility is subject to a commitment fee of approximately 0.2% per annum on the
unused portion of the facility and a letter of credit fee of up to 0.5% per
annum on the outstanding face amount of letters of credit.
The Senior Secured Credit Facility is secured by a pledge of stock of
certain of Hexcel's subsidiaries. In addition, the Company is subject to various
financial covenants and restrictions under the Senior Secured Credit Facility,
as more fully described in the Company's 1995 Annual Report on Form 10-K.
OBLIGATION TO ISSUE SENIOR SUBORDINATED NOTES PAYABLE TO CIBA-GEIGY
In connection with the acquisition of the Acquired Business, Hexcel has
undertaken to deliver to Ciba and/or one or more of its subsidiaries the Senior
Subordinated Notes. The Senior Subordinated
F-46
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO RELATED
PARTIES (CONTINUED)
Notes, which will be issued following the completion of certain post-closing
adjustment procedures contemplated by the Strategic Alliance Agreement, will be
general unsecured obligations of the Company. As discussed in Note 2, the
aggregate principal amount of Senior Subordinated Notes to be issued to Ciba,
determined in accordance with the Strategic Alliance Agreement, was
approximately $28,300 as of March 31, 1996. However, the actual aggregate
principal amount of the Senior Subordinated Notes is expected to exceed this
amount as a result of the pending acquisition of certain assets of the Acquired
Business that have not yet been transferred to the Company.
As of March 31, 1996, the fair value of the obligation to issue the Senior
Subordinated Notes was $26,170, which is $2,130 lower than the aggregate
principal amount as of that date. The $2,130 discount reflects the absence of
certain call protection provisions from the terms of the Senior Subordinated
Notes and the difference between the stated interest rate on the Senior
Subordinated Notes and the estimated market rate for debt obligations of
comparable quality and maturity. The Senior Subordinated Notes are expected to
bear interest for three years at a rate of 7.5% per annum, payable semiannually
from February 29, 1996. The interest rate is expected to increase to 10.5% per
annum on the third anniversary of the acquisition of the Acquired Business, and
by an additional 0.5% per year thereafter until the Senior Subordinated Notes
mature in the year 2003. The payment of principal and interest on the Senior
Subordinated Notes will be subordinate to the Senior Secured Credit Facility.
As of March 31, 1996, Ciba owned approximately 49.9% of Hexcel's issued and
outstanding common stock, and four of the Company's ten directors were members
of Ciba management. Accordingly, the Company's obligation to issue the Senior
Subordinated Notes has been classified as "Indebtedness to related parties" in
the accompanying condensed consolidated balance sheet as of March 31, 1996.
OBLIGATION TO ISSUE SENIOR DEMAND NOTES PAYABLE TO CIBA-GEIGY
Under the terms of the Strategic Alliance Agreement, the cash on hand at
certain of the non-U.S. subsidiaries included in the Acquired Business was
acquired by Hexcel in exchange for an undertaking to deliver to Ciba and/or one
or more of its subsidiaries the Senior Demand Notes. The Senior Demand Notes,
totaling $2,099, are expected to be presented for payment shortly after
issuance.
NOTE 7 -- DEFERRED LIABILITIES
Deferred liabilities as of March 31, 1996 and December 31, 1995 were
comprised primarily of various pension, retirement and post-retirement benefit
liabilities, as well as deferred tax liabilities and certain other long-term
obligations.
NOTE 8 -- NON-CASH FINANCING ACTIVITIES
In addition to a cash payment of $25,000 and the obligations to issue the
Senior Subordinated Notes and the Senior Demand Notes, the consideration paid
for the Acquired Business included approximately 18,022 shares of newly issued
Hexcel common stock. The aggregate value of these shares has been estimated at
approximately $144,200, based on a discounted market price of $8 per share
multiplied by the number of shares issued. The discounted market price of $8 per
share was based on a market price of $10 per share during a reasonable period
before and after December 12, 1995, the date that the terms for determining the
total consideration to be paid by the Company were finalized, and a discount
rate of 20%. The 20% discount reflects the illiquidity of the Hexcel common
stock issued to Ciba caused by the size of Ciba's holding, the contractual
restrictions on transferring
F-47
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8 -- NON-CASH FINANCING ACTIVITIES (CONTINUED)
such shares and, accordingly, limitations on the price Ciba could realize, the
contractual limitation on the per share price Ciba could realize in certain
types of transactions, the fact that such shares are "restricted securities"
within the meaning of the Securities Act of 1933, and various other factors.
NOTE 9 -- OTHER INCOME, NET
Other income of $2,697 in the quarter ended March 31, 1996 was largely
attributable to the receipt of an additional $1,560 of cash in connection with
the disposition of the Chandler, Arizona manufacturing facility and certain
related assets and technology in 1994, and to the partial settlement for $1,054
of a claim arising from the sale of certain assets in 1991.
NOTE 10 -- BANKRUPTCY REORGANIZATION
On January 12, 1995, the United States Bankruptcy Court for the Northern
District of California entered an order dated January 10, 1995 confirming the
First Amended Plan of Reorganization (the "Reorganization Plan") proposed by
Hexcel and the Official Committee of Equity Security Holders (the "Equity
Committee"). On February 9, 1995, the Reorganization Plan became effective and
Hexcel emerged from the bankruptcy reorganization proceedings which 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.
The Reorganization Plan which became effective on February 9, 1995 provided,
among other things, for the reinstatement or payment in full, with interest, of
all allowed claims, including prepetition accounts payable and notes payable. On
February 9, 1995, Hexcel paid $78,144 in prepetition claims and interest, and
reinstated another $60,575 in prepetition liabilities. The payment of claims and
interest 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 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 Fund Inc. in
connection with a standby purchase agreement with respect to a subscription
rights offering for additional shares of new common stock; and (d) borrowings
under a U.S. revolving credit facility. The subscription rights offering for
additional shares of new common stock was subsequently concluded on April 6,
1995, with a total of 10,800 shares of new common stock having been issued
between February 9, 1995 and April 6, 1995. The U.S. revolving credit facility
was subsequently replaced by the Senior Secured Credit Facility on February 29,
1996.
Professional fees and other costs directly related to bankruptcy proceedings
were expensed as incurred, and have been reflected in the condensed consolidated
statement of operations for the quarter ended April 2, 1995 as "bankruptcy
reorganization expenses." Bankruptcy reorganization expenses consisted primarily
of professional fees paid to legal and financial advisors of Hexcel, the Equity
Committee and the Official Committee of Unsecured Creditors. In addition, these
expenses 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 generally
accepted accounting principles. The resolution of certain bankruptcy-related
issues, including the final settlement of disputed claims and professional fees,
resulted in bankruptcy reorganization expenses being incurred after the
effective date of the Reorganization Plan.
F-48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Ciba-Geigy Limited
We have audited the accompanying combined balance sheets of Ciba Composites (a
division of Ciba-Geigy Limited) as of December 31, 1995 and 1994, and the
related combined statements of operations, owner's equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. 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, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Ciba Composites as of
December 31, 1995 and 1994, and the combined results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 10 to the combined financial statements, in 1993, the U.S.
Group Company changed its methods of accounting for postretirement benefits
other than pensions and for postemployment benefits.
/s/ COOPERS & LYBRAND L.L.P.
Stamford, Connecticut
February 29, 1996
F-49
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
COMBINED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash............................................................................... $ 8,412 $ 7,990
Accounts receivable, net of allowance for doubtful accounts of $2,291 and $3,378 in
1995 and 1994, respectively....................................................... 58,799 53,024
Inventories........................................................................ 60,337 66,672
Prepaid expenses and other current assets.......................................... 9,957 9,327
----------- -----------
Total current assets........................................................... 137,505 137,013
Property, plant and equipment, net................................................... 156,364 161,153
Intangibles, net..................................................................... 42,211 49,143
Other assets......................................................................... 4,214 5,111
----------- -----------
Total assets................................................................... $ 340,294 $ 352,420
----------- -----------
----------- -----------
LIABILITIES AND OWNER'S EQUITY:
Current liabilities:
Accounts payable................................................................... $ 29,611 $ 29,249
Accrued liabilities................................................................ 20,259 17,346
Accrued compensation............................................................... 7,315 7,704
Short-term debt.................................................................... 720 2,730
Short-term debt due to affiliates.................................................. 9,052 5,302
Current portion of long-term debt.................................................. 256 487
Current portion of obligations under capital leases................................ 441 348
----------- -----------
Total current liabilities...................................................... 67,654 63,166
Long-term debt....................................................................... 1,305 1,775
Long-term debt due to affiliates..................................................... 9,502 37,493
Long-term capital lease obligations.................................................. 4,290 4,372
Other long-term liabilities.......................................................... 13,626 14,430
----------- -----------
Total liabilities.............................................................. 96,377 121,236
----------- -----------
Commitments and contingencies
Minority interest.................................................................... 6,968 5,048
Owner's equity:
Invested capital................................................................... 236,949 226,136
----------- -----------
Total liabilities and owner's equity........................................... $ 340,294 $ 352,420
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-50
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................................................. $ 331,073 $ 292,611 $ 271,258
Cost of sales.............................................................. 273,997 249,717 244,247
----------- ----------- -----------
Gross profit........................................................... 57,076 42,894 27,011
----------- ----------- -----------
Operating (income) expenses:
Selling, general and administrative expenses............................. 47,540 45,515 47,804
Research and development expense......................................... 10,426 7,902 5,909
Amortization and write-downs of purchased intangibles.................... 6,930 10,219 5,734
Restructuring expense.................................................... 2,362 1,600 7,722
Gain on sale of facility................................................. -- (2,700) --
Other, net............................................................... 1,102 (279) 241
----------- ----------- -----------
Total operating expenses............................................. 68,360 62,257 67,410
----------- ----------- -----------
Operating loss........................................................... 11,284 19,363 40,399
Other expense:
Interest expense......................................................... 668 1,193 2,236
Minority interest........................................................ 1,506 891 245
----------- ----------- -----------
Loss before income taxes and cumulative effect of accounting
changes............................................................. 13,458 21,447 42,880
Provision (benefit) for income taxes....................................... 5,085 2,843 (962)
----------- ----------- -----------
Loss before cumulative effect of accounting changes.................. 18,543 24,290 41,918
Cumulative effect of accounting changes.................................... -- -- 7,077
----------- ----------- -----------
Net loss............................................................. $ 18,543 $ 24,290 $ 48,995
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-51
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
COMBINED STATEMENT OF OWNER'S EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<S> <C>
Balance, December 31, 1992....................................................... $ 294,364
Capital distributions, net..................................................... (1,547)
Translation adjustments........................................................ (2,731)
Net loss....................................................................... (48,995)
---------
Balance, December 31, 1993....................................................... 241,091
Capital contributions, net..................................................... 4,676
Translation adjustments........................................................ 4,659
Net loss....................................................................... (24,290)
---------
Balance, December 31, 1994....................................................... 226,136
Capital contributions, net..................................................... 26,927
Translation adjustments........................................................ 2,429
Net loss....................................................................... (18,543)
---------
Balance, December 31, 1995....................................................... $ 236,949
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-52
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net loss.................................................................... $ (18,543) $ (24,290) $ (48,995)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Cumulative effect of accounting changes................................... -- -- 7,077
Depreciation.............................................................. 14,725 15,868 19,964
Amortization and write-downs of purchased intangibles..................... 6,930 10,219 5,734
Minority interest......................................................... 1,506 891 245
Restructuring provisions and write-downs of property, plant and
equipment................................................................ 2,328 3,924 604
Gain on sale of facility.................................................. -- (2,700) --
Changes in assets and liabilities, net of effects from acquisition:
(Increase) decrease in trade receivables................................ (3,787) (6,009) 16,128
Decrease in inventories................................................. 8,223 1,272 10,025
Decrease in prepaid expenses and other current assets................... 2,116 1,451 3,197
Decrease in other long-term assets...................................... 714 3,739 3,585
Increase (decrease) in accounts payable................................. (832) 3,820 178
Increase in accrued liabilities and accrued compensation................ 1,340 4,248 1,061
Increase (decrease) in other long-term liabilities...................... 13 1,265 (3,450)
---------- ---------- ----------
Net cash provided by operating activities............................. 14,733 13,698 15,353
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment....................... 417 8,518 576
Purchases of property, plant and equipment................................ (13,214) (7,685) (12,280)
Acquisition of business................................................... -- (4,680) --
Other..................................................................... (3,049) (2,227) --
Net cash used in investing activities................................. (15,846) (6,074) (11,704)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from borrowings.................................................. 7,800 56 4,288
Payments on borrowing..................................................... (36,619) (10,415) (3,636)
Equity contributions (distributions)...................................... 29,822 4,676 (1,547)
---------- ---------- ----------
Net cash provided by (used in) financing activities................... 1,003 (5,683) (895)
Effect of exchange rate changes on cash..................................... 532 582 (263)
---------- ---------- ----------
Net change in cash.................................................... 422 2,523 2,491
Cash at beginning of period................................................. 7,990 5,467 2,976
---------- ---------- ----------
Cash at end of period................................................. $ 8,412 $ 7,990 $ 5,467
---------- ---------- ----------
---------- ---------- ----------
Cash paid (received) during the year for:
Income taxes.............................................................. $ 219 $ (69) $ 517
Interest.................................................................. 1,514 1,595 2,289
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-53
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION
The accompanying financial statements include the combined worldwide
accounts of the Ciba Composites Division (the "Division") of Ciba-Geigy Limited
(the "Parent" or "Owner"), a publicly-traded company based in Switzerland. The
financial statements include the accounts of (1) corporate entities wholly or
majority-owned indirectly by the Parent (principally in the United Kingdom,
France, Austria and Italy) and (2) divisional accounts which have historically
operated as business units of wholly-owned, multi-product line subsidiaries of
the Parent, (the "Group Companies"), principally in the United States, South
Africa and Germany. The United Kingdom operation became a corporate entity
wholly-owned by the Parent effective July 1995. The minority interest represents
a third party's 49.0% ownership of the Austrian corporate entity.
The Division's primary business is manufacturing, marketing, and
distributing composite materials, including prepregs, fabrics, adhesives,
honeycomb core and fabricated structural interiors, panels, and parts for the
commercial aerospace industry. Market segments served by the Division include
aerospace, sports and leisure, marine, surface transportation, energy and a
variety of other industrial applications. Approximately two-thirds of the
Division's net sales are to the aerospace market.
The Division's financial statements include the assets, liabilities,
revenues and expenses which are specifically identifiable with the Division, as
well as certain allocated expenses for services that have historically been
performed by the corporate headquarters of the Group Companies. These expenses
are allocated using various methods dependent upon the nature of the service.
The Division's management believes that these allocations are based on
assumptions that are reasonable under the circumstances; however, these
allocations are not necessarily indicative of the costs and expenses that would
have resulted if the Division had been operated as a separate entity.
The net cash position of certain of the Group Companies has been managed
through a centralized treasury system. Accordingly, transfers of cash within the
treasury system are recorded through intercompany accounts, which are reflected
as a component of Owner's equity in the accompanying Combined Balance Sheets. In
addition, intercompany balances arising from purchase and sale transactions with
other Parent affiliates and allocated charges for services have been treated as
the equivalent of cash transactions in the accompanying financial statements and
are included as a component of Owner's equity. There is no direct interest cost
allocation to the Division with respect to Group Company borrowings, and
accordingly, the Combined Statements of Operations do not include any allocated
financing costs. Debt payable to third parties and affiliates outside of the
Division, and related interest expense, is reflected in accordance with their
terms.
All significant transactions within the combined Division have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR:
The U.S. Group Company's fiscal years consist of a fifty-two or fifty-three
week period, ending the last Friday of December. The 1995 and 1994 fiscal years
consisted of fifty-two week periods and 1993 consisted of a fifty-three week
period for the U.S. Group Company. The remaining Division entities have fiscal
years ending December 31. For purposes of financial statement presentation, all
fiscal year-ends are referred to as December 31.
F-54
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined
using various methods including average cost and the first-in, first-out (FIFO)
basis.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation is determined
using the straight-line method applied over the estimated useful lives of the
respective assets, which range from 3 to 50 years. It is the Division's policy
to periodically review the estimated lives of assets and, where appropriate,
revise the estimated lives to reflect technological changes in the industry.
Upon sale or retirement of depreciable assets, the cost and related
accumulated depreciation are removed from the accounts and any resultant gain or
loss is included in operations.
INTANGIBLES:
The excess of cost over the fair value of net assets (goodwill) and
identifiable intangible assets of acquired companies are capitalized at
acquisition and are amortized on a straight-line basis over their estimated
useful lives, ranging from twelve to forty years. The Division evaluates the
realizability of intangibles based upon the projected, undiscounted net cash
flows related to the intangibles. The Division recorded impairment losses of
$2,809 and $5,097 in 1995 and 1994, respectively, for certain identifiable
intangibles which consisted of contracted manufacturing programs. The loss was
measured using projected discounted cash flows and is included in "Amortization
and write-downs of purchased intangibles" in the Combined Statements of
Operations.
REVENUE RECOGNITION:
Revenue is recognized at the time products are shipped.
TRANSLATION OF FOREIGN CURRENCIES:
The functional currency in all significant foreign locations is considered
to be the local currency. The translation of the applicable foreign currencies
into U.S. dollars is performed for balance sheet accounts using exchange rates
in effect at the balance sheet date and for revenue and expense accounts using
an average exchange rate for the year. Gains or losses resulting from
translation are reflected in Owner's equity. Aggregate foreign currency
transaction gains and losses are included in determining results from
operations.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods.
RECLASSIFICATIONS:
Certain amounts in the 1994 Combined Statement of Cash Flows have been
reclassified to conform to the 1995 presentation.
F-55
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
3. RESTRUCTURING EXPENSE AND GAIN ON SALE OF FACILITY
In 1995, 1994 and 1993, the Division incurred approximately $2,400, $1,600
and $7,700, respectively, in restructuring charges. These charges are primarily
due to the consolidation and downsizing of certain facilities and consisted
principally of personnel related expenses and the costs of consolidating these
facilities.
In December 1994, the Division sold its Miami, Florida facility for $8,000
in cash resulting in a net gain of approximately $2,700 which is included as
such in the accompanying Combined Statements of Operations.
4. ACQUISITIONS
In August 1994, the Division acquired certain assets and customer contracts
from a British Petroleum Chemicals Division for total consideration of
approximately $4,700. The revenues and results of operations of the acquired
business are not significant and are included in the Combined Statements of
Operations from the date of acquisition.
5. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Raw materials.................................................... $ 22,261 $ 20,523
Work in process.................................................. 33,317 41,492
Finished goods................................................... 4,759 4,657
----------- -----------
Total........................................................ $ 60,337 $ 66,672
----------- -----------
----------- -----------
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Land............................................................. $ 15,436 $ 15,150
Buildings and improvements....................................... 91,872 93,020
Buildings and equipment under capital leases..................... 6,251 5,776
Machinery and equipment.......................................... 161,047 154,940
Construction in progress......................................... 3,582 1,210
----------- -----------
278,188 270,096
Less, Accumulated depreciation and amortization.............. (121,824) (108,943)
----------- -----------
$ 156,364 $ 161,153
----------- -----------
----------- -----------
</TABLE>
F-56
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
7. INTANGIBLES
Intangibles consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Contracted manufacturing programs................................ $ 11,588 $ 20,779
Customer relationships........................................... 25,237 25,237
Goodwill......................................................... 19,005 19,005
----------- -----------
55,830 65,021
Less, Accumulated amortization............................... (13,619) (15,878)
----------- -----------
$ 42,211 $ 49,143
----------- -----------
----------- -----------
</TABLE>
Intangible assets arose principally from the acquisition of Reliable
Manufacturing Co. in 1979 (goodwill of $3,285) and Heath Tecna Aerospace Co. in
1988. Changes in contracted manufacturing programs in 1995 resulted from an
impairment write-down of $2,809 due to reductions in aircraft build rates and a
corresponding adjustment of cost and accumulated amortization of $6,382.
8. DEBT
Short-term debt includes commercial paper, bank overdrafts, loans and other
short-term debt outstanding in Europe with maturities of one year or less.
Interest rates for this debt ranged from approximately 5.8% - 11.5% in 1995 and
5.7% - 8.6% in 1994.
Short-term debt due to affiliates consists of an overdraft facility at one
of the Division's operating units of $2,419 and $5,302 in 1995 and 1994,
respectively, bearing interest from July 1995 at the U.K. Bank Base Rate (6.5%
at December 31, 1995) plus 1% and a short-term borrowing by another of the
Division's operating units of $6,633 in 1995 bearing interest at Italian LIBOR
(11.2% at December 31, 1995). Through June 1995, the overdraft facility was
noninterest bearing.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Mortgage payable in equal quarterly installments through 1999 at
an interest rate of 6.5%........................................ $ 548 $ 684
Other............................................................ 1,013 1,578
----------- -----------
1,561 2,262
Less, Current portion........................................ 256 487
----------- -----------
Long-term debt............................................. $ 1,305 $ 1,775
----------- -----------
----------- -----------
</TABLE>
F-57
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
8. DEBT (CONTINUED)
Long-term debt to affiliates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Loans payable, due in 1998, at floating interest rates based on
the six-month French LIBOR rate................................. $ 9,502 $ 8,697
Loan payable, with no stated maturity date or interest rate...... -- 4,317
Loan payable, with no stated maturity date, at a floating
interest rate based on the three-month Italian LIBOR rate....... -- 2,175
Advances from affiliate, with no stated maturity date or interest
rate............................................................ -- 22,304
----------- -----------
Long-term debt to affiliates................................. $ 9,502 $ 37,493
----------- -----------
----------- -----------
</TABLE>
The six-month French LIBOR rate at December 31, 1995 was 6.3%.
Aggregate maturities of Long-term debt at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AFFILIATES OTHER
----------- -----------
<S> <C> <C>
1996............................................................. $ -- $ 256
1997............................................................. -- 546
1998............................................................. 9,502 367
1999............................................................. -- 310
2000............................................................. -- 82
----------- -----------
$ 9,502 $ 1,561
----------- -----------
----------- -----------
</TABLE>
9. EMPLOYEE BENEFITS
Approximately 20 percent of the United States employees participate in a
separate trusteed pension plan (the "U.S. Plan"). The U.S. Plan is a
noncontributory defined benefit pension plan covering certain salaried
employees. Benefits are based on employees' years of service and average of the
highest consecutive five years' compensation in the ten years before retirement.
The U.S. Group Company's funding policy is to make the minimum annual
contribution required by applicable regulators.
Net periodic pension cost for 1995, 1994 and 1993, for the U.S. Plan
described above, includes the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the period........... $ 503 $ 706 $ 518
Interest cost on projected benefit obligation............... 621 561 547
Actual return on plan assets................................ (1,931) (5) (1,022)
Net amortization and deferral............................... 1,238 (639) 445
--------- --------- ---------
Net periodic pension cost............................... $ 431 $ 623 $ 488
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-58
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
9. EMPLOYEE BENEFITS (CONTINUED)
The actuarial present value of benefit obligations and funded status of the
U.S. Plan as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Benefit obligations:
Vested benefits................................................ $ 6,744 $ 4,956
Nonvested benefits............................................. 394 288
----------- -----------
7,138 5,244
Projected compensation increases................................. 2,324 2,002
----------- -----------
Projected benefit obligation................................... 9,462 7,246
Plan assets at fair value........................................ 8,773 7,332
----------- -----------
Plan assets in excess of (less than) projected benefit
obligations................................................... (689) 86
Unrecognized prior service cost.................................. 186 200
Unrecognized net loss............................................ (366) (724)
----------- -----------
Pension liability.......................................... $ (869) $ (438)
----------- -----------
----------- -----------
</TABLE>
Assumptions used in developing the projected benefit obligation were as
follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Discount rate........................................................ 7.50% 8.50%
Rate of increase in compensation..................................... 4.50% 5.50%
Expected long-term rate of return on plan assets..................... 10.00% 9.00%
</TABLE>
The majority of the remaining employees participate in various
multi-employer pension plans. These plans include various pension plans
sponsored by Group Companies and accounted for as multi-employer plans.
Accordingly, the Combined Statements of Operations include an allocation of
$3,516, $2,502 and $3,414 in 1995, 1994 and 1993, respectively, for the costs
associated with the employees who participate in such plans. Included in the
costs for 1995 is a curtailment gain of $650 related to certain personnel
reductions. Included in the costs for 1994 is a curtailment gain of $600 related
to the sale of the Miami facility.
Additionally, no assets and liabilities have been reflected in the Combined
Balance Sheets related to the various multi-employer pension plans since it is
not practicable to segregate these amounts.
The Division also has an Investment Savings Plan for U.S. employees.
Division contributions to the plan were approximately $374, $450 and $477 during
1995, 1994 and 1993, respectively.
10. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS
The Division has various postretirement plans that provide healthcare
benefits to retired salaried and hourly employees and their dependents. Certain
of these plans require employee contributions at varying rates. Not all
employees are eligible to receive benefits, with eligibility depending on the
plan in effect at a particular location.
Total postretirement benefit expense of $628, $164 and $813 is included in
the Combined Statements of Operations for 1995, 1994 and 1993, respectively.
Included in the expense for 1994 is a
F-59
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
10. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
curtailment gain of $318 related to the sale of the Miami facility. Assets and
liabilities have not been reflected in the Combined Balance Sheets relating to
Group Company plans, as it is not practical to segregate these amounts.
Effective January 1, 1993, the U.S. Group Company changed its method of
accounting for postretirement benefits other than pensions from the
pay-as-you-go method to the accrual method as required by Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS No. 106"). This standard requires the accrual of the
expected costs of postretirement medical and other nonpension benefits during an
employee's period of service. Similar accounting methods were adopted by other
Division entities prior to 1993. The cumulative effect of adopting SFAS No. 106
as of January 1, 1993, resulted in a charge of $6,006 to 1993 earnings, with no
related income tax benefit. The effect of the change on the 1993 loss before
income taxes was additional expense of approximately $422.
Effective January 1, 1993, the U.S. Group Company also elected to adopt
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS No. 112"). SFAS No. 112 establishes accounting
standards for employers who provide certain benefits to former or inactive
employees after employment but before retirement.
Previously, postemployment benefits, for the U.S. Group Company, were
recognized on the pay-as-you-go method. The cumulative effect of the change in
accounting for postemployment benefits was $1,071, which represented the
unfunded accumulated postemployment benefit obligations as of January 1, 1993.
There was no related income tax benefit in connection with the election. The
effect of the change on the 1993 loss before income taxes was additional expense
of approximately $33. Similar accounting methods were adopted by other Division
entities prior to 1993. Total postemployment benefit expense was $305, $778 and
$154 for 1995, 1994 and 1993, respectively. Assets and liabilities have not been
reflected in the Combined Balance Sheets relating to Group Company plans, as it
is not practical to segregate these amounts.
11. INCOME TAXES
For purposes of the Combined Statements of Operations, income taxes have
been provided on a stand-alone basis, as if the Division was a separate taxable
entity.
F-60
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
11. INCOME TAXES (CONTINUED)
The components of loss before income taxes and cumulative effect of
accounting changes and provision (benefit) for income taxes were:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss before) income taxes and cumulative effect
of accounting changes:
United States......................................... $ (19,469) $ (26,215) $ (32,965)
International......................................... 6,011 4,768 (9,915)
---------- ---------- ----------
$ (13,458) $ (21,447) $ (42,880)
---------- ---------- ----------
---------- ---------- ----------
Provision (benefit) for income taxes:
Current:
United States....................................... $ -- $ -- $ --
International....................................... 4,529 1,383 (1,282)
---------- ---------- ----------
Total current..................................... 4,529 1,383 (1,282)
---------- ---------- ----------
Deferred:
United States....................................... -- -- --
International....................................... 556 1,460 320
---------- ---------- ----------
Total deferred.................................... 556 1,460 320
---------- ---------- ----------
Total provision (benefit) for income taxes........ $ 5,085 $ 2,843 $ (962)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The current provision for income taxes for 1995 includes a benefit
recognized from utilization of operating loss carryforwards of $302.
The effective income tax provision (benefit) rate on the loss before income
taxes differed from the United States federal statutory rate for the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Benefit at the U.S. federal statutory rate.............. $ (4,710) $ (7,506) $ (15,008)
Tax effect of net operating losses not recognized....... 4,225 7,016 14,546
Foreign tax (benefit)................................... 5,085 2,843 (962)
Goodwill amortization................................... 442 442 442
Other................................................... 43 48 20
---------- ---------- ----------
Provision (benefit) for income taxes.................... $ 5,085 $ 2,843 $ (962)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-61
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
11. INCOME TAXES (CONTINUED)
The tax effects of temporary differences which gave rise to deferred income
tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Postretirement/postemployment benefits.......................... $ 3,648 $ 3,023
Environmental reserve........................................... 1,651 1,746
Intangibles..................................................... 1,845 679
Restructuring reserve........................................... 592 625
Inventory reserve............................................... 518 621
Other reserves.................................................. 1,793 2,207
Net operating losses............................................ 87,847 87,163
---------- ----------
Total deferred income tax assets.............................. 97,894 96,064
---------- ----------
Deferred income tax liabilities:
Depreciation.................................................... (11,368) (11,560)
Revenue recognition............................................. (3,153) (5,106)
---------- ----------
Total deferred income tax liabilities....................... (14,521) (16,666)
---------- ----------
Subtotal.................................................... 83,373 79,398
Valuation allowance............................................... (84,072) (79,541)
---------- ----------
Net deferred income tax liabilities......................... $ (699) $ (143)
---------- ----------
---------- ----------
</TABLE>
Deferred income tax assets of $1,161 and $1,391 at December 31, 1995 and
1994, respectively, are included in other assets in the Combined Balance Sheets.
Deferred income tax liabilities of $1,860 and $1,534 at December 31, 1995
and 1994, respectively, are included in other long-term liabilities in the
Combined Balance Sheets.
Operating loss carryforwards of non-corporate Divisional entities
(principally the United States of approximately $219 million) have generally
been utilized to offset Group Company taxable income in the year incurred.
However, for purposes of these combined financial statements, the tax effect of
such operating loss carryforwards have been reflected as deferred tax assets
with related valuation allowances, based upon management's assessment of the
Division's likelihood of realizing the benefit of such operating loss
carryforwards through future stand-alone taxable income.
The Division has net operating loss carryforwards of which approximately
$6,200 and $600 are available to offset certain future taxable income in Italy
and France, respectively.
These operating loss carryforwards expire as follows:
<TABLE>
<S> <C>
1996............................................................... $ 159
1997............................................................... 1,556
1998............................................................... 2,359
1999............................................................... 1,097
2000............................................................... 1,629
</TABLE>
F-62
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
12. COMMITMENTS AND CONTINGENCIES
SELF-INSURANCE:
The Division is partially self-insured for workers' compensation, general
liability and property insurance risks, subject to specific retention levels.
Self-insurance costs are accrued based upon the aggregate of the estimated
liability for reported claims and estimated liabilities for claims incurred but
not reported.
LITIGATION:
The Division is involved in legal proceedings which are in various stages of
development and involve various uncertainties which can affect the eventual
outcome of the issues. While it is difficult to predict what the eventual
resolution of these issues will be, the Division believes, on the basis of the
facts presently known, that these actions will not have a material adverse
effect on the Division's financial condition or results of operations.
ENVIRONMENTAL COSTS:
In connection with an acquisition of one of the Division's operating
facilities, the Division entered into an agreement with the previous owner
whereby the Division agreed to share in the operating cost for groundwater
treatment and monitoring facilities which had been ordered by regulatory
authorities prior to the date of acquisition. The Division's share of annual
cost sharing is estimated at $250. While the ultimate period of treatment and
monitoring required by regulatory authorities is not determinable, the Division
estimated the minimum period at twenty years. The Combined Balance Sheets
include reserves of approximately $4,200 and $4,500 as of December 31, 1995 and
1994, respectively, related to these costs. Charges against these reserves
totaled approximately $300 and $200 in 1995 and 1994, respectively.
In the normal course of its business, the Division is subject to
environmental regulations in jurisdictions in which the Division has facilities
and, accordingly, the Division may be required to incur either remediation or
capital improvement costs in the future. Management of the Division believes
that the amounts of such costs, if any, will not have a material adverse effect
on the Division's financial condition or results of operations.
LEASE OBLIGATIONS:
The Division leases certain equipment and facilities under capital leases
and noncancelable operating leases expiring at various dates through 2012.
F-63
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum annual lease payments under such leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
1996................................................................. $ 725 $ 1,818
1997................................................................. 725 1,097
1998................................................................. 333 710
1999................................................................. 333 548
2000................................................................. 333 274
Thereafter........................................................... 5,863 --
--------- -----------
8,312 $ 4,447
-----------
-----------
Amounts representing interest........................................ 3,581
---------
Present value of net minimum lease payments.......................... 4,731
Less, Current portion............................................ 441
---------
Long-term portion.................................................... $ 4,290
---------
---------
</TABLE>
Lease expense was $2,080, $1,883 and $1,724 in 1995, 1994 and 1993,
respectively.
GUARANTEES:
The Italian corporate entity has guaranteed $650 of certain obligations of
an unrelated third party as sole guarantor. Additionally, the entity has
guaranteed $824 of obligations of the third party on a joint and several basis
with sixteen other unrelated co-guarantors.
CONCENTRATION OF CREDIT RISK:
The Division operates in one principal industry segment.
In 1995, 1994 and 1993, one customer accounted for 18%, 20% and 29%,
respectively, of the net sales of the Division.
EXCHANGE RATES:
Certain items included on the Division's Combined Balance Sheets originating
from non-U.S. transactions are subject to fluctuations in the applicable
exchange rates between the transaction and settlement dates.
F-64
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
13. SEGMENT INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
United States........................................ $ 148,919 $ 139,831 $ 136,141
Europe............................................... 171,235 143,071 127,469
Other geographic regions............................. 10,919 9,709 7,648
----------- ----------- -----------
Total net sales.................................. $ 331,073 $ 292,611 $ 271,258
----------- ----------- -----------
----------- ----------- -----------
Intra-division transfers/sales between geographic areas
(eliminated in combination):
United States........................................ $ 4,360 $ 3,702 $ 2,077
Europe............................................... 9,748 9,702 7,782
----------- ----------- -----------
Total intra-divisional transfers/sales........... $ 14,108 $ 13,404 $ 9,859
----------- ----------- -----------
----------- ----------- -----------
Operating loss (income):
United States........................................ $ 19,469 $ 26,215 $ 32,966
Europe............................................... (6,057) (4,238) 8,523
Other geographic regions............................. (2,128) (2,614) (1,090)
----------- ----------- -----------
Total operating loss............................. $ 11,284 $ 19,363 $ 40,399
----------- ----------- -----------
----------- ----------- -----------
Identifiable assets:
United States........................................ $ 179,662 $ 199,470 $ 222,874
Europe............................................... 156,182 148,476 135,658
Other geographic regions............................. 4,450 4,474 3,752
----------- ----------- -----------
Total identifiable assets........................ $ 340,294 $ 352,420 $ 362,284
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Transfers between geographic areas are recorded at amounts generally above
cost. Operating (income) loss consists of total net sales less cost of sales and
operating expenses. The United States' operating loss and identifiable assets
include certain amounts related to the administration of worldwide Division
operations.
Export sales to unaffiliated customers by geographic area are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Europe................................................. $ 18,881 $ 15,639 $ 14,225
North America.......................................... 11,824 9,946 7,461
Other.................................................. 8,582 6,746 6,123
----------- ----------- -----------
$ 39,287 $ 32,331 $ 27,809
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
14. RELATED PARTY TRANSACTIONS
Certain expenses reflected in the Combined Statements of Operations include
allocated amounts of $2,719, $2,836 and $2,048 in 1995, 1994 and 1993,
respectively. These charges are principally for legal, human resource,
accounting and treasury functions performed for the Division.
F-65
<PAGE>
CIBA COMPOSITES
(A DIVISION OF CIBA-GEIGY LIMITED)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
Through the normal course of business, the Division conducts transactions
with affiliates. Such transactions in 1995, 1994 and 1993 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Purchases of products.................................. $ 11,759 $ 12,212 $ 10,816
Interest expense, net.................................. 1,032 810 1,471
Other expense (income)................................. 968 541 (147)
</TABLE>
The Division purchases certain raw materials from affiliates at cost. For
purposes of the accompanying financial statements, a mark-up above cost was
added to such purchases which adjustment increased the loss from operations in
1995, 1994 and 1993 by $4,192, $4,355 and $3,573, respectively.
Accounts payable in the Combined Balance Sheets includes amounts due to
affiliates of $2,849 and $343 in 1995 and 1994, respectively.
As discussed in Note 1, in July 1995, the Parent contributed the net assets
of its United Kingdom Composites Division to a new wholly-owned corporate entity
in the United Kingdom. As part of this transaction, debt of the Division owed to
affiliates amounting to approximately $22,000 was repaid and approximately
$3,900 of fixed assets previously carried on the Division's accounts were
transferred to an affiliate of the Division.
During 1995, long-term debt due to affiliates approximating $6,500 was
repaid with a similar amount being borrowed from an affiliate on a short-term
basis.
The Division has various financing arrangements with affiliates as discussed
in Note 8.
15. SUBSEQUENT EVENT
On February 21, 1996, the stockholders of Hexcel Corporation approved a
transaction to combine with the Division. On February 29, 1996, the transaction
was consummated. According to the terms of the agreement, the Parent will
receive 49.9% of the combined entity in exchange for the Division. The Parent
will also receive additional consideration as part of the transaction.
F-66
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
Hercules Incorporated:
We have audited the accompanying balance sheets of the Composite Products
Division of Hercules Incorporated as of December 31, 1995 and 1994 and the
related statements of operations, division equity, and cash flow for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Composite Products
Division of Hercules Incorporated as of December 31, 1995 and 1994 and the
results of its operations and its cash flow for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Notes 6 and 9 to the financial statements, in 1993, the
Company changed its methods of accounting for postretirement and postemployment
benefits other than pensions.
/s/ COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
February 26, 1996
F-67
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................................................. $ 100,449 $ 100,113 $ 101,448
Cost of sales.............................................................. 83,748 94,786 92,298
----------- ----------- -----------
Gross profit............................................................... 16,701 5,327 9,150
Selling, general, and administrative expenses.............................. 2,266 2,888 3,229
Allocated selling, general, and administrative expenses.................... 7,086 6,047 6,336
Research and development................................................... 2,184 2,481 2,815
Other operating (income) expenses, net..................................... (391) 1,670 1,755
----------- ----------- -----------
Income (loss) before taxes and effect of changes in accounting
principles................................................................ 5,556 (7,759) (4,985)
Provision for taxes on income.............................................. -- -- --
----------- ----------- -----------
Income (loss) before effect of changes in accounting principles............ 5,556 (7,759) (4,985)
Effect of changes in accounting principles................................. -- -- (3,916)
----------- ----------- -----------
Net income (loss).......................................................... $ 5,556 $ (7,759) $ (8,901)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-68
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
BALANCE SHEET
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Current Assets
Cash................................................................................. $ 2,126 $ 4,905
Trade accounts receivable............................................................ 17,510 14,923
Less allowance for doubtful accounts................................................. (401) (390)
----------- -----------
Net Accounts Receivable............................................................ 17,109 14,533
Inventories
Finished products.................................................................. 11,813 13,740
Materials, supplies, and work in process........................................... 13,485 27,225
----------- -----------
Total Inventories................................................................ 25,298 40,965
----------- -----------
Total Current Assets................................................................. 44,533 60,403
Property, plant, and equipment
Land............................................................................... 1,514 1,514
Buildings and equipment............................................................ 187,185 182,494
Construction in progress........................................................... 6,772 2,231
Accumulated depreciation........................................................... (100,456) (89,459)
----------- -----------
Net Property, Plant and Equipment.................................................. 95,015 96,780
Deferred charges and other assets.................................................... 1,036 1,135
----------- -----------
TOTAL ASSETS..................................................................... $ 140,584 $ 158,318
----------- -----------
----------- -----------
<CAPTION>
LIABILITIES AND DIVISION EQUITY
<S> <C> <C>
Current liabilities
Accounts payable..................................................................... $ 2,379 $ 2,915
Accrued expenses
Payroll and employee benefits...................................................... 5,996 5,177
Other.............................................................................. 3,132 4,631
----------- -----------
Total Current Liabilities........................................................ 11,507 12,723
Other liabilities.................................................................... 1,048 1,276
Minority interest.................................................................... -- 12,000
Division Equity...................................................................... 128,029 132,319
----------- -----------
TOTAL LIABILITIES AND DIVISION EQUITY............................................ $ 140,584 $ 158,318
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-69
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
STATEMENT OF CASH FLOW
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1994 1993
---------- --------- ----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)............................................................ $ 5,556 $ (7,759) $ (8,901)
Adjustments to reconcile net income(loss) to cash provided from operations:
Depreciation and amortization.............................................. 9,395 9,452 9,522
Gain on settlement......................................................... (1,100) -- --
Loss on disposal of property, plant, and equipment......................... 65 43 (34)
Provision for inventory loss............................................... 1,300 1,561 2,642
Accruals and deferrals of cash receipts and payments:
Accounts receivable, net................................................... (2,576) (2,862) (1,594)
Inventories................................................................ 12,029 11,020 8,281
Accounts payable and accrued expenses...................................... (1,216) 156 3,622
Deferred charges and other assets.......................................... 99 (77) 113
Other liabilities.......................................................... (228) (33) 103
---------- --------- ----------
Net cash provided by operations............................................ 23,324 11,501 13,754
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures....................................................... (8,543) (1,871) (1,740)
---------- --------- ----------
Net cash used for investing activities..................................... (8,543) (1,871) (1,740)
CASH FLOW FROM FINANCING ACTIVITIES
Net Parent company capital withdrawals..................................... (17,560) (7,351) (9,540)
---------- --------- ----------
Net cash used for financing activities..................................... (17,560) (7,351) (9,540)
Increase (Decrease) in Cash................................................ (2,779) 2,279 2,474
Cash, beginning of year.................................................... 4,905 2,626 152
---------- --------- ----------
Cash, end of year.......................................................... $ 2,126 $ 4,905 $ 2,626
---------- --------- ----------
---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-70
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
STATEMENT OF CHANGES IN DIVISION EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE AT JANUARY 1, 1993........................................................ $ 163,220
Net loss.......................................................................... (8,901)
Net Capital withdrawal............................................................ (11,766)
---------
BALANCE AT DECEMBER 31, 1993...................................................... $ 142,553
Net loss.......................................................................... (7,759)
Net Capital withdrawal............................................................ (2,475)
---------
BALANCE AT DECEMBER 31, 1994...................................................... $ 132,319
Net income........................................................................ 5,556
Net Capital withdrawal............................................................ (9,846)
---------
BALANCE AT DECEMBER 31, 1995...................................................... $ 128,029
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-71
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The Composite Products Division (CPD) is a division of Hercules Incorporated
(the Parent). CPD serves worldwide markets for carbon fiber materials (fiber and
prepregs). These materials are used to make structural products. The division
has three major operating units which include Bacchus (Magna, UT), HISPAN
(Decatur, AL) and HAESA (Madrid, Spain). Currently, the division's geographic
scope is primarily North America, where its largest facilities are located. CPD
serves a diverse customer base which operate in several market segments. CPD
sales to the U.S. Government represented approximately 22%, 41%, and 49% of
total net sales during 1995, 1994, and 1993, respectively. CPD sales to
Construcciones Aeronauticas S.A. (Government of Spain) represented approximately
14%, 12%, and 9% of total net sales during 1995, 1994, and 1993 respectively.
CPD performs ongoing evaluations of its customers but generally does not require
collateral to support customer receivables.
The financial statements reflect the results of operations and financial
position of CPD, including certain allocations by the parent company. All
material intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that pertain to current operations or relate to
future revenues are expensed or capitalized consistent with the Parent's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations, that do not contribute to current
or future revenues, are expensed. Liabilities are recognized for remedial
activities when the cleanup is probable and the cost can be reasonably
estimated.
INVENTORIES
Inventories are stated at the lower of cost or market. Domestic inventories
are valued predominantly on the last-in, first-out (LIFO) method. Spare parts,
supplies and foreign inventories, representing approximately $6,130, and $6,270
in 1995 and 1994, respectively, are valued on the average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. HISPAN and HAESA use the
straight-line method, while Bacchus uses an accelerated depreciation method.
Effective January 1, 1993, CPD changed its estimate of the useful lives for all
processing equipment. CPD believes these new depreciation lives provide for a
better matching of costs and revenues over the life of the assets. For income
tax purposes, accelerated depreciation methods are used.
Maintenance, repairs, and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the cost of property (less proceeds of sale or salvage) is charged to income.
F-72
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
CPD is not a separate tax paying entity. Accordingly, its results of
operations have been included in tax returns filed by Hercules. The accompanying
financial statements include tax computations assuming CPD filed separate
returns and reflecting the application of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" for all periods presented.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of HASEA are translated at current exchange rates,
and related revenues and expenses are translated at average exchange rates in
effect during the period. Resulting translation adjustments are recorded as a
component of division equity.
2. SUPPLEMENTAL CASH FLOW INFORMATION:
During 1995, CPD was involved in the following non-cash activities with the
Parent:
- $7,538 of assets relating to claims were withdrawn by the Parent
- $2,000 of fixed assets were contributed by the Parent and
- $10,900 of equity was contributed by the Parent pursuant to the Parent's
buy out of the minority interest
During 1994, $4,437 of equity was contributed by the Parent through a
dividend payment to the minority shareholder.
3. INVENTORIES:
If the cost of all inventories had been valued on the average cost method,
which approximates current cost, inventories would have been $460 and $691
higher than as reported on the LIFO method at December 31, 1995, and 1994,
respectively.
During 1995 and 1994, inventory quantities were reduced, which resulted in a
liquidation of LIFO inventory layers carried at higher costs which prevailed in
prior years. The effect of the liquidations was to increase cost of goods sold
and decrease net income (increase net loss) by approximately $6,880 and $2,570
in 1995 and 1994, respectively.
4. PENSIONS:
CPD participates in various Hercules-defined benefit pension plans covering
substantially all employees. Benefits are based on average final pay and years
of service. CPD's allocation of amounts credited directly to Allocated Selling,
General and Administrative expense, based on the relationship of CPD's total
payroll to Hercules' payroll, was $1,034, $215, and $260 in 1995, 1994 and 1993,
respectively. Information on the actuarial present value of benefit obligation,
fair value of plan assets, and pension costs is not provided as such information
is not maintained separately for employees of CPD.
5. EMPLOYEE BENEFIT PLAN:
An operating unit of CPD has a noncontributory defined contribution pension
plan covering substantially all employees. This operating unit contributes
amounts equal to 6% of covered employee compensation up to the Social Security
Wage Base and amounts equal to 5% in excess of the Social Security Wage Base.
Pension expense for the years ended December 31, 1995, 1994, and 1993 was $133,
$130 and $150, respectively.
F-73
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. OTHER POSTRETIREMENT BENEFITS:
CPD participates in certain defined benefit postretirement health care and
life insurance programs provided to retired Hercules employees. Substantially
all employees are covered and become eligible for these benefits upon satisfying
the appropriate age and service requirements necessary for receipt of these
benefits.
Effective January 1, 1993, Hercules adopted Statement of Financial
Accounting Standards (SFAS) No. 106 "Employers' Accounting for Postretirement
Benefits Other than Pensions." SFAS No. 106 requires the recognition of these
benefit costs on an accrual basis. Prior to January 1, 1993, the costs of
retiree health care and life insurance were expensed as paid. The effect of
adopting this accounting standard has been recognized immediately as the effect
of a change in accounting principle and has resulted in a charge of $3,122. (No
tax benefit was realized). This represents the accumulated postretirement
benefit obligation existing at January 1, 1993. CPD's allocated portion of the
net periodic postretirement cost was $456, $556 and $746 in 1995, 1994, and
1993, respectively. The accumulated postretirement benefit expense and the
annual postretirement benefit expense were allocated based on the relationship
between CPD's number of active employees to Hercules' number of active
employees. The liability for such costs has not been reflected in these
financial statements.
7. PURCHASE OF MINORITY INTEREST:
As disclosed in Note 2, the Parent bought out the minority interest holder
in HISPAN for $10,900 in 1995. In addition, included in other (income) expense
in 1995 is a $1,100 gain related to the settlement of CPD's claim against the
minority holder.
8. CLAIMS:
During 1995, $6,840 of assets relating to a claim due to a termination for
convenience by the U.S. Government were withdrawn from CPD by the Parent, who is
entitled to the cash receipt of the claim value. The estimated profit relating
to these claims of $1,500 is included in CPD sales in 1995. In addition, $698 of
assets relating to a damaged inventory claim were withdrawn from CPD by the
Parent.
9. POSTEMPLOYMENT BENEFITS:
CPD participates in certain disability and workers' compensation benefits,
including medical benefits, provided to former or inactive Hercules employees.
Substantially all employees are covered and become eligible for these benefits
upon satisfying the appropriate age and service requirements necessary for
receipt of these benefits.
Effective January 1, 1993, Hercules adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." This statement requires recognition of
these benefit costs on an accrual basis. Prior to January 1, 1993, disability
benefits and workers' compensation benefits were expensed as claims were
reported. The effect of adopting SFAS No. 112 has been recognized immediately as
the effect of a change in accounting principle and has resulted in a charge of
$794. (No tax benefit was realized). The income statement impact of this
accumulated postemployment benefit expense was allocated based on the
relationship between CPD's total number of employees and Hercules' total number
of employees. The periodic postemployment benefit costs, which are included in
the corporate cost allocation, are impracticable to determine. The liability for
such costs has not been reflected in these financial statements.
F-74
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. RELATED PARTY TRANSACTIONS:
The financial statements include allocations by Hercules for certain
corporate administrative and benefit costs incurred for the benefit of all
operating divisions. These costs are allocated to operating divisions on a
variety of methodologies as follows:
a. Specific identification -- based on estimates of time and services
provided.
b. Relative identification -- based on relevant criteria that establishes
the division's relationship to the entire pool of beneficiaries.
c. Formula driven -- nonidentifiable to division but incurred for the
benefit of all.
Corporate costs include executive, legal, accounting, tax, auditing, cash
management, purchasing, safety, human resources, health and environmental,
international, and employee benefits.
Allocated costs included in selling, general, and administrative costs were
$7,086, $6,047, and $6,336 during 1995, 1994, and 1993, respectively. These
allocations, while reasonable under the circumstances, may not represent the
cost of similar activities on a separate entity basis.
11. CASH AND CAPITAL REQUIREMENTS:
Certain operating units of CPD participated in Hercules' centralized cash
management system. Accordingly, cash received from CPD operations was
administered centrally while Hercules financed operational and working capital
requirements as well as capital expenditures. These operating units had no
external sources of financing, such as available lines of credit, as may be
necessary to operate as a separate entity. The statement of cash flow is
prepared as though the cash received and disbursed on behalf of these CPD
operating units by Hercules was transacted through CPD. The cash balance
represents amounts directly held by two operating units of CPD.
12. CAPITALIZED INTEREST:
As a result of cash management and funding practices within Hercules, CPD
records capitalized interest on construction projects. These amounts are based
on Hercules' weighted average interest rate on borrowings outstanding during the
construction periods. The amortization of capitalized interest, included in
other operating income and expense for 1995, 1994, and 1993, was $650, $650, and
$650 while the unamortized balance included as a cost of facilities at December
31, 1995 and 1994 was $4,551 and $5,201, respectively.
13. TAXES ON INCOME:
The domestic and foreign components of income (loss) before taxes on income
are presented below.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Domestic............................................................... $ 4,604 $ (7,023) $ (4,401)
Foreign................................................................ 952 (736) (584)
--------- --------- ---------
$ 5,556 $ (7,759) $ (4,985)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-75
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. TAXES ON INCOME: (CONTINUED)
Deferred tax liabilities (assets) at December 31, 1995 and 1994 consist of:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Depreciation..................................................................... $ 20,689 $ 21,415
--------- ---------
--------- ---------
Gross deferred tax liabilities................................................... 20,689 21,415
Net Operating Losses............................................................. (21,440) (22,598)
Accrued expenses................................................................. (24) (24)
Inventory........................................................................ (3,302) (4,792)
Accounts receivable.............................................................. (153) (149)
Deferred Assets.................................................................. 0 (176)
--------- ---------
Gross deferred tax assets........................................................ (24,919) (27,739)
Valuation allowance.............................................................. 4,230 6,324
--------- ---------
Net deferred tax liability....................................................... $ 0 $ 0
--------- ---------
--------- ---------
</TABLE>
A reconciliation of income taxes at the U.S. statutory rate with the income
taxes recorded follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Computed at statutory income tax rate.................................. $ 1,941 $ (2,716) $ (1,745)
State taxes, net of federal benefit.................................... 150 (228) (142)
Valuation Allowance.................................................... (2,094) 2,942 1,886
Other.................................................................. 3 2 1
--------- --------- ---------
Provision for income taxes............................................. $ 0 $ 0 $ 0
--------- --------- ---------
--------- --------- ---------
</TABLE>
14. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
CPD leases buildings, vehicles, and equipment under various operating leases
with third parties.
Rent expense under operating leases for the years ended December 31, 1995,
1994, and 1993 was $603, $547, and $540, respectively.
SUPPLIER AGREEMENT
CPD entered into an agreement with a customer to supply carbon fiber at a
fixed price. The price is adjusted annually based on inflation and the agreement
expires on March 15, 2000.
F-76
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
15. OPERATIONS BY GEOGRAPHIC AREA:
The following table represents operating results and other financial data by
geographic area:
<TABLE>
<CAPTION>
UNITED
STATES OTHER TOTAL
------------ --------- -----------
<S> <C> <C> <C>
1995
Net sales........................................................ $ 81,447 $ 19,002 $ 100,449
Profit from operations........................................... 3,587 1,969 5,556
Identifiable assets.............................................. 118,219 19,203 137,422
1994
Net sales........................................................ 84,161 15,952 100,113
Loss from operations............................................. (9,456) 1,697 (7,759)
Identifiable assets.............................................. 133,744 18,534 152,278
1993
Net sales........................................................ 88,894 12,554 101,448
Loss from operations............................................. (5,891) 906 (4,985)
Identifiable assets.............................................. 150,302 16,701 167,003
</TABLE>
The company's foreign operations are primarily in Spain. Identifiable assets
include net trade accounts receivable, inventories, and net property, plant and
equipment.
16. PENDING SALE:
On December 20, 1995, a letter of intent was signed by the company's Parent
with a third party for the pending sale of substantially all the assets and
liabilities of the company.
F-77
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED
MARCH 31, 1996
---------------------
<S> <C>
Net sales.................................................................................. $ 22,342
Cost of sales.............................................................................. 17,303
--------
Gross profit............................................................................... 5,039
Selling, general, and administrative expenses.............................................. 296
Allocated selling, general, and administrative expenses.................................... 1,611
Research and development................................................................... 518
Other operating (income) expenses, net..................................................... 220
--------
Income (loss) before taxes................................................................. 2,394
Provision for taxes on income.............................................................. --
--------
Net income (loss).......................................................................... $ 2,394
--------
--------
</TABLE>
The accompanying notes are an integral part of the Financial Statements
F-78
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current Assets....................................................................................
Cash.............................................................................................. $ 603
Trade accounts receivable......................................................................... 16,451
Less allowance for doubtful accounts.............................................................. (390)
--------------
Net Accounts Receivable......................................................................... 16,061
Inventories
Finished products............................................................................... 13,824
Materials, supplies, and work in process........................................................ 14,790
--------------
Total Inventories............................................................................. 28,614
--------------
Total Current Assets.............................................................................. 45,278
Property, plant, and equipment
Land............................................................................................ 1,514
Buildings and equipment......................................................................... 188,120
Construction in progress........................................................................ 6,194
Accumulated depreciation........................................................................ (102,767)
--------------
Net Property, Plant and Equipment............................................................... 93,061
Deferred charges and other assets................................................................. 1,027
--------------
TOTAL ASSETS.................................................................................. $ 139,366
--------------
--------------
LIABILITIES AND DIVISION EQUITY
Current liabilities...............................................................................
Accounts payable.................................................................................. $ 3,979
Accrued expenses
Payroll and employee benefits................................................................... 3,581
Other........................................................................................... 2,688
--------------
Total Current Liabilities..................................................................... 10,248
Other liabilities................................................................................. 1,113
Division Equity................................................................................... 128,005
--------------
TOTAL LIABILITIES AND DIVISION EQUITY......................................................... $ 139,366
--------------
--------------
</TABLE>
The accompanying notes are an integral part of the Financial Statements
F-79
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
STATEMENT OF CASH FLOW
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED
MARCH 31, 1996
-------------------
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)............................................................................ $ 2,394
Adjustments to reconcile net income(loss) to cash provided from operations:
Depreciation and amortization.............................................................. 2,495
Accruals and deferrals of cash receipts and payments:
Accounts receivable, net................................................................... 1,048
Inventories................................................................................ (3,316)
Accounts payable and accrued expenses...................................................... (1,259)
Deferred charges and other assets.......................................................... 9
Other liabilities.......................................................................... 65
-------
Net cash provided by operations............................................................ 1,436
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures....................................................................... (782)
-------
Net cash used for investing activities..................................................... (782)
CASH FLOW FROM FINANCING ACTIVITIES
Net Parent company capital withdrawals..................................................... (2,177)
-------
Net cash used for financing activities..................................................... (2,177)
Increase (Decrease) in Cash................................................................ $ 1,523
Cash, beginning of year.................................................................... 2,126
-------
Cash, end of year.......................................................................... $ 603
-------
-------
</TABLE>
The accompanying notes are an integral part of the Financial Statements
F-80
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
STATEMENT OF CHANGES IN DIVISION EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
----------
<S> <C>
BALANCE AT JANUARY 1, 1996............................................................................ $ 128,029
Net Income............................................................................................ 2,394
Net Capital withdrawal................................................................................ (2,418)
----------
BALANCE AT MARCH 31, 1996............................................................................. $ 128,005
----------
----------
</TABLE>
The accompanying notes are an integral part of the Financial Statements
F-81
<PAGE>
COMPOSITE PRODUCTS DIVISION
HERCULES INCORPORATED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. THE COMPOSITE PRODUCTS DIVISION (CPD) IS A DIVISION OF HERCULES INCORPORATED
(THE PARENT).
The accompanying statements are unaudited and have been prepared by CPD. The
financial statements reflect the results of operations and financial position of
CPD, including certain allocations by the parent company. All material
intercompany transactions have been eliminated. In the opinion of management
such financial statements contain all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows for the interim periods presented. The
aforementioned financial statements have been prepared substantially in
conformity with the accounting principles reflected in the CPD financial
statements for the year ended December 31, 1995.
F-82
<PAGE>
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE SUCH DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 4
Incorporation of Certain Documents by
Reference..................................... 4
Prospectus Summary............................. 5
Risk Factors................................... 13
Use of Proceeds................................ 19
Capitalization................................. 20
Price Range of Common Stock and Dividend
Policy........................................ 21
Pro Forma Financial Information................ 22
Selected Consolidated Financial Information.... 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 33
Business....................................... 46
Management..................................... 59
Description of Notes........................... 62
Description of Capital Stock................... 71
Underwriting................................... 74
Notice to Canadian Residents................... 75
Certain Federal Income Tax Considerations...... 76
Legal Matters.................................. 79
Experts........................................ 79
Glossary of Terms.............................. 80
Index to Financial Statements.................. F-1
</TABLE>
[LOGO]
$100,000,000
% Convertible
Subordinated
Notes Due 2003
P R O S P E C T U S
CS First Boston
Bear, Stearns & Co. Inc.
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission........... $ 39,655
National Association of Securities Dealers, Inc. Filing Fee...... 12,000
Printing and Engraving Expenses.................................. 200,000*
Legal Fees and Expenses.......................................... 150,000*
Trustee Fees and Expenses........................................ 10,000*
Accounting Fees and Expenses..................................... 100,000*
Rating Agency Fees............................................... 100,000*
Blue Sky Fees and Expenses....................................... 20,000*
Miscellaneous.................................................... 68,345*
---------
Total........................................................ $ 700,000
---------
---------
</TABLE>
- ------------------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Set forth below is a description of certain provisions of the General
Corporation Law of the State of Delaware (the "GCL"), the Certificate of
Incorporation of the Registrant, the Bylaws of the Registrant, the Strategic
Alliance Agreement dated as of September 29, 1995 among Ciba-Geigy Limited,
Ciba-Geigy Corporation and the Registrant, as amended (the "Strategic Alliance
Agreement"), and the Hexcel Corporation Incentive Stock Plan (the "Incentive
Stock Plan"), as such provisions relate to the indemnification of the directors
and officers of the Registrant. This description is intended only as a summary
and is qualified in its entirety by reference to the applicable provisions of
the GCL, the Certificate of Incorporation of the Registrant, the Bylaws of the
Registrant, the Strategic Alliance Agreement and the Plan, which are
incorporated herein by reference.
The Registrant is a Delaware corporation. Section 145 of the GCL provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party 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 a director, officer, employee or agent of the
corporation, or is or was serving at its request in such capacity at another
corporation or business organization, against 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 if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interest of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
that such person's conduct was unlawful. A Delaware corporation may indemnify
officers and directors in an action by or in the right of the corporation under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify against the expenses that such officer or director actually and
reasonably incurred.
Section 102(b)(7) of the GCL permits a corporation to provide in its
certificate of incorporation that a director of a 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 liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the GCL
(Liability of Directors for Unlawful Payment of Dividend or Unlawful Stock
Purchase or Redemption) or (iv) for any transaction from which the director
derived an improper personal benefit.
II-1
<PAGE>
The Registrant's Certificate of Incorporation provides for the elimination
of personal liability of a director for breach of fiduciary duty, to the full
extent permitted by the GCL. The Registrant's Certificate of Incorporation also
provides that the Registrant shall indemnify its directors and officers to the
full extent permitted by the GCL; PROVIDED, HOWEVER, that the Registrant shall
indemnify any such person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
the Board of Directors of the Registrant. The Certificate of Incorporation
further provides that the Registratnt may, to the extent authorized from time to
time by the Board of Directors, provide rights to indemnification similar to
those provided to the directors and officers of the Registrant to the employees
and agents of the Registrant who are not directors or officers of the
Registrant.
The Strategic Alliance Agreement provides that the Registrant's Certificate
of Incorporation and Bylaws will continue to contain the provisions with respect
to indemnification of directors and officers as of the date of the Strategic
Alliance Agreement, which provisions will not be amended, repealed or otherwise
modified, for a period of six years following the Closing contemplated by the
Strategic Alliance Agreement (the "Ciba Closing") in any manner that would
adversely affect the rights of individuals who at any time prior to the Ciba
Closing were directors or officers of the Registrant in respect of actions or
omissions occurring at or prior to the Ciba Closing, except for such
modifications as are required by applicable law. In addition, the Strategic
Alliance Agreement generally requires the Registrant to indemnify its officers
and directors as of the date of the Strategic Alliance Agreement against all
losses (including reasonable fees and expenses of counsel) arising out of any
claim based in whole or in part on the fact that such person was a director or
officer of the Registrant at or prior to the Ciba Closing.
The Registrant maintains, at its expense, an insurance policy which insures
the directors and officers of the Registrant, subject to certain exclusions and
deductions, against certain liabilities that they may incur in their capacity as
such. The Strategic Alliance Agreement provides that for six years after the
Ciba Closing, the Registrant is generally required to provide directors' and
officers' liability insurance for its officers and directors as of the date of
the Strategic Alliance Agreement.
Pursuant to the Plan, no member of the Executive Compensation Committee of
the Board of Directors of the Company or such other committee of the Board of
Directors as may be designated by the Board of Directors from time to time to
administer the Incentive Stock Plan shall be liable for any action or
determination made in good faith, and the members of such committee shall be
entitled to indemnification in the manner provided in the Registrant's
Certificate of Incorporation.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement among the Company, CS First Boston and Bear, Stearns & Co. Inc.
2.1 First Amended Plan of Reorganization dated as of November 7, 1994 (incorporated by reference to
Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 2,
1994).
2.2 Strategic Alliance Agreement dated as of September 29, 1995 among the Company, Ciba and CGC
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on 8-K dated as of
October 13, 1995).
2.2(a) Amendment dated as of December 12, 1995 to the Strategic Alliance Agreement (incorporated by
reference to Exhibit 2.1(a) to the Company's Current Report on Form 8-K dated as of March 15,
1996).
2.2(b) Letter Agreement dated as of February 28, 1996 among the Company, Ciba and CGC (incorporated by
reference to Exhibit 2.1(c) to the Company's Current Report on Form 8-K dated as of March 15,
1996).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
2.2(d) Distribution Agreement dated as of February 29, 1996 among the Company, Brochier S.A., Composite
Materials Limited, Salver S.r.l. and Ciba (incorporated by reference to Exhibit 2.1(c) to the
Company's Current Report on Form 8-K dated as of March 15, 1995).
2.3 Sale and Purchase Agreement dated as of April 15, 1996 among the Company, Hercules, Hercules
Nederland BV and HISPAN Corporation (incorporated by reference to Exhibit 2.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996) as amended by the
amendments dated June 27, 1996 (incorporated by reference to Exhibits 2.2 and 2.3 to the
Company's Current Report on Form 8-K dated as of July 12, 1996).
4 Form of Indenture between the Company and First Trust of California, National Association, as
trustee, relating to the Notes.
5 Opinion of Skadden, Arps, Slate, Meagher & Flom regarding the legality of the securities covered
by this Registration Statement.
12 Statement re: computation of ratio of earnings to fixed charges.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand L.L.P. (Philadelphia, Pennsylvania)
23.3 Consent of Coopers & Lybrand L.L.P. (Stamford, Connecticut)
23.4 Consent of Skadden, Arps, Slate, Meagher & Flom (included in Exhibit 5).
+24 Power of attorney.
+25 Statement of Eligibility on Form T-1 of First Trust of California, National Association, as
trustee, under the Indenture relating to the Notes.
</TABLE>
- ------------------------
+ Previously filed.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment 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 of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
each filing of the Registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act that is incorporated by reference in the
registration statement 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.
(2) 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
II-3
<PAGE>
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.
(3) For the purpose of determining any liability under the Securities
Act, 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>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-3 and has duly caused this Amendment No. 2 to the
Registrant's Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Stamford and State of
Connecticut, on July 18, 1996.
HEXCEL CORPORATION
By: /s/ JOHN J. LEE*
-----------------------------------
John J. Lee
CHAIRMAN OF THE BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registrant's Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------- ------------------------------- -------------
<C> <S> <C>
Chairman of the Board of
/s/ JOHN J. LEE* Directors, Chief Executive
- ------------------------------------------- Officer and Director July 18, 1996
John J. Lee (Principal Executive Officer)
/s/ JUERGEN HABERMEIER*
- ------------------------------------------- President, Chief Operating July 18, 1996
Juergen Habermeier Officer and Director
/s/ WILLIAM P. MEEHAN* Vice President -- Finance and
- ------------------------------------------- Chief Financial Officer July 18, 1996
William P. Meehan (Principal Financial Officer)
/s/ WAYNE C. PENSKY* Corporate Controller and Chief
- ------------------------------------------- Accounting Officer (Principal July 18, 1996
Wayne C. Pensky Accounting Officer)
/s/ JOHN M.D. CHEESMOND*
- ------------------------------------------- Director July 18, 1996
John M.D. Cheesmond
/s/ MARSHALL S. GELLER*
- ------------------------------------------- Director July 18, 1996
Marshall S. Geller
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------- ------------------------------- -------------
<C> <S> <C>
/s/ STANLEY SHERMAN*
- ------------------------------------------- Director July 18, 1996
Stanley Sherman
/s/ MARTIN L. SOLOMON*
- ------------------------------------------- Director July 18, 1996
Martin L. Solomon
/s/ GEORGE S. SPRINGER*
- ------------------------------------------- Director July 18, 1996
George S. Springer
/s/ JOSEPH T. SULLIVAN*
- ------------------------------------------- Director July 18, 1996
Joseph T. Sullivan
/s/ FRANKLIN S. WIMER*
- ------------------------------------------- Director July 18, 1996
Franklin S. Wimer
*By: /s/ STEPHEN C. FORSYTH
Stephen C. Forsyth
Attorney-in-fact
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- --------- ----------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1 Form of Underwriting Agreement among the Company, CS First Boston and Bear, Stearns & Co.
Inc.
2.1 First Amended Plan of Reorganization dated as of November 7, 1994 (incorporated by
reference to Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 2, 1994).
2.2 Strategic Alliance Agreement dated as of September 29, 1995 among the Company, Ciba and
CGC (incorporated by reference to Exhibit 10.1 to the Company's Current Report on 8-K
dated as of October 13, 1995).
2.2(a) Amendment dated as of December 12, 1995 to the Strategic Alliance Agreement (incorporated
by reference to Exhibit 2.1(a) to the Company's Current Report on Form 8-K dated as of
March 15, 1996).
2.2(b) Letter Agreement dated as of February 28, 1996 among the Company, Ciba and CGC
(incorporated by reference to Exhibit 2.1(c) to the Company's Current Report on Form 8-K
dated as of March 15, 1996).
2.2(d) Distribution Agreement dated as of February 29, 1996 among the Company, Brochier S.A.,
Composite Materials Limited, Salver S.r.l. and Ciba (incorporated by reference to
Exhibit 2.1(c) to the Company's Current Report on Form 8-K dated as of March 15, 1995).
2.3 Sale and Purchase Agreement dated as of April 15, 1996 among the Company, Hercules,
Hercules Nederland BV and HISPAN Corporation (incorporated by reference to Exhibit 2.2
to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1996) as amended by the amendments dated June 27, 1996 (incorporated by reference to
Exhibits 2.2 and 2.3 to the Company's Current Report on Form 8-K dated as of July 12,
1996).
4 Form of Indenture between the Company and First Trust of California, National
Association, as trustee, relating to the Notes.
5 Opinion of Skadden, Arps, Slate, Meagher & Flom regarding the legality of the securities
covered by this Registration Statement.
12 Statement re: computation of ratio of earnings to fixed charges.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand L.L.P. (Philadelphia, Pennsylvania)
23.3 Consent of Coopers & Lybrand L.L.P. (Stamford, Connecticut)
23.4 Consent of Skadden, Arps, Slate, Meagher & Flom (included in Exhibit 5).
+24 Power of attorney.
+25 Statement of Eligibility on Form T-1 of First Trust of California, National Association,
as trustee, under the Indenture relating to the Notes.
</TABLE>
- ------------------------
+ Previously filed.
<PAGE>
$100,000,000
HEXCEL CORPORATION
% Convertible Subordinated Notes Due 2003
UNDERWRITING AGREEMENT
July , 1996
CS FIRST BOSTON CORPORATION,
BEAR, STEARNS & CO. INC.
c/o CS FIRST BOSTON CORPORATION
Park Avenue Plaza,
New York, NY 10055
Dear Sirs:
1. INTRODUCTORY. Hexcel Corporation, a Delaware corporation (the
"Company"), proposes to issue and sell $100,000,000 principal amount (the "Firm
Securities") of its % Convertible Subordinated Notes Due 2003 (the
"Securities") and also proposes to issue and sell to the Underwriters, at the
option of the Underwriters, an aggregate of not more than $15,000,000 additional
principal amount (the "Optional Securities") of Securities as set forth below,
all to be issued under an indenture, dated as of July , 1996 (the
"Indenture"), between the Company and First Trust of California, National
Association, as trustee (the "Trustee"). The Firm Securities and the Optional
Securities are herein collectively called the "Offered Securities". The Company
hereby agrees with CS First Boston Corporation ("CS First Boston") and Bear,
Stearns & Co. Inc. (collectively, the "Underwriters") as follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with the Underwriters that:
(a) A registration statement (No. 333-05821) relating to the Offered
Securities and the shares of Common Stock, par value $.01 per share, of the
Company ("Common Stock") into which the Offered Securities are
<PAGE>
2
convertible (the "Underlying Shares"), including a form of prospectus, has
been filed with the Securities and Exchange Commission (the "Commission")
and either (i) has been declared effective under the Securities Act of 1933
(the "Act") and is not proposed to be amended or (ii) is proposed to be
amended by amendment or post-effective amendment. If such registration
statement (the "initial registration statement") has been declared
effective, either (i) one or more additional registration statements (each
an "additional registration statement") relating to the Offered Securities
and the Underlying Shares may have been filed with the Commission pursuant
to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, each of
which has become effective upon filing pursuant to such Rule, and the
Offered Securities and such Underlying Shares have been duly registered
under the Act pursuant to the initial registration statement and, if
applicable, any additional registration statement or (ii) one or more
additional registration statements are proposed to be filed with the
Commission pursuant to Rule 462(b) and each will become effective upon
filing pursuant to such rule, and upon such filing the Offered Securities
and such Underlying Shares will have been duly registered under the Act
pursuant to the initial registration statement and any additional
registration statement. If the Company does not propose to amend the
initial registration statement or if one or more additional registration
statements have been filed and the Company does not propose to amend any of
them, and if any post-effective amendment to any such registration
statement has been filed with the Commission prior to the execution and
delivery of this Agreement, the most recent amendment (if any) to each such
registration statement has been declared effective by the Commission or has
become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under
the Act or, in the case of an additional registration statement, Rule
462(b). For purposes of this Agreement, "Effective Time" with respect to
the initial registration statement or, if filed prior to the execution and
delivery of this Agreement, an additional registration statement means (i)
if the Company has advised the Underwriters that it does not propose to
amend such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement,
<PAGE>
3
was declared effective by the Commission or has become effective upon
filing pursuant to Rule 462(c), or (ii) if the Company has advised the
Underwriters that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which
such registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If
an additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Underwriters that it proposes to do so, "Effective Time" with respect to
each such additional registration statement means the date and time as of
which each such additional registration statement is filed and becomes
effective pursuant to Rule 462(b). "Effective Date" with respect to the
initial registration statement or an additional registration statement (if
any) means the date of the Effective Time thereof. The initial registration
statement, as amended at its Effective Time, including all material
incorporated by reference therein, including all information contained in
all additional registration statements (if any) and deemed to be a part of
the initial registration statement as of the Effective Time of each
additional registration statement pursuant to the General Instructions of
the Form on which it is filed and including all information (if any) deemed
to be a part of the initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
referred to as the "Initial Registration Statement". Each additional
registration statement, as amended at its Effective Time, including the
contents of the initial registration statement incorporated by reference
therein and including all information (if any) deemed to be a part of such
additional registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as an "Additional Registration
Statement". The Initial Registration Statement and each Additional
Registration Statement are herein referred to collectively as the
"Registration Statements" and individually as a "Registration Statement".
The form of prospectus relating to the Offered Securities, as first filed
with the Commission pursuant to and in accordance with Rule 424(b) ("Rule
424(b)") under the Act or (if no such filing is required) as included in a
Registration Statement, including all material
<PAGE>
4
incorporated by reference in such prospectus, is hereinafter referred to as
the "Prospectus". No document has been or will be prepared or distributed
in reliance on Rule 434 under the Act;
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement complied in all material respects with the
requirements of the Act and the rules and regulations of the Commission
(the "Rules and Regulations") and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii) on
the Effective Date of each Additional Registration Statement (if any), each
Registration Statement complied, or will comply in all material respects
with the requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact and
did not omit, or will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading
and (iii) on the date of this Agreement, the Initial Registration Statement
and, if the Effective Time of any Additional Registration Statement is
prior to the execution and delivery of this Agreement, each such Additional
Registration Statement complies, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is required) at
the Effective Date of each Additional Registration Statement in which the
Prospectus is included, each Registration Statement and the Prospectus will
comply, in all material respects with the requirements of the Act and the
Rules and Regulations, and none of such documents includes, or will
include, any untrue statement of a material fact or omits, or will omit, to
state any material fact required to be stated therein or necessary to make
the statements therein, (in the case of the Prospectus) in light of the
circumstances under which they were made, not misleading. If the Effective
Time of the Initial Registration Statement is subsequent to the execution
and delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and the
Prospectus will comply in all respects with the requirements of the Act and
<PAGE>
5
the Rules and Regulations, neither of such documents will include any
untrue statement of a material fact or will omit to state any material fact
required to be stated therein or necessary to make the statements therein
(in the case of the Prospectus, in light of the circumstances in which they
were made) not misleading, and no Additional Registration Statement has
been or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the Prospectus
made in reliance upon (i) written information furnished to the Company by
any Underwriter specifically for use therein, it being understood and
agreed that the only such information is that described as such in
Section 7(b) of this Agreement or (ii) made or omitted from the Statement
of Eligibility of the Trustee on Form T-1, other than any such untrue
statement or omission made therein or omitted therefrom in reliance on
information furnished in writing to the Trustee by the Company for use
therein;
(c) The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure to so qualify would not have a material adverse effect on the
Company and its Subsidiaries (as hereinafter defined), taken as a whole;
(d) Each subsidiary of the Company within the meaning of Rule 1-02 of
Regulation S-X under the Act is listed in Schedule A hereto (collectively,
the "Subsidiaries"). Each Subsidiary has been duly incorporated and is a
validly existing corporation in good standing (where applicable) under the
laws of the jurisdiction of its incorporation, with power and authority
(corporate and other) to own its properties and conduct its business as
described in the Prospectus; and each Subsidiary of the Company is duly
qualified to do business as a foreign corporation in good standing
(where applicable) in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification except where the failure to so qualify would not have a
material adverse effect on the Company and its Subsidiaries, taken as a
whole; all the issued and outstanding capital stock of each Subsidiary of
the Company has been duly authorized and validly issued and
<PAGE>
6
is fully paid and nonassessable; and except as disclosed in Schedule A
hereto, the outstanding capital stock of each Subsidiary is owned by the
Company, directly or through subsidiaries, and is owned free from liens,
encumbrances and defects except for those disclosed in a schedule to the
Credit Agreement or as disclosed in the Registration Statement;
(e) The Indenture has been duly authorized and, if the Effective Time
of a Registration Statement is prior to the execution and delivery of this
Agreement, has been or otherwise upon such Effective Time will be duly
qualified under the Trust Indenture Act of 1939 (the "Trust Indenture Act")
with respect to the Offered Securities registered thereby; the Offered
Securities have been duly authorized; and when the Offered Securities are
authenticated and delivered by the Trustee in accordance with the terms of
the Indenture and are delivered to and paid for by the Underwriters
pursuant to this Agreement on each Closing Date (as defined below), such
Offered Securities will be valid and binding obligations of the Company
entitled to the benefit of the Indenture and enforceable against the
Company in accordance with their respective terms except to the extent that
enforcement thereof may be limited by (i) bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or other similar laws, now
or hereafter in effect, relating to creditors' rights generally and
(ii) general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law); the Indenture will have
been duly executed and delivered by the Company and assuming due
authorization, execution and delivery thereof by the Trustee, will
constitute a valid and legally binding obligation of the Company,
enforceable in accordance with its terms, except to the extent that
enforcement thereof may be limited by (i) bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or other similar laws, now
or hereafter in effect, relating to creditors' rights generally and
(ii) general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law); the Offered Securities
will conform in all material respects thereof to the description contained
in the Prospectus;
(f) When the Offered Securities are delivered in accordance with the
Indenture and paid for pursuant to
<PAGE>
7
this Agreement on each Closing Date, such Offered Securities will be
convertible into the Underlying Shares in accordance with the terms of the
Indenture; the Underlying Shares initially issuable upon conversion of such
Offered Securities have been duly authorized and reserved for issuance upon
such conversion and, when issued upon such conversion, will be validly
issued, fully paid and nonassessable; the outstanding shares of Common
Stock have been duly authorized and validly issued, are fully paid and
nonassessable and conform in all material respects to the description
thereof contained in the Prospectus; and the stockholders of the Company
have no preemptive rights with respect to the Offered Securities or the
Underlying Shares. Ciba-Geigy Limited ("Ciba"), however, has informed the
Company that, by reason of the issuance of the Securities, it believes
(which belief the Company disagrees with) it has certain rights to purchase
securities similar to the Securities and additional Common Stock pursuant
to Section 3.02 of the Governance Agreement dated as of February 29, 1996,
between Ciba and the Company (the "Governance Agreement"), but has executed
a waiver of such purported rights with respect to the issuance of the
Securities and of additional Common Stock upon conversion of such
Securities;
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment with respect to
the issuance of the Offered Securities and of the additional Common Stock
upon conversion of the Offered Securities contemplated hereby;
(h) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to require
the Company to include such securities in the Registration Statement or in
any other registration statement filed by the Company under the Act, except
as provided in the Registration Rights Agreement dated as of February 29,
1996, between Ciba and the Company, the Registration
<PAGE>
8
Rights Agreement dated as of February 9, 1995, between Mutual Series Fund
Inc. and the Company, the agreement dated April 6, 1995 between John J.
Lee, Mutual Series Fund Inc. and the Company and the Registration Rights
Agreement for Affiliates dated as of February 9, 1995, among certain
Eligible Holders, as defined therein, and the Company;
(i) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and the
Trust Indenture Act and such as may be required under state securities or
Blue Sky laws or regulations;
(j) The execution, delivery and performance of the Indenture and this
Agreement, and the issuance and sale of the Offered Securities and
compliance with the terms and provisions thereof, including the issuance
and delivery of Underlying Shares upon conversion (if any) of the Offered
Securities, will not result in a breach or violation of any of the terms
and provisions of, or constitute a default under, (A) any statute, any
rule, regulation or order of any governmental agency or body or any court,
domestic or foreign, having jurisdiction over the Company or any Subsidiary
of the Company or any of their properties, or any agreement or instrument
to which the Company or any such Subsidiary is a party or by which the
Company or any such Subsidiary is bound or to which any of the properties
of the Company or any such subsidiary is subject, or (B) the charter or by-
laws of the Company or any such Subsidiary, except, with respect to
clause (A), such breach, violation or default which would not, individually
or in the aggregate, have a material adverse effect on the Company and its
Subsidiaries, taken as a whole; and the Company has full power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement and to issue and deliver the Underlying
Shares upon conversion (if any) of the Offered Securities;
(k) This Agreement has been duly authorized, executed and delivered
by the Company;
<PAGE>
9
(l) Except as disclosed in a schedule to the Credit Agreement or in
the Prospectus, the Company and its Subsidiaries have good and marketable
title to all real properties and all other properties and assets owned by
them, in each case free from liens, encumbrances and defects that would
materially affect the value thereof or materially interfere with the use
made or proposed to be made thereof by them; and except as disclosed in the
Prospectus, the Company and its Subsidiaries hold any leased real or
personal property under valid and enforceable leases with such exceptions
as are not material to the Company and its Subsidiaries, taken as a whole
and would not materially interfer with the use made or proposed to be made
thereof by them;
(m) The Company and its Subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business in the manner presently conducted
by them, subject to such qualifications as may be set forth in the
Prospectus or except where the failure to so possess would not, singularly
or in the aggregate, have a material adverse effect on the Company or its
Subsidiaries, taken as a whole and have not received any notice of
proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the
Company or any of its Subsidiaries, would individually or in the aggregate
have a material adverse effect on the Company and its Subsidiaries taken as
a whole;
(n) No labor dispute with the employees of the Company or any
Subsidiary exists or, to the knowledge of the Company, is imminent that
might have a material adverse effect on the Company and its Subsidiaries
taken as a whole;
(o) The Company and its Subsidiaries own or possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "intellectual property rights")
necessary to conduct the business now operated by them, or presently
employed by them except where the failure to so own or possess would not,
singularly or in the aggregate, have a material adverse effect on the
<PAGE>
10
Company and its Subsidiaries, taken as a whole and have not received any
notice of infringement of or conflict with asserted rights of others with
respect to any intellectual property rights that, if determined adversely
to the Company or any of its Subsidiaries, would individually or in the
aggregate have a material adverse effect on the Company and its
Subsidiaries taken as a whole;
(p) Except as disclosed in the Prospectus, neither the Company nor
any of its Subsidiaries is in violation of any statute, rule, regulation,
ordinance, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, operation, handling,
transportation, disposal or release of hazardous or toxic substances or
wastes or relating to the protection or restoration of the environment or
human exposure to hazardous or toxic substances or wastes (collectively,
"environmental laws"), owns or operates any real property contaminated with
any substance that is subject to any environmental laws, is liable for any
on-site or off-site disposal or contamination pursuant to any environmental
laws, or, to the knowledge of the Company, is subject to any claim relating
to any environmental laws, which violation, contamination, liability or
claim would individually or in the aggregate have a material adverse effect
on the Company and its Subsidiaries taken as a whole; and the Company is
not aware of any pending investigation which might lead to such a claim;
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company or any of
its Subsidiaries or, to the knowledge of the Company or its Subsidiaries,
to which any of their respective properties are subject, or that are
required to be described in the Registration Statement or the Prospectus
but are not described as required that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a material adverse effect on the condition (financial or other),
business, properties, prospects or results of operations of the Company
and its Subsidiaries taken as a whole, or would materially and adversely
affect the ability of the Company to perform its obligations under the
Indenture or this Agreement, or which are otherwise material in the
context of the sale of the Offered Securities; and no such actions,
suits or proceedings
<PAGE>
11
are, to the Company's knowledge, threatened or contemplated;
(r) The historical financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of the
Company and its consolidated Subsidiaries on the basis stated in any
Registration Statement and the Prospectus as of the dates shown and their
results of operations and cash flows for the periods shown, and such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a consistent
basis throughout the periods involved, except as disclosed therein; the
schedules included in each Registration Statement present fairly the
information required to be stated therein; and the pro forma financial
information, and the related notes thereto included in the Registration
Statement and the Prospectus and the assumptions used in preparing such pro
forma financial statements are a reasonable basis for presenting the
significant effects directly attributable to the transactions or events
described therein, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma columns therein reflect the
proper application of those adjustments to the corresponding historical
financial statement amounts;
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
Subsidiaries taken as a whole, and, except as disclosed in or contemplated
by the Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock;
and
(t) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" defined
in the Investment Company Act of 1940, as amended (the "Investment Act").
<PAGE>
12
3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of % of the principal amount thereof
plus accrued interest from , 1996 to the First Closing Date (as
hereinafter defined) the respective principal amounts of Firm Securities set
forth opposite the names of the Underwriters in Schedule B hereto.
The Company will deliver the Firm Securities to the Underwriters,
against payment of the purchase price in funds available on the same day by wire
transfer to the account of the Company at a bank acceptable to CS First Boston
or by official Federal Reserve Bank check or checks drawn to the order of the
Company at the office of Cravath, Swaine & Moore, 825 Eighth Avenue, New York,
New York 10019 at 10 A.M. (New York time), on July , 1996, or at such other
time not later than seven full business days thereafter as CS First Boston and
the Company determine, such time being herein referred to as the "First Closing
Date". The Company shall reimburse the Underwriters for the additional costs of
effecting payment of the purchase price of the Firm Securities in the foregoing
manner as compared with the payment in New York Clearing House (next day) funds.
For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934 (the
"Exchange Act"), the First Closing Date (if later than the otherwise applicable
settlement date) shall be the settlement date for payment of funds and delivery
of securities for all the Firm Securities sold pursuant to the offering. The
Firm Securities so to be delivered shall be in definitive fully registered form,
in such denominations and registered in such names as CS First Boston requests
and shall be made available for checking and packaging at the office of the
Trustee at a reasonable time in advance of the First Closing Date.
In addition, upon written notice from CS First Boston given to the
Company from time to time not more than 30 days subsequent to the date of the
Prospectus, the Underwriters may purchase all or less than all the Optional
Securities at the purchase price per principal amount of Optional Securities to
be paid for the Firm Securities, plus accrued interest from , 1996
to the related Optional Closing Date (as hereinafter defined). The Company
agrees to sell to the Underwriters the principal amount of
<PAGE>
13
Optional Securities specified in such notice and the Underwriters agree,
severally and not jointly, to purchase such Optional Securities. Such Optional
Securities shall be purchased for the account of each Underwriter in the same
proportion as the principal amount of Firm Securities set forth opposite such
Underwriter's name bears to the total principal amount of Firm Securities
(subject to adjustment by CS First Boston to eliminate fractions) and may be
purchased by the Underwriters only for the purpose of covering over-allotments
made in connection with the sale of the Firm Securities. No Optional Securities
shall be sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by CS First Boston to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be on the
First Closing Date (the First Closing Date and each Optional Closing Date, if
any, being sometimes referred to as a "Closing Date"), shall be determined by CS
First Boston but shall be not later than seven full business days after written
notice of election to purchase Optional Securities is given. The Company will
deliver the Optional Securities being purchased on each Optional Closing Date to
the Underwriters, against payment of the purchase price in funds available on
the same day by wire transfer to the account of the Company at a bank acceptable
to CS First Boston or by official Federal Reserve Bank check or checks drawn to
the order of the Company at the office of Cravath, Swaine & Moore, 825 Eighth
Avenue, New York, New York 10019 at 10 A.M. (New York time), on such Optional
Closing Date. For purposes of Rule 15c6-1 under the Exchange Act, each Optional
Closing Date (if later than the otherwise applicable settlement date) shall be
the settlement date for payment of funds and delivery of securities for all the
Optional Securities being purchased on such Optional Closing Date and sold
pursuant to the offering. The Company shall reimburse the Underwriters for the
additional costs of effecting payment of the purchase price of the Optional
Securities in the foregoing manner as compared with the payment in New York
Clearing House (next day) funds. The Optional Securities being purchased on
each Optional Closing Date shall be in definitive fully registered form, in such
denominations and registered in such names as CS First Boston requests (which
request shall
<PAGE>
14
be delivered at least three days prior to such Optional Closing Date) and shall
be made available for checking and packaging at the office of the Trustee at
least 24 hours prior to such Optional Closing Date.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. CERTAIN AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company shall
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CS First Boston,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement.
The Company shall advise CS First Boston promptly of any such filing
pursuant to Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and an
additional registration statement is necessary to register a portion of the
Offered Securities under the Act but the Effective Time thereof has not
occurred as of such execution and delivery, the Company shall file such
additional registration statement or, if filed, shall file a post-effective
amendment thereto with the Commission pursuant to and in accordance with
Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, on or prior to the time the Prospectus is printed
and distributed to any Underwriter, or shall make such filing at such later
date as shall have been consented to by CS First Boston;
(b) The Company shall advise CS First Boston promptly of any proposal
to amend or supplement the initial or any additional registration statement
as filed or the related prospectus or the Initial Registration Statement,
each Additional Registration
<PAGE>
15
Statement (if any) or the Prospectus and shall not effect such amendment or
supplementation without CS First Boston's consent; and the Company shall
also advise CS First Boston promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplement to a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement and shall use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible its
lifting, if issued;
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company shall promptly
notify the Underwriters of such event and shall promptly prepare and file
with the Commission, at its own expense, an amendment or supplement that
shall correct such statement or omission or an amendment that shall effect
such compliance. Neither CS First Boston's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6 of this
Agreement;
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company shall make generally available to its
securityholders an earning statement covering a period of at least
12 months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the most recent Effective Date of any Additional
Registration Statement) which shall satisfy the provisions of Section 11(a)
of the Act. For the purpose of the preceding sentence, "Availability Date"
means the 45th day after the end of the fourth fiscal quarter following the
fiscal quarter that includes such Effective Date, except that, if such
fourth fiscal quarter is the last quarter of the Company's fiscal
<PAGE>
16
year, "Availability Date" means the 90th day after the end of such fourth
fiscal quarter;
(e) The Company shall furnish to the Underwriters copies of each
Registration Statement (three of which shall be signed and shall include
all exhibits), each related preliminary prospectus, and, so long as
delivery of a prospectus relating to the Offered Securities is required to
be delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CS First Boston reasonably
requests. The Prospectus shall be so furnished on or prior to 3:00 P.M.,
New York time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other documents shall be so furnished as soon
as available. The Company shall pay the expenses of printing and
distributing to the Underwriters all such documents;
(f) The Company shall arrange for the qualification of the Offered
Securities for sale and the determination of their eligibility for
investment under the laws of such jurisdictions in the United States and
Canada as CS First Boston designates and shall continue such qualifications
in effect so long as required for the distribution;
(g) For five years hereafter, the Company shall furnish to the
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
shall furnish to the Underwriters (i) as soon as available, a copy of each
report and any definitive proxy statement of the Company filed with the
Commission under the Exchange Act or mailed to stockholders, and (ii) from
time to time, such other information concerning the Company as the
Underwriters may reasonably request;
(h) The Company shall pay all expenses incident to the performance of
its obligations under this Agreement and shall reimburse the Underwriters
(if and to the extent incurred by them) for any filing fees and other
expenses (including fees and disbursements of counsel) incurred by them in
connection with qualification of the Offered Securities for sale and
<PAGE>
17
determination of their eligibility for investment under the laws of such
jurisdictions in the United States and Canada as CS First Boston designates
and the word processing of memoranda relating thereto, for any fees charged
by investment rating agencies for the rating of the Offered Securities, for
the filing fee of the National Association of Securities Dealers, Inc.
relating to the Offered Securities, for any travel expenses of the
Company's officers and employees and any other expenses of the Company in
connection with attending or hosting meetings with prospective purchasers
of the Offered Securities and for expenses incurred in distributing
preliminary prospectuses and the Prospectus (including any amendments and
supplements thereto) to the Underwriters; and
(i) For a period of 90 days after the date of the initial public
offering of the Offered Securities, the Company shall not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Commission a registration statement under the Act relating
to any shares of Common Stock or securities convertible into or
exchangeable or exercisable for any shares of Common Stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposal or
filing, without the prior written consent of CS First Boston, except
issuances of Underlying Shares pursuant to the conversion or exchange of
convertible or exchangeable securities or the exercise of warrants or
options, in each case outstanding on the date hereof, grants of employee
stock options pursuant to the terms of a plan in effect on the date hereof,
or issuances of shares of Common Stock pursuant to the exercise of such
options.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities on the First Closing Date and the Optional Securities to be purchased
on each Optional Closing Date shall be subject to the accuracy of the
representations and warranties on the part of the Company herein, to the
accuracy of the statements of Company officers made pursuant to the provisions
hereof, to the performance by the Company of its obligations hereunder and to
the following additional conditions precedent:
(a) The Underwriters shall have received a letter, dated the date of
delivery thereof (which, if
<PAGE>
18
the Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement, shall be on or prior to the date
of this Agreement or, if the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this Agreement,
shall be prior to the filing of the amendment or post-effective amendment
to the registration statement to be filed shortly prior to such Effective
Time), of Deloitte & Touche LLP confirming that they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations, stating that they have performed certain procedures
on the unaudited financial information of the Ciba Composites Business (as
defined in the Prospectus) for the three months ended March 31, 1996, from
which certain unaudited amounts included in the Registration Statements
were derived, as CS First Boston may specify and that they are able to
report on, including a reading of the latest available interim financial
statements of the Ciba Composites Business, inquiries of officials of the
Ciba Composites Business who have responsibility for financial and
accounting matters and other specified procedures, and stating to the
effect that:
(i) in their opinion the financial statements and schedules of
the Company examined by them and incorporated by reference and
included in the Registration Statements comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Exchange Act and the related published Rules and
Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited financial
statements of the Company incorporated by reference and included in
the Registration Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim financial
statements of the Company, inquiries of officials of the Company who
have responsibility for financial and accounting matters and other
specified procedures, nothing
<PAGE>
19
came to their attention that caused them to believe that:
(A) the unaudited financial statements of the Company
incorporated by reference and included in the Registration
Statements do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the related
published Rules and Regulations or any material modifications
should be made to such unaudited financial statements for them to
be in conformity with generally accepted accounting principles;
(B) at the date of the latest available balance sheet of the
Company read by such accountants, or at a subsequent date, there
was any change in the capital stock or any increase in short-term
debt or long-term debt of the Company and its consolidated
subsidiaries or, at the date of the latest available balance
sheet of the Company read by such accountants, there was any
decrease in consolidated (i) total current assets minus total
current liabilities or (ii) total shareholders' equity (or
deficit), as compared with amounts shown on the latest balance
sheet of the Company included in the Prospectus; or
(C) for the period from the closing date of the latest
statements of operations of the Company included in the
Prospectus to the closing date of the latest available statements
of operations of the Company read by such accountants there were
any decreases, as compared with the corresponding period of the
previous year and with the period of corresponding length ended
the date of the latest statements of operations of the Company
included in the Prospectus, in consolidated net sales, in
consolidated income (or loss) from continuing operations, in the
total or per share amounts of consolidated net income (or loss)
or in the ratio of earnings to fixed charges, except in all cases
set forth in clauses (B) and (C)
<PAGE>
20
above for changes, increases or decreases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
incorporated by reference and contained in the Registration Statements
(in each case to the extent that such dollar amounts, percentages and
other financial information are derived from the general accounting
records of the Company and its subsidiaries subject to the internal
controls of the Company's accounting system or are derived directly
from such records by analysis or computation) with the results
obtained from inquiries, a reading of such general accounting records
and other procedures specified in such letter and have found such
dollar amounts, percentages and other financial information to be in
agreement with such results, except as otherwise specified in such
letter; and
(v) on the basis of a reading of the unaudited pro forma
financial statements of the Company incorporated by reference and
included in the Registration Statements and the Prospectus (the "pro
forma financial statements"), carrying out certain specified
procedures, reading of minutes, inquiries of certain officials of the
Company who have responsibility for financial and accounting matters
and proving the arithmetic accuracy of the application of the
pro forma adjustments to the historical amounts in the pro forma
financial statements, nothing came to their attention which caused
them to believe that the pro forma financial statements do not comply
as to form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X under the Act or that the
pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements or on the pro forma
basis described in the notes thereto.
(b) The Underwriters shall have received a letter, dated the date of
the delivery thereof (which,
<PAGE>
21
if the Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement, shall be on or prior to the date
of this Agreement or, if the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this Agreement,
shall be prior to the filing of the Amendment or post-effective Amendment
to the Registration Statement to be filed shortly prior to such Effective
Time), of Coopers & Lybrand LLP confirming that they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations, and stating to the effect that:
(i) in their opinion the financial statements and schedules of
the Ciba Composites Business examined by them and incorporated by
reference and included in the Registration Statements comply as to
form in all material respects with the applicable accounting
requirements of the Act and the Exchange Act and the related published
Rules and Regulations; and
(ii) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
incorporated by reference and contained in the Registration Statements
(in each case to the extent that such dollar amounts, percentages and
other financial information are derived from the general accounting
records of the Ciba Composites Business subject to the internal
controls of the Ciba Composites Business's accounting system or are
derived directly from such records by analysis or computation) with
the results obtained from inquiries, a reading of such general
accounting records and other procedures specified in such
<PAGE>
22
letter and have found such dollar amounts, percentages and other
financial information to be in agreement with such results, except as
otherwise specified in such letter.
(c) The Underwriters shall have received a letter, dated the date of
delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall
be on or prior to the date of this Agreement or, if the Effective Time of
the Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, shall be prior to the filing of the amendment
or post-effective amendment to the registration statement to be filed
shortly prior to such Effective Time), of Coopers & Lybrand LLP confirming
that they are independent public accountants within the meaning of the Act
and the applicable published Rules and Regulations and stating to the
effect that:
(i) in their opinion the financial statements and schedules of
the Hercules Composites Business examined by them and included in the
Registration Statements comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited financial
statements of the Hercules Composites Business included in the
Registration Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim financial
statements of the Hercules Composites Business, inquiries of officials
of the Hercules Composites Business who have responsibility for
financial and accounting matters and other specified procedures,
nothing came to their attention that caused them to believe that:
<PAGE>
23
(A) the unaudited financial statements of the Hercules
Composites Business included in the Registration Statements do
not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations or any material modifications
should be made to such unaudited financial statements for them to
be in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited financial statements included in the Registration
Statements and the Prospectus; or
(B) at the date of the latest available balance sheet of the
Hercules Composites Business read by such accountants, or at a
subsequent specified date not more than three days prior to the
date of this Agreement, there was any change in the capital stock
or any increase in total current liabilities or other liabilities
of the Hercules Composites Business or, at the date of the latest
available balance sheet of the Hercules Composites Business read
by such accountants, there was any decrease in (i) total current
assets minus total current liabilities or (ii) division equity
(or deficit), as compared with amounts shown on the latest
balance sheet of the Hercules Composites Business included in the
Prospectus; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Hercules
Composites Business subject to the internal controls of the Hercules
Composites Business's accounting system or are derived directly from
such records by analysis or computation) with the results obtained
from inquiries, a reading of such general accounting records and other
procedures specified in such letter and have found such dollar
amounts, percentages and other financial
<PAGE>
24
information to be in agreement with such results, except as otherwise
specified in such letter.
For purposes of subsections (a), (b) and (c) above, (i) if the Effective
Time of the Initial Registration Statement is subsequent to the execution
and delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the amendment
or post-effective amendment to be filed shortly prior to its Effective
Time, (ii) if the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement but the Effective
Time of an Additional Registration is subsequent to such execution and
delivery, "Registration Statements" shall mean the Initial Registration
Statement and such additional registration statement or statements as
proposed to be filed or as proposed to be amended by the post-effective
amendment to be filed shortly prior to its or their Effective Time, and
(iii) "Prospectus" shall mean the prospectus included in the Registration
Statements. All financial statements and schedules included in material
incorporated by reference into the Prospectus shall be deemed included in
the Registration Statements for purposes of this subsection.
(d) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the
date of this Agreement or such later date as shall have been consented to
by CS First Boston. If the Effective Time of an Additional Registration
Statement (if any) is not prior to the execution and delivery of this
Agreement, such Effective Time shall have occurred not later than
10:00 P.M., New York time, on the date of this Agreement or, if earlier,
the time the Prospectus is printed and distributed to any Underwriter, or
shall have occurred at such later date as shall have been consented to by
CS First Boston. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such
Closing Date, no stop order suspending the effectiveness of a Registration
Statement shall have been issued and no proceedings for that purpose shall
<PAGE>
25
have been instituted or, to the knowledge of the Company or the
Underwriters, shall be contemplated by the Commission.
(e) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company or its
Subsidiaries that, in the judgment of a majority in interest of the
Underwriters, is material and adverse and makes it impractical or
inadvisable to proceed with completion of the public offering or the sale
of and payment for the Offered Securities; (ii) any downgrading in the
rating of any debt securities of the Company, including, without
limitation, the Offered Securities, by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g)
under the Act), or any public announcement that any such organization has
under surveillance or review its rating of any debt securities of the
Company, including, without limitation, the Offered Securities (other than
an announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any
suspension or limitation of trading in securities generally on the New York
Stock Exchange, or any setting of minimum prices for trading on such
exchange, or any suspension of trading of any securities of the Company on
any exchange or in the over-the-counter market; (iv) any banking moratorium
declared by U.S. Federal or New York authorities; or (v) any outbreak or
escalation of major hostilities in which the United States is involved, any
declaration of war by Congress or any other substantial national or
international calamity or emergency if, in the judgment of a majority in
interest of the Underwriters, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment
for the Offered Securities.
(f) The Underwriters shall have received an opinion, dated such
Closing Date, of Skadden Arps, Slate, Meagher & Flom, counsel for the
Company, to the effect that:
<PAGE>
26
(i) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, one
or more Additional Registration Statements (if any) were filed and
became effective under the Act as of the date and time (if
determinable) specified in such opinion, the Prospectus either was
filed with the Commission pursuant to the subparagraph of Rule 424(b)
specified in such opinion on the date specified therein or was
included in the Initial Registration Statement or an Additional
Registration Statement (as the case may be), and, to the best of the
knowledge of such counsel, no stop order suspending the effectiveness
of a Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, (except for the financial
statements, the notes thereto and related schedules and other
financial and statistical data included therein or excluded therefrom
or the exhibits to the Registration Statement, and the Form T-1, as to
which no opinion need be expressed), appeared on their face to be
appropriately responsive in all material respects to the requirements
of the Act; except that such counsel does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus
(except to the extent set forth in paragraph (iii) below with
respect to the description of the Offered Securities and in paragraph
(iv) below with respect to the description of the Common Stock in the
Registration Statement);
(ii) The Company has been duly incorporated and is a validly
existing corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
(iii) The Indenture has been duly authorized, executed and
delivered and has been duly qualified under the Trust Indenture Act;
the issuance of the Offered Securities has been duly authorized, and
when executed and authenticated in accordance with the terms of the
Indenture and delivered to and
<PAGE>
27
paid for by the Underwriters pursuant to this Agreement, will be valid
and binding obligations of the Company entitled to the benefit of the
Indenture and enforceable against the Company in accordance with their
respective terms except to the extent that enforcement thereof may be
limited by (i) bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditor's rights generally and (ii) general
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law); the Offered Securities conform
in all material respects to the description thereof contained in the
Prospectus; and assuming due authorization, execution and delivery
thereof by the Trustee, on the Closing Date the Indenture will
constitute a valid and legally binding obligation of the Company
enforceable in accordance with its terms except to the extent that
enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditor's rights generally and (ii) general
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law);
(iv) The Offered Securities delivered on such Closing Date are
convertible into the Underlying Shares in accordance with the terms of
the Indenture; the Underlying Shares initially issuable upon
conversion of such Offered Securities have been duly authorized and
reserved for issuance upon such conversion and, when issued upon such
conversion, will be validly issued, fully paid and nonassessable; the
outstanding Common Stock conforms in all material respects to the
description thereof contained in the Prospectus; and the stockholders
of the Company have no preemptive rights under the Certificate of
Incorporation or Bylaws with respect to the Offered Securities or the
Underlying Shares, or similar rights under any Applicable Contracts
(as defined below) except that counsel need express no opinion with
regard to Section 3.02 of the Governance Agreement;
<PAGE>
28
(v) No contracts or agreements filed as an exhibit to the
Registration Statement that is governed by New York or Delaware law
(the "Applicable Contracts") grants to any person the right to require
the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in a
Registration Statement or in any other registration statement filed by
the Company under the Act, except as provided in the Registration
Rights Agreement dated as of February 29, 1996, between Ciba-Geigy
Limited and the Company, the Registration Rights Agreement dated as of
February 9, 1995, between Mutual Series Fund Inc. and the Company, the
agreement dated April 6, 1995 between John J. Lee, Mutual Series Fund
Inc. and the Company and the Registration Rights Agreement for
Affiliates dated as of February 9, 1995, among certain Eligible
Holders, as defined therein, and the Company;
(vi) No consent, approval, authorization, or order of, or filing
(collectively, "Government Approval") with, any Delaware, New York or
federal governmental agency, body or court (a "Governmental
Authority") under Applicable Laws (as defined below) is required for
the consummation by the Company of the transactions contemplated by
this Agreement in connection with the issuance or sale of the Offered
Securities by the Company, except such as have been obtained and made
under the Act and the Trust Indenture Act and such as may be required
under state securities laws;
(vii) The execution, delivery and performance by the Company of
the Indenture and the consummation by the Company of the transactions
contemplated by this Agreement, and the issuance and sale of the
Offered Securities and compliance by the Company with the terms and
provisions thereof, including the issuance and delivery of
<PAGE>
29
Underlying Shares upon conversion (if any) of the Offered Securities,
will not (i) result in a violation of any Applicable Laws or
Applicable Orders (as defined below), statute, rule or regulation;
provided, however, that such counsel need express no opinion with
respect to (x) any state securities or Blue Sky laws or (y) the
information contained in, or the accuracy, completeness or correctness
of, the Prospectus or the Registration Statement or the compliance
thereof as to form with the Act or (z) the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 with respect to conversion of the
Securities, (ii) constitute a breach of or default under the terms of
any Applicable Contracts (except that such counsel need not express an
opinion as to any covenant, restriction or provisions of
any such agreement with respect to financial covenants, ratios or
tests or any aspect of the financial condition or results of
operations of the Company), or (iii) conflict with any provisions of
the restated certificate of incorporation or restated by-laws of the
Company and the Company has full corporate power and authority to
authorize, issue and sell the Offered Securities as contemplated by
this Agreement and to issue and deliver the Underlying Shares upon
conversion (if any) of the Offered Securities; "Applicable Laws" means
those laws, rules and regulations of the United States, the State of
New York and the State of Delaware that, in such counsel's opinion
expressed in this paragraph based on such counsel's experience, are
normally applicable to transactions of the type provided for in this
Agreement, but without having made any special investigation
concerning any other requirements of law, and "Applicable Orders"
means any order of any United States Federal, New York or Delaware
Governmental Authority specifically identified to such counsel by the
Company as one to which it is subject;
(viii) This Agreement has been duly authorized, executed and
delivered by the Company;
<PAGE>
30
(ix) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be regulated or
required to be registered as an "investment company" as defined in the
Investment Company Act of 1940.
Such counsel shall also state that such counsel has participated in
conferences with directors, officers and other representatives of the
Company, representatives of the independent public accountants for the
Company, representatives of the Underwriters and representatives of counsel
for the Underwriters, at which conferences the contents of the Registration
Statement and Prospectus and related matters were discussed and, although
such counsel is not passing upon and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement and Prospectus, and has made no independent check or
verification thereof (except to the extent set forth in paragraph (iii) above
with respect to the description of the Offered Securities and in paragraph
(iv) above with respect to the description of the Common Stock in the
Registration Statement) on the basis of the foregoing, no facts have come to
such counsel's attention which have caused such counsel to believe that the
Registration Statement, at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, not misleading or that the Prospectus,
as of its date and as of the Closing Date, contains an untrue statement of a
material fact or omits to state a material fact necessary in order to make
the statements therein, in light of the circumstances in which they were
made, not misleading (it being understood that such counsel need express no
view with respect to the financial statements and the notes related thereto
and other financial, statistical and accounting data included in, or excluded
from, any Registration Statement or exhibits to the Registration Statement or
the Form T-1).
Such opinion may be limited to the General Corporation Law of the
State of Delaware and the laws of the State of New York and the federal laws of
the United States.
<PAGE>
31
(g) The Underwriters shall have received an opinion, dated such
Closing Date, of Joseph H. Shaulson, general counsel for the Company, to
the effect that:
(i) The Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its
ownership or lease of property or the conduct of its business requires
such qualification;
(ii) Such counsel does not know of any legal or governmental
proceeding required to be described in a Registration Statement or the
Prospectus which are not described as required or of any contracts or
documents of a character required to be described in a Registration
Statement or the Prospectus or to be filed as exhibits to a
Registration Statement which are not described and filed as required;
(iii) No contracts, agreements or understandings known to such
counsel between the Company and any person grants to any person the
right to require the Company to file a registration statement under
the Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such
securities in a Registration Statement or in any other registration
statement filed by the Company under the Act, except as provided in
the Registration Rights Agreement dated as of February 29, 1996,
between Ciba-Geigy Limited and the Company, the Registration Rights
Agreement dated as of February 9, 1995, between Mutual Series Fund
Inc. and the Company, the agreement dated April 6, 1995 between
John J. Lee, Mutual Series Fund Inc. and the Company and the
Registration Rights Agreement for Affiliates dated as of February 9,
1995, among certain Eligible Holders, as defined therein, and the
Company; and
(iv) The execution, delivery and performance by the Company
of the Indenture and the consummation by the Company of the
transactions contemplated by this Agreement, and the issuance and
sale of the Offered Securities and compliance by the Company with
the terms and provisions thereof, including the issuance and
delivery of Underlying Shares upon conversion (if any) of the
Offered Securities, will not constitute a breach of or default
under the terms of any agreement or instrument known to such
counsel to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary is bound or to which any of the
properties of the Company or any Subsidiary is subject;
(h) The Underwriters shall have received opinions, dated such Closing
Date, of counsel for the Subsidiaries, to the effect that:
(i) Each Subsidiary of the Company has been duly incorporated
and is a validly existing corporation in good standing (where
applicable) under the law of the jurisdiction of its incorporation,
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus; and each
Subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing (where applicable) in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification except where the
failure to so own or qualify would not have a material adverse effect
on the Company and its Subsidiaries, taken as a whole; all the issued
and outstanding capital stock of each Subsidiary of the Company has
been duly authorized and validly issued and is fully paid and
nonassessable; and except as disclosed in Schedule A hereto, the
outstanding capital stock of each Subsidiary is owned by the Company,
directly or through Subsidiaries, and is owned free from liens,
<PAGE>
32
encumbrances and defects except for those created under the Credit
Agreement, as disclosed in the Prospectus.
(i) The Underwriters shall have received from Cravath, Swaine &
Moore, counsel for the Underwriters, such opinion or opinions, dated such
Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Underwriters may require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them to
pass upon such matters.
(j) The Underwriters shall have received a certificate, dated such
Closing Date, of the President or any Vice-President and a principal
financial or accounting officer of the Company in which such officers, to
the best of their knowledge after reasonable investigation, shall state
that: the representations and warranties of the Company in this Agreement
are true and correct on and as of the Closing Date with the same effect as
if made on the Closing Date; the Company has complied with all agreements
and satisfied all conditions on its part to be performed or satisfied
hereunder at or prior to such Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or, to the knowledge of
the Company, are contemplated by the Commission; one or more Additional
Registration Statements (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) were filed pursuant to
Rule 462(b), including payment of the applicable filing fees in accordance
with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was
printed and distributed to any Underwriter; and, subsequent to the date of
the most recent financial statements in the Prospectus, there has been no
material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
Subsidiaries taken as a whole except as set forth in or contemplated by
the Prospectus or as described in such certificate.
<PAGE>
33
(k) The Underwriters shall have received a letter, dated such Closing
Date, of Deloitte & Touche LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than three days prior to such
Closing Date for the purposes of this subsection.
(l) The Underwriters shall have received a letter, dated such Closing
Date, of Coopers & Lybrand LLP which meets the requirements of
subsection (b) of this Section, except that the specified date referred to
in such subsection will be a date not more than three days prior to such
Closing Date for the purposes of this subsection.
The Company shall furnish the Underwriters with such conformed copies of such
opinions, certificates, letters and documents as the Underwriters reasonably
request. CS First Boston may in its sole discretion waive on behalf of the
Underwriters compliance with any conditions to the obligations of the
Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company shall
indemnify and hold harmless each Underwriter, its directors and officers and any
person controlling (within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act) such Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein (in the case of
the Prospectus, in light of the circumstance in which they were made) not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company shall not be liable in such case
(x) to the extent that any such loss, claim, damage or
<PAGE>
34
liability arises out of or is based upon an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter specifically for use therein, it being understood and
agreed that the only such information furnished by any Underwriter consists of
the information described as such in subsection (b) below or (y) with respect to
any Underwriter from whom the person asserting such losses, claims, damages or
liabilities purchased the Offered Securities, if such losses, claims, damages or
liabilities arose out of an untrue statement or omission made in any preliminary
prospectus or Prospectus and a copy of the Prospectus (as amended or
supplemented, if the Company shall have furnished the Underwriter with such
amendments or supplements thereto on a timely basis) was not delivered by or on
behalf of such Underwriter if required by the Act to the person asserting such
losses, claims, damages or liabilities, at or prior to the written confirmation
of the sale of the Securities and the Prospectus (as so amended or supplemented)
would have corrected such untrue statement or omission.
(b) Each Underwriter shall severally and not jointly indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, and any person controlling (within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act) the Company against any losses, claims,
damages or liabilities to which the Company may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading (in the case of the
Prospectus, in light of the circumstance in which they were made), in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter specifically for use therein, and shall reimburse any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such loss, claim,
<PAGE>
35
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the last paragraph at the bottom of the cover page concerning the
terms of the offering by the Underwriters, the stabilization legend on the
inside front cover page, the statements appearing in the fourth paragraph under
the caption "Underwriting" and the information contained in the eighth through
tenth paragraphs under the caption "Underwriting".
(c) Promptly after receipt by an indemnified party under this Section
or Section 10 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under subsection (a) or (b) above or Section 10, notify the
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to any indemnified party otherwise than under subsection (a) or (b) above or
Section 10. In case any such action is brought against any indemnified party
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party (who shall not, except with the consent of the indemnified party, be
counsel to the indemnifying party), and after notice from the indemnifying party
to such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section or Section 10, as the case may be, for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
<PAGE>
36
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the indemnifying party on the one hand and the indemnified party on the other
from the offering of the Offered Securities or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the indemnifying party on the one hand and
the indemnified party on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the Prospectus. The relative fault of the Company and the Underwriters
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities referred to in the first sentence of this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim which is the subject of this subsection (d). Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Offered Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of
<PAGE>
37
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion to
the respective numbers of Firm Shares as forth opposite their names in Schedule
B hereto (or such numbers of Firm Shares increased as set forth in Section 8
hereof) and not joint.
(e) The obligations of the Company under this Section or Section 10
shall be in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter or the Independent Underwriter (as hereinafter defined)
within the meaning of the Act; and the obligations of the Underwriters under
this Section shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company, to each officer of the Company who
has signed a Registration Statement and to each person, if any, who controls the
Company within the meaning of the Act.
8. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First or any Optional Closing Date and the aggregate principal amount of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total principal amount of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date,
CS First Boston may make arrangements satisfactory to the Company for the
purchase of such Offered Securities by other persons, including any of the
Underwriters, but if no such arrangements are made by such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Offered Securities that such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate principal amount of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total principal amount of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CS First Boston and the Company for the purchase of such Offered Securities by
other persons are not made within 36 hours after such default, this Agreement
will terminate without liability on the part
<PAGE>
38
of any non-defaulting Underwriter or the Company, except as provided in Section
9 (provided that if such default occurs with respect to Optional Securities
after the First Closing Date, this Agreement will not terminate as to the Firm
Securities or any Optional Securities purchased prior to such termination). As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The
respective indemnities, agreements, representations, warranties and other
statements of the Company or its officers and of the several Underwriters set
forth in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any investigation or statement as to the results thereof,
made by or on behalf of any Underwriter, the Company or any of their respective
representatives, officers or directors or any controlling person, and shall
survive delivery of and payment for the Offered Securities. If this Agreement
is terminated pursuant to Section 8 or if for any reason the purchase of the
Offered Securities by the Underwriters is not consummated, the Company shall
remain responsible for the expenses to be paid or reimbursed by it pursuant to
Section 5 and the respective obligations of the Company and the Underwriters
pursuant to Section 7 and the obligations of the Company pursuant to Section 10
shall remain in effect, and if any Offered Securities have been purchased
hereunder the representations and warranties in Section 2 and all obligations
under Section 5 shall also remain in effect. If the purchase of the Offered
Securities by the Underwriters is not consummated for any reason other than
solely because of the termination of this Agreement pursuant to Section 8 or the
occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(e),
the Company shall reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of counsel) reasonably incurred by them in
connection with the offering of the Offered Securities.
10. QUALIFIED INDEPENDENT UNDERWRITER. (a) The Company hereby
confirms its engagement of the services of Bear, Stearns & Co. Inc. (the
"Independent Underwriter") as, and the Independent Underwriter hereby confirms
its agreement with the Company to render services as, a "qualified independent
underwriter" within the meaning of Section 2(o) of Schedule E ("Schedule E") of
the By-laws of
<PAGE>
39
the National Association of Securities Dealers, Inc. (the "NASD") with respect
to the offering and sale of the Offered Securities.
(b) The Independent Underwriter hereby represents and warrants to, and
agrees with, the Company and CS First Boston that with respect to the offering
and sale of the Offered Securities as described in the Prospectus:
(i) the Independent Underwriter constitutes a "qualified independent
underwriter" within the meaning of Section 2(o) of Schedule E;
(ii) the Independent Underwriter has participated in the preparation
of the Registration Statements and the Prospectus and has exercised the
usual standards of "due diligence" in respect thereto;
(iii) the Independent Underwriter has undertaken the legal
responsibilities and liabilities of an underwriter under the Act
specifically including those inherent in Section 11 thereof;
(iv) based upon, among other factors, the information set forth in the
Prospectus and its review of such other documents and the taking of such
other actions as the Independent Underwriter, in its sole discretion, has
deemed necessary or appropriate for the purposes of delivering its
recommendation hereunder, the Independent Underwriter recommends, as of the
date of the execution and delivery of this Agreement, that the yield at
which the Offered Securities are to be distributed to the public shall not
be lower than that set forth on the cover page of the Prospectus, which
yield should in no way be considered or relied upon as an indication of the
value of the Offered Securities; and
(v) the Independent Underwriter will furnish to CS First Boston on
each Closing Date a letter, dated the date of delivery thereof, in form and
substance satisfactory to CS First Boston, to the effect of clauses (i)
through (iv) above.
(c) The Company, the Independent Underwriter and CS First Boston agree
to comply in all material respects with all of the requirements of Schedule E
applicable to them in connection with the offering and sale of the Offered
<PAGE>
40
Securities. The Company agrees to cooperate with the Underwriters, including
the Independent Underwriter, to enable the Underwriters to comply with
Schedule E and the Independent Underwriter to perform the services contemplated
by this Agreement.
(d) The Company agrees promptly to reimburse the Independent
Underwriter for all out-of-pocket expenses, including fees and disbursements of
counsel, reasonably incurred in connection with this Agreement and the services
to be rendered as Independent Underwriter hereunder.
(e) The Independent Underwriter hereby consents to the references to
it as set forth under the caption "Underwriting" in the Prospectus.
(f) The Company will indemnify and hold harmless the Independent
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which the Independent Underwriter may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon the Independent
Underwriter's acting (or alleged failing to act) as such "qualified
independent underwriter" except where such acts (or alleged failures to act)
constitute gross negligence or willful misconduct and will reimburse the
Independent Underwriter for any legal or other expenses reasonably incurred
by the Independent Underwriter in connection with investigating or defending
any such loss, claim, damage, liability or action as such expenses are
incurred.
11. NOTICES. All communications required hereunder to be in writing
shall be delivered as follows, if sent to the Underwriters, will be mailed,
delivered or telegraphed and confirmed to the Underwriters, c/o CS First Boston
at Park Avenue Plaza, New York, N.Y. 10055, Attention: Investment Banking
Department----Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at Hexcel Corporation, Two
Stamford Plaza, 281 Tresser Blvd., Stamford, CT 06901, Attention: Joseph
Shaulson, Esq.; provided, however, that any notice to an Underwriter pursuant to
Section 7 will be mailed, delivered or telegraphed and confirmed to such
Underwriter.
12. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors
<PAGE>
41
and controlling persons referred to in Section 7, and no other person shall have
any right or obligation hereunder.
13. REPRESENTATION OF UNDERWRITERS. CS First Boston will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by CS First Boston in such capacity shall be binding upon
all the Underwriters.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
If the foregoing is in accordance with the Underwriters' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it shall become a binding agreement between the Company and
the several Underwriters in accordance with its terms.
Very truly yours,
HEXCEL CORPORATION
By
--------------------------
John J. Lee
Chairman and Chief
Executive Officer
<PAGE>
42
The foregoing Underwriting Agreement is hereby confirmed and
accepted as of the date first above written.
CS FIRST BOSTON CORPORATION
By:
------------------------------------
Joseph D. Carrabino
Director
BEAR, STEARNS & CO. INC.
By:
------------------------------------
Randall E. Paulson
Associate Director
<PAGE>
43
SCHEDULE A
Subsidiaries
------------
<PAGE>
44
SCHEDULE B
Principal Amount of
Underwriter Firm Securities
----------- -------------------
CS First Boston Corporation . . . . . . . . . $
Bear, Stearns & Co. Inc.. . . . . . . . . . .
-------------------
Total . . . . . . . . . . . . . . . . . $ 100,000,000
-------------------
<PAGE>
================================================================================
HEXCEL CORPORATION,
Issuer,
to
FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION,
Trustee
INDENTURE
Dated as of July __, 1996
$100,000,000****
% Convertible Subordinated Notes Due 2003
================================================================================
- ----------
**** Subject to increase up to an additional $15,000,000.
<PAGE>
TABLE OF CONTENTS*
Page
----
ARTICLE I
Definitions and Other Provisions
of General Application
SECTION 1.01. Definitions ................................................ 1
SECTION 1.02. Compliance Certificates and Opinions ....................... 9
SECTION 1.03. Form of Documents Delivered to Trustee ..................... 10
SECTION 1.04. Acts of Holders ............................................ 11
SECTION 1.05. Notices, Etc., to Trustee and Company ...................... 11
SECTION 1.06. Notices to Holders; Waiver ................................. 12
SECTION 1.07. Conflict with Trust Indenture Act .......................... 12
SECTION 1.08. Effect of Headings and Table of Contents ................... 12
SECTION 1.09. Successors and Assigns ..................................... 13
SECTION 1.10. Separability Clause ........................................ 13
SECTION 1.11. Benefits of Indenture ...................................... 13
SECTION 1.12. Governing Law .............................................. 13
SECTION 1.13. Legal Holidays ............................................. 13
SECTION 1.14. Record Date for Vote or Consent of Holders ................. 13
SECTION 1.15. Incorporators, Stockholders, Officers and Directors of the
Company Exempt from Individual Liability ................ 14
ARTICLE II
Forms of Security
SECTION 2.01. Forms Generally ............................................ 14
SECTION 2.02. Form of Face of Security ................................... 15
SECTION 2.03. Form of Reverse of Security ................................ 16
SECTION 2.04. Form of Trustee's Certificate of Authentication ............ 20
SECTION 2.05. Form of Election to Convert ................................ 21
SECTION 2.06. Form of Option of Holder to Elect Purchase ................. 23
____________
* This Table of Contents is not part of the Indenture.
<PAGE>
Table of Contents, p. 2
ARTICLE III
The Securities
SECTION 3.01. Title and Terms ............................................ 23
SECTION 3.02. Denominations .............................................. 24
SECTION 3.03. Execution, Authentication, Delivery and Dating ............. 24
SECTION 3.04. Temporary Securities ....................................... 25
SECTION 3.05. Registration, Registration of Transfer and Exchange ........ 25
SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities ........... 26
SECTION 3.07. Payment of Interest; Interest Rights Preserved ............. 27
SECTION 3.08. Persons Deemed Owners ...................................... 28
SECTION 3.09. Cancellation ............................................... 28
SECTION 3.10. Computation of Interest .................................... 29
ARTICLE IV
Satisfaction and Discharge
SECTION 4.01. Satisfaction and Discharge of Indenture .................... 29
SECTION 4.02. Application of Trust Money ................................. 30
ARTICLE V
Remedies
SECTION 5.01. Events of Default .......................................... 30
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment ......... 32
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee ................................................. 33
SECTION 5.04. Trustee May File Proofs of Claim ........................... 34
SECTION 5.05. Trustee May Enforce Claims Without Possession of
Securities .............................................. 35
SECTION 5.06. Application of Money Collected ............................. 35
SECTION 5.07. Limitation on Suits ........................................ 35
SECTION 5.08. Unconditional Right of Holders to Receive Principal,
Premium and Interest and to Convert ..................... 36
SECTION 5.09. Restoration of Rights and Remedies ......................... 36
SECTION 5.10. Rights and Remedies Cumulative ............................. 36
<PAGE>
Table of Contents, p. 3
SECTION 5.11. Delay or Omission Not Waiver ............................... 37
SECTION 5.12. Control by Holders ......................................... 37
SECTION 5.13. Waiver of Past Defaults .................................... 37
SECTION 5.14. Undertaking for Costs ...................................... 38
SECTION 5.15. Waiver of Stay or Extension Laws ........................... 38
ARTICLE VI
The Trustee
SECTION 6.01. Certain Duties and Responsibilities ........................ 38
SECTION 6.02. Notice of Defaults ......................................... 40
SECTION 6.03. Certain Rights of Trustee .................................. 40
SECTION 6.04. Not Responsible for Recitals or Issuance of Securities ..... 41
SECTION 6.05. May Hold Securities ........................................ 41
SECTION 6.06. Money Held in Trust ........................................ 41
SECTION 6.07. Compensation and Reimbursement ............................. 42
SECTION 6.08. Disqualification; Conflicting Interest ..................... 42
SECTION 6.09. Corporate Trustee Required; Eligibility .................... 42
SECTION 6.10. Resignation and Removal; Appointment of Successor .......... 43
SECTION 6.11. Acceptance of Appointment by Successor ..................... 44
SECTION 6.12. Merger, Conversion, Consolidation or Succession to
Business ................................................ 45
SECTION 6.13. Preferential Collection of Claims Against Company .......... 45
SECTION 6.14. Appointment of Authenticating Agent ........................ 45
ARTICLE VII
Holders' Lists and Reports by Trustee and Company
SECTION 7.01. Company To Furnish Trustee Names and Addresses of
Holders ................................................. 47
SECTION 7.02. Preservation of Information; Communications to Holders ..... 47
SECTION 7.03. Reports by Trustee ......................................... 48
SECTION 7.04. Reports by Company ......................................... 48
<PAGE>
Table of Contents, p. 4
ARTICLE VIII
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 8.01. Company May Consolidate, Etc., Only on Certain
Terms ................................................... 49
SECTION 8.02. Successor Substituted for Company .......................... 50
ARTICLE IX
Supplemental Indentures
SECTION 9.01. Supplemental Indentures Without Consent of Holders ......... 50
SECTION 9.02. Supplemental Indentures With Consent of Holders ............ 51
SECTION 9.03. Execution of Supplemental Indentures ....................... 51
SECTION 9.04. Effect of Supplemental Indentures .......................... 52
SECTION 9.05. Conformity With Trust Indenture Act ........................ 52
SECTION 9.06. Reference in Securities to Supplemental Indentures ......... 52
SECTION 9.07. No Impairment of Subordinates .............................. 52
ARTICLE X
Covenants
SECTION 10.01. Payment of Principal, Premium and Interest ................. 52
SECTION 10.02. Maintenance of Office or Agency ............................ 53
SECTION 10.03. Money for Security Payments to be Held in Trust ............ 53
SECTION 10.04. Statements of Officers of Company as to Default ............ 55
SECTION 10.05. Existence .................................................. 55
SECTION 10.06. Maintenance of Properties .................................. 55
SECTION 10.07. Payment of Taxes and Other Claims .......................... 55
SECTION 10.08. Further Instruments and Acts ............................... 56
SECTION 10.09. Waiver of Certain Covenants ................................ 56
<PAGE>
Table of Contents, p. 5
ARTICLE XI
Redemption of Securities
SECTION 11.01. Right of Redemption ........................................ 56
SECTION 11.02. Applicability of Article ................................... 56
SECTION 11.03. Election to Redeem; Notice to Trustee ...................... 57
SECTION 11.04. Selection by Trustee of Securities to be Redeemed .......... 57
SECTION 11.05. Notice of Redemption ....................................... 57
SECTION 11.06. Deposit of Redemption Price ................................ 58
SECTION 11.07. Securities Payable on Redemption Date ...................... 58
SECTION 11.08. Securities Redeemed in Part ................................ 59
SECTION 11.09. Conversion Arrangements on Call for Redemption ............. 59
ARTICLE XII
Conversion of Securities
SECTION 12.01. Conversion of Privilege and Conversion Price ............... 60
SECTION 12.02. Exercise of Conversion Privilege ........................... 61
SECTION 12.03. Fractions of Shares ........................................ 62
SECTION 12.04. Adjustment of Conversion Price ............................. 62
SECTION 12.05. Notice of Adjustments of Conversion Price .................. 70
SECTION 12.06. Notice of Certain Corporate Activities ..................... 70
SECTION 12.07. Company to Reserve Common Stock ............................ 71
SECTION 12.08. Taxes on Conversions ....................................... 71
SECTION 12.09. Covenant as to Common Stock ................................ 71
SECTION 12.10. Cancelation of Converted Securities ........................ 71
SECTION 12.11. Provisions in Case of Consolidation, Merger, Share
Exchange or Conveyance of Assets ........................ 71
SECTION 12.12. Trustee Adjustment Disclaimer .............................. 73
SECTION 12.13. When No Adjustment Required ................................ 73
<PAGE>
Table of Contents, p. 6
ARTICLE XIII
Subordination of Securities
SECTION 13.01. Agreement to Subordinate by Company ........................ 73
SECTION 13.02. Distribution on Dissolution, Liquidation and
Reorganization; Subrogation ............................. 73
SECTION 13.03. No Payment in Event of Default on Senior
Indebtedness ............................................ 75
SECTION 13.04. Payments Permitted ......................................... 76
SECTION 13.05. Authorization to Trustee to Effect Subordination ........... 77
SECTION 13.06. Notices to Trustee ......................................... 77
SECTION 13.07. Trustee as Holder of Senior Indebtedness ................... 77
SECTION 13.08. Modification of Terms of Senior Indebtedness ............... 78
ARTICLE XIV
Right to Require Repurchase
SECTION 14.01. Repurchase of Securities at Option of the Holder Upon
Change of Control ....................................... 78
SECTION 14.02. Effect of Change of Control Purchase Notice ................ 80
SECTION 14.03. Deposit of Repurchase Price ................................ 81
SECTION 14.04. Securities Purchased in Part ............................... 82
SECTION 14.05. Covenant to Comply with Securities Laws Upon Purchase
of Securities ........................................... 82
ARTICLE XV
Defeasance and Covenant Defeasance
SECTION 15.01. Company's Option to Effect Defeasance or Covenant
Defeasance .............................................. 82
SECTION 15.02. Defeasance and Discharge ................................... 82
SECTION 15.03. Covenant Defeasance ........................................ 83
SECTION 15.04. Conditions to Defeasance or Covenant Defeasance ............ 83
SECTION 15.05. Deposited Money and U.S. Government Obligations to be
Held in Trust; Other Miscellaneous Provisions ........... 86
SECTION 15.06. Reinstatement .............................................. 87
<PAGE>
Table of Contents, p. 7
Reconciliation and tie between Trust Indenture Act of 1939
and Indenture dated as of July, 1996.
Trust Indenture Act Section Indenture Section
- --------------------------- -----------------
ss.310(a)(1)......................................... 6.09
(a)(2)......................................... 6.09
(a)(3)......................................... N.A.
(a)(4)......................................... N.A.
(a)(5)......................................... 6.09
(b)............................................ 6.08
(c)............................................ N.A.
ss.311(a)............................................ 6.13
(b)............................................ 6.13
(b)(2)......................................... 6.13
(c)............................................ N.A.
ss.312(a)............................................ 7.01; 7.02(a)
(b)............................................ 7.02(b)
(c)............................................ 7.02(b)
ss.313(a)............................................ 7.03(a)
(b)............................................ 7.03(a)
(c)............................................ 7.03(a)
(d)............................................ 7.03(b)
ss.314(a)............................................ 7.04; 10.04
(b)............................................ N.A.
(c)(1)......................................... 1.02
(c)(2)......................................... 1.02
(c)(3)......................................... N.A.
(d)............................................ N.A.
(e)............................................ 1.02
(f)............................................ N.A.
ss.315(a)............................................ 6.01(a)
(b)............................................ 6.02; 7.03
(c)............................................ 6.01(b)
(d)............................................ 6.01(c)
(d)(1)......................................... 6.01(c)(1)
(d)(2)......................................... 6.01(c)(2)
(d)(3)......................................... 6.01(c)(3)
(e)............................................ 5.14
ss.316(a)(1)(A)...................................... 5.12
(a)(1)(B)...................................... 5.13
<PAGE>
Table of Contents, p. 8
Trust Indenture Act Section Indenture Section
- --------------------------- -----------------
(a)(2)......................................... N.A.
(b)............................................ 5.08
(c)............................................ 1.14
ss.317(a)(1)......................................... 5.03
(a)(2)......................................... 5.04
(b)............................................ 10.03
ss.318(a)............................................ 1.07
<PAGE>
INDENTURE dated as of July __, 1996, between HEXCEL
CORPORATION, a Delaware corporation (the "Company"), and FIRST
TRUST OF CALIFORNIA, NATIONAL ASSOCIATION, as Trustee (the
"Trustee").
The Company and the Trustee agree as follows for the benefit of each
other and for the equal and ratable benefit of the Holders of the ___%
Convertible Subordinated Notes Due 2003:
ARTICLE I
Definitions and Other Provisions of General Application
SECTION 1.01. Definitions. For all purposes of this Indenture,
except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles;
(d) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision; and
(e) unless otherwise specifically stated herein, the words "Article"
and "Section" refer to an Article and Section, respectively, of this
Indenture.
"Act", when used with respect to any Holder, has the meaning
specified in Section 1.04.
"Affiliate" of any specified Person means any other person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of
<PAGE>
2
voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Authenticating Agent" means any Person authorized by the Trustee to
act on behalf of the Trustee to authenticate Securities.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in the city in which the
Corporate Trust Office of the Trustee is located or The City of New York, New
York are authorized or obligated by law or executive order to close.
"Capital Stock" means, with respect to any corporation, any and all
shares, interests, rights to purchase, warrants, options, participations or
other equivalents of or interests (however designated) in stock issued by that
corporation.
A "Change of Control" shall occur when: (i) all or substantially all
the Company's assets are sold as an entirety to any person or related group of
persons other than a Permitted Holder; (ii) there shall be consummated any
consolidation or merger of the Company other than with or into a Permitted
Holder (A) in which the Company is not the continuing or surviving corporation
(other than a consolidation or merger with a wholly owned subsidiary of the
Company in which all shares of Common Stock outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same consideration)
or (B) pursuant to which the Common Stock is converted into cash, securities or
other property, in each case other than a consolidation or merger of the Company
in which the holders of the Common Stock immediately prior to the consolidation
or merger have, directly or indirectly, at least a majority of the common stock
of the continuing or surviving corporation immediately after such consolidation
or merger; or (iii) any person, or persons acting together that would constitute
a "group" for purposes of Section 13(d) of the Exchange Act, together with any
affiliates thereof, other than one or more Permitted Holders, shall beneficially
own (as defined in Rule 13d-3 under the Exchange Act) at least 50% of the total
voting power of all classes of capital stock of the Company entitled to vote
generally in the election of directors of the Company. Notwithstanding clause
(iii) of the foregoing sentence, a Change of Control shall not be deemed to have
occurred
<PAGE>
3
solely by virtue of the Company, any subsidiary of the Company, any employee
stock purchase plan, stock option plan or other stock incentive plan or program,
retirement plan or automatic dividend reinvestment plan or any substantially
similar plan of the Company or any subsidiary of the Company or any person
holding securities of the Company for or pursuant to the terms of any such
employee benefit plan filing or becoming obligated to file a report under or in
response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or
report) under the Exchange Act disclosing beneficial ownership by it of shares
or securities of the Company, whether in excess of 50% or otherwise.
Notwithstanding the foregoing, a Change of Control shall not be deemed to have
occurred if (i) the current market price (as defined in Section 12.04(8))
of the Common Stock is at least equal to 105% of the conversion price of
the Securities in effect immediately preceding the time of such Change of
Control, or (ii) all the consideration to the holders of Common Stock
(excluding cash payments for fractional shares) in the transaction
giving rise to such Change of Control consists of shares of common stock
that are, or immediately upon issuance will be, listed on a national
securities exchange or quoted on the Nasdaq National Market, and as a
result of such transaction the Securities become convertible solely into such
common stock, or (iii) the consideration to the holders of Common Stock in the
transaction giving rise to such Change of Control consists of cash or securities
that are, or immediately upon issuance will be, listed on a national securities
exchange or quoted on the Nasdaq National Market, or a combination of cash and
such securities, and the aggregate fair market value of such consideration
(which, in the case of such securities, shall be equal to the average of the
daily Closing Prices of such securities during the ten consecutive Trading Days
commencing with the sixth Trading Day following consummation of such
transaction) is at least 105% of the conversion price of the Securities in
effect on the date immediately preceding the closing date of such transaction.
"Change of Control Notice" has the meaning specified in
Section 14.01.
"Ciba" means Ciba-Geigy Limited, a Swiss corporation.
"Closing Price" on any Trading Day with respect to the per share
price of Common Stock or any other security means the last reported sales price
regular way for a share of such Common Stock or a trading unit of such other
security or, in case no such reported sale takes place on such
Trading Day, the average of the reported closing bid and asked prices regular
way, in either case on the New York Stock Exchange or, if the Common Stock or
such other security is not listed or admitted to trading on such exchange,
on the principal national securities exchange on which the Common Stock or
such other security is listed or admitted to trading or, if not listed or
admitted to trading on any national securities exchange, on the Nasdaq National
Market or, if the Common Stock or such other security is not listed or admitted
to trading on any national securities exchange
<PAGE>
4
or the Nasdaq National Market, the average of the closing bid and asked prices
in the over-the-counter market as furnished by any New York Stock Exchange
member firm that is selected from time to time by the Company for that purpose.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act, or, if at any time
after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Common Stock" includes any stock of any class of the Company that
has no preference in respect of dividends or of amounts payable in the event of
any voluntary or involuntary liquidation, dissolution or winding-up of the
Company and which is not subject to redemption by the Company. However, subject
to the provisions of Section 12.11, shares issuable on conversions of Securities
shall include only shares of the class designated as Common Stock of the Company
at the date of this Indenture or shares of any class or classes resulting from
any reclassification or reclassifications thereof and that have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company and that are
not subject to redemption by the Company; provided that if at any time there
shall be more than one such resulting class, the shares of each such class then
so issuable shall be substantially in the proportion that the total number of
shares of such class resulting from all such reclassification bears to the total
number of shares of all such classes resulting from all such reclassifications.
"Company" means the Person named as the "Company" in the preamble of
this instrument until a successor Person shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor Person.
"Company Request" or "Company Order" means a written request or
order signed in the name of the Company by its Chairman of the Board, its
President or a Vice President, and by its Treasurer, an Assistant Treasurer, its
Secretary or an Assistant Secretary, and delivered to the Trustee.
"Corporate Trust Office" means the office of the Trustee at which at
any particular time its corporate trust business shall be administered.
"Corporation" means a corporation, association, company, joint-stock
company or business trust.
<PAGE>
5
"Covenant Defeasance" has the meaning specified in Section 15.03.
"Credit Facility" means the revolving credit facility dated as of
June 27, 1996 among the Company and certain subsidiaries of the Company, as
borrowers, the lenders party thereto and Credit Suisse as managing agent for the
lenders, as the same may be amended, modified, restated, supplemented, replaced,
renewed, refunded or refinanced from time to time (including subsequent or
successive refundings, refinancings, replacements or renewals).
"Defaulted Interest" has the meaning specified in Section 3.07.
"Defeasance" has the meaning specified in Section 15.02.
"Event of Default" has the meaning specified in Section 5.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and the rules and regulations promulgated by the Commission
thereunder.
"Fair Value" means the fair value as determined in good faith by the
Board of Directors of the Company after consultation with a nationally
recognized investment banking firm.
"Holder" means a Person in whose name a Security is registered in
the Security Register.
"Indenture" means this instrument as originally executed or as it
may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof
including, for all purposes of this instrument, the provisions of the Trust
Indenture Act that are deemed to be a part of and govern this instrument.
"Interest Payment Date" means the Stated Maturity of an installment
of interest on the Securities.
"Maturity", when used with respect to any Security, means the date
on which the principal of such Security becomes due and payable as therein or
herein provided, whether at the Stated Maturity or by declaration of
acceleration, call for redemption or otherwise.
"Non-Payment Default" means, at any time when the Company has
outstanding obligations constituting Senior Indebtedness, the occurrence or
existence of any event, circumstance, condition or state of facts that, by the
terms of such
<PAGE>
6
Senior Indebtedness, permits one or more holders of such obligations (or a
trustee or agent on behalf of the holders thereof) to declare such obligations
immediately due and payable prior to the date on which they would otherwise
become due and payable, other than a Payment Default.
"Obligation" of any Person means any obligation of such Person to
pay principal, premium, interest (including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating to the
Company, whether or not a claim for such post-petition interest is allowed in
such proceeding), penalties, reimbursement or indemnification amounts, fees,
expenses or other amounts.
"Officers' Certificate" means a certificate signed by the Chairman
of the Board, the President or a Vice President, and by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company and
delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel reasonably
acceptable to the Trustee, which may be an employee of or counsel for the
Company.
"Optional Closing Date" means each time the Optional Securities are
delivered to and paid for by the underwriters of the Securities initially issued
hereunder.
"Optional Securities" means an aggregate of not more than
$15,000,000 additional principal amount of Securities.
"Outstanding", when used with respect to Securities, means, as of
the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered to
the Trustee for cancellation;
(ii) Securities as to which money for the payment or redemption in
the necessary amount has been theretofore deposited with the Trustee or
any Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its own
Paying Agent) for the Holders of such Securities; provided that, if such
Securities are to be redeemed, notice of such redemption has been duly
given pursuant to this Indenture or provision therefor satisfactory to the
Trustee has been made; and
<PAGE>
7
(iii) Securities which have been paid pursuant to Section 3.06 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities
in respect of which there shall have been presented to the Company proof
satisfactory to it that such Securities are held by a bona fide purchaser
in whose hands such Securities are valid obligations of the Company and
the Trustee shall have received notice from the Company that such
Securities are Outstanding;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which the Trustee actually knows to be so
owned shall be so disregarded. Securities so owned which have been pledged in
good faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act with respect to such
Securities and that the pledgee is not the Company or any other obligor upon the
Securities or any Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Securities on behalf of
the Company.
"Payment Blockage Period" has the meaning specified in Section
13.03.
"Payment Default" means a default in the payment of any principal of
or premium, if any, interest or sinking fund on, or other payment obligation of
the Company constituting, Senior Indebtedness when due, whether at the Stated
Maturity of any such payment or by declaration of acceleration, call for
redemption or otherwise.
"Permitted Holder" means (i) Ciba and its successors and their
affiliates, (ii) any Person formerly described in clause (i) that was spun off
or otherwise distributed to the shareholders of its parent company and (iii) any
corporation owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company.
"Person" means any individual, corporation, partnership, joint
venture, trust, unincorporated organization or government or agency or political
subdivision thereof.
<PAGE>
8
"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that evidenced
by such particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 3.06 in exchange for or in
lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security.
"Redemption Date", when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture, including as applicable without duplication, any premium or accrued
interest due upon such redemption pursuant to the terms of this Indenture.
"Regular Record Date" for the interest payable on any Interest
Payment Date means the ______________ or ____________ (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date.
"Repurchase Date" has the meaning specified in Section 14.01.
"Repurchase Price" has the meaning specified in Section 14.01.
"Responsible Officer", when used with respect to the Trustee, means
the chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, the cashier, any
assistant cashier, any trust officer or assistant trust officer, the controller
or any assistant controller or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Securities" means the ___% Convertible Subordinated Notes Due 2003
of the Company authenticated and delivered under this Indenture.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 3.05.
"Senior Indebtedness" means the principal of and premium, if any,
and unpaid interest on, and any reasonable fees or costs related to, (a)
indebtedness of the
<PAGE>
9
Company (including indebtedness of others guaranteed by the Company) other than
the Securities, whether outstanding on the date hereof or hereafter created,
incurred, assumed or guaranteed (i) for money owing to banks or their
subsidiaries or their affiliates, (ii) for money borrowed other than from banks
evidenced by notes, bonds, debentures or other similar instruments or (iii)
arising under a lease of property, equipment or other assets, which
indebtedness, pursuant to generally accepted accounting principles then in
effect, is classified upon the balance sheet of the Company as a liability of
the Company, unless, in each case, the instrument creating or evidencing the
same or pursuant to which the same is outstanding provides that such
indebtedness is not superior in right of payment to the Securities; (b) to the
extent not otherwise described in clause (a) above, any obligations under the
Credit Facility; and (c) renewals, extensions, modifications and refundings of
any such indebtedness; provided, however, that Senior Indebtedness shall not
include (i) indebtedness to a subsidiary of the Company or (ii) the 7%
Convertible Subordinated Debentures of the Company Due 2011.
"Special Record Date" for the payment of any Defaulted Interest
means a date fixed by the Trustee as the record date for the payment of
Defaulted Interest pursuant to Section 3.07.
"Stated Maturity", when used with respect to any Security or any
installment of interest thereon, means the date specified in such Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding
voting stock of which is owned, directly or indirectly, by the Company or by one
or more other Subsidiaries, or by the Company and one or more other
Subsidiaries. For the purposes of this definition, "voting stock" means stock
which ordinarily has voting power for the election of directors, whether at all
times or only so long as no senior class of stock has such voting power by
reason of any contingency.
"Trading Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday, other than any day on which securities are not traded on the applicable
securities exchange or in the applicable security market.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this instrument is qualified thereunder, except as
provided in Section 9.05; provided that in the event the Trust Indenture Act of
1939 is amended after such date, "Trust Indenture Act" means, to the extent
required by such amendment, the Trust Indenture Act of 1939 as so amended.
<PAGE>
10
"Trustee" means the Person names as the "Trustee" in the preamble of
this instrument until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean
such successor Trustee.
"U.S. Government Obligations" has the meaning specified in
Section 15.04.
"Vice President", when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president".
SECTION 1.02. Compliance Certificates and Opinions. Upon any
application or request by the Company to the Trustee to take any action under
any provision of this Indenture, the Company shall furnish to the Trustee an
Officers' Certificate stating that all conditions precedent, if any, provided
for in this Indenture relating to the proposed action have been complied with
and an Opinion of Counsel stating that in the opinion of such counsel all such
conditions precedent, if any, have been complied with, except that in the case
of any such application or request as to which the furnishing of such documents
is specifically required by any provision of this Indenture relating to such
particular application or request, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(a) a statement that each person signing such certificate or opinion
has read such covenant or condition and the definitions herein relating thereto;
(b) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of each such person, he has
made such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has been
complied with; and
(d) a statement as to whether, in the opinion of each such person,
such condition or covenant has been complied with.
<PAGE>
11
SECTION 1.03. Form of Documents Delivered to Trustee. In any case
where several matters are required to be certified by, or covered by an opinion
of, any specified Person, it is not necessary that all such matters be certified
by or covered by the opinion of, only one such Person, or that they be so
certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such Persons
as to other matters, and any such Person may certify or give an opinion as to
such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it related to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion or representations may be based,
insofar as they relate to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company, unless such counsel
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.04. Acts of Holders. (a) Any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by Holders may be embodied in and evidenced
by one or more instruments of substantially similar tenor signed by such Holders
in person or by an agent duly appointed in writing; and, except as herein
otherwise expressly provided, such action shall become effective when such
instrument or instruments are delivered to the Trustee and, where it is hereby
expressly required, to the Company. Such instrument or instruments (and the
action embodied therein and evidenced thereby) are herein sometimes referred to
as the "Act" of the Holders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Indenture and (subject to Section 6.01)
conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take
<PAGE>
12
acknowledgements of deeds, certifying that the individual signing such
instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
(c) The ownership of Securities shall be proved by the Security
Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Security shall bind every future Holder
of the same Security and the Holder of every Security issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Security. Without limiting the foregoing, a Holder entitled to give or take
any action hereunder with regard to any particular Security may do so with
regard to all or any part of the principal amount of such Security by one or
more duly appointed agents each of which may do so pursuant to such appointment
with regard to all or any different part of such principal amount.
SECTION 1.05. Notices, Etc., to Trustee and Company. Any request,
demand, authorization, direction, notice, consent, waiver or other Act of
Holders or other document provided or permitted by this Indenture to be made
upon, given or furnished to, or filed with,
(a) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder, if made, given, furnished or filed in writing to or
with the Trustee at First Trust of California, National Association, 1
California Street, Fourth Floor, San Francisco, California 94111, Corporate
Trust Office, Attention: Corporate Trust Department, or
(b) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided) if in
writing and mailed, first-class postage prepaid, to the Company, addressed to it
at First Trust of California, National Association, 1 California Street, Fourth
Floor, San Francisco, California 94111, or at any other address previously
furnished in writing to the Trustee by the Company.
<PAGE>
13
SECTION 1.06. Notice to Holders; Waiver. Where this Indenture
provides for notice to Holders of any event, such notice shall be sufficiently
given (unless otherwise herein expressly provided) if in writing and mailed,
first-class postage prepaid, to each Holder affected by such event, at his
address as it appears in the Security Register, not later than the latest date,
and not earlier than the earliest date, prescribed for the giving of such
notice. In any case where notice to Holders is given by mail, neither the
failure to mail such notice, nor any defect in any notice so mailed, to any
particular Holder shall affect the sufficiency of such notice with respect to
other Holders. Where this Indenture provides for notice in any manner, such
notice may be waived in writing by the Person entitled to receive such notice,
either before or after the event, and such waiver shall be the equivalent of
such notice. Waivers of notice by Holders shall be filed with the Trustee, but
such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
SECTION 1.07. Conflict with Trust Indenture Act. If any provision
hereof limits, qualifies or conflicts with a provision of the Trust Indenture
Act that is required under such Act to be a part of and govern this Indenture,
the latter provision shall control. If any provision of this Indenture modifies
or excludes any provision of the Trust Indenture Act that may be so modified or
excluded, the provisions of the Trust Indenture Act shall be deemed to apply to
this Indenture as so modified, or if excluded shall not be deemed to apply to
this Indenture, as the case may be.
SECTION 1.08. Effect of Headings and Table of Contents. The Article
and Section headings herein and the Table of Contents are for convenience only
and shall not affect the construction of any of the terms or provisions hereof.
SECTION. 1.09. Successors and Assigns. All covenants and agreements
in this Indenture by the Company and the Trustee shall bind their respective
successors and assigns, whether so expressed or not.
SECTION 1.10. Separability Clause. In case any provision to this
Indenture or in the Securities shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
<PAGE>
14
SECTION 1.11. Benefits of Indenture. Nothing in this Indenture or in
the Securities, express or implied, shall give to any Person, other than the
parties hereto and their successors hereunder, the holders of Senior
Indebtedness and the Holders of Securities, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
SECTION 1.12. Governing Law. This Indenture and the Securities shall
be governed by and construed in accordance with the laws of the State of New
York, without regard to principles of conflicts of laws.
SECTION 1.13. Legal Holidays. In any case where any Interest Payment
Date, Redemption Date or Stated Maturity of any Security or the last date on
which a Holder has the right to convert his Securities shall not be a Business
Day, then (notwithstanding any other provision of this Indenture or of the
Securities) payment of interest or principal (and premium, if any) or conversion
of the Securities need not be made on such date, but may be made on the next
succeeding Business Day with the same force and effect as if made on the
Interest Payment Date or Redemption Date, or at the Stated Maturity, or on such
last day for conversion; provided that no interest shall accrue for the period
from and after such Interest Payment Date, Redemption Date or Stated Maturity,
as the case may be, if such payment is made or duly provided for on the next
succeeding Business Day.
SECTION 1.14. Record Date for Vote or Consent of Holders. The
Company (or, in the event deposits have been made pursuant to Articles IV or XV
or after the occurrence of an Event of Default the Trustee has called for action
by the Holders, the Trustee) may set a record date for purposes of determining
the identity of Holders entitled to vote or consent to any action by vote or
consent authorized or permitted under this Indenture, which record date shall be
the later of ten days prior to the first solicitation of such vote or consent or
the date of the most recent list of Holders furnished to the Trustee pursuant to
Section 7.01 hereof prior to such solicitation. If a record date is fixed, those
persons who were Holders of Securities at such record date (or their duly
designated proxies), and only those persons, shall be entitled to take such
action by vote or consent or to revoke any vote or consent previously given,
whether or not such persons continue to be Holders after such record date.
SECTION 1.15. Incorporators, Stockholders, Officers and Directors of
the Company Exempt from Individual Liability. No recourse under or upon any
obligation, covenant or agreement of this Indenture or any indenture
supplemental hereto or of any Security, or for any claim based thereon or
otherwise in respect thereof, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or of any successor Person, either
<PAGE>
15
directly or through the Company or any successor Person, whether by virtue of
any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise; it being expressly understood that this
Indenture and the obligations issued hereunder are solely corporate obligations,
and that no such personal liability, whatever shall attach to, or is or shall be
incurred by the incorporators, or past, present or future stockholders, officers
or directors, as such, of the Company or of any successor Person, or any of
them, because of the creation of the indebtedness hereby authorized, or under or
by reason of the obligations, covenants or agreements contained in this
Indenture or in any of the Securities or implied therefrom; and that any and all
such personal liability of every name and nature, either at common law or in
equity or by constitution or statute, of, and any and all such rights and claims
against, every such incorporator, stockholder, officer or director, as such,
because of the creation of the indebtedness hereby authorized, or unless or by
reason of the obligation, covenants or agreements contained in this Indenture or
in any of the Securities or implied therefrom are hereby expressly waived and
released as a condition of, and as a consideration for, the execution of this
Indenture and the issue of such Securities.
ARTICLE II
Forms of Securities
SECTION 2.01. Forms Generally. The Securities and the Trustee's
certificates of authentication shall be in substantially the forms set forth in
this Article, with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by this Indenture, and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such Securities, as evidenced by their execution thereof,
with the consent of the Trustee. The terms and provisions of the Securities set
forth herein shall constitute, and are hereby expressly made, a part of this
Indenture and the Company and the Trustee, by their execution and delivery of
this Indenture, expressly agree to such terms and such provisions and to be
bound thereby.
The definitive Securities relating thereto shall be printed,
lithographed or engraved or produced by any combination of these methods or may
be produced in any other manner permitted by the rules of any securities
exchange on which the Securities may be listed, all as determined by the
officers executing such Securities, as evidenced by their execution thereof,
with the consent of the Trustee.
<PAGE>
16
SECTION 2.02. Form of Face of Security.
HEXCEL CORPORATION
__% Convertible Subordinated Note Due 2003
No. _______ $_____
Hexcel Corporation, a Delaware corporation (herein called the
"Company," which term includes any successor corporation under the Indenture
hereinafter referenced), for value received, hereby promises to pay to ________
or registered assigns, the principal sum of _______ Dollars on _________, and to
pay interest thereon from _________, 1996 or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, semi-annually
on ____ and _____ in each year, commencing _____, 1997, until the principal
hereof is paid or made available for payment, at the rate per annum of __% from
and including the date of issuance of this Security until maturity or earlier
redemption. The interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in such Indenture, be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, which shall be the ____ and ____ (whether or not a Business Day), as
the case may be, next preceding such Interest Payment Date. Any such interest
not so punctually paid or duly provided for will forthwith cease to be payable
to the Holder on such Regular Record Date and may either be paid to the Person
in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest to be fixed by the Trustee, notice whereof shall be
given to Holders of Securities not less than 10 days prior to such Special
Record Date, or be paid at any time in any other lawful manner not inconsistent
with the requirements of any securities exchange on which the Securities may be
listed, and upon such notice as may be required by such exchange, all as more
fully provided in said Indenture. Payment of the principal of (and premium, if
any) and interest on this Security will be made at the office or agency of the
Company in the Borough of Manhattan, The City of New York, or at any other
office or agency maintained by the Company for such purpose, in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts; provided, however, that at the
option of the Company, payment of interest may be made by check mailed to the
address of the Person entitled thereto as such address shall appear in the
Security Register.
<PAGE>
17
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereof has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed under its corporate seal.
HEXCEL CORPORATION
(seal)
By:_______________________________
Attest: (Title)
_____________________
(Title)
SECTION 2.03. Form of Reverse of Security. This Security is one of a
duly authorized issue of Securities of the Company designated as its __%
Convertible Subordinated Notes Due 2003 (herein called the "Securities"),
limited in aggregate principal amount of $100,000,000 (subject to increase as
provided in the Indenture up to $115,000,000 aggregate principal amount), issued
and to be issued under an Indenture, dated as of July __, 1996 (herein called
the "Indenture"), between the Company and First Trust of California, National
Association, as Trustee (herein called the "Trustee," which term includes any
successor trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee, the holders of Senior Indebtedness and the Holders of the
Securities and of the terms upon which the Securities are, and are to be,
authenticated and delivered.
Subject to and upon compliance with the provisions of the Indenture,
the Holder of this Security is entitled, at his option, at any time on or before
the close of business on ________, 2003, or in case this Security or a portion
hereof is called for redemption, then in respect of this Security or such
portion hereof until and including, but (unless the Company defaults in making
the payment due upon redemption) not after, the close of business on the tenth
day preceding the Redemption Date, to convert this Security (or any portion of
the principal amount
<PAGE>
18
hereof which is $1,000 or an integral multiple thereof), at the principal amount
hereof, or of such portion, into fully paid and non-assessable shares
(calculated as to each conversion to the nearest 1/100 of a share) of Common
Stock of the Company at a conversion price equal to $_________ aggregate
principal amount of Securities for each share of Common Stock (or at the current
adjusted conversion price if an adjustment has been made as provided in the
Indenture) by surrender of this Security, duly endorsed or assigned to the
Company or in blank, to the Company at its office or agency in the Borough of
Manhattan, The City of New York, or at any other office or agency maintained by
the Company for such purpose, accompanied by written notice to the Company that
the Holder hereof elects to convert this Security, or if less than the entire
principal amount hereof is to be converted, the portion hereof to be converted,
and, in case such surrender shall be made during the period from the close of
business on any Regular Record Date next preceding any Interest Payment Date to
the opening of business on such Interest Payment Date, also accompanied by
payment in New York Clearing House or other funds acceptable to the Company of
an amount equal to the interest payable on such Interest Payment Date on the
principal amount of this Security then being converted. Subject to the aforesaid
requirement for payment and, in the case of a conversion after the Regular
Record Date next preceding any Interest Payment Date and on or before such
Interest Payment Date, to the right of the Holder of this Security (or any
Predecessor Security) of record at such Regular Record Date to receive an
installment of interest (with certain exceptions provided in the Indenture), no
payment or adjustment is to be made on conversion for interest accrued hereon or
for dividends on the Common Stock issued on conversion. No fractions of shares
or scrip representing fractions of shares will be issued on conversion, but
instead of any fractional interest the Company shall pay a cash adjustment as
provided in the Indenture. The conversion price is subject to adjustment as
provided in the Indenture. In addition, the Indenture provides that in case of
certain consolidations, mergers or share exchanges to which the Company is a
party or the conveyance, transfer or lease of all or substantially all of its
assets, the Indenture shall be amended, without the consent of any Holders of
Securities, so that this Security, if then outstanding, will be convertible
thereafter, during the period this Security shall be convertible as specified
above, only into the kind and amount of securities, cash and other property
receivable upon the consolidation, merger, share exchange, conveyance, transfer
or lease by a holder of the number of shares of Common Stock into which this
Security might have been converted immediately prior to such consolidation,
merger, share exchange, conveyance, transfer or lease (assuming such holder of
Common Stock failed to exercise any rights of election and received per share
the kind and amount received per share by a plurality of non-electing shares).
The Securities are redeemable, at the Company's option, as a whole
or from time to time in part (in denominations of $1,000 or integral multiples
thereof),
<PAGE>
19
on or after _____, 1999, and prior to maturity, upon not less than 20 nor more
than 40 days' notice mailed to the registered Holder thereof. The redemption
price shall be equal to __% of the principal amount of the Securities redeemed
during the period commencing on _____, 1999 and ending _____, 2000, ___% of the
principal amount of the Securities redeemed during the period commencing _____,
2001 and ending _____, 2002 and 100% of the principal amount of the Securities
redeemed thereafter, together, in each case, with accrued interest to the
Redemption Date, but interest installments whose Stated Maturity is on or prior
to such Redemption Date will be payable to the Holders of such Securities, or
one or more Predecessor Securities, of record at the close of business on the
relevant Record Dates referred to on the face hereof, all as provided in the
Indenture.
In the event of redemption or conversion of this Security in part
only, a new Security or Securities for the unredeemed or unconverted portion
thereof will be issued in the name of the Holder thereof upon the cancellation
hereof.
The Indebtedness evidenced by this Security is, to the extent
provided in the Indenture, subordinate and subject in right of payment to the
prior payment in full of all Senior Indebtedness, and this Security is issued
subject to the provisions of the Indenture with respect thereto. Each Holder of
this Security, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his behalf to take such
action as may be necessary or appropriate to effectuate the subordination so
provided and (c) appoints the Trustee his attorney-in-fact for any and all such
purposes.
In the event there shall occur any Change of Control with respect to
the Company, each Holder of Securities shall have the right, at such Holder's
option but subject to the conditions set forth in the Indenture, to require the
Company to purchase on the Repurchase Date all or any part of such Holder's
Securities at a Repurchase Price equal to 100% of the principal amount thereof,
together with accrued and unpaid interest to the Repurchase Date and in the
manner specified in the Indenture. Failure by the Company to repurchase the
Notes when required under the preceding sentence will result in an Event of
Default whether or not such repurchase is permitted by the subordination
provisions of the Indenture.
If an Event of Default shall occur and be continuing, the principal
of all the Securities may be declared due and payable in the manner and with the
effect provided in the Indenture.
The Indenture permits with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities under the Indenture at
any time by the
<PAGE>
20
Company and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Securities at the time Outstanding. The
Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Securities at the time
Outstanding, on behalf of the Holders of all the Securities, to waive compliance
by the Company with certain provisions of the Indenture and certain past
defaults under the Indenture and their consequences. Any such consent or waiver
by the Holder of this Security shall be conclusive and binding upon such Holder
and upon all future Holders of this Security and of any Security issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not notation of such consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this
Security or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of (and
premium, if any) and interest on this Security at the times, place and rate, and
in the coin or currency, herein prescribed or to convert this Security as
provided in the Indenture.
The Securities are issuable only in registered form without coupons
in denominations of $1,000 or any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Securities are
exchangeable for a like aggregate principal amount of Securities of a different
authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Security is registered as the owner
hereof for all purposes whether or not this Security be overdue, and neither the
Company, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Indenture and the Securities shall be governed by and construed
in accordance with the laws of the State of New York as applied to contracts
made and performed within the State of New York, without regard to principles of
conflicts of laws.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
<PAGE>
21
ASSIGNMENT FORM
To Assign this Security, fill in the form below:
I or we assign and transfer this Security to ________ whose tax identification
number or social security number is __________, and whose address is (print or
type below, including zip code):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
I or we irrevocably appoint ___________ agent to transfer this Security on the
books of the Company. The Agent may substitute another to act for him.
Date: __________
Your signature: ____________________________________________
(Sign exactly as your name
appears on the other side of
this Security)
Signature Guarantee(1):
_________________________
SECTION 2.04. Form of Trustee's Certificate of Authentication. This
is one of the Securities referred to in the within-mentioned Indenture.
First Trust of California, National
Association, as Trustee
by_________________________________
Authorized Signatory
Date of Authentication: _____________
__________
(1) Participant in a recognized signature guarantee medallion program (or
other signature guarantor satisfactory to the Trustee).
<PAGE>
22
SECTION 2.05. Election to Exercise Conversion Right. The undersigned
Holder of this Security hereby irrevocably exercises the option to convert this
Security, or the portion (which is $1,000 or an integral multiple thereof) below
designated, into shares of Common Stock of Hexcel Corporation in accordance with
the terms of the Indenture referred to in this Security, and directs that the
shares issuable and deliverable upon conversion, together with any check in
payment for fractional shares, be issued in the name of and delivered to the
undersigned registered Holder hereof, unless a different name has been indicated
in the assignment below. If shares are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and shall cause the undersigned's signature to be
guaranteed. Any amount required to be paid by the undersigned on account of
interest accompanies this Security.
<PAGE>
23
Portion of Security to be converted
($1,000 or an integral multiple thereof):
$___________________
Date: _____________
Signature: _______________________________________________
(Sign exactly as your name appears on the
other side of this Security)
If shares of Common Stock are to be issued
and registered otherwise than to the
registered Holder named above, please have
the above signature guaranteed and print or
typewrite name and address, including zip
code, and social security or other taxpayer
identification number of the person in whose
name such Common Stock will be registered.
____________________________________________
____________________________________________
____________________________________________
Signature Guarantee(2):
________________________
_________
(2) Participant in a recognized signature guarantee medallion program (or
other signature guarantor satisfactory to the Trustee).
<PAGE>
24
Election to Exercise Purchase Right. If you wish to elect to have
this Security purchased by the Company pursuant to Article XIV of the Indenture,
check the box: |_|
If you wish to elect to have only part of this Security purchased by
the Company pursuant to Article XIV of the Indenture, state the amount you elect
to have purchased:
$
Date:
Signature: _______________________________________
(Sign exactly as your name appears
on the other side of this Security)
Signature Guarantee(3):
________________________
ARTICLE III
The Securities
SECTION 3.01. Title and Terms. The aggregate principal amount of
Securities that may be authenticated and delivered under this Indenture is
limited to (a) $100,000,000, plus (b) such aggregate principal amount (which may
not exceed $15,000,000 principal amount) of Securities as shall be purchased by
the Underwriters on one or more Optional Closing Dates pursuant to the
Underwriting Agreement dated July __, 1996 among the Company and CS First Boston
Corporation and Bear, Stearns & Co. Inc., as Underwriters, except for Securities
authenticated and delivered upon registration of transfer of, or exchange for,
or in lieu of, other Securities pursuant to Sections 3.04, 3.05, 3.06, 9.06,
11.08, 12.02 or 14.04.
The Securities shall be known and designated as the "__% Convertible
Subordinated Notes Due 2003" of the Company. Their Stated Maturity shall be
________, 2003, and they shall bear interest at the rate of __% per annum, from
and
__________
(3) Participant in a recognized signature guarantee medallion program (or
other signature guarantor satisfactory to the Trustee).
<PAGE>
25
including the date of issuance thereof until maturity or earlier redemption,
payable semi-annually on _____________ and ____________ commencing __________,
1997, until the principal thereof is paid or made available for payment.
The principal of (and premium, if any) and interest on the
Securities shall be payable at the office or agency of the Company in the
Borough of Manhattan, The City of New York, maintained for such purpose and at
any other office or agency maintained by the Company for such purpose; provided,
however, that at the option of the Company, payment of interest may be made by
check mailed to the address of the Person entitled thereto as such address shall
appear in the Security Register.
The Securities shall be redeemable as provided in Article XI.
The Securities shall be convertible as provided in Article XII.
The Securities shall be subordinated in right of payment to Senior
Indebtedness as provided in Article XIII.
The Securities shall be subject to repurchase by the Company, at the
option of the Holders as provided in Article XIV.
SECTION 3.02. Denominations. The Securities shall be issuable only
in registered form without coupons and only in denominations of $1,000 or any
integral multiple thereof.
SECTION 3.03. Execution, Authentication, Delivery and Dating. The
Securities shall be executed on behalf of the Company by its Chairman of the
Board, its President or one of its Vice Presidents, under its corporate seal
reproduced thereon and attested by its Secretary or one of its Assistant
Secretaries. The signature of any of these officers on the Securities may be
manual or facsimile. Securities bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices at the date of such Securities. At any time and from
time to time after the execution and delivery of this Indenture, the Company may
deliver Securities executed by the Company up to an aggregate principal amount
stated in the Securities, to the Trustee for authentication, together with a
Company Order for the authentication and delivery of such Securities; and an
authorized officer of the Trustee in accordance with such Company Order shall
authenticate and deliver such Securities as provided in this Indenture and not
otherwise. Each Security shall be dated the date of its authentication. No
Security shall be entitled to any benefit under this Indenture or be valid or
obligatory for any
<PAGE>
26
purpose unless there appears on such Security a certificate of authentication
substantially in the form provided for herein executed by an authorized officer
of the Trustee by manual signature, and such certificate upon any Security shall
be conclusive evidence, and the only evidence, that such Security has been duly
authenticated and delivered hereunder and is entitled to the benefits of this
Indenture.
SECTION 3.04. Temporary Securities. Pending the preparation of
definitive Securities, the Company may execute, and upon Company Order the
Trustee shall authenticate and deliver, temporary Securities which are printed,
lithographed, typewritten, mimeographed or otherwise produced, in any authorized
denomination, substantially of the tenor of the definitive Securities in lieu of
which they are issued and with such appropriate insertions, omissions,
substitutions, and other variations as the officers executing such Securities
may determine, as evidenced by their execution of such Securities with the
consent of the Trustee.
If temporary Securities are issued, the Company will cause
definitive Securities to be prepared without unreasonable delay. After the
preparation of definitive Securities, the temporary Securities shall be
exchangeable for definitive Securities upon surrender of the temporary
Securities at any office or agency of the Company designated pursuant to Section
10.02, without charge to the Holder. Upon surrender for cancellation of any one
or more temporary Securities, the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor a like principal amount of
definitive Securities of authorized denominations. Until so exchanged, the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.
SECTION 3.05. Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of the Trustee
a register (the register maintained in such office and in any other office or
agency designated pursuant to Section 10.02 being herein sometimes collectively
referred to as the "Security Register") in which, subject to such reasonable
regulations as it may prescribe, the Company shall provide for the registration
of Securities and of transfers of Securities. The Trustee is hereby appointed
"Security Registrar" for the purpose of registering Securities and transfers of
Securities as herein provided. Upon surrender for registration of transfer of
any Security at an office or agency of the Company designated pursuant to
Section 10.02 for such purpose, the Company shall execute, and an authorized
officer of the Trustee shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new Securities of any
authorized denominations and of a like aggregate principal amount. At the option
of the Holder, Securities may be exchanged for other Securities of any
authorized denominations and of a like aggregate principal amount, upon
surrender of the
<PAGE>
27
Securities to be exchanged at such office or agency. Whenever any Securities are
so surrendered for exchange, the Company shall execute, and an authorized
officer of the Trustee shall authenticate and deliver, the Securities which the
Holder making the exchange is entitled to receive. All Securities issued upon
any registration or transfer or exchange of Securities shall be the valid
obligations of the Company evidencing the same debt, and entitled to the same
benefits under this Indenture, as the Securities surrendered upon such
registration of transfer or exchange. Every Security presented or surrendered
for registration of transfer or for exchange shall (if so required by the
Company or the Trustee) be duly endorsed, or be accompanied by a written
instrument or transfer in form satisfactory to the Company and the Security
Registrar duly executed by the Holder thereof or his attorney duly authorized in
writing. No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Securities, other than
exchanges pursuant to Section 3.04, 3.06, 9.06, 11.08, 12.02 or 14.04 not
involving any transfer. The Company shall not be required (i) to issue, register
the transfer of or exchange any Security during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of Securities selected for redemption under Section 11.04 and ending
at the close of business on the day of such mailing, or (ii) to register the
transfer of or exchange any Security so selected for redemption in whole or in
part, except the unredeemed portion of any Security being redeemed in part.
SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities. If
any mutilated Security is surrendered to the Trustee, the Company shall execute
and the Trustee shall authenticate and deliver in exchange therefor a new
Security of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any Security
and (ii) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and upon its request the Trustee shall
authenticate and deliver, in lieu of any such destroyed, lost or stolen
Security, a new Security of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
<PAGE>
28
Upon the issuance of any new Security under this Section, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.07. Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest.
Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder on the
relevant Regular Record Date notwithstanding the fact that such Holder was a
Holder on such Regular Record Date, and such Defaulted Interest may be paid by
the Company at its election, as provided in Clause (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest
to the Persons in whose names the Securities (or their respective
Predecessor Securities) are registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest, which
shall be fixed in the following manner. The Company shall notify the
Trustee in writing of the amount of Defaulted Interest proposed to be paid
on each Security and the date of the proposed payment, and at the same
time the Company shall deposit with the Trustee an amount of money equal
to the aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for such
deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the Persons entitled to
such Defaulted Interest as in this Clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such
<PAGE>
29
Defaulted Interest which shall be not more than 15 days and not less than
10 days prior to the date of the proposed payment and not less than 10
days after the receipt by the Trustee of the notice of the proposed
payment. The Trustee shall promptly notify the Company of such Special
Record Date and, in the name and at the expense of the Company, shall
cause notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor to be mailed, first-class postage prepaid, to
each Holder at his address as it appears in the Security Register, not
less than 10 days prior to such Special Record Date. Notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor having been so mailed, such Defaulted Interest shall be paid to
the Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on such Special Record
Date and shall no longer be payable pursuant to the following Clause (b).
(b) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this Clause,
such manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
In the case of any Security which is converted after any Regular
Record Date and on or prior to the next succeeding Interest Payment Date,
subject to the obligation to deliver funds pursuant to Section 12.02, interest
whose Stated Maturity is on such Interest Payment Date shall be payable on such
Interest Payment Date notwithstanding such conversion, and such interest
(whether or not punctually paid or duly provided for) shall be paid to the
Person in whose name that Security (or one or more Predecessor Securities) is
registered at the close of business on such Regular Record Date. Except as
otherwise expressly provided in the immediately preceding sentence, in the case
of any Security which is converted, interest whose Stated Maturity is after the
date of conversion of such Security shall not be payable.
SECTION 3.08. Persons Deemed Owners. Prior to due presentment
of a Security for registration of transfer, the Company, the Trustee and any
agent of the Company or the Trustee may treat the Person in whose name such
Security is registered as the owner of such Security for the purpose of
receiving payment of
<PAGE>
30
principal of (and premium, if any) and (subject to Section 3.07) interest on
such Security and for all other purposes whatsoever, whether or not such
Security be overdue, and neither the Company, the Trustee nor any agent of the
Company or the Trustee shall be affected by notice to the contrary.
SECTION 3.09. Cancellation. All Securities surrendered for payment,
redemption, registration of transfer or exchange, conversion or repurchase
shall, if surrendered to any Person other than the Trustee, be delivered to the
Trustee and shall be promptly canceled by it. The Company may at any time
deliver to the Trustee for cancellation any Securities previously authenticated
and delivered hereunder which the Company may have acquired in any manner
whatsoever, and all securities so delivered shall be promptly canceled by the
Trustee. No Securities shall be authenticated in lieu of or in exchange for any
Securities canceled as provided in this Section, except as expressly permitted
by this Indenture. All canceled Securities held by the Trustee shall be disposed
of by the Trustee and a certificate of destruction shall be delivered to the
Company.
SECTION 3.10. Computation of Interest. Interest on the Securities
shall be computed on the basis of a 360-day year of twelve 30-day months.
ARTICLE IV
Satisfaction and Discharge
SECTION 4.01. Satisfaction and Discharge of Indenture. This
Indenture shall upon Company Request cease to be of further effect (except as to
any surviving rights of conversion, registration of transfer or exchange of
Securities and rights of the Trustee herein expressly provided for), and the
Trustee, on demand of and at the expense of the Company, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered
(other than (i) Securities which have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section 3.06 and
(ii) Securities for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company
and thereafter repaid to the Company or discharged from such trust,
as provided in Section 10.03) have been delivered to the Trustee for
cancellation; or
<PAGE>
31
(B) all such Securities not theretofore delivered to the
Trustee for cancellation have become due and payable and the Company
has deposited or caused to be deposited with the Trustee as trust
funds in trust for the purpose an amount sufficient to pay and
discharge the entire indebtedness on such Securities not theretofore
delivered to the Trustee for cancellation, for principal (and
premium, if any) and interest to the date of such deposit (in the
case of Securities which have become due and payable) or to the
Stated Maturity or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company;
(3) the Trustee has not received any notice pursuant to the terms of
Section 13.06; and
(4) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge
of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture,
the obligations of the Company in Sections 3.05, 3.06, 6.07, 7.02, 10.01, 10.02
and 10.03 and in Article XII shall survive until the Securities are no longer
outstanding and the obligations of the Company in Section 6.07 shall survive
termination of this Indenture.
SECTION 4.02. Application of Trust Money. Subject to the provisions
of the last paragraph of Section 10.03, all money deposited with the Trustee
pursuant to Section 4.01 shall be held in trust and applied by it, in accordance
with the provisions of the Securities and this Indenture, to the payment, either
directly or through any Paying Agent (including the Company acting as its own
Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of
the principal (and premium, if any) and interest for whose payment such money
has been deposited with the Trustee. All moneys deposited with the Trustee
pursuant to Section 4.01 (and held by it or any Paying Agent) for the payment of
Securities subsequently converted shall be returned to the Company upon Company
Request.
<PAGE>
32
ARTICLE V
Remedies
SECTION 5.01. Events of Default. "Event of Default", wherever used
herein, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be occasioned by the provisions of Article
XIII or be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(1) default in the payment of any interest upon any Security when it
becomes due and payable, and continuance of such default for a period of
30 days, whether or not such payment is prohibited by Article XIIII; or
(2) default in the payment of the principal of (or premium, if any,
on) any Security at its Maturity, whether or not such payment is
prohibited by Article XIII; or
(3) default in the payment of the Redemption Price in respect of any
Security on the Redemption Date therefor in accordance with the provisions
of Article XI, whether or not such payment is prohibited by Article XIII;
or
(4) default in the payment of the Repurchase Price in respect of any
Security on the Repurchase Date therefore in accordance with the provision
of Article XIV, whether or not such payment is prohibited by Article XIII;
or
(5) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in
this Section specifically dealt with), and continuance of such default or
breach for a period of 60 days after there has been given, by registered
or certified mail, to the Company by the Trustee or to the Company and the
Trustee by the Holders of at least 25% in principal amount of the
Outstanding Securities in written notice specifying such default or breach
and requiring it to be remedied and stating that such notice is a "Notice
of Default" hereunder; or
(6) default, beyond any applicable grace period, if any, in the
payment of amounts due under any mortgage, indenture or instrument under
which there is outstanding, or by which there is secured or evidenced, any
indebtedness of the Company in excess of an aggregate of $25 million at
its stated maturity either for borrowed money or representing any Senior
Indebtedness or default under
<PAGE>
33
any such indebtedness that results in the acceleration of such
indebtedness prior to its express maturity; provided, however, that if
such default under such mortgage, indenture or instrument shall be
remedied or cured by the Company or waived by the holders of such
indebtedness prior to an acceleration under this Indenture, then the Event
of Default hereunder by reason thereof shall be deemed likewise to have
been thereupon remedied, cured or waived without further action upon the
part of either the Trustee or any of the Holders of the Securities; or
(7) the entry by a court having jurisdiction in the premises of (A)
a decree or order for relief in respect of the Company in an involuntary
case or proceeding under any applicable Federal or state bankruptcy,
insolvency, reorganization or other similar law or (B) a decree or order
adjudging the Company a bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company under any applicable Federal
or state law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or of any
substantial part of its property, or ordering the winding up or
liquidation of its affairs, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in effect
for a period of 60 consecutive days; or
(8) the commencement by the Company of a voluntary case or
proceeding under any applicable Federal or state bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to
be adjudicated as bankrupt or insolvent, or the consent by the Company to
the entry of a decree or order for relief in respect of the Company in an
involuntary case or proceeding under any applicable Federal or state
bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under any applicable Federal or state law, or the
consent by it to the filing of such petition or to the appointment of or
taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of the Company or of any substantial part
of its property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its
debts generally as they become due, or the taking of corporate action by
the Company in furtherance of any such action.
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in clause (7)
or (8) of
<PAGE>
34
Section 5.01) occurs and is continuing, then and in every such case the Trustee
or the Holders of not less than 25% in principal amount of the Outstanding
Securities may declare the principal of all the Securities to be due and payable
by a notice in writing to the Company (and to the Trustee if given by a Holder),
and such principal shall become immediately due and payable. If an Event of
Default specified in clause (7) or (8) of Section 5.01 occurs, all unpaid
principal and accrued interest on the Securities then outstanding shall become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any Holder.
At any time after a declaration of acceleration has been made as a
result of any Event of Default described in Section 5.01, and before a judgment
or decree for payment of the money due has been obtained by the Trustee as
hereinafter in this Article provided, the Holders of a majority in principal
amount of the Outstanding Securities, by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if:
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue interest on all Securities,
(B) the principal of (and premium, if any, on) any Securities
which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the
Securities,
(C) to the extent the payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Securities,
and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(2) all Events of Default, other than the nonpayment of the
principal of Securities which have become due solely by such declaration
of acceleration, have been cured or waived as provided in Section 5.13.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement
by Trustee. The Company covenants that if
<PAGE>
35
(1) default is made in the payment of any interest on any Security
when such interest becomes due and payable and such default continues for
a period of 30 days, or
(2) default is made in the payment of the principal of (or premium,
if any, on) any Security at the Maturity thereof, including payment of the
Redemption Price on any Redemption Date, or
(3) default is made in the payment of the Change in Control Purchase
Price in respect of any Security on the Change in Control Purchase Date
thereof in accordance with the provisions of Article XIV.
the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the whole amount then due and payable on such
Securities for principal (and premium, if any) and interest, and, to the extent
that payment of such interest shall be legally enforceable, interest on any
overdue principal (and premium, if any) and on any overdue interest, at the rate
borne by the Securities, and, in addition thereto, such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon the Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon the Securities, wherever
situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem
appropriate to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 5.04. Trustee May File Proofs of Claim. In case of the
pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceeding relative to the Company or any other obligor upon the Securities or
the property of the Company or of such other obligor or their creditors, the
Trustee (irrespective of whether the principal of the Securities shall then be
due and payable as therein expressed or by
<PAGE>
36
declaration or otherwise and irrespective of whether the Trustee shall have made
any demand on the Company for the payment of overdue principal or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise,
(i) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest owing and unpaid in respect of the
Securities and to file such other papers or documents as may be necessary
or advisable and to take any and all actions authorized under the Trust
Indenture Act or any other applicable law as may be appropriate in order
to have the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel) and of the Holders allowed in such judicial
proceeding; and
(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder to make such payment to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders, to
pay to the Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and any other
amounts due the Trustee under Section 6.07.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
SECTION 5.05. Trustee May Enforce Claims Without Possession of
Securities. All rights of action and claims under this Indenture or the
Securities may be prosecuted and enforced by the Trustee without the possession
of any of the Securities or the production thereof in any proceeding relating
thereto, and any such proceeding instituted by the Trustee shall be brought in
its own name as trustee of an express trust, and any recovery of judgment shall,
after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
SECTION 5.06. Application of Money Collected. Subject to Article
XIII, any money collected by the Trustee pursuant to this Article shall be
<PAGE>
37
applied in the following order, at the date or dates fixed by the Trustee and,
in the case of the distribution of such money on account of principal (or
premium, if any) or interest, upon presentation of the Securities and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
6.07; and
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Securities in respect of
which or for the benefit of which such money has been collected, ratably,
without preference or priority of any kind, according to the amounts due and
payable on such Securities for principal (and premium, if any) and interest,
respectively; and
THIRD: To the payment of the remainder, if any, to whomsoever may be
lawfully entitled thereto, or as a court of competent jurisdiction may direct.
SECTION 5.07. Limitation on Suits. No Holder of any Security shall
have any right to institute any proceeding, judicial or otherwise, with respect
to this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee
of a continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name
as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities;
<PAGE>
38
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 5.08. Unconditional Right of Holders to Receive Principal,
Premium and Interest and to Convert. Notwithstanding any other provision in this
Indenture, the Holder of any Security shall have the right, which is absolute
and unconditional, to receive payment of the principal of (and premium, if any)
and (subject to Section 3.07) interest on such Security on the respective Stated
Maturities expressed in such Security (or, in the case of redemption, on the
Redemption Date) and to convert such Security in accordance with Article XII and
to institute suit for the enforcement of any such payment and right to convert,
and such rights shall not be impaired without the consent of such Holder.
SECTION 5.09. Restoration of Rights and Remedies. If the Trustee or
any Holder has instituted any proceeding to enforce any right or remedy under
this Indenture and such proceeding has been discontinued or abandoned for any
reason, or has been determined adversely to the Trustee or to such Holder, then
and in every such case, subject to any determination in such proceeding, the
Company, the Trustee and the Holders shall be restored severally and
respectively to their former positions hereunder and thereafter all rights and
remedies of the Trustee and the Holders shall continue as though no such
proceeding had been instituted.
SECTION 5.10. Rights and Remedies Cumulative. Except as otherwise
provided with respect to the replacement or payment of mutilated, destroyed,
lost or stolen Securities in the last paragraph of Section 3.06, no right or
remedy herein conferred upon or reserved to the Trustee or to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 5.11. Delay or Omission Not Waiver. No delay or omission of
the Trustee or of any Holder of any Security to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article or by law to the Trustee or to the
Holders may
<PAGE>
39
be exercised from time to time, and as often may be deemed expedient, by the
Trustee or by the Holders, as the case may be.
SECTION 5.12. Control by Holders. The Holders of a majority in
principal amount of the Outstanding Securities shall have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee;
provided that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture, and
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION 5.13. Waiver of Past Defaults. The Holders of not less
than a majority in principal amount of the Outstanding Securities may on behalf
of the Holders of all the Securities waive any past default hereunder and its
consequences, except a default
(1) in the payment of the principal of (or premium, if any) or
interest on any Security,
(2) in respect of a covenant or provision hereof which under Article
X cannot be modified or amended without the consent of the Holder of each
Outstanding Security affected, or
(3) in respect of the conversion rights under Article XII.
Upon any such waiver, such default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 5.14. Undertaking for Costs. All parties to this Indenture
agree, and each Holder of any Security by his acceptance thereof shall be deemed
to have agreed, that any court may in its discretion require, in any suit for
the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken, suffered or omitted by it as Trustee,
the filing by any party litigant in such suit of an undertaking to pay the costs
of such suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; but the provisions of this
<PAGE>
40
Section shall not apply to any suit instituted by the Company, to any suit
instituted by the Trustee, to any suit instituted by any Holder, or group of
Holders, holding in the aggregate more than 10% in principal amount of the
Outstanding Securities, or to any suit instituted by any Holder for the
enforcement of the payment of the principal of (or premium, if any) or interest
on any Security on or after the respective Stated Maturities expressed in such
Security (or, in the case of redemption, on or after the Redemption Date) or for
the enforcement of the right to convert any Security in accordance with Article
XII.
SECTION 5.15. Waiver of Stay or Extension Laws. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law wherever enacted, now or at
any time hereinafter in force, which may affect the covenants or the performance
of this Indenture; and the Company (to the extent that it may lawfully do so)
hereby expressly waives all benefit or advantage of any such law and covenants
that it will not hinder, delay or impede the execution of any power herein
granted to the Trustee, but will suffer and permit the execution of every such
power as though no such law had been enacted.
ARTICLE VI
The Trustee
SECTION 6.01. Certain Duties and Responsibilities. (a) Except
during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture, and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions furnished
to the Trustee and conforming to the requirements of this Indenture; but
in the case of any such certificates or opinions which by any provision
hereof are specifically required to be furnished to the Trustee, the
Trustee shall be under a duty to examine the same to determine whether or
not they conform to the requirements of this Indenture.
(b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and
<PAGE>
41
use the same degree of care and skill in their exercise as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own wilful misconduct, except that
(1) this Subsection shall not be construed to limit the effect of
Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment made
in good faith by a Responsible Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority in principal amount of the
Outstanding Securities relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture; and
(4) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder, or in the exercise of any
of its rights or powers, if it shall have reasonable grounds for believing
that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
(d) Whether or not therein expressly provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section.
SECTION 6.02. Notice of Defaults. Within 90 days after the
occurrence of any default hereunder, the Trustee shall transmit by mail to all
Holders, as their names and addresses appear in the Security Register, notice of
such default hereunder known to the Trustee, unless such default shall have been
cured or waived; provided, however, that, except in the case of a default in the
payment of the principal of (or premium, if any) or interest on any Security,
the Trustee shall be protected in withholding such notice if and so long as the
board of directors, the executive committee or a trust committee of directors or
Responsible Officers of the Trustee in good faith determine that the withholding
of such notice is in the interest of the Holders. The Trustee shall not be
deemed to have knowledge of any default
<PAGE>
42
except (i) a payment default under Section 5.01(1), (2), (3) or (4) so long as
the Trustee is the Paying Agent or (ii) any default of which the Trustee shall
have received written notification or a Responsible Officer charged with the
administration of this Indenture shall have obtained actual knowledge, and such
notification shall not be deemed to include receipt of information obtained in
any report or other documents furnished under Section 7.04 of this Indenture,
which reports and documents the Trustee shall have no duty to examine. For the
purpose of this Section, the term "default" means any event which is, or after
notice or lapse of time or both would become, an Event of Default.
SECTION 6.03. Certain Rights of Trustee. Subject to the provisions
of Section 6.01:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented
by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall
be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of
bad faith on its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel and the written advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it
in compliance with such request or direction;
<PAGE>
43
(f) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit[,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the relevant books, records
and premises of the Company, personally or by agent or attorney]; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder.
SECTION 6.04. Not Responsible for Recitals or Issuance of
Securities. The recitals contained in the Securities, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company,
and the Trustee assumes no responsibility for their correctness. The Trustee
makes no representation as to the validity or sufficiency of this Indenture or
of the Securities. The Trustee shall not be accountable for the use or
application by the Company of Securities or the proceeds thereof.
SECTION 6.05. May Hold Securities. The Trustee, any Authenticating
Agent, any Paying Agent, any Security Registrar or any other agent of the
Company, in its individual or any other capacity, may become the owner or
pledgee of Securities and, subject to Sections 6.08 and 6.13, may otherwise deal
with the Company with the same rights it would have if it were not the Trustee,
Authenticating Agent, Paying Agent, Security Registrar or such other agent.
SECTION 6.06. Money Held in Trust. Money held by the Trustee in
trust hereunder need not be segregated from other funds except to the extent
required by law. The Trustee shall be under no liability for interest or any
money received by it hereunder except as otherwise agreed with the Company.
<PAGE>
44
SECTION 6.07. Compensation and Reimbursement. The Company agrees
(1) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advances as may be attributable to any action or failure
to act by the Trustee that breaches the applicable standard of care
relating thereto; and
(3) to indemnify the Trustee (including its officers, directors,
employees and agents) for, and to hold it harmless against, any loss,
liability or expense incurred, unless incurred in connection with any
action or failure to act by the Trustee that breaches the applicable
standard of care relating thereto, arising out of or in connection with
the acceptance or administration of the trust hereunder, including the
costs and expenses of defending itself against any claim or liability in
connection with the exercise or performance of any of its powers or duties
hereunder.
When the Trustee incurs expenses or renders services in connection
with an Event of Default specified in clauses (7) and (8) of Section 5.01, the
expenses (including the reasonable charges and expenses of its counsel) and the
compensation for the services are intended to constitute expenses of
administration under any applicable Federal or state bankruptcy, insolvency or
other similar law.
The provisions of this Section shall survive the termination of this
Indenture.
SECTION 6.08. Disqualification; Conflicting Interest. The Trustee
shall be subject to the provisions of Section 3.10(b) of the Trust Indenture
Act. Nothing herein shall prevent the Trustee from filing with the Commission
the application referred to in the penultimate paragraph of Section 3.10(b) of
the Trust Indenture Act.
<PAGE>
45
SECTION 6.09. Corporate Trustee Required; Eligibility. There shall
at all times be a Trustee hereunder who satisfies the requirements of paragraphs
(1), (2) and (5) of Section 3.10(a) of the Trust Indenture Act and which shall
be a corporation organized and doing business under the laws of the United
States of America, any state thereof or the District of Columbia, authorized
under such laws to exercise corporate trust powers, having a combined capital
and surplus of at least $100,000,000 and subject to supervision or examination
by Federal or state authority. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of said
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of condition
so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article.
SECTION 6.10. Resignation and Removal; Appointment of Successor. (a)
No resignation or removal of the Trustee and no appointment of a successor
Trustee pursuant to this Article shall become effective until the acceptance of
appointment by the successor Trustee in accordance with the applicable
requirements of Section 6.11.
(b) The Trustee may resign at any time by giving written notice to
the Company. If the instrument of acceptance by a successor Trustee required by
Section 6.11 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of
a majority in principal amount of the Outstanding Securities, delivered to the
Trustee and to the Company.
(d) If at any time:
(1) The Trustee shall fail to comply with Section 6.08 ,
(2) the Trustee shall cease to be eligible under Section 6.09, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
<PAGE>
46
then in any such case, (i) the Company may remove the Trustee or (ii) subject to
Section 5.14, any Holder who has been a bona fide Holder of a Security for at
least six months may, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company shall promptly appoint a successor Trustee. If, within one year after
such resignation, removal or incapability, or the occurrence of such vacancy, a
successor Trustee shall be appointed by Act of the Holders of a majority in
principal amount of the Outstanding Securities delivered to the Company and the
retiring Trustee, the successor Trustee so appointed shall, forthwith upon its
acceptance of such appointment, become the successor Trustee and supersede the
successor Trustee appointed by the Company. If no successor Trustee shall have
been so appointed by the Company or the Holders and accepted appointment in the
manner required by Section 6.11 within 60 days after the retiring Trustee
resigns or is removed, the retiring Trustee, the Company or any Holder who has
been a bona fide Holder of a Security for at least six months may, on behalf of
himself and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee by mailing
written notice of such event by first-class mail, postage prepaid, to all
Holders as their names and addresses appear in the Security Register. Each
notice shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
SECTION 6.11. Acceptance of Appointment by Successor. Every
successor Trustee appointed hereunder shall execute, acknowledge and deliver to
the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective, the retiring Trustee shall be released from all
obligations for future actions under this Indenture and such successor Trustee,
without any further act, deed or conveyance, shall become vested, with all the
rights, powers, trusts and duties of the retiring Trustee under this Indenture;
but, on request of the Company or the successor Trustee, such retiring Trustee
shall, upon payment of its charges, execute and deliver an instrument
transferring to such successor Trustee all the rights, powers and trusts of the
retiring Trustee and shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder. Upon
request of any such successor Trustee, the Company shall execute any and all
<PAGE>
47
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 6.12. Merger, Conversion, Consolidation or Succession to
Business. Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee shall be the successor of the Trustee hereunder; provided such
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Securities so authenticated with the same effect
as if such successor Trustee had itself authenticated such Securities.
SECTION 6.13. Preferential Collection of Claims Against Company. The
Trustee is subject to Section 3.11(a) of the Trust Indenture Act, excluding any
creditor relationship listed in Section 3.11(b) of the Trust Indenture Act. A
trustee who has resigned or been removed shall be subject to Section 3.11(a) of
the Trust Indenture Act to the extent indicated therein.
SECTION 6.14. Appointment of Authenticating Agent. The Trustee may
appoint an Authenticating Agent or Agents which shall be authorized to act on
behalf of the Trustee to authenticate Securities issued upon original issue and
upon exchange, registration of transfer, partial conversion or partial
redemption thereof or pursuant to Section 3.06, and Securities so authenticated
shall be entitled to the benefits of this Indenture and shall be valid and
obligatory for all purposes as if authenticated by the Trustee hereunder.
Whatever reference is made in this Indenture to the authentication and delivery
of Securities by the Trustee or the Trustee's certificate of authentication,
such reference shall be deemed to include authentication and delivery on behalf
of the Trustee by an Authenticating Agent and a certificate of authentication
executed on behalf of the Trustee by an Authenticating Agent. Each
Authenticating Agent shall be acceptable to the Company and shall at all times
be a corporation organized and doing business under the laws of the United
States of America, any state thereof or the District of Columbia, authorized
under such laws to act as Authenticating Agent, having a combined capital and
surplus of not less than $100,000,000 and subject to supervision or examination
by Federal or state authority.
<PAGE>
48
If such Authenticating Agent publishes reports of condition at least annually
pursuant to law or to the requirements of said supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such Authenticating Agent shall be deemed to be its combined capital
and surplus as set forth in its most recent report of condition so published. If
at any time an Authenticating Agent shall resign immediately in the manner and
with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent; provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent, which shall be acceptable to the Company, and shall mail written notice
of such appointment by first-class mail, postage prepaid, to all Holders as
their names and addresses appear in the Security Register. Any successor
Authenticating Agent upon acceptance of its appointment hereunder shall become
vested with all rights, powers and duties of its predecessor hereunder, with
like effect as if originally named as an Authenticating Agent. No successor
Authenticating Agent shall be appointed unless eligible under the provisions of
this Section.
The Trustee agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section, and the
Trustee shall be entitled to be reimbursed for such payments, subject to the
provisions of Section 6.07.
<PAGE>
49
If an appointment is made pursuant to this Section, the Securities
may have endorsed thereon in addition to the Trustee's certificate of
authentication, an alternate certificate of authentication in the following
form:
This is one of the Securities described in the within mentioned
Indenture.
, as Trustee
by______________________________________
As Authenticating Agent
by______________________________________
As Authorized Signatory
ARTICLE VII
Holders Lists and Reports by Trustee and Company
SECTION 7.01. Company to Furnish Trustee Names and Addresses of
Holders. If the Trustee is not the Security Registrar, the Company will furnish
or cause to be furnished to the Trustee
(a) semi-annually, not more than 15 days after each Regular Record
Date, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders as of such Regular Record Date, and
(b) at such other times as the Trustee may request in writing,
within 10 Business Days after the receipt by the Company of any such
request, a list of similar form and content as of a date not more than 15
days prior to the time such list is furnished.
SECTION 7.02. Preservation of Information; Communications to
Holders. (a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 7.01 or the names and
addresses of Holders received by the Trustee in its capacity as Security
Registrar. The Trustee
<PAGE>
50
may destroy any list furnished to it as provided in Section 7.01 upon receipt of
a new list so furnished.
(b) Holders may communicate pursuant to Section 3.12(b) of the Trust
Indenture Act with other Holders with respect to their rights under this
Indenture or the Securities. The Company, the Security Trustee, the Registrar
and any other person shall have the protection of Section 3.12(c) of the Trust
Indenture Act.
SECTION 7.03. Reports by Trustee. (a) If such report is required by
Section 3.13 of the Trust Indenture Act, within 60 days after each May 15,
beginning with May 15 following the date of this Indenture, and so long as the
Securities shall remain outstanding the Trustee shall mail to each Holder a
brief report dated as of such May 15 that complies with Section 3.13(a) of the
Trust Indenture Act. The Trustee also shall comply with Section 3.13(b)(2), (c)
and (d) of the Trust Indenture Act.
(b) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each securities exchange
upon which the Securities are listed, with the Commission and with the Company.
The Company will notify the Trustee when the Securities are listed on any
securities exchange.
SECTION 7.04. Reports by Company. The Company shall:
(1) file with the Trustee, within 15 days after the Company is
required to file the same with the Commission, copies of the annual
reports and of the information, documents and other reports (or copies of
such portions of any of the foregoing as the Commission may from time to
time by rules and regulations prescribe) which the Company may be required
to file with the Commission pursuant to Section 13 or Section 15(d) of the
Exchange Act; or, if the Company is not required to file information,
documents or reports pursuant to either of said Sections, then it shall
file with the Trustee and the Commission, in accordance with rules and
regulations prescribed from time to time by the Commission, such of the
supplementary and periodic information, documents, and reports which may
be required pursuant to Section 13 of the Exchange Act in respect of a
security listed and registered on a national securities exchange as may be
prescribed from time to time in such rules and regulations including, in
the case of annual reports, if required by such rules and regulations,
certificates or opinions of independent public accountants, conforming to
the requirements of Section 1.02, as to compliance with conditions or
covenants, compliance with which is subject to verification by
accountants;
<PAGE>
51
(2) file with the Trustee and the Commission, in accordance with
rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance
by the Company with the conditions and covenants of this Indenture as may
be required from time to time by such rules and regulations; and
(3) transmit by mail to all Holders, in the manner and to the extent
provided in Section 7.03(a), such summaries of any information, documents
and reports required to be filed by the Company pursuant to paragraphs (1)
and (2) of this Section as may be required by rules and regulations
prescribed from time to time by the Commission.
ARTICLE VIII
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 8.01. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merger into any other Person or
convey, transfer or lease all or substantially all of its assets to any Person,
and the Company shall not permit any Person to consolidate with or merge into
the Company unless:
(1) in case the Company shall consolidate with or merge into another
Person or convey, transfer or lease all or substantially all of its assets
to any Person, the Person formed by such consolidation or into which the
Company is merged or the Person which acquires by conveyance or transfer,
or which leases, all or substantially all of the assets of the Company
shall be a corporation, partnership or trust, organized or validly
existing under the laws of the United States of America, any state thereof
or the District of Columbia and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee in form
satisfactory to the Trustee, the due and punctual payment of the principal
of (and premium, if any) and interest on all the Securities and the
performance of every covenant of this Indenture on the part of the Company
to be performed or observed and shall have provided for conversion rights
in accordance with Section 12.11;
(2) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would
become an Event of Default, shall have happened and be continuing;
<PAGE>
52
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture, comply with this Article and that all
conditions precedent herein provided for relating to such transaction have
been complied with.
SECTION 8.02. Successor Substituted for Company. Upon any
consolidation of the Company with, or merger of the Company into, any other
Person or any conveyance, transfer or lease of all or substantially all of the
assets of the Company in accordance with Section 8.01, the successor Person
formed by such consolidation or into which the Company is merged or to which
such conveyance, transfer or lease is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this Indenture
with the same effect as if such successor Person had been named as the Company
herein, and thereafter, except in the case of a lease, the predecessor Person
shall be relieved of all obligations and covenants under this Indenture and the
Securities.
ARTICLE IX
Supplemental Indentures
SECTION 9.01. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more indentures supplemental hereto, in form satisfactory to the Trustee,
for any of the following purposes:
(1) to evidence the succession of another Person to the Company and
the assumption by any such successor of the covenants of the Company
herein and in the Securities in accordance with Article VIII; or
(2) to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power herein conferred upon the
Company; or
(3) to add any additional Events of Default; or
(4) to secure the Securities; or
<PAGE>
53
(5) to make provision with respect to the conversion rights of
Holders pursuant to the requirements of Section 12.11; or
(6) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising
under this Indenture which shall not be inconsistent with the provision of
this Indenture, provided such action pursuant to this Clause (6) shall not
adversely affect the interests of the Holders in any material respect.
SECTION 9.02. Supplemental Indentures With Consent of Holders. With
the consent of the Holders of not less than a majority in principal amount of
the Outstanding Securities, by Act of said Holders delivered to the Company and
the Trustee, the Company, when authorized by a Board Resolution, and the Trustee
may enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders under this Indenture; provided, however, that no such supplemental
indenture shall, without the consent of the Holder of each Outstanding Security
affected thereby:
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Security or, once a Repurchase Notice has
been sent following a Change of Control, the date on which the Securities
are subject to repurchase pursuant to Article XIV, or reduce the principal
amount thereof or the rate of interest thereon or any premium payable upon
the redemption thereof or the price payable upon repurchase pursuant to
Article XIV, or change the place of payment where, or the coin or currency
in which, any Security or any premium or purchase price or the interest
thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity thereof
(or, in the case of redemption, on or after the Redemption Date or, in the
case of a repurchase pursuant to Article XIV, on or after the Repurchase
Date), or adversely affect the right to convert any Security as provided
in Article XII (except as permitted by Section 9.01(5)) or modify the
provisions of this Indenture with respect to the subordination of the
Securities in a manner adverse to the Holders, or
(2) reduce the percentage in principal amount of the Outstanding
Securities, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for
any waiver (of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences) provided for in this
Indenture, or
<PAGE>
54
(3) modify any of the provisions of this Section or Section 5.13 or
Section 10.09, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived
without the consent of the Holder of each Outstanding Security affected
thereby.
It shall not be necessary for any Act of Holders under this Section
to approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act shall approve the substance thereof.
SECTION 9.03. Execution of Supplemental Indentures. In executing, or
accepting the additional trusts created by, any supplemental indenture permitted
by this Article or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and (subject to Section
6.01) shall be fully protected in relying upon, an Opinion of Counsel of the
Company stating that the execution of such supplemental indenture is authorized
or permitted by this Indenture. The Trustee may, but shall not be obligated to,
enter into any such supplemental indenture which affects the Trustee's own
rights, duties or immunities under this Indenture or otherwise.
SECTION 9.04. Effect of Supplemental Indentures. Upon the execution
of any supplemental indenture under this Article, this Indenture shall be
modified in accordance therewith, and such supplemental indenture shall form a
part of this Indenture for all purposes; and, subject to Section 9.02, every
Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
SECTION 9.05. Conformity With Trust Indenture Act. Every
supplemental indenture executed pursuant to this Article shall conform to the
requirements of the Trust Indenture Act as then in effect.
SECTION 9.06. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any supplemental
indenture pursuant to this Article may, and shall if required by the Trustee,
bear a notation in form approved by the Trustee as to any matter provided for in
such supplemental indenture. If the Company or the Trustee shall so determine,
new Securities so modified as to conform, in the opinion of the Company, to any
such supplemental indenture may be prepared and executed by the Company and
authenticated and delivered by the Trustee in exchange for Outstanding
Securities.
SECTION 9.07. No Impairment of Subordinates. No supplemental
indenture which modifies the provisions of Article XIV in any manner which
alters
<PAGE>
55
the subordination of the Securities shall be effective against any holder of
outstanding Senior Indebtedness without the consent of such holder.
ARTICLE X
Covenants
SECTION 10.01. Payment of Principal, Premium and Interest. The
Company shall duly and punctually pay or cause to be paid the principal of (and
premium, if any) and interest on the Securities and the Redemption Price and the
Repurchase Price, if any, each in accordance with the terms of the Securities
and this Indenture.
To the extent permitted by applicable law, the Company shall pay
interest on overdue amounts at the rate set forth in paragraph 1 of the
Securities, and it shall pay interest on overdue interest at the same rate
compounded semi-annually (to the extent that the payment of such interest shall
be legally enforceable), which interest on overdue interest shall accrue from
the date such amounts became overdue.
SECTION 10.02. Maintenance of Office or Agency. The Company shall
maintain in the Borough of Manhattan, The City of New York an office or agency
where Securities may be presented or surrendered for payment, where Securities
may be surrendered for registration of transfer or exchange, where Securities
may be surrendered for conversion or purchase pursuant to Article XIV and where
notices and demands to or upon the Company in respect of the Securities and this
Indenture may be served. The Company shall give prompt written notice to the
Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company fails to maintain any such required office or
agency or fails to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the Securities
may be presented or surrendered for any or all such purposes and may from time
to time rescind such designation; provided, however, that no such designation or
rescission shall in any manner relieve the Company of its obligations to
maintain an office or agency in the Borough of Manhattan, The City of New York
for such purposes. The Company shall give prompt written notice to the Trustee
of any such designation or rescission and of any change in the location of any
such other office or agency.
<PAGE>
56
SECTION 10.03. Money for Security Payments to be Held in Trust. If
the Company at any time acts as its own Paying Agent, it shall, on or before
each due date of the principal of (and premium, if any) or interest on any of
the Securities, segregate and hold in trust for the benefit of the Persons
entitled thereto a sum sufficient to pay the principal (and premium, if any) or
interest so becoming due until such sums are paid to such Persons or otherwise
disposed of as herein provided and shall promptly notify the Trustee of its
action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it shall,
prior to each due date of the principal of (and premium, if any) or interest on
any Securities, deposit with a Paying Agent a sum sufficient to pay the
principal (and premium, if any) or interest so becoming due, such sum to be held
in trust for the benefit of the Persons entitled to such principal, premium or
interest, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of its action or failure so to act.
The Company shall cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such paying Agent will:
(1) hold all sums held by it for the payment of the principal of
(and premium, if any) or interest on Securities in trust for the benefit
of the Persons entitled thereto until such sums shall be paid to such
Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any
other obligor upon the Securities) in the making of any payment of
principal (and premium, if any) or interest; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which sums were held by the Company or such
Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.
<PAGE>
57
Any money deposited with the Trustee or any Paying Agent, or then
held by the Company in trust for the payment of the principal of (and premium,
if any) or interest on any Security and remaining unclaimed for two years after
such principal (and premium, if any) or interest has become due and payable
shall be paid to the Company on Company Request or (if then held by the Company)
shall be discharged from such trust; and the Holder of such Security shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in New York, New York notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
SECTION 10.04. Statements of Officers of Company as to Default. (a)
The Company will deliver to the Trustee, within 120 days after the end of each
fiscal year of the Company ending after the date hereof (but no later than the
time of filing of the annual report of the Company with the Trustee pursuant to
Section 7.04), an Officers' Certificate, stating whether or not to the best
knowledge of the signers thereof the Company is in compliance with all
conditions and covenants hereunder, without regard to any period of grace or
requirements of notice provided hereunder, and if the Company shall be in
default, specifying all such defaults and the nature and status thereof of which
they may have knowledge. The Officers' Certificate need not comply with Section
1.02 hereof.
(b) The Company shall file with the Trustee written notice of the
occurrence of any default or Event of Default within five Business Days of its
becoming aware of any such default or Event of Default.
SECTION 10.05. Existence. Subject to Article VIII, the Company will
do or cause to be done all things necessary to preserve and keep in full force
and effect it existence, rights (charter and statutory) and franchise; provided,
however, that the Company shall not be required to preserve any such right or
franchise if its Board of Directors shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the Company.
SECTION 10.06. Maintenance of Properties. The Company will
cause all properties material to the conduct of its business or the business of
any Subsidiary to be maintained and kept in good condition, repair and working
order and
<PAGE>
58
supplied with all necessary equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times
while any Securities are Outstanding; provided, however, that nothing in this
Section shall prevent the Company from discontinuing the operation or
maintenance of any of such properties if such discontinuance is, in the judgment
of the Company, desirable in the conduct of its business or the business of any
Subsidiary.
SECTION 10.07. Payment of Taxes and Other Claims. The Company shall
pay or discharge or cause to be paid or discharged, before the same shall become
delinquent, (1) all material taxes, assessments and governmental charges
(including withholding taxes and any penalties, interest and additions to taxes)
levied or imposed upon the Company or any Subsidiary or upon the income, profits
or property of the Company or any Subsidiary, and (2) all material lawful claims
for labor, materials and supplies which, if unpaid, might by law become a lien
upon the property of the Company or any Subsidiary, in each case material to the
Company and its Subsidiaries taken as a whole; provided, however, that the
Company shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings and for
which disputed amounts adequate reserves have been made.
SECTION 10.08. Further Instruments and Acts. Upon reasonable request
of the Trustee, the Company will execute and deliver such further instruments
and perform such further acts as may be reasonably necessary or proper to carry
out more effectively the purposes of this Indenture.
SECTION 10.09. Waiver of Certain Covenants. The Company may omit in
any particular instance to comply with any term, provision or condition set
forth in this Article X (other than Sections 10.01 through 10.05, inclusive), if
before the time for such compliance the Holders of at least a majority (or such
greater amount as may be specified in any such term, provision or condition) in
principal amount of the Outstanding Securities shall, by Act of such Holders,
either waive such compliance in such instance or generally waive compliance with
such term, provision or condition, but no such waiver shall extend to or affect
such term, provision or condition except to the extent so expressly waived, and,
until such waiver shall become effective, the obligations of the Company and the
duties of the Trustee in respect of any such term, provision or condition shall
remain in full force and effect.
<PAGE>
59
ARTICLE XI
Redemption of Securities
SECTION 11.01. Right of Redemption. The Securities may be redeemed
at the election of the Company, as a whole or from time to time in part, at any
time on or after _______, 1999, and prior to maturity at the Redemption Prices
specified in the form of Security hereinbefore set forth for redemptions,
together with accrued interest to the Redemption Date (subject to the provisions
of Section 11.07); provided, however, if an Event of Default shall have occurred
and be continuing, the Securities may be redeemed in part only if redeemed pro
rata as to all Holders thereof.
SECTION 11.02. Applicability of Article. Redemption of Securities at
the election of the Company, as permitted or required by any provision of this
Indenture, shall be made in accordance with such provision and this Article.
SECTION 11.03. Election to Redeem; Notice to Trustee. The election
of the Company to redeem any Securities pursuant to Section 11.01 shall be
evidenced by a Board Resolution. In case of any redemption at the election of
the Company, the Company shall, at least 45 days prior to the Redemption Date
fixed by the Company (unless a shorter notice shall be satisfactory to the
Trustee), notify the Trustee of such Redemption Date and of the principal amount
of Securities to be redeemed.
SECTION 11.04. Selection by Trustee of Securities to be Redeemed. If
less than all the Securities are to be redeemed, the particular Securities to be
redeemed shall be selected not more than 40 days prior to the Redemption Date by
the Trustee, from the Outstanding Securities not previously called for
redemption, pro rata or by lot or by a method that complies with the
requirements of any exchange on which the Securities are listed that the Trustee
shall deem fair and appropriate and which may provide for the selection for
redemption of portions (equal to $1,000 or any integral multiple thereof) of the
principal amount of Securities of a denomination larger than $1,000.
If any Securities selected for partial redemption are converted in
part before termination of the conversion right with respect to the portion of
the Security so selected, the converted portion of such Security shall be deemed
(so far as may be) to be the portion selected for redemption. Securities which
have been converted during a selection of Securities to be redeemed shall be
treated by the Trustee as Outstanding for the purpose of such selection
notwithstanding that any such Security is converted in whole or in part before
the mailing of the notice of redemption.
<PAGE>
60
The Trustee shall promptly notify the Company and each Security
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.
For purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.
SECTION 11.05. Notice of Redemption. Notice of redemption shall be
given by first-class mail, postage prepaid, mailed not less than 20 nor more
than 40 days prior to the Redemption Date, to each Holder of Securities to be
redeemed, at his address appearing in the Security Register.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all the Outstanding Securities are to be redeemed,
the identification (and, in the case of partial redemption, the principal
amounts) of the particular Securities to be redeemed,
(4) that on the Redemption Date, the Redemption Price will become
due and payable upon each such Security to be redeemed and that interest
thereon will cease to accrue on and after said date,
(5) the conversion price, the date on which the right to convert the
principal of the Securities to be redeemed will terminate and the place or
places where such Securities may be surrendered for conversion, and
(6) the place or places where such Securities are to be surrendered
for payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
SECTION 11.06. Deposit of Redemption Price. Prior to any Redemption
Date, the Company shall deposit with the Trustee or with a Paying Agent
<PAGE>
61
(or, if the Company is acting as its own Paying Agent, segregate and hold in
trust as provided in Section 10.03) an amount of money sufficient to pay the
Redemption Price of, and (except if the Redemption Date shall be an Interest
Payment Date) accrued interest on, all the Securities which are to be redeemed
on that date other than any Securities called for redemption on that date which
have been converted prior to the date of such deposit.
If any Security called for redemption is converted, any money
deposited with the Trustee or with any Paying Agent or so segregated and held in
trust for the redemption of such Security shall (subject to any right of the
Holder of such Security or any Predecessor Security to receive interest as
provided in the last paragraph of Section 3.07) be returned to the Company or,
if then held by the Company, shall be discharged from such trust.
SECTION 11.07. Securities Payable on Redemption Date. Notice of
redemption having been given as aforesaid, the Securities so to be redeemed
shall, on the Redemption Date, become due and payable at the Redemption Price
therein specified, and from and after such date (unless the Company shall
default in the payment of the Redemption Price and accrued interest) such
Securities shall cease to bear interest. Upon surrender of any such Security for
redemption in accordance with said notice, such Security shall be paid by the
Company at the Redemption Price, together with accrued interest to the
Redemption Date; provided, however, that installments of interest whose Stated
Maturity is on or prior to the Redemption Date shall be payable to the Holders
of such Securities, or one or more Predecessor Securities, registered as such at
the close of business on the relevant Record Dates according to their terms and
the provisions of Section 3.07.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption the principal (and premium, if any) shall,
until paid, bear interest from the Redemption Date at the rate borne by the
Security.
SECTION 11.08. Securities Redeemed in Part. Any Security which is to
be redeemed only in part shall be surrendered at an office or agency of the
Company designated for that purpose pursuant to Section 10.02 (with, if the
Company or the Trustee so requires, due endorsement by, or a written instrument
of transfer in form satisfactory to the Company and the Trustee duly executed
by, the Holder thereof or his attorney duly authorized in writing), and the
Company shall execute, and the Trustee shall authenticate and deliver to the
Holder of such Security without service charge, a new Security or Securities of
any authorized denomination as requested by such Holder, in aggregate principal
amount equal to and in exchange for the unredeemed portion of the principal of
the Security so surrendered.
<PAGE>
62
SECTION 11.09. Conversion Arrangements on Call for Redemption.
Notwithstanding anything to the contrary contained in this Indenture, in
connection with any redemption of Securities, the Company, by an agreement with
one or more investment bankers or other purchasers, may arrange for such
purchasers to purchase all Securities called for redemption (the "Called
Securities") which are either (i) surrendered for redemption or (ii) not duly
surrendered for redemption or conversion prior to the close of business on the
Redemption Date, and to convert the same into shares of Common Stock, by the
purchasers' depositing with the Trustee (acting as Paying Agent with respect to
the deposit of such amount and as conversion agent with respect to the
conversion of such Called Securities), in trust for the Holders of the Called
Securities, on or prior to the Redemption Date in the manner agreed to by the
Company and such purchasers, an amount sufficient to pay the Redemption Price,
payable by the Company on redemption of such Called Securities. In connection
with any such arrangement for purchase and conversion, the Trustee as Paying
Agent shall pay on or after the Redemption Date such amounts to deposited by the
purchasers in exchange for Called Securities surrendered for redemption prior to
the close of business on the Redemption Date and for all Called Securities
surrendered after such Redemption Date. Notwithstanding anything to the contrary
contained in this Article XI, the obligation of the Company to pay the
Redemption Price of such Called Securities shall be satisfied and discharged to
the extent such amount is so paid by such purchasers; provided, however, that
nothing in this Section 11.09 shall in any way relieve the Company of the
obligation to pay such Redemption Price on all Called Securities to the extent
such amount is not so paid by said purchasers. For all purposes of this
Indenture, any Called Securities surrendered by the Holders for redemption, and
any Called Securities not duly surrendered for redemption or conversion prior to
the close of business on the Redemption Date, shall be deemed acquired by such
purchasers from such Holders and surrendered by such purchasers for conversion
and shall in all respects be deemed to have been converted, all as of
immediately prior to the close of business on the Redemption Date, subject to
the deposit by the purchasers of the above amount as aforesaid. Nothing in this
Section 11.09 shall in any way limit the right of any Holder of a Security to
convert his Security pursuant to the terms of this Indenture any time prior to
the close of business on the tenth day preceding the Redemption Date (or, if
such day is not a Business Day, on the next succeeding Business Day).
ARTICLE XII
Conversion of Securities
SECTION 12.01. Conversion Privilege and Conversion Price. Subject to
and upon compliance with the provisions of this Article, at the option of the
Holder
<PAGE>
63
thereof, any Security or any portion of the principal amount thereof which is
$1,000 or an integral multiple of $1,000 may be converted into fully paid and
nonassessable shares (calculated as to each conversion to the nearest 1/100 of a
share) of Common Stock of the Company which equals the quotient obtained by
dividing such principal amount by the conversion price, determined as
hereinafter provided, in effect at the time of conversion. In case a Security or
portion thereof is called for redemption, such conversion right in respect of
the Security or portion so called shall expire at the close of business on the
tenth day preceding the Redemption Date (or, if such day is not a Business Day,
on the next succeeding Business Day), unless the Company defaults in making the
payment due upon redemption.
The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "conversion price") shall be initially $__________
per share of Common Stock. The conversion price shall be adjusted in certain
instances as provided in Section 12.04.
In case the Company shall, by dividend or otherwise, declare or make
a distribution on its Common Stock referred to in paragraph (5) of
Section 12.04, the Holder of each Security, upon the conversion thereof
pursuant to this Article subsequent to the close of business on the date fixed
for the determination of stockholders entitled to receive such distribution and
prior to the effectiveness of the conversion price adjustment in respect of such
distribution pursuant to paragraph (5) of Section 12.04, shall also be
entitled to receive for each share of Common Stock into which such Security is
converted, the portion of the cash so distributed applicable to one share of
Common Stock. If any conversion of a Security described in the
immediately preceding sentence occurs prior to the payment date for a
distribution to holders of Common Stock which the Holder of the Security so
converted is entitled to receive in accordance with the immediately preceding
sentence, the Company may elect (such election to be evidenced by a Board
Resolution) to distribute to such Holder a due bill for the cash to which
such Holder is so entitled; provided that such due bill (i) meets any
applicable requirements of the principal national securities exchange
or other market on which the Common Stock is then traded and (ii) requires
payment or delivery of such cash no later than the date of payment
or delivery thereof to holders of Common Stock receiving such distribution.
<PAGE>
64
SECTION 12.02. Exercise of Conversion Privilege. In order to
exercise the conversion privilege, the Holder of any Security to be converted
shall surrender such Security, duly endorsed or assigned to the Company or in
blank, at any office or agency maintained by the Company pursuant to Section
10.02, accompanied by written notice to the Company at such office or agency
that the Holder elects to convert such Security or, if less than the entire
principal amount thereof is to be converted, the portion thereof to be
converted. Securities surrendered for conversion during the period from the
close of business on any Regular Record Date next preceding any Interest Payment
Date to the opening of business on such Interest Payment Date (except Securities
or portions thereof called for redemption on a Redemption Date within such
period between and including a Regular Record Date and a related Interest
Payment Date) shall be accompanied by payment in New York Clearing House funds
or other funds acceptable to the Company of an amount equal to the interest
payable on such Interest Payment Date on the principal amount of Securities
being surrendered for conversion. Except as provided in the preceding sentence
and subject to the last paragraph of Section 3.07, no payment or adjustment
shall be made upon any conversion on account of any interest accrued on the
Securities surrendered for conversion or on account of any dividends on the
Common Stock issued upon conversion.
Securities shall be deemed to have been converted immediately prior
to the close of business on the day of surrender of such Securities for
conversion in accordance with the foregoing provisions, and at such time the
rights of the Holders of such Securities as Holders shall cease, and the Person
or Persons entitled to receive the Common Stock issuable upon conversion shall
be treated for all purposes as the record holder or holders of such Common stock
at such time. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver at such office or agency a certificate or
certificates for the number of full shares of Common Stock issuable upon
conversion, together with payment in lieu of any fraction of a share, as
provided in Section 12.03.
In the case of any Security which is converted in part only, upon
such conversion the Company shall execute and the Trustee shall authenticate and
deliver to the Holder thereof, at the expense of the Company, a new Security or
Securities, of authorized denominations in aggregate principal amount equal to
the unconverted portion of the principal amount of such Security.
SECTION 12.03. Fractions of Shares. No fractional shares of Common
Stock shall be issued upon conversion of Securities. If more than one Security
shall be surrendered for conversion at one time by the same Holder, the number
of full shares which shall be issuable upon conversion thereof shall be computed
on the basis of the aggregate principal amount of the Securities (or specified
<PAGE>
65
portions thereof) so surrendered. Instead of any fractional share of Common
Stock which would otherwise be issuable upon conversion of any Security or
Securities (or specified portions thereof), the Company shall pay a cash
adjustment (rounded to the nearest cent) in respect of such fraction in an
amount equal to the same fraction of the Closing Price per share of the Common
Stock at the close of business on the day of conversion (or, if such day is not
a Trading Day, on the Trading Day immediately preceding such day).
SECTION 12.04. Adjustment of Conversion Price. (1) In case the
Company shall pay or make a dividend or other distribution on its Common Stock
exclusively in Common Stock or shall pay or make a dividend or other
distribution on any other class of capital stock of the Company, which dividend
or distribution includes Common Stock, the conversion price in effect at the
opening of business on the day following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such conversion price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination and the denominator shall
be the sum of such number of shares and the total number of shares constituting
such dividend or other distribution, such reduction to become effective
immediately after the opening of business on the day following the date fixed
for such determination. For the purposes of this paragraph (1), the number of
shares of Common Stock at any time outstanding shall not include shares held in
the treasury of the Company but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock. The
Company shall not pay any dividend or make any distribution on shares of Common
Stock held in the treasury of the Company.
(2) Subject to the last sentence of paragraph (7) of this Section,
in case the Company shall pay or make a dividend or other distribution on its
Common Stock consisting exclusively of, or shall otherwise issue to all holders
of its Common Stock, rights, warrants or options entitling the holders thereof
to subscribe for or purchase shares of Common Stock at a price per share less
than the current market price per share (determined as provided in paragraph (8)
of this Section) of the Common Stock on the date fixed for the determination of
stockholders entitled to receive such rights, warrants or options the conversion
price in effect at the opening of business on the day following the date fixed
for such determination shall be reduced by multiplying such conversion price by
a fraction of which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such determination
plus the number of shares of Common Stock that the aggregate of the offering
price of the total number of shares of Common Stock so offered for subscription
or purchase would purchase at such current market price and the denominator
shall be the number of shares of Common Stock outstanding at the close
<PAGE>
66
of business on the date fixed for such determination plus the number of shares
of Common Stock so offered for subscription or purchase, such reduction to
become effective immediately after the opening of business on the day following
the date fixed for such determination. For the purposes of this paragraph (2),
the number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company but shall include shares issuable in
respect of scrip certificates issued in lieu of fractions of shares of Common
Stock. The Company shall not issue any rights or warrants in respect of shares
of Common Stock held in the treasury of the Company. If at the end of the period
during which such rights or warrants are convertible into Common Stock, not all
such rights or warrants have been converted into Common Stock, the conversion
price shall be immediately readjusted to what the conversion price would have
been based on the number of additional shares of Common Stock actually issued.
(3) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock or combined into a smaller
number of shares of Common Stock, the conversion price in effect at the opening
of business on the date following the day upon which such subdivision or
combination becomes effective shall be proportionately reduced or increased, as
the case may be, such adjustment to become effective immediately after the
opening of business on the day following the day upon which such subdivision or
combination becomes effective.
(4) Subject to the last sentence of this paragraph (4), in case the
Company shall, by dividend or otherwise, distribute to all holders of its Common
Stock evidences of its indebtedness, shares of any class of capital stock, cash
or assets (including securities, but excluding (x) any rights, warrants or
options referred to in paragraph (2) of this Section, (y) any dividend or
distribution paid exclusively in cash out of net profits of the Company for
the twelve full calendar months preceding the calendar month in which such
dividend or distribution is to be made and (z) any dividend or distribution
referred to in paragraph (1) of this Section), the conversion price shall be
reduced so that the same shall equal the price determined by multiplying the
conversion price in effect immediately prior to the effectiveness of the
conversion price reduction contemplated by this paragraph (4) by a fraction
of which the numerator shall be the current market price per share (determined
as provided in paragraph (8) of this Section) of the Common Stock on the date
of such effectiveness less the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
Resolution), on the date of such effectiveness, of the portion of the evidences
of indebtedness, shares of capital stock, cash and assets so distributed
applicable to one share of Common Stock and the denominator shall be such
current market price per share of the Common Stock, such reduction to become
effective immediately prior to the opening of business on the date following the
day fixed for the determination of stockholders entitled to receive such
distribution (the "Reference Date") PROVIDED, HOWEVER that in the event the
fair market value (as so determined) of the portion of the evidences of
indebtedness, shares of capital stock, cash and assets so distributed
applicable to one share of Common Stock is equal to greater than such current
market price per share of Common Stock, or if the excess of such current
market price per share over such fair market value is less than $1.00, then
adequate provision shall be made so that the Holders shall have the right to
receive upon conversion of the Securities the amount of evidences of
indebtedness, shares of capital stock, cash and assets such Holder would have
received had the Holder converted the Securities immediately prior to the
Reference Date. If the Board of Directors determines the fair
<PAGE>
67
market value of any distribution for purposes of this paragraph (4) by reference
to the actual or when issued trading market for any securities included in such
distribution, it shall in doing so consider the prices in such market over the
same period used in computing the current market price per share pursuant to
paragraph (8) of this Section. For purposes of this paragraph (4), any dividend
or distribution that includes shares of Common Stock, rights, warrants or
options to subscribe for or purchase shares of Common Stock or other securities
convertible into or exchangeable for shares of Common Stock shall be deemed
instead to be (a) a dividend or distribution of the evidences of indebtedness,
cash, assets or shares of capital stock other than such shares of Common Stock,
such rights, warrants or options or such other convertible or exchangeable
securities (making any conversion price reduction required by this paragraph (4)
immediately followed by (b) in the case of such shares of Common Stock or such
rights, warrants or options, a dividend or distribution thereof (making any
further conversion price reduction required by paragraph (1) or (2) of this
Section, except (i) the Reference Date of such dividend or distribution as
defined in this paragraph (4) shall be substituted as "the date fixed for the
determination of stockholders entitled to receive such distribution" and "the
date fixed for such determination" within the meaning of paragraphs (1) and (2)
of this Section and (ii) any shares of Common Stock included in such dividend or
distribution shall not be deemed "outstanding at the close of business on the
date fixed for such determination" within the meaning of paragraph (1) of this
Section) or (c) in the case of such other convertible or exchangeable
securities, a dividend or distribution of such number of shares of Common Stock
as would then be issuable upon the conversion of exchange thereof, whether or
not the conversion or exchange of such securities is subject to any conditions
(making any further conversion price reduction required by paragraph (1) of this
Section, except (i) the Reference Date of such dividend or distribution as
defined in this paragraph (4) shall be substituted as "the date fixed for the
determination of stockholders entitled to receive such distribution" and "the
date fixed for such determination" and (ii) the shares deemed to constitute such
dividend or distribution shall not be deemed "outstanding at the close of
business on the date fixed for such determination," each within the meaning of
paragraph (1) of this Section).
(5) In case the Company shall, by dividend or otherwise, at any time
distribute to all holders of its Common Stock cash (including any distribution
of cash out of the retained earnings of the Company but excluding any cash that
is distributed as part of a distribution requiring a conversion price adjustment
pursuant to paragraph (4) of this Section) in an aggregate amount that, together
with (i) the aggregate amount of any other distributions to all holders of its
Common Stock made exclusively in cash within the 12 months preceding the date of
payment of such distribution and in respect of which no conversion price
adjustment pursuant to paragraph (4) of this Section or this paragraph (5) has
been made and (ii) the portion of the aggregate of any cash plus the fair market
value (as determined by the Board of
<PAGE>
68
Directors, whose determination shall be conclusive and described in a Board
Resolution) of consideration payable in respect of any tender offer or exchange
offers by the Company or a Subsidiary of all or any portion of the Company's
Common Stock concluded within the 12 months preceding the date of payment of
such distribution and in respect of which no conversion price adjustment
pursuant to paragraph (6) of this Section or this paragraph (5) of this Section
has been made that is in excess of an amount equal to the product of (x) the
number of shares of Common Stock with respect to which the aggregate tender or
exchange offer or negotiated purchase consideration is payable multiplied by (y)
the average of the daily Closing Prices per share of Common Stock on the five
consecutive Trading Days selected by the Company out of the 10 consecutive
Trading Days next succeeding the date of payment of such the negotiated purchase
consideration or expiration of the tender or exchange offer, as the case may be,
exceeds 20% of the product of the current market price per share (determined as
provided in paragraph (8) of this Section) of the Common Stock on the date fixed
for stockholders entitled to receive such distribution multiplied by the number
of shares of Common Stock outstanding on such date (excluding shares held in the
treasury of the Company), the conversion price shall be reduced so that the same
shall equal the price determined by multiplying such conversion price in effect
immediately prior to the conversion price reduction contemplated by this
paragraph (5) by a fraction of which the numerator shall be the current market
price per share (determined as provided in paragraph (8) of this Section) of the
Common Stock on the date of such distribution less the amount of cash so
distributed applicable to one share of Common Stock and the denominator shall be
such current market price per share (determined as provided in paragraph (8) of
this Section) of the Common Stock on the date of such distribution, such
reduction to become effective immediately prior to the opening of business on
the day following the date fixed for the payment of such distribution.
(6) In case a tender or exchange offer (the "Current Purchase") made
by the Company or any Subsidiary for all or any portion of the Company's
outstanding Common Stock shall be consummated, if the aggregate of any cash plus
the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution) of
consideration payable in respect of such tender offer or exchange offer is in
excess of an amount equal to the product of (a) the number of shares of Common
Stock with respect to which the aggregate tender offer or exchange offer
consideration is payable multiplied by (b) the average of the daily Closing
Prices per share of Common Stock on the five consecutive Trading Days selected
by the Company out of the 10 consecutive Trading Days next succeeding the date
of payment of the purchase consideration or expiration of the tender offer or
exchange offer, as the case may be (the "Reference Price"), and the amount of
such excess, together with (i) the portion of the aggregate of the cash, plus
the fair market value (as determined by the Board of Directors, whose
<PAGE>
69
determination shall be conclusive and described in a Board Resolution) of
consideration payable in respect of any tender offer or exchange offer (the
"Prior Purchase") by the Company or a Subsidiary for all or any portion of the
Company's Common Stock concluded within the 12 months preceding the expiration
of a tender offer or exchange offer or the consummation of any negotiated
purchase, as the case may be, that is the subject of the Current Purchase (the
"Current Purchase Expiration Time") and in respect of which no conversion price
adjustment pursuant to paragraph (5) of this Section or this paragraph (6) has
been made, that is in excess of an amount equal to the product of (a) the number
of shares of Common Stock with respect to which the aggregate consideration for
the Prior Purchase was payable multiplied by (b) the average of the daily
Closing Prices per share of Common Stock on the five consecutive Trading Days
selected by the Company out of the 10 consecutive Trading Days next succeeding
the date of payment of the purchase consideration or expiration of the tender or
exchange offer, as the case may be, with respect to the negotiated purchase,
tender offer or exchange offer that was the subject of the Prior Purchase, and
(ii) the aggregate amount of any distributions to all holders of the Company's
Common Stock made exclusively in cash (specifically including distributions of
cash out of retained or current earnings) within the 12 months preceding the
expiration of the tender offer or exchange offer and as to which no adjustment
pursuant to paragraph (4) or paragraph (5) of this Section 12.04 has been made,
exceeds 20% of the product of the Reference Price multiplied by the number of
shares of Common Stock outstanding (including any tendered shares but excluding
any shares held in the Treasury of the Company) on the Current Purchase
Expiration Time, the conversion price shall be reduced so that the same shall
equal the price determined by multiplying such conversion price in effect
immediately prior to the Current Purchase Expiration Time by a fraction of which
the numerator shall be (i) the product of the Reference Price multiplied by the
number of shares of Common Stock outstanding (including any tendered shares but
excluding any shares held in the treasury of the Company) on the Current
Purchase Expiration Time minus (ii) the fair market value (determined as
aforesaid) of the aggregate consideration payable to stockholders based on the
acceptance (up to any maximum specified in the terms of the tender offer or
other negotiated purchase) of all shares validly tendered and not withdrawn or
purchased in any negotiated purchase as of the Current Purchase Expiration Time
(the shares deemed so accepted, purchased or exchanged, up to any such maximum,
being referred to as the "Purchased Shares") and the denominator shall be the
product of (i) such Reference Price multiplied by (ii) such number of
outstanding shares (excluding any shares held in the treasury of the Company) on
the Current Purchase Expiration Time less the number of Purchased Shares, such
reduction to become effective immediately prior to the opening of business on
the day following the Current Purchase Expiration Time.
<PAGE>
70
(7) The reclassification of Common Stock into securities other than
Common Stock (other than any reclassification upon a consolidation or merger to
which Section 12.11 applies) shall be deemed to involve (a) a distribution of
such securities other than Common Stock to all holders of Common Stock (and the
effective date of such reclassification shall be deemed to be "the Reference
Date" within the meaning of paragraph (4) of this Section), and (b) a
subdivision or combination, as the case may be, of the number of shares of
Common Stock outstanding immediately prior to such reclassification into the
number of shares of Common Stock outstanding immediately thereafter (and the
effective date of such reclassification shall be deemed to be "the day upon
which such subdivision becomes effective" or "the day upon which such
combination becomes effective," as the case may be, and "the day upon which such
subdivision or combination becomes effective" within the meaning of paragraph
(3) of this Section). Rights, warrants or options issued by the Company to all
holders of its Common Stock entitling the holders thereof to subscribe for or
purchase shares of Common Stock or Preferred Stock, which rights, warrants or
options (i) are deemed to be transferred with such shares of Common Stock, (ii)
are not exercisable and (iii) are also issued in respect of future issuances of
Common Stock, in each case in clauses (i) through (iii) until occurrence of a
specified event or events ("Trigger Event"), shall for purposes of this Section
12.04 not be deemed issued until the occurrence of the earliest Trigger Event.
(8) For the purpose of any computation under this paragraph and
paragraphs (2), (4) and (5) of this Section, the current market price per share
of Common Stock on any date shall be deemed to be the average of the daily
Closing Prices for the five consecutive Trading Days selected by the Company
commencing not more than 20 Trading Days before, and ending not later than the
relevant date; provided, however, that (i) if the "ex" date for any event (other
than the issuance or distribution requiring such computation) that requires an
adjustment to the conversion price pursuant to paragraph (1), (2), (3), (4), (5)
or (6) above occurs on or after the 20th Trading Day prior to the day in
question and prior to the "ex" date for the issuance or distribution requiring
such computation, the Closing Price for each Trading Day prior to the "ex" date
for such other event shall be adjusted by multiplying such Closing Price by the
same fraction by which the conversion price is so required to be adjusted as a
result of such other event, (ii) if the "ex" date for any event (other than the
issuance or distribution requiring such computation) that requires an adjustment
to the conversion price pursuant to paragraph (1), (2), (3), (4), (5) or (6)
above occurs on or after the "ex" date for the issuance or distribution
requiring such computation and on or prior to the day in question, the Closing
Price for each Trading Day on and after the "ex" date for such other event shall
be adjusted by multiplying such Closing Price by the reciprocal of the fraction
by which the conversion price is so required to be adjusted as a result of such
other event, and (iii) if the "ex" date for the issuance or distribution
requiring such computation is on
<PAGE>
71
or prior to the day in question, after taking into account any adjustment
required pursuant to clause (ii) of this proviso, the Closing Price for each
Trading Day on or after such "ex" date shall be adjusted by adding thereto the
amount of any cash and the fair market value on the day in question (as
determined by the Board of Directors in a manner consistent with any
determination of such value for purposes of paragraph (4) or (5) of this
Section, whose determination shall be conclusive and described in a Board
Resolution) of the evidences of indebtedness, shares of capital stock or assets
being distributed applicable to one share of Common Stock as of the close of
business on the day before such "ex" date. For the purpose of any computation
under paragraph (6) of this Section, the current market price per share of
Common Stock on any date shall be deemed to be the average Closing Prices for
the five consecutive Trading Days selected by the Company commencing on or after
the latest (the "Commencement Date") of (i) the date 20 Trading Days before the
date in question, (ii) the date of commencement of a tender offer requiring such
computation and (iii) the date of the last amendment, if any, of such a tender
offer involving a change in the maximum number of shares for which tenders are
sought or a change in the consideration offered, and ending not later than the
expiration time with respect to the tender offer or negotiated purchase, as the
case may be; provided, however, that if the "ex" date for any event (other than
the tender offer requiring such computation) that requires an adjustment to the
conversion price pursuant to paragraph (1), (2), (3), (4), (5) or (6) above
occurs on or after the Commencement Date and prior to the expiration time for
the tender offer requiring such computation, the Closing Price for each Trading
Day prior to the "ex" date, for such other event shall be adjusted by
multiplying such Closing Price by the same fraction by which the conversion
price is so required to be adjusted as a result of such other event. For
purposes of this paragraph, the term "ex" date, (i) when used with respect to
any issuance or distribution, means the first day on which the Common Stock
trades regular way on the relevant exchange or in the relevant market from which
the Closing Price was obtained without the right to receive such issuance or
distribution, (ii) when used with respect to any subdivision or combination of
shares of Common Stock, means the first day on which the Common Stock trades
regular way on such exchange or in such market after the time at which such
subdivision or combination becomes effective, and (iii) when used with respect
to any tender offer means the first date on which the Common Stock trades
regular way on such exchange or in such market after the expiration time of such
tender offer.
(9) The Company may make such reductions in the conversion price, in
addition to those required by paragraphs (1), (2), (3), (4), (5), (6), (7) and
(8) of this Section, as it considers to be advisable in order that any event
treated for Federal income tax purposes as a dividend of stock or stock rights
shall not be taxable to the recipients.
<PAGE>
72
(10) No adjustment in the conversion price shall be required unless
such adjustment would require an increase or decrease of at least 1% in the
conversion price; provided, however, that any adjustments which by reason of
this paragraph (11) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All adjustments to the
conversion price shall be to the nearest cent.
(11) Anything herein to the contrary notwithstanding, in the event
the Company shall declare any dividend or distribution requiring an adjustment
in the conversion price hereunder and shall, thereafter and before the payment
of such dividend or distribution to stockholders, legally abandon its plan to
pay such dividend or distribution or, if such dividend or distribution was
contingent on the occurrence of one or more events, not pay such dividend or
distribution upon the failure of such condition, the conversion price then in
effect hereunder, if changed to reflect such dividend or distribution, shall
upon the legal abandonment of such plan or such nonpayment of such contingent
dividend or distribution be changed (on a prospective basis for any
Securities not theretofore converted) to the conversion price which would have
been in effect at the time of such abandonment (after giving effect to all other
adjustments not so legally abandoned pursuant to the provisions of this Article
XII) had such dividend or distribution never been declared.
(12) Notwithstanding any other provision of this Section 12.04, no
adjustment to the conversion price shall reduce the conversion price below the
then par value per share of the Common Stock, and any such purported adjustment
shall instead reduce the conversion price to such par value. The Company hereby
covenants not to take any action (i) to increase the par value per share of the
Common Stock or (ii) that would or does result in any adjustment in the
conversion price that, if made without giving effect to the previous sentence,
would cause the conversion price to be less than the then par value per share of
the Common Stock.
SECTION 12.05. Notice of Adjustments of Conversion Price.
Whenever the conversion price is adjusted as herein provided:
(a) the Company shall compute the adjusted conversion price in
accordance with Section 12.04 and shall prepare a certificate signed by
the Treasurer of the Company setting forth the adjusted conversion price
and showing in reasonable detail the facts upon which such adjustment is
based, and such certificate shall forthwith be filed (with a copy to the
Trustee) at each office or agency maintained for the purpose of conversion
of Securities pursuant to Section 10.02; and
(b) a notice stating that the conversion price has been adjusted and
setting forth the adjusted conversion price shall forthwith be required,
and as soon as practicable after it is required, such notice shall be
mailed by the
<PAGE>
73
Company to all Holders at their last addresses as they shall appear in the
Security Register.
SECTION 12.06. Notice of Certain Corporate Activities. In case:
(a) the Company takes any action that would require an adjustment in
the conversion price pursuant to paragraphs (1) through (7) of Section
12.04; or
(b) of any consolidation, merger or share exchange to which the
Company is a party and for which approval of stockholders of the Company
is required or of the conveyance or transfer of all or substantially all
of the assets of the Company; or
(c) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company:
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Securities pursuant to Section 10.02, and shall
cause to be mailed to all Holders at their last addresses as they shall appear
in the Security Register, at least 20 days prior to the applicable record,
effective or expiration date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such dividend,
distribution or granting of rights, warrants or options, or, if a record is not
to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution, rights, warrants or options are to be
determined, or (y) the date on which any reclassification, consolidation,
merger, share exchange, conveyance, transfer, dissolution, liquidation or
winding up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, share exchange, conveyance,
transfer, dissolution, liquidation or winding up, or (z) the date on which any
tender offer commenced, the date on which such tender offer is scheduled to
expire unless extended, the consideration offered and the other material terms
thereof (or the material terms of any amendment thereto).
SECTION 12.07. Company to Reserve Common Stock. The Company shall at
all times reserve and keep available, free from preemptive rights, out of its
authorized but unissued Common Stock for the purpose of effecting the conversion
of Securities, the full number of shares of Common Stock then issuable upon the
conversion of all outstanding Securities.
<PAGE>
74
SECTION 12.08. Taxes on Conversions. The Company will pay any and
all taxes that may be payable in respect of the issue or delivery of shares of
Common Stock on conversion of Securities pursuant hereto. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that of the Holder of the Security or Securities to be converted, and
no such issue or delivery shall be made unless and until the Person requesting
such issue has paid to the Company or Securities Registrar the amount of any
such tax, or has established to the satisfaction of the Company or Securities
Registrar that such tax has been paid.
SECTION 12.09. Covenant as to Common Stock. The Company covenants
that all shares of Common Stock which may be issued upon conversion of
Securities will upon issue be fully paid and nonassessable and, except as
provided in Section 12.08, the Company will pay all taxes, liens and charges
with respect to the issue thereof.
The Company will endeavor promptly to comply with all federal and
state securities laws regulating the offer and delivery of shares of Common
Stock upon conversion of Securities, if any, and will list or cause to have
quoted such shares of Common Stock on each national securities exchange or in
the over-the-counter market or such other market on which the Common Stock is
then listed or quoted.
SECTION 12.10. Cancellation of Converted Securities. All Securities
delivered for conversion shall be delivered to the Trustee to be canceled by or
at the direction of the Trustee, which shall dispose of the same as provided in
Section 3.09.
SECTION 12.11. Provisions in Case of Consolidation, Merger, Share
Exchange or Conveyance of Assets. In case of any consolidation of the Company
with, or merger of the Company into, any other Person, any merger of another
Person into the Company (other than a merger which does not result in any
reclassification, conversion, exchange, or cancellation of outstanding shares of
Common Stock ) any exchange of shares of Common Stock of the Company with any
Person pursuant to a plan of exchange or any conveyance, transfer or lease of
all or substantially all of the Company's assets, the Person formed by such
consolidation or resulting from such merger or which acquires shares of Common
Stock of the Company pursuant to a share exchange or which acquires or leases
such assets, as the case may be, shall execute and deliver to the Trustee a
supplemental indenture providing that the Holder of each Security then
outstanding shall have the right thereafter, during the period such Security
shall be convertible as specified in Section 12.01, to convert such Security
only into the kind and amount of securities, cash and other property receivable,
if any, upon such consolidation, merger, share
<PAGE>
75
exchange, conveyance, transfer or lease by a holder of the number of shares of
Common Stock of the Company into which such Security might have been converted
immediately prior to such consolidation, merger, share exchange, conveyance,
transfer or lease, assuming such holder of Common Stock of the Company (i) is
not a Person with which the Company consolidated or into which the Company
merged or which merged into the Company or with which the Company consummated a
share exchange or to which such conveyance, transfer or lease was made, as the
case may be ("Constituent Person"), or an Affiliate of a Constituent Person and
(ii) failed to exercise his rights of election, if any, as to the kind or amount
of securities, cash and other property receivable upon such consolidation,
merger, share exchange, conveyance, transfer or lease (provided that if the kind
or amount of securities, cash and other property receivable upon such
consolidation, merger, share exchange, conveyance, transfer or lease is not the
same for each share of Common Stock of the Company held immediately prior to
such consolidation, merger, conveyance, transfer or lease by other than a
Constituent Person or an Affiliate thereof and in respect of which such rights
of election shall not have been exercised ("non electing share"), then for the
purpose of this Section the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, share exchange, conveyance,
transfer or lease by each non-electing share shall be deemed to be the kind and
amount so receivable per share by a plurality of the non-electing shares). Such
supplemental indenture shall provide for adjustments which, for events
subsequent to the effective date of such supplemental indenture, shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Article. If the issuer of any such securities is an Affiliate of the Person
formed by such consolidation, resulting from such merger consummating such share
exchange or acquiring such assets, such issuer shall join in such supplemental
indenture for the purpose of making the provisions required by this Section. The
above provisions of this Section shall similarly apply to successive
consolidations, merger, share exchanges, conveyances, transfers and leases.
SECTION 12.12. Trustee Adjustment Disclaimer. The Trustee has no
duty to determine when an adjustment under this Article XII should be made, how
it should be made or what it should be. The Trustee has no duty to determine
whether a supplemental indenture under Section 12.11 need be entered into or
whether any provisions of any supplemental indenture are correct. The Trustee
shall not be accountable for and makes no representation as to the validity or
value of any securities or assets issued upon conversion of Securities. The
Trustee shall not be responsible for the Company's failure to comply with this
Article XII.
SECTION 12.13. When No Adjustment Required. (a) Except as expressly
set forth in Section 12.04, no adjustment in the conversion price shall be made
because the Company issues, in exchange for cash, property or services, shares
<PAGE>
76
of Common Stock, or any securities convertible into or exchangeable for shares
of Common Stock, or securities (including warrants, rights and options) carrying
the right to subscribe for or purchase shares of Common Stock or such
convertible or exchangeable securities.
(b) No adjustment in the conversion price shall be made pursuant to
Section 12.04 in respect of any dividend or distribution if the Holders may
participate therein (on a basis determined in good faith to be fair by the Board
of Directors) and receive the same consideration they would have received if
they had converted the Securities immediately prior to the record date with
respect to such dividend or distribution (a "Non-Adjustment Distribution"). All
Non-Adjustment Distributions shall be ignored for purposes of any computation.
ARTICLE XIII
Subordination of Securities
SECTION 13.01. Agreement to Subordinate by Company. Notwithstanding
anything in this Indenture to the contrary (other than the last paragraph of
Section 15.05), the Company, for itself, its successors and assigns, covenants
and agrees, and each Holder of Securities, by his acceptance thereof, likewise
covenants and agrees, that payment by the Company of the principal of and
premium, if any, and interest on each and all of the Securities, and payment in
respect of any repurchase of the Securities pursuant to Section 14.01, are
hereby expressly subordinated, to the extent and in the manner hereinafter set
forth, in right of payment to the prior payment in full of all Senior
Indebtedness.
SECTION 13.02. Distribution on Dissolution, Liquidation and
Reorganization; Subrogation. Upon any distribution of assets of the Company upon
any dissolution, winding up, liquidation or reorganization of the Company,
whether in bankruptcy, insolvency, reorganization or receivership proceedings or
upon an assignment for the benefit of creditors or any other marshalling of the
assets and liabilities of the Company or otherwise (subject to the power of a
court of competent jurisdiction to make other equitable provision reflecting the
rights conferred in this Indenture upon the Senior Indebtedness and the holders
thereof, with respect to the Securities and the holders thereof, by a lawful
plan of reorganization under applicable bankruptcy law),
(a) the holders of all Senior Indebtedness shall be entitled to
receive payment in full of the Senior Indebtedness before the Holders
of the Securities are entitled to receive any
<PAGE>
77
payment upon the principal of or premium, if any, or interest on
indebtedness evidenced by the Securities; and
(b) any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, to which the
Holders of the Securities or the Trustee would be entitled except for the
provisions of this Article XIII shall be paid by the liquidating trustee
or agent or other person making such payment or distribution, whether a
trustee in bankruptcy, a receiver or liquidating trustee or otherwise,
directly to the holders of Senior Indebtedness or their representative or
representatives or to the trustee or trustees under any indenture under
which any instruments evidencing any of such Senior Indebtedness may have
been issued, ratably according to the aggregate amounts remaining unpaid
on account of the Senior Indebtedness held or represented by each, to
the extent necessary to make payment in full of all Senior Indebtedness
remaining unpaid, after giving effect to any concurrent payment or
distribution to the holders of such Senior Indebtedness; and
(c) in the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in
cash, property or securities, shall be received by the Holders of the
Securities or by the Trustee before all Senior Indebtedness is paid in
full, such payment or distribution shall be paid over to the holders of
such Senior Indebtedness, or their representative or representatives or to
the trustee or trustees under any indenture under which any instruments
evidencing any of such Senior Indebtedness may have been issued, ratably
as aforesaid, for application to the payment of all Senior Indebtedness
remaining unpaid until all such Senior Indebtedness shall have been paid
in full, after giving effect to any concurrent payment or distribution to
the holders of such Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the
Holders of the Securities shall be subrogated to the rights of the holders of
Senior Indebtedness to receive payments or distributions of cash, property or
securities of the Company, applicable to Senior Indebtedness until the principal
of, premium, if any, and interest on the Securities shall be paid in full and no
such payments or distributions to the Holders of the Securities of cash,
property or securities otherwise distributable to the holders of Senior
Indebtedness and the Holders of the Securities be deemed to be a payment by the
Company to or on account of the Securities. It is understood that the provisions
of this Article XIII are and are intended solely for the purpose of defining the
relative rights of the Holders of the Securities on the one hand, and the
holders of Senior Indebtedness on the other hand. Nothing contained in this
Article XIII or elsewhere in this Indenture or in the Securities is intended to
or shall impair, as
<PAGE>
78
between the Company, its creditors other than the holders of Senior Indebtedness
and the Holders of the Securities, as the case may be, the obligations of the
Company, which are unconditional and absolute, to pay to the Holders of the
Securities the principal of, premium, if any, and interest on the Securities as
and when the same shall become due and payable in accordance with their terms,
or to affect the relative rights of the Holders of the Securities and creditors
of the Company other than the holders of Senior Indebtedness, nor shall anything
herein or in the Securities prevent the Trustee or the Holder of any Security
from exercising all remedies otherwise permitted by applicable law upon default
under this Indenture, subject to the rights, if any, under this Article XIII of
the holders of Senior Indebtedness in respect of cash, property or securities of
the Company received upon the exercise of any such remedy. Upon any payment or
distribution of assets of the Company referred to in this Article XIII, the
Trustee, subject to the provisions of Section 6.01, shall be entitled to rely
upon a certificate of the liquidating trustee or agent or other person making
any distribution to the Trustee for the purpose of ascertaining the persons
entitled to participate in such distribution, the holders of Senior Indebtedness
and other indebtedness of the Company, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article XIII.
The Trustee, however, shall not be deemed to owe any fiduciary duty
to the holders of Senior Indebtedness. In the absence of gross negligence or
willful misconduct, the Trustee shall not be liable to any
such holder if it shall pay over or distribute to or on behalf of Holders of
Securities or the Company moneys or assets to which any holder of Senior
Indebtedness shall be entitled by virtue of this Article XIII.
If the Trustee or any Holder of Securities does not file a proper
claim or proof of debt in the form required in any proceeding referred to above
prior to 30 days before the expiration of the time to file of such claim in such
proceeding, then the holder of any Senior Indebtedness is hereby authorized, and
has the right, to file an appropriate claim or claims for or on behalf of such
Holder of Securities.
SECTION 13.03. No Payment In Event Of Default On Senior
Indebtedness. In the event that any Payment Default shall have occurred and be
continuing, then no payment of account of any principal, premium (if any),
interest, redemption or repurchase of the Securities shall be made unless and
until such Payment Default shall have been cured or waived or shall have ceased
to exist or all amounts then due and payable in respect of Senior Indebtedness
shall have been paid in full, or provisions shall have been made for such
payment in cash or cash equivalents or otherwise in a manner satisfactory to the
holders of Senior Indebtedness.
<PAGE>
79
In the event that any Non-Payment Default shall have occurred with
respect to any Designated Senior Indebtedness and be continuing, then, upon the
receipt by the Trustee of written notice of such Non-Payment Default from
holders of Designated Senior Indebtedness (as defined below) or a
representative thereof, no payment on account of any principal, premium (if
any), interest, redemption or repurchase of the Securities shall be made during
the period (the "Payment Blockage Period") commencing on the date of such
receipt of such written notice and ending on the earlier of (i) the date on
which the Trustee shall have received written notice of such Non-Payment
Default shall have been cured or waived or shall have ceased to exist or any
acceleration of the Designated Senior Indebtedness to which such Non-Payment
Default relates shall have been rescinded or annulled or such Senior
Indebtedness shall have been discharged and (ii) the 180th day after
the date of such receipt of such written notice provided, however, during
any 360-day period the aggregate of all Payment Blockage Periods shall
not exceed 180 days and there shall be a period of at least 180 consecutive
days in each 360-period when no Payment Blockage Period is in effect.
For all purposes of this paragraph, no Non-Payment Default that existed
or was continuing on the date of commencement of any Payment Blockage
Period shall be, or be made, the basis for the commence of a subsequent
Payment Blockage Period by Holders of Senior Indebtedness on their
representatives unless such Non-Payment Default shall have been cured for
a period of not less than 90 consecutive days. "Designated Senior
Indebtedness" means (i) any Indebtedness under the Credit Facility and
(ii) any other Senior Indebtedness of the Company which, at the date of
determination, has an aggregate principal amount of, or under which, at the
date of determination, the holders thereof are committed to lend up to, at
least $35 million and is specifically designated by the Company in the
instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for purposes of the Indenture.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall, at or prior to the
time of such payment, have been made known to the Trustee or, as the case may
be, such Holder, then and in such event such payment shall be paid over and
delivered forthwith to the holders of the relevant Designated Senior
Indebtedness (or their respective representatives).
The provisions of this Section shall not apply to any payment with
respect to which Section 13.02 would be applied.
SECTION 13.04. Payments Permitted. Nothing contained in this
Indenture or in any of the Securities shall (a) affect the obligation of the
Company to make, or prevent the Company from making, at any time except as
provided in Sections 13.02 and 13.03, payments of principal of, premium, if any,
or interest on the Securities or (b) prevent the application by the Trustee of
any moneys deposited with it hereunder to the payment of or on account of the
principal of, premium, if any, or interest on the Securities unless the Trustee
shall have received at its Corporate Trust Office written notice of any event
prohibiting the making of such payment more than three Business Days prior to
the date fixed for such payment.
<PAGE>
80
SECTION 13.05. Authorization to Trustee to Effect Subordination.
Each Holder of Securities by his acceptance thereof authorizes and directs the
Trustee in his behalf to take such action as may be necessary or appropriate to
effectuate the subordination as provided in this Article XIII and appoints the
Trustee to his attorney-in-fact for any and all such purposes.
SECTION 13.06. Notices to Trustee. Notwithstanding the provisions of
this Article or any other provisions of this Indenture, neither the Trustee nor
any Paying Agent (other than the Company) shall be charged with knowledge of the
existence of any Senior Indebtedness or of any event which would prohibit the
making of any payment of moneys to or by the Trustee or such Paying Agent,
unless and until the Trustee or such Paying Agent shall have received (in the
case of the Trustee, at its Corporate Trust Office) written notice thereof from
the Company or from the holder of any Senior Indebtedness or from the trustee
for any such holder, together with proof reasonably satisfactory to the Trustee
of such holding of Senior Indebtedness or of the authority of such trustee;
provided, however, that if at least three Business Days prior to the date
upon which by the terms hereof any such moneys may become payable for any
purpose (including, without limitation, the payment of either the principal
of, premium, if any, or interest on any Security) the Trustee shall not have
received with respect to any such moneys the notice provided for in this
Section 13.06, then, anything herein contained to the contrary notwithstanding,
the Trustee shall have the full power and authority to receive such moneys and
to apply the same to the purpose for which they were received, and shall not
be affected by any notice to the contrary, which may be received by it on or
after such three Business Days prior to such date. The Trustee shall be
entitled to rely on the delivery to it of a written notice by a person
representing himself to be a holder of Senior Indebtedness (or a trustee on
behalf of such holder) to establish that such a notice has been given by a
holder of Senior Indebtedness or a trustee on behalf of any such holder.
In the event that the Trustee determines in good faith that further
evidence is required with respect to the right of any person as a holder
of Senior Indebtedness to participate in any payment or distribution pursuant to
this Article XIII, the Trustee may request such person to furnish evidence to
the reasonable satisfaction of the Trustee as to the amount of Senior
Indebtedness held by such person, the extent to which such person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such person under this Article XIII and, if such evidence is not
furnished, the Trustee may defer any payment to such person pending judicial
determination as to the right of such person to receive such payment.
SECTION 13.07. Trustee as Holder of Senior Indebtedness. The Trustee
shall be entitled to all the rights set forth in this Article XIII in respect of
any Senior Indebtedness at any time held by it to the same extent as any other
holder of
<PAGE>
81
Senior Indebtedness and nothing in Section 6.13 or elsewhere in this Indenture
shall be construed to deprive the Trustee of any of its rights as such holder.
SECTION 13.08. Modification of Terms of Senior Indebtedness. Any
renewal or extension of the time of payment of any Senior Indebtedness or the
exercise by the holders of Senior Indebtedness of any of their rights under any
instrument creating or evidencing Senior Indebtedness, including, without
limitation, the waiver of default thereunder, may be made or done all without
notice to or assent from the Holders of the Securities or the Trustee.
No compromise, alteration, amendment, modification, extension,
renewal or other change of, or waiver, consent or other action in respect of,
any liability or obligation under or in respect of, or of any of the terms,
covenants or conditions of any indenture or other instrument under which any
Senior Indebtedness is outstanding or of such Senior Indebtedness, whether or
not such action is in accordance with the provisions of any applicable document,
shall in any way alter or affect any of the provisions of this Article XIII or
of the Securities relating to the subordination thereof.
ARTICLE XIV
Right to Require Repurchase
SECTION 14.01. Repurchase of Securities at Option of the Holder Upon
Change of Control. (a) If at any time there shall have occurred a Change of
Control with respect to the Company, each Holder shall have the right, at such
Holder's option, subject to the terms and conditions of this Indenture, to
require the Company to repurchase all or a portion of such Holder's Securities
(in denominations of $1,000 or integral multiples thereof, at the purchase price
equal to 100% of the principal amount plus accrued interest (the "Repurchase
Price") to the Repurchase Date (the "Repurchase Date") that is 60 days after the
date the Company's Change of Control Notice (as defined below) is mailed (or
such earlier or later date as is required by law, rule or regulation), subject
to substantial satisfaction by or on behalf of the Holder of the requirements
set forth in Section 14.01(c). Promptly, but in any event within 29 days
following any such Change of Control, the Company hereby covenants, with respect
to any Senior Indebtedness that would prohibit the repurchase of Securities by
the Company in the event of such Change of Control, to: either (i) repay all
such Senior Indebtedness in full, in cash, or (ii) obtain the requisite consents
under such Senior Indebtedness or any agreement pursuant to which any such
Senior Indebtedness is issued to permit the repurchase of the Securities as
provided below. The foregoing shall in no way limit the occurrence of an Event
of Default,
<PAGE>
82
including an Event of Default arising from a default under the covenants of the
second sentence of this Section 14.01(a), and the right to demand payment of the
Securities upon acceleration thereafter.
(b) Within 15 days after the Change of Control has occurred, the
Company covenants that it shall mail a written notice (the "Change of Control
Notice") of Change of Control by first-class mail to the Trustee and to each
Holder (and to beneficial owners as required by applicable law) and shall cause
a copy of such notice to be published in a daily newspaper of national
circulation. The notice shall state:
(i) the events causing a Change of Control (specifying such event)
and the date of such Change of Control;
(ii) the date by which the Change of Control Purchase Notice to this
Section 14.01 must be given;
(iii) the Repurchase Date;
(iv) the Repurchase Price;
(v) the name and address of the Paying Agent and the conversion
agent;
(vi) the conversion price and any adjustments thereto;
(vii) that Securities as to which a Change of Control Purchase
Notice has been given may be converted into Common Stock only if the
Change of Control Purchase Notice has been withdrawn in accordance with
the terms of this Indenture;
(viii) the procedures the Holder must follow to exercise the rights
under this Section 14.01 and a brief description of such rights:
(ix) that brief description of the conversion rights of the
Securities; and
(x) the procedures for withdrawing a Change of Control Purchase
Notice.
The Change of Control Notice shall also state whether or not the Company has
satisfied its obligations to the holders of the Senior Indebtedness of the type
referred to in Section 14.01(a) as required pursuant to Section 14.01(a). If the
Company is unable to satisfy such obligations, the Change of Control Notice
shall also state that
<PAGE>
83
the Company is or will be in default under Section 5.01(4) of the Indenture,
that receipt by the Company of one or more Change of Control Purchase Notices by
Holders of at least 25% of the outstanding Securities will constitute a Notice
of Default thereunder, and that the failure of the Company to cure such default
within 60 days (or the then applicable time period) shall be an Event of Default
allowing the Trustee or the Holders of not less than 25% in principal amount of
the Outstanding Securities to declare the principal of all the Securities to be
due and payable immediately.
(c) A Holder may exercise its rights specified in Section 14.01(a)
upon delivery of a written notice of purchase (a "Change of Control Purchase
Notice") to the Company or an agent designated by the Company for such purpose
on or before the third Business Day prior to the Repurchase Date, stating:
(i) the certificate number or numbers of the Security or Securities
which the Holder will deliver to be purchased;
(ii) the portion of the principal amount of the Security or
Securities which the Holder will deliver to be repurchased, which portion
must be $1,000 or an integral multiple thereof; and
(iii) that such Security or Securities shall be repurchased pursuant
to the terms and conditions specified in this Article XIV.
The delivery of such Security or Securities to the Paying Agent (together with
all necessary endorsements) at the offices of the Paying Agent shall be a
condition to the receipt by the Holder of the Repurchase Price therefor;
provided, however, that such Repurchase Price shall be so paid pursuant to
this Section 14.01 only if the Security or Securities so delivered to the
Paying Agent shall conform in all respects to the description thereof set
forth in the related Change of Control Purchase Notice. The Company
shall repurchase from the Holder thereof, pursuant to this Section
14.01, a portion of a Security if the principal amount of such portion is $1,000
or an integral multiple of $1,000. Any repurchase by the Company contemplated
pursuant to the provisions of this Section 14.01 shall be consummated by the
delivery of the consideration to be received by the Holder promptly following
the Repurchase Date. Notwithstanding anything herein to the contrary, any Holder
delivering to the Paying Agent the Change of Control Purchase Notice
contemplated by this Section 14.01(c) shall have the right to withdraw such
Change of Control Purchase Notice at any time prior to the close of business on
the Repurchase Date by delivery of a written notice of withdrawal to the Paying
Agent in accordance with Section 14.02.
<PAGE>
84
SECTION 14.02 Effect of Change of Control Purchase Notice. Upon
receipt by the Company of the Change of Control Purchase Notice specified in
Section 14.01, the Holder of the Security in respect of which such notice was
given shall (unless such notice is withdrawn as specified in the following
paragraph) thereafter be entitled to receive solely the Repurchase Price with
respect to such Security. Such price shall be paid to such Holder (provided the
conditions in Section 14.01 have been satisfied) promptly following the
Repurchase Date with respect to such Security delivery of such Security.
Securities in respect of which a Change of Control Purchase Notice has been
given by the Holder thereof may not be converted into shares of Common Stock on
or after the date of the delivery of such Change of Control Purchase Notice
unless such notice has first been validly withdrawn as specified in the
following paragraph.
A Change of Control Purchase Notice may be withdrawn by means of a
written notice of withdrawal delivered to the office of the Paying Agent at any
time prior to the close of business on the Repurchase Date specifying:
(i) the certificate number or numbers of the Security or Securities
in respect of which such notice of withdrawal is being submitted;
(ii) the portion of the principal amount of the Security or
Securities with respect to which such notice of withdrawal is being
submitted, which amount must be $1,000 or an integral multiple thereof;
and
(iii) the portion of the principal amount, if any, of such Security
or Securities which remains subject to the original Change of Control
Purchase Notice and which has been or will be delivered for purchase by
the Company, which amount must be $1,000 or an integral multiple thereof.
In addition to the requirement that the Company must first comply with the
covenants set forth in Section 14.01, there shall be no repurchase of any
Securities pursuant to Section 14.01 if there has occurred (prior to, on or
after the giving, by the Holders of such Securities, of the required Change of
Control Purchase Notice) and is continuing an Event of Default. The foregoing
shall in no way limit the occurrence of an Event of Default, including an Event
of Default arising from a default under the covenants in this Article XIV and
the right to demand payment of the Securities upon acceleration thereafter.
SECTION 14.03. Deposit of Repurchase Price. On or before the
Business Day following the Repurchase Date, the Company shall deposit with the
Trustee or with the Paying Agent (or, if the Company or a Subsidiary or an
Affiliate of either of them is the Paying Agent, shall segregate and hold in
trust as provided in
<PAGE>
85
Section 10.03) an amount of money sufficient to pay the Securities or portions
thereof which are to be purchased as of the Repurchase Date.
SECTION 14.04. Securities Purchased in Part. Any Security which is
to be purchased only in part shall be surrendered at the office of the Paying
Agent (with, if the Company or the Trustee so requires, due endorsement by, or
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing) and the Company shall execute and the Trustee shall
authenticate and make available for delivery to the Holder of such Security,
without service charge, a new Security or Securities, of any authorized
denomination as requested by such Holder in aggregate principal amount equal to,
and in exchange for, the portion of the principal amount of the Security so
surrendered which is not purchased.
SECTION 14.05. Covenant to Comply with Securities Laws Upon Purchase
of Securities. In connection with any purchase of Securities under Section 14.01
hereof, the Company shall, to the extent then applicable and required by law:
(i) comply with Rule 13e-4 and Rule 14e-1 (which terms, as used herein, includes
any successor provision thereto) under the Exchange Act; (ii) file the related
Schedule 13E-4 (or any successor or similar schedule, form or report) under the
Exchange Act; and (iii) otherwise comply with all federal and state securities
laws so as to permit the rights and obligations under Section 14.01 to be
exercised in the time and in the manner specified in Section 14.01.
ARTICLE XV
Defeasance and Covenant Defeasance
SECTION 15.01. Company's Option to Effect Defeasance or Covenant
Defeasance. The Company may at its option by Board Resolution, at any time,
elect to have either Section 15.02 or Section 15.03 applied to the Outstanding
Securities upon compliance with the conditions set forth below in this Article
XV.
SECTION 15.02. Defeasance and Discharge. Upon the Company's exercise
of the option provided in Section 15.01 applicable to this Section and
satisfaction of the conditions set forth in Section 15.04, the Company shall be
deemed to have been discharged from its obligations with respect to the
Outstanding Securities (including the provision of Article XIII hereof) on the
date the conditions set forth below are satisfied (hereinafter, "Defeasance").
For this purpose, such Defeasance means that the Company shall be deemed to have
paid and discharged the entire indebtedness represented by the Outstanding
Securities and to have satisfied all its
<PAGE>
86
other obligations under such Securities and this Indenture insofar as such
Securities are concerned (and the Trustee, at the expense of the Company, shall
execute proper instruments acknowledging the same), except for the following
which shall survive until otherwise terminated or discharged hereunder: (A) the
rights of Holders of Outstanding Securities to receive, solely from the trust
fund described in Section 15.04 and as more fully set forth in such Section,
payments in respect of the principal of and premium, if any, and interest on
such Securities when such payments are due; (B) the Company's obligations with
respect to such Securities under Sections 3.05, 3.06, 6.07, 7.01, 7.04, 10.02
and 10.03; (C) the rights, powers, trusts, duties and immunities of the Trustee
hereunder and the Company's obligations with respect thereto; (D) the Company's
obligations under Article XII; and (E) this Article XV.
Subject to compliance with this Article XV, the Company may exercise
its option under this Section 15.02 notwithstanding the prior exercise of its
option under Section 15.03.
SECTION 15.03. Covenant Defeasance. Upon the Company's exercise of
the option provided in Section 15.01 applicable to this Section and satisfaction
of the conditions set forth in Section 15.04, the Company (i) shall be released
from its obligations under Section 10.07, Section 10.08 and the provisions of
Article XIII hereof and (ii) the occurrence of an event specified in Section
5.01(6) shall not constitute an Event of Default, and such Sections and Articles
shall no longer apply with respect to or for the benefit of the Company, the
Securities, the Holders of Securities and the holders of Senior Indebtedness on
and after the date the conditions set forth below are satisfied (hereinafter,
"Covenant Defeasance"). For this purpose, such Covenant Defeasance means that
the Company may omit to comply with and shall have no liability in respect of
any term, condition or limitation set forth in any such Sections or Article
whether directly or indirectly by reason of any reference elsewhere herein to
any such Sections or Article or by reason of any reference in any such Sections
or Article to any other provision herein or in any other document, but the
remainder of this Indenture and such Securities shall be unaffected thereby.
SECTION 15.04. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either Section 15.02 or
Section 15.03 to the Outstanding Securities:
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 6.09 who shall agree to comply with the provisions of this
Article XV applicable to it) as trust funds in trust for the purpose of
making the following payments, specifically pledged as security for, and
dedicated solely to, the
<PAGE>
87
benefit of the Holders of such Securities, (A) money in an amount, or (B)
U.S. Government Obligations which through the scheduled payment of
principal and interest in respect thereof in accordance with their terms
and without further reinvestment thereof will provide, not later than one
day before the due date of any payment, money in an amount, or (C) a
combination thereof in an aggregate amount, sufficient, in the opinion of
a nationally recognized firm of independent public accountants expressed
in a written certification thereof delivered to the Trustee, to pay and
discharge, and which shall be applied by the Trustee or other qualifying
trustee to pay and discharge, the principal of and premium, if any, on and
each installment of interest on the Securities on the Stated Maturity of
such principal or installment of interest on the day on which such
payments are due and payable in accordance with the terms of this
Indenture and of such Securities. For this purpose, "U.S. Government
Obligations" means securities that are (x) direct obligations of the
United States of America for the payment of which its full faith and
credit is pledged or (y) obligations of a Person controlled or supervised
by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof,
and shall also include a depository receipt issued by a bank (as defined
in Section 3(a)(2) of the Securities Act of 1933, as amended) as custodian
with respect to any such U.S. Government Obligation on a specific payment
of principal of or interest on any such U.S. Government Obligation held by
such custodian for the account of the Trustee (or such other trustee) as
holder of such depository receipt; provided that (except as required by
law) such custodian is not authorized to make any deduction from the
amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or
the specific payment of principal of or interest on the U.S. Government
Obligation evidenced by such depository receipt.
(2) In the case of an election under Section 15.02, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that (x)
the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (y) since the date of this Indenture
there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion shall
confirm that, the Holders of the Outstanding Securities will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit, Defeasance and discharge and will be subject to federal income
tax on the same amounts, in the same manner
<PAGE>
88
and at the same times as would have been the case if such Defeasance had
not occurred.
(3) In the case of an election under Section 15.03, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of the Outstanding Securities will not recognize income,
gain or loss for the federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such deposit and Covenant Defeasance had not occurred.
(4) The Company shall have delivered to the Trustee an Officers'
Certificate to the effect that the Securities, if then listed on any
securities exchange, will not be delisted as a result of such deposit, in
the case of an election under Section 15.02 or 15.03.
(5) At the time such Defeasance or Covenant Defeasance is effective:
(A) no default in the payment of all or a portion of principal of (or
premium, if any) or interest in respect of any Senior Indebtedness shall
have occurred and be continuing, and no event of default with respect to
any Senior Indebtedness shall have occurred and be continuing and shall
have resulted in such Senior Indebtedness becoming or being declared due
and payable prior to the date on which it would otherwise have become due
and payable and (B) (i) no other event of default with respect to any
Senior Indebtedness shall have occurred and be continuing permitting the
holders of such Senior Indebtedness (or a trustee on behalf of the holders
thereof) to declare such Senior Indebtedness due and payable prior to the
date on which it would otherwise have become due and payable, (ii) no
judicial proceeding shall be pending with respect to any such event of
default and (iii) the Company and the Trustee shall not have received a
notice with respect to any such event of default from any holder of Senior
Indebtedness (or their representative or representatives), or, in the case
of either clause (A) or clause (B) above, each such default or event of
default shall have been cured or waived or shall have ceased to exist.
(6) No Event of Default or event which with notice or lapse of time
or both would become an Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as subsections 5.01(7)
and (8) are concerned, at any time during the period ending on the 90th
day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until the expiration of such
period).
<PAGE>
89
(7) The Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that after the 90th day following the deposit, such
deposit (and the trust funds) will not be subject to avoidance under
Section 547 of the United States Bankruptcy Code (or any successor
provision thereto) and related judicial decisions.
(8) Such Defeasance or Covenant Defeasance shall not cause the
Trustee to have a conflicting interest as defined in Section 6.08 and for
purposes of the Trust Indenture Act with respect to any securities of the
Company.
(9) Such Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any other agreement
or instrument to which the Company is a party or by which it is bound.
(10) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the Defeasance under Section
15.02 or the Covenant Defeasance under Section 15.03 (as the case may be)
have been complied with.
(11) Such Defeasance or Covenant Defeasance shall not result in the
trust arising from such deposit to constitute,unless it is qualified as, a
regulated investment company under the Investment Company Act of 1940, as
amended.
SECTION 15.05. Deposited Money and U.S. Government Obligations to be
Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the
last paragraph of Section 10.03. all money and U.S. Government Obligations
(including the proceeds thereof) deposited with the Trustee (or other qualifying
trustee--collectively, for purposes of this Section 15.05, the "Trustee")
pursuant to Section 15.04 shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Securities and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Holders of
such Securities, of all sums due and to become due thereon, in respect of
principal (and premium, if any) and interest, but such money need not be
segregated from other funds except in the event required by law. Money so held
in trust, to the extent allocated for the payment of Securities, shall not be
subject to the provisions of Article XIII.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the U.S. Government Obligations
<PAGE>
90
deposited pursuant to Section 15.04 or the principal and interest received in
respect thereof other than any such tax, fee, or other charge which by law is
for the account of the Holders of the Outstanding Securities.
Anything in this Article XV to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
request any money or U.S. Government Obligations held by it as provided in
Section 15.04 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount hereof which would then be
required to be deposited to the effect an equivalent Defeasance or Covenant
Defeasance.
The provisions for subordination of the Securities set forth in
Article XIII are hereby expressly made subject to the provisions for Defeasance
or Covenant Defeasance in this Article XV and, anything herein to the contrary
notwithstanding, upon the effectiveness of such Defeasance or Covenant
Defeasance, such Securities shall thereupon cease to be so subordinated.
SECTION 15.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money in accordance with Section 15.02 or 15.03 by reason of
any order or judgment of any court or governmental authority enjoining,
restraining or otherwise prohibiting such application, the Company's obligations
under this Indenture and the Securities shall be revived and reinstated as
though no deposit had occurred pursuant to this Article XV until such time as
the Trustee or Paying Agent is permitted to apply all such money in accordance
with Section 15.02 or 15.03; provided, however, that if the Company makes any
payment of principal of (or premium, if any) or interest on any Security
following the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of such Securities to receive such payment from the
money held by the Trustee or Paying Agent.
<PAGE>
91
This instrument may be executed in any number of counterparts, each
of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
HEXCEL CORPORATION,
by____________________________________
Name:
Title:
FIRST TRUST OF CALIFORNIA,
NATIONAL ASSOCIATION,
by____________________________________
Name:
Title:
Attest:
________________________________
Name:
Title:
<PAGE>
Exhibit 5
[SKADDEN, ARPS, SLATE, MEAGHER & FLOM LETTERHEAD]
July 18, 1996
Hexcel Corporation
Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901-3238
Re: Hexcel Corporation
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Hexcel Corporation, a Delaware
corporation (the "Company"), in connection with the preparation of a
registration statement on Form S-3 (the "Registration Statement") relating to
the public offering of $115,000,000 aggregate principal amount of the
Company's % Convertible Subordinated Notes Due 2003 (the "Notes"),
including $15,000,000 aggregate principal amount of Notes subject to
over-allotment options granted to the Underwriters (as defined herein), to be
issued under an indenture (the "Indenture") to be entered into between the
Company and First Trust of California, National Association, as trustee (the
"Trustee").
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K of the General Rules and Regulations
promulgated under the Securities Act of 1933, as amended (the "Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement filed with the Securities and Exchange Commission (the "Commission")
on June 12, 1996 under the Act, Amendment 1 thereto filed with the Commission on
July 2, 1996 and Amendment No. 2 thereto filed with the Commission on
<PAGE>
Hexcel Corporation
July 17, 1996
Page 2
July 18, 1996 (such Registration Statement as so amended being hereinafter
referred to as the "Registration Statement"); (ii) the form of the
underwriting agreement (the "Underwriting Agreement") proposed to be entered
into between the Company, as issuer, and CS First Boston Corporation and Bear
Stearns & Co., Inc., as representatives of the underwriters named therein
(the "Underwriters"), filed as an exhibit to the Registration Statement,
(iii) the form of the Indenture filed as an exhibit to the Registration
Statement; (iv) the form of the Notes; (v) a specimen certificate evidencing
the Common Stock; (vi) the Company's Certificate of Incorporation, as
currently in effect; (vii) the Company's Bylaws, as currently in effect; and
(viii) certain resolutions of the Company's Board of Directors and drafts of
certain resolutions of the Finance Committee of the Board of Directors of the
Company (the "Draft Resolutions"), in each case relating to the issuance and
sale of the Notes and related matters. We have also examined originals or
copies, certified or otherwise identified to our satisfaction, of such
records of the Company and such agreements, certificates of public officials,
certificates of officers or other representatives of the Company and others,
and such other documents, certificates and records as we have deemed
necessary or appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the validity and
binding effect of such documents on such parties. As to any
<PAGE>
Hexcel Corporation
July 17, 1996
Page 3
facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and
others.
Members of our firm are admitted to the bar in the States of New York
and Delaware, and we do not express any opinion as to the laws of any other
jurisdiction.
Based upon the foregoing, we are of the opinion that:
1. when (a) the Registration Statement becomes effective and the
Indenture has been qualified under the Trust Indenture Act of 1939, as
amended, (b) the Draft Resolutions have been adopted by the Finance
Committee, (c) the interest rate, maturity, redemption, conversion price and
other terms of the Notes as well as the price at which the Notes are to be
sold to the Underwriters pursuant to the Underwriting Agreement and other
matters relating to the issuance and sale of the Notes have been approved by
the Finance Committee of the Board of Directors in accordance with the Draft
Resolutions, (d) the Indenture and the Underwriting Agreement have been duly
executed and delivered and (e) Notes in the form of the specimen Notes
examined by us have been duly executed and authenticated in accordance with
the terms of the Indenture and delivered to and paid for by the Underwriters
as contemplated by the Underwriting Agreement, the issuance and sale of the
Notes will have been duly authorized, and the Notes will be valid and binding
obligations of the Company entitled to the benefits of the Indenture and
enforceable against the Company in accordance with their terms, except to the
extent that enforcement thereof may be limited by (1) bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws now
or hereafter in effect relating to creditors' rights generally and (2)
general principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity).
2. assuming the occurrence of items (a) through (e) in paragraph
1. above, when certificates represent-
<PAGE>
Hexcel Corporation
July 17, 1996
Page 4
ing the shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company initially issuable upon conversion of the Notes (the
"Conversion Shares") in the form of the specimen certificates examined
by us have been manually signed by an authorized officer of the transfer
agent and registrar for the Common Stock and issued and delivered upon
conversion of the Notes in accordance with the terms thereof and of the
Indenture, the Conversion Shares will be duly and validly issued and
outstanding, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission
as an exhibit to the Registration Statement. We also consent to the
reference to our firm under the caption "Legal Matters" in the Registration
Statement. In giving this consent, we do not thereby admit that we are
included in the category of persons whose consent is required under Section 7
of the Act or the rules and regulations of the Commission.
Very truly yours,
/s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM
<PAGE>
EXHIBIT 12
PAGE 1 OF 2
HEXCEL CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------------------------------------------------
FOR THE QUARTER ENDED FOR THE YEAR ENDED DECEMBER 31,
------------------------------ -----------------------------------------------------
MARCH 31, 1996 APRIL 2, 1995 1995 1994 1993 1992 1991
--------------- ------------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS AVAILABLE FOR FIXED CHARGES
Income (loss) from continuing operations
before income taxes........................ $ 3,154 $ (1,859) $ 6,514 $ (24,494) $ (73,848) $ (22,358) $ 5,059
Fixed charges............................... 3,872 2,669 9,639 13,071 10,039 9,783 12,340
------- ------------- --------- --------- --------- --------- ---------
$ 7,026 $ 810 $ 16,153 $ (11,423) $ (63,809) $ (12,575) $ 17,399
------- ------------- --------- --------- --------- --------- ---------
------- ------------- --------- --------- --------- --------- ---------
FIXED CHARGES
Interest and expense on indebtedness........ $ 3,633 $ 2,363 $ 8,682 $ 11,846 $ 8,862 $ 8,196 $ 10,870
One-third of rental expense for operating
leases..................................... 239 306 957 1,225 1,177 1,587 1,470
------- ------------- --------- --------- --------- --------- ---------
$ 3,872 $ 2,669 $ 9,639 $ 13,071 $ 10,039 $ 9,783 $ 12,340
------- ------------- --------- --------- --------- --------- ---------
------- ------------- --------- --------- --------- --------- ---------
RATIO OF EARNINGS TO FIXED CHARGES.......... 1.81x --(a) 1.68x --(a) --(a) --(a) 1.41x
------- --------- ---------
------- --------- ---------
</TABLE>
- --------------------------
(a) For the quarter ended April 2, 1995 and the years ended December 31, 1994,
1993 and 1992, earnings were insufficient to cover fixed charges by
approximately $1.9 million, $24.5 million, $73.8 million and $22.4 million,
respectively.
<PAGE>
EXHIBIT 12
PAGE 2 OF 2
HEXCEL CORPORATION AND SUBSIDIARIES
PRO FORMA COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------------------------
FOR THE FOR THE YEAR
QUARTER ENDED ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
PRO FORMA EARNINGS AVAILABLE FOR FIXED CHARGES
Income from continuing operations before income taxes......................... $ 4,189 $ 840
Fixed charges................................................................. 6,943 22,321
-------------- --------
$ 11,132 $ 23,161
-------------- --------
-------------- --------
PRO FORMA FIXED CHARGES
Interest and expense on indebtedness.......................................... $ 6,480 $ 20,470
One-third of rental expense for operating leases.............................. 463 1,851
-------------- --------
$ 6,943 $ 22,321
-------------- --------
-------------- --------
PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES.................................. 1.60x 1.04x
-------------- --------
-------------- --------
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Amendment No. 2 to Registration
Statement No. 333-05821 of Hexcel Corporation on Form S-3 of our report dated
March 1, 1996, appearing in the Annual Report on Form 10-K of Hexcel Corporation
for the year ended December 31, 1995 (which report expresses an unqualified
opinion on such financial statements and includes explanatory paragraphs
regarding the confirmation of plan of reorganization, acquisition of the Ciba
Composites Business, and a change in accounting for income taxes) and to the
reference to us under the heading "Experts" in the Prospectus, which is part of
this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Oakland, California
July 16, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3 (File No.
333-05821) of our report dated February 26, 1996, on our audits of the financial
statements of the Composite Products Division of Hercules Incorporated. We also
consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
July 15, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3 (File No.
333-05821) of our report dated February 29, 1996, on our audits of the financial
statements of Ciba Composites (a division of Ciba-Geigy Limited). We also
consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Stamford, Connecticut
July 15, 1996
